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)
September 19, 2007
Nephros,
Inc.
(Exact
Name of Registrant as Specified in Charter)
Commission
File Number:
001-32288
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Delaware
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13-3971809
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(State
or other Jurisdiction of
Incorporation)
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(I.R.S.
Employer Identification No.)
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3960
Broadway, New York, New York 10032
(Address
of Principal Executive Offices)
(Zip
Code)
(212)
781-5113
(Registrant’s
telephone number, including area code)
Not
Applicable
(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:
r
Written
communications
pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
r
Soliciting
material
pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
r
Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
r
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
Nephros,
Inc.
(“Nephros” or the “Company”) entered into a
Subscription Agreement with
Lambda Investors LLC (“Lambda”) on September 19, 2007 (the “First Closing
Date”), GPC 76, LLC on September 20, 2007, Lewis P. Schneider on September 21,
2007 and Enso Global Equities Partnership LP on September 25, 2007
(collectively, the “New Investors”) pursuant to which the New Investors
purchased an aggregate of approximately $12.7 million principal amount of Series
A 10% Secured Convertible Notes due 2008 (the “Purchased Notes”) of Nephros, for
the face value thereof (the “Offering”).
Concurrently
with the Offering, Nephros entered into an Exchange Agreement with each of
Southpaw
Credit
Opportunity Master Fund LP
, 3V Capital Master Fund Ltd, Distressed/High
Yield Trading Opportunities, Ltd., Kudu Partners, L.P. and LJHS Company
(collectively, the “Exchange Investors” and together with the New Investors, the
“Investors”), pursuant to which the Exchange Investors agreed to exchange the
principal and accrued but unpaid interest in an aggregate amount of
approximately $5.6 million under the 6% Secured Convertible Notes due 2012
(“Old
Notes”) of Nephros, for new Series B 10% Secured Convertible Notes due 2008 in
an aggregate principal amount of $5.3 million (the “Exchange Notes”, and
together with the Purchased Notes, the “New Notes”) (the “Exchange”, and
together with the Offering, the “Financing”).
The
Company has obtained the approval of its stockholders representing a majority
of
its outstanding shares to the issuance of the shares issuable upon conversion
of
the New Notes and exercise of the warrants issuable upon such conversion, as
further described below. The stockholder approval will be effective
20 days after a definitive Schedule 14C Information Statement (“Schedule 14C”)
is sent or given to the Company’s stockholders.
Upon
effectiveness of such approval, all principal and accrued but unpaid interest
(the “Conversion Amount”) under the New Notes will automatically convert into
(i) shares of Nephros’ common stock, par value $0.001 per share (“Common Stock”)
at a conversion price per share of Common Stock equal to $0.706 and (ii) in
the
case of Purchased Notes, but not Exchange Notes, Class D Warrants (the
“Warrants”) for purchase of shares of Common Stock in an amount equal to 50% of
the number of shares of Common Stock issued to the New Investors in accordance
with clause (i) above with an exercise price per share of Common Stock equal
to
$0.90 (subject to anti-dilution adjustments).
National
Securities Corporation (“NSC”) and Dinosaur Securities, LLC (“Dinosaur” and
together with NSC, the “Placement Agent”) acted as co-placement agents in
connection with the Financing pursuant to an Engagement Letter, dated June
6,
2007 and a Placement Agent Agreement dated September 18, 2007. The
Placement Agent will receive (i)
an aggregate
cash
fee equal to 8% of the face amount of the Purchased Notes
, allocated and
paid 6.25% to NSC and 1.75% to Dinosaur, and (ii) warrants with a term of five
years from the date of issuance to purchase 10% of the aggregate number of
shares of Common Stock issued upon conversion of the Purchased Notes at an
exercise price of $0.90 per share.
No
later
than 15 business days after the First Closing Date, the Company is required
to
file a preliminary Schedule 14C with the Securities and Exchange Commission
(the
“SEC”).
The
Company will file a definitive Schedule 14C with the SEC no later than the
second day after receiving confirmation that the SEC has no further comments
on
the preliminary Schedule 14C.
While
outstanding, the New Notes accrue interest at a rate of 10% per annum,
compounded annually and payable in arrears at maturity or
conversion. The New Notes are secured by a first lien and security
interest on all of Nephros’ assets.
The
Warrants, when issued, will have a term of five years and will be non-callable
by Nephros.
In
connection with the sale of the New Notes, Nephros and the Investors have
entered into a Registration Rights Agreement dated as of the First Closing
Date
(the “Registration Rights Agreement”) pursuant to which Nephros agreed to file
an initial registration statement (“Initial Resale Registration Statement”) with
the SEC no later than 60 days after the Company files a definitive Schedule
14C
with the SEC.
The
Company has agreed to use its commercially reasonable best efforts to have
the
Initial Resale Registration Statement declared effective within 240 days after
filing of the definitive Schedule 14C. In the event the Initial
Resale Registration Statement has not been declared effective within such time
period, for each 30-day period thereafter or portion thereof, Nephros will
pay
each Investor as liquidated damages an amount equal to 1% of such Investor’s
Conversion Amount in respect of the first ten 30-day periods, and 2% of such
Investor’s Conversion Amount thereafter. If the Company fails to pay
the liquidated damages, the Company will pay interest thereon at a rate of
15%
per annum.
In
connection with
the sale of the New Notes, Nephros and the Investors have entered into an
Investor Rights Agreement dated as of the First Closing Date (the “Investor
Rights Agreement”) pursuant to which Nephros agreed to take such corporate
actions as may be required to, among other things, entitle
Lambda to (i)
nominate the Lambda Nominees (as defined in the Investor Rights Agreement)
to
the Board of Directors of Nephros (the “Board”) to serve as directors until
their respective successor(s) are elected and qualified, (ii) nominate each
successor to the Lambda Nominees, provided that any successor shall have
reasonably appropriate experience and background, and (iii) direct the removal
from the Board of any director nominated under the foregoing clauses (i) or
(ii)
. Under
the Investor Rights Agreement,
Nephros is required to convene meetings of
the Board at least once every three months. If the Company fails to
do so, a Lambda director will be empowered to convene such meeting.
The
Investor Rights Agreement also provides that, except as Lambda may otherwise
agree in writing, Lambda will have the right to (i) engage, directly or
indirectly, in the same or similar business activities or lines of business
as
Nephros and (ii) do business with any client, competitor or customer of Nephros,
with the result that Nephros shall have no right in or to such activities or
any
proceeds or benefits therefrom, and neither Lambda nor any Lambda Person (as
defined in the Investor Rights Agreement) will be liable to Nephros or its
stockholders for breach of any fiduciary duty by reason of any such activities
of Lambda or of such Lambda Person’s participation therein. A Lambda
Person who is serving as an officer or director of Nephros may not, at the
same
time, serve as an officer or director of any entity whose principal business
activity is (i) the development or sale of medical devices for the treatment
of
end stage renal disease or (ii) water filtration. In the event that
Lambda or any Lambda Person acquires
knowledge
of a potential transaction or matter that may be a corporate opportunity for
both Lambda and Nephros other than in the case of a “director-related
opportunity” (as defined in the Investor Rights Agreement), Lambda and such
Lambda Person will have no duty to communicate or present such corporate
opportunity to Nephros.
In
addition, in the event that a Lambda director acquires knowledge of a potential
transaction or matter that may be a corporate opportunity for both Nephros
and
Lambda, such corporate opportunity will belong to Lambda, unless such corporate
opportunity is a director-related opportunity, in which case such corporate
opportunity will belong to Nephros.
The
forms
of the Subscription Agreement, the Purchased Note, the Warrant, the Exchange
Note and the Placement Agent Warrant, as well as the Exchange Agreement, the
Registration Rights Agreement, the Investor Rights Agreement and the Placement
Agent Agreement, are being filed as exhibits to this Current Report on Form
8-K,
and the descriptions of such documents set forth herein are summary only and
are
qualified in their entirety by reference to such exhibits, which 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.
Certain
disclosure required by this item is included in Item 1.01 above and is
incorporated herein by reference.
Subject
to certain terms and conditions, the outstanding principal of and accrued
interest on the New Notes may become immediately due and payable upon the
occurrence of any of the following events of default: Nephros’
failure to pay principal or interest on the New Notes when due; certain
bankruptcy-related events with respect to Nephros; material breach of any
representation, warranty or certification made by Nephros in or pursuant to
the
New Notes, or under the Registration Rights Agreement or, as related to the
Purchased Notes, the Subscription Agreement, or, as related to the Exchange
Notes, the Exchange Agreement; breach of any Nephros covenants contained in
the
New Notes or, as related to the Purchased Notes, the Subscription Agreement,
or,
as related to the Exchange Notes, the Exchange Agreement, which is not cured
within 10 calendar days after notice of such breach is given to Nephros; the
removal of a director who was requested to be elected by Lambda without the
written consent of Lambda; Nephros’ incurrence of Indebtedness (as defined in
the New Notes) without prior approval of Lambda; or the acceleration of certain
other debt of Nephros.
Item
3.02. Unregistered Sales of Equity Securities.
Certain
disclosure required by this item is included in Item 1.01 above and is
incorporated herein by reference.
Nephros
has determined that the issuance of the New Notes and any securities issuable
upon conversion or prepayment of the New Notes or exercise of the Warrants
are
exempt from registration under the Securities Act of 1933, as amended, in
reliance on Section 4(2) thereof and/or Regulation D promulgated thereunder.
The
Investors represented their status as sophisticated investors, as well as their
intention to acquire the New Notes and any Common
Stock
issuable upon conversion thereof or upon exercise of the Warrants for investment
only and not with a view to or for sale in connection with any distribution
thereof, and appropriate legends have been affixed to the New Notes and will
be
affixed to the share certificates for any such Common Stock. Moreover, each
Investor either received adequate information about Nephros or had access to
such information.
Item
5.02. Departure of Directors or Certain Officers; Election of Directors;
Appointment of Certain Officers; Compensatory Arrangements of Certain
Officers.
On
September 19, 2007, in connection
with the closing of the Financing, William J. Fox resigned as Executive Chairman
and a director of the Board and Judy S. Slotkin, W. Townsend Ziebold, Jr. and
Howard Davis resigned as directors of the Board. The resignation of
four directors from the Board were a condition precedent to the closing of
the
Financing.
On
September 19, 2007, in connection
with Mr. Fox’s resignation as Executive Chairman, Nephros and Mr. Fox entered
into a Separation Agreement and Release (the “Separation Agreement”), pursuant
to which the parties mutually agreed to terminate Mr. Fox’s employment with
Nephros and the employment agreement between Nephros and Mr. Fox made as of
July
1, 2006 (the “Employment Agreement”), effective immediately. Nephros
will pay Mr. Fox an aggregate of $142,500 paid in equal installments for a
period of six months after the Termination Date (as defined in the Separation
Agreement). Nephros will also pay to Mr. Fox any accrued but unpaid
Base Salary (as defined in the Employment Agreement) for services rendered
through the Termination Date.
Also
on
the Termination Date, unvested stock options to purchase 56,250 shares of Common
Stock held by Mr. Fox will vest and become fully exercisable. Mr. Fox
has the right to exercise all of the vested options he holds within the period
commencing on the Termination Date and ending ninety days after the Termination
Date (the “Options Exercise Period”). Any options not exercised by
Mr. Fox within the Options Exercise Period shall be cancelled. For a
period of six months after the Termination Date, Mr. Fox will continue to
participate in all employee benefit plans, programs and arrangements in which
Mr. Fox was participating in immediately prior to termination.
Although
neither Mr. Fox nor the Company has any further obligations under the Employment
Agreement, certain provisions of the Employment Agreement remain in full force
and effect and are incorporated by reference into the Separation
Agreement. Such provisions relate to, among other things,
noncompetition and nonsolicitation (as amended pursuant to the Separation
Agreement), proprietary information, confidentiality and surrender of records,
and inventions and patents.
The
Separation Agreement is being filed as an exhibit to this Current Report
on Form
8-K, and the description of such document set forth herein is summary only
and
is qualified in its entirety by reference to such exhibit, which is incorporated
herein by reference.
Effective
on September 19, 2007, in connection with the closing of the Financing, Paul
A.
Mieyal and Arthur H. Amron were appointed as directors of the
Company. The appointment of Dr. Mieyal and Mr. Amron to the Board was
a condition precedent to the closing of the Financing. There were no
definitive arrangements that were made regarding committees of the Company
to
which Dr. Mieyal and Mr. Amron were expected to be named. Dr. Mieyal and Mr.
Amron are employed by Wexford Capital LLC (“Wexford Capital”), a registered
investment
advisory
firm that manages Lambda. Apart from the Financing, and the
transactions contemplated therein, neither Dr. Mieyal nor Mr. Amron has had
a
direct or indirect material interest in any transaction of the Company during
the last two years, or proposed transaction, to which the Company was or is
to
be a party.
Dr.
Mieyal is a Vice President of Wexford Capital. Prior to that, he was Vice
President in charge of healthcare investments for Wechsler & Co., Inc., a
private investment firm and registered broker-dealer. Dr. Mieyal serves as
a
Director of Danube Pharmaceuticals, Inc., Epiphany Biosciences, Inc.,
GlobeImmune, Inc., Interventional Spine, Inc., Microbiogen Pty Ltd., Nile
Therapeutics, Inc., and Tigris Pharmaceuticals, Inc. Dr. Mieyal received his
Ph.D. in pharmacology from New York Medical College, a B.A. in chemistry and
psychology from Case Western Reserve University, and is a Chartered Financial
Analyst.
Mr.
Amron
is a partner of Wexford Capital and serves as its General
Counsel. Mr. Amron also actively participates in various private
equity transactions, particularly in the bankruptcy and restructuring areas,
and
has served on the boards and creditors’ committees of a number of public and
private companies in which Wexford has held investments. From 1991-94, Mr.
Amron
was an Associate at Schulte Roth & Zabel LLP specializing in corporate and
bankruptcy law and from 1984-91, Mr. Amron was an Associate at Debevoise &
Plimpton LLP specializing in corporate litigation and bankruptcy law. Mr. Amron
holds a JD from Harvard University, a BA in political theory from Colgate
University and is a member of the New York Bar.
Item
5.03. Amendments to Articles of Incorporation or Bylaws; Change in Fiscal
Year.
On
September 19, 2007, in connection
with the Financing, the majority of the stockholders of Nephros have, by written
consent in lieu of a meeting, adopted an amendment to Nephros’ fourth amended
and restated certificate of incorporation (the “Amendment”) to increase the
authorized shares of Common Stock of Nephros to 60 million. Nephros
does not intend to solicit proxies to adopt the Amendment. As
disclosed above, Nephros intends to file a preliminary Schedule 14C with the
SEC
no later than 15 days after the closing of the Financing and will file a
definitive Schedule 14C with the SEC no later than the second day after
receiving confirmation that the SEC has no further comments on the preliminary
Schedule 14C. The Amendment will not be filed or take effect until 20
days after the definitive Schedule 14C is filed. A form of the
Amendment is attached hereto as Exhibit 3.1 and is incorporated herein by
reference.
Item
8.01. Other Events.
On
September 25, 2007, Nephros issued a
press release announcing the Financing discussed above. A copy of
such press release is attached hereto as Exhibit 99.1 and is incorporated herein
by reference.
Item
9.01. Financial Statements and Exhibits.
(d) Exhibits
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3.1
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Form
of Amendment to the Fourth Amended and Restated Certificate of
Incorporation for Nephros, Inc.
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4.1
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Form
of Series A 10% Secured Convertible Note due 2008 convertible into
Common
Stock and Warrants
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4.2
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Form
of Series B 10% Secured Convertible Note due 2008 convertible into
Common
Stock
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4.3
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Form
of Class D Warrant
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4.4
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Form
of Placement Agent Warrant
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10.1
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Form
of Subscription Agreement between Nephros and each New
Investor
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10.2
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Exchange
Agreement, dated as of September 19, 2007, between Nephros and the
Exchange Investors
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10.3
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Registration
Rights Agreement, dated as of September 19, 2007, among Nephros and
the
Investors
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10.4
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Investor
Rights Agreement, dated as of September 19, 2007, among Nephros and
the
Investors
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10.5
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Placement
Agent Agreement, dated as of September 18, 2007, among Nephros, NSC
and
Dinosaur
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10.6
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Separation
Agreement and Release, dated September 19, 2007, between Nephros and
William J. Fox
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99.1
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Press
Release issued by Nephros, Inc. dated September 25,
2007
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SIGNATURES
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.
Date:
September 25, 2007
NEPHROS,
INC.
By:
/s/
Mark W.
Lerner
Name:
Mark W. Lerner
Title:
Chief Financial Officer (Principal
Financial
and
Accounting Officer)
Exhibit
3.1
CERTIFICATE
OF AMENDMENT
TO
THE
FOURTH
AMENDED AND RESTATED
CERTIFICATE
OF INCORPORATION
OF
NEPHROS,
INC.
It
is
hereby certified that:
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1.
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The
name of the Corporation is: Nephros, Inc. (the
“Corporation”).
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2.
