UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant
to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (date of earliest event reported): May 22, 2014
Xenonics Holdings, Inc.
(Exact name of registrant as specified in its charter)
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| Nevada |
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001-32469 |
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84-1433854 |
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of incorporation) |
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(Commission
File Number) |
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(I.R.S. Employer
Identification No.) |
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| 3186 Lionshead Avenue
Carlsbad, California |
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92010 |
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(Zip Code) |
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| Registrant’s telephone number, including area code: (760) 477-8900 |
Former name or former address, if changed since last report
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the
following provisions:
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Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
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Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
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Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
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Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
ITEM 1.01 ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT
On July 10, 2014, Xenonics Holdings, Inc. (the “Company”), closed the initial round in the aggregate sum of $90,000 of a private
placement by the Company of Secured Convertibles Notes (“Notes”) pursuant to Subscription Agreements (the “Subscription Agreements”) entered into by the Company with each of the accredited investors identified therein. The final
closing of the private placement occurred on September 10, 2014. A total of $981,000 of gross proceeds was raised in the Company’s private placement of secured convertible notes (including $100,000 raised in May 2014, as described below).
Sandlapper Securities LLC (“Sandlapper”) served as the placement agent for $343,000 of such notes (the “Sandlapper Notes”) issued between July 10, 2014 and September 10, 2014. The balance of the $981,000 of gross
proceeds from the sale of the notes was raised on the Company’s behalf by officers and directors of the Company (the “Company Notes”).
Sandlapper Notes
The Notes bear simple
interest at the rate of 13% per annum and mature three years following the date of issuance. The Notes (i) rank pari passu with all other prior secured indebtedness of the Company (“Prior Indebtedness”) and senior to all
unsecured indebtedness of the Company, and (ii) are convertible at the option of the holder thereof into shares of the Company’s common stock (the “Conversion Shares”) at the conversion rate of $0.07 per share (subject to
adjustment in the event of, among other specified events, stock splits, stock dividends and reclassifications) (the “Conversion Rate”). The number of Conversion Shares issuable upon conversion of the Notes will be determined by dividing
the part of the principal amount of the Notes to be converted, plus the accrued but unpaid interest thereon, by the Conversion Rate in effect on the date of conversion. The Company may redeem all or a portion of each Note at any time between the
first and second anniversary of the date of issuance of such Note at 110% of the principal amount of the Note, plus accrued and unpaid interest, provided that the holder of the Note has the option to convert the principal and unpaid interest of its
Note into common stock of the Company upon receipt of any redemption notice from the Company. Following the second anniversary of the issue date of a Note, the Company may redeem the Note without penalty.
Additionally, pursuant to the Notes, for so long as any portion of the principal or interest on the Notes is due and payable, the Company
agreed to not take any of the following actions, among others, without the prior written consent of the holders of at least 51% of the outstanding principal amount of the Sandlapper Notes:
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Sell voting stock of the Company in any transaction resulting in the holders of the voting securities of the Company outstanding immediately prior to such transaction owning less than a majority of the total voting
power of the Company; |
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Sell, lease, exclusively license, assign, transfer, convey or otherwise dispose of (i) all or substantially all of the Company’s assets, except to a direct or indirect wholly-owned subsidiary of the Company,
(ii) any capital stock or limited liability interests of any direct or indirect subsidiary of the Company, or (iii) any profits, losses, dividends or distributions of any kind of the Company or any direct or indirect subsidiary;
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Acquire or dispose of any business or assets, except in the ordinary course of business or the sale of inventory on an arms-length basis; |
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Liquidate, dissolve or wind-up the business and affairs of the Company or any direct or indirect subsidiary of the Company; |
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Make any capital expenditure of the Company exceeding $50,000 individually or $150,000 in the aggregate which is not for the benefit of the Company; |
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Enter into any agreement or arrangement to incur any indebtedness other than the Notes or unsecured debt; |
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Enter into any agreement or arrangement that would result in the creation of any lien or encumbrance on any of the assets of the Company or any direct or indirect subsidiary; |
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Redeem, purchase for cancellation or otherwise retire or pay off any of the Company’s outstanding securities other than the Notes; |
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Declare or pay any dividends or make any distribution, whether in cash, in shares of stock, limited liability interests, or otherwise on any of the Company’s outstanding securities other than the Notes;
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Alter, modify or amend the terms of employment or compensation to the Chairman of the Board of Directors or Chief Executive Officer of the Company, except if such alteration, amendment or modification is to reduce or
terminate the terms of such employment; |
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Enter into any transaction, or make any amendment thereto, with any director or officer of the Company, or any immediate family member or affiliate of any director or officer of the Company; and |
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Use all or any portion of the proceeds of the issuance of the Notes to pay any fees to affiliates of the Company, except as described in the Subscription Agreement. |
The payment obligations under the Notes may be accelerated upon certain events of default, including any uncured material breach of the Notes,
bankruptcy, the existence of an event of default of the Company on any obligation for the payment of borrowed money in excess of $50,000 individually, or $150,000 in the aggregate, subject to exceptions, or the entry of a judgment against the
Company that (i) exceeds by more than $50,000 any insurance coverage applicable thereto, or (ii) would be reasonably likely to have a material adverse effect (as defined) on the Company.
The May 2014 Notes (as defined under Item 3.02, below) and the Company Notes include the same $0.07 conversion rate and three-year term
as the Sandlapper Notes, and are also secured by the Company’s assets, but such notes do not contain the above covenants of the Company or any other provisions protecting the interests of the note holders that are contained in the Sandlapper
Notes.
Alan Magerman, the Chairman of the Board of Directors and Chief Executive Officer of the Company, and Jeffrey Kennedy, the
President and Chief Operating Officer of the Company, each purchased a Company Note in the principal amount of $50,000.
Security Agreement
The Notes are secured by a first priority lien and security interest on the Company’s assets, pursuant to a Security Agreement entered
into by the Company and purchasers of Notes (the “Security Agreement”).
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Intercreditor Agreement
The Company entered into an intercreditor agreement (“Intercreditor Agreement”), effective as of July 10, 2014, with holders
(the “Other Secured Parties”) of Prior Indebtedness and Sandlapper, on behalf of purchasers of Sandlapper Notes (the “Sandlapper Parties”). Under the Intercreditor Agreement, among other things, the Other Secured Parties agreed
to not take any action with respect to the Prior Indebtedness without the written consent of holders of at least 75% of the outstanding aggregate principal amount owed to the Other Secured Parties and the Sandlapper Parties acting as a single class.
Additionally, under the Intercreditor Agreement, so long as the Company (i) remains current in its interest payments to the Sandlapper Parties, the Company may pay interest to the Other Secured Parties under the Prior Indebtedness, and
(ii) generates (a) at least $1,000,000 of revenue during any fiscal quarter of the Company, and (b) positive EBITDA during such quarter, the Company may, in its discretion, pay down the principal balance under the Prior Indebtedness
within 45 days after the end of any such quarter in an amount not to exceed 25% of such positive EBITDA on a cumulative basis; provided, however, that (i) no principal payments may be made unless the Company has “free cash” (as
defined) of at least $200,000, and (ii) no proceeds of the private placement may be used to make any of the foregoing interest and principal payments.
In connection with the foregoing private placement of notes other than the Company Notes, the Company paid to Sandlapper aggregate commissions
of $39,870 and $15,000 for expenses. Additionally, the Company issued to Sandlapper five-year Warrants (the “Sandlapper Warrants”) to purchase up to 1,582,143 shares of common stock of the Company at an exercise price of $0.12 per share.
The Sandlapper Warrants may be exercised in a cashless exercise.
Transaction Documents
The Subscription Agreement, the Notes and, the Security Agreement contain ordinary and customary provisions for agreements of this nature, such
as representations, warranties, covenants, and indemnification obligations, as applicable. The foregoing descriptions of such documents do not purport to describe all of the terms and provisions thereof and are qualified in their entirety by
reference to the form of Subscription Agreement, the form of Note, the form of Security Agreement and the Company Note, which are filed as Exhibits 10.1, 10.2, 10.3 and 10.4, respectively, to this Current Report on Form 8-K and are incorporated
herein by reference.
ITEM 2.03 CREATION OF A DIRECT FINANCIAL OBLIGATION OR AN OBLIGATION UNDER AN OFF-BALANCE SHEET ARRANGEMENT OF A REGISTRANT
The disclosures set forth in Item 1.01 of this Current Report on Form 8-K with respect to the secured convertible notes issued by
the Company in the private placements are hereby incorporated by reference into this Item 2.03.
ITEM 3.02 UNREGISTERED SALES OF EQUITY
SECURITIES
The disclosures set forth in Item 1.01 of this Current Report on Form 8-K are hereby incorporated by reference into
this Item 3.02.
On May 12, 2014 and May 22, 2014, the Company issued and sold to accredited investors secured convertible
notes of the Company in an aggregate principal amount of $100,000 (the “May 2014 Notes”). From July 10, 2014, 2014 through September 10, 2014, the Company issued and sold to other accredited investors secured convertible notes of
the Company in an aggregate principal amount of $881,000. As described in Item 1.01, above, the notes are convertible at the option of the holder thereof into shares of the Company’s common stock at a conversion rate of $0.07 per share.
Additionally, the Company issued the Sandlapper Warrants to Sandlapper to purchase up to 1,582,143 shares of common stock of the Company.
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The securities described in this Item 3.02 were not registered under the Securities Act of
1933, as amended (the “Act”), in reliance upon the exemption from registration contained in Section 4(2) of the Act and Regulation D promulgated thereunder. The investors in the private placement represented in writing that they were
accredited investors and acquired the securities for their own accounts for investment purposes. A legend will be placed on the common stock issuable upon conversion of the secured convertible notes of the Company, on the Sandlapper Warrants, and on
the common stock issuable upon the exercise of the Sandlapper Warrants stating that the securities have not been registered under the Act and cannot be sold or otherwise transferred without registration or an exemption therefrom.
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS
(d) Exhibits
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| Exhibit No. |
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Description |
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| 10.1 |
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Form of Subscription Agreement entered into by the Company and investors between July 10, 2014 and September 10, 2014. |
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| 10.2 |
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Form of Secured Convertible Note issued by the Company to investors under the Subscription Agreement. |
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| 10.3 |
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Form of Security Agreement between the Company and investors under the Subscription Agreement. |
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| 10.4 |
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Form of Company Note. |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
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XENONICS HOLDINGS, INC. |
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| September 16, 2014 |
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By: |
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/s/ Richard S. Kay |
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Name: Richard S. Kay |
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EXHIBIT 10.1
FORM OF CONFIDENTIAL SUBSCRIPTION AGREEMENT
XENONICS HOLDINGS, INC.
Private Sale of up to $1,000,000 of Convertible
Senior Secured Notes
THIS
SUBSCRIPTION AGREEMENT CONTAINS MATERIAL NONPUBLIC INFORMATION CONCERNING XENONICS HOLDINGS, INC. AND IS PREPARED SOLELY FOR THE USE OF THE OFFEREE NAMED ABOVE. ANY USE OF THIS INFORMATION FOR ANY PURPOSE OTHER THAN IN CONNECTION WITH THE
CONSIDERATION OF AN INVESTMENT IN THE SECURITIES OFFERED HEREBY MAY SUBJECT THE USER TO CRIMINAL AND CIVIL LIABILITY.
THE
SECURITIES OFFERED HEREBY ARE HIGHLY SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE DILUTION AND MAY BE PURCHASED ONLY BY PERSONS WHO QUALIFY AS “ACCREDITED SUBSCRIBERS” UNDER RULE 501 (a) OF REGULATION D UNDER THE
SECURITIES ACT.
THIS DOCUMENT HAS NOT BEEN FILED WITH OR REVIEWED BY THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR ANY
OTHER COMMISSION OR REGULATORY AUTHORITY, AND HAS NOT BEEN FILED WITH OR REVIEWED BY THE ATTORNEY GENERAL OF ANY STATES NOR HAS ANY SUCH COMMISSION, AUTHORITY OR ATTORNEY GENERAL DETERMINED WHETHER IT IS ACCURATE OR COMPLETE OR PASSED UPON OR
ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
XENONICS HOLDINGS, INC.
3186 Lionshead Avenue
Carlsbad, CA
92010
June 23, 2014
CONFIDENTIAL SUBSCRIPTION AGREEMENT
INSTRUCTIONS:
Items to be delivered by all Subscribers:
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One (1) completed and executed Subscription Agreement, including the Investor Questionnaire. |
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One completed and executed Security Agreement. |
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Payment in the amount of subscription, by wire transfer of funds only. |
Wired funds should be
directed as follows:
California Bank & Trust
2501 Palomar Airport Rd.
Carlsbad, CA 92011
Routing#:
122232109
For credit to: Xenonics, Inc.
Account #:
THE SUBSCRIBER IS RESPONSIBLE
FOR ALL WIRE TRANSFER FEES IMPOSED BY THE SUBSCRIBER’S BANK.
ALL DOCUMENTS SHOULD BE RETURNED TO:
Sandlapper Securities LLC
Sandlapper Financial Center
29800
Agoura Rd Suite 205
Agoura Hills, CA 91301
Attn.: Scott Ozer
Fax 818 707 7201
In the event investor decides not to participate in this offering please return this Confidential Subscription Agreement to the address
set forth above.
THE FOLLOWING EXHIBITS AND SCHEDULES ARE ANNEXED TO
AND FORM PART OF THIS SUBSCRIPTION AGREEMENT:
DISCLOSURE SCHEDULE
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| EXHIBIT A: |
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INVESTOR QUESTIONNAIRE |
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FORM OF CONVERTIBLE SENIOR SECURED NOTE |
| EXHIBIT C: |
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FORM OF SECURITY AGREEMENT |
| EXHIBIT D: |
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FORM OF INTERCREDITOR AGREEMENT |
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SUBSCRIPTION AGREEMENT
The undersigned (the “Subscriber” or the “Purchaser”) hereby subscribes to purchase from Xenonics Holdings,
Inc., a Nevada corporation (the “Company”), Senior Secured Notes, on the terms as described herein. The Company is offering hereby (the “Offering”) up to a total aggregate principal amount of $1,000,000 of Senior
Secured Convertibles Notes on a “best efforts” basis in the principal amount of $25,000 (the “Convertible Note”).
Article I
SALE OF
CONVERTIBLE NOTES
1.1 Sale of Securities; Offering Period
(a) Subject to the terms and conditions hereof and on the basis of the representations and warranties hereinafter set forth, the Company
hereby agrees to issue and sell to the Subscriber and the Subscriber agrees to purchase from the Company, upon Closing, the principal amount of Convertible Notes as described herein for the purchase price as set forth on the signature page of this
Subscription Agreement executed by the Subscriber. The Convertible Notes are convertible into shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”) or the “Conversion Securities”, as
defined below. The principal amount of Convertible Notes purchased hereunder by a Subscriber shall be as specified on the signature page of this Subscription Agreement executed by the Subscriber. The Company may reject any subscription in whole or
in part. The Company is offering the Convertible Notes on a “best efforts” basis as the total Offering amount. This Offering is only being made to “accredited Subscribers” (as defined in Rule 501 under the Securities Act of 1933,
as amended (the “Securities Act”)) in reliance upon an exemption from registration under Section 4(2) of the Securities Act and/or Regulation D promulgated thereunder, and on similar exemptions under applicable state laws. The
Convertible Notes may be purchased, in part or their entirety, by officers and directors of the Company or representatives of the Selling Agent (as defined below).
(b) The Securities are being offered during the offering period commencing on the date set forth on the cover page of this Subscription
Agreement and terminating on the earlier of (a) 5:00 p.m. (Los Angeles, California time) on July 31, 2014 or (b) the date on which all the Securities authorized for sale have been sold (the “Offering Period”). The
Company reserves the right to terminate or close the offering at any time.
(c) The Convertible Notes are convertible at the option
of the holder shares of the Company’s Common Stock (the “Conversion Shares”) at the initial conversion rate of $0.07 per share. The conversion rate is subject to adjustment as described in the Convertible Notes, including in
the event that the Company issued additional shares of Common Stock or other equity securities at a purchase price (or exercise price or conversion price for Convertible Securities) below the initial conversion rate. The principal amount of the
Convertible Notes shall bear interest at the rate of 13% per annum and shall have maturity date of there 3 years from the original issue date. The Convertible Notes are secured obligations of the Company and will be secured by a first priority
lien and security interest on the Company’s assets, which lien will be evidenced by the Security Agreement annexed hereto (the “Security Agreement. A summary of the material terms and conditions of the Convertible Notes is set forth
below under the caption “Summary of Offering.”
1.2 High Risk Investment. This investment is speculative and
should only be made by Subscribers who can afford the risk of loss of their entire investment. The proceeds from the sale of the Convertible Notes will be used to fund short term capital needs to enable the Company to maintain operations (including
certain limited payments to officers for accrued salaries) until additional funding is received. The Company has significant outstanding debt represented by promissory notes which is due and payable prior to the maturity date of the Convertible
Notes and although a substantial potion of the creditors holding these outstanding obligations will be required to agree to forgo collection efforts, for a period of time, it is possible that the Company’s revenue and income will be unable to
generate sufficient funds to repay all of the outstanding debt, including the Convertible Notes. The Company may be required to sell additional securities (whether debt or equity or equity linked) after the completion of this transaction to further
fund its operations. Unless the Company is successful in completing these additional funding transactions, or is able to generate sufficient revenue from operations, the Company may be forced to significantly curtail its operations, the Convertible
Notes may remain unpaid and Subscribers will lose their entire investment.
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1.3 Selling Agents; Certain Expenses. The Company has engaged Sandlapper Securities LLC as
its exclusive selling agent (the “Selling Agent”), for the sale of the Convertible Notes and will pay commissions and other compensation to the Selling Agent based on the subscriptions procured by it in this Offering. The Company
will pay commissions to the Selling Agent of 9.0% of the gross proceeds from the sale of the Securities in this Offering to subscribers procured by Sandlapper Securities LLC and reimburse Sandlapper Securities LLC for their reasonable expenses up to
$15,000. The Company will also issue to the Selling Agent warrants (the “Agent Warrants”) to purchase such number of shares of Common Stock of the Company as equals 25% of the number of shares of Common Stock based upon the
principal amount of Convertible Notes and the conversion price of the Convertible Notes sold in the Offering to Subscribers procured by the Selling Agents. The Agent Warrants will be exercisable for a period of five (5) years at an exercise
price of $0.12 per share. Officers, directors and affiliates of the Selling Agent and the Company may purchase Convertible Notes in the Offering. The Company will also indemnify the Selling Agent against certain liabilities, including liabilities
under the Securities Act of 1933, and liabilities arising from breaches of representations and warranties contained in the agreement, or to contribute to payments that it may be required to make in respect of such liabilities.
Summary of Offering
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The Company is offering a total of $1,000,000 of its Convertible Notes on a “best efforts” basis as to the entire Offering. As used herein the Convertible Notes and Conversion Shares may be collectively referred to as the
“Securities.” |
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| Purchase Price: |
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The Company is selling the Convertible Notes in this Offering at a Purchase Price of $25,000 principal amount. The Company may accept subscriptions for partial Convertible Notes in its sole discretion. |
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| Offering Period: |
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The Securities are being offered during the Offering Period commencing on the date set forth on the cover page of this Subscription Agreement and terminating on the earlier of (a) 5:00 p.m. (Los Angeles, California time) on July 31,
2014 or (b) the date on which maximum principal amount of Convertible Notes authorized for sale have been sold. The Company reserves the right to terminate or close the offering at any time. |
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| Summary of Convertible Notes: |
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| Principal Amount: |
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Up to an aggregate principal amount of $1,000,000. |
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| Interest: |
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The Convertible Notes shall accrue simple interest at the rate of 13% per annum, payable semi-annually and at maturity. Interest shall be payable on September 30th and March 30th of each year. |
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| Maturity: |
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The Convertible Notes shall have a maturity date of three (3) years from the date of issuance. |
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| Prepayment/
Redemption: |
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The Convertible Notes may be prepaid in whole or in part at any time at the option of the Company between the first anniversary and second anniversary thereafter at 110% of the principal amount plus accrued and unpaid interest.
Holders of the Convertible Notes shall have the option to convert principal and unpaid interest into Common Stock at their option upon receipt of any prepayment notice received from the Company. After the second anniversary the Convertible Notes can
be prepaid without any prepayment penalty under the same terms. |
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| Conversion Price: |
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At the holder’s option the Convertible Notes will be convertible into shares of Common Stock at an initial conversion rate of $0.07 per share. |
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| Anti-dilution protection: |
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The conversion rate of the Convertible Notes will be adjusted on a “full ratchet” basis in the event that the Company issues additional shares of Common Stock or common stock equivalents (other than for stock option grants
and other customary exclusions) at a purchase price less than the initial conversion rate of the Convertible Notes. In addition, the Convertible Notes will be adjusted proportionally in the event of stock splits, stock dividends, combinations,
recapitalizations, and similar events. |
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| Security Interest: |
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The outstanding principal and interest outstanding under the Convertible Notes, and all other amounts due thereunder, shall be secured by a first priority lien on the assets of the Company as set forth in the Security Agreement
which lien is intended to be pari passu with all other secured Indebtedness. Holders of the Convertible Notes shall enter into an intercreditor agreement (“Intercreditor Agreement”) with other secured indebtedness. The Company has
approximately $2,375,000 (“Prior Debt”) amount of indebtedness secured by a lien on the Company’s assets which is intended to be pari passu which the lien granted in connection with the Convertible Notes. |
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| Registration Rights: |
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Subscribers shall not be entitled to registration rights and will be required to rely upon Rule 144 with respect to the resale of any shares of Common Stock upon conversion of the Convertible Notes. The Company, shall at its cost
and expense, provide on behalf of investor, any legal opinions with respect to sales, pursuant to Rule 144, of Conversion Shares as may be required by the Company’s stock transfer agent. |
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| Use of Proceeds: |
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The proceeds will be used to fund working capital and for general corporate purposes. No more than an aggregate of $50,000 of the proceeds will be used to repay accrued salaries or expenses of officers or directors or affiliates
thereof. After the final Closing, any such remaining accrued, but unpaid salaries and expenses shall be paid solely from positive cash flow from operations of the Company and not from any proceeds of the offering. |
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| Escrow; No Offering Minimum: |
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The Company and the Selling Agent have established a non-interest bearing escrow account for the deposit of funds in this Offering. However, each Subscriber acknowledges and understands that there is no minimum Offering amount
necessary to conduct a closing for the funds to be released to the Company. The escrow account will be established between the Company and the Selling Agent at California Bank & Trust. Funds may be released to the Company and closings held, from
time to time, as determined by the Company and the Selling Agent at any time during the Offering Period. |
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| Subscription Procedure: |
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In order to subscribe for the Securities, each prospective subscriber must complete, execute and deliver to the Company a signature page evidencing such prospective subscriber’s execution of this Subscription Agreement along
with a completed confidential Purchaser Questionnaire and a copy of the Security Agreement. The Agent appointed (Sandlapper Securities LLC on behalf of the subscribers) under the Security Agreement will execute the Intercreditor Agreement on behalf
of Subscribers. |
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| Restrictions on
Transferability: |
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There is no public market for the Convertible Notes and it is not anticipated that a market will develop after this Offering. Further, the Conversion Shares have not been registered under the Securities Act or under the securities
laws of the United States or of any state or other jurisdiction. As a result, the Convertible Notes and Conversion Shares (collectively, sometimes referred to as the “Securities”) are restricted securities under the Securities Act
and they may not be transferred without registration under the Securities Act, or, if applicable, the securities laws of any state or other jurisdiction, unless in the opinion of counsel to the Company, such registration is not then required because
of the availability of an exemption from registration. |
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| Investment: |
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An investment in the Company is highly speculative, and each investor bears the risk of losing his, her or its entire investment. All Purchasers must complete and execute a Subscription Agreement, the Security Agreement, and a
confidential Purchaser Questionnaire. Purchasers must set forth representations in such documents that he, she or it is purchasing the Securities for investment purposes only and without a view toward distribution. The Securities are suitable
investments only for sophisticated Subscribers for whom an investment in the Securities does not constitute a complete investment program and who fully understand, are willing to assume, and who have the financial resources necessary to withstand,
the risks involved in investing in the Securities and who can bear the potential loss of their entire investment. The Securities are being offered and sold only to persons who qualify as “accredited Subscribers,” as defined under
Regulation D of the Securities Act. |
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| Risk Factors: |
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An investment in the Securities involves a high degree of risk. Purchasers of the Securities should carefully review the factors under the heading “Risk Factors” herein and in the Company’s reports filed under the
Securities Exchange Act of 1934, as amended which are incorporated by reference. |
1.4 Escrow and No Minimum Offering Amount; Multiple Closings.
Each Subscriber acknowledges and agrees that all subscription amounts will be deposited in a non-interest bearing account established by the
Company and the Selling Agent at California Bank & Trust, but that there is no minimum Offering amount (or other conditions other than normal closing conditions) necessary to conduct a closing for the funds to be released to the Company.
Accordingly, funds may be released to the Company and closings held, from time to time, as determined by the Company at any time during the Offering Period. During the Offering Period, subscription funds will be placed into the escrow account and
closings will be held from time to time up to the sale of the maximum amount of Securities described in this Subscription Agreement or the expiration of the Offering Period. In the event a subscription is not accepted in whole or in part by the
Company, the full or ratable amount, as the case may be, of any subscription payment received will be promptly refunded to the Subscriber without deduction therefrom and without interest thereon. In the event a subscription is accepted by the
Company, in whole or in part, and subject to the conditions set forth in this Subscription Agreement, a closing may be held from time to time by the Company and the Company shall issue and deliver to subscriber, the Convertible Note dated the date
of closing on such funds, and a fully executed copy of this Subscription Agreement and the Security Agreement.
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At each closing of the transactions contemplated herein (the “Closing”), the
Subscribers shall purchase, severally and not jointly, and the Company shall issue and sell, to the Subscribers the amount of Securities as indicated on the signature page of each Subscriber’s subscription agreement, up to the total Offering
amount. The Securities may be purchased, in part or their entirety, by officers and directors of the Company or representatives of the Selling Agent. Each Closing shall occur on the date determined by the Company and the Selling Agent at such times
and/or locations as the Company may set. A final Closing shall be held either on the date of which this Offering is fully subscribed or the last date during the Offering Period on which the Company accepts a subscription, whichever is latest. This
Offering shall terminate on the earlier of (a) 5:00 p.m. (New York time) on July 31, 2014 or (b) the date on which all the Securities authorized for sale have been sold, unless sooner terminated by the Company, in its sole discretion.
Each Closing of the transactions contemplated hereunder shall be deemed to occur at the offices of Becker & Poliakoff, LLP, 45 Broadway, 8th Floor, New York, New York 10006, or at such
other place as shall be mutually agreeable to the parties, at 12 noon, New York time, on such date or dates as may be mutually agreeable to the parties.
1.5 Closing Matters. At each Closing the following actions shall be taken:
(a) each Subscriber shall deliver its Purchase Price in immediately available United States funds to the escrow account established for the
Offering;
(b) the Company shall deliver the Convertible Notes subscribed for to each Subscriber; and
(c) each of the Company and the Subscriber shall deliver to the other signed copies of this Agreement and the Security Agreement and the
Subscriber shall deliver to the Selling Agent a completed and executed Purchaser Questionnaire.
1.6 Use of Proceeds. The Company
intends to use the proceeds derived from this Offering to satisfy its working capital requirements and general corporate purposes. No more than an aggregate of $50,000 of the proceeds will be used to repay accrued salaries or expenses of officers or
directors or affiliates thereof. After the Closing, any such remaining accrued, but unpaid salaries and expenses shall be paid solely from positive cash flow from operations of the Company and not from any proceeds of the offering. Management
reserves the right to utilize the net proceeds of the Offering in a manner in the best interests of the Company. Accordingly, management will have broad discretion in the application of the proceeds of the Offering. The amount of the net proceeds
that will be invested in particular areas of the Company’s business will depend upon future economic conditions and business opportunities. To the extent that the Company continues to incur losses from operations, such losses will be funded
from its general funds, including the net proceeds of this Offering. As reported in its Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, filed on May 15, 2014, the Company had total liabilities of approximately
$3,499,000, including accounts payable of approximately $591,000. Holders of not less than $2,375,000 of outstanding notes (“Prior Debt”) are entitled, under the existing terms of such debt, to be repaid in October and December of
2014, which is prior to the maturity date of the Convertible Notes. The holders of such Prior Debt have entered into the Intercreditor Agreement with Subscribers in this Offering (the security agent shall execute the Intercreditor Agreement on
behalf of Subscribers) whereby the holders of the Prior Debt shall agree to postpone any collection efforts with respect to such Prior Debt except upon consent of at least 75% of the principal amount of all the Prior Debt and the Convertible Notes,
considered as a single class. Further, under the Interecreditor Agreement, the holders of the Prior Debt and the Convertible Notes shall share ratably as secured creditors in the assets of the Company upon any default. Additionally under the
Intercreditor Agreement, (i) no interest payments may be made on the Prior Debt or the convertible Notes unless both receive interest payments, (ii) so long as the Company generates (a) at least $1,000,000 of revenue during any fiscal
quarter of the Company, and (b) positive EBITDA during such quarter, the Company may, in its discretion, pay down the principal balance under the Prior Debt within 45 days after the end of any such quarter in an amount not to exceed 25% of such
positive EBITDA on a cumulative basis; provided, however, that no principal payments may be made unless the Company has free cash of at least $200,000. For purposes of this Agreement, (a) “EBITDA” means, for any period in question,
Company’s consolidated net income for such period plus, to the extent deducted in determining consolidated net income for such period, interest expense, income tax expense, and depreciation and amortization, and (b) “free cash”
means cash of the Company net of any principal payments that are contemplated to be made by the Company.
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1.7 Certain Reports Filed Under the Securities Exchange Act of 1934.
(a) Annual Report on Form 10-K for the year ended September 30, 2013. On December 19, 2013, the Company filed its Annual
Report on Form 10-K for the year ended September 30, 2013 (the “2013 Annual Report”) with the United States Securities and Exchange Commission (the “SEC”).
(b) Quarterly Reports on Form 10-Q. On May 15, 2014, the Company filed with the SEC its Quarterly Report on Form 10-Q for the
quarter ended March 31, 2014 (the “2013 Quarterly Reports”).
(c) Current Reports on Form 8-K. The Company has
filed Current Reports on Form 8-K with the SEC on the following dates during the current fiscal year: February 14, 2013 and May 19, 2014 (the “Current Reports”).
(d) Acknowledgement and Confirmation. The undersigned hereby agrees and acknowledges that it has been advised that the Company
has filed with the SEC the 2013 Annual Report, the 2014 Quarterly Reports and the Current Reports (collectively, the “SEC Reports”) and that it has either obtained or has access to (through the public website of the SEC or
otherwise) the SEC Reports. The SEC Reports comprise an integral part of this Agreement and each Subscriber is urged to read each such report in its entirety including the “Risk Factors” stated therein. The undersigned further agrees that
the SEC Reports are incorporated herein by reference, that it has taken the opportunity to review such reports in their entirety, including the risk factors described therein, and that it has considered all factors that it deems material in deciding
on the advisability of investing in the Company’s Convertible Notes.
1.8 Subscriber Information
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Name(s) of
SUBSCRIBER(s):
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The Subscriber acknowledges and agrees that the offering and sale of the Securities are intended to be
exempt from registration under the Securities Act, by virtue of Section 4(2) thereof and/or Regulation D promulgated thereunder. In accordance therewith and in furtherance thereof, the Subscriber represents and warrants to and agrees with the
Company as follows [Please check statements applicable to the Subscriber]:
The Subscriber is an Accredited Investor because the
Subscriber is (check appropriate item):
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a bank as defined in Section 3(a)(2) of the Securities Act; |
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a savings and loan association or other institution as defined in Section 3(a)(5)(A) of the Securities Act; |
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a broker or dealer registered pursuant to Section 15 of the Securities Exchange Act of 1934 as amended (the “Exchange Act”); |
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an insurance company as defined in Section 2(13) of the Securities Act; |
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an investment company registered under the Investment Company Act of 1940, as amended or a business development company as defined in Section 2(a)(48) of such act; |
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a Small Business Investment Company licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958; |
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an employee benefit plan within the meaning of Title I of the Employee Retirement Income Security Act of 1974, as amended, if the investment decision is made by a plan fiduciary, as defined in Section 3(21) of such
Act, which is either a bank, savings and loan association, insurance company, or registered investment adviser, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made
solely by persons that are accredited Subscribers; |
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a private business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940, as amended; |
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an organization described in Section 501(c)(3) of the Internal Revenue Code, a corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities
offered, with total assets in excess of $5,000,000; |
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a natural person whose individual net worth or joint net worth with that person’s spouse, at the time of his purchase exceeds $l,000,000 (excluding the value of such person’s primary residence);
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a natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person’s spouse in excess of $300,000 in each of those years and has a reasonable
expectation of reaching the same income level in the current year; |
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a trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person as described in Rule 506(b)(2)(ii) of the
Exchange Act; |
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an entity in which all of the equity owners are accredited Subscribers. (If this alternative is checked, the Subscriber must identify each equity owner and provide statements signed by each demonstrating how each
qualifies as an accredited investor); |
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a plan established and maintained by a state, its political subdivisions, or any agency or instrumentality thereof, for the benefit of its employees, if such plan has total assets in excess of $5,000,000; or
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a director or officer of the Company. |
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(d) Additional Information.
The Subscriber has completed the signature page to this Subscription Agreement and the Questionnaire annexed at Exhibit A to this
Subscription Agreement and the signature page to the Security Agreement annexed as Exhibit C.
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1.9 Risk Factors
Investing in the Company’s Convertible Notes involves risks and the Company’s operating results and financial condition have varied in the past
and may in the future vary significantly depending on a number of factors. Investors should consider the following risk factors in evaluating whether to invest in the Securities. However, the risks described below are not the only risks facing the
Company. In addition to these risk factors and other risks described elsewhere in this Agreement, including the Disclosure Schedule to this Agreement, investors should carefully consider the risk factors described in the Company’s SEC Reports,
each of which has been filed with the Securities and Exchange Commission and which are all incorporated by reference in this Agreement. These risks could have a material adverse effect on the Company’s business, results of operations, financial
condition or liquidity and cause the Company’s actual operating results to materially differ from those contained in forward-looking statements made in this Agreement, in the Company’s SEC Reports and elsewhere by management. Before making
an investment decision, investor should carefully consider these risks as well as other information contained or incorporated by reference in this Agreement. Additional risks and uncertainties not currently known to the Company or that the Company
currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results.
General Risks Related to the Company’s Business
The Company has only Limited Revenue and has a history of Losses.
Revenues for the quarter ended March 31, 2014 were $16,000 compared to revenues of $961,000 for the quarter ended March 31, 2013. In the quarter
ended March 31, 2014, 100% of revenues were from sales of the Company’s NightHunter products to the military (U.S. Army, U.S. Marines and military distributors). In the quarter ended March 31, 2013, 98% of revenues were from sales of
the NightHunter products to the military. The Company had, in the quarter ended March 31, 2014 net losses of $576,000 compared to a net loss of $293,000 for the quarter ended March 31, 2013. Unless the amount of revenue and net profit
increase, we will be unable to repay the Convertible Notes and Subscribers may lose their investment.
The Company’s financial statements include
a “Going Concern” qualification.
The Company’s financial statements for the three and six months ended March 31, 2014 and for the
fiscal year ended September 30, 2013, include an explanatory paragraph relating to the Company’s ability to continue as a going concern. Based on the amount of working capital that on hand on March 31, 2014 and the amount of unfilled
and potential orders that are pending, management is optimistic about its ability to obtain sales orders and/or additional equity or debt financing to continue to support planned operations and satisfy obligations. However, due to the nature of the
Company’s business, and its dependence upon US and Foreign military spending, business, there is no assurance that the Company will receive new orders if ever or when anticipated.
Risks Related to this Offering
This Offering may result in dilution to common shareholders.
Dilution of the per share value of the Company’s Common Stock could result from the issuance of the Securities in this Offering. If this
Offering is fully subscribed and excluding the Agent Warrants, the Company will issue an aggregate of $1,000,000 of Convertible Notes, which are initially convertible into a total of 14,285,714 Conversion Shares. In addition, the Company may be
required to issue additional Conversion Shares pursuant to the anti-dilution provision of the Convertible Notes. The issuance of a substantial number of shares of the Company’s Common Stock will dilute the equity interests of the Company’s
current stockholders.
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The Company does not currently have necessary Revenue or Income to Repay its Outstanding Debt; Certain
Proceeds will be used to repay Officers Salaries; Subscribers of Convertible Notes will be limited in rights to collect upon collateral in the event of default or non payment.
The Company has secured debt and other liabilities in excess of its ability to pay currently. The Company’s primary goal is to use the
funds from this Offering to help it obtain additional contracts and revenue although the Company may use up to $50,000 for officers’ salaries. Holders of the Convertible Notes will be required, under the terms of the Intercreditor Agreement, to
forego certain rights as secured creditors or share in assets of the Company with other secured creditors, and this may result in less proceeds being available, if the Company defaults under the Convertible Notes, to repay the holders of the
Convertible Notes in full.
The Company will require additional financing.
The Company anticipates that it will need to raise additional financing following the completion of this Offering. The net proceeds from the
sale of the Convertible Notes will not satisfy all of our working capital needs. Further, the Company outstanding debt of approximately $[2,385,000] as of June 1, 2014, all of which has due date for payment prior to the maturity date of
the Convertible Notes. The Company would be unable to repay such Prior Debt with the proceeds of this Offering and may be unable to generate income in an amount necessary to repay the Prior Debt of the Convertible Notes. If the Company is unable to
generate sufficient income or cancel the due dates or terms of the Prior Debt, it may also be required to raise additional funds. Accordingly, the purchasers of the Securities should expect to experience substantial dilution in their percentage of
ownership of the Company and, possibly, the value of their investment. Any future offerings will dilute the percentage ownership of the Company for purchasers of Securities in this Offering. The Company currently has no commitments or arrangement
with respect to any additional financings, and cannot provide any assurances as to whether such additional financing will be available or as to the terms upon which it may be available. If the Company raises additional funds by selling common stock
or convertible securities, the ownership of the Company’s existing shareholders will be diluted
The Securities offered hereby are
“restricted securities” and may not be transferred or resold absent registration or an exemption therefrom.
The
Securities offered hereby will be issued pursuant to an exemption from registration under the Securities Act and therefore have not been and will not be registered under that act or any applicable state securities laws. Consequently, the Securities
may be sold, transferred, or otherwise disposed of by the Purchasers hereunder only if, among other things, the Securities are registered or, in the opinion of counsel acceptable to us, registration is not required under the Securities Act or any
applicable state securities laws. Accordingly, Subscribers will need to rely on exemptions to the registration requirements under the Securities Act and the “blue sky” laws in order to be able to resell the Securities offered hereby.
Purchasers of the Company’s Securities must be aware of the long-term nature of their investment and be able to bear the economic risks
of their investment for an indefinite period of time. The Securities have not been registered under the Securities Act or the securities or “blue sky” laws of any state. The right of any Subscriber to sell, transfer, pledge or otherwise
dispose of the Securities offered herein will be limited by the Securities Act and state securities laws and the regulations promulgated thereunder. Accordingly, under the Securities Act, the Securities offered herein may not be resold unless a
registration statement is filed and becomes effective or an exemption from registration is available. The Company is not under any affirmative obligation to file a registration statement covering the Securities and even if the Company did file a
registration statement covering the Securities, there can be no assurance that any such registration statement would be declared effective. Further, there can be no assurance that a liquid market for the Company’s Common Stock will be
sustained. Rule 144 promulgated under the Securities Act requires, among other conditions, a holding period prior to the resale of securities acquired in a non-public offering without having to satisfy the registration requirements of the Securities
Act. There can be no assurance that the Company will fulfill in the future any reporting requirements under the Exchange Act, or disseminate to the public any current financial or other information concerning the Company, as required by Rule 144 as
one of the conditions of its availability.
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No assurances that enough Securities will be sold to pursue business strategies or to repay the Convertible
Notes.
No person or entity is committed to purchase any of the Securities offered pursuant to this Offering, and no assurance is
or can be given that all or any of the Securities offered hereunder will be sold. Further, although the Company has established an escrow account for the subscription amounts from Subscribers, no minimum amounts of Securities are required to be
sold. Proceeds received from the Offering will be available to the Company upon receipt, which the Company intends to promptly utilize in accordance with the terms of the “Use of Proceeds” section of this Subscription Agreement, including
the payment of outstanding obligations. The application of the proceeds of the Offering to the payment of current obligations would reduce the ability of the Company to utilize such proceeds for other business purposes. In the event that the Company
is unable to sell all or a significant portion of the Securities pursuant to the Offering, the Company may have insufficient capital after making the aforesaid payments to proceed with the Company’s business strategies and thus may be forced to
seek additional capital sooner than would have been the case had the Offering been fully subscribed. The Company also may need additional funds from loans and/or the sale of securities to repay the Convertible Notes at their maturity date. There can
be no assurance that such additional funds will be available to the Company when required on terms acceptable to the Company. The Company’s inability to obtain financing on favorable terms could restrict its operations and could materially harm
an investment in the Company. The Company has not entered into any agreement or letter of intent for the Next Financing or any other subsequent financing. In the event the Next Financing is not consummated or other financing obtained, the Company
may not have adequate funds available to repay the Convertible Notes.
This Offering is being made on a best efforts basis and there is no minimum
amount of funds required to hold a closing.
This Offering is being made on a “best efforts” rather than a firm
commitment basis. No commitment exists by anyone, including the Selling Agent, to purchase all or any part of the Securities being offered pursuant to this Offering. There can be no assurance that any Securities offered hereby will be sold. Although
the Company has established an escrow account for this Offering, there is no “minimum offering” amount required in this Offering and closings may be held and funds released to the Company at such times and in such amounts, up to the
maximum Offering amount, as determined by the Company and Selling Agent in their discretion once the holders of Prior Debt have executed the Intercreditor Agreement.
No independent counsel for Purchasers.
Each of the Company and the Selling Agent has employed its own legal counsel in connection with this Offering. The Purchasers have not been
represented by independent counsel in connection with the preparation of this Subscription Agreement or the terms of this Offering and no investigation of the merits or fairness of this Offering has been conducted on behalf of the Purchasers.
Company Counsel has not conducted due diligence on behalf of the Purchasers. Prospective Subscribers should consult with their own legal, tax and financial advisors with respect to the Offering made hereby.
The Company’s management will have broad discretion with respect to the use of the proceeds of this Offering.
The Company has highlighted the intended use of proceeds for this Offering, including repayment of outstanding accounts payable. No proceeds
shall be used to repay indebtedness or accrued expenses of officers or directors or affiliates thereof; provided however, the Company may utilize up to $50,000 to pay officers and directors accrued salaries and expenses. The Company’s
management will have broad discretion as to the application of these net proceeds and could use them for purposes other than those contemplated at the time of this Offering. The Company’s note holders may not agree with the manner in which the
Company’s management chooses to allocate and spend the net proceeds.
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Availability of Securities Act exemption.
The Securities are being offered pursuant to various available exemptions from registration from U.S. federal and state securities law
registration requirements. It is intended that the offering of the Convertible Notes will be conducted in a manner so as to comply with Section 4(2) of the Securities Act of 1933, as amended and Rule 506 (b) of Regulation D promulgated by
the SEC. Compliance with such laws, which must be met in order for such exemptions to be available to us, is highly technical and to some extent involves elements beyond the Company’s control. If the proper exemptions do not ultimately prove to
be available, we could be subject to the claims of all or only some of the Company’s shareholders for violations of federal or state securities laws, which could materially adversely affect the Company’s profitability or operations or make
an investment in the Securities worthless.
Risks Related to the Company’s Securities
Exercise or conversion of outstanding options, warrants and shares of convertible preferred stock will dilute stockholders and could decrease the market
price of the Company’s common stock.
As of May 1, 2014, there were issued and outstanding options to purchase 2,305,000
shares of Common Stock and warrants to purchase an aggregate of 7,187,000 additional shares of Common Stock. To the extent that these securities are exercised or converted, dilution to the Company’s shareholders will occur. Further, there are
no outstanding shares of Common Stock pursuant to unvested restricted stock awards or any additional shares of Common Stock or warrants to certain third parties pursuant to consulting or other business arrangements that are not described in the
Company’s SEC filings. The exercise and conversion of these securities by the holders and issuance of these additional shares of Common Stock may adversely affect the market price of the Company’s Common Stock and the terms under which we
could obtain additional equity capital.
We do not anticipate paying dividends in the foreseeable future, and the lack of dividends may have a
negative effect on the price of the Company’s Common Stock.
The Company currently intends to retain our future earnings, if
any, to support operations and to finance expansion and therefore, the Company does not anticipate paying any cash dividends on its Company’s Common Stock in the foreseeable future.
The Company’s Common Stock is traded on the OTC Bulletin Board, which may be detrimental to Subscribers.
The Company’s Common Stock is currently traded on the OTC Bulletin Board under the symbol XNNH. Stocks traded on the OTC Bulletin Board
generally have limited trading volume and are therefore susceptible to exhibiting a wide spread between the bid/ask quotations. The Company cannot predict whether a more active market for the Company’s Common Stock will develop in the future.
In the absence of an active trading market, Subscribers may have difficulty buying and selling the Company’s Common Stock or obtaining market quotations; market visibility for the Company’s Common Stock may be limited; and a lack of
visibility for the Company’s Common Stock may have a depressive effect on the market price for the Company’s Common Stock.
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Shares of the Company’s Common Stock are subject to restrictions on sales by broker-dealers and penny
stock rules, which may be detrimental to Subscribers; Penny Stock Disclosure
The Company’s Common Stock is subject to Rules
15g-1 through 15g-9 under the Exchange Act, which imposes certain sales practice requirements on broker-dealers who sell the Company’s Common Stock to persons other than established customers and “accredited Subscribers” (as defined
in Rule 501(c) of the Securities Act). For transactions covered by this rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to the
sale. This rule adversely affects the ability of broker-dealers to sell the Company’s Common Stock and purchasers of the Company’s Common Stock to sell their shares.
Additionally, the Company’s Common Stock is subject to SEC regulations applicable to “penny stocks.” Penny stocks include any
non-Nasdaq equity security that has a market price of less than $5.00 per share, subject to certain exceptions. Penny stocks are low-priced shares of small companies. Penny stocks may trade infrequently – which means that it may be difficult to
sell penny stock shares once a Subscriber owns them. Because it may also be difficult to find quotations for penny stocks, they may be impossible to accurately price. Investors in penny stock should be prepared for the possibility that they may lose
their whole investment. For the 52 weeks ending June 20, 2014, the Company’s had a high of $0.20 and a low of $0.05 per share and on June 20, 2014, the Company’s Common Stock had a closing price of $0.09 per share. The
regulations require that prior to any non-exempt buy/sell transaction in a penny stock, a disclosure schedule proscribed by the SEC relating to the penny stock market must be delivered by a broker-dealer to the purchaser of such penny stock. This
disclosure must include the amount of commissions payable to both the broker-dealer and the registered representative and current price quotations for the Company’s Common Stock. The regulations also require that monthly statements be sent to
holders of a penny stock that disclose recent price information for the penny stock and information of the limited market for penny stocks. These requirements adversely affect the market liquidity of the Company’s Common Stock. Under U.S.
Securities and Exchange Commission rules, the Selling Agent is required to provide purchasers of penny stocks the following disclosure statement available at: http://www.sec.gov/investor/schedule15g.htm. The link explains some of the risks of
investing in penny stocks. The Company and the Selling Agent advise each Subscriber to read it carefully before agreeing to purchase or sell a penny stock.
There are outstanding a significant number of shares available for future sales under Rule 144.
As of May 1, 2014, of the 24,975,929 issued and outstanding shares of the Company’s Common Stock, approximately 1,061,935 shares may
be deemed “restricted shares” and, in the future, may be sold in compliance with Rule 144 under the securities Act of 1933, as amended. In general, under Rule 144 under the Securities Act, a person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of ours at any time during the three months preceding a sale, and who has beneficially owned restricted securities within the meaning of Rule 144 for at least six months (including any period
of consecutive ownership of preceding non-affiliated holders) would be entitled to sell those shares, subject only to the availability of current public information about us. A non-affiliated person who has beneficially owned restricted securities
within the meaning of Rule 144 for at least one year would be entitled to sell those shares without regard to the provisions of Rule 144. A person (or persons whose shares are aggregated) who is deemed to be an affiliate of ours and who
has beneficially owned restricted securities within the meaning of Rule 144 for at least six months would be entitled to sell within any three-month period a number of shares that does not exceed the greater of one percent of the then
outstanding shares of the Company’s common stock or the average weekly trading volume of the Company’s common stock during the Company’s calendar weeks preceding such sale. Such sales are also subject to certain manner of sale
provisions, notice requirements and the availability of current public information about us. Possible or actual sales of the Company’s Common Stock by certain of the Company’s present shareholders under Rule 144 may, in the future, have a
depressive effect on the price of the Company’s Common Stock in any market which may develop for such shares. Such sales at that time may have a depressive effect on the price of the Company’s Common Stock in the open market.
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A substantial number of shares may be sold in the market following this offering, which will further dilute
the Company’s common shareholders and may depress the market price for the Company’s common stock.
Sales of a
substantial number of shares of the Company’s Common Stock in the public market following this offering could cause the market price of the Company’s common stock to decline. If the total Offering is completed, the Company will issue to
Subscribers (a) an aggregate of $1,000,000 principal amount of Convertible Notes, which are initially convertible into 14,285,714 Conversion Shares. The Company will also issue to the Selling Agent a maximum of 3,571,429 Agent Warrants. Based
on a total of 24,975,929 shares of Common Stock outstanding, if the total Offering is completed and the Convertible Notes converted into Conversion Shares at a conversion rate of $0.07 per share, the total number of outstanding shares of Common
Stock would be 39,261,643 shares, assuming no interest on the principal amount of the Convertible Notes or exercise of outstanding options or warrants or of Agent Warrants. The issuance of a substantial number of the Company’s Common Stock will
dilute the equity interests of the Company’s current stockholders. Further, as a substantial majority of the outstanding shares of the Company’s Common Stock are, tradable without restriction or further registration under the Securities
Act of 1933 unless these shares are purchased by affiliates, the issuance of the Common Stock offered hereby may further depress the market price of the Company’s Common Stock.
Preferred Stock as an anti-takeover device.