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The
Corporation’s Fourth Amended and Restated Certificate of Incorporation, as
filed with the Secretary of State of the State of Delaware on June
24,
2005 (the “Certificate”), is hereby amended by deleting the existing
Section 2 of Article IV and replacing it in its entirety with the
following:
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“Section
2. Capital Stock. The total authorized capital stock of the Corporation
shall be: 65,000,000 shares, consisting of:
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(i)
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60,000,000
shares of Common Stock, $.001 par value per share (the “Common
Stock”);
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(ii)
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5,000,000
shares of preferred stock, $.001 par value per share (collectively,
the
“Undesignated Preferred Stock”). Subject to any limitations set
forth elsewhere in this Certificate of Incorporation, the shares
of
Undesignated Preferred Stock may be issued from time to time in
one or
more series. Subject to any limitations set forth elsewhere in
this Certificate of Incorporation, the Board of Directors is hereby
authorized, by adopting appropriate resolutions and causing one
or more
certificates of amendment to be signed, verified and delivered
in
accordance with the DGCL, to establish from time to time the number
of
shares to be included in such series, and to fix the powers, preferences
and rights of, and the qualifications, limitations and restrictions
granted to and imposed upon such Undesignated Preferred
Stock. Such powers, preferences and rights of, and the
qualifications, limitations and restrictions granted to and imposed
upon
such Undesignated Preferred Stock may include, but are not limited
to, the
fixing or alteration of the dividend rights, dividend rate, conversion
rights, exchange rights, voting rights, rights and terms of redemption
(including sinking fund provisions), the redemption price or prices,
and
the liquidation preferences of any wholly unissued series of shares
of
Undesignated Preferred Stock, or any of them. In accordance
with the authority hereby granted, the Board may increase or decrease
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the
number of shares of any series of preferred stock, whether or not
such preferred stock then constitutes Undesignated Preferred Stock, subsequent
to the issuance of shares of that series; provided that any such increase
shall
be no greater than the total number of authorized shares of Undesignated
Preferred Stock at such time, and no such decrease shall result in the number
of
authorized shares of such series being fewer than the number then
outstanding. In case the number of shares of any series of preferred
stock, other than Undesignated Preferred Stock, shall be so decreased, the
shares constituting such decrease shall become Additional Undesignated Preferred
Stock. Any shares of a series of preferred stock, which is designated
pursuant to this clause (ii), that were issued but, thereafter, are no longer
outstanding shall not resume the status of authorized and unissued shares
of
such series, but shall instead become authorized and unissued shares of
Additional Undesignated Preferred Stock. Except as may otherwise be
required by law or this Certificate of Incorporation, the terms of any series
of
Undesignated Preferred Stock may be amended without the consent of the holders
of any other series of the Corporation’s preferred stock, or Common
Stock.”
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3.
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The
amendment of the Certificate herein certified has been duly adopted
in
accordance with the provisions of Section 242 of the General Corporation
Law of the State of Delaware.
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[Remainder
of page intentionally left blank]
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IN
WITNESS WHEREOF
, the undersigned has executed this Certificate as of
the __ day of ___________, 2007.
By:
_____________________
Name: Norman
J.
Barta
Title: Chief
Executive
Officer
Exhibit
4.1
THIS
NOTE IS SUBJECT TO THE TERMS OF A SUBSCRIPTION AGREEMENT, A COPY OF WHICH IS
ON
FILE WITH, AND AVAILABLE FROM, THE SECRETARY OF NEPHROS,
INC.
THIS
NOTE AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT BEEN
REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE
“SECURITIES ACT”), OR ANY STATE SECURITIES LAWS. THIS NOTE AND SUCH
SECURITIES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED OR
OTHERWISE TRANSFERRED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT
WITH
RESPECT TO SUCH SECURITIES UNDER THE SECURITIES ACT OR AN AVAILABLE EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. ANY SUCH
TRANSFER MAY ALSO BE SUBJECT TO COMPLIANCE WITH APPLICABLE STATE SECURITIES
LAWS.
THE
SECURITIES ISSUABLE UPON CONVERSION OF THIS NOTE ARE ISSUED SUBJECT TO THE
PROVISIONS OF A REGISTRATION RIGHTS AGREEMENT, AND ANY TRANSFEREE OF SUCH
SECURITIES SHALL BE BOUND BY THE PROVISIONS OF SAID AGREEMENT, A COPY OF WHICH
IS ON FILE WITH, AND AVAILABLE FROM, THE SECRETARY OF NEPHROS,
INC.
NEPHROS,
INC.
No.
[__]
Series
A 10% Secured Convertible Note due 2008
$[___________]
September ___,
2007
Nephros,
Inc., a Delaware corporation, (the “Company”), for value received, hereby
promises to pay to [_________________________________________], or registered
assigns (as applicable, the “Holder”), the principal sum set forth above, with
interest thereon at a rate equal to ten percent 10% per annum, on the Maturity
Date. Payment shall be made upon surrender of this Note (as defined
below) at such place as designated by the Company, and shall be 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
shall be made to the Holder at its address as set forth on the registration
records of the Company or, at the request of the Holder, by wire transfer to
an
account specified by the Holder. This Note is one of a duly
authorized issue of up to $15,000,000 aggregate principal amount of Nephros,
Inc. Series A 10% Secured Convertible Notes due 2008 (individually a “Note” and
collectively the “Notes”). Certain capitalized terms used herein are defined in
Section 9. Capitalized terms used herein without definition have the
respective meanings specified therefor in the Subscription
Agreement. The Notes are secured by the Collateral pursuant to the
Subscription Agreement.
The
Company will pay interest in arrears on the Maturity Date. Interest
on this Note will accrue daily at a rate of ten percent (10%) per annum from
the
date of its issuance set forth above and shall be compounded
annually. Notwithstanding the foregoing, the Company hereby
unconditionally promises to pay to the order of the Holder interest on any
principal or interest payable hereunder that shall not be paid in full when
due,
whether at the Maturity Date or upon acceleration or declaration or otherwise,
for the period from and including the due date of such payment to but excluding
the date the same is paid in full, at a rate of eighteen (18%) per annum (but
in
no event in excess of the maximum rate permitted under applicable
law). Interest will cease to accrue on the Automatic Conversion
Date.
This
Note
may not be prepaid in whole or in part.
(a)
Conversion
. On
the Automatic Conversion Date, this Note and all accrued but unpaid interest
thereon shall immediately, and without any action on the part of the Company
or
the Holder, convert into (i) shares of the Company’s common stock, par value
$0.001 per share (the “Common Stock”), at a conversion price per share of Common
Stock equal to $0.706 (the “Conversion Price”), and (ii) Class D Warrants (the
“Warrants”) for the purchase of shares of Common Stock in an amount equal to 50%
of the number of shares of Common Stock issued to the Holder in accordance
with
clause (i) in this Section 3(a) (rounded up to the nearest whole share and
subject to adjustment as provided in Section 3(c) below) at an exercise price
per share of Common Stock, subject to adjustment as provided in Section 3(c)
below, equal to $0.90 per share (the “Exercise Price”), such Warrants to have
the terms and conditions set forth in the form of Warrant attached hereto as
Exhibit A
. This Note may not be converted by the Holder at any
time.
No
greater than 20 nor fewer than 5 days prior to the Automatic Conversion Date,
notice (the “Automatic Conversion Notice”) by first class mail, postage prepaid,
shall be given to the Holder, addressed to the Holder at its last address as
shown on the registration records of the Company. The Automatic
Conversion Notice shall specify the date fixed for conversion, the place or
places for surrender of Notes, and the then effective Conversion Rate pursuant
to this Section 3.
Any
Automatic Conversion Notice which is mailed as herein provided shall be
conclusively presumed to have been duly given by the Company on the date
deposited in the mail, whether or not the Holder receives such notice; and
failure properly to give such notice by mail, or any defect in such notice,
to
the Holder shall not affect the validity of the proceedings for the conversion
of this Note. Notwithstanding that this Note shall not have been
surrendered, this Note shall no longer be deemed outstanding and all rights
whatsoever with respect to this Note, except the right to receive the number
of
full shares of Common Stock and Warrants to which such person shall be entitled
upon conversion hereof, shall terminate.
(b)
Conversion
Procedures
.
(i)
As
promptly as practicable after the Automatic Conversation Date, the Holder shall
surrender this Note at the place designated in the Automatic Conversion Notice,
duly endorsed. The Holder shall also submit a notice (the “Notice of
Conversion”) specifying the name or names (with address) in which a certificate
or certificates evidencing shares of Common Stock and the Warrants are to be
issued;
provided, however,
the Company shall not be required to honor
any Notice of Conversion unless the Secured Party shall have provided the
Company with any authorizations as may be requested by the Company to file
a
termination statement with respect to the Secured Party’s security interest in
the Collateral, as set forth in the Subscription Agreement. The surrender
of the Note and the delivery of the Notice of Conversion and authorizations
to
file a termination statement are the only procedures required of the Holder
upon
the conversion of this Note. No additional legal opinion or other
information or instructions shall be required of the Holder upon the conversion
of this Note.
(ii)
The
Company will make a notation of the date that a Notice of Conversion is
received, which date of receipt shall be deemed to be the date of receipt for
purposes hereof.
(iii)
The
Company shall, or shall direct its transfer agent to, within 10 days after
such
deposit of any Note accompanied by a Notice of Conversion and compliance with
any other conditions herein contained, deliver to the person for whose account
such Note was so surrendered (x) certificates evidencing the number of full
shares of Common Stock to which such person is entitled as aforesaid, subject
to
Section 4, and (y) Warrants evidencing the number of full shares of Common
Stock
to which such person is entitled as aforesaid upon exercise of such
Warrants.
(iv)
Such
conversion shall be deemed to have been made as of the Automatic Conversion
Date, and the person or persons entitled to receive the Common Stock and
Warrants deliverable upon conversion of such Note shall be treated for all
purposes as the record holder or holders of such Common Stock and Warrants
on
such date and the Note shall no longer be deemed outstanding and all rights
whatsoever in respect thereof (including the right to receive interest thereon)
shall terminate except the right to receive the number of full shares of Common
Stock and Warrants to which such person shall be entitled upon conversion
hereof;
provided
,
however
, that the Company shall not be
required to issue any certificates representing shares of Common Stock and
Warrants (x) until such Note has been received at the place designated in the
Automatic Conversion Notice; and (y) if the Note is received while the stock
transfer books of the Company are closed for any purpose, but such certificates
shall be issued immediately upon the reopening of such books as if the Note
had
been received on the date of such reopening.
(c)
Adjustment
of Conversion Price and Warrant Terms
. In the event the Company shall, at
any time or from time to time after the date hereof, and prior to the Automatic
Conversion Date (i) pay a dividend or make a distribution on its Common
Stock in shares of Common Stock, (ii) subdivide its outstanding shares of
Common Stock into a greater number of shares or (iii) combine its
outstanding shares of Common Stock into a smaller number of shares (each of
(i) through (iii), a “Change of Shares”), then (x) the Conversion Price
shall be changed
to
a
price (rounded to the nearest one-tenth of a cent) determined by multiplying
the
Conversion Price in effect immediately prior to such Change of Shares by a
fraction, the numerator of which shall be the number of shares of Common Stock
outstanding (excluding treasury stock) immediately prior to the Change of Shares
and the denominator of which shall be the number of shares of Common Stock
outstanding (excluding treasury stock) immediately following the Change of
Shares. If between the date hereof and the Automatic Conversion Date
any transaction or event occurs that, if the Warrants were then outstanding,
would result in an adjustment to the Per Share Exercise Price (as such term
is
defined in the Form of Warrant) or the number of shares of Common Stock covered
by the Warrants (other than an adjustment to such number of shares of Common
Stock that has already been effected by an adjustment to the number of shares
of
Common Stock issued upon the conversion of this Note), then the Exercise Price
and number of shares covered by the Warrants issued upon the conversion of
this
Note shall be adjusted to take into account such transaction or event as if
such
Warrants were outstanding during the period from the date hereof through the
Automatic Conversion Date.
(d)
Anti-Dilution
Notices
. After each adjustment of the Conversion Price and
Warrant terms pursuant to Subsection 3(c), the Company will prepare a
certificate signed by the Chief Executive Officer or President, and by the
Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary,
of the Company setting forth: (i) the Conversion Price, Exercise
Price and number of shares covered by the Warrants as so adjusted and (ii)
a
brief statement of the facts accounting for such adjustment. The
Company will send such certificate by ordinary first class mail to the Holder
at
its last address as it shall appear on the registration records of the
Company. No failure to mail such certificate nor any defect therein
or in the mailing thereof shall affect the validity of such
adjustment. The certificate of the Secretary or an Assistant
Secretary of the Company that such certificate has been mailed shall, in the
absence of fraud, be prima facie evidence of the facts therein
stated. The transfer agent, if other than the Company, may rely on
the information in the certificate as true and correct and has no duty nor
obligation independently to verify the amounts or calculations therein set
forth.
(e)
Reservation
of Shares; Transfer Taxes; Etc
. The Company shall at all times
reserve and keep available, out of its authorized and unissued shares of Common
Stock, solely for the purpose of effecting the conversion of the Notes and
exercise of the Warrants, such number of shares of its Common Stock free of
preemptive rights as shall be sufficient to effect the conversion of all of
the
2007 Notes and exercise of all Warrants from time to time
outstanding. The Company covenants that such shares of Common Stock
so issuable and deliverable shall, upon issuance in accordance with the terms
hereof, be duly authorized and validly issued and fully paid and
nonassessable. The Company shall use its reasonable best efforts from
time to time, in accordance with the laws of the State of Delaware, to increase
the authorized number of shares of Common Stock if at any time the authorized
number of shares of Common Stock not outstanding shall not be sufficient to
permit the conversion of all the then-outstanding 2007 Notes and the exercise
of
all Warrants issuable upon conversion of the Notes.
The
Company shall pay any and all issue or other taxes (other than income taxes)
that may be payable in respect of any issue or delivery of shares of Common
Stock or Warrants on conversion of the Notes. The Company shall not,
however, be required to pay any tax which may be payable in respect of any
transfer involved in the issue or delivery of Common Stock or Warrants (or
other
securities or assets) in a name other than that in which the Notes so converted
were
registered, 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 such tax
or
has established, to the satisfaction of the Company, that such tax has been
paid.
(f)
Other
Changes in Conversion Price
. The Company from time to time may
decrease the Conversion Price by mailing to the Holder an irrevocable notice
of
the decrease at least 15 days before the date the decreased Conversion Price
takes effect, and such notice shall state the decreased Conversion Price and
the
resulting increased Conversion Rate.
(g)
Minimum
Conversion Price
. Notwithstanding anything to the contrary
herein, in no case shall the Conversion Price be adjusted to an amount less
than
$0.001 per share, the current par value of the Common Stock.
SECTION
4.
Fractional
Shares
.
No
fractional shares or scrip representing fractional shares of Common Stock shall
be issued upon conversion of this Note. If more than one certificate
evidencing Notes shall be surrendered for conversion at one time by the same
Holder, the number of full shares issuable upon conversion thereof shall be
computed on the basis of the aggregate principal amount and accrued interest
of
the Notes so surrendered. Instead of any fractional share of Common
Stock which would otherwise be issuable upon conversion of this Note (or of
such
aggregate number of Notes), the number of shares of Common Stock will be rounded
to the nearest whole share (with a .5 of a share rounded upward).
SECTION
5.
Covenants
.
The
Company hereby covenants and agrees that between the date hereof and the
Automatic Conversion Date, the Company will not:
(a)
create,
issue, incur (by conversion, exchange or otherwise), assume, guarantee or
otherwise become or remain directly or indirectly liable for any
Indebtedness;
(b)
declare
any dividend (or any other distribution) or redeem or repurchase any of its
capital stock or other securities;
(c)
authorize
the granting to the holders of Common Stock of rights or warrants to subscribe
for or purchase any shares of stock of any class or of any other rights or
warrants;
(d)
reclassify
the Common Stock (other than a subdivision or combination of the outstanding
Common Stock, or a change in par value, or from par value to no par value,
or
from no par value to par value);
(e)
be
a
party to any merger or consolidation for which approval of any stockholders
of
the Company shall be required, or of the sale or transfer of all or
substantially all of the assets of the Company or of any compulsory share
exchange whereby the Common Stock is converted into other securities, cash
or
other property; or
(f)
cause
or
permit any Liquidation Event; or
(g)
take
any
action to approve any of the foregoing.
SECTION
6.
Events
of Default Defined
.
The
following shall each constitute an “Event of Default” hereunder:
(a)
the
failure of the Company to make any payment of principal of or interest on this
Note when due;
(b)
the
Company shall, (i) apply for or consent to the appointment of a receiver,
trustee, liquidator or custodian of itself or of all or a substantial part
of
its property, (ii) be unable to, or admit in writing its inability, pay its
debts generally as they mature, (iii) make a general assignment for the benefit
of its or any of its creditors, (iv) be dissolved or liquidated, (v) commence
a
voluntary case or other proceeding seeking liquidation, reorganization or other
relief with respect to itself or its debts under any bankruptcy, insolvency
or
other similar law now or hereafter in effect or consent to any such relief
or to
the appointment of or taking possession of its property by any official in
an
involuntary case or other proceeding commenced against it, or (vi) take any
action for the purpose of effecting any of the foregoing;
(c)
proceedings
for the appointment of a receiver, trustee, liquidator or custodian of the
Company or of all or a substantial part of the property thereof, or an
involuntary case or other proceedings seeking liquidation, reorganization or
other relief with respect to the Company or the debts thereof under any
bankruptcy, insolvency or other similar law now or hereafter in effect shall
be
commenced and an order for relief entered or such proceeding shall not be
dismissed or discharged within 90 days of commencement;
(d)
any
representation, warranty or certification made herein or pursuant hereto (or
in
any modification or supplement hereto) or under the Registration Rights
Agreement or the Subscription Agreement by the Company was not true or correct
in any material respect when made;
(e)
the
Company shall breach any of its covenants contained in this Note or in the
Subscription Agreement and shall not cure such breach within ten calendar days
after notice of such breach is given to the Company by any Registered
Holder;
(f)
any
director who was requested to be elected by the Secured Party shall be removed
as a director without the written consent of the Secured Party;
(g)
the
Company shall Incur any Indebtedness without the prior written approval of
the
Secured Party; and
(h)
the
Company shall default in the performance of any of its obligations under, or
shall otherwise breach, any covenant in any agreement or instrument for borrowed
money in an aggregate amount in excess of $500,000, the effect of which causes
or permits any holder or holders of such agreement or instrument to cause such
borrowed money to be declared due and payable prior to its stated maturity
and
such holder or holders in fact declare such money due and payable, except for
any default set forth on
Schedule 6(
h
)
.
SECTION
7.
Remedies
upon Event of Default
.
(a)
If
an
Event of Default occurs and is continuing for a period of 15 or more consecutive
days, the Registered Holders of 2007 Notes constituting a majority of the
principal amount of 2007 Notes then outstanding (the “Majority Noteholders”), by
notice to the Company, may declare the unpaid principal of and accrued interest
on all the 2007 Notes then outstanding to be due and payable without
presentment, demand, protest or any other notice of any kind, all of which
are
hereby expressly waived (an “Acceleration”); provided, an Acceleration shall
automatically occur upon the occurrence of an Event of Default specified in
Section 6(b) or (c). Upon any Acceleration, all principal and accrued
interest, fees, charges or damages for early prepayment on the 2007 Notes shall
be due and payable immediately. Majority Noteholders may rescind an
Acceleration and its consequences;
provided, however
, that no such
rescission shall effect any subsequent Default or impair any right consequent
thereto.
(b)
Majority
Noteholders or Secured Party may waive an existing Default or Event of Default
and its consequences. Upon any such waiver, such Default shall cease
to exist and any Event of Default arising therefrom shall be deemed to have
been
cured for every purpose of this Note; but no such waiver shall extend to any
subsequent or other Default or impair any right consequent thereon.
(c)
Upon
the
occurrence and during the continuance of an Event of Default, Secured Party
may,
at its election, without notice of its election and without demand, take any
action permitted by law, including the exercise of any rights accorded a secured
creditor under the Uniform Commercial Code as in effect in New York and any
rights granted in the Subscription Agreement.
(d)
The
remedies provided in this Note shall be cumulative and in addition to all other
remedies available under this Note and the Subscription Agreement at law or
in
equity (including a decree of specific performance and/or other injunctive
relief), and nothing herein shall limit the Holder’s right to pursue damages for
any failure by the Company to comply with the terms of this
Note. Amounts set forth or provided for herein with respect to
payments, redemption and the like (and the computation thereof) shall be the
amounts to be received by the Holder and shall not, except as expressly provided
herein, be subject to any other obligation of the Company (or the performance
thereof). The Company acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to the Holder and that the remedy at
law
for any such breach may be inadequate. The Company therefore agrees that, in
the
event of any such breach or threatened breach, the Holder shall be entitled,
in
addition to all other available remedies, to an injunction restraining any
breach, without the necessity of showing economic loss and without any bond
or
other security being required.
SECTION
8.
Lost,
Mutilated, etc. Note
.
Upon
receipt by the Company of evidence reasonably satisfactory to it of the loss,
theft, destruction or mutilation of this Note and of indemnity or bond
reasonably satisfactory to it, and upon reimbursement to the Company of all
reasonable expenses incidental thereto, and upon surrender and cancellation
of
this Note (in case of mutilation) the Company will make and deliver in lieu
of
this Note a new Note of like tenor and unpaid principal amount and dated as
of
the
date
to which interest has been paid on the unpaid principal amount of this Note
in
lieu of which such new Note is made and delivered.
SECTION
9.
C
ertain
Definitions
.
(a)
“2007
Notes” shall mean, collectively, the Notes and the Nephros, Inc. Series B 10%
Secured Convertible Notes.
(b)
“Automatic
Conversion Date” shall mean the twenty-first (21
st
) day after
the
Company sends or gives its stockholders a definitive Schedule 14C information
statement relating to written consent of stockholders of the Company approving
the issuance of the Common Stock and Warrants issuable upon the conversion
of
the 2007 Notes and the amendment of the Company’s Certificate of Incorporation
to increase the number of authorized shares of Common Stock to 60,000,000
shares.
(c)
“Collateral”
includes all of the property of the Company whether now owned or hereafter
acquired, regardless where located, including without limitation the
following: (a) all accounts and other rights of the Company to
payment of money, no matter how evidenced, all chattel paper, instruments and
other writings evidencing any such right, and all goods repossessed or returned
in connection therewith; (b) all chattel paper (including electronic chattel
paper); (c) all inventory, including but not limited to all raw materials,
work
in process, materials used or consumed in the Company’s business, and finished
goods, together with all additions and accessions thereto and replacements
therefor, all substitutes therefor, all improvements to and returns of such
inventory, and products thereof; (d) all deposit accounts and all funds,
certificates, documents, instruments, checks, drafts, wire transfer receipts
and
other earnings, profits or other proceeds from time to time representing,
evidencing, deposited into or held in the deposit accounts or payable to the
Company in respect thereof; (e) all general intangibles; (f) all equipment,
fixtures and real property; (g) all intellectual property, including, without
limitation, all copyrights, trademarks and patents and all applications and
licenses thereof; (h) all commodity contracts, security entitlements; financial
assets and investment property, including, without limitation, all capital
stock
and other ownership interests and the certificates (if any) representing such
capital stock and ownership interests and all dividends, cash, instruments
and
other property from time to time received, receivable or otherwise distributed
or distributable in respect of or in exchange for any or all of the foregoing;
(i) all money; (j) all commercial tort claims; (k) all Debt from time to time
owed to the Company by any person or entity, including without limitation,
all
instruments evidencing such Debt; (l) all letter of credit rights and letters
of
credit; (m) all automobiles and motor vehicles; (n) all computer hardware and
software; (o) all consumer goods; (p) all supporting obligations arising from
or
related to any of the property described in
clauses
(a)
through
(o)
above; (q) any and all rights in and claims under insurance
policies, judgments and rights thereunder and tort claims; (r) all documents,
books and records; (s) all other goods and personal property of the Company
of
any kind or character, whether tangible or intangible; (t) all rights of the
Company in all of the foregoing; and (u) all products and proceeds, in cash
or
otherwise, of any of the foregoing property.
(d)
“Conversion
Price” shall initially be $0.706 per share of Common Stock, subject to
adjustment as provided herein, representing an initial conversion rate (subject
to adjustment) of approximately 1,416.43 shares of Common Stock per $1,000
of principal amount of Note being converted (the “Conversion
Rate”).
(e)
“Default”
means an event which, with notice or the passage of time, or both, would become
an Event of Default.
(f)
“Incur”
means, with respect to any Indebtedness or other obligation of any person,
to
create, issue, incur (by conversion, exchange or otherwise), assume, guarantee
or otherwise become or remain directly or indirectly liable for such
Indebtedness or other obligation.
(g)
“Indebtedness”
means (a) any liabilities for borrowed money (other than trade accounts
payable incurred in the ordinary course of business), (b) every obligation
of
the Company evidenced by bonds, debentures, notes or other similar instruments,
(c) all guaranties, endorsements and other contingent obligations in
respect of Indebtedness of others, whether or not the same are or should be
reflected in the Company’s balance sheet (or the notes thereto), except
guaranties by endorsement of negotiable instruments for deposit or collection
or
similar transactions in the ordinary course of business; and (d) the
present value of any lease payments due under leases required to be capitalized
in accordance with United States generally accepted accounting
principles.
(h)
“Liquidation
Event” means any (i) liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, (ii) a sale or other disposition of all
or substantially all of the assets of the Company or (iii) any consolidation,
merger, combination, reorganization or other transaction in which the Company
is
not the surviving entity or shares of Common Stock constituting in excess of
50%
of the voting power of the Company are exchanged for or changed into stock
or
securities of another entity, cash and/or any other property.
(i)
“Maturity
Date” means September [_], 2008.
(j)
“Registered
Holder,” with respect to any 2007 Note, shall mean the holder of record
thereof.
(k)
“Registration
Rights Agreement” means the registration rights agreement of even date herewith,
among the Company and the Holders listed on Schedule 1 attached thereto, in
the
form attached to the Subscription Agreement as Exhibit C.
(l)
“Secured
Party” means Lambda Investors LLC.
(m)
“Securities
Act” means the United Stated Securities Act of 1933, as amended.
(n)
“SEC”
means the Securities and Exchange Commission.
(o)
“Subscription
Agreement” means the subscription agreement of even date herewith entered into
between the Company and the Holder.
(p)
“Warrants”
shall mean the warrants to purchase shares of Common Stock that are being issued
pursuant to the Notes.
SECTION
10.
Miscellaneous
.
(a)
This
Note
may be amended only by mutual written agreement of the Company and the Holder
or, if such amendment shall apply to all outstanding 2007 Notes, with the
written consent of the Company and the Majority Noteholders;
provided
,
however
, without the consent of the holder of this Note, no such
amendment may be approved that would have the effect of (i) decreasing the
principal amount or rate of interest payable hereunder, (ii) extending the
Automatic Conversion Date or Maturity Date, (iii) increasing the Conversion
Price or decreasing the Conversion Rate; or (iv) affect any adjustment under
Section 3 of this Note. Furthermore, the Company may take any action
herein prohibited or omit to take any action herein required to be performed
by
it, and any breach of any covenant, agreement, warranty or representation may
be
waived, if the Company has obtained the written consent or waiver of the Holder
or, if such consent or waiver shall apply to all outstanding 2007 Notes, the
Majority Noteholders. Any amendments approved in compliance with this
Section 10(a) shall bind the Holder’s successors and assigns.
(b)
Forbearance
from Suit
. No holder of Notes shall institute any suit or
proceeding for the enforcement of the payment of principal or interest unless
the Secured Party joins in such suit or proceeding.
(c)
Governing
Law
. This Note shall be governed by, and construed in accordance
with, the laws of the State of New York, excluding the body of law relating
to
conflict of laws. Notwithstanding anything to the contrary contained
herein, in no event may the effective rate of interest collected or received
by
the Holder exceed that which may be charged, collected or received by the Holder
under applicable law.
(d)
Interpretation
. If
any term or provision of this Note shall be held invalid, illegal or
unenforceable, the validity of all other terms and provisions hereof shall
in no
way be affected thereby.
(e)
Successors
and Assigns
. Subject to the restrictions on transfer contained
herein, this Note shall be binding upon the Company and its successors and
assigns and shall inure to the benefit of the Holder and its successors and
registered assigns.
(f)
Assignment
by the Holder
. This Note and any of the rights, interests or
obligations hereunder, may be assigned at any time in whole or in part by the
Holder, without the consent of the Company, if the transferee is an “accredited
investor” as defined in Regulation D under the Securities Act and agrees to be
bound by all of the provisions of the Note, the Warrants, the Subscription
Agreement and the Registration Rights Agreement, including without limitation,
making representations and warranties identical to those of the Holder contained
in such documents but with respect to such transferee and as of the date of
such
transfer.
(g)
Assignment
by the Company
. Neither this Note nor any of the rights,
interests or obligations hereunder may be assigned, by operation of law or
otherwise, in whole or in part, by the Company without the prior written consent
of the Holder.
(h)
Saturdays,
Sundays, Holidays
. If any date that may at any time be specified
in this Note as a date for the making of any payment of principal or interest
under this Note shall fall on Saturday, Sunday or on a day which in New York
shall be a legal holiday, then the date for the making of that payment shall
be
the next subsequent day which is not a Saturday, Sunday or legal
holiday.
(i)
Subscription
Agreement.
This Note is subject to the terms contained in the
Subscription Agreement and the Holder of this Note is entitled to the benefits
of such Subscription Agreement to the extent provided therein.
(j)
Jurisdiction;
Forum
. Any dispute arising out of or relating to this Note shall
be resolved, and all suits, actions and proceedings brought by the Company
or
Holder hereunder shall be brought only in, any state court sitting in the County
of New York or federal court sitting in the Southern District of the State
of
New York. The Company waives any objection to the laying of venue in
such courts and any claim that any such action has been brought in an
inconvenient forum. To the extent permitted by law, any judgment in
respect of a dispute arising out of or relating to this Note may be enforced
in
any other jurisdiction within or outside the United States by suit on the
judgment, a certified copy of such judgment being conclusive evidence of the
fact and amount of such judgment.
(k)
Attorneys’
Fees
. In the event of any litigation or other proceeding
concerning this Note or the transactions contemplated hereby, including any
such
litigation or proceeding with respect to the collection or other enforcement
of
this Note against the Company, the prevailing party in such litigation or
proceeding shall be entitled to reimbursement from the party opposing such
prevailing party for all attorneys’ fees and costs incurred by such prevailing
party in such litigation or proceeding.
[Signature
page follows immediately]
IN
WITNESS WHEREOF, this Series A 10% Secured Convertible Note due 2008 has been
executed and delivered on the date first above written by the duly authorized
representative of the Company.
NEPHROS,
INC.
By: ___________________________________
Name:
Title:
Schedule
6
(
h
)
On
July
23, 2007, the Company received a letter from counsel for Receiver in the action
captioned Marty Steinberg, Esq. as Receiver for Lancer Offshore, Inc. v.
Nephros, Inc., Case No. 04-CV-20547 notifying the Company of its failure to
pay
the third installment due to the Receiver pursuant to a Settlement Agreement
between the Receiver and the Company, and asking the Company to cure such
default by July 30, 2007. The Company failed to cure such default in
the specified time period. On August 20, 2007, counsel for Receiver
filed in the United States District Court for the Southern District of Florida
(the “Court”) a motion to enforce the Settlement Agreement and for entry of
Final Default Judgment against the Company in the amount of $700,000 plus
interest and attorney’s fees and costs. On August 29, 2007, the Court
granted a motion of an extension of time until October 4, 2007 for the Company
to serve its opposition to the Receiver’s motion to enforce Settlement Agreement
and for entry of Final Default Judgment. Pursuant to an e-mail from
counsel for Receiver sent to counsel for the Company on August 24, 2007, the
Receiver has agreed to the following:
|
1.
|
If
the Company makes the late $200,000 payment required under the Settlement
Agreement by October 4, 2007, then the default under the Settlement
Agreement will be cured.
|
|
2.
|
Thereafter,
the Company’s only remaining payment obligation under the Settlement
Agreement will be to make a $200,000 payment by January 18,
2008.
|
|
3.
|
If
the Company fails to make the payment described in (1) above by October
4,
2007, the Company will not file a response to the motion to enforce
Settlement Agreement and for entry of default judgment. The
Receiver may then advise the Court and request immediate entry of
an order
granting the relief requested.
|
EXHIBIT
A
[FORM
OF
WARRANT]
14
Exhibit
4.2
THIS
NOTE IS SUBJECT TO THE TERMS OF AN EXCHANGE AGREEMENT, A COPY OF WHICH IS ON
FILE WITH, AND AVAILABLE FROM, THE SECRETARY OF NEPHROS,
INC.
THIS
NOTE AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT BEEN
REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE
“SECURITIES ACT”), OR ANY STATE SECURITIES LAWS. THIS NOTE AND SUCH
SECURITIES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED OR
OTHERWISE TRANSFERRED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT
WITH
RESPECT TO SUCH SECURITIES UNDER THE SECURITIES ACT OR AN AVAILABLE EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. ANY SUCH
TRANSFER MAY ALSO BE SUBJECT TO COMPLIANCE WITH APPLICABLE STATE SECURITIES
LAWS.
THE
SECURITIES ISSUABLE UPON CONVERSION OF THIS NOTE ARE ISSUED SUBJECT TO THE
PROVISIONS OF A REGISTRATION RIGHTS AGREEMENT, AND ANY TRANSFEREE OF SUCH
SECURITIES SHALL BE BOUND BY THE PROVISIONS OF SAID AGREEMENT, A COPY OF WHICH
IS ON FILE WITH, AND AVAILABLE FROM, THE SECRETARY OF NEPHROS,
INC.
NEPHROS,
INC.
No.
[__]
Series
B 10% Secured Convertible Note due 2008
$[___________]
September
___,
2007
Nephros,
Inc., a Delaware corporation, (the “Company”), for value received, hereby
promises to pay to [_________________________________________], or registered
assigns (as applicable, the “Holder”), the principal sum set forth above, with
interest thereon at a rate equal to ten percent 10% per annum, on the Maturity
Date. Payment shall be made upon surrender of this Note (as defined
below) at such place as designated by the Company, and shall be 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
shall be made to the Holder at its address as set forth on the registration
records of the Company or, at the request of the Holder, by wire transfer to
an
account specified by the Holder. This Note is one of a duly
authorized issue of up to $5,300,000 aggregate principal amount of Nephros,
Inc.
Series B 10% Secured Convertible Notes due 2008 (individually a “Note” and
collectively the “Notes”). Certain capitalized terms used herein are defined in
Section 9. Capitalized terms used herein without definition have the
respective meanings specified therefor in the Exchange Agreement. The
Notes are secured by the Collateral pursuant to the Exchange
Agreement.
SECTION
1.
Interest
.
The
Company will pay interest in arrears on the Maturity Date. Interest
on this Note will accrue daily at a rate of ten percent (10%) per annum from
the
date of its issuance set forth above and shall be compounded
annually. Notwithstanding the foregoing, the Company hereby
unconditionally promises to pay to the order of the Holder interest on any
principal or interest payable hereunder that shall not be paid in full when
due,
whether at the Maturity Date or upon acceleration or declaration or otherwise,
for the period from and including the due date of such payment to but excluding
the date the same is paid in full, at a rate of eighteen (18%) per annum (but
in
no event in excess of the maximum rate permitted under applicable
law). Interest will cease to accrue on the Automatic Conversion
Date.
SECTION
2.
Prepayment
.
This
Note
may not be prepaid in whole or in part.
SECTION
3.
Conversion
(a)
Conversion
. On
the Automatic Conversion Date, this Note and all accrued but unpaid interest
thereon shall immediately, and without any action on the part of the Company
or
the Holder, convert into shares of the Company’s common stock, par value $0.001
per share (the “Common Stock”), at a conversion price per share of Common Stock
equal to $0.706 (the “Conversion Price”). This Note may not be
converted by the Holder at any time.
No
greater than 20 nor fewer than 5 days prior to the Automatic Conversion Date,
notice (the “Automatic Conversion Notice”) by first class mail, postage prepaid,
shall be given to the Holder, addressed to the Holder at its last address as
shown on the registration records of the Company. The Automatic
Conversion Notice shall specify the date fixed for conversion, the place or
places for surrender of Notes, and the then effective Conversion Rate pursuant
to this Section 3.