The Company is authorized to issue 5,000,000 shares of preferred stock, $0.001 par value. Presently, the Company does not have any shares of
preferred stock outstanding. The preferred stock may be issued in series from time to time with such designation, voting and other rights, preferences and limitations as the Company’s Board of Directors may determine by resolution. Unless the
nature of a particular transaction and applicable statutes require such approval, the Board of Directors has the authority to issue these shares without stockholder approval subject to approval of the holders of the Company’s preferred stock.
The issuance of preferred stock may have the effect of delaying or preventing a change in control of the Company without any further action by the Company’s stockholders.
Forward Looking Statements
This Subscription Agreement and the exhibits and schedules annexed hereto contain certain forward looking information within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. These statements relate to future events or future predictions, including events or predictions relating to the Company’s future financial performance,
and are generally identifiable by use of the use of forward-looking terminology such as “believes”, “expects”, “may”, “will”, “should”, “plan”, “intend”, or
“anticipates” or the negative thereof or other variations thereon or comparable terminology, or by discussion of strategy that involve risks an uncertainties. Management wishes to caution each Subscriber that these forward-looking
statements and other statements contained herein regarding matters that are not historical facts, are only predictions and estimates regarding future events and circumstances and involve known and unknown risks, uncertainties and other factors,
including the risks described under “Risk Factors” that may cause the Company’s or its industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by such forward-looking statements. This information is based on various assumptions by the management which may not prove to be correct.
In addition to the risks described in Risk Factors, important factors to consider and evaluate in such forward-looking statements include:
(i) changes in the external competitive market factors which might impact the Company’s results of operations; (ii) unanticipated working capital or other cash requirements including those created by the failure of the Company to
adequately anticipate the costs associated with clinical trials, manufacturing and other critical activities; (iii) changes in the Company’s business strategy or an inability to execute its strategy due to the occurrence of unanticipated
events; (iv) the inability or failure of the Company’s management to devote sufficient time and energy to the Company’s business; and (v) the failure of the Company to complete any or all of the transactions described herein on
the terms currently contemplated. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained or incorporated by reference in this Agreement will in fact transpire.
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All of these assumptions are inherently subject to significant uncertainties and contingencies,
many of which are beyond the control of the Company. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance or
achievements. Accordingly, there can be no assurance that actual results will meet expectations or will not be materially lower than the results contemplated in this Agreement. Subscribers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this document or, in the case of documents referred to or incorporated by reference, the dates of those documents. The Company does not undertake any obligation to release publicly any
revisions to these forward-looking statements to reflect events or circumstances after the date of this document or to reflect the occurrence of unanticipated events, except as may be required under applicable U.S. securities law.
Article II
REPRESENTATIONS AND WARRANTIES OF COMPANY
Except as set forth under the corresponding section of the Disclosure Schedule, which Disclosure Schedule shall be deemed a part hereof and to
qualify any representation or warranty otherwise made herein to the extent of such disclosure, the Company hereby represents and warrants to the Purchasers as of the date of this Subscription Agreement as follows:
(A) Organization. The Company is duly organized, validly existing and in good standing under the laws of its state of incorporation,
with all requisite power and authority to own, lease, license, and use its properties and assets and to carry out the business in which it is engaged, except where the failure to have or be any of the foregoing may not be expected to have a material
adverse effect on the Company’s presently conducted businesses. The Company is not in violation of any of the provisions of its articles of incorporation, bylaws or other organizational or charter documents. The Company is duly qualified to
transact the business in which it is engaged and is in good standing as a foreign corporation in every jurisdiction in which its ownership, leasing, licensing or use of property or assets or the conduct of its business make such qualification
necessary, except where the failure to be so qualified or in good standing, as the case may be, could not, individually or in the aggregate, have or reasonably be expected to result in (i) a material and adverse effect on the legality, validity
or enforceability of this Agreement, (ii) a material and adverse effect on the results of operations, assets, prospects, business or condition (financial or otherwise) of the Company, taken as a whole, or (iii) an adverse impairment to the
Company’s ability to perform on a timely basis its obligations hereunder (any of (i), (ii) or (iii), a “Material Adverse Effect”).
(B) Capitalization. The Company is currently authorized to issue 50,000,000 shares of Common Stock, $0.001 par value per share and
5,000,000 shares of Preferred Stock, $0.001 par value per share. Except as may be described in this Agreement, no securities of the Company are entitled to preemptive or similar rights, and no entity or person has any right of first refusal,
preemptive right, right of participation, or any similar right to participate in the transactions contemplated by this Agreement unless any such rights have been waived. The issue and sale of the Securities will not (except pursuant to their terms
thereunder), immediately or with the passage of time, obligate the Company to issue shares of Common Stock or other securities to any entity or person and will not result in a right of any holder of Company securities to adjust the exercise,
conversion, exchange or reset price under such securities. As of May 1, 2014, there are outstanding 24,975,929 shares of Common Stock. Further, as of such date there are (i) outstanding an aggregate of 2,305,000 options to purchase shares
of Common Stock under the Company’s stock option plans, (ii) outstanding an aggregate of 7,187,000 common stock purchase warrants, (iii) reserved for issuance an aggregate of zero shares of Common Stock pursuant to restricted stock
awards granted to certain of the Company’s employees under the Company’s stock option plans; and (iv) no other shares of Common Stock which are issuable pursuant to arrangements we have agreed to with consultants or vendors.
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(C) Authorization; Enforceability. The Company has the requisite corporate power and
authority to enter into, deliver and consummate the transactions contemplated by this Subscription Agreement, to issue, sell and deliver the Securities, and otherwise to carry out its obligations hereunder. The execution and delivery of this
Subscription Agreement and the consummation by it of the transactions contemplated thereby have been duly authorized by the Company and no further action is required by the Company in connection therewith. When executed and delivered by the Company,
this Subscription Agreement, the Convertible Notes will constitute the legal, valid and binding obligations of the Company, enforceable as to the Company in accordance with their respective terms, except as enforcement may be limited by bankruptcy,
insolvency, reorganization, arrangement, fraudulent conveyance or transfer, moratorium or other laws or court decisions, now or hereinafter in effect, relating to or affecting the rights of creditors generally and as may be limited by general
principles of equity and the discretion of the court having jurisdiction in an enforcement action (regardless of whether such enforceability is considered in a proceeding in equity or at law).
(D) Consents. The Company is not required to obtain any consent, waiver, authorization, approval or order of, give any notice to, or
make any filing or registration with, any court or other federal, state, local or other governmental authority or other person or entity in connection with the execution, delivery and performance by the Company of this Agreement or the issuance,
sale or delivery of the Securities other than (i) any filings required by state securities laws, (ii) the filing of a Notice of a Sale of Securities on Form D with the Commission under Regulation D of the Securities Act, (iii) those
that have been made or obtained prior to or contemporaneously with the initial Closing, (iv) filings pursuant to the Exchange Act upon closing of the offering and (v) UCC filings to evidence the security interest granted under the Security
Agreement.
(E) No Conflicts. The execution, delivery and performance of this Subscription Agreement by the Company and the
consummation by the Company of the transactions contemplated hereby in accordance with the terms and conditions described herein do not and will not: (i) conflict with or violate any provision of the Company’s certificate or articles of
incorporation, bylaws or other organizational or charter documents, or (ii) violate, conflict with, or constitute a default or breach (or an event that with notice or lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any agreement, credit facility, debt or other instrument (evidencing a Company debt or otherwise) or other understanding to which the
Company is a party or by which any property or asset of the Company is bound or affected, or (iii) result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental
authority to which the Company is subject (including federal and state securities laws and regulations), or by which any property or asset of the Company is bound or affected; except in the case of each of clauses (ii) and (iii), such as could
not, individually or in the aggregate, have or reasonably be expected to result in a Material Adverse Effect.
(F) Issuance of
Securities. The Securities have been duly authorized and, when issued and paid for in accordance with this Subscription Agreement, the Securities, and the securities comprising the Securities, will be duly and validly issued, fully paid and
nonassessable and will be issued free and clear of all liens and encumbrances, other than restrictions on transfer under applicable securities laws. The Company has properly reserved for issuance all the securities underlying the Convertible and,
upon payment for and issuance of such securities in accordance with the terms of the Convertible Notes, they will be duly authorized, fully paid and nonassessable securities of the Company, and will be issued free and clear of all liens and
encumbrances, other than restrictions on transfer under applicable securities laws.
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(G) SEC Reports; Financial Statements. As of their respective dates, the SEC Reports (as
defined in Section 1.7 above) complied in all material respects with the requirements of the Exchange Act and none of the SEC Reports, when filed, contained any untrue statement of a material fact or omitted to state a material fact required to
be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. Except as may be stated in the SEC Reports, the financial statements of the Company included in the
SEC Reports comply in all material respects with applicable accounting requirements and the rules and regulations of the Commission with respect thereto as in effect at the time of filing. Such financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America applied on a consistent basis during the periods involved (“GAAP”), except as may be otherwise specified in such financial statements or the notes thereto
and except that unaudited financial statements may not contain all footnotes required by GAAP, and fairly present in all material respects the financial position of the Company as of and for the dates thereof and the results of operations and cash
flows for the periods then ended, subject, in the case of unaudited statements, to normal, immaterial, year-end audit adjustments. The Company is current is satisfying its obligations to file periodic reports with the SEC in accordance with the SEC
rules and regulations. The SEC Reports accurately report that the Company is not a “shell” company within the meaning of SEC rules and regulations.
(H) Litigation. Except as disclosed in the SEC Reports or in Schedule II(H) to this Subscription Agreement, there is no pending or, to
the best knowledge of the Company, threatened action, suit, proceeding or investigation before any court, governmental agency or body, or arbitrator having jurisdiction over the Company, or any of its affiliates that would affect the execution by
the Company or the performance by the Company of its obligations under this Agreement, and all other agreements entered into by the Company relating hereto. Except as disclosed in the SEC Reports, there is no pending or, to the best knowledge
of the Company, threatened action, suit, proceeding or investigation before any court, governmental agency or body, or arbitrator having jurisdiction over the Company, or any of its affiliates which litigation if adversely determined could result in
a Material Adverse Effect.
(I) Liabilities. The Company has no liabilities or obligations which are material, individually or in
the aggregate, which are not disclosed in the SEC Reports, other than those incurred in the ordinary course of the Company’s businesses and which, individually or in the aggregate, would not reasonably be expected to have a material adverse
effect on the Company’s financial condition. Since the date of the latest audited financial statements included within the SEC Reports, except as specifically disclosed in a subsequent SEC Report filed prior to the date hereof or otherwise
disclosed herein, there has been no event, occurrence or development that has had or that could reasonably be expected to result in a Material Adverse Effect. Section 2(I) of the Disclosure Schedule sets forth a schedule, as of June 1,
2014 of all trade and accounts payable, setting forth the amount and the intended payee.
(J) Compliance. Except as disclosed in the
SEC Reports, the Company is not to its knowledge: (i) in default under or in violation of (and no event has occurred that has not been waived that, with notice or lapse of time or both, would result in a default by the Company or any Subsidiary
under), nor has the Company or any Subsidiary received notice of a claim that it is in default under or that it is in violation of, any indenture, loan or credit agreement or any other agreement or instrument to which it is a party or by which it or
any of its properties is bound (whether or not such default or violation has been waived), (ii) in violation of any judgment, decree or order of any court, arbitrator or governmental body or (iii) in violation of any statute, rule,
ordinance or regulation of any governmental authority, including without limitation all foreign, federal, state and local laws relating to taxes, environmental protection, occupational health and safety, product quality and safety and employment and
labor matters, except in each case as could not have or reasonably be expected to result in a Material Adverse Effect.
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(K) Intellectual Property. To the Company’s knowledge, the Company owns, possesses,
licenses or has other rights to use, on reasonable terms, all patents, patent applications, trade and service marks, trade and service mark registrations, trade names, copyrights, licenses, inventions, trade secrets, technology, know-how and other
intellectual property (collectively, the “Intellectual Property”) necessary for the conduct of the Company’s business as now conducted. Except as set forth in the SEC Reports or for such matters which would not be expected to
have a Material Adverse Effect, (a) to the Company’s knowledge, there is no material infringement by third parties of any such Intellectual Property owned by or exclusively licensed to the Company; (b) there is no pending or, to the
Company’s knowledge, threatened action, suit, proceeding or claim by others challenging the Company’s or any subsidiary’s rights in or to any material Intellectual Property, and the Company is unaware of any facts which would form a
reasonable basis for any such claim; (c) there is no pending or, to the Company’s knowledge, threatened action, suit, proceeding or claim by others challenging the validity or scope of any such Intellectual Property, and the Company is
unaware of any facts which would form a reasonable basis for any such claim; and (d) there is no pending or, to the Company’s knowledge, threatened action, suit, proceeding or claim by others that the Company’s business as now
conducted infringes or otherwise violates any patent, trademark, copyright, trade secret or other proprietary rights of others, and the Company is unaware of any other fact which would form a reasonable basis for any such claim.
(L) Tax Matters. Except for matters that would not, individually or in the aggregate, have or reasonably be expected to result in a
Material Adverse Effect, the Company (i) has made or filed all United States federal and state income and all foreign income and franchise tax returns, reports and declarations required by any jurisdiction to which it is subject, (ii) has
paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations and (iii) has set aside on its books provision reasonably adequate for the
payment of all material taxes for periods subsequent to the periods to which such returns, reports or declarations apply except for any such amounts that is currently being contested in good faith. There are no tax audits or investigations pending,
which if adversely determined would have a Material Adverse Effect; nor are there any material proposed additional tax assessments against the Company.
(M) Accountants. To the knowledge and belief of the Company, the Company’s independent registered public accounting firm
(i) is a registered public accounting firm as required by the Exchange Act and (ii) is an independent public or certified public accountants as required by the Securities Act and the Exchange Act.
(N) Bad Actors. Neither the Company nor any officer, director or member of executive management of the Company, any sponsor, general
partner, manager, advisor or any of the issuer’s affiliates, any beneficial owner of 20% or more of any class of the Company’s equity securities or any promoter (for purposes of this clause ((N) a “Covered Person”), has been the
subject of SEC, Financial Industry Regulatory Authority or state disciplinary actions or proceedings or criminal complaints within the last 10 years. No Covered Person:
(a) Has been convicted, within ten years before the date of this Subscription Agreement of any felony or misdemeanor: (i) in connection
with the purchase or sale of any security; (ii) involving the making of any false filing with the SEC; or (iii) arising out of the conduct of the business of an underwriter, broker, dealer, municipal securities dealer, investment advisor
or paid solicitor of purchasers of securities;
(b) Has been subject to any order, judgment or decree of any court of competent
jurisdiction, entered within five years within the date of this Subscription Agreement, that restrains or enjoins the Covered Person from engaging or continuing to engage in any conduct or practice: (i) in connection with the purchase or sale
of any security; (ii) involving the making of any false filing with the SEC; or (iii) arising out of the conduct of the business of an underwriter, broker, dealer, municipal securities dealer, investment adviser or paid solicitor of
purchasers of securities;
(c) Has been subject to a final order of a state securities commission (or an agency or officer of a state
performing like functions), a state authority that supervises or examines banks, savings associations, or credit unions, a state insurance commission (or an agency or officer of a state performing like functions), an appropriate federal banking
agency, the Commodity Futures Trading Commission, or the National Credit Union Administration that: (i) at the time of the sale of the securities, bars investor from: (a) association with an entity regulated by such commission, authority,
agency or officer, (b) engaging in the business of securities, insurance or banking, or (c) engaging in savings association or credit union activities; or (ii) constitutes a final order based on a violation of any law or regulation
that prohibits fraudulent, manipulative, or deceptive conduct entered within ten years before the date of this Subscription Agreement;
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(d) Has been subject to an order of the SEC entered pursuant to section 15(b) or 15B(c) of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”) or section 203(e) or 203(f) of the Investment Advisers Act of 1940, as amended (the “Advisers Act”) that, at the time of the sale of the securities:
(i) suspends or revokes the Covered Person’s registration as a broker, dealer, municipal securities dealer or investment adviser; (ii) places limitations on the activities, functions or operations of, or imposes civil money penalties
on, such person; or (iii) bars the Covered Person from being associated with any entity or from participating in the offering of any penny stock;
(e) Has been subject to any order of the SEC, entered within five years before the date of this Subscription Agreement, orders the Covered
Person to cease and desist from committing or causing a future violation of: (i) any scienter-based anti-fraud provision of the federal securities laws, including, but not limited to, Section 17(a)(1) of the Securities Act,
Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 206(1) of the Advisers Act or any other rule or regulation thereunder; or (ii) Section 5 of the Securities Act;
(f) Has been suspended or expelled from membership in, or suspended or barred from association with a member of, a securities self-regulatory
organization (e.g., a registered national securities exchange or a registered national or affiliated securities association) for any act or omission to act constituting conduct inconsistent with just and equitable principles of trade;
(g) Has been subject to a United States Postal Service false representation order entered within five years of the date of this Subscription
Agreement, subject to a temporary restraining order or preliminary injunction with respect to conduct alleged by the United States Postal Service to constitute a scheme or device for obtaining money or property through the mail by means of false
representations; and
(h) Has filed (as a registrant or issuer), or were named as an underwriter in any registration statement or
Regulation A offering statement filed with the SEC that, within five years before the sale of the securities, was the subject of a refusal order, stop order, or order suspending the Regulation A exemption, or is, at the time of the sale of the
securities, the subject of an investigation or proceeding to determine whether a stop order or suspension order should be issued.
Article III
REPRESENTATIONS AND WARRANTIES OF PURCHASERS
By signing this Agreement, each undersigned Purchaser hereby represents and warrants to the Company as follows as an inducement to the Company
to accept the subscription of the Purchaser:
(A) The Purchaser acknowledges and agrees that (i) the offering and sale of the
Securities are intended to be exempt from registration under the Securities Act by virtue of Section 4(2) of the Securities Act and/or Regulation D promulgated thereunder, (ii) the Securities have not been registered under the Securities
Act and (iii) that the Company has represented to the Purchaser (assuming the veracity of the representations of the Purchaser made herein and in the Questionnaire annexed hereto at Exhibit A) that the Securities have been offered and
sold by the Company in reliance upon an exemption from registration provided in Section 4(2) of the Securities Act and Regulation D thereunder. In accordance therewith and in furtherance thereof, the Purchaser represents and warrants to and
agrees with the Company that it is an accredited investor (as defined in Rule 501 promulgated under the Securities Act) for the reason indicated in Article I of this Subscription Agreement.
(B) The Purchaser hereby represents and warrants that the Purchaser is acquiring the Securities hereunder for its own account for investment
and not with a view to distribution, and with no present intention of distributing the Securities or selling the Securities for distribution. The Purchaser understands that the Securities are being sold to the Purchaser in a transaction which is
exempt from the registration requirements of the Securities Act. Accordingly, the Purchaser acknowledges that it has been advised that the Securities have not been registered under the Securities Act and are being sold by the Company in reliance
upon the veracity of the Purchaser’s representations contained herein and upon the exemption from the registration requirements provided by the Securities Act and the securities laws of all applicable states. The Purchaser’s acquisition of
the Securities shall constitute a confirmation of the foregoing representation and warranty and understanding thereof.
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(C) The Purchaser (or its “Purchaser Representative”, if any) has such knowledge
and experience in financial and business matters as is required for evaluating the merits and risks of making this investment, and the Purchaser or its Purchaser Representative(s) has received such information requested by the Purchaser concerning
the business, management and financial affairs of the Company in order to evaluate the merits and risks of making this investment. Further, the Purchaser acknowledges that the Purchaser has had the opportunity to ask questions of, and receive
answers from, the officers of the Company concerning the terms and conditions of this investment and to obtain information relating to the organization, operation and business of the Company and of the Company’s contracts, agreements and
obligations or needed to verify the accuracy of any information contained herein or any other information about the Company. Except as set forth in this Subscription Agreement, no representation or warranty is made by the Company to induce the
Purchaser to make this investment, and any representation or warranty not made herein or therein is specifically disclaimed and no information furnished to the Purchaser or the Purchaser’s advisor(s) in connection with the sale were in any way
inconsistent with the information stated herein. The Purchaser further understands and acknowledges that no person has been authorized by the Company to make any representations or warranties concerning the Company, including as to the accuracy or
completeness of the information contained in this Subscription Agreement.
(D) The Purchaser is making the foregoing representations and
warranties with the intent that they may be relied upon by the Company in determining the suitability of the sale of the Securities to the Purchaser for purposes of federal and state securities laws. Accordingly, each Purchaser represents and
warrants that the information stated herein is true, accurate and complete, and agrees to notify and supply corrective information promptly to the Company as provided above if any of such information becomes inaccurate or incomplete. The Purchaser
has completed this Agreement and Questionnaire, has delivered it herewith and represents and warrants that it is accurate and true in all respects and that it accurately and completely sets forth the financial condition of the Purchaser on the date
hereof. The Purchaser has no reason to expect there will be any material adverse change in its financial condition and will advise the Company of any such changes occurring prior to the closing or termination of the Offering.
(E) The Purchaser is not subscribing for any of the Securities as a result of or subsequent to any advertisement, article, notice or other
communication published in any newspaper, magazine or similar media or broadcast over television or radio, any seminar or meeting, or any solicitation of a subscription by a person not previously known to the Purchaser in connection with investments
in Securities generally.
(F) The Purchaser has received or obtained access to certain information regarding the Company, including this
Subscription Agreement, the SEC Reports and other accompanying documents of the Company receipt of which is hereby acknowledged. The Purchaser has carefully reviewed all information provided to it and has carefully evaluated and understands the
risks described therein related to the Company and an investment in the Company, and understands and has relied only on the information provided to it in writing by the Company relating to this investment. No agent prepared any of the information to
be delivered to prospective Subscribers in connection with this transaction. Prospective Subscribers are advised to conduct their own review of the business, properties and affairs of the Company before subscribing to purchase the Securities.
(G) The Purchaser acknowledges and agrees that investing in the Company’s Securities involves risks and that the Company’s operating
results and financial condition have varied in the past and may in the future vary significantly depending on a number of factors. The Purchaser acknowledges and agrees that it has evaluated and understands the risks regarding investing in the
Company’s securities, including the risks identified in this Subscription Agreement and the Risk Factors described in the Company’s SEC Reports. The Purchaser agrees that the risks described herein and in such SEC Reports are not the only
risks facing the Company. The Purchaser agrees that these risks could have a material adverse effect on the Company’s business, results of operations, financial condition or liquidity and cause its actual operating results to materially differ
from those contained in any forward-looking statements made in this Subscription Agreement, in the Company’s SEC Reports and elsewhere by management. Before making an investment decision, each Purchaser acknowledges that it has been advised
that it should carefully consider these risks as well as other information contained or incorporated by reference in this Subscription Agreement. Additional risks and uncertainties not currently known to the Company or that it currently deems to be
immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results.
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(H) The Purchaser also understands and agrees that, although the Company will use its best
efforts to keep the information provided in this Subscription Agreement strictly confidential, the Company or its counsel may present this Subscription Agreement and the information provided in answer to it to such parties as they may deem advisable
if called upon to establish the availability under any federal or state securities laws of an exemption from registration of the private placement or if the contents thereof are relevant to any issue in any action, suit or proceeding to which the
Company or its affiliates is a party, or by which they are or may be bound or as otherwise required by law or regulatory authority. Notwithstanding the foregoing, the Company shall not publicly disclose the name of any Purchaser, or include the name
of any Purchaser in any filing with the Commission without the prior written consent of such Purchaser, except as required by federal securities law in connection with the disclosure of the transactions contemplated by this Subscription Agreement
and otherwise to the extent such disclosure is required by law or regulation, in which case the Company shall provide the Purchasers with prior notice of such disclosure permitted under this clause.
(I) The individual signing below on behalf of any entity hereby warrants and represents that he/she is authorized to execute this Subscription
Agreement on behalf of such entity. If an individual, the Purchaser has reached the age of majority in the state in which the Purchaser resides. The execution and delivery of this Subscription Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by all requisite action, if any, in respect thereof on the part of Purchasers and no other proceedings on the part of Purchasers are necessary to consummate the transactions contemplated hereby. This
Subscription Agreement has been duly and validly executed and delivered by Purchasers and constitutes a valid and binding obligation of Purchasers, enforceable against Purchasers in accordance with its terms (subject to applicable bankruptcy,
insolvency and similar laws affecting creditors’ rights generally and subject, as to enforceability, to general principles of equity (whether applied in a proceeding in equity or at law)).
(J) The Purchaser is aware that the offering of the Securities involves securities for which only a limited trading market exists, thereby
requiring any investment to be maintained for an indefinite period of time. The purchase of the Securities involves risks which the Purchaser has evaluated, and the Purchaser is able to bear the economic risk of the purchase of such Securities and
the loss of its entire investment. The undersigned is able to bear the substantial economic risk of the investment for an indefinite period of time, has no need for liquidity in such investment and can afford a complete loss of such investment. The
Purchaser’s overall commitment to investments that are not readily marketable is not, and his acquisition of the Securities will not cause such overall commitment to become, disproportionate to his net worth and the Purchaser has adequate means
of providing for its current needs and contingencies.
(K) In entering into this Subscription Agreement and in purchasing the Securities,
the Purchaser further acknowledges that:
(i) The Company has informed the Purchaser that the Securities have not been offered for sale by
means of general advertising or solicitation and the Purchaser acknowledges that it has either a pre-existing personal or business relationship with either the Company or any of its officers, directors or controlling person, of a nature and duration
such as would enable a reasonable prudent investor to be aware of the character, business acumen, and general business and financial circumstances of the Company and an investment in the Securities.
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(ii) Neither the Securities nor any interest therein may be resold by the Purchaser in the
absence of a registration under the Securities Act or an exemption from registration. In particular, the Purchaser is aware that all of the foregoing described Securities will be “restricted securities”, as such term is defined in Rule 144
promulgated under the Securities Act (“Rule 144”), and they may not be sold pursuant to Rule 144, unless the conditions thereof are met. Other than set forth in this Agreement, the Company has no obligation to register any
securities purchased or issuable hereunder.
(iii) The following legend (or substantially similar language) shall be placed on the
certificate(s) or other instruments evidencing the Securities:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 (THE “ACT”), OR ANY STATE SECURITIES LAWS AND NEITHER SUCH NOTES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR OTHERWISE TRANSFERRED UNLESS (1) A REGISTRATION STATEMENT WITH
RESPECT THERETO IS EFFECTIVE UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (2) THE COMPANY RECEIVES AN OPINION OF COUNSEL TO THE HOLDER OF SUCH NOTES, WHICH COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH
NOTES MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR TRANSFERRED IN THE MANNER CONTEMPLATED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR APPLICABLE STATE SECURITIES LAWS.
(iv) The Company may at any time place a stop transfer order on its transfer books against the Securities. Such stop order will be removed, and
further transfer of the Securities will be permitted, upon an effective registration of the respective Securities, or the receipt by the Company of an opinion of counsel satisfactory to the Company that such further transfer may be effected pursuant
to an applicable exemption from registration.
(L) The Company has employed its own legal counsel in connection with the Offering. The
Purchasers have not been represented by independent counsel in connection with the preparation of this Subscription Agreement or the terms of this Offering and no investigation of the merits or fairness of the Offering has been conducted on behalf
of the Purchasers. Each Purchaser has had the opportunity to consult with its own legal, tax and financial advisors with respect to the Offering made pursuant to this Subscription Agreement.
(M) (insert name of
Purchaser Representative: if none leave blank) has acted as the Purchaser’s Purchaser Representative for purposes of the private placement exemption under the Act. If the Purchaser has appointed a Purchaser Representative (which
term is used herein with the same meaning as given in Rule 501(h) of Regulation D), the Purchaser has been advised by his Purchaser Representative as to the merits and risks of an investment in the Company in general and the suitability of an
investment in the Securities for the Purchaser in particular.
(N) The undersigned hereby acknowledges that officers, affiliates, employees
and directors of the Company and/or the Selling Agent may purchase Securities in the Offering on the same terms and conditions as the Purchasers.
(O) It never has been represented, guaranteed or warranted by the Company, any of the officers, directors, stockholders, partners, employees or
agents of the Company, or any other persons, whether expressly or by implication, that: (i) the Company or the Purchasers will realize any given percentage of profits and/or amount or type of consideration, profit or loss as a result of the
Company’s activities or the Purchaser’s investment in the Company; or (ii) the past performance or experience of the management of the Company, or of any other person, will in any way indicate the predictable results of the ownership
of the Securities or of the Company’s activities.
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(P) The Purchaser acknowledges that any delivery to it of this Subscription Agreement relating to
the Securities prior to the determination by the Company of its suitability as a Purchaser shall not constitute an offer of the Securities until such determination of suitability shall be made, and the Purchaser hereby agrees that it shall promptly
return this Subscription Agreement and the other Offering documents to the Company upon request. The Purchaser understands that the Company shall have the right to accept or reject this subscription in whole or in part. Unless this subscription is
accepted in whole or in part by the Company this subscription shall be deemed rejected in whole.
(Q) Each Purchaser acknowledges that it
is aware (and that its representatives who are apprised of this matter have been or will be advised) that the United States securities laws restrict persons with material non-public information about a company obtained directly or indirectly from
that company from purchasing or selling securities of such company, or from communicating such information to any other person under circumstances in which it is reasonably foreseeable that such person is likely to purchase or sell such securities.
Each Purchaser hereby confirm and acknowledges that it is in receipt of material, non-public information regarding this Offering and the Company and each Purchaser further agrees and acknowledges that it will hold such information in confidence, is
restricted in its ability to use such information and may not use any such information in contravention of applicable securities laws or otherwise, including trading in the Company’s securities, except for the purpose of evaluating an
investment in the Company’s securities. Each Purchaser agrees to comply with such restrictions for so long as it (or its representatives) posses any material, non-public information concerning the Company or the transactions contemplated
herein.
(R) Each Purchaser acknowledges and agrees that there is no “minimum” offering amount for the Securities and that funds
may be immediately released to the Company.
(S) Each Purchaser understands that nothing in this Subscription Agreement or any other
materials presented to the Purchaser in connection with the purchase and sale of the Securities constitutes legal, tax or investment advice. The Purchaser has consulted such legal, tax and investment advisors as it, in its sole discretion, has
deemed necessary or appropriate in connection with its purchase of Securities.
Article IV
COVENANTS AND AGREEMENTS
4.1 Maintain SEC Reporting Requirements; Rule 144 Availability. The Company shall, in a timely manner, make all necessary filings with
the SEC under the Securities and Exchange Act of 1934 for the longer of (i) so long as any principal or interest under the Convertible Notes remain unpaid or (ii) a date which is the last trading day of the ninth calendar month after the
date of conversion into Conversion Shares of the last outstanding Convertible Note by the holder thereof. The Company shall, at its cost and expenses, (i) maintain a stock transfer agent with respect to its Common Stock; (ii) at the
Company’s cost and expense, cause to be provided to the Subscribers in connection with the sale of Conversion Shares any and all opinions of counsel to allow for the sale of the Conversion Shares pursuant to SEC Rule 144; and (iii) cause
its transfer agent to issue Conversion Shares upon conversion of the Convertible Notes (or remove any restrictive legends on the Conversion Shares) as may be allowed in conformity with SEC rules and regulations.
25
Article V
INDEMNIFICATION
5.1 Indemnification by the Company. The Company agrees to defend, indemnify and hold harmless the Purchasers and shall reimburse
Purchasers for, from and against each claim, loss, liability, cost and expense (including without limitation, interest, penalties, costs of preparation and investigation, and the reasonable fees, disbursements and expenses of attorneys, accountants
and other professional advisors) (collectively, “Losses”) directly or indirectly relating to, resulting from or arising out of any untrue representation, misrepresentation, breach of warranty or non-fulfillment of any covenant,
agreement or other obligation by or of the Company contained herein or in any certificate, document, or instrument delivered to Purchasers pursuant hereto.
5.2 Indemnification by Purchasers. Purchasers agrees to defend, indemnify and hold harmless the Company and shall reimburse the Company
for, from and against all Losses directly or indirectly relating to, resulting from or arising out of any untrue representation, misrepresentation, breach of warranty or non-fulfillment of any covenant, agreement or other obligation of the
Purchasers contained herein or in any certificate, document or instrument delivered to the Company pursuant hereto.
5.3 Procedure.
The party to be indemnified hereunder (the “Indemnified Party”) shall promptly notify the party providing indemnification hereunder (the “Indemnifying Party”) of any claim, demand, action or proceeding for which
indemnification may be sought under Sections 5.1 or 5.2 of this Subscription Agreement, and, if such claim, demand, action or proceeding is a third party claim, demand, action or proceeding (collectively, an “Action”), the
Indemnifying Party will have the right at its expense to assume the defense thereof using counsel reasonably acceptable to the Indemnified Party; provided, however any failure or delay to so notify the Indemnifying Party will not relieve it from its
obligation to indemnify any Indemnified Party, unless and only to the extent that such failure or delay results in the forfeiture by the Indemnifying Party of substantial rights and defenses or the Indemnifying Party is otherwise materially
prejudiced by such failure or delay. Any Indemnified Party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such
Indemnified Party except to the extent that (i) the employment thereof has been specifically authorized by the Indemnifying Party in writing, (ii) the Indemnifying Party has failed after a reasonable period of time to assume such defense
and to employ counsel or (iii) in such action there is, in the reasonable opinion of counsel, a material conflict on any material issue between the position of the Indemnifying Party and the position of such Indemnified Party, in which case the
Indemnifying Party shall be responsible for the reasonable fees and expenses of no more than one such separate counsel for the Indemnified Party. In connection with any such third party Action, Purchasers and the Company shall cooperate with each
other and provide each other with access to relevant books and records in their possession. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, which shall not be unreasonably withheld, effect any settlement,
compromise or consent to the entry of judgment in any pending or threatened Action in respect of which any Indemnified Party is or could have been a party and indemnity was or could have been sought hereunder by such Indemnified Party, unless such
settlement, compromise or consent includes an unconditional release of such Indemnified Party from all liability on claims that are the subject matter of such Action. Further, no Indemnified Party seeking indemnification hereunder will, without the
prior written consent of the Indemnifying Party, which shall not be unreasonably withheld, settle, compromise, consent to the entry of any judgment in or otherwise seek to terminate any Action. The Indemnifying Party shall not be liable for
settlement of any Action effected without its written consent.
26
ARTICLE VI
MISCELLANEOUS
6.1 Representations and Warranties and Covenants. No investigation made by or on behalf of either party shall affect the
representations and warranties made pursuant to this Subscription Agreement. No party makes any additional or implied representations other than those set forth herein. The representations, warranties and covenants made by the Company herein shall
survive final Closing of the Offering for a period of one (1) year. Section 4.1 f this Agreement shall remain in effect for a period of the longer of (i) so long as any principal or interest under the Convertible Notes remain unpaid
or (ii) a date which is the last trading day of the ninth calendar month after the date of conversion into Conversion Shares of the last outstanding Convertible Note by the holder thereof.
6.2 Expenses. Each party hereto shall bear and pay all costs and expenses incurred by it in connection with the transactions
contemplated hereby, including fees and expenses of its own brokers, finders, financial consultants, accountants and counsel.
6.3
Entire Agreement. This Subscription Agreement, including the Exhibits, contains the entire agreement and understanding of the parties with respect to its subject matter. This Subscription Agreement supersedes all prior arrangements and
understandings between the parties, either written or oral, with respect to its subject matter.
6.4 Binding Effect of
Subscription. The Purchaser hereby acknowledges and agrees, subject to any applicable state securities laws that the subscription and application hereunder are irrevocable, that the Purchaser is not entitled to cancel, terminate or revoke this
Subscription Agreement and that this Subscription Agreement shall survive the death or disability of the Purchaser and shall be binding upon and inure to the benefit of the Purchaser and his heirs, executors, administrators, successors, legal
representatives, and assigns. If the Purchaser is more than one person, the obligations of the Purchaser hereunder shall be joint and several, and the agreements, representations, warranties, and acknowledgments herein contained shall be deemed to
be made by and be binding upon each such person and his heirs, executors, administrators, successors, legal representatives, and assigns.
6.5 Captions. The table of contents and captions contained in this Subscription Agreement are for reference purposes only and are not
part of this Subscription Agreement.
6.6 Amendments; Waivers. No provision of this Subscription Agreement may be waived or amended
except in a written instrument signed by the Company and the Purchasers holding a majority of the Convertible Notes. No waiver of any default with respect to any provision, condition or requirement of this Subscription Agreement shall be deemed to
be a continuing waiver in the future or a waiver of any subsequent default or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of either party to exercise any right hereunder in any manner impair the
exercise of any such right.
6.7 Notices. All notices, requests, consents and other communications hereunder will be in writing,
will be mailed by first-class registered or certified airmail, or nationally recognized overnight express courier, postage prepaid, or by facsimile, and will be deemed given (i) if delivered by first-class registered or certified mail domestic,
three business days after so mailed, (ii) if delivered by nationally recognized overnight carrier, one business day after so mailed, and (iii) if delivered by facsimile, upon electric confirmation of receipt and will be delivered and
addressed as follows: (A) if to the Company, to the Company’s executive office as set forth on the cover of this Subscription Agreement and (b) if to a Subscriber, to the address given by the Subscriber on the signature page to this
Subscription Agreement, or such other address as may be given in writing by the Subscriber to the Company.
6.8 Execution. This
Subscription Agreement may be executed through the use of separate signature pages or in any number of counterparts, and each of such counterparts shall, or all purposes, constitute one agreement binding on all parties, notwithstanding that all
parties are not signatories to the same counterpart.
27
6.9 Severability; Assignment. Each provision of this Subscription Agreement is intended to
be severable from every other provisions, and the invalidity or illegality of any portion hereof, shall not affect the validity or legality of the remainder hereof. This Subscription Agreement is not transferable or assignable by the Purchaser
except as may be provided herein. This Subscription Agreement shall be binding upon and inure to the benefit of the Company, the Purchasers and their respective successors and permitted assigns.
6.10 Governing Law. All questions concerning the construction, validity, enforcement and interpretation of this Subscription Agreement
shall be governed by and construed and enforced in accordance with the internal laws of the State of California, without regard to the principles of conflicts of law thereof. Each party agrees that all proceedings concerning the interpretations,
enforcement and defense of the transactions contemplated by this Agreement (whether brought against a party hereto or its respective Affiliates, employees or agents) shall be commenced exclusively in the state and federal courts sitting in the
Courts of Los Angeles, State of California (the “California Courts”). Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the California Courts for the adjudication of any dispute hereunder or in connection
herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any proceeding, any claim that it is not personally subject to the jurisdiction of any California Court, or that
such proceeding has been commenced in an improper or inconvenient forum. Each party hereto hereby irrevocably waives personal service of process and consents to process being served in any such proceeding by mailing a copy thereof via registered or
certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof.
Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by
jury in any proceeding arising out of or relating to this Agreement or the transactions contemplated hereby. If either party shall commence a proceeding to enforce any provisions of this Agreement, then the prevailing party in such proceeding shall
be reimbursed by the other party for its reasonable attorney’s fees and other reasonable costs and expenses incurred with the investigation, preparation and prosecution of such Proceeding.
Signature pages to Subscription Agreement Follows
28
SIGNATURE PAGE TO SUBSCRIPTION AGREEMENT
IN WITNESS WHEREOF, the parties hereto have executed or caused this Subscription Agreement to be executed by their signature as natural
persons or by individuals by their duly authorized officers as of the day of
, 2014.
|
| THE COMPANY: |
|
| XENONICS HOLDINGS, INC.: |
|
| |
| Name: |
| Title: |
29
XENONICS HOLDINGS, INC.
EXECUTION BY AN INDIVIDUAL
(Not applicable to entities)
IF
SUBSCRIBERS ARE PURCHASING SECURITIES WITH THE COMPANY’S SPOUSE, INVESTOR MUST BOTH SIGN THIS SIGNATURE PAGE.
PLEASE INDICATE DESIRED TYPE OF
OWNERSHIP OF SECURITIES:
| |
¨ |
Joint Tenants (rights of survivorship) |
| |
¨ |
Tenants in Common (no rights of survivorship) |
I represent that the foregoing information is true and correct.
IN WITNESS WHEREOF, the undersigned has duly executed this Subscription Agreement and agrees to the terms hereof.
Dated:
, 2014
Subscription Amount (Principal Amount of Convertible Notes purchased):
$
|
|
(Name of Subscriber - Please Print) |
|
|
(Signature) |
|
|
(Name of co- Subscriber - Please
Print) |
|
|
(Signature of Co- Subscriber) |
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|
| Exact name Securities are to be issued under: |
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| Address for Delivery of Certificates
(if not the same as in Questionnaire): |
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30
XENONICS HOLDINGS, INC.
PARTNERSHIP SIGNATURE PAGE
The undersigned PARTNERSHIP hereby represents and warrants that the person signing this Subscription Agreement on behalf of the PARTNERSHIP is
a general partner of the PARTNERSHIP, has been duly authorized by the PARTNERSHIP to acquire the Securities and sign this Subscription Agreement on behalf of the PARTNERSHIP and, further, that the undersigned PARTNERSHIP has all requisite authority
to purchase such Securities and enter into the Subscription Agreement.
IN WITNESS WHEREOF, the undersigned has duly executed this Subscription Agreement
and agrees to the terms hereof.
Dated:
, 2014
Subscription Amount (Principal Amount of Convertible Notes purchased):
$
|
|
|
| |
|
|
Name of Partnership |
|
|
(Please Type or Print) |
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| By: |
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(Signature) |
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| Name: |
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|
(Please Type or Print) |
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| Title: |
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|
(Please Type or Print) |
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|
| Exact name Securities are to be issued under: |
|
|
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| Address for Delivery of Certificates
(if not the same as in Questionnaire): |
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31
XENONICS HOLDINGS, INC.
CORPORATION/LIMITED LIABILITY COMPANY SIGNATURE PAGE
The undersigned CORPORATION or LIMITED LIABILITY COMPANY hereby represents and warrants that the person signing this Subscription Agreement on behalf of the
CORPORATION or LIMITED LIABILITY COMPANY has been duly authorized by all requisite action on the part of the CORPORATION or LIMITED LIABILITY COMPANY to acquire the Securities and sign this Subscription Agreement on behalf of the CORPORATION or
LIMITED LIABILITY COMPANY and, further, that the undersigned CORPORATION or LIMITED LIABILITY COMPANY has all requisite authority to purchase the Securities and enter into this Subscription Agreement.
IN WITNESS WHEREOF, the undersigned has duly executed this Subscription Agreement and agrees to the terms hereof.
Dated:
, 2014
Subscription Amount (Principal Amount of Convertible Notes purchased):
$
|
|
|
| |
|
|
Name of Corporation |
|
|
Or Limited Liability Company |
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|
(Please Type or Print) |
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| By: |
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|
Signature |
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| Name: |
|
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(Please Type or Print) |
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| Title: |
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(Please Type or Print) |
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| Exact name Securities are to be issued under: |
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| Address for Delivery of Certificates
(if not the same as in Questionnaire): |
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32
XENONICS HOLDINGS, INC.
TRUST/RETIREMENT PLAN SIGNATURE PAGE
The
undersigned TRUST or RETIREMENT PLAN hereby represents and warrants that the persons signing this Subscription Agreement on behalf of the TRUST or RETIREMENT PLAN are duly authorized to acquire the Securities and sign this Subscription Agreement on
behalf of the TRUST or RETIREMENT PLAN and, further, that the undersigned TRUST or RETIREMENT PLAN has all requisite authority to purchase such Securities and enter into the Subscription Agreement.
IN WITNESS WHEREOF, the undersigned has duly executed this Subscription Agreement and agrees to the terms hereof.
Dated:
, 2014
Subscription Amount (Principal Amount of Convertible Notes purchased):
$
|
|
|
| |
| Title of Trust or Retirement Plan |
| (Please Type or Print) |
|
|
| By: |
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Signature of Trustee or |
|
|
Authorized Signatory |
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| Name of Trustee: |
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(Please Type or Print) |
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| By: |
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Signature of Co-Trustee if applicable |
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| Name of Co-Trustee: |
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(Please Type or Print) |
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| Exact name Securities are to be issued under: |
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| Address for Delivery of Certificates
(if not the same as in Questionnaire): |
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33
EXHIBIT A
XENONICS HOLDINGS, INC.
Private Placement of Secured Convertible Notes
INVESTOR SUITABILITY QUESTIONNAIRE
The following information is needed in order to determine (i) whether an investment in XENONICS HOLDINGS, INC. (the “Company”
or “Xenonics”) by the undersigned (the “Investor”) is suitable in light of the Investor’s personal and financial position, and (ii) whether the Investor, either alone or with a representative, has sufficient knowledge
and experience in financial and business affairs to evaluate the merits and risks of the prospective investment (the “Investment”) in Secured Convertible Notes of Xenonics as described in the Subscription Agreement dated as of
June 23, 2014 (“Agreement”). Terms not otherwise defined herein shall have the meaning ascribed to such terms in the Agreement.
The Investor understands that this questionnaire (this “Questionnaire”) is intended to enable the Company and Sandlapper Securities,
LLC, as selling agent (“Placement Agent”), to discharge their respective responsibilities under an exemption from registration under the Securities Act of 1933 (the “Act”), and with respect to the Placement Agent, its obligations
under applicable FINRA rules, and thus the Company, the Placement Agent and their respective advisors will rely upon the information contained herein. Accordingly, the undersigned represents to the Company and the Placement Agent as follows:
(i) The information contained herein is complete and accurate and may be relied upon by the Company and its advisors; and
(ii) The Investor will notify the Company immediately of any material change in any information provided herein occurring prior to the
acceptance or rejection of a subscription agreement between the Company and the Investor.
The Investor understands and agrees that,
although the Company will use its best efforts to keep the information provided in the answers to this Questionnaire strictly confidential, the Company may present this Questionnaire and the information provided in it by the Investor to such parties
as the Company deems advisable if called upon to establish the availability under any federal or state securities laws of an exemption from registration or if the contents thereof are relevant to any issue in any action, suit, or proceeding to which
the Company is a party or by which it is or may be bound.
The Investor realizes that this Questionnaire does not constitute an offer of
securities by the Company, but rather is a request for information.
Investor Information
INSTRUCTIONS: Please print or type all answers.
If the
answer to any question is “none” or “not applicable,” please so state.
Part A — Personal Data
| 1. |
Name of the Investor:_____________________________________________________________ |
| 2. |
Date of Birth:____________________________________________________________________ |
| 3. |
Social Security No.: ______________________________________________________________ |
| 4. |
Marital Status: __________________________________________________________________ |
| 5. |
Home Address (The address given must be your residence address where you are registered to vote. |
34
Post office boxes and other addresses including addresses care of a representative will not be
accepted.)
__________________________________________________________________________________
__________________________________________________________________________________
| 6. |
Home Telephone Number:______________________________________________________________ |
| 7. |
Profession: __________________________________________________________________________ |
| 8. |
Name of Employer: ___________________________________________________________________ |
| 9. |
Business Address: ___________________________________________________________________ |
| 10. |
Business Telephone Number: __________________________________________________________ |
| 11. |
Position/ Title: ______________________________________________________________________ |
| 12. |
Nature of Duties: ____________________________________________________________________ |
Part B —
Financial Data and Investment History
13. Please state whether you are an “accredited investor,” as such term is defined under the Securities
Act of 1933. Check the applicable category below:
|
|
|
| (a) |
|
A “Bank” as defined in Section 3(a)(2) of the Act, or any savings and loan association or other institution as defined in Section 3(a)(5)(A) of the Act whether acting in its individual or fiduciary capacity; |
|
|
| (b) |
|
Any broker or dealer registered pursuant to Section 15 of the Securities Exchange Act of 1934 (the “Exchange Act”); |
|
|
| (c) |
|
An insurance company as defined in Section 2(13) of the Act; |
|
|
| (d) |
|
An investment company registered under the Investment Company Act of 1940 (the “1940 Act”) or a business development company as defined in Section 2(a)(48) of the 1940 Act; |
|
|
| (e) |
|
A “Small Business Investment Company” licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958; |
|
|
| (f) |
|
A plan established and maintained by a state, or its political subdivisions, or any agency or instrumentality of a state or its political subdivisions for the benefit of its employees, if such plan has total assets in excess of
$5,000,000; |
|
|
| (g) |
|
Any employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974, as amended, if the investment decision is made by a plan fiduciary, as defined in Section 3(21) of such Act, which is either a
bank, savings and loan association, insurance company, or registered investment advisor, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are
Accredited Investors. |
|
|
| (h) |
|
A “Private Business Development Company” as defined in Section 202(a)(22) of the Investment Advisers Act of 1940. |
|
|
| (i) |
|
An organization described in Section 501(c)(3) of the Internal Revenue Code, corporation or similar business trust, or partnership, not formed for the specific purpose of acquiring the Units, with total assets in excess of
$5,000,000. |
35
|
|
|
| (j) |
|
A natural person whose individual net worth,* or joint net worth with that person’s spouse, at the time of purchase exceeds $1,000,000. |
|
|
| (k) |
|
A natural person who had an individual income** in excess of $200,000 in each of the two most recent years or joint income with that person’s spouse in excess of $300,000 in each of those years and has a reasonable
expectation of reaching the same income level in the current year. |
|
|
| (l) |
|
A trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the Units, whose purchase is directed by a sophisticated person as described in Rule 506(b)(2)(ii) of Regulation D promulgated
under the Act. |
|
|
| (m) |
|
Any entity in which all of the equity owners are Accredited Investors.*** |
| * |
For purposes hereof net worth shall be deemed to include ALL of your assets, liquid or illiquid (excluding the value of your principal residence) MINUS any liabilities (including such items as home mortgages and other
debts and liabilities). |
| ** |
For purposes hereof the term “income” is not limited to “adjusted gross income” as that term is defined for federal income tax purposes, but rather includes certain items of income which are deducted
in computing “adjusted gross income.” For Subscribers who are salaried employees, the gross salary of such Subscribers, minus any significant expenses personally incurred by such Subscriber in connection with earning the salary, plus any
income from any other source including unearned income, is a fair measure of “income” for purposes hereof. For Subscribers who are self-employed, “income” is generally construed to mean total revenues received during the calendar
year minus significant expenses incurred in connection with earning such revenues. |
| *** |
If the Subscriber intends to qualify under (m), then all owners of the entity must complete a Subscription Agreement as an individual. |
14. Please provide your net worth (together with your joint net worth including your spouse, if married) as of the time of your investment. Joint net worth is
the sum of the individual net worth of both spouses. The term is not limited to property which is jointly held in a formal sense (e.g., tenancy in common, tenancy by the entirety, or community property). In calculating net worth, all assets, such as
home, home furnishings and automobiles, less liabilities, should be considered.