Any
Automatic Conversion Notice which is mailed as herein provided shall be
conclusively presumed to have been duly given by the Company on the date
deposited in the mail, whether or not the Holder receives such notice; and
failure properly to give such notice by mail, or any defect in such notice,
to
the Holder shall not affect the validity of the proceedings for the conversion
of this Note. Notwithstanding that this Note shall not have been
surrendered, this Note shall no longer be deemed outstanding and all rights
whatsoever with respect to this Note, except the right to receive the number
of
full shares of Common Stock to which such person shall be entitled upon
conversion hereof, shall terminate.
(b)
Conversion
Procedures
.
(i)
As
promptly as practicable after the Automatic Conversation Date, the Holder shall
surrender this Note at the place designated in the Automatic Conversion Notice,
duly endorsed. The Holder shall also submit a notice (the “Notice of
Conversion”) specifying the name or names (with address) in which a certificate
or certificates evidencing shares of Common Stock are to be issued;
provided, however,
the Company shall not be required to honor any
Notice of Conversion unless the Secured Party shall have provided the Company
with any
authorizations
as may be requested by the Company to file a termination statement with respect
to the Secured Party’s security interest in the Collateral, as set forth in the
Exchange Agreement. The surrender of the Note and the delivery of the
Notice of Conversion and authorizations to file a termination statement are
the
only procedures required of the Holder upon the conversion of this
Note. No additional legal opinion or other information or
instructions shall be required of the Holder upon the conversion of this
Note.
(ii)
The
Company will make a notation of the date that a Notice of Conversion is
received, which date of receipt shall be deemed to be the date of receipt for
purposes hereof.
(iii)
The
Company shall, or shall direct its transfer agent to, within 10 days after
such
deposit of any Note accompanied by a Notice of Conversion and compliance with
any other conditions herein contained, deliver to the person for whose account
such Note was so surrendered certificates evidencing the number of full shares
of Common Stock to which such person is entitled as aforesaid, subject to
Section 4.
(iv)
Such
conversion shall be deemed to have been made as of the Automatic Conversion
Date, and the person or persons entitled to receive the Common Stock deliverable
upon conversion of such Note shall be treated for all purposes as the record
holder or holders of such Common Stock on such date and the Note shall no longer
be deemed outstanding and all rights whatsoever in respect thereof (including
the right to receive interest thereon) shall terminate except the right to
receive the number of full shares of Common Stock to which such person shall
be
entitled upon conversion hereof;
provided
,
however
, that the
Company shall not be required to issue any certificates representing shares
of
Common Stock (x) until such Note has been received at the place designated
in
the Automatic Conversion Notice; and (y) if the Note is received while the
stock
transfer books of the Company are closed for any purpose, but such certificates
shall be issued immediately upon the reopening of such books as if the Note
had
been received on the date of such reopening.
(c)
Adjustment
of Conversion Price
. In the event the Company shall, at any time or from
time to time after the date hereof, and prior to the Automatic Conversion Date
(i) pay a dividend or make a distribution on its Common Stock in shares of
Common Stock, (ii) subdivide its outstanding shares of Common Stock into a
greater number of shares or (iii) combine its outstanding shares of Common
Stock into a smaller number of shares (each of (i) through (iii), a “Change
of Shares”), then (x) the Conversion Price shall be changed to a price (rounded
to the nearest one-tenth of a cent) determined by multiplying the Conversion
Price in effect immediately prior to such Change of Shares by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding
(excluding treasury stock) immediately prior to the Change of Shares and the
denominator of which shall be the number of shares of Common Stock outstanding
(excluding treasury stock) immediately following the Change of
Shares.
(d)
Anti-Dilution
Notices
. After each adjustment of the Conversion Price pursuant
to Subsection 3(c), the Company will prepare a certificate signed by the Chief
Executive Officer or President, and by the Treasurer or an Assistant Treasurer
or the Secretary or an Assistant Secretary, of the Company setting
forth: (i) the Conversion Price as so adjusted and (ii) a brief
statement of the facts accounting for such adjustment. The Company
will send such certificate by ordinary first class mail to the Holder at its
last address as it shall appear on the
registration
records of the Company. No failure to mail such certificate nor any
defect therein or in the mailing thereof shall affect the validity of such
adjustment. The certificate of the Secretary or an Assistant
Secretary of the Company that such certificate has been mailed shall, in the
absence of fraud, be prima facie evidence of the facts therein
stated. The transfer agent, if other than the Company, may rely on
the information in the certificate as true and correct and has no duty nor
obligation independently to verify the amounts or calculations therein set
forth.
(e)
Reservation
of Shares; Transfer Taxes; Etc
. The Company shall at all times
reserve and keep available, out of its authorized and unissued shares of Common
Stock, solely for the purpose of effecting the conversion of the Notes, such
number of shares of its Common Stock free of preemptive rights as shall be
sufficient to effect the conversion of all of the 2007 Notes. The
Company covenants that such shares of Common Stock so issuable and deliverable
shall, upon issuance in accordance with the terms hereof, be duly authorized
and
validly issued and fully paid and nonassessable. The Company shall
use its reasonable best efforts from time to time, in accordance with the laws
of the State of Delaware, to increase the authorized number of shares of Common
Stock if at any time the authorized number of shares of Common Stock not
outstanding shall not be sufficient to permit the conversion of all the
then-outstanding 2007 Notes.
The
Company shall pay any and all issue or other taxes (other than income taxes)
that may be payable in respect of any issue or delivery of shares of Common
Stock on conversion of the Notes. The Company shall not, however, be
required to pay any tax which may be payable in respect of any transfer involved
in the issue or delivery of Common Stock (or other securities or assets) in
a
name other than that in which the Notes so converted were registered, 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 such tax or has established, to
the
satisfaction of the Company, that such tax has been paid.
(f)
Other
Changes in Conversion Price
. The Company from time to time may
decrease the Conversion Price by mailing to the Holder an irrevocable notice
of
the decrease at least 15 days before the date the decreased Conversion Price
takes effect, and such notice shall state the decreased Conversion Price and
the
resulting increased Conversion Rate.
(g)
Minimum
Conversion Price
. Notwithstanding anything to the contrary
herein, in no case shall the Conversion Price be adjusted to an amount less
than
$0.001 per share, the current par value of the Common Stock.
SECTION
4.
Fractional
Shares
.
No
fractional shares or scrip representing fractional shares of Common Stock shall
be issued upon conversion of this Note. If more than one certificate
evidencing Notes shall be surrendered for conversion at one time by the same
Holder, the number of full shares issuable upon conversion thereof shall be
computed on the basis of the aggregate principal amount and accrued interest
of
the Notes so surrendered. Instead of any fractional share of Common
Stock which would otherwise be issuable upon conversion of this Note (or of
such
aggregate number of Notes), the number of shares of Common Stock will be rounded
to the nearest whole share (with a .5 of a share rounded upward).
SECTION
5.
Covenants
.
The
Company hereby covenants and agrees that between the date hereof and the
Automatic Conversion Date, the Company will not:
(a)
create,
issue, incur (by conversion, exchange or otherwise), assume, guarantee or
otherwise become or remain directly or indirectly liable for any
Indebtedness;
(b)
declare
any dividend (or any other distribution) or redeem or repurchase any of its
capital stock or other securities;
(c)
authorize
the granting to the holders of Common Stock of rights or warrants to subscribe
for or purchase any shares of stock of any class or of any other rights or
warrants;
(d)
reclassify
the Common Stock (other than a subdivision or combination of the outstanding
Common Stock, or a change in par value, or from par value to no par value,
or
from no par value to par value);
(e)
be
a
party to any merger or consolidation for which approval of any stockholders
of
the Company shall be required, or of the sale or transfer of all or
substantially all of the assets of the Company or of any compulsory share
exchange whereby the Common Stock is converted into other securities, cash
or
other property; or
(f)
cause
or
permit any Liquidation Event; or
(g)
take
any
action to approve any of the foregoing.
SECTION
6.
Events
of Default Defined
.
The
following shall each constitute an “Event of Default” hereunder:
(a)
the
failure of the Company to make any payment of principal of or interest on this
Note when due;
(b)
the
Company shall, (i) apply for or consent to the appointment of a receiver,
trustee, liquidator or custodian of itself or of all or a substantial part
of
its property, (ii) be unable to, or admit in writing its inability, pay its
debts generally as they mature, (iii) make a general assignment for the benefit
of its or any of its creditors, (iv) be dissolved or liquidated, (v) commence
a
voluntary case or other proceeding seeking liquidation, reorganization or other
relief with respect to itself or its debts under any bankruptcy, insolvency
or
other similar law now or hereafter in effect or consent to any such relief
or to
the appointment of or taking possession of its property by any official in
an
involuntary case or other proceeding commenced against it, or (vi) take any
action for the purpose of effecting any of the foregoing;
(c)
proceedings
for the appointment of a receiver, trustee, liquidator or custodian of the
Company or of all or a substantial part of the property thereof, or an
involuntary case or other proceedings seeking liquidation, reorganization or
other relief with respect to the Company or the debts thereof under any
bankruptcy, insolvency or other similar law now or
hereafter
in effect shall be commenced and an order for relief entered or such proceeding
shall not be dismissed or discharged within 90 days of
commencement;
(d)
any
representation, warranty or certification made herein or pursuant hereto (or
in
any modification or supplement hereto) or under the Registration Rights
Agreement or the Exchange Agreement by the Company was not true or correct
in
any material respect when made;
(e)
the
Company shall breach any of its covenants contained in this Note or in the
Exchange Agreement and shall not cure such breach within ten calendar days
after
notice of such breach is given to the Company by any Registered
Holder;
(f)
any
director who was requested to be elected by the Secured Party shall be removed
as a director without the written consent of the Secured Party;
(g)
the
Company shall Incur any Indebtedness without the prior written approval of
the
Secured Party; and
(h)
the
Company shall default in the performance of any of its obligations under, or
shall otherwise breach, any covenant in any agreement or instrument for borrowed
money in an aggregate amount in excess of $500,000, the effect of which causes
or permits any holder or holders of such agreement or instrument to cause such
borrowed money to be declared due and payable prior to its stated maturity
and
such holder or holders in fact declare such money due and payable, except for
any default set forth on
Schedule 6(h)
.
SECTION
7.
Remedies
upon Event of Default
.
(a)
If
an
Event of Default occurs and is continuing for a period of 15 or more consecutive
days, the Registered Holders of 2007 Notes constituting a majority of the
principal amount of 2007 Notes then outstanding (the “Majority Noteholders”), by
notice to the Company, may declare the unpaid principal of and accrued interest
on all the 2007 Notes then outstanding to be due and payable without
presentment, demand, protest or any other notice of any kind, all of which
are
hereby expressly waived (an “Acceleration”); provided, an Acceleration shall
automatically occur upon the occurrence of an Event of Default specified in
Section 6(b) or (c). Upon any Acceleration, all principal and accrued
interest, fees, charges or damages for early prepayment on the 2007 Notes shall
be due and payable immediately. Majority Noteholders may rescind an
Acceleration and its consequences;
provided, however
, that no such
rescission shall effect any subsequent Default or impair any right consequent
thereto.
(b)
Majority
Noteholders or Secured Party may waive an existing Default or Event of Default
and its consequences. Upon any such waiver, such Default shall cease
to exist and any Event of Default arising therefrom shall be deemed to have
been
cured for every purpose of this Note; but no such waiver shall extend to any
subsequent or other Default or impair any right consequent thereon.
(c)
Upon
the
occurrence and during the continuance of an Event of Default, Secured Party
may,
at its election, without notice of its election and without demand, take any
action permitted by law, including the exercise of any rights accorded a secured
creditor under the Uniform Commercial Code as in effect in New York and any
rights granted in the Exchange Agreement.
(d)
The
remedies provided in this Note shall be cumulative and in addition to all other
remedies available under this Note and the Exchange Agreement at law or in
equity (including a decree of specific performance and/or other injunctive
relief), and nothing herein shall limit the Holder’s right to pursue damages for
any failure by the Company to comply with the terms of this
Note. Amounts set forth or provided for herein with respect to
payments, redemption and the like (and the computation thereof) shall be the
amounts to be received by the Holder and shall not, except as expressly provided
herein, be subject to any other obligation of the Company (or the performance
thereof). The Company acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to the Holder and that the remedy at
law
for any such breach may be inadequate. The Company therefore agrees that, in
the
event of any such breach or threatened breach, the Holder shall be entitled,
in
addition to all other available remedies, to an injunction restraining any
breach, without the necessity of showing economic loss and without any bond
or
other security being required.
SECTION
8.
Lost,
Mutilated, etc. Note
.
Upon
receipt by the Company of evidence reasonably satisfactory to it of the loss,
theft, destruction or mutilation of this Note and of indemnity or bond
reasonably satisfactory to it, and upon reimbursement to the Company of all
reasonable expenses incidental thereto, and upon surrender and cancellation
of
this Note (in case of mutilation) the Company will make and deliver in lieu
of
this Note a new Note of like tenor and unpaid principal amount and dated as
of
the date to which interest has been paid on the unpaid principal amount of
this
Note in lieu of which such new Note is made and delivered.
SECTION
9.
Certain
Definitions
.
(a)
“2007
Notes” shall mean, collectively, the Notes and the Nephros, Inc. Series A 10%
Secured Convertible Notes.
(b)
“Automatic
Conversion Date” shall mean the twenty-first (21
st
) day after
the
Company sends or gives its stockholders a definitive Schedule 14C information
statement relating to written consent of stockholders of the Company approving
the issuance of the Common Stock and Warrants issuable upon the conversion
of
the 2007 Notes and the amendment of the Company’s Certificate of Incorporation
to increase the number of authorized shares of Common Stock to 60,000,000
shares.
(c)
“Collateral”
includes all of the property of the Company whether now owned or hereafter
acquired, regardless where located, including without limitation the
following: (a) all accounts and other rights of the Company to
payment of money, no matter how evidenced, all chattel paper, instruments and
other writings evidencing any such right, and all goods repossessed or returned
in connection therewith; (b) all chattel paper (including electronic chattel
paper); (c) all inventory, including but not limited to all raw materials,
work
in process, materials used or consumed in the Company’s business, and finished
goods, together with all additions and accessions thereto and replacements
therefor, all substitutes therefor, all
improvements
to and returns of such inventory, and products thereof; (d) all deposit accounts
and all funds, certificates, documents, instruments, checks, drafts, wire
transfer receipts and other earnings, profits or other proceeds from time to
time representing, evidencing, deposited into or held in the deposit accounts
or
payable to the Company in respect thereof; (e) all general intangibles; (f)
all
equipment, fixtures and real property; (g) all intellectual property, including,
without limitation, all copyrights, trademarks and patents and all applications
and licenses thereof; (h) all commodity contracts, security entitlements;
financial assets and investment property, including, without limitation, all
capital stock and other ownership interests and the certificates (if any)
representing such capital stock and ownership interests and all dividends,
cash,
instruments and other property from time to time received, receivable or
otherwise distributed or distributable in respect of or in exchange for any
or
all of the foregoing; (i) all money; (j) all commercial tort claims; (k) all
Debt from time to time owed to the Company by any person or entity, including
without limitation, all instruments evidencing such Debt; (l) all letter of
credit rights and letters of credit; (m) all automobiles and motor vehicles;
(n)
all computer hardware and software; (o) all consumer goods; (p) all supporting
obligations arising from or related to any of the property described in
clauses
(a)
through
(o)
above; (q) any and all rights
in and claims under insurance policies, judgments and rights thereunder and
tort
claims; (r) all documents, books and records; (s) all other goods and personal
property of the Company of any kind or character, whether tangible or
intangible; (t) all rights of the Company in all of the foregoing; and (u)
all
products and proceeds, in cash or otherwise, of any of the foregoing
property.
(d)
“Conversion
Price” shall initially be $0.706 per share of Common Stock, subject to
adjustment as provided herein, representing an initial conversion rate (subject
to adjustment) of approximately 1,416.43 shares of Common Stock per $1,000
of principal amount of Note being converted (the “Conversion
Rate”).
(e)
“Default”
means an event which, with notice or the passage of time, or both, would become
an Event of Default.
(f)
“Exchange
Agreement” means the exchange agreement of even date herewith entered into
between the Company, the Holder and the other parties thereto.
(g)
“Incur”
means, with respect to any Indebtedness or other obligation of any person,
to
create, issue, incur (by conversion, exchange or otherwise), assume, guarantee
or otherwise become or remain directly or indirectly liable for such
Indebtedness or other obligation.
(h)
“Indebtedness”
means (a) any liabilities for borrowed money (other than trade accounts
payable incurred in the ordinary course of business), (b) every obligation
of
the Company evidenced by bonds, debentures, notes or other similar instruments,
(c) all guaranties, endorsements and other contingent obligations in
respect of Indebtedness of others, whether or not the same are or should be
reflected in the Company’s balance sheet (or the notes thereto), except
guaranties by endorsement of negotiable instruments for deposit or collection
or
similar transactions in the ordinary course of business; and (d) the
present value of any lease payments due under leases required to be capitalized
in accordance with United States generally accepted accounting
principles.
(i)
“Liquidation
Event” means any (i) liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, (ii) a sale or other disposition of all
or substantially all of the assets of the Company or (iii) any consolidation,
merger, combination, reorganization or other transaction in which the Company
is
not the surviving entity or shares of Common Stock constituting in excess of
50%
of the voting power of the Company are exchanged for or changed into stock
or
securities of another entity, cash and/or any other property.
(j)
“Maturity
Date” means September [_], 2008.
(k)
“Registered
Holder,” with respect to any 2007 Note, shall mean the holder of record
thereof.
(l)
“Registration
Rights Agreement” means the registration rights agreement, of even date
herewith, among the Company and the Holders listed on Schedule 1 attached
thereto, in the form attached to the Exchange Agreement as Exhibit
E.
(m)
“Secured
Party” means Lambda Investors LLC.
(n)
“Securities
Act” means the United Stated Securities Act of 1933, as amended.