15. Indicate (a) your individual income from all sources for the
calendar years 2012 and 2013 and estimated income for 2014 or (b) your joint income with your spouse from all sources for the calendar years 2012 and 2013 and estimated income for 2014 (It is important that you check the highest applicable
amount; for guidance in computing “income” for purposes of this Subscription Agreement, see the notes at the end of “Section B: Accredited Investor Status.”):
(a) individual income:
|
|
|
|
|
|
|
|
|
| |
|
$200,000
to $299,000 |
|
$300,000
to $399,000 |
|
$400,000
to $499,000 |
|
$500,000
and over |
| 2012 |
|
_________ |
|
_________ |
|
_________ |
|
_________ |
| 2013 |
|
_________ |
|
_________ |
|
_________ |
|
_________ |
| 2014 |
|
_________ |
|
_________ |
|
_________ |
|
_________ |
(b) joint income:
36
|
|
|
|
|
|
|
|
|
| |
|
$200,000
to $299,000 |
|
$300,000
to $399,000 |
|
$400,000
to $499,000 |
|
$500,000
and over |
| 2012 |
|
_________ |
|
_________ |
|
_________ |
|
_________ |
| 2013 |
|
_________ |
|
_________ |
|
_________ |
|
_________ |
| 2014 |
|
_________ |
|
_________ |
|
_________ |
|
_________ |
16. Will you have following the time of your investment in the Company adequate liquid assets (defined as cash, cash
equivalents and freely marketable securities) to meet your current needs and personal contingencies without considering the funds used to make the investment?
Yes ¨
No ¨
17. Please indicate below any additional matter
of a financial nature that is relevant to an analysis of your financial position, including whether you have filed for or been involved in personal bankruptcy proceedings within the past five years; whether there have been any lawsuits or claims
pending or threatened against you materially affecting your net worth as reported in this questionnaire; and whether other significant liabilities have existed for which you may have been obligated:
18. Have you invested in securities offered through private placements in the last five years?
Yes ¨
No ¨
| 19. |
Do you always make your own ultimate decisions on your investments? |
Yes ¨ No ¨
20. Do you believe that you have sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of your investment in
the Company?
Yes ¨
No ¨
21. Have you used a purchaser representative in
connection with your investment in the Company (i.e., someone who has such knowledge and experience in financial and business matters that he or she is capable of evaluating the merits and risks of your investment in the Company and whom you
acknowledged in writing during the course of your investment to be your purchaser representative)?
Yes ¨ No ¨
If yes, please provide name and contact information:
|
|
|
| 22. Education: |
|
Please describe your business or professional education or training, listing any schools you have attended and degrees you have received. |
37
|
|
|
|
|
| Dates |
|
School |
|
Degrees and Area of
Concentration (if any) |
| __________________________ |
|
__________________________ |
|
__________________________ |
| __________________________ |
|
__________________________ |
|
__________________________ |
| __________________________ |
|
__________________________ |
|
__________________________ |
| |
23. |
Do you understand that there is no guarantee of any financial return on this investment? |
Yes ¨
No ¨
| |
24 |
Do you understand that this investment is not liquid and the securities of the Company may not continue to be publicly traded? |
Yes ¨
No ¨
| |
25 |
Do you have adequate means of providing for your current needs and personal contingencies in view of the fact that this is not a liquid investment and you may incur a complete loss of your entire investment?
|
Yes ¨
No ¨
| |
26 |
Are you aware of the Company’s business affairs and financial condition, and have you acquired all such information about the Company as you deem necessary and appropriate to enable you to reach an informed and
knowledgeable decision to acquire the Units? |
Yes ¨
No ¨
| |
27 |
Do you have a “pre-existing relationship” with the Company or any of its officers, managers or members? |
Yes ¨
No ¨
(For purposes hereof,
“Pre-existing relationship” means any relationship consisting of personal or business contacts of a nature and duration such as would enable a reasonably prudent Subscriber to be aware of the character, business acumen, and general
business and financial circumstances of the person with whom such relationship exists.)
If so, please indicate whether the relationship
is with the Company, and/or name the individual(s) with whom you have a pre-existing relationship and describe the relationship:
38
| 28. |
In order for the Company and its selling agents to comply with applicable anti-money laundering/U.S. Treasury Department Office of Foreign Assets Control (“OFAC”) rules and regulations, Subscriber is
required to provide the following information: |
(i) Name and address (including country) of the bank from which
Subscriber’s payment to the Company is being wired (the “Wiring Bank”):
(ii) Subscriber’s wiring instructions at the Wiring Bank:
(iii) Is the Wiring Bank located in the U.S. or another “FATF Country”*?
¨ Yes ¨
No
(iv) Is Subscriber a customer of the Wiring Bank?
¨ Yes ¨
No
| |
(b) |
Additional Information |
Investors wishing to subscribe must provide the following
additional information or documents.
For Individual Investors:
|
|
|
| A government issued
form of picture identification (e.g., passport or drivers license). |
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| Proof of the individual’s current address
(e.g., current utility bill), if not included in the form of picture identification. |
For Funds of Funds or Entities that Invest on Behalf of Third Parties:
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| A certificate of due formation and organization and
continued authorization to conduct business in the jurisdiction of its organization (e.g., certificate of good standing). |
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| An “incumbency certificate” attesting to the
title of the individual executing these subscription materials on behalf of the prospective investor. |
| * |
As of the date hereof, countries that are members of the Financial Action Task Force on Money Laundering (“FATF Country”) are: Argentina, Australia, Austria, Belgium, Brazil, Canada, Denmark, Finland,
France, Germany, Greece, Hong Kong, Iceland, Ireland, Italy, Japan, Luxembourg, Mexico, Kingdom of the Netherlands, New Zealand, Norway, Portugal, Russian Federation, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, United Kingdom and
the United States of America. |
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A completed copy of a certification that the entity has adequate anti-money laundering policies and procedures (“AML Policies and Procedures”) in place that are consistent with the USA PATRIOT Act, OFAC and other
relevant federal, state or non-U.S. anti-money laundering laws and regulations (with a copy of the entity’s current AML Policies and Procedures to which such certification relates). |
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A letter of reference any entity not located in the U.S. or other FATF country, from the entity’s local office of a reputable bank or brokerage firm that is incorporated, or has its principal place of business located, in the
U.S. or other FATF Country certifying that the prospective investor maintains an account at such bank/brokerage firm for a length of time and containing a statement affirming the prospective investor’s integrity. |
For all other Entity Investors:
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| _____ |
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A certificate of due formation and organization and continued authorization to conduct business in the jurisdiction of its organization (e.g., certificate of good standing). |
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An “incumbency certificate” attesting to the title of the individual executing these subscription materials on behalf of the prospective investor. |
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| _____ |
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A letter of reference from the entity’s local office of a reputable bank or brokerage firm that is incorporated, or has its principal place of business located, in the U.S. or other FATF Country certifying that the
prospective investor maintains an account at such bank/brokerage firm for a length of time and containing a statement affirming the prospective investor’s integrity. |
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If the prospective investor is a privately-held entity, a certified list of the names of every person or entity who is directly or indirectly the beneficial owner of 25% or more of any voting or non-voting class of equity
interests of the Subscriber, including (i) country of citizenship (for individuals) or principal place of business (for entities) and, (ii) for individuals, such individual’s principal employer and position. |
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| ARTICLE II. |
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If the prospective investor is a trust, a certified list of (i) the names of the current beneficiaries of the trust that have, directly or indirectly, 25% or more of any interest
in the trust, (ii) the name of the settlor of the trust, (iii) the name(s) of the trustee(s) of the trust, and (iv) the country of citizenship (for individuals) or principal place of business (for entities). |
Certain trusts generally may not qualify as accredited investors except
under special circumstances. Therefore, if you intend to purchase the shares of the Company’s securities in whole or in part through a trust, please answer each of the following questions.
Is the trustee of the trust a national or state bank that is acting in its fiduciary capacity in making the investment on behalf of the trust?
Yes ¨
No ¨
Does this investment in the
Company exceed 10% of the trust assets?
Yes ¨
No ¨
(b). If the trust is a
revocable trust, please complete Question 1 below. If the trust is an irrevocable trust, please complete Question 2 below.
1.
REVOCABLE TRUSTS
Can the trust be amended or revoked at any time by its grantors:
Yes ¨
No ¨
40
If yes, please answer the following questions relating to each grantor (please add
sheets if necessary):
Grantor Name:
Net worth of grantor (including spouse, if applicable), including home, home furnishings and automobiles exceeds $1,000,000?
Yes ¨
No ¨
OR
Income (exclusive of any income attributable to spouse) was in excess of $200,000 for 2011 and 2012 and is reasonably expected
to be in excess of $200,000 for 2013?
Yes ¨
No ¨
OR
Income (including income attributable to spouse) was in excess of $300,000 for 2006 and 2007 and is reasonably expected to be
in excess of $300,000 for 2008?
Yes ¨
No ¨
If the trust is an irrevocable trust, please answer the
following questions:
Please provide the name of each trustee:
Trustee Name: ____________________________________________________________
Trustee Name: ___________________________________________________________
A. Does the trust have assets greater than $5 million?
Yes ¨
No ¨
B. Do you have such knowledge and
experience in financial and business matters as to be capable of evaluating the merits and risks of an investment in the Company?
Yes ¨
No ¨
C. Indicate how often you invest
in:
Marketable Securities
Often ¨ Occasionally ¨ Seldom ¨ Never ¨
Restricted Securities
Often ¨ Occasionally ¨ Seldom ¨ Never ¨
Venture Capital Companies
Often ¨ Occasionally ¨ Seldom ¨ Never ¨
41
Signature Page to
XENONICS HOLDINGS, INC.
INVESTOR SUITABILITY
QUESTIONNAIRE
IN WITNESS WHEREOF, the Investor has executed this questionnaire as of the date of the Investor’s
investment in the Company and declared that it is truthful and correct.
Dated as of
, 2014
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| Authorized Signature(s): |
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42
EXHIBIT B
FORM OF CONVERTIBLE SENIOR SECURED NOTE
(see attached)
43
EXHIBIT C
FORM OF SECURITY AGREEMENT
(see attached)
44
EXHIBIT 10.2
NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE HAS 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”), OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR
SALE, SOLD, TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT, OR APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN AVAILABLE EXEMPTION THEREFROM, 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.
XENONICS HOLDINGS, INC.
FORM OF CONVERTIBLE SENIOR SECURED NOTE
1. Convertible Note.
This Convertible Senior Secured Note is one of a duly authorized series of Convertible Senior Secured Notes (individually, the
“Convertible Note” and collectively, the “Convertible Notes”) of Xenonics Holdings, Inc., a Nevada corporation (the “Company”). The Convertible Notes are similar in terms except for dates,
principal amounts and named payees and are being issued pursuant to a Subscription Agreement of various dates (the “Subscription Agreement”) entered into by and between the Company and the signatories thereto under which the Company
is offering to sell up to an aggregate principal amount of $1,000,000 of Convertible Notes thereunder. By its acceptance of this Convertible Note, each Holder agrees to be bound by the terms of the Subscription Agreement. The Convertible Notes are
secured obligations of the Company, to the extent provided for in the Security Agreement dated as of the date of the Subscription Agreements (the “Security Agreement”) entered into among the Company and the holders of the
Convertible Notes, and are pari passu in right of payment, collection and priority of secured interest to the Prior Notes (as defined in the Security Agreement) of the Company. This Convertible Note is a direct obligation of the
Company and ranks pari passu with all other Convertible Notes now or hereafter issued in accordance with the Subscription Agreement under the terms set forth herein.
Capitalized terms used and not otherwise defined herein, shall have the respective meanings given to those terms in Section 10
hereof.
2. Principal and Interest.
(a) The Company for value received, hereby promises to pay to
, or its
registered assigns (the “Holder”) on , 2017 (the “Maturity Date”), (i) the principal sum of
DOLLARS (U.S. $ .00) and (ii) all accrued and unpaid
interest thereon. Notwithstanding the foregoing, however, the Company’s payment obligations hereunder may be accelerated in accordance with the redemption rights, as provided in Section 6 below, or in the Event of Default (as
defined in Section 8). Interest is payable on each date specified therefor in Section 2(c) below or on the date of redemption (if any) at the then-current Interest Rate in cash. Payment of the principal of this Convertible
Note shall be made upon the surrender of this Convertible Note to the Company, at its chief executive office (or such other office within the United States as shall be designated by the Company to the Holder hereof) (the “Designated
Office”), in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts. Payment of principal (and premium, if any), interest and all other amounts
payable with respect to the Convertible Notes shall be made by U.S. dollar check mailed to the address of the Holder entitled thereto as such address shall appear in the Subscription Agreement. Payments of principal and interest shall be deemed made
on the date such payment is deposited or, if mailed, on the date deposited in the mail with proper postage and addressed to the Holder and the address as shown on the records of the Company, or such other address as provided to the Company in
writing by the Holder. In the event that the date for the payment of any amount payable under this Convertible Note falls due on a Saturday, Sunday or public holiday under the laws of the State of California, the time for payment of such amount
shall be extended to the next succeeding Business Day and Interest shall continue to accrue on any principal amount so effected until the payment thereof on such extended due date.
(b) Payment of Interest. This Convertible Note shall bear simple interest at the rate of 13% per annum (the “Interest
Rate”). Interest on the unconverted and then outstanding principal amount of this Convertible Note shall be calculated on the basis of a 360-day year and shall accrue daily commencing on the original issue date of this Convertible Note
until the earlier of (i) payment in full of the principal sum hereon, together with all accrued and unpaid interest has been made or (ii) this Convertible Note has been converted in full. Interest shall cease to accrue with respect to any
principal amount of Convertible Notes that are converted or repaid. Interest is payable semi-annually on September 30th and March 30th of each year during which this Convertible Note is outstanding, to the holder of the Convertible Notes
on such date and on each Conversion Date (as defined herein) and on the Maturity Date (each such date, an “Interest Payment Date”), in cash.
3. Conversion.
(a)
General. The Holder shall have the right, in accordance with the terms hereof, to convert the principal amount, and any accrued and unpaid interest thereon, of this Convertible Note into shares of Common Stock (“Conversion
Shares”). Except as provided below, the Holder may exercise such conversion rights at any time and from time to time prior to the Maturity Date and prior to the redemption (if any) of this Convertible Note, upon no less than 15 days’
written notice by the Holder to the Company. The Holder may convert all or a portion of the principal amount of outstanding Convertible Notes, and any accrued and unpaid interest thereon, into Conversion Shares at a conversion rate equal to $0.07
per share (the “Conversion Rate”). In calculating the number of Conversion Shares to be issued to the Holder, such number shall be rounded down to the nearest whole number. The Company shall not issue any fractional Conversion
Shares under any circumstances, but shall pay to the Holder any cash amounts in respect of the value of any fractional Conversion Shares that may have been issuable in the absence of the aforementioned prohibition.
2
(b) Number of Conversion Shares. The number of Conversion Shares issuable upon conversion
of this Convertible Note shall be determined by dividing the principal amount of this Convertible Note, or the part of the principal amount to be converted, plus the accrued but unpaid interest, by the Conversion Rate in effect on the Conversion
Date (as defined in subparagraph (c)(2) below). To convert this Convertible Note, at any time and from time to time prior to the Maturity Date and prior to redemption (if any), upon no less than 15 days’ written notice by the Holder
to the Company, the Holder shall send by facsimile (or otherwise deliver) a copy of the fully executed conversion notice in the form attached as Exhibit A hereto (the “Conversion Notice”) to the Company and shall contain a
completed schedule in the form of Schedule 1 to the Conversion Notice (as amended on each Conversion Date, the “Conversion Schedule”) reflecting the remaining principal amount of this Convertible Note and all accrued and unpaid
interest thereon subsequent to the conversion at issue. The Holder shall surrender or cause to be surrendered this Convertible Note as soon as practicable thereafter to the Company, and pay any transfer taxes or other applicable taxes or
duties, if required. The Company shall not be obligated to issue shares of Common Stock upon a conversion unless either this Convertible Note is delivered to the Company as provided above, or the Holder notifies the Company that this
Convertible Note has been lost, stolen or destroyed and delivers the documentation to the Company required by Section 11(c)(3) hereof.
(c) Issuance of Conversion Shares. As promptly as practicable on or after the Conversion Date, and in no event more than seven
(7) business days after receipt of the Conversion Notice, the Company shall cause to be issued and delivered to the Holder or its nominee that number of shares of Common Stock issuable upon conversion of the portion of this Convertible Note
being converted. The Company shall deliver to the Holder physical certificates representing the Common Stock issuable upon conversion. The Holder is not entitled to any rights of a holder of Common Stock until this Convertible Note has
been converted into Common Stock.
(1) This Convertible Note shall be deemed to have been converted immediately prior to the close of
business on the day that the Holders delivers notice to the Company in accordance with the foregoing provisions (such day, the “Conversion Date”), and at such time the rights of the Holder of this Convertible Note as the Holder
hereof shall cease, and the Person or Persons entitled to receive the shares of Common Stock issuable upon conversion shall be deemed to be a stockholder of record on the Conversion Date; provided, however, that no surrender of this
Convertible Note on any date that is not a Business Day shall be effective to constitute the person or persons entitled to receive the shares of Common Stock upon such conversion as the record holder or holders of such shares of Common Stock on such
date, but such surrender shall be effective to constitute the person or persons entitled to receive such shares of Common Stock as the record holder or holders thereof for all purposes at the close of business on the next succeeding Business Day. If
the Holder converts more than one Convertible Note at the same time, the number of shares of Common Stock issuable upon the conversion shall be based on the aggregate principal amount of Convertible Notes converted.
(2) If the Holder elects to convert less than the entire aggregate principal amount outstanding of this Convertible Note, the Company shall
issue to the Holder a new Convertible Note, duly executed by the Company, in form and substance identical to this Convertible Note surrendered by the Holder, for the balance of the aggregate principal amount of this Convertible Note that has not
been so converted.
3
(d) Adjustment of Conversion Rate. The Conversion Rate will be subject to adjustments
from time to time as follows:
(1) In case the Company shall hereafter pay a dividend or make a distribution to all holders of the
outstanding Common Stock in shares of Common Stock, the Conversion Rate in effect at the opening of business on the day following the Conversion Record Date shall be reduced by multiplying such Conversion Rate by a fraction: (A) the numerator
of which shall be the number of shares of Common Stock outstanding at the close of business on the Conversion Record Date fixed for the determination of the holders entitled to such dividend or distribution; and (B) the denominator of which
shall be the sum of such number of shares referred to in (A) above and the total number of shares constituting such dividend or other distribution. Such reduction in the Conversion Rate shall become effective immediately after the opening of
business on the day following the Conversion Record Date. If any dividend or distribution of the type described in this Section 3(e)(1) is declared but not so paid or made, the Conversion Rate shall again be adjusted to the
Conversion Rate that otherwise would then be in effect if such dividend or distribution had not been declared.
(2) In case the
outstanding shares of Common Stock shall be subdivided into a greater number of shares of Common Stock, the Conversion Rate in effect at the opening of business on the day following the day upon which such subdivision becomes effective shall be
proportionately reduced, and conversely, in case the outstanding shares of Common Stock shall be combined into a smaller number of shares of Common Stock, the Conversion Rate in effect at the opening of business on the day following the day upon
which such combination becomes effective shall be proportionately increased, such reduction or increase, as applicable, to become effective immediately after the opening of business on the day following the day upon which such subdivision or
combination becomes effective.
(3) (A) In case the Company shall, by dividend or otherwise, distribute to all or substantially all
holders of its Common Stock shares of any class of Capital Stock of the Company (other than any dividends or distributions to which Section 3(e)(1) applies) or evidences of its indebtedness, cash or other assets, including securities,
but excluding dividends or distributions of stock, securities or other property or assets (including cash) in connection with a reclassification, change, merger, consolidation, statutory share exchange, combination, sale or conveyance to which
Section 3(f) applies (such Capital Stock, evidences of its indebtedness, cash, other assets or securities being distributed hereinafter in this Section 3(e)(3) called the “Distributed Assets”), then, in each
such case, the Conversion Rate shall be reduced so that the same shall be equal to the price determined by multiplying the Conversion Rate in effect immediately prior to the close of business on the Conversion Record Date with respect to such
distribution by a fraction: (i) the numerator of which shall be the Fair Market Value of the Common Stock of the Company on such date less the fair market value (as determined by the Board of Directors, whose determination shall be conclusive
and set forth in a Board resolution) on such date of the portion of the Distributed Assets so distributed applicable to one share of Common Stock (determined on the basis of the number of shares of Common Stock outstanding on the Conversion Record
Date); and (ii) the denominator of which shall be such Fair Market Value of the Common Stock of the Company on such date.
(B) Such
reduction in the Conversion Rate shall become effective immediately prior to the opening of business on the day following the Conversion Record Date. However, in the event that the then fair market value (as so determined) of the portion of the
Distributed Assets so distributed applicable to one share of Common Stock is equal to or greater than the Fair Market Value on the Conversion Record Date, in lieu of the foregoing adjustment, adequate provision shall be made so that the Holder of
this Convertible Note shall have the right to receive upon conversion hereof (or any portion hereof) the amount of Distributed Assets the Holder would have received had the Holder converted this Convertible Note (or portion hereof) immediately prior
to such Conversion Record Date. In the event that such dividend or distribution is not so paid or made, the Conversion Rate shall again be adjusted to be the Conversion Rate that otherwise would then be in effect if such dividend or
distribution had not been declared.
4
(4) Adjustment of Conversion Rate upon Issuance of Common Stock, Options, Convertible
Securities, Etc.
(A) If prior to the Maturity Date (or any Conversion Date or Redemption Date, if applicable), the Company
(i) issues or sells any Common Stock, Convertible Securities, warrants, or Options or (ii) directly or indirectly effectively reduces the conversion, exercise or exchange price for any Convertible Securities or Options which are currently
outstanding, at or to an effective Per Share Selling Price (as defined below) which is less than the then-current Conversion Rate, then in each such case the Conversion Rate in effect immediately prior to such issue or sale date, as applicable,
shall be automatically reduced effective concurrently with such issue or sale to an amount determined by multiplying the Conversion Rate then in effect by a fraction, (x) the numerator of which shall be the sum of (1) the number of shares
of Common Stock outstanding immediately prior to such issue or sale, plus (2) the number of shares of Common Stock which the aggregate consideration received by the Company for such additional shares would purchase at such Conversion Rate and
(y) the denominator of which shall be the number of shares of Common Stock of the Company outstanding immediately after such issue or sale. Notwithstanding the foregoing, however, no adjustment hereunder shall be made with respect to an Exempt
Issuance, as defined below.
(B) For the purposes of the foregoing adjustment, in the case of the issuance of any Convertible Securities
or Options, the maximum number of shares of Common Stock issuable upon exercise, exchange or conversion of such Convertible Securities or Options shall be deemed to be outstanding at the initial conversion or exercise price applicable to such
securities, provided that no further adjustment shall be made upon the actual issuance of Common Stock upon exercise, exchange or conversion of such Convertible Securities or Options, and provided further that to the extent such Convertible
Securities or Options expire or terminate unconverted or unexercised, then at such time the Conversion Rate shall be readjusted as if such portion of such Convertible Securities or Options had not been issued. For purposes of this
Section 3(e)(4), if an event occurs that triggers more than one of the above adjustment provisions, then only one adjustment shall be made and the calculation method which yields the greatest downward adjustment in the Conversion Rate
shall be used. If shares are issued for a consideration other than cash, the Per Share Selling Price shall be the fair value of such consideration as determined in good faith by independent certified public accountants mutually acceptable to the
Company and the Holder. In the event the Company directly or indirectly effectively reduces the conversion, exercise or exchange price for any Convertible Securities or Options which are currently outstanding, then the Per Share Selling Price shall
equal such effectively reduced conversion, exercise or exchange price.
5
(C) As used herein, “Exempt Issuance” means the issuance of (i) shares of
Common Stock or Options or Convertible Securities to employees, officers, consultants, service providers or directors of the Company approved by a majority of the non-employee members of the Board of Directors or a majority of the members of a
committee of non-employee directors established for such purpose an in effect as of June 1, 2014, (ii) Common Stock, Convertible Securities, warrants, or Options (1) upon the exercise or exchange of or conversion of any securities
issued hereunder and/or other securities exercisable or exchangeable for or convertible into shares of Common Stock issued and outstanding as of the date of the Subscription Agreement, or (2) pursuant to other rights or agreements binding on
the Company as of the date of the Subscription Agreement; provided that such securities have not been amended since the date of the Subscription Agreement to increase the number of such securities or to decrease the exercise price, exchange price or
conversion price of such securities; (iii) shares of Common Stock issued by reason of a dividend, stock split, split-up or other distribution on shares of Common Stock; (iv) shares of Common Stock, Convertible Securities, warrants or
Options in connection with transactions with vendors, suppliers, lenders or other commercial partners, the terms of which are approved by the Board of Directors, and in each case, the primary purpose of which is not to raise equity capital;
(v) shares of Common Stock, Convertible Securities, warrants or Options in connection with transactions pursuant to which the Company transfers or assigns liabilities, claims or contract rights; (vi) shares of Common Stock, Convertible
Securities, warrants or Options issued pursuant to mergers, acquisitions, asset sales or strategic alliances approved by a majority of the disinterested directors of the Company, provided that any such issuance shall provide to the Company
additional benefits in addition to the investment of funds, but shall not include a transaction in which the Company is issuing securities primarily for the purpose of raising equity capital; and (vii) shares of Common Stock, issued pursuant to
the Subscription Agreement.
(D) For purposes hereof: (i) “Convertible Securities” means any stock or securities
(other than Options) directly or indirectly convertible into or exercisable or exchangeable for Common Stock; (ii) “Options” means any rights, warrants or options to subscribe for or purchase Common Stock or Convertible
Securities; and (iii) “Per Share Selling Price” shall include the amount actually paid by third parties for each share of Common Stock in a sale or issuance by the Company. A sale of shares of Common Stock shall include the
sale or issuance of Convertible Securities or Options, and in such circumstances the Per Share Selling Price of the Common Stock covered thereby shall also include the exercise, exchange or conversion price thereof (in addition to the consideration
received by the Company upon such sale or issuance less the fee amount as provided above).
(5) No adjustment in the Conversion Rate shall
be required unless such adjustment would require an increase or decrease of at least 1% in such price; provided, however, that any adjustments which by reason of this Section 3(e)(5) are not required to be made shall be
carried forward and taken into account in any subsequent adjustment. All calculations under this Section 3 shall be made by the Company in good faith and shall be made to the nearest cent or to the nearest one hundredth of a share,
as applicable. No adjustment need be made for a change in the par value or no par value of the Common Stock.
(6) Whenever the
Conversion Rate is adjusted as provided in Section 3(e), the Company shall compute the adjusted Conversion Rate in accordance with Section 3(e) and shall prepare a certificate signed by an officer of the Company setting forth
the adjusted Conversion Rate and showing in reasonable detail the facts upon which such adjustment is based, and shall promptly deliver such certificate to the Holder of this Convertible Note. For purposes of this Section 3(e), the
number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock. The
Company will not pay any dividend or make any distribution on shares of Common Stock held in the treasury of the Company.
6
(7) For purposes hereof:
(A) “Conversion Record Date” shall mean, with respect to any dividend, distribution or other transaction or event in which
the holders of Common Stock have the right to receive any cash, securities or other property or in which the Common Stock (or other applicable security) is exchanged for or converted into any combination of cash, securities or other property, the
date fixed for determination of stockholders entitled to receive such cash, securities or other property (whether such date is fixed by the Board of Directors or by statute, contract or otherwise).
(B) “Fair Market Value” shall mean the average of the daily Trading Prices per share of Common Stock (or such other security
as specified herein) for the 10 consecutive Trading Days immediately prior to the date in question.
Notwithstanding the foregoing,
whenever successive adjustments to the Conversion Rate are called for pursuant to this Section 3(e), such adjustments shall be made to the Fair Market Value as may be necessary or appropriate to effectuate the intent of this
Section 3(e) and to avoid unjust or inequitable results as determined in good faith by the Board of Directors.
(f)
Adjustments for Reclassifications, Mergers, Sales of Assets and Other Business Combinations or Transactions. If any of following events occur: (1) any reclassification or change of the outstanding shares of Common Stock (other than a
change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), as a result of which holders of Common Stock shall be entitled to receive Capital Stock, securities or other
property or assets (including cash) with respect to or in exchange for such Common Stock; (2) any merger, consolidation, statutory share exchange or combination of the Company with another Person as a result of which holders of Common Stock
shall be entitled to receive stock, securities or other property or assets (including cash) with respect to or in exchange for such Common Stock; or (3) any sale or conveyance of the properties and assets of the Company as, or substantially as,
an entirety to any other Person as a result of which holders of Common Stock shall be entitled to receive stock, securities or other property or assets (including cash) with respect to or in exchange for such Common Stock, then the Company or the
successor or purchasing corporation, as applicable, shall provide that this Convertible Note shall be convertible into the kind and amount of shares of capital stock and other securities or property or assets (including cash) that such Holder would
have been entitled to receive upon such reclassification, change, merger, consolidation, statutory share exchange, combination, sale or conveyance had this Convertible Note been converted into Common Stock immediately prior to such reclassification,
change, merger, consolidation, statutory share exchange, combination, sale or conveyance assuming the Holder, as a holder of Common Stock, did not exercise its rights of election, if any, as to the kind or amount of securities, cash or other
property receivable upon such reclassification, change, merger, consolidation, statutory share exchange, combination, sale or conveyance and that the rights of the Holder to convert this Convertible Note for adjustments thereafter shall be as nearly
equivalent as may be practicable to the adjustments provided for in this Section 3. The above provisions of this Section shall apply to successive or series of related reclassifications, changes, mergers, consolidations,
statutory share exchanges, combinations, sales and conveyances.
(g) Notices of Proposed Adjustments. In case at any time after the
date hereof:
(1) the Company shall declare a dividend (or any other distribution) on its Common Stock that would result in an
adjustment to the Conversion Rate pursuant to this Section 3;
(2) there shall occur any reclassification of the Common
Stock of the Company (other than a subdivision or combination of its outstanding Common Stock, a change in par value, a change from par value to no par value or a change from no par value to par value), or any merger, consolidation, statutory share
exchange or combination to which the Company is a party and for which approval of any stockholders of the Company is required, or the sale, transfer or conveyance of all or substantially all of the assets of the Company; or
7
(3) there shall occur the voluntary or involuntary dissolution, liquidation or winding up of the
Company;
the Company shall cause to be provided to the Holder of this Convertible Note, at least 10 days prior to the applicable record or effective date
hereinafter specified, a notice stating: (A) the date on which a record is to be taken for the purpose of such dividend or distribution, or, if a record is not to be taken, the date as of which the holders of shares of Common Stock of record to
be entitled to such dividend or distribution are to be determined; or (B) the date on which such reclassification, merger, consolidation, statutory share exchange, combination, sale, transfer, conveyance, dissolution, liquidation or winding up
is expected to become effective, and the date as of which it is expected that holders of shares of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such
reclassification, merger, consolidation, statutory share exchange, sale, transfer, dissolution, liquidation or winding up. Neither the failure to give such notice nor any defect therein shall affect the legality or validity of the proceedings or
actions described in Sections 3(g)(1) through 3(g)(3).
(h) Availability of Conversion Shares. The Company shall at all times
reserve and keep available, free from preemptive rights, out of its authorized but unissued Common Stock, for the purpose of effecting the conversion of this Convertible Note, the full number of shares of Common Stock then issuable upon the
conversion of this Convertible Note. The Company covenants that all shares of Common Stock that may be issued upon conversion of this Convertible Note will upon issue be fully paid and nonassessable.
(i) Taxes. Except as provided in the next sentence, the Company will pay any and all taxes (other than taxes on income) and duties that
may be payable in respect of the issue or delivery of Common Stock upon conversion of this Convertible Note. The Company shall not, however, be required to pay any tax or duty that may be payable in respect of any transfer involved in the issue
and delivery of Common Stock in a name other than that of the Holder of this Convertible Note, and no such issue or delivery shall be made unless and until the Person requesting such issue has paid to the Company the amount of any such tax or duty,
or has established to the satisfaction of the Company that such tax or duty has been paid.
(j) Registration Rights;Sales under Rule
144. The Company shall not be required to undertake or cause the registration of the shares of Common Stock issuable upon the conversion of this Convertible Note. For so long as principal or interest under this Convertible Note remain due and
owing, the Company shall (i) make all periodic and other filings required to be made by it from time to time under the Securities and Exchange Act of 1934 and the rules and regulations promulgated thereunder in order to preserve its status as a
“reporting issuer” with the meaning of SEC Rule 144 and (ii) provide at its cost and expense, in a timely manner, for and on behalf of holders of Conversion Shares any and all opinions of counsel as may be required of the
Company’s stock transfer agent to allow for the resale of the Conversion Shares pursuant to SEC Rule 144.
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4. Prepayment/Redemption.
(a) At any time and from time to time on a date commencing on the first year anniversary date and ending on a date prior to the Maturity Date,
upon no less than 30 days’ written notice by the Company to the Holder (the “Redemption Notice”), the Company may elect, in its sole option, to redeem all or a portion of the then outstanding Convertible Notes by payment of the
Redemption Amount (defined below) (the “Redemption Amount”). The last day of such notice day period shall be the “Redemption Date” unless such date shall not be a Business Day, in which event, the Redemption Date
shall be first Business Day following the expiration of such notice period. The Redemption Amount is due in full on the Redemption Date. Within 15 days from the date of the Redemption Notice, the Holder may exercise the conversion feature of the
Convertible Notes that are the subject of the Redemption Notice, by providing written notice to the Company of such Holder’s intention to exercise such conversion feature. The Conversion Shares underlying such Convertible Notes shall be issued
by the Company on or prior to the 10th day following the date of the Holder’s notice of intention to exercise such conversion feature. The Company covenants and agrees that it will honor all
Notices of Conversion tendered from the time of delivery of the Redemption Notice through the date all amounts owing thereon are due and paid in full.
(b) As used herein, “Redemption Amount” means either (i) for any redemption for which the Redemption Date shall be on or
before the second year anniversary of the original issue date of this Convertible Note, the Redemption Amount shall be equal to 110% of the principal amount thereof, plus the unpaid interest which has accrued on the principal of the outstanding
Convertible Notes up to and including the day immediately preceding the Redemption Date or (ii) for any redemption for which the Redemption Date shall be after the second year anniversary of the original issue date of this Convertible Note, the
Redemption Amount shall be equal to 100% of the principal amount thereof, plus the unpaid interest which has accrued on the principal of the outstanding Convertible Notes up to and including the day immediately preceding the Redemption Date.
5. Seniority and Security.
(a) Seniority of Note. The Convertible Notes shall rank pari passu with all other Prior Notes and senior to all unsecured Indebtedness
of the Company. This Convertible Note is issued subject to the provisions of this Section 5 and each person taking or holding this Convertible Note, accepts and agrees to be bound by these provisions. Accordingly, the indebtedness
evidenced by this Convertible Note is hereby expressly in right of payment to the prior payment of all other Indebtedness. The Holder will not demand or receive from the Company (and Company will not pay to the Holder) all or any part of the
Convertible Note, by way of payment, prepayment, setoff, lawsuit or otherwise, nor will the Holder exercise any remedy with respect to any of the collateral secured by the Senior Indebtedness, nor will the Holder commence, or cause to commence,
prosecute or participate in any administrative, legal or equitable action against the Company, except in accordance with the Security Agreement. Notwithstanding the foregoing, the Holder shall be entitled to receive cancellation of indebtedness
hereunder in consideration of the conversion of such indebtedness into securities of the Company pursuant to the terms of this Convertible Note. Nothing in this section shall prohibit the Holder from converting all or any part of the Convertible
Note into equity securities of the Company. The Company and the Holder further agree that neither the Company nor the Holder will modify this Section 5 without the prior consent of holders of a Majority in Interest of the Convertible
Notes.
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(b) Security Interest. As security for the full, prompt and complete payment and
performance of the Company’s obligations hereunder, the Company hereby grants to the Holder of this Convertible Note, equally and ratably with the security interests granted to the other Holders of other Convertible Notes issued under the
Subscription Agreements, a security interest in and to the Collateral (as collectively defined in that certain Security Agreement) pursuant to the Security Agreement. Provided that proper filing is made in accordance with the Uniform Commercial Code
and as otherwise expressly set forth herein, the Company hereby represents and warrants that Holder shall, and during such time as this Convertible Note remains outstanding, have a valid, perfected first priority security interest in the Collateral.
(c) Intercreditor Agreement. Each Holder of this Convertible Note and the rights granted hereunder and under the Security Agreement, shall
be subject to the terms and conditions of the Intercreditor Agreement of even date herewith between the Company, the holders of Prior Debt and the Holder. Pursuant to the terms of the Intercreditor Agreement, among other things, the Holder and the
Company agree:
(i) So long as the Company remains current in its interest payments to the New Secured Parties under the
Notes, the Company may pay interest to the Existing Secured Parties (as defined in the Intercreditor Agreement) under the Existing Secured Notes (as defined in the Intercreditor Agreement);
(ii) So long as the Company generates (a) at least $1,000,000 of revenue during any fiscal quarter of the Company, and
(b) positive EBITDA (as defined in the Intercreditor Agreement) during such quarter, the Company may, in its discretion, pay down the principal balance under the Existing Secured Notes within 45 days after the end of any such quarter in an
amount not to exceed 25% of such positive EBITDA on a cumulative basis;
(iii) provided, however, that no principal
payments may be made unless the Company has free cash of at least $200,000.
(d) Consent to Appointment of Agent. Each Holder of
this Convertible Note consents to the appointment of Sandlapper Securities LP as the agent in the Security Agreement and Intercreditor Agreement, and any successor to the initial agent, for the purposes of exercising the rights and remedies of the
Holders as set forth in the Security Agreement and the Intercreditor Agreement.
6. Events of Default.
(a) “Event of Default”, wherever used herein, means any one of the following events (whatever the reason for such Event
of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body):
(1) the Company defaults in the payment of the principal or interest (a “Defaulted Payment”) on this Convertible Note
when the same becomes due and payable, and such default continues for a period of 30 days after written notice of such failure, requiring the Company to remedy the same, shall have been given to the Company by the holders of at least a Majority in
Interest of the outstanding Convertible Notes;
(2) the Company fails to perform or observe any other term, covenant or agreement
contained in this Convertible Note or the Security Agreement or Intercreditor Agreement, and the default continues for a period of 30 days after written notice of such failure, requiring the Company to remedy the same, shall have been given to the
Company by the holders of at least a Majority in Interest of the outstanding Convertible Notes;
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(3) a default by the Company in the conversion of any of the Convertible Notes, which
default continues for a period of 15 days after written notice of such failure, requiring the Company to remedy the same, shall have been given to the Company by the holders of at least a Majority in Interest of the outstanding Convertible Notes;
(4) any proceeding under any applicable U.S. federal or state bankruptcy, insolvency, reorganization or other similar law relating to the
Company or to all or any material part of its properties is instituted against the Company without its consent and continues undischarged or unstayed for ninety (90) calendar days, or any order for relief is entered in any such proceeding or
there is an entry by a court having competent jurisdiction of (A) a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable U.S. federal or state bankruptcy, insolvency, reorganization or
other similar law or (B) a decree or order adjudging the Company bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company, under any
applicable U.S. federal or state law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of its property, or ordering the winding up or liquidation of
its affairs;
(5) the commencement by the Company of a voluntary case or proceeding under any applicable U.S. federal or state
bankruptcy, insolvency, reorganization or other similar law; or the Company commences any other proceeding under any adjustment of debt, relief of debtors, dissolution, or liquidation or similar law relating to the Company or any subsidiary thereof;
or the consent by the Company to the entry of a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable U.S. federal or state bankruptcy, insolvency, reorganization or other similar law or to
the commencement of any bankruptcy or insolvency case or proceeding against the Company, or the consent by the Company to the appointment of, or the taking possession by, a custodian, receiver, liquidator, assignee, trustee, sequestrator or other
similar official of the Company, of any substantial part of its property which continues undischarged or unstayed for a period of 60 days; or the making by the Company of an assignment for the benefit of creditors; or
(6) A default or event of default exists under the Prior Notes or any other obligation of the Company for the payment of borrowed money in
excess of $50,000 individually or $150,000 in the aggregate for all such obligations, and is not paid when due or within any applicable grace period, or such obligation becomes or is declared to be due and payable before the expressed maturity of
the obligation, or there shall have occurred an event which, with the giving of notice or lapse of time, or both, would cause any such obligation to become, or allow any such obligation to be declared to be, due and payable;
(7) One or more final judgments, orders or decrees shall be rendered against the Company by a court of competent jurisdiction that either:
(i) exceeds by more than $50,000 any insurance coverage applicable thereto (to the extent the relevant insurer has been notified of such claim and has not denied coverage therefor); or (ii) would be reasonably likely to have a Material
Adverse Effect on the Company, and either (x) enforcement proceedings shall have been commenced upon any such judgment, order or decree or (y) such judgment, order or decree shall not have been vacated or discharged for a period of thirty
(30) consecutive days and there shall not be in effect (by reason of a pending appeal or otherwise) any stay of enforcement thereof;
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(8) The direct or indirect sale, lease, exclusive license, assignment, transfer, conveyance or
other disposition by the Company of: (i) all or substantially all of its assets, including without limitation, a sale, transfer or assignment of the assets of any direct or indirect subsidiary, in one or a series of related transactions; or
(ii) any capital stock or limited liability interests of any subsidiary; or (iii) any profits, losses, dividends or distributions of any kind of the Company or any subsidiary.
(b) Acceleration of Payment. If an Event of Default occurs and is continuing, the holders of at least a Majority in Interest of the
Convertible Notes, by written notice to the Company, may declare due and payable the principal of this Convertible Note and all other outstanding Convertible Notes, plus any accrued and unpaid interest to the date of payment. Upon a declaration
of acceleration, such principal and premium, if any, and accrued and unpaid interest, to the date of payment shall be immediately due and payable. Notwithstanding the foregoing, if an Event of Default specified in Section 7(a)(4) or
7(a)(5) occurs with respect to the Company, the principal and accrued and unpaid interest, on this Convertible Note shall become and be immediately due and payable, without any declaration or other act on the part of the Holder.
The holders of not less than a Majority in Interest of the principal of the outstanding Convertible Notes may, on behalf of the holders of all
of the Convertible Notes, waive, rescind and annul an acceleration and its consequences (including waiver of any defaults) if the rescission would not conflict with any judgment or decree of a court of competent jurisdiction and is not
precluded by the restrictions set forth in Section 9(d).
(c) Collections. If an Event of Default with respect to
this Convertible Note occurs and such Event of Default has not been waived or annulled, the Holder may pursue any available remedy by proceeding at law or in equity to collect the Defaulted Payment or interest due and payable on this Convertible
Note or to enforce the performance of any provision of this Convertible Note.
(d) Right to Receive Payment Upon Default.
Notwithstanding any other provision in this Convertible Note, unless the Holder elects to convert this Convertible Note following any Event of Default, the Holder of this Convertible Note shall have the right, which is absolute and unconditional,
subject to the Senior Indebtedness and the Intercreditor Agreement, receive payment of the principal and interest in respect of the Convertible Notes held by the Holder, on or after the final Maturity Date, or to bring suit for the enforcement of
any such payment on or after such date or the right to convert, and such rights shall not be impaired or affected adversely without the consent of the Holder.
(e) No Exclusive Right or Remedy. Except as otherwise provided herein, no right or remedy conferred in this Convertible Note upon
the Holder is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or hereafter existing at law or in
equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy.
(f) No Waiver of Right or Remedy. No delay or omission of the Holder of this Convertible Note to exercise any right or remedy
accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or any acquiescence therein. Every right and remedy given by this Section 6 or by law to the Holder may be
exercised from time to time, and as often as may be deemed expedient, by the Holder.
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7. Covenants.
For so long as all or any portion of principal or interest on this Convertible Note is due and payable, the Company shall not take any of the following actions
without the prior written consent of Majority in Interest, which consent may be withheld for any reason:
(a) the acquisition of the
Company by another entity by means of any transaction or series of related transactions (including any acquisition of common stock or common stock equivalents, limited liability membership interests, partnership interests, reorganization, merger or
consolidation), after the consummation of which the holders of the voting securities of the Company outstanding immediately prior to such transaction or series of related transactions own, directly or indirectly, less than a majority of the total
voting power represented by the outstanding voting securities of the Company or such other surviving or resulting entity (or if the Company or such other surviving or resulting entity is a wholly-owned subsidiary immediately following such
acquisition, its parent) immediately after such transaction or series of related transactions;
(b) the direct or indirect sale, lease,
exclusive license, assignment, transfer, conveyance or other disposition by the Company of: (i) all or substantially all of its assets, except by the Company to a direct or indirect wholly-owned subsidiary of the Company; or (ii) any
capital stock or limited liability interests of any direct or indirect subsidiary; or (iii) any profits, losses, dividends or distributions of any kind of the Company or any direct or indirect subsidiary.
(c) any acquisition or disposition (including licensing) of any business or assets, except in the ordinary course of business or the sale of
inventory on an arms-length basis (which, for purposes of clarity, includes entering into normal and customary agreements and licenses with manufacturers, distributors, sales agents and the like);
(d) the liquidation, dissolution or winding-up of the business and affairs of the Company or any direct or indirect subsidiary of the Company;
(e) any capital expenditure exceeding the sum of $50,000 individually or $150,000 in the aggregate which is not for the benefit of the
Company;
(f) enter into any agreement or arrangement to incur any indebtedness other than the Convertible Notes or unsecured debt;
(g) enter into any agreement or arrangement that would result in the creation of any lien or encumbrance on any of the assets of the Company or
any direct or indirect subsidiary;
(h) redeem, purchase for cancellation or otherwise retire or pay off any of its outstanding securities
other than the Convertible Notes;
(i) declare or pay any dividends or make any distribution, whether in cash, in shares of stock, limited
liability interests, or in specie, or otherwise on any of its outstanding securities;
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(j) alter, modify or amend the terms of employment or compensation to the Company’s Chairman
of the Board of Directors or Chief Executive Officer, except if such alteration, amendment or modification is to reduce or terminate the terms of such employment;
(k) enter into any transaction, or make any amendment thereto, with any director or officer of the Company, or any immediate family member or
Affiliate of any director or officer of the Company, including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring
payments to or from, any such officer or director (or any immediate family member or Affiliate thereof); and
(p) use all or any portion of
the proceeds of the issuance of the Convertible Notes to pay any fees to Affiliates of the Company, except as described in the Subscription Agreement.
8. Restrictions on Transfer.
(a) This Convertible Note and the Common Stock or other securities issuable upon conversion of this Convertible Note have not been registered
under the Securities Act, or the securities laws of any state or other jurisdiction. Neither this Convertible Note nor the Common Stock or other securities issuable upon conversion of this Convertible Note nor any interest or participation
herein may be reoffered, sold, assigned, transferred, pledged, encumbered or otherwise disposed of (a “Transfer”) in the absence of such registration or unless (i) such transaction is exempt from, or not subject to,
registration under the Securities Act or the securities laws of any state or other jurisdiction and (ii) is made in compliance with applicable federal and state statutory resale restrictions, if any. The Holder by its acceptance of this
Convertible Note or the Common Stock issuable upon conversion of this Convertible Note agrees that it shall not offer, sell, assign, transfer, pledge, encumber or otherwise dispose of this Convertible Note or any portion thereof or interest therein
other than in a minimum denomination of $10,000 principal amount (or any integral multiple of $1,000 in excess thereof) and then (other than with respect to a Transfer pursuant to a registration statement that is effective at the time of such
Transfer) only (a) to the Company, (b) to an Affiliate of the Holder, (c) to a person it reasonably believes to be an “accredited investor” within the meaning of Rule 501(a) under the Securities Act, or
(d) pursuant to a transaction in compliance with Rule 144 or Rule 144A under the Securities Act, and in the case of (b), (c) and (d) above in which the transferor (y) agrees to be bound by the restrictions and limitations
set forth herein and in the Subscription Agreement and (z) furnishes the Company with such certifications, legal opinions or other information as the Company may reasonably request to confirm that such transfer is being made pursuant to an
exemption from, or in a transaction not subject to, the registration requirements of the Securities Act as applicable.
(b) The Holder
acknowledges that the shares of Common Stock and other securities issuable upon conversion of this Convertible Note shall bear the following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES
ACT”), OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT, OR
(B) AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT (II) UNLESS SOLD OR TRANSFERRED TO A “QUALIFIED INSTITUTIONAL BUYER” WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES ACT
OR (III) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT.
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(c) The Holder represents that it is an “accredited investor” within the meaning of
Rule 501 of the Securities Act. The Holder has been advised that this Convertible Note has not been registered under the Securities Act, or any state securities laws and, therefore, cannot be resold unless it is registered under the
Securities Act and applicable state securities laws or unless an exemption from such registration requirements is available. The Holder is aware that the Company is under no obligation to effect any such registration or to file for or comply
with any exemption from registration. The Holder has not been formed solely for the purpose of making this investment and is acquiring the Convertible Note for its own account for investment, and not with a view to, or for resale in connection
with, the distribution thereof.
(d) The Company shall cooperate with the Holder and take all actions reasonably necessary to effectuate
any Transfer of this Convertible Note by the Holder that is permitted under Section 8(a) above.
9. Definitions.
Unless otherwise defined in this Convertible Note, the following capitalized terms shall have the following respective meanings when used
herein. Other capitalized terms used in this Convertible Note that are not defined herein shall have the respective meanings ascribed to such terms as set forth in the Subscription Agreement:
“Affiliate” of any specified Person means any other Person directly or indirectly controlling or controlled by or under
direct or indirect common control with such specified Person. For the purposes of this definition, “control”, when used with respect to any specified Person, means the power to direct the management and policies of such Person,
directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms “controlling” and “controlled” have meanings correlative to the foregoing.
“Board of Directors” means the board of directors of the Company or any authorized committee of the board of directors.
“Business Day” means each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which the banking institutions
in the City of New York, New York are authorized or obligated by law or executive order to close or be closed.
“Capital
Stock” of any Person means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interest in (however designated) equity of such Person, but excluding any debt securities convertible
into such equity.