(o)
“SEC”
means the Securities and Exchange Commission.
(p)
“Warrants”
shall mean the warrants to purchase shares of Common Stock that are being issued
pursuant to the Nephros, Inc. Series A 10% Secured Convertible
Notes.
SECTION
10.
Miscellaneous
.
(a)
This
Note
may be amended only by mutual written agreement of the Company and the Holder
or, if such amendment shall apply to all outstanding 2007 Notes, with the
written consent of the Company and the Majority Noteholders;
provided
,
however
, without the consent of the holder of this Note, no such
amendment may be approved that would have the effect of (i) decreasing the
principal amount or rate of interest payable hereunder, (ii) extending the
Automatic Conversion Date or Maturity Date, (iii) increasing the Conversion
Price or decreasing the Conversion Rate; or (iv) affect any adjustment under
Section 3 of this Note. Furthermore, the Company may take any action
herein prohibited or omit to take any action herein required to be performed
by
it, and any breach of any covenant, agreement, warranty or representation may
be
waived, if the Company has obtained the written consent or waiver of the Holder
or, if such consent or waiver shall apply to all outstanding 2007 Notes, the
Majority Noteholders. Any amendments approved in compliance with this
Section 10(a) shall bind the Holder’s successors and assigns.
(b)
Forbearance
from Suit
. No holder of Notes shall institute any suit or
proceeding for the enforcement of the payment of principal or interest unless
the Secured Party joins in such suit or proceeding.
(c)
Governing
Law
. This Note shall be governed by, and construed in accordance
with, the laws of the State of New York, excluding the body of law relating
to
conflict of laws. Notwithstanding anything to the contrary contained
herein, in no event may the effective rate of interest collected or received
by
the Holder exceed that which may be charged, collected or received by the Holder
under applicable law.
(d)
Interpretation
. If
any term or provision of this Note shall be held invalid, illegal or
unenforceable, the validity of all other terms and provisions hereof shall
in no
way be affected thereby.
(e)
Successors
and Assigns
. Subject to the restrictions on transfer contained
herein, this Note shall be binding upon the Company and its successors and
assigns and shall inure to the benefit of the Holder and its successors and
registered assigns.
(f)
Assignment
by the Holder
. This Note and any of the rights, interests or
obligations hereunder, may be assigned at any time in whole or in part by the
Holder, without the consent of the Company, if the transferee is an “accredited
investor” as defined in Regulation D under the Securities Act and agrees to be
bound by all of the provisions of the Note, the Exchange Agreement and the
Registration Rights Agreement, including without limitation, making
representations and warranties identical to those of the Holder contained in
such documents but with respect to such transferee and as of the date of such
transfer.
(g)
Assignment
by the Company
. Neither this Note nor any of the rights,
interests or obligations hereunder may be assigned, by operation of law or
otherwise, in whole or in part, by the Company without the prior written consent
of the Holder.
(h)
Saturdays,
Sundays, Holidays
. If any date that may at any time be specified
in this Note as a date for the making of any payment of principal or interest
under this Note shall fall on Saturday, Sunday or on a day which in New York
shall be a legal holiday, then the date for the making of that payment shall
be
the next subsequent day which is not a Saturday, Sunday or legal
holiday.
(i)
Exchange
Agreement.
This Note is subject to the terms contained in the
Exchange Agreement and the Holder of this Note is entitled to the benefits
of
such Exchange Agreement to the extent provided therein.
(j)
Jurisdiction;
Forum
. Any dispute arising out of or relating to this Note shall
be resolved, and all suits, actions and proceedings brought by the Company
or
Holder hereunder shall be brought only in, any state court sitting in the County
of New York or federal court sitting in the Southern District of the State
of
New York. The Company waives any objection to the laying of venue in
such courts and any claim that any such action has been brought in an
inconvenient forum. To the extent permitted by law, any judgment in
respect of a dispute arising out of or relating to this Note may be enforced
in
any other jurisdiction within or outside the United States by suit on the
judgment, a certified copy of such judgment being conclusive evidence of the
fact and amount of such judgment.
(k)
Attorneys’
Fees
. In the event of any litigation or other proceeding
concerning this Note or the transactions contemplated hereby, including any
such
litigation
or
proceeding with respect to the collection or other enforcement of this Note
against the Company, the prevailing party in such litigation or proceeding
shall
be entitled to reimbursement from the party opposing such prevailing party
for
all attorneys’ fees and costs incurred by such prevailing party in such
litigation or proceeding.
[Signature
page follows immediately]
IN
WITNESS WHEREOF, this Series B 10% Secured Convertible Note due 2008 has been
executed and delivered on the date first above written by the duly authorized
representative of the Company.
NEPHROS,
INC.
By:_____________________________________
Name:
Title:
Schedule
6(h)
On
July
23, 2007, the Company received a letter from counsel for Receiver in the action
captioned Marty Steinberg, Esq. as Receiver for Lancer Offshore, Inc. v.
Nephros, Inc., Case No. 04-CV-20547 notifying the Company of its failure to
pay
the third installment due to the Receiver pursuant to a Settlement Agreement
between the Receiver and the Company, and asking the Company to cure such
default by July 30, 2007. The Company failed to cure such default in
the specified time period. On August 20, 2007, counsel for Receiver
filed in the United States District Court for the Southern District of Florida
(the “Court”) a motion to enforce the Settlement Agreement and for entry of
Final Default Judgment against the Company in the amount of $700,000 plus
interest and attorney’s fees and costs. On August 29, 2007, the Court
granted a motion of an extension of time until October 4, 2007 for the Company
to serve its opposition to the Receiver’s motion to enforce Settlement Agreement
and for entry of Final Default Judgment. Pursuant to an e-mail from
counsel for Receiver sent to counsel for the Company on August 24, 2007, the
Receiver has agreed to the following:
|
1.
|
If
the Company makes the late $200,000 payment required under the Settlement
Agreement by October 4, 2007, then the default under the Settlement
Agreement will be cured.
|
|
2.
|
Thereafter,
the Company’s only remaining payment obligation under the Settlement
Agreement will be to make a $200,000 payment by January 18,
2008.
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3.
|
If
the Company fails to make the payment described in (1) above by October
4,
2007, the Company will not file a response to the motion to enforce
Settlement Agreement and for entry of default judgment. The
Receiver may then advise the Court and request immediate entry of
an order
granting the relief requested.
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13
Exhibit
4.3
THE
TERMS OF THIS WARRANT ARE SUBJECT TO THE TERMS OF A SUBSCRIPTION AGREEMENT
AND
ANY TRANSFEREE OF SUCH SECURITIES SHALL BE BOUND BY THE PROVISIONS OF SAID
AGREEMENT, COPIES OF WHICH ARE ON FILE WITH, AND AVAILABLE FROM, THE SECRETARY
OF NEPHROS, INC.
THIS
WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT
BEEN
REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE
“SECURITIES ACT”), OR ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY
NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED OR OTHERWISE TRANSFERRED
IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO SUCH
SECURITIES UNDER THE SECURITIES ACT OR AN AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. ANY SUCH TRANSFER
MAY ALSO BE SUBJECT TO COMPLIANCE WITH APPLICABLE STATE SECURITIES
LAWS.
THE
SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT ARE ISSUED SUBJECT TO THE
PROVISIONS OF A REGISTRATION RIGHTS AGREEMENT, AND ANY TRANSFEREE OF SUCH
SECURITIES SHALL BE BOUND BY THE PROVISIONS OF SAID AGREEMENT, A COPY OF WHICH
IS ON FILE WITH, AND AVAILABLE FROM, THE SECRETARY OF NEPHROS,
INC.
NEPHROS,
INC.
Class
D Warrant for the Purchase of Shares of Common Stock
No.:
D-
__
Number
of
Shares: ___________
Date
of
Issuance: _____ __, 2007
FOR
VALUE
RECEIVED, the undersigned, NEPHROS, INC., a Delaware corporation (together
with
its successors and assigns, the “
Company
”), hereby certifies that
_______________________________ or its registered assigns (the “
Holder
”)
is entitled to subscribe for and purchase from the Company, subject to the
provisions of this Warrant (this “Warrant” and, together with any other Class D
Warrants to purchase shares of Common Stock, collectively, the
“
Warrants
”), at any time on or prior to 5:00 P.M., New York City time, on
[_____ __], 2012
(the “
Termination Date
”),
[________________] (___________) fully paid and non-assessable shares of the
Common Stock, par value $.001 per share, of the Company (“
Common Stock
”),
at an exercise price per share of Common Stock equal to $0.90 per share (the
“
Per Share Exercise Price
”), as such price may be adjusted from time to
time as shall result from the adjustments specified in this
Warrant.
1.
Exercise
of Warrant
.
(a)
Exercise
. This
Warrant may be exercised in whole or in part, at any time by its holder prior
to
the Termination Date by presentation and surrender of this Warrant, together
with the duly executed notice of exercise form attached at the end hereof,
at
the address set forth in Subsection 8(c) hereof, together with payment to the
Company of an amount of consideration therefor equal to the Per Share Exercise
Price in effect on the date of such exercise multiplied by the number of shares
of Common Stock issuable upon exercise of any Warrant or Warrants or otherwise
issuable pursuant to any Warrant or Warrants then being exercised (the
“
Warrant Shares
”), payable by certified or official bank check or by wire
transfer to an account designated by the Company. The delivery of the
notice of exercise and payment of the Per Share Exercise Price are the only
procedures required of the Holder to exercise this Warrant. No
additional legal opinion or other information or instructions shall be required
of the Holder upon the exercise of this Warrant.
(b)
Cashless
Exercise
. If, and only if, at the time of exercise pursuant to
this Section 1 there is no effective registration statement registering, or
no current prospectus available for, the sale of the Warrant Shares to the
Holder or the resale of the Warrant Shares by the Holder and the VWAP (as
defined below) is greater than the Per Share Exercise Price at the time of
exercise, then this Warrant may also be exercised at such time and with respect
to such exercise by means of a “cashless exercise” in which the Holder shall be
entitled to receive a certificate for the number of Warrant Shares equal to
the
quotient obtained by dividing (i) the result of (x) the difference of (A) minus
(B), multiplied by (y) (C), by (ii) (A), where:
|
|
(A)
= the VWAP (as defined below) on the Trading Day (as defined below)
immediately preceding the date of such election;
|
|
|
(B)
= the Per Share Exercise Price of this Warrant, as adjusted;
and
|
|
|
(C)
= the number of Warrant Shares issuable upon exercise of this Warrant
in
accordance with the terms of this Warrant by means of a cash exercise
rather than a cashless exercise.
|
“
VWAP
”
means, for any date, the price determined by the first of the following clauses
that applies: (a) if the Common Stock is then listed or quoted for trading
on the New York Stock Exchange, American Stock Exchange, Nasdaq Capital Market,
Nasdaq Global Market, Nasdaq Global Select Market or the OTC Bulletin Board,
or
any successor to any of the foregoing (a “
Trading Market
”), the daily
volume weighted average price of the Common Stock on the Trading Market on
which
the Common Stock is then listed or quoted for trading as reported by Bloomberg
L.P. for such date if such date is a date on which the Trading Market on which
the Common Stock is then listed or quoted for trading (a “
Trading Day
”)
or the nearest preceding Trading Date (based on a Trading Day from 9:30 a.m.
(New York City time) to 4:02 p.m. (New York City time); (b) if the Common
Stock is not then listed or quoted for trading on a Trading Market and if prices
for the Common Stock are then reported in the “Pink Sheets” published by Pink
Sheets, LLC (or a similar organization or agency succeeding to its functions
of
reporting prices), the most recent bid price per share of the Common Stock
so
reported; or (c) in all other cases, the fair market value of a share of
Common Stock as determined by an independent appraiser selected in good faith
by
the Holder and reasonably acceptable to the Company.
(c)
Partial
Exercise
. If this Warrant is exercised in part only, the Company
shall, upon presentation of this Warrant upon such exercise, execute and deliver
(along with the
certificate
for the Warrant Shares purchased) a new Warrant evidencing the rights of the
Holder hereof to purchase the balance of the Warrant Shares purchasable
hereunder upon the same terms and conditions as herein set
forth. Upon proper exercise of this Warrant, the Company promptly
shall deliver certificates for the Warrant Shares to the Holder.
2.
Stock
Fully Paid; Reservation and Listing of Shares;
Covenants.
(a)
Authorization,
Reservation of Shares; Etc.
The Company shall at all times
reserve and keep available, out of its authorized and unissued shares of Common
Stock, solely for the purpose of effecting the exercise of this Warrant, such
number of shares of its Common Stock free of preemptive rights as shall be
sufficient to effect the exercise of this Warrant. The Company shall
use its commercially reasonable best efforts from time to time, in accordance
with the laws of the State of Delaware, to increase the authorized number of
shares of Common Stock if at any time the number of shares of Common Stock
not
outstanding shall not be sufficient to permit the exercise of this
Warrant. The Company covenants that all Warrant Shares so issuable
and deliverable shall, upon issuance and the payment of the applicable Per
Share
Exercise Price in accordance with the terms hereof, be duly authorized and
validly issued and fully paid and nonassessable. The Company will take all
such
action as may be necessary to assure that such shares of Common Stock may be
issued as provided herein without violation of any applicable law or regulation,
or of any requirements of any securities exchange or automated quotation system
upon which the Common Stock may be listed.
(b)
Payment
of Taxes
. The Company shall pay any and all issue or other taxes
(other than income taxes) that may be payable in respect of any issue or
delivery of Warrant Shares on exercise of this Warrant. The Company
shall not, however, be required to pay any tax which may be payable in respect
of any transfer involved in the issue or delivery of Warrant Shares (or other
securities or assets) in a name other than that in which Warrant was registered,
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 such tax or has
established, to the satisfaction of the Company, that such tax has been
paid.
(c)
Loss,
Theft, Destruction of Warrants
. Upon receipt of evidence
satisfactory to the Company of the ownership of and the loss, theft, destruction
or mutilation of this Warrant and, in the case of any such loss, theft or
destruction, upon receipt of indemnity or security satisfactory to the Company
(which may include a bond) or, in the case of any such mutilation, upon
surrender and cancellation of such Warrant, the Company will make and deliver,
in lieu of such lost, stolen, destroyed or mutilated Warrant, a new Warrant
of
like date, tenor and denomination.
(d)
Delivery
of Warrant Shares
.
(i) Upon
the exercise of this Warrant, the Company shall promptly (but in no event later
than three Trading Days after the exercise date) issue or cause to be issued
and
cause to be delivered to or upon the written order of the Holder and in such
name or names as the Holder may designate, a certificate for the Warrant Shares
issuable upon such exercise, free of restrictive legends unless a registration
statement covering the resale of the Warrant Shares and naming the Holder as
a
selling stockholder thereunder is not then effective and the Warrant Shares
are
not freely transferable without volume restrictions pursuant to Rule 144 under
the Securities Act.
The Holder, or any Person so
designated
by the Holder to receive Warrant Shares, shall be deemed to have become holder
of record of such Warrant Shares as of the exercise date. Notwithstanding any
provision of this Warrant requiring the delivery of certificates, the Company
shall, upon request of the Holder, use its commercially reasonable efforts
to
deliver Warrant Shares hereunder electronically through the Depository Trust
Corporation or another established clearing corporation performing similar
functions. Any obligation to deliver certificates under this Warrant
shall be deemed satisfied if Warrant Shares are delivered electronically in
accordance with the preceding sentence.
(ii) If
the Company fails to cause its transfer agent to transmit to the Holder a
certificate or certificates representing the Warrant Shares pursuant to this
Section 2(d)(ii) by the third Trading Day following the Warrant Share date
of exercise, then the Holder shall have the right to rescind such
exercise.
(iii) In
addition to any other rights available to a Holder, if the Company fails to
deliver to the Holder a certificate representing Warrant Shares by the third
Trading Day after exercise of this Warrant in full compliance with Section
1,
and if after such third Trading Day the Holder purchases (in an open market
transaction) shares of Common Stock to deliver in satisfaction of a sale by
the
Holder of the Warrant Shares that the Holder anticipated receiving from the
Company (a “
Buy-In
”) upon such exercise, then the Company shall, within
three Trading Days after the Holder’s request and in the Holder’s discretion,
either (x) pay cash to the Holder in an amount equal to the Holder’s total
purchase price (including brokerage commissions, if any) for the shares of
Common Stock so purchased (the “
Buy-In Price
”), at which point the
Company’s obligation to deliver such certificate (and to issue such Warrant
Shares) shall terminate, or (y) promptly honor its obligation to deliver to
the
Holder a certificate or certificates representing such Common Stock and pay
cash
to the Holder in an amount equal to the excess (if any) of the Buy-In Price
over
the product of (1) the number of shares of Common Stock purchased in the Buy-In,
times (2) the closing price on the date of the exercise. The Holders
shall provide the Company written notice indicating the amounts payable to
the
Holder in respect of the Buy-In, together with applicable confirmations and
other evidence reasonably requested by the Company.
(iv) Except
as provided in clause (x) of Section 2(d)(iii), the Company’s obligations to
issue and deliver Warrant Shares upon an exercise in accordance with Section
1
above are absolute and unconditional, irrespective of any action or inaction
by
the Holder to enforce the same, any waiver or consent with respect to any
provision hereof, the recovery of any judgment against any person or entity
or
any action to enforce the same, or any setoff, counterclaim, recoupment,
limitation or termination, or any breach or alleged breach by the Holder or
any
other person or entity of any obligation to the Company or any violation or
alleged violation of law by the Holder or any other person or entity, and
irrespective of any other circumstance which might otherwise limit such
obligation of the Company to the Holder in connection with the issuance of
Warrant Shares. Nothing herein shall limit a Holder’s right to pursue any
other remedies available to it hereunder, at law or in equity, including,
without limitation, a decree of specific performance and/or injunctive relief
with respect to the Company’s failure to timely deliver certificates
representing shares of Common Stock upon exercise of the Warrant as required
pursuant to the terms hereof.