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“Common Stock” means any stock of any class of the Company which has no
preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company and which is not subject to redemption by the Company. However, subject to the
provisions of Section 3(e) hereof, shares assumable on conversion of the Convertible Notes shall include only shares of the class designated as Common Stock, par value $0.001 per share, of the Company at the date of execution of this
Convertible Note or shares of any class or classes resulting from any reclassification or reclassifications thereof and which have no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Company and which are not subject to redemption by the Company, provided that if at any time there shall be more than one such resulting class, the shares of each such class then so assumable shall be
substantially in the proportion which the total number of shares of such class resulting from all such reclassifications bears to the total number of shares of all such classes resulting from all such reclassifications.
“Convertible Note Register” means the register or other ledger maintained by the Company that records the record owners of
the Convertible Notes.
“Defaulted Payment” has the meaning set forth in Section 8 hereof.
“Exchange Act” means the Securities Exchange Act of 1934, as amended and the rules and regulations promulgated thereunder.
“Holder” means the person in whose name this Convertible Note is registered on the Convertible Note Register.
“Indebtedness” means, without duplication, with respect to any Person (the “subject Person”), all
liabilities, obligations and indebtedness of the subject Person to any other Person, of any kind or nature, now or hereafter owing, arising, due or payable, howsoever evidenced, created, incurred, acquired or owing, whether primary, secondary,
direct, contingent, fixed or otherwise, consisting of indebtedness for borrowed money or the deferred purchase price of property, excluding purchases of property, product, merchandise and services in the ordinary course of business, but including
(a) all obligations and liabilities of any Person secured by any lien on the subject Person’s property, even though the subject Person shall not have assumed or become liable for the payment thereof; (except unperfected liens incurred in
the ordinary course of business and not in connection with the borrowing of money); provided, however, that all such obligations and liabilities which are limited in recourse to such property shall be included in Indebtedness only to the
extent of the book value of such property as would be shown on a balance sheet of the subject Person prepared in accordance with GAAP; (b) all capital lease obligations and other obligations or liabilities created or arising under any
conditional sale or other title retention agreement with respect to property used or acquired by the subject Person, even if the rights and remedies of the lessor, seller or lender thereunder are limited to repossession of such property;
provided, however, that all such obligations and liabilities which are limited in recourse to such property shall be included in Indebtedness only to the extent of the book value of such property as would be shown on a balance sheet of the
subject Person prepared in accordance with GAAP; (c) all obligations and liabilities under guarantees; (d) the present value of lease payments due under synthetic leases; (e) all obligations and liabilities under any asset
securitization or sale/leaseback transaction; and (f) obligations of such Person in respect of letters of credit or similar instruments issued or accepted by banks and other financial institutions for the account of such Person; provided,
further, however, that in no event shall the term Indebtedness include the capital stock surplus, retained earnings, minority interests in the common stock of Subsidiaries, lease obligations (other than pursuant to (b) or (d) above),
reserves for deferred income taxes and investment credits, other deferred credits or reserves.
“Majority in Interest”
has the meaning set forth in Section 11(d).
“Maturity Date” has the meaning set forth in
Section 2 hereof.
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“Person” shall mean and include an individual, a partnership, a corporation
(including a business trust), a joint stock company, a limited liability company, an unincorporated association, a joint venture or other entity or a governmental authority.
“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
“Subscription Agreement” means the Subscription Agreement among the Company and the initial holders of the Convertible Notes.
“Subsidiary” means, in respect of any Person, any corporation, association, partnership or other business entity of
which more than 50% of the total voting power of shares of Capital Stock or other interests (including partnership interests) entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers, general
partners or trustees thereof is at the time owned or controlled, directly or indirectly, by (i) such Person; (ii) such Person and one or more Subsidiaries of such Person; or (iii) one or more Subsidiaries of such Person.
“Trading Day” means: (1) if the applicable security is quoted on the Nasdaq Stock Market, a day on which the Nasdaq
Stock Market is open for business; (2) if that security is listed on the New York Stock Exchange, a day on which trades may be made on the New York State Exchange; (3) if that security is not so listed on the New York Stock Exchange and
not quoted on the Nasdaq Stock Market, a day on which the principal U.S. securities exchange on which the securities are listed or the OTC Bulletin Board, if the Company’s securities are quoted thereon, is open for business; or (4) if the
applicable security is not so listed, admitted for trading or quoted, any day other than a Saturday or a Sunday or a day on which banking institutions in the State of California are authorized or obligated by law or executive order to close.
“Trading Market” means any of the following markets or exchanges on which the Common Stock is listed or quoted for trading on
the date in question: the NYSE AMEX, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the New York Stock Exchange or the OTC Bulletin Board.
“Trading Price” of a security on any date of determination means: (1) the closing sale price as reported by the Trading
Market on which the Common Stock is listed or quoted for trading on the date in question; or (2) if such security is not listed or quoted for trading on a Trading Market, the average of the last bid and ask prices for such security on such date
from a dealer engaged in the trading of convertible securities selected by the Company for this purpose, or as determined by the Board of Directors in good faith.
10. Miscellaneous.
(a)
Payment; No Recourse. No provision of this Convertible Note shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of (and premium, if any) and interest, if any, on this Convertible Note
at the times, places and rate, and in the coin or currency, herein prescribed, and in accordance with the terms and conditions set forth herein; or to convert this Convertible Note as herein provided. This Convertible Note is issued upon the express
condition, to which each successive holder expressly assents and by receiving the same agrees, that no recourse under or upon any obligation, covenant or agreement of the Convertible Note, or for the payment of the Principal of, or premium, if any,
or the interest on, the Convertible Note, or for any claim based on the Convertible Note, or otherwise in respect hereof, shall be had against any incorporator or any past, present or future stockholder, officer or director, as such, of the Company
or of any successor corporation, whether by virtue of the constitution, statute or rule of law or by any assessment or penalty or otherwise howsoever, all such individual liability being hereby expressly waived and released as a condition of and as
a part of the consideration for the execution and issue of the Convertible Note.
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(b) Notice. The Company will give prompt written notice to the Holder of this Convertible
Note of any change in the location of the Designated Office. Any notice to the Company or to the holder of this Convertible Note shall be given in the manner set forth in the Subscription Agreement; provided that the Holder of this
Convertible Note, if not a party to such Subscription Agreement, may specify alternative notice instructions to the Company.
(c)
Transfer. (1) The transfer of this Convertible Note is registrable on the Convertible Note Register upon surrender of this Convertible Note for registration of transfer at the Designated Office, duly endorsed by, or accompanied by a
written instrument of transfer in form satisfactory to the Company duly executed by, the Holder hereof or such Holder’s attorney duly authorized in writing, and thereupon one or more new Convertible Notes, of authorized denominations and for
the same aggregate principal amount, will be issued to the designated transferee or transferees. Such Convertible Notes are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. No
service charge shall be made for any such registration of transfer, but the Company may require payment of a sum sufficient to recover any tax or other governmental charge payable in connection therewith. Prior to due presentation of this
Convertible Note for registration of transfer, the Company and any agent of the Company may treat the Person in whose name this Convertible Note is registered as the owner thereof for all purposes, whether or not this Convertible Note be overdue,
and neither the Company nor any such agent shall be affected by notice to the contrary.
(2) Upon presentation of this Convertible
Note for registration of transfer at the Designated Office accompanied by (i) certification by the transferor that such transfer is in compliance with the terms hereof and (ii) by a written instrument of transfer in a form approved by the
Company executed by the Holder, in person or by the Holder’s attorney thereunto duly authorized in writing, and including the name, address and telephone and fax numbers of the transferee and name of the contact person of the transferee, such
Convertible Note shall be transferred on the Convertible Note Register, and a new Convertible Note of like tenor and bearing the same legends shall be issued in the name of the transferee and sent to the transferee at the address and c/o the contact
person so indicated. Transfers and exchanges of Convertible Notes shall be subject to such additional restrictions as are set forth in the legends on the Convertible Notes and to such additional reasonable regulations as may be prescribed by
the Company as specified in Section 9 hereof. Successive registrations of transfers as aforesaid may be made from time to time as desired, and each such registration shall be Convertible Noted on the Convertible Note register.
(3) Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this
Convertible Note, and in the case of loss, theft or destruction, receipt of indemnity reasonably satisfactory to the Company and upon surrender and cancellation of this Convertible Note, if mutilated, the Company will deliver a new Convertible Note
of like tenor and dated as of such cancellation, in lieu of such Convertible Note.
18
(d) Amendments; Waivers. Neither this Convertible Note nor any term hereof may be
amended or waived orally or in writing, except that any term of this Convertible Note and the other Convertible Notes may be amended and the observance of any term of this Convertible Note and the other Convertible Notes may be waived (either
generally or in a particular instance and either retroactively or prospectively), and such amendment or waiver shall be applicable to all of the Convertible Notes, upon the approval of the Company and the holders of fifty-one percent (51%) or
more of the outstanding principal amount of all then outstanding Convertible Notes (a “Majority in Interest”); provided, however, that any amendment that would (i) change the maturity of the principal of or any installment of
interest on any of the Convertible Notes, (ii) reduce the principal amount of, or any premium or interest on any Convertible Note, (iii) reduce the percentage in aggregate principal amount of Convertible Notes outstanding necessary to
modify or amend the Convertible Notes or to waive any past default; or (iv) modify this Section 10(d) shall, in each case, require the approval of the holder of each Convertible Note to which such amendment shall apply. The Company
may, without the consent of any holder of the Convertible Notes, amend the Convertible Notes for the purpose curing any ambiguity or correcting or supplementing any defective provision contained in the Convertible Notes; provided that such
modification or amendment does not, in the good faith opinion of the Board of Directors, adversely affect the interests of the holders of the Convertible Notes in any material respect, or adding or modifying any other provisions with respect to
matters or questions arising under the Convertible Notes which the Company may deem necessary or desirable and which will not adversely affect the interests of the holders of the Convertible Notes. The Company will not amend any provision of
any other Convertible Note in a manner favorable to any holder thereof unless a similar amendment is made or offered with respect to all of the Convertible Notes.
(e) Governing Law. This security shall be governed by and construed in accordance with the internal laws of the State of California,
without regard to the principles of conflicts of law thereof.
(f) Headings. Article and Section headings used herein are for
convenience of reference only, are not part of this Convertible Note and shall not affect the construction of, or be taken into consideration in interpreting, this Convertible Note.
(g) Severability. If any provision of this Convertible Note is invalid, illegal or unenforceable, the balance of this Convertible Note
shall remain in effect, and if any provision is inapplicable to any Person or circumstance, it shall nevertheless remain applicable to all other Persons and circumstances. This Convertible Note is subject to the express condition that at no time
shall the Company be obligated or required to pay interest hereunder at a rate which could subject the Holder or any other Person to either civil or criminal liability as a result of being in excess of the maximum interest rate which the Company is
permitted by applicable law to contract or agree to pay. If by the terms of this Convertible Note, the Company is at any time required or obligated to pay interest hereunder at a rate in excess of such maximum rate, the rate of interest under
this Convertible Note shall be deemed to be immediately reduced to such maximum rate and the interest payable shall be computed at such maximum rate and all prior interest payments in excess of such maximum rate shall be applied and shall be deemed
to have been payments in reduction of the principal balance of this Convertible Note.
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(h) Execution; Entirety. This Convertible Note may be executed in counterparts (and by
different parties hereto on different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. Delivery of an executed counterpart of a signature page of this Convertible
Note by telecopy shall be effective as delivery of a manually executed counterpart of this Convertible Note. This Convertible Note constitutes the entire contract among the parties relating to the subject matter hereof and supersede any and all
previous agreements and understandings, oral or written, relating to the subject matter hereof.
[Remainder of page intentionally left
blank.]
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IN WITNESS WHEREOF, the Company has caused this Convertible Note to be duly executed on the date
first written above.
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| XENONICS HOLDINGS, INC. |
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| By: |
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| Name: |
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Alan Magerman |
| Title: |
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Chairman and Chief Executive Officer |
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EXHIBIT A
CONVERSION NOTICE
NOTICE OF
CONVERSION
The undersigned hereby elects to convert principal and, if specified, interest under the Convertible Note (the “Convertible
Note”) of Xenonics Holdings, Inc. (the “Company”) into shares of common stock, $0.001 par value per share (the “Common Stock”), of the Company according to the conditions hereof, as of the date written below. If shares are
to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates and opinions as reasonably requested by the Company in accordance
therewith. No fee will be charged to the holder for any conversion, except for such transfer taxes, if any.
The undersigned agrees to comply with the
prospectus delivery requirements under the applicable securities laws in connection with any transfer of the aforesaid shares of Common Stock.
Conversion
calculations:
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Date to Effect Conversion:
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Principal Amount of Convertible Notes to be Converted: |
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$
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Number of shares of Common Stock or Conversion Securities (if applicable) to be Issued:
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Applicable Conversion Rate:
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Signature: |
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Name: |
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Schedule 1
CONVERSION SCHEDULE
This Conversion
Schedule reflects conversions made under Section 3 of the above referenced Note.
Dated:
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| Date of Conversion
(or for first entry, Original Issue
Date) |
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Amount of
Conversion |
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Aggregate
Principal Amount
Remaining
Subsequent to
Conversion
(or original
Principal
Amount) |
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Company Attest |
23
EXHIBIT 10.3
FORM OF SECURITY AGREEMENT
THIS SECURITY AGREEMENT (this “Agreement”) is made and entered into as of July , 2014 by Xenonics
Holdings, Inc., a Nevada corporation (the “Company”) and the holders of the Company’s up to $1,000,000 of the Company’s Convertible Senior Secured Notes (the “Notes”) issued from time to time under the
Subscription Agreement (defined below) (each, a “Note Holder” and together, the “Note Holders”). This Agreement is being executed and delivered by the Company and the Note Holders in connection with that certain
Subscription Agreement, dated as of June 23, 2014 (the “Subscription Agreement”), by and among the Company and the Note Holders. Capitalized terms used herein and not otherwise defined herein shall have the respective meanings
set forth in the Subscription Agreement.
W I T N E S S E T H:
WHEREAS, pursuant to the terms of the Subscription Agreement, the Note Holders have agreed to purchase from the Company, and the Company has
agreed to sell to the Note Holders, the Notes, pursuant to the terms of the Subscription Agreement;
WHEREAS, the Company shall derive
substantial direct and/or indirect benefits from the transactions contemplated by the Subscription Agreement;
WHEREAS, in order to induce
the Note Holders to extend the loans evidenced by the Notes, the Company has agreed to execute and deliver to the Secured Parties this Agreement and to grant the Note Holders through the Security Agent (as defined herein) a first priority security
interest in certain property of the Company to secure the prompt payment, performance and discharge in full of all of the Company’s obligations under the Notes;
WHEREAS, other holders of the Company’s outstanding secured notes in the aggregate principal amount of $2,375,000 (“Prior
Notes”) as described on Schedule I annexed hereto (“Prior Note Holders”) have been granted by the Company a first priority security interest in certain property of the Company to secure the prompt payment, performance and
discharge in full of all of the Company’s obligations under the Prior Notes; and
WHEREAS, the Note Holders (sometimes, collectively
referred to as the “Secured Parties” and individually as a “Secured Party”) desire to enter into this Agreement and the Intercreditor Agreement (as defined below) to provide that the obligations represented by the Notes and the
Prior Notes shall be treated on a pari passu basis with respect to the grant of a first lien and security interest on the terms provided herein, and that no Secured Party shall act to obtain or foreclose upon the Collateral (as defined
below) other than in accordance herewith.
NOW, THEREFORE, in consideration of the foregoing, the covenants set forth herein, and other
good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, each Secured Party and the Company hereby agree as follows.
SECTION I
DEFINITIONS
1. Certain Definitions. As used in this Agreement, the following terms shall have the meanings set forth in this
Section 1. Terms used but not otherwise defined in this Agreement that are defined in Article 9 of the UCC (such as “account”, “chattel paper”, “commercial tort claim”, “deposit account”,
“document”, “equipment”, “fixtures”, “general intangibles”, “goods”, “instruments”, “inventory”, “investment property”, “letter-of-credit rights”,
“proceeds” and “supporting obligations”) shall have the respective meanings given such terms in Article 9 of the UCC.
(a) “Collateral” means the collateral in which the Secured Parties are granted a security interest by this Agreement and
which shall include the following personal property of the Company, whether presently owned or existing or hereafter acquired or coming into existence, wherever situated, and all additions and accessions thereto and all substitutions and
replacements thereof, and all proceeds, products and accounts thereof, including, without limitation, all proceeds from the sale or transfer of the Collateral and of insurance covering the same and of any tort claims in connection therewith:
(i) All goods, including, without limitation, (A) all machinery, equipment, computers, motor vehicles, trucks, tanks, boats, ships,
appliances, furniture, special and general tools, fixtures, test and quality control devices and other equipment of every kind and nature and wherever situated, together with all documents of title and documents representing the same, all additions
and accessions thereto, replacements therefor, all parts therefor, and all substitutes for any of the foregoing and all other items used and useful in connection with the Company’s businesses and all improvements thereto; and (B) all
inventory;
(ii) All contract rights and other general intangibles, including, without limitation, all partnership interests,
membership interests, stock or other securities, licenses, distribution and other agreements, computer software (whether “off-the-shelf”, licensed from any third party or developed by the Company), computer software development rights,
leases, franchises, customer lists, quality control procedures, grants and rights, goodwill, trademarks, service marks, trade styles, trade names, patents, patent applications, copyrights, and income tax refunds;
(iii) All accounts, together with all instruments, all documents of title representing any of the foregoing, all rights in any
merchandising, goods, equipment, motor vehicles and trucks which any of the same may represent, and all right, title, security and guaranties with respect to each account, including any right of stoppage in transit; and
(iv) All documents, letter-of-credit rights, instruments and chattel paper; all commercial tort claims; all deposit accounts and all cash
(whether or not deposited in such deposit accounts); all investment property; all supporting obligations; and all files, records, books of account, business papers, and computer programs; and all the products and proceeds of all of the
foregoing Collateral set forth in clauses (i)-(iv) above.
Notwithstanding the foregoing, nothing herein shall be deemed to
constitute an assignment of any asset which, in the event of an assignment, becomes void by operation of applicable law or the assignment of which is otherwise prohibited by applicable law (in each case to the extent that such applicable law is not
overridden by Sections 9-406, 9-407 and/or 9-408 of the UCC or other similar applicable law); provided, however, that to the extent permitted by applicable law, this Agreement shall create a valid security interest in such asset and,
to the extent permitted by applicable law, this Agreement shall create a valid security interest in the proceeds of such asset.
2
(b) “Intellectual Property” means the collective reference to all rights,
priorities and privileges relating to intellectual property, whether arising under United States, multinational or foreign laws or otherwise, including, without limitation, (i) all copyrights arising under the laws of the United States, any
other country or any political subdivision thereof, whether registered or unregistered and whether published or unpublished, all registrations and recordings thereof, and all applications in connection therewith, including, without limitation, all
registrations, recordings and applications in the United States Copyright Office, (ii) all letters patent of the United States, any other country or any political subdivision thereof, all reissues and extensions thereof, and all applications
for letters patent of the United States or any other country and all divisions, continuations and continuations-in-part thereof, (iii) all trademarks, trade names, corporate names, company names, business names, fictitious business names, trade
dress, service marks, logos, domain names and other source or business identifiers, and all goodwill associated therewith, now existing or hereafter adopted or acquired, all registrations and recordings thereof, and all applications in connection
therewith, whether in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof or any other country or any political subdivision thereof, or otherwise, and all common law rights related
thereto, (iv) all trade secrets arising under the laws of the United States, any other country or any political subdivision thereof, (v) all rights to obtain any reissues, renewals or extensions of the foregoing, (vi) all licenses for
any of the foregoing, and (vii) all causes of action for infringement of the foregoing.
(c) “Intercreditor
Agreement” means the Intercreditor Agreement, by and among the Company, Sandlapper Securities LLC, as agent on behalf of the Note Holders, and the Prior Note Holders.
(d) “Lien” means a lien, charge, security interest, encumbrance, right of first refusal, preemptive right or other
restriction.
(e) “Majority in Interest” means, at any time of determination, or decision, the vote or approval of
the holders of at least 67% of the outstanding principal amount of the Notes and Prior Notes acting together as a single class of the Secured Parties.
(f) “Obligations” means all of the liabilities and obligations (primary, secondary, direct, contingent, sole, joint or
several) due or to become due, or that are now or may be hereafter contracted or acquired, or owing to, of the Company to the Secured Parties, including, without limitation, all obligations under this Agreement, the Notes, the Prior Notes and any
other instruments, agreements or other documents executed and/or delivered in connection herewith or therewith, in each case, whether now or hereafter existing, voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or
unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent
all or any part of such payment is avoided or recovered directly or indirectly from any of the Secured Parties as a preference, fraudulent transfer or otherwise as such obligations may be amended, supplemented, converted, extended or modified from
time to time. Without limiting the generality of the foregoing, the term “Obligations” shall include, without limitation: (i) principal of, and interest on the Notes and the loans extended pursuant thereto; (ii) any
and all other fees, indemnities, costs, obligations and liabilities of the Company from time to time under or in connection with this Agreement, the Notes, and any other instruments, agreements or other documents executed and/or delivered in
connection herewith or therewith; and (iii) all amounts (including but not limited to post-petition interest) in respect of the foregoing that would be payable but for the fact that the obligations to pay such amounts are unenforceable or not
allowable due to the existence of a bankruptcy, reorganization or similar proceeding involving the Company.
3
(g) “Permitted Liens” means (i) the Liens and security interests permitted
by the Notes and the Prior Notes; (ii) any Lien for taxes not yet due or delinquent or being contested in good faith by appropriate proceedings for which adequate reserves have been established in accordance with GAAP, (iii) any statutory
Lien arising in the ordinary course of business by operation of law with respect to a liability that is not yet due or delinquent, (iv) any Lien created by operation of law, such as materialmen’s liens, mechanics’ liens and other
similar liens, arising in the ordinary course of business with respect to a liability that is not yet due or delinquent or that are being contested in good faith by appropriate proceedings, (v) Liens (A) upon or in any equipment acquired
or held by the Company or any of its Subsidiaries to secure the purchase price of such equipment or indebtedness incurred solely for the purpose of financing the acquisition or lease of such equipment, or (B) existing on such equipment at the
time of its acquisition, provided that the Lien is confined solely to the property so acquired and improvements thereon, and the proceeds of such equipment, (vi) Liens incurred in connection with the extension, renewal or refinancing of the
indebtedness secured by Liens of the type described in clauses (i) through (v) above, provided that any extension, renewal or replacement Lien shall be limited to the property encumbered by the existing Lien and the principal amount of the
Indebtedness being extended, renewed or refinanced does not increase, (vii) leases or subleases and licenses and sublicenses granted to others (who are not affiliated with the Company or an officer or director) in the ordinary course of the
Company’s business, not interfering in any material respect with the business of the Company and its Subsidiaries taken as a whole, (viii) Liens in favor of customs and revenue authorities arising as a matter of law to secure payments of
custom duties in connection with the importation of goods, and (ix) Liens arising from judgments, decrees or attachments in circumstances not constituting an Event of Default under the Notes.
(h) “Person” means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint
venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind.
(i)
“Security Agent” means the Person appointed to act as the agent of the Secured Parties in accordance with the terms and conditions of Section 7 of this Agreement.
(j) “Subsidiary” means, in respect of any Person, any corporation, association, partnership or other business entity of which
more than 50% of the total voting power of shares of Capital Stock or other interests (including partnership interests) entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers, general partners
or trustees thereof is at the time owned or controlled, directly or indirectly, by (i) such Person; (ii) such Person and one or more Subsidiaries of such Person; or (iii) one or more Subsidiaries of such Person.
(k) “Transaction Documents” means this Agreement, the Subscription Agreement, the Notes and the Intercreditor Agreement.
(l) “UCC” means the Uniform Commercial Code of the State of California and or any other applicable law of any state or
states which has jurisdiction with respect to all, or any portion of, the Collateral or this Agreement, from time to time.
SECTION II
COLLATERAL; OBLIGATION SECURED
Section 2.1 Grant and Description. In order to secure the full and complete payment and performance of the Obligations when due,
the Company hereby grants to each Secured Party a security interest in all of the Company’s rights, titles, and interests in and to the Collateral (the “Security Interest”) and subject to the Permitted Liens, pledges,
collaterally transfers, and assigns the Collateral to the Secured Parties, all upon and subject to the terms and conditions of this Security Agreement. If the grant, pledge, or collateral transfer or assignment of any specific item of the Collateral
is expressly prohibited by any contract or by law, then the Security Interest created hereby nonetheless remains effective to the extent allowed by such contract, the UCC or other applicable laws, but is otherwise limited by that prohibition.
4
Section 2.2 Financing Statements; Further Assurances.
(a) The Company hereby irrevocably authorizes the Security Agent at any time and from time to time to file in any UCC jurisdiction any initial
financing statements and amendments thereto (without the requirement for the Company’s signature thereon) that (i) indicate the Collateral (A) as all assets of the Company or words of similar effect, regardless of whether any
particular asset comprised in the Collateral falls within the scope of Article 9 of the UCC of the state or such jurisdiction or whether such assets are included in the Collateral hereunder, or (B) as being of an equal or lesser scope or
with greater detail, and (ii) contain any other information required by Article 9 of the UCC of the state or such jurisdiction for the sufficiency or filing office acceptance of any financing statement or amendment, including whether the
Company is an organization, the type of organization, and any organization identification number issued to the Company. The Company agrees to furnish to the Security Agent any such information reasonably required by the Security Agent for the
purposes contemplated by this Section 2.2.
(b) Until the Obligations are paid and performed in full, the Company covenants and agrees
that it will, at its own expense and, subject to the Intercreditor Agreement, upon the Security Agent’s reasonable request: (i) after an Event of Default, file or cause to be filed such applications and take such other actions as the
Security Agent may reasonably request to obtain the consent or approval of any governmental authority to the rights of the Secured Parties and the Security Agent hereunder, including, without limitation, the right to sell all the Collateral upon an
Event of Default without additional consent or approval from such governmental authority; (ii) from time to time, either before or after an Event of Default, promptly execute and deliver to the Security Agent all such other assignments,
certificates, supplemental documents, and financing statements, and do all other acts or things as the Security Agent may reasonably request in order to more fully create, evidence, perfect, continue, and preserve the priority of the Security
Interest and to carry out the provisions of this Agreement; and (iii) either before or after an Event of Default, pay all filing fees in connection with any financing, continuation, or termination statement or other instrument with respect to
the Security Interest.
SECTION III
COVENANTS
Section 3.1 Duties of the Company Regarding Collateral. At all times from and after the date hereof and until the Notes have been
indefeasibly paid in full, the Company agrees that it shall:
(a) Preserve the Collateral in good condition and order (ordinary wear and
tear excepted) and not permit it to be abused or misused;
(b) Not allow any of the Collateral to be affixed to real estate, except for any
property deemed to be fixtures;
(c) Maintain good and complete title to the Collateral subject only to Permitted Liens;
(d) Keep the Collateral free and clear at all times of all Liens other than Permitted Liens;
(e) Take or cause to be taken such acts and actions as shall be necessary or appropriate to assure that each Secured Party’s security
interest in the Collateral (other than the Permitted Liens) shall not become subordinate or junior to the security interests, Liens or claims of any other Person;
5
(f) Except with respect to inventory sold in the normal course of business, refrain from selling,
assigning or otherwise disposing of any of the Collateral or moving or removing any of the Collateral, without obtaining the prior written consent of the Secured Parties, or until all of the Obligations have been fully performed and paid in full;
provided, however, that concurrently with any disposition permitted by this Section 3.1(f), (x) the security interest granted hereby shall automatically be released from the Collateral so disposed, and (y) the security
interest shall continue in the Proceeds (as defined in the UCC) of such Collateral or any property purchased with such Proceeds; and provided further, that, the Secured Parties shall execute and deliver, at the Company’s sole cost and
expense, any releases or other documents reasonably requested by the Company, that is in form and substance reasonably acceptable to the executing party, confirming the release of the security interest in that portion of the Collateral that is the
subject of a disposition permitted by this Section 3.1(f);
(g) Promptly provide to the Secured Parties such financial
statements, reports, lists and schedules related to the Collateral and any other information relating to the Collateral as the Secured Parties may reasonably request from time to time;
(h) Upon reasonable notice, permit the Security Agent to inspect all books and records of the Company relating to the Collateral at such times
and as often as the Security Agent reasonably request; and
(i) Promptly notify the Secured Parties if any Event of Default (as hereinafter
defined) occurs.
Section 3.2 Other Encumbrances. At all times after the date hereof and until such time as there are no
Obligations due to the Secured Parties, the Company shall, subject to the rights of the holders of the Permitted Liens: (i) defend its title to, and each Secured Party’s interest in, the Collateral against all claims, (ii) take any
action necessary to remove any encumbrances on the Collateral other than Permitted Liens, and (iii) defend the right, title and interest of each Secured Party in and to any of the Company’s rights in the Collateral.
Section 3.3 Change Name or Location. At all times after the date hereof and until such time as there are no Obligations due to the
Secured Parties, the Company shall not, except upon 10 days’ prior written notice to the Secured Parties, change its company name or conduct its business under any name other than that set forth herein or change its jurisdiction of organization
or incorporation, chief executive office, place of business from the current location.
SECTION IV
REPRESENTATIONS AND WARRANTIES
The Company represents and warrants to each Secured Party as follows:
Section 4.1 Title to Collateral. The Company is the owner of and has good and marketable title to, or has a valid and subsisting
leasehold interest in, all of the Collateral.
Section 4.2 No Other Encumbrances. Other than the Permitted Liens, the Company
has not granted, nor will it grant, a security interest in the Collateral to any other individual or entity, and such Collateral is free and clear of any mortgage, pledge, lease, trust, bailment, lien, security interest, encumbrance, charge or other
arrangement.
6
Section 4.3 Authority; Enforceability. The Company has the authority and capacity to
perform its obligations hereunder, and this Agreement is the valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency or
other similar laws of general application affecting the enforcement of creditors’ rights or general equitable principles, whether applied in law or equity.
Section 4.4 Company Name; Place of Business; Location of Collateral. The Company’s true and correct company name, all trade
name(s) under which it conducts its business, its jurisdiction of organization or incorporation and each of its chief executive offices, its place(s) of business and the locations of the Collateral or records relating to the Collateral are set forth
in Schedule II hereto.
Section 4.5 Perfection; Security Interest. For Collateral in which the Security Interest may be
perfected by the filing of financing statements, once those financing statements have been properly filed in the appropriate jurisdictions, the Security Interest in such Collateral will be fully perfected, subject only to Permitted Liens. Other than
the financing statements and with respect to this Agreement, there are no other financing statements or control agreements covering any Collateral, other than those evidencing Permitted Liens.
SECTION V
EVENTS OF DEFAULT
Section 5.1 Events of Default Defined. The occurrence of any of the following events shall constitute an event of default under
this Agreement (each, an “Event of Default”):
(a) The failure of the Company to perform or comply in a material respect
with any act, duty or obligation required to be performed under this Agreement if such failure is not remedied within twenty (20) days after the Company receives written notice of such failure from the Security Agent;
(b) If any of the representations or warranties of the Company set forth in this Agreement shall prove to have been incorrect in any material
respect when made, or becomes incorrect in any material respect and is not cured within thirty (30) days after the Company receives written notice from the Security Agent;
(c) If any material portion of the Collateral shall be damaged, destroyed or otherwise lost and such damage, destruction or loss is not covered
by insurance; or
(d) If an “Event of Default” as defined in the Notes shall have occurred and is continuing.
Section 5.2 Rights and Remedies Upon Default. If an Event of Default exists and is continuing, the Security Agent may, at its
election (but in accordance with the Intercreditor Agreement and subject to Section 8 below), exercise any and all rights available to a secured party under the UCC, in addition to any and all other rights afforded by the Transaction
Documents, at law, in equity, or otherwise, including, without limitation, (a) requiring the Company to assemble all or part of the Collateral and make it available to the Security Agent at a place to be designated by the Security Agent which
is reasonably convenient to the Company, (b) surrendering any policies of insurance on all or part of the Collateral and receiving and applying the unearned premiums as a credit on the Obligation, (c) applying by appropriate judicial
proceedings for appointment of a receiver for all or part of the Collateral (and the Company hereby consents to any such appointment), and (d) applying to the Obligation any cash held by Security Agent under this Security Agreement.
7
Section 5.3 Notice. Reasonable notification of the time and place of any public sale
of the Collateral, or reasonable notification of the time after which any private sale or other intended disposition of the Collateral is to be made, shall be sent to the Company, the holders of Permitted Liens, and to any other person or entity
entitled to notice under the UCC. It is agreed that notice sent or given not less than ten calendar days prior to the taking of the action to which the notice relates is reasonable notification and notice for the purposes of this subparagraph.
Section 5.4 Allocation of Proceeds. Subject to the Intercreditor Agreement, the Security Agent may determine the order in which to
apply funds received by it hereunder (e.g., the Security Agent may determine to apply funds first to expenses, second to interest and third to principal or the it may determine to apply funds first to interest, second to expenses and third to
principal).
SECTION VI
ADDITIONAL REMEDIES
Section 6.1 Additional Remedies. Subject to the Intercreditor Agreement and Section 8, upon the occurrence of an Event of
Default, the Company shall:
(a) Endorse any and all documents evidencing any Collateral (other than any Collateral if and to the extent
subject to the Permitted Liens) to each Secured Party, or as otherwise instructed by the Security Agent, and notify any payor that said documents have been so endorsed and that all sums due and owing pursuant to them should be paid directly to such
Secured Party, or as otherwise instructed by the Security Agent;
(b) Turn over to the Security Agent, or as otherwise instructed by the
Security Agent, copies of all documents evidencing any right to collection of any sums due to the Company arising from or in connection with any of the Collateral;
(c) Take any action reasonably required by a Secured Party with reference to the Federal Assignment of Claims Act; and
(d) Keep all of its books, records, documents and instruments relating to the Collateral in such manner as the Secured Parties may require.
SECTION VII
SECURITY AGENT
Section 7.1 Appointment. The Secured Parties, by their acceptance of the benefits of the Agreement, hereby designate
Sandlapper Securities LLC as the representative to act as the security agent in accordance with the terms of this Agreement (the “Security Agent”) and to execute, on behalf each Secured Party, the Interrcreditor Agreement. The
Secured Parties agree that the act of the Majority in Interest in appointing the Security Agent shall be sufficient in all respects to rightfully appoint the Security Agent hereunder. Each Secured Party (whether or not a signatory hereto) shall be
deemed irrevocably (a) to consent to the appointment of Security Agent as its agent hereunder and under the Intercreditor Agreement, (b) to confirm that the Security Agent shall have the authority to act as the exclusive agent of such
Person for the enforcement of any provisions of this Agreement and under the Intercreditor Agreement against the Company, the exercise or non exercise of remedies hereunder and the giving or withholding of any consent or approval hereunder relating
to any Collateral or the Company’s obligations with respect thereto, (c) to agree that it shall not take any action to enforce any provisions of this Agreement against the Company, to exercise any remedy hereunder or to give any consents
or approvals hereunder except as expressly provided in this Agreement or in the Notes or under the Intercreditor Agreement and (d) to agree to be bound by the terms of this Agreement. Each of the Secured Parties hereby understands and confirms
that the Security Agent shall not be required to act against Collateral or to enforce any provision of this Agreement without the instruction or approval of a Majority in Interest or as may be allowed under the Intercreditor Agreement. The
appointment of the Security Agent shall continue until revoked in writing by a Majority in Interest, at which time a Majority in Interest shall appoint a new Security Agent. The Security Agent may perform any of its duties hereunder by or through
its agents or employees.
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Section 7.2 Nature of Duties. The Security Agent shall have no duties or
responsibilities except those expressly set forth in this Agreement. Neither the Security Agent nor any of its partners, members, shareholders, officers, directors, employees or agents shall be liable for any action taken or omitted by it as
such under the Agreement or in connection herewith, be responsible for the consequence of any oversight or error of judgment or answerable for any loss, unless caused solely by its or their gross negligence or willful misconduct as determined by a
final judgment (not subject to further appeal) of a court of competent jurisdiction. The duties of the Security Agent shall be mechanical and administrative in nature; the Security Agent shall not have by reason of the Agreement or any other
Transaction Document a fiduciary relationship in respect of the Company or any Secured Party; and nothing in the Agreement or any other Transaction Document, expressed or implied, is intended to or shall be so construed as to impose upon the Agent
any obligations in respect of the Agreement or any other Transaction Document except as expressly set forth herein and therein.
Section
7.3 Lack of Reliance on the Security Agent. Independently and without reliance upon the Security Agent, each Secured Party, to the extent it deems appropriate, has made and shall continue to make (i) its own independent
investigation of the financial condition and affairs of the Company and its subsidiaries in connection with such Secured Party’s investment in the Company, the creation and continuance of the Obligations, the transactions contemplated by the
Transaction Documents, and the taking or not taking of any action in connection therewith, and (ii) its own appraisal of the creditworthiness of the Company and its subsidiaries, and of the value of the Collateral from time to time, and the
Security Agent shall have no duty or responsibility, either initially or on a continuing basis, to provide any Secured Party with any credit, market or other information with respect thereto, whether coming into its possession before any Obligations
are incurred or at any time or times thereafter. The Security Agent shall not be responsible to the Company or any Secured Party for any recitals, statements, information, representations or warranties herein or in any document, certificate or
other writing delivered in connection herewith, or for the execution, effectiveness, genuineness, validity, enforceability, perfection, collectibility, priority or sufficiency of the Agreement or any other Transaction Document, or for the financial
condition of the Company or the value of any of the Collateral, or be required to make any inquiry concerning either the performance or observance of any of the terms, provisions or conditions of the Agreement or any other Transaction Document, or
the financial condition of the Company, or the value of any of the Collateral, or the existence or possible existence of any default or Event of Default under the Agreement, the Notes or any of the other Transaction Documents.
Section 7.4 Certain Rights of the Security Agent. Subject to the Intercreditor Agreement, the Security Agent shall have the right
to take any action with respect to the Collateral, on behalf of all of the Secured Parties. To the extent practical, the Security Agent shall request instructions from the Secured Parties with respect to any material act or action (including
failure to act) in connection with the Agreement or any other Transaction Document, and shall be entitled to act or refrain from acting in accordance with the instructions of a Majority in Interest; if such instructions are not provided despite the
Security Agent’s request therefor, the Security Agent shall be entitled to refrain from such act or taking such action, and if such action is taken, shall be entitled to appropriate indemnification from the Secured Parties in respect of actions
to be taken by the Security Agent; and the Security Agent shall not incur liability to any person or entity by reason of so refraining. Without limiting the foregoing, (a) no Secured Party shall have any right of action whatsoever against
the Security Agent as a result of the Security Agent acting or refraining from acting hereunder in accordance with the terms of the Agreement or any other Transaction Document, and the Company shall have no right to question or challenge the
authority of, or the instructions given to, the Security Agent pursuant to the foregoing and (b) the Security Agent shall not be required to take any action which the Security Agent believes (i) could reasonably be expected to expose it to
personal liability or (ii) is contrary to this Agreement, the Transaction Documents or applicable law.
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Section 7.5 Reliance. The Security Agent shall be entitled to rely, and shall be
fully protected in relying, upon any writing, resolution, notice, statement, certificate, telex, teletype or telecopier message, cablegram, radiogram, order or other document or telephone message signed, sent or made by the proper person or entity,
and, with respect to all legal matters pertaining to the Agreement and the other Transaction Documents and its duties thereunder, upon advice of counsel selected by it and upon all other matters pertaining to this Agreement and the other Transaction
Documents and its duties thereunder, upon advice of other experts selected by it. Anything to the contrary notwithstanding, the Security Agent shall have no obligation whatsoever to any Secured Party to assure that the Collateral exists or is
owned by the Company or is cared for, protected or insured or that the liens granted pursuant to the Agreement have been properly or sufficiently or lawfully created, perfected, or enforced or are entitled to any particular priority.
Section 7.6 Indemnification. To the extent that the Security Agent is not reimbursed and indemnified by the Company, the
Secured Parties will jointly and severally reimburse and indemnify the Security Agent, in proportion to their initially purchased respective principal amounts of Notes, from and against any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against the Security Agent in performing its duties hereunder or under the Agreement or any
other Transaction Document, or in any way relating to or arising out of the Agreement or any other Transaction Document except for those determined by a final judgment (not subject to further appeal) of a court of competent jurisdiction to have
resulted solely from the Security Agent’s own gross negligence or willful misconduct. Prior to taking any action hereunder as Security Agent, the Security Agent may require each Secured Party to deposit with it sufficient sums as it
determines in good faith is necessary to protect the Security Agent for costs and expenses associated with taking such action.
Section
7.7 Resignation by the Security Agent.
(a) The Security Agent may resign from the performance of all its functions and
duties under the Agreement and the other Transaction Documents at any time by giving 30 days’ prior written notice (as provided in the Agreement) to the Company and the Secured Parties. Such resignation shall take effect upon the
appointment of a successor Security Agent pursuant to clauses (b) and (c) below.
(b) Upon any such notice of resignation,
the Secured Parties, acting by a Majority in Interest, shall appoint a successor Security Agent hereunder.
(c) If a successor Security
Agent shall not have been so appointed within said 30-day period, the Security Agent shall then appoint a successor Security Agent who shall serve as Security Agent until such time, if any, as the Secured Parties appoint a successor Security Agent
as provided above. If a successor Security Agent has not been appointed within such 30-day period, the Security Agent may petition any court of competent jurisdiction or may interplead the Company and the Secured Parties in a proceeding for the
appointment of a successor Security Agent, and all fees, including, but not limited to, extraordinary fees associated with the filing of interpleader and expenses associated therewith, shall be payable by the Company on demand.
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Section 7.8 Rights with respect to Collateral. Subject to the Intercreditor
Agreement, each Secured Party agrees with all other Secured Parties and the Security Agent (i) that it shall not, and shall not attempt to, exercise any rights with respect to its security interest in the Collateral, whether pursuant to any
other agreement or otherwise (other than pursuant to this Agreement), or take or institute any action against the Security Agent or any of the other Secured Parties in respect of the Collateral or its rights hereunder (other than any such action
arising from the breach of this Agreement) and (ii) that such Secured Party has no other rights with respect to the Collateral other than as set forth in this Agreement and the other Transaction Documents. Upon the acceptance of any
appointment as Security Agent hereunder by a successor Security Agent, such successor Security Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Security Agent and the retiring
Security Agent shall be discharged from its duties and obligations under the Agreement. After any retiring Security Agent’s resignation or removal hereunder as Security Agent, the provisions of the Agreement shall inure to its benefit as
to any actions taken or omitted to be taken by it while it was Security Agent.
SECTION VIII
MISCELLANEOUS
Section 8.1 Termination and Release. Upon the full and final payment and performance of the Obligation, this Agreement shall
automatically terminate. The Liens created by this Agreement on any of the Collateral shall be automatically released if the Company disposes of such Collateral pursuant to a transaction permitted by this Agreement, the Note, the Intercreditor
Agreement or otherwise consented to by the Security Agent or the Majority in Interest. In connection with any termination or release pursuant to this Section 8.1, the Majority in Interest shall cause the Security Agent to promptly execute and
deliver to the Company all documents that the Company shall reasonably request to evidence such termination or release.
Section 8.2
Severability. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision;
provided, that in such case the parties shall negotiate in good faith to replace such provision with a new provision which is not illegal, unenforceable or void, as long as such new provision does not materially change the economic benefits
of this Agreement to the parties.
Section 8.3 Continuing Security Interest; Successors. This Agreement creates a continuing
security interest in the Collateral and shall (i) remain in full force and effect until the Obligations are paid and performed in full; and (ii) inure to the benefit of and be enforceable by Secured Parties and their successors,
transferees, and assigns. Each Secured Party may assign its rights hereunder in connection with any private sale or transfer of its Note in accordance with the terms of the Subscription Agreement and applicable law, in which case the term
“Secured Party” shall be deemed to refer to such transferee as though such transferee was an original signatory hereto.
Section 8.4 Governing Law; Jurisdiction. This Agreement shall be governed by and construed under the laws of the State of
California applicable to contracts made and to be performed entirely within the State of California. The Company hereby irrevocably submit to the non-exclusive jurisdiction of the state and federal courts sitting in the City of Los Angeles,
California, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waive, and agree not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper.
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Section 8.5 Headings. The headings used in this Agreement are used for convenience
only and are not to be considered in construing or interpreting this Agreement.
Section 8.6 Notices. Any notice to the
Company or to the holder of this Convertible Note shall be given in the manner set forth in the Subscription Agreement; provided that the Holder of this Convertible Note, if not a party to such Subscription Agreement, may specify alternative
notice instructions to the Company. Either party may, by notice given in accordance with the Subscription Agreement, change the address to which notices, demands and requests shall be sent to such party. Any notice to be given by the Company to the
Security Agent shall be given in the manner provided for in the Subscription Agreement, and delivered to such address as the Company is instructed by the Security Agent.
Section 8.7 Entire Agreement; Amendments; Waivers. This Agreement constitutes the entire agreement between the parties with regard
to the subject matter hereof and thereof, superseding all prior agreements or understandings, whether written or oral, between or among the parties. Except as expressly provided herein, neither this Agreement nor any term hereof may be amended
except pursuant to a written instrument executed by Company and the Majority in Interest, and no provision hereof may be waived other than by a written instrument signed by the party against whom enforcement of any such waiver is sought. The Secured
Parties shall not, by any act, any failure to act or any delay in acting be deemed to have (i) waived any right or remedy under this Agreement, or (ii) acquiesced in any Event of Default or in any breach of any of the terms and conditions
of this Agreement. No failure to exercise, nor any delay in exercising, any right, power or privilege of the Secured Parties under this Agreement shall operate as a waiver of any such right, power or privilege. No single or partial exercise of any
right, power or privilege under this Agreement shall preclude any other or further exercise of any other right, power or privilege. A waiver by a Secured Party of any right or remedy under this Agreement on any one occasion shall not be construed as
a bar to any right or remedy that such Secured Party would otherwise have on any future occasion.
Section 8.8 Multiple
Counterparts. This Agreement has been executed in a number of identical counterparts, each of which shall be deemed an original for all purposes and all of which constitute, collectively, one agreement; but, in making proof of this Agreement, it
shall not be necessary to produce or account for more than one such counterpart.
Section 8.9 Cumulative Remedies. The rights
and remedies provided in this Agreement are cumulative, may be exercised singly or concurrently, and are not exclusive of any other rights or remedies provided by law.
Section 8.10 Waivers. The Company acknowledges that the Obligations arose out of a commercial transaction and hereby knowingly
waives any right to require the Secured Parties to (i) proceed against any person or entity, (ii) proceed against any other collateral under any other agreement, (iii) pursue any other remedy available to the Secured Parties, or
(iv) make presentment, demand, dishonor, notice of dishonor, acceleration and/or notice of non-payment.
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Section 8.11 Release. No transfer or renewal, extension, assignment or termination of
this Agreement or of any instrument or document executed and delivered by an Obligor or any other obligor to the Secured Parties, nor additional advances made by the Secured Parties to an Obligor, nor the taking of further security, nor the retaking
or re-delivery of the Collateral to an Obligor by the Secured Parties nor any other act of the Secured Parties shall release either Obligor from any Obligation, except a release or discharge executed in writing by the Secured Parties with respect to
such Obligation or upon full payment and satisfaction of all Obligations and termination of the Notes. At such time the Obligations have been satisfied in full, each Secured Party shall execute and deliver to each Obligor all assignments and other
instruments as may be reasonably necessary or proper to terminate such Secured Party’s security interest in the Collateral, subject to any disposition of the Collateral that may have been made by the Secured Parties pursuant to this Agreement.
For the purpose of this Agreement, the Obligations shall be deemed to continue if either Obligor enters into any bankruptcy or similar proceeding at a time when any amount paid to the Secured Parties could be ordered to be repaid as a preference or
pursuant to a similar theory, and shall continue until it is finally determined that no such repayment can be ordered.
[Signature Pages to
Follow]
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IN WITNESS WHEREOF, the Company and the Secured Parties have duly executed this Agreement as of
the date first written above.
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| XENONICS HOLDINGS, INC. |
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Name: Alan Magerman |
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Title: Chairman and Chief Executive Officer |
SIGNATURE PAGE TO SECURITY
AGREEMENT
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SIGNATURE PAGE TO SECURITY
AGREEMENT
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| SECURED PARTIES: |
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Name: |
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Title: |
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EXHIBIT 10.4
SECURED CONVERTIBLE PROMISSORY NOTE
Date:
FOR VALUE RECEIVED, the undersigned, Xenonics, Inc., a Nevada corporation, (the “Borrower”), promises to pay to the order of
(“Holder”) at such place as Holder may from time to time designate, in lawful money of the United States, the
principal sum of Dollars ($ 0.00), together with accrued interest on the unpaid principal balance thereof from and after the
date of this Note at the rate of thirteen percent (13.0%) per annum, payable on a quarterly basis, commencing on , 2014.
The entire unpaid principal balance of this Note and any accrued interest shall be due and payable on
, 2017.
The
payment of this Note is secured by a security interest in all of the assets of the Borrower. The Borrower has filed a UCC-1 perfecting a security interest in its assets in favor of Holder. This security interest is on a pari passu
basis with secured notes issued to other note holders.
The Borrower shall have the privilege of prepaying, without penalty or premium,
the outstanding principal balance hereof in whole or in part at any time or from time to time.
The unpaid principal amount of this Note
shall be convertible by the Holder into Common Stock of the Borrower at the rate of $.07 per share.
The Borrower’s failure to
pay when due any principal or accrued interest owed under this Note shall constitute an “Event of Default.” Upon the occurrence of an Event of Default, the Holder shall have the right at any time thereafter, (i) to declare the
entire balance of principal and accrued interest on this Note to be immediately due and payable, and (ii) to exercise all of its rights as a secured party.
If any attorney is engaged by the Holder to enforce or construe any provision of this Note as a consequence of the occurrence of an Event of
Default, then the Borrower shall pay immediately on demand all attorneys’ fees and other costs and expenses incurred by Holder in connection therewith.
The Borrower waives presentment and demand for payment, notice of dishonor, protest and notice of protest, notice of default and any and all
lack of diligence or delay by the Holder in the collection or enforcement of this Note.
The Note is being delivered and is intended to be
performed in the State of California and shall be governed and construed in accordance with the laws of California.
IN WITNESS WHEREOF,
the Borrower has executed and delivered this Note as of the date first written above.
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| XENONICS, INC. |
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| By: |
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Alan Magerman, Chairman and
CEO |
Xenonics (CE) (USOTC:XNNHQ)
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