3.
Protection
Against Dilution
.
(a) In
case the Company shall, at any time or from time to time hereafter (i) pay
a
dividend or make a distribution on its Common Stock in shares of Common Stock,
(ii) subdivide its outstanding shares of Common Stock into a greater number
of
shares or (iii) combine its outstanding shares of Common Stock into a smaller
number of shares (each of (i) through (iii), a “
Change of Shares
”), then
(1) the number of shares of Common Stock for which this Warrant is exercisable
immediately after the occurrence of any such event shall be adjusted to equal
the number of shares of Common Stock which a record holder of the same number
of
shares of Common Stock for which this Warrant is exercisable immediately prior
to the occurrence of such event would own or be entitled to receive after the
happening of such event, and (2) the Per Share Exercise Price in effect
immediately prior to the occurrence of such event shall be adjusted to equal
(A)
the Per Share Exercise Price in effect immediately prior to the occurrence
of
such event multiplied by (B) the number of shares of Common Stock for which
this
Warrant is exercisable immediately prior to the adjustment divided by (C) the
number of shares of Common Stock for which this Warrant is exercisable
immediately after such adjustment. An adjustment made pursuant to
this Subsection 3(a) shall become effective immediately after the record date
in
the case of a dividend or distribution and shall become effective immediately
after the effective date in the case of a subdivision, combination or
reclassification.
(b) If
the Company, at any time while this Warrant is outstanding, distributes to
holders of Common Stock (i) evidences of its indebtedness, (ii) any security
(other than a distribution of Common Stock covered by paragraph (a) above or
a
security issued in a capital reorganization or reclassification, consolidation
or merger covered by paragraph (c) below), (iii) rights, warrants or options
to
subscribe for or purchase any security, or (iv) any other asset (in each case,
“
Distributed Property
”), then in each such case (1) the Per Share
Exercise Price in effect immediately prior to the record date fixed for
determination of stockholders entitled to receive such Distributed Property
shall be adjusted (effective on such record date) to equal the product of such
Per Share Exercise Price times a fraction of which the denominator shall be
the
VWAP for the Trading Day immediately prior to (but not including) such record
date and of which the numerator shall be the difference between such VWAP minus
the then fair market value of the Distributed Property distributed in respect
of
one outstanding share of Common Stock, as determined by the Board of Directors
of the Company in good faith, and (2) the number of shares of Common Stock
for
which this Warrant is exercisable immediately prior to such record date shall
be
adjusted to equal (A) the number of shares of Common Stock for which this
Warrant is exercisable immediately prior to such record date multiplied by
(B)
the Per Share Exercise Price in effect immediately prior to such record date
divided by (C) the Per Share Exercise Price in effect immediately after such
record date.
(c) In
the event of any capital reorganization or reclassification, or any
consolidation or merger to which the Company is a party (other than a merger
or
consolidation in which the Company is the continuing corporation and in which
no
securities, cash or other property is distributed to holders of Common Stock),
or in case of any sale or conveyance to another entity of the property of the
Company as an entirety or substantially as an entirety, or in the case of any
statutory exchange of securities with another corporation (including any
exchange effected in connection with a merger of a third corporation into the
Company), the Holder of this Warrant shall have the right thereafter to receive
on the exercise of this Warrant the kind and amount of
securities,
cash or other property which the Holder would have owned or have been entitled
to receive immediately after such reorganization, reclassification,
consolidation, merger, statutory exchange, sale or conveyance had this Warrant
been exercised immediately prior to the effective date of such reorganization,
reclassification, consolidation, merger, statutory exchange, sale or conveyance
and in any such case, if necessary, appropriate adjustment shall be made in
the
application of the provisions set forth in this Section 3 with respect to the
rights and interests thereafter of the Holder of this Warrant to the end that
the provisions set forth in this Section 3 shall thereafter correspondingly
be
made applicable, as nearly as may reasonably be, in relation to any shares
of
stock or other securities or property thereafter deliverable on the exercise
of
this Warrant. A sale of all or substantially all of the assets of the
Company for a consideration consisting primarily of securities shall be deemed
a
consolidation or merger for the foregoing purposes.
(d)
Anti-Dilution
Adjustments
.
(i) (A)
Except
as
otherwise provided in Subparagraph 3(d)(iii)(B), or for Changes of Shares in
the
event the Company shall, at any time or from time to time after the date hereof,
sell or issue any shares of Common Stock for a consideration per share less
than
the Conversion Price in effect on the date of such sale or issuance (any such
sale or issuance, a “
Dilutive Issuance
”), then, and thereafter upon each
further Dilutive Issuance, the Per Share Exercise Price in effect immediately
prior to such Dilutive Issuance shall be changed to a price equal to the
consideration per share received by the Company in respect of the shares issued
in such Dilutive Issuance (rounded to the nearest tenth of a cent) (determined
as provided in Clause 3(d)(ii)(D) below). Such adjustment shall be
made successively whenever such an issuance is made.
(B) Upon
any adjustment of the Per Share Exercise Price as provided in this Subparagraph
3(d), the number of shares of Common Stock for which this Warrant is exercisable
immediately after the occurrence of any such event shall be adjusted to equal
(1) the number of shares of Common Stock for which this Warrant was exercisable
immediately prior to the adjustment multiplied by (2) the Per Share Exercise
Price in effect immediately prior to the occurrence of such event divided by
(3)
the Per Share Exercise Price in effect immediately after the occurrence of
such
event.
(ii) For
purposes of Paragraph 3(d)(i), the following Subparagraphs (A) to (E) shall
also
be applicable:
(A) No
adjustment in the Per Share Exercise Price shall be required unless such
adjustment would require a decrease of at least $0.001 per share of Common
Stock;
provided
,
however
, that any adjustments which by reason of
this Subsection 3(d)(ii)(A) are not required to be made shall be carried forward
and shall be made at the time of and together with adjustments so carried
forward, shall require a decrease of at least $0.001 per share of Common Stock
in the Per Share Exercise Price hereunder.
(B) In
case of the sale or other issuance by the Company (including as a component
of a
unit) of any rights or warrants to subscribe for or purchase, or any options
for
the purchase of, Common Stock or any securities
convertible
into or exchangeable for Common Stock (such securities convertible, exercisable
or exchangeable into Common Stock being herein called “
Convertible
Securities
”), whether or not such rights, warrants or options, or the right
to convert or exchange such Convertible Securities, are immediately exercisable,
if the consideration per share for which Common Stock is issuable upon the
exercise, conversion or exchange of such Convertible Securities (determined
by
dividing (x) the minimum aggregate consideration, as set forth in the instrument
relating thereto without regard to any antidilution or similar provisions
contained therein for a subsequent adjustment of such amount, payable to the
Company upon the exercise of such Convertible Securities, plus the consideration
received by the Company for the issuance or sale of such Convertible Securities,
by (y) the total maximum number, as set forth in the instrument relating thereto
without regard to any antidilution or similar provisions contained therein
for a
subsequent adjustment of such amount, of shares of Common Stock issuable upon
the exercise, conversion or exchange of such Convertible Securities) is less
than the Per Share Exercise Price as of the date of the issuance or sale of
such
Convertible Securities, then such total maximum number of shares of Common
Stock
issuable upon the exercise, conversion or exchange of such Convertible
Securities (as of the date of the issuance or sale of such rights, warrants
or
options) shall be deemed to be “Common Stock” for purposes of Paragraph 3(d)(i)
and shall be deemed to have been sold for an amount equal to such consideration
per share and shall cause an adjustment to be made in accordance with Paragraph
3(d)(i).
(C) In
case the rights of conversion, exchange or exercise of any of the securities
referred to in Subparagraph (B) of this Paragraph 3(d)(ii) or any other
securities of the Company convertible, exchangeable or exercisable for shares
of
Common Stock are modified for any reason other than an event that would require
adjustment to prevent dilution under another paragraph in this Section 3, so
that the consideration per share received by the Company after such modification
is less than the Per Share Exercise Price as of the date prior to such
modification, then such securities, to the extent not theretofore exercised,
converted or exchanged, shall be deemed to have expired or terminated
immediately prior to the date of such modification and the Company shall be
deemed, for purposes of calculating any adjustments pursuant to this Subsection
3(d), to have issued such new securities upon such new terms on the date of
modification. Such adjustment shall become effective as of the date
upon which such modification shall take effect.
(D) In
case of the sale of any shares of Common Stock, any Convertible Securities,
any
rights or warrants to subscribe for or purchase, or any options for the purchase
of, Common Stock or Convertible Securities, the consideration received by the
Company therefor shall be deemed to be the gross sales price therefor without
deducting therefrom any expense paid or incurred by the Company or any
underwriting discounts or commissions or concessions paid or allowed by the
Company in connection therewith. In the event that any securities
shall be issued in connection with any other securities of the Company, together
comprising one integral transaction in which no specific consideration is
allocated among the securities, then each of such securities shall be deemed
to
have
been
issued
for such consideration as the Board of Directors of the Company determines
in
good faith. In case of the sale of any shares of Common Stock, any
Convertible Securities, any rights or warrants to subscribe for or purchase,
or
any options for the purchase of, Common Stock or Convertible Securities for
any
non-cash consideration, then the non-cash component of the consideration for
such securities shall be deemed to be such amount as the Board of Directors
of
the Company determines in good faith.
(iii) Notwithstanding
any other provision hereof, no adjustment to the Per Share Exercise Price will
be made:
(A) upon
the issuance or exercise of any options or other awards granted pursuant to
a
stock incentive plan or similar plan of the Company in effect on the date hereof
(but without giving effect to any amendment thereto after the date hereof)
or
approved by the Warrant Majority or otherwise issued as compensation or
inducement to employment or engagement in the ordinary course of business;
or
(B) upon
exercise or conversion of any Convertible Securities that are outstanding as
of
the date hereof, or upon the issuance, conversion or exercise of any Warrants
or
warrants issued as compensation in connection with the transactions that gave
rise to the issuance of the Warrants; or
(C) upon
the issuance, exercise or conversion of Common Stock, Convertible Securities
or
options, warrants or other rights to acquire Common Stock or Convertible
Securities in connection with any of the following: (v) settlement of any actual
or threatened litigation or other claims; (w) customer or vendor alliances;
(x)
joint ventures or manufacturing, marketing or distribution alliances; (y)
equipment leasing transactions or borrowing transactions with institutional
lenders; and (z) acquisitions, joint ventures or other strategic transactions;
provided, that in each such case the Board of Directors has determined in good
faith that such transaction is not primarily a capital raising transaction;
or
(D) upon
the issuance or sale of Common Stock or other securities upon exercise,
conversion or exchange of any Convertible Securities, whether or not such
Convertible Securities were outstanding on the date hereof or are hereafter
issued or sold; provided, that any adjustment was either made or not required
to
be made upon the issuance or sale of such Convertible Securities or any
modification of the terms thereof were so made; or
(E) if
the Company shall take a record of the holders of its Common Stock for the
purpose of entitling them to receive a dividend or distribution or subscription
or purchase rights and shall, thereafter and before the distribution to
stockholders thereof, legally abandon its plan to pay or deliver such dividend,
distribution, subscription or purchase rights, and any such adjustment
previously made in respect thereof shall be rescinded and annulled.
Notwithstanding
anything to the contrary in this Paragraph 3(d)(iii), Subparagraph 3(d)(ii)(C)
shall apply to any modification of the rights of conversion, exchange or
exercise of any of the securities referred to in Subparagraphs (B) and (D)
of
this Paragraph 3(d)(iii).
(v) As
used in this Subsection 3(c), the term “Common Stock” shall mean and include the
Company’s Common Stock authorized on the date hereof and shall also include any
capital stock of any class of the Company thereafter authorized which shall
not
be limited to a fixed sum or percentage in respect of the rights of the holders
thereof to participate in dividends and in the distribution of assets upon
the
voluntary liquidation, dissolution or winding up of the Company, and the number
of “shares” thereof for purposes hereof shall be based on the ratio by which
such new securities participate equally with the Common Stock.
(d) All
calculations under this Section 3 shall be made to the nearest tenth of a cent
or to the nearest 1/100th of a share, as the case may be. Anything in
this Section 3 to the contrary notwithstanding, the Company shall be entitled
to
make such reductions in the Per Share Exercise Price, in addition to those
required by this Section 3, as it in its discretion shall deem to be advisable
in order that any stock dividend, subdivision of shares or distribution of
rights to purchase stock or securities convertible or exchangeable for stock
hereafter made by the Company to its stockholders shall not be
taxable.
(e) If,
as a result of an adjustment made pursuant to this Section 3, the Holder of
any
Warrant thereafter surrendered for exercise shall become entitled to receive
shares of two or more classes of capital stock or shares of Common Stock and
other capital stock of the Company, the Board of Directors shall determine
in
good faith the allocation of the adjusted Per Share Exercise Price between
or
among shares or such classes of capital stock or shares of Common Stock and
other capital stock.
4.
Prior
Notice of Certain Events
. In case:
(i)
the Company shall declare any dividend (or any other distribution);
(ii)
the Company shall authorize the granting to the holders of Common
Stock of rights or warrants to subscribe for or purchase any shares of stock
of
any class or of any other rights or warrants;
(iii) of
any reclassification of Common Stock (other than a subdivision or combination
of
the outstanding Common Stock, or a change in par value, or from par value to
no
par value, or from no par value to par value);
(iv) of
any consolidation or merger to which the Company is a party and for which
approval of any stockholders of the Company shall be required, or of the sale
or
transfer of all or substantially all of the assets of the Company or of any
compulsory share exchange whereby the Common Stock is converted into other
securities, cash or other property; or
(v) any
(x) liquidation, dissolution or winding up of the Company, whether voluntary
or
involuntary, (y) a sale or other disposition of all or substantially all of
the
assets
of
the Company or (z) any consolidation, merger, combination, reorganization or
other transaction in which the Company is not the surviving entity or shares
of
Common Stock constituting in excess of 50% of the voting power of the Company
are exchanged for or changed into stock or securities of another entity, cash
and/or any other property;
then
the
Company shall cause to be mailed to the Holder, at its last address as it shall
appear upon the warrant registration records of the Company or its transfer
agent, at least ten days prior to the applicable date hereinafter specified,
a
notice stating (x) the date on which a record (if any) is to be taken for the
purpose of such dividend. distribution or granting of rights or warrants or,
if
a record is not to be taken, the date as of which the holders of Common Stock
of
record to be entitled to such dividend, distribution, rights or warrants are
to
be determined and a description of the cash, securities or other property to
be
received by such holders upon such dividend, distribution or granting of rights
or warrants or (y) the date on which such reclassification, consolidation,
merger, sale, transfer, share exchange or Liquidation Event is expected to
become effective, the date as of which it is expected that holders of Common
Stock of record shall be entitled to exchange their shares of Common Stock
for
securities or other property deliverable upon such exchange or Liquidation
Event
and the consideration, including securities or other property, to be received
by
such holders upon such exchange; provided, however, that no failure to mail
such
notice or any defect therein or in the mailing thereof shall affect the validity
of the corporate action required to be specified in such notice.
5.
Notice
of Adjustments
. Whenever the Per Share Exercise Price is
adjusted as provided in Section 3 and upon any modification of the rights of
a
Holder of Warrants in accordance with Section 3, the Chief Financial Officer,
or
equivalent officer, of the Company shall promptly prepare a certificate setting
forth the Per Share Exercise Price and the number of Warrant Shares after such
adjustment or the effect of such modification, a brief statement of the facts
requiring such adjustment or modification and the manner of computing the same
and cause copies of such certificate to be mailed to the Holder.
6
.
Fractional
Shares
. No
fractional shares or scrip representing fractional Warrant Shares shall be
issued upon conversion of this Warrant. If more than one certificate
evidencing Warrants shall be surrendered for conversion at one time by the
same
Holder, the number of full shares issuable upon conversion thereof shall be
computed on the basis of the aggregate number of shares of Common Stock that
may
be purchased pursuant to the Warrants so surrendered. Instead of any
fractional Warrant Shares which would otherwise be issuable upon exercise of
this Warrant (or of such aggregate number of Warrants), the Company may elect,
in its sole discretion, independently for each Holder, whether such number
of
Warrant Shares will be rounded to the nearest whole share (with a .5 of a share
rounded upward) or whether such Holder will be given cash, in lieu of any
fractional share, in an amount equal to the same fraction of the fair market
value per share of Common Stock at such time, as determined by the Board of
Directors of the Company in good faith as of the close of business on the day
of
exercise.
7.
Securities
Laws Matters
.
(a) The
Holder represents, by accepting this Warrant, that it understands that this
Warrant and any securities obtainable upon exercise of this Warrant have not
been registered for sale under Federal or state securities laws and are being
offered and sold to the Holder pursuant
to
one or
more exemptions from the registration requirements of such securities
laws. The Holder further represents that it is an “accredited
investor” within the meaning of Regulation D under the Securities
Act. In the absence of an effective registration of such securities
or an exemption therefrom, any certificates for such securities shall bear
a
legend similar to the legend set forth in Section 7(c) hereof. The
Holder understands that it must bear the economic risk of its investment in
this
Warrant and any securities obtainable upon exercise of this Warrant for an
indefinite period of time, as this Warrant and such securities have not been
registered under Federal or state securities laws and therefore cannot be sold
unless subsequently registered under such laws, unless as exemption from such
registration is available.
(b)
The Holder, by his acceptance of this Warrant, represents to the Company that
it
is acquiring this Warrant and will acquire any securities obtainable upon
exercise of this Warrant for its own account for investment and not with a
view
to, or for sale in connection with, any distribution thereof in violation of
the
Securities Act. The Holder agrees that this Warrant and any such
securities will not be sold or otherwise transferred unless (i) a registration
statement with respect to such transfer is effective under the Securities Act
and any applicable state securities laws or (ii) such sale or transfer is made
pursuant to one or more exemptions from the Securities Act.
(c)
All certificates representing Warrant Shares issued upon exercise hereof shall
be stamped or imprinted with a legend in substantially the following
form:
THE
SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES
SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY STATE
SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF A
REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO SUCH SECURITIES UNDER THE
SECURITIES ACT OR AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS
OF
THE SECURITIES ACT. ANY SUCH TRANSFER MAY ALSO BE SUBJECT TO
COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS.
THE
SECURITIES REPRESENTED HEREBY ARE SUBJECT TO THE PROVISIONS OF A REGISTRATION
RIGHTS AGREEMENT, AND ANY TRANSFEREE OF SUCH SECURITIES SHALL BE BOUND BY THE
PROVISIONS OF SAID AGREEMENT, A COPY OF WHICH IS ON FILE WITH, AND AVAILABLE
FROM, THE SECRETARY OF NEPHROS, INC.
8.
Miscellaneous
(a) This
Warrant may be amended only by mutual written agreement of the Company and
the
Holder or, if such amendment shall apply to all outstanding Warrants, with
the
written consent of the Company and the registered holders of Warrants to
purchase a majority of the shares of Common Stock or other securities or
property issuable upon exercise of all outstanding Warrants (the “
Warrant
Majority
”); provided, however, without the consent of the Holder of this
Warrant, no such amendment may be approved that would have the effect of (i)
increasing the Per Share Exercise Price of this Warrant, (ii) decreasing the
number of shares of
Common
Stock for which this Warrant is exercisable, (iii) accelerating the Termination
Date; or (iv) except as permitted by the following proviso, waive any adjustment
under Section 3 of this Agreement; provided, further, that the Warrant Majority
may waive the application of any adjustment under Subsection 3(d) of this
Agreement, however, that (x) such waiver must be given in writing prior to
the
date such adjustment would otherwise become effective, and (y) for purposes
of
determining a Warrant Majority for such purpose any holder of Warrants (and
any
Warrants held by such holders) participating in the transaction that would
otherwise give rise to such adjustment shall be excluded from such
determination. Furthermore, the Company may take any action herein
prohibited or omit to take any action herein required to be performed by it,
and
any breach of any covenant, agreement, warranty or representation may be waived,
if the Company has obtained the written consent or waiver of the
Holder. Any amendments approved in compliance with this Section 8
shall bind the Holder’s successors and assigns.
(b) This
Agreement shall be governed by and construed in accordance with the laws of
the
State of New York, without giving effect to principles governing conflicts
of
law that would defer to the substantive law of another
jurisdiction.
(c)
Notice
. Any
notice or other communication required or permitted to be given hereunder shall
be in writing and shall be mailed by certified mail, return receipt requested,
or by Federal Express, Express Mail or similar guaranteed overnight delivery
or
courier service or delivered in person against receipt to the party to whom
it
is to be given,
Nephros,
Inc.
3960
Broadway
New
York,
New York 10032
Attn:
President
(ii) with
a copy to,
Kramer
Levin Naftalis & Frankel LLP
1177
Avenue of the Americas
New
York,
New York 10036
Attention: Thomas
D. Balliett, Esq.
|
|
(iii)
|
if
to the Holder, at the address set forth on the Company’s
records,
|
or
in
either case, to such other address as the party shall have furnished in writing
in accordance with the provisions of this Section 8(c). Any notice
given by means permitted by this Section 8(c) shall be deemed given at the
time of receipt thereof at the address specified in this Section
8(c).
(d)
Interpretation
. If
any term or provision of this Warrant shall be held invalid, illegal or
unenforceable, the validity of all other terms and provisions hereof shall
in no
way be affected thereby.
(e)
Successors
and Assigns
. Subject to the restrictions on transfer contained in
Section 7 of this Agreement, this Warrant shall be binding upon the Company
and
its
successors
and assigns and shall inure to the benefit of the Holder and its successors
and
registered assigns.
(f)
Assignment
by the Company
. Neither this Warrant nor any of the rights,
interests or obligations hereunder may be assigned, by operation of law or
otherwise, in whole or in part, by the Company without the prior written consent
of the Holder.
(g)
Saturdays,
Sundays, Holidays
. If any date that may at any time be specified
in this Warrant as a date for the taking of any action under this Warrant shall
fall on Saturday, Sunday or on a day which in New York shall be a legal holiday,
then the date for the making of that payment shall be the next subsequent day
which is not a Saturday, Sunday or legal holiday.
(h)
Jurisdiction;
Forum
. Any dispute arising out of or relating to this Warrant
shall be resolved, and all suits, actions and proceedings brought by the Company
or Holder hereunder shall be brought only in, any state court sitting in the
County of New York or federal court sitting in the Southern District of the
State of New York. The Company waives, and upon delivery of a Notice
of Election the Holder waives, any objection to the laying of venue in such
courts and any claim that any such action has been brought in an inconvenient
forum. To the extent permitted by law, any judgment in respect of a
dispute arising out of or relating to this Warrant may be enforced in any other
jurisdiction within or outside the United States by suit on the judgment, a
certified copy of such judgment being conclusive evidence of the fact and amount
of such judgment.
(i)
Attorneys’
Fees
. In the event of any litigation or other proceeding
concerning this Warrant or the transactions contemplated hereby, including
any
such litigation or proceeding with respect to the enforcement of this Warrant
against any defaulting party, the prevailing party in such litigation or
proceeding shall be entitled to reimbursement from the party opposing such
prevailing party for all attorneys’ fees and costs incurred by such prevailing
party in such litigation or proceeding.
9.
Registration
Rights
. The Holder of this Warrant is entitled to the benefit of
certain registration rights with respect to the Warrant Shares issuable upon
the
exercise of this Warrant pursuant to that certain Registration Rights Agreement
by and among the Company and persons listed on Schedule I thereto (the
“
Registration Rights Agreement
”) and the registration rights with respect
to the Warrant Shares issuable upon the exercise of this Warrant by any
subsequent Holder may only be assigned in accordance with the terms and
provisions of the Registrations Rights Agreement.
10.
Headings
. The
headings of the Sections of this Warrant are for convenience of reference only
and shall not, for any purpose, be deemed a part of this Warrant.
[REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK]
IN
WITNESS WHEREOF, the Company has executed this Warrant as of the day and year
first above written.
NEPHROS,
INC.
By: __________________________________
Name:
Title:
NOTICE
OF EXERCISE-CASH PAYMENT
The
undersigned, ____________________________, pursuant to the provisions of the
foregoing Warrant, hereby elects to exercise the within Warrant to the extent
of
purchasing _____________________ shares of Common Stock of Nephros, Inc.
thereunder and hereby makes payment of $_______________ by certified or official
bank check in payment of the exercise price therefor. The undersigned
hereby confirms the representations, warranties and covenants made by it in
the
Warrant.
Dated:_______________
Signature:_____________________________
Address:______________________________
NOTICE
OF EXERCISE-CASHLESS EXERCISE
The
undersigned, ____________________________, pursuant to the provisions of the
foregoing Warrant, hereby elects to exercise the within Warrant as it relates
to
_____________________ shares of Common Stock of Nephros, Inc. by means of a
cashless exercise pursuant to Section 1(d) of the Warrant. As a
result of such exercise, and based on a VWAP of $_______ per share, the
undersigned is entitled to receive _____________ shares of Common
Stock. The undersigned hereby confirms the representations,
warranties and covenants made by it in the Warrant.
Dated:_______________
Signature:_____________________________
Address:______________________________
ASSIGNMENT
FOR
VALUE
RECEIVED _______________________________________ hereby sells, assigns and
transfers unto _____________________________________ the foregoing Warrant
and
all rights evidenced thereby, and does irrevocably constitute and appoint
_____________________________, attorney, to transfer said Warrant on the books
of Nephros, Inc.
Dated:_______________
Signature:_____________________________
Address:______________________________
PARTIAL
ASSIGNMENT
FOR
VALUE
RECEIVED __________________________ hereby assigns and transfers unto
_________________________ the right to purchase __________ shares of the Common
Stock, $0.001 par value per share, of Nephros, Inc. covered by the foregoing
Warrant, and a proportionate part of said Warrant and the rights evidenced
thereby, and does irrevocably constitute and appoint __________________________,
attorney, to transfer that part of said Warrant on the books of Nephros,
Inc.
Dated:_______________
Signature:___________________________
Address:____________________________
16
Exhibit
4.4
THIS
WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT
BEEN
REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE
“SECURITIES ACT”), OR ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY
NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED OR OTHERWISE TRANSFERRED
IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO SUCH
SECURITIES UNDER THE SECURITIES ACT OR AN AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. ANY SUCH TRANSFER
MAY ALSO BE SUBJECT TO COMPLIANCE WITH APPLICABLE STATE SECURITIES
LAWS.
NEPHROS,
INC.
Placement
Agent Warrant for the Purchase of Shares of Common Stock
No.:
PA-
__
Number
of Shares:
___________
Date
of
Issuance: _____ __, 2007
FOR
VALUE
RECEIVED, the undersigned, NEPHROS, INC., a Delaware corporation (together
with
its successors and assigns, the “
Company
”), hereby certifies that
_______________________________ or its registered assigns (the “
Holder
”)
is entitled to subscribe for and purchase from the Company, subject to the
provisions of this Warrant (this “Warrant” and, together with any other
Placement Agent Warrants to purchase shares of Common Stock, collectively,
the
“
Warrants
”), at any time on or prior to 5:00 P.M., New York City time, on
[_____ __], 2012
(the “
Termination Date
”),
[________________] (___________) fully paid and non-assessable shares of the
Common Stock, par value $.001 per share, of the Company (“
Common Stock
”),
at an exercise price per share of Common Stock equal to $0.90 per share (the
“
Per Share Exercise Price
”), as such price may be adjusted from time to
time as shall result from the adjustments specified in this
Warrant.
1.
Exercise
of Warrant
.
(a)
Exercise
. This
Warrant may be exercised in whole or in part, at any time by its holder prior
to
the Termination Date by presentation and surrender of this Warrant, together
with the duly executed notice of exercise form attached at the end hereof,
at
the address set forth in Subsection 8(c) hereof, together with payment to the
Company of an amount of consideration therefor equal to the Per Share Exercise
Price in effect on the date of such exercise multiplied by the number of shares
of Common Stock issuable upon exercise of any Warrant or Warrants or otherwise
issuable pursuant to any Warrant or Warrants then being exercised (the
“
Warrant Shares
”), payable by certified or official bank check or by wire
transfer to an account designated by the Company. The delivery of the
notice of exercise and payment of the Per Share Exercise Price are the only
procedures required of the Holder to exercise this Warrant. No
additional legal opinion or other information or instructions shall be required
of the Holder upon the exercise of this Warrant.
(b)
Cashless
Exercise
. If, and only if, at the time of exercise pursuant to
this Section 1 there is no effective registration statement registering, or
no current prospectus available for, the sale of the Warrant Shares to the
Holder or the resale of the Warrant Shares by the Holder and the VWAP (as
defined below) is greater than the Per Share Exercise Price at the time of
exercise, then this Warrant may also be exercised at such time and with respect
to such exercise by means of a “cashless exercise” in which the Holder shall be
entitled to receive a certificate for the number of Warrant Shares equal to
the
quotient obtained by dividing (i) the result of (x) the difference of (A) minus
(B), multiplied by (y) (C), by (ii) (A), where:
|
|
(A)
= the VWAP (as defined below) on the Trading Day (as defined below)
immediately preceding the date of such
election;
|
|
|
(B)
= the Per Share Exercise Price of this Warrant, as adjusted;
and
|
|
|
(C)
= the number of Warrant Shares issuable upon exercise of this Warrant
in
accordance with the terms of this Warrant by means of a cash exercise
rather than a cashless exercise.
|
“
VWAP
”
means, for any date, the price determined by the first of the following clauses
that applies: (a) if the Common Stock is then listed or quoted for trading
on the New York Stock Exchange, American Stock Exchange, Nasdaq Capital Market,
Nasdaq Global Market, Nasdaq Global Select Market or the OTC Bulletin Board,
or
any successor to any of the foregoing (a “
Trading Market
”), the daily
volume weighted average price of the Common Stock on the Trading Market on
which
the Common Stock is then listed or quoted for trading as reported by Bloomberg
L.P. for such date if such date is a date on which the Trading Market on which
the Common Stock is then listed or quoted for trading (a “
Trading Day
”)
or the nearest preceding Trading Date (based on a Trading Day from 9:30 a.m.
(New York City time) to 4:02 p.m. (New York City time); (b) if the Common
Stock is not then listed or quoted for trading on a Trading Market and if prices
for the Common Stock are then reported in the “Pink Sheets” published by Pink
Sheets, LLC (or a similar organization or agency succeeding to its functions
of
reporting prices), the most recent bid price per share of the Common Stock
so
reported; or (c) in all other cases, the fair market value of a share of
Common Stock as determined by an independent appraiser selected in good faith
by
the Holder and reasonably acceptable to the Company.
(c)
Partial
Exercise
. If this Warrant is exercised in part only, the Company
shall, upon presentation of this Warrant upon such exercise, execute and deliver
(along with the certificate for the Warrant Shares purchased) a new Warrant
evidencing the rights of the Holder hereof to purchase the balance of the
Warrant Shares purchasable hereunder upon the same terms and conditions as
herein set forth. Upon proper exercise of this Warrant, the Company
promptly shall deliver certificates for the Warrant Shares to the
Holder.
2.
Stock
Fully Paid; Reservation and Listing of Shares;
Covenants.
(a)
Authorization,
Reservation of Shares; Etc.
The Company shall at all times
reserve and keep available, out of its authorized and unissued shares of Common
Stock, solely for the purpose of effecting the exercise of this Warrant, such
number of shares of its Common Stock free of preemptive rights as shall
be
sufficient
to effect the exercise of this Warrant. The Company shall use its
commercially reasonable best efforts from time to time, in accordance with
the
laws of the State of Delaware, to increase the authorized number of shares
of
Common Stock if at any time the number of shares of Common Stock not outstanding
shall not be sufficient to permit the exercise of this Warrant. The
Company covenants that all Warrant Shares so issuable and deliverable shall,
upon issuance and the payment of the applicable Per Share Exercise Price in
accordance with the terms hereof, be duly authorized and validly issued and
fully paid and nonassessable. The Company will take all such action as may
be
necessary to assure that such shares of Common Stock may be issued as provided
herein without violation of any applicable law or regulation, or of any
requirements of any securities exchange or automated quotation system upon
which
the Common Stock may be listed.
(b)
Payment
of Taxes
. The Company shall pay any and all issue or other taxes
(other than income taxes) that may be payable in respect of any issue or
delivery of Warrant Shares on exercise of this Warrant. The Company
shall not, however, be required to pay any tax which may be payable in respect
of any transfer involved in the issue or delivery of Warrant Shares (or other
securities or assets) in a name other than that in which Warrant was registered,
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 such tax or has
established, to the satisfaction of the Company, that such tax has been
paid.
(c)
Loss,
Theft, Destruction of Warrants
. Upon receipt of evidence
satisfactory to the Company of the ownership of and the loss, theft, destruction
or mutilation of this Warrant and, in the case of any such loss, theft or
destruction, upon receipt of indemnity or security satisfactory to the Company
(which may include a bond) or, in the case of any such mutilation, upon
surrender and cancellation of such Warrant, the Company will make and deliver,
in lieu of such lost, stolen, destroyed or mutilated Warrant, a new Warrant
of
like date, tenor and denomination.
(d)
Delivery
of Warrant Shares
.
(i) Upon
the exercise of this Warrant, the Company shall promptly (but in no event later
than three Trading Days after the exercise date) issue or cause to be issued
and
cause to be delivered to or upon the written order of the Holder and in such
name or names as the Holder may designate, a certificate for the Warrant Shares
issuable upon such exercise, free of restrictive legends unless a registration
statement covering the resale of the Warrant Shares and naming the Holder as
a
selling stockholder thereunder is not then effective and the Warrant Shares
are
not freely transferable without volume restrictions pursuant to Rule 144 under
the Securities Act.
The Holder, or any Person so designated by
the Holder to receive Warrant Shares, shall be deemed to have become holder
of
record of such Warrant Shares as of the exercise date. Notwithstanding any
provision of this Warrant requiring the delivery of certificates, the Company
shall, upon request of the Holder, use its commercially reasonable efforts
to
deliver Warrant Shares hereunder electronically through the Depository Trust
Corporation or another established clearing corporation performing similar
functions. Any obligation to deliver certificates under this Warrant
shall be deemed satisfied if Warrant Shares are delivered electronically in
accordance with the preceding sentence.
(ii) If
the Company fails to cause its transfer agent to transmit to the Holder a
certificate or certificates representing the Warrant Shares pursuant to this
Section 2(d)(ii) by the third Trading Day following the Warrant Share date
of exercise, then the Holder shall have the right to rescind such
exercise.
(iii) In
addition to any other rights available to a Holder, if the Company fails to
deliver to the Holder a certificate representing Warrant Shares by the third
Trading Day after exercise of this Warrant in full compliance with Section
1,
and if after such third Trading Day the Holder purchases (in an open market
transaction) shares of Common Stock to deliver in satisfaction of a sale by
the
Holder of the Warrant Shares that the Holder anticipated receiving from the
Company (a “
Buy-In
”) upon such exercise, then the Company shall, within
three Trading Days after the Holder’s request and in the Holder’s discretion,
either (x) pay cash to the Holder in an amount equal to the Holder’s total
purchase price (including brokerage commissions, if any) for the shares of
Common Stock so purchased (the “
Buy-In Price
”), at which point the
Company’s obligation to deliver such certificate (and to issue such Warrant
Shares) shall terminate, or (y) promptly honor its obligation to deliver to
the
Holder a certificate or certificates representing such Common Stock and pay
cash
to the Holder in an amount equal to the excess (if any) of the Buy-In Price
over
the product of (1) the number of shares of Common Stock purchased in the Buy-In,
times (2) the closing price on the date of the exercise. The Holders
shall provide the Company written notice indicating the amounts payable to
the
Holder in respect of the Buy-In, together with applicable confirmations and
other evidence reasonably requested by the Company.
(iv) Except
as provided in clause (x) of Section 2(d)(iii), the Company’s obligations to
issue and deliver Warrant Shares upon an exercise in accordance with Section
1
above are absolute and unconditional, irrespective of any action or inaction
by
the Holder to enforce the same, any waiver or consent with respect to any
provision hereof, the recovery of any judgment against any person or entity
or
any action to enforce the same, or any setoff, counterclaim, recoupment,
limitation or termination, or any breach or alleged breach by the Holder or
any
other person or entity of any obligation to the Company or any violation or
alleged violation of law by the Holder or any other person or entity, and
irrespective of any other circumstance which might otherwise limit such
obligation of the Company to the Holder in connection with the issuance of
Warrant Shares. Nothing herein shall limit a Holder’s right to pursue any
other remedies available to it hereunder, at law or in equity, including,
without limitation, a decree of specific performance and/or injunctive relief
with respect to the Company’s failure to timely deliver certificates
representing shares of Common Stock upon exercise of the Warrant as required
pursuant to the terms hereof.
3.
Protection
Against Dilution
.
(a) In
case the Company shall, at any time or from time to time hereafter (i) pay
a
dividend or make a distribution on its Common Stock in shares of Common Stock,
(ii) subdivide its outstanding shares of Common Stock into a greater number
of
shares or (iii) combine its outstanding shares of Common Stock into a smaller
number of shares (each of (i) through (iii), a “
Change of Shares
”), then
(1) the number of shares of Common Stock for which this Warrant is exercisable
immediately after the occurrence of any such event shall be adjusted to equal
the number of shares of Common Stock which a record holder of the same number
of
shares of Common Stock for which this Warrant is exercisable immediately prior
to the occurrence of such event would own or be entitled to receive after the
happening of such event, and (2) the Per Share Exercise Price in effect
immediately prior to the occurrence of such event shall be adjusted to equal
(A)
the Per Share Exercise Price in effect immediately prior to the occurrence
of
such
event
multiplied by (B) the number of shares of Common Stock for which this Warrant
is
exercisable immediately prior to the adjustment divided by (C) the number of
shares of Common Stock for which this Warrant is exercisable immediately after
such adjustment. An adjustment made pursuant to this Subsection 3(a)
shall become effective immediately after the record date in the case of a
dividend or distribution and shall become effective immediately after the
effective date in the case of a subdivision, combination or
reclassification.
(b) If
the Company, at any time while this Warrant is outstanding, distributes to
holders of Common Stock (i) evidences of its indebtedness, (ii) any security
(other than a distribution of Common Stock covered by paragraph (a) above or
a
security issued in a capital reorganization or reclassification, consolidation
or merger covered by paragraph (c) below), (iii) rights, warrants or options
to
subscribe for or purchase any security, or (iv) any other asset (in each case,
“
Distributed Property
”), then in each such case (1) the Per Share
Exercise Price in effect immediately prior to the record date fixed for
determination of stockholders entitled to receive such Distributed Property
shall be adjusted (effective on such record date) to equal the product of such
Per Share Exercise Price times a fraction of which the denominator shall be
the
VWAP for the Trading Day immediately prior to (but not including) such record
date and of which the numerator shall be the difference between such VWAP minus
the then fair market value of the Distributed Property distributed in respect
of
one outstanding share of Common Stock, as determined by the Board of Directors
of the Company in good faith, and (2) the number of shares of Common Stock
for
which this Warrant is exercisable immediately prior to such record date shall
be
adjusted to equal (A) the number of shares of Common Stock for which this
Warrant is exercisable immediately prior to such record date multiplied by
(B)
the Per Share Exercise Price in effect immediately prior to such record date
divided by (C) the Per Share Exercise Price in effect immediately after such
record date.
(c) In
the event of any capital reorganization or reclassification, or any
consolidation or merger to which the Company is a party (other than a merger
or
consolidation in which the Company is the continuing corporation and in which
no
securities, cash or other property is distributed to holders of Common Stock),
or in case of any sale or conveyance to another entity of the property of the
Company as an entirety or substantially as an entirety, or in the case of any
statutory exchange of securities with another corporation (including any
exchange effected in connection with a merger of a third corporation into the
Company), the Holder of this Warrant shall have the right thereafter to receive
on the exercise of this Warrant the kind and amount of securities, cash or
other
property which the Holder would have owned or have been entitled to receive
immediately after such reorganization, reclassification, consolidation, merger,
statutory exchange, sale or conveyance had this Warrant been exercised
immediately prior to the effective date of such reorganization,
reclassification, consolidation, merger, statutory exchange, sale or conveyance
and in any such case, if necessary, appropriate adjustment shall be made in
the
application of the provisions set forth in this Section 3 with respect to the
rights and interests thereafter of the Holder of this Warrant to the end that
the provisions set forth in this Section 3 shall thereafter correspondingly
be
made applicable, as nearly as may reasonably be, in relation to any shares
of
stock or other securities or property thereafter deliverable on the exercise
of
this Warrant. A sale of all or substantially all of the assets of the
Company for a consideration consisting primarily of securities shall be deemed
a
consolidation or merger for the foregoing purposes.
(d)
Anti-Dilution
Adjustments
.
(i) (A)
Except
as
otherwise provided in Subparagraph 3(d)(iii)(B), or for Changes of Shares in
the
event the Company shall, at any time or from time to time after the date hereof,
sell or issue any shares of Common Stock for a consideration per share less
than
the Conversion Price in effect on the date of such sale or issuance (any such
sale or issuance, a “
Dilutive Issuance
”), then, and thereafter upon each
further Dilutive Issuance, the Per Share Exercise Price in effect immediately
prior to such Dilutive Issuance shall be changed to a price equal to the
consideration per share received by the Company in respect of the shares issued
in such Dilutive Issuance (rounded to the nearest tenth of a cent) (determined
as provided in Clause 3(d)(ii)(D) below). Such adjustment shall be
made successively whenever such an issuance is made.
(B) Upon
any adjustment of the Per Share Exercise Price as provided in this Subparagraph
3(d), the number of shares of Common Stock for which this Warrant is exercisable
immediately after the occurrence of any such event shall be adjusted to equal
(1) the number of shares of Common Stock for which this Warrant was exercisable
immediately prior to the adjustment multiplied by (2) the Per Share Exercise
Price in effect immediately prior to the occurrence of such event divided by
(3)
the Per Share Exercise Price in effect immediately after the occurrence of
such
event.
(ii) For
purposes of Paragraph 3(d)(i), the following Subparagraphs (A) to (E) shall
also
be applicable:
(A) No
adjustment in the Per Share Exercise Price shall be required unless such
adjustment would require a decrease of at least $0.001 per share of Common
Stock;
provided
,
however
, that any adjustments which by reason of
this Subsection 3(d)(ii)(A) are not required to be made shall be carried forward
and shall be made at the time of and together with adjustments so carried
forward, shall require a decrease of at least $0.001 per share of Common Stock
in the Per Share Exercise Price hereunder.
(B) In
case of the sale or other issuance by the Company (including as a component
of a
unit) of any rights or warrants to subscribe for or purchase, or any options
for
the purchase of, Common Stock or any securities convertible into or exchangeable
for Common Stock (such securities convertible, exercisable or exchangeable
into
Common Stock being herein called “
Convertible Securities
”), whether or
not such rights, warrants or options, or the right to convert or exchange such
Convertible Securities, are immediately exercisable, if the consideration per
share for which Common Stock is issuable upon the exercise, conversion or
exchange of such Convertible Securities (determined by dividing (x) the minimum
aggregate consideration, as set forth in the instrument relating thereto without
regard to any antidilution or similar provisions contained therein for a
subsequent adjustment of such amount, payable to the Company upon the exercise
of such Convertible Securities, plus the consideration received by the Company
for the issuance or sale of such Convertible Securities, by (y) the total
maximum number, as set forth in the instrument relating thereto without regard
to any antidilution or similar provisions contained therein for a
subsequent
adjustment
of such amount, of shares of Common Stock issuable upon the exercise, conversion
or exchange of such Convertible Securities) is less than the Per Share Exercise
Price as of the date of the issuance or sale of such Convertible Securities,
then such total maximum number of shares of Common Stock issuable upon the
exercise, conversion or exchange of such Convertible Securities (as of the
date
of the issuance or sale of such rights, warrants or options) shall be deemed
to
be “Common Stock” for purposes of Paragraph 3(d)(i) and shall be deemed to have
been sold for an amount equal to such consideration per share and shall cause
an
adjustment to be made in accordance with Paragraph 3(d)(i).
(C) In
case the rights of conversion, exchange or exercise of any of the securities
referred to in Subparagraph (B) of this Paragraph 3(d)(ii) or any other
securities of the Company convertible, exchangeable or exercisable for shares
of
Common Stock are modified for any reason other than an event that would require
adjustment to prevent dilution under another paragraph in this Section 3, so
that the consideration per share received by the Company after such modification
is less than the Per Share Exercise Price as of the date prior to such
modification, then such securities, to the extent not theretofore exercised,
converted or exchanged, shall be deemed to have expired or terminated
immediately prior to the date of such modification and the Company shall be
deemed, for purposes of calculating any adjustments pursuant to this Subsection
3(d), to have issued such new securities upon such new terms on the date of
modification. Such adjustment shall become effective as of the date
upon which such modification shall take effect.
(D) In
case of the sale of any shares of Common Stock, any Convertible Securities,
any
rights or warrants to subscribe for or purchase, or any options for the purchase
of, Common Stock or Convertible Securities, the consideration received by the
Company therefor shall be deemed to be the gross sales price therefor without
deducting therefrom any expense paid or incurred by the Company or any
underwriting discounts or commissions or concessions paid or allowed by the
Company in connection therewith. In the event that any securities
shall be issued in connection with any other securities of the Company, together
comprising one integral transaction in which no specific consideration is
allocated among the securities, then each of such securities shall be deemed
to
have been issued for such consideration as the Board of Directors of the Company
determines in good faith. In case of the sale of any shares of Common
Stock, any Convertible Securities, any rights or warrants to subscribe for
or
purchase, or any options for the purchase of, Common Stock or Convertible
Securities for any non-cash consideration, then the non-cash component of the
consideration for such securities shall be deemed to be such amount as the
Board
of Directors of the Company determines in good faith.
(iii) Notwithstanding
any other provision hereof, no adjustment to the Per Share Exercise Price will
be made:
(A) upon
the issuance or exercise of any options or other awards granted pursuant to
a
stock incentive plan or similar plan of the Company
in
effect
on the date hereof (but without giving effect to any amendment thereto after
the
date hereof) or approved by the Warrant Majority (as defined in Section 8
hereto) or otherwise issued as compensation or inducement to employment or
engagement in the ordinary course of business; or
(B) upon
exercise or conversion of any Convertible Securities that are outstanding as
of
the date hereof, or upon the issuance, conversion or exercise of any Warrants
or
Class D Warrants (as hereafter defined); or
(C) upon
the issuance, exercise or conversion of Common Stock, Convertible Securities
or
options, warrants or other rights to acquire Common Stock or Convertible
Securities in connection with any of the following: (v) settlement of any actual
or threatened litigation or other claims; (w) customer or vendor alliances;
(x)
joint ventures or manufacturing, marketing or distribution alliances; (y)
equipment leasing transactions or borrowing transactions with institutional
lenders; and (z) acquisitions, joint ventures or other strategic transactions;
provided, that in each such case the Board of Directors has determined in good
faith that such transaction is not primarily a capital raising transaction;
or
(D) upon
the issuance or sale of Common Stock or other securities upon exercise,
conversion or exchange of any Convertible Securities, whether or not such
Convertible Securities were outstanding on the date hereof or are hereafter
issued or sold; provided, that any adjustment was either made or not required
to
be made upon the issuance or sale of such Convertible Securities or any
modification of the terms thereof were so made; or
(E) if
the Company shall take a record of the holders of its Common Stock for the
purpose of entitling them to receive a dividend or distribution or subscription
or purchase rights and shall, thereafter and before the distribution to
stockholders thereof, legally abandon its plan to pay or deliver such dividend,
distribution, subscription or purchase rights, and any such adjustment
previously made in respect thereof shall be rescinded and annulled.
Notwithstanding
anything to the contrary in this Paragraph 3(d)(iii), Subparagraph 3(d)(ii)(C)
shall apply to any modification of the rights of conversion, exchange or
exercise of any of the securities referred to in Subparagraphs (B) and (D)
of
this Paragraph 3(d)(iii).
(v) As
used in this Subsection 3(c), the term “Common Stock” shall mean and include the
Company’s Common Stock authorized on the date hereof and shall also include any
capital stock of any class of the Company thereafter authorized which shall
not
be limited to a fixed sum or percentage in respect of the rights of the holders
thereof to participate in dividends and in the distribution of assets upon
the
voluntary liquidation, dissolution or winding up of the Company, and the number
of “shares” thereof for purposes hereof shall be based on the ratio by which
such new securities participate equally with the Common Stock.
(d) All
calculations under this Section 3 shall be made to the nearest tenth of a cent
or to the nearest 1/100th of a share, as the case may be. Anything in
this Section 3 to the contrary notwithstanding, the Company shall be entitled
to
make such reductions in the Per Share Exercise Price, in addition to those
required by this Section 3, as it in its discretion shall deem to be advisable
in order that any stock dividend, subdivision of shares or distribution of
rights to purchase stock or securities convertible or exchangeable for stock
hereafter made by the Company to its stockholders shall not be
taxable.
(e) If,
as a result of an adjustment made pursuant to this Section 3, the Holder of
any
Warrant thereafter surrendered for exercise shall become entitled to receive
shares of two or more classes of capital stock or shares of Common Stock and
other capital stock of the Company, the Board of Directors shall determine
in
good faith the allocation of the adjusted Per Share Exercise Price between
or
among shares or such classes of capital stock or shares of Common Stock and
other capital stock.
4.
Prior
Notice of Certain Events
. In case:
(i)
the Company shall declare
any dividend (or any other distribution);
(ii)
the Company shall
authorize the granting to the holders of Common Stock of rights or warrants
to
subscribe for or purchase any shares of stock of any class or of any other
rights or warrants;
(iii) of
any reclassification of Common Stock (other than a subdivision or combination
of
the outstanding Common Stock, or a change in par value, or from par value to
no
par value, or from no par value to par value);
(iv) of
any consolidation or merger to which the Company is a party and for which
approval of any stockholders of the Company shall be required, or of the sale
or
transfer of all or substantially all of the assets of the Company or of any
compulsory share exchange whereby the Common Stock is converted into other
securities, cash or other property; or
(v) any
(x) liquidation, dissolution or winding up of the Company, whether voluntary
or
involuntary, (y) a sale or other disposition of all or substantially all of
the assets of the Company or (z) any consolidation, merger, combination,
reorganization or other transaction in which the Company is not the surviving
entity or shares of Common Stock constituting in excess of 50% of the voting
power of the Company are exchanged for or changed into stock or securities
of
another entity, cash and/or any other property;
then
the
Company shall cause to be mailed to the Holder, at its last address as it shall
appear upon the warrant registration records of the Company or its transfer
agent, at least ten days prior to the applicable date hereinafter specified,
a
notice stating (x) the date on which a record (if any) is to be taken for the
purpose of such dividend. distribution or granting of rights or warrants or,
if
a record is not to be taken, the date as of which the holders of Common Stock
of
record to be entitled to such dividend, distribution, rights or warrants are
to
be determined and a description of the cash, securities or other property to
be
received by such holders upon such dividend, distribution or granting of rights
or warrants or (y) the date on which such reclassification, consolidation,
merger, sale, transfer, share exchange or Liquidation Event is expected to
become
effective,
the date as of which it is expected that holders of Common Stock of record
shall
be entitled to exchange their shares of Common Stock for securities or other
property deliverable upon such exchange or Liquidation Event and the
consideration, including securities or other property, to be received by such
holders upon such exchange; provided, however, that no failure to mail such
notice or any defect therein or in the mailing thereof shall affect the validity
of the corporate action required to be specified in such notice.
5.
Notice
of Adjustments
. Whenever the Per Share Exercise Price is
adjusted as provided in Section 3 and upon any modification of the rights of
a
Holder of Warrants in accordance with Section 3, the Chief Financial Officer,
or
equivalent officer, of the Company shall promptly prepare a certificate setting
forth the Per Share Exercise Price and the number of Warrant Shares after such
adjustment or the effect of such modification, a brief statement of the facts
requiring such adjustment or modification and the manner of computing the same
and cause copies of such certificate to be mailed to the Holder.
6
.
Fractional
Shares
. No
fractional shares or scrip representing fractional Warrant Shares shall be
issued upon conversion of this Warrant. If more than one certificate
evidencing Warrants shall be surrendered for conversion at one time by the
same
Holder, the number of full shares issuable upon conversion thereof shall be
computed on the basis of the aggregate number of shares of Common Stock that
may
be purchased pursuant to the Warrants so surrendered. Instead of any
fractional Warrant Shares which would otherwise be issuable upon exercise of
this Warrant (or of such aggregate number of Warrants), the Company may elect,
in its sole discretion, independently for each Holder, whether such number
of
Warrant Shares will be rounded to the nearest whole share (with a .5 of a share
rounded upward) or whether such Holder will be given cash, in lieu of any
fractional share, in an amount equal to the same fraction of the fair market
value per share of Common Stock at such time, as determined by the Board of
Directors of the Company in good faith as of the close of business on the day
of
exercise.
7.
Securities
Laws Matters
.
(a) The
Holder represents, by accepting this Warrant, that it understands that this
Warrant and any securities obtainable upon exercise of this Warrant have not
been registered for sale under Federal or state securities laws and are being
offered and sold to the Holder pursuant to one or more exemptions from the
registration requirements of such securities laws. The Holder further
represents that it is an “accredited investor” within the meaning of Regulation
D under the Securities Act. In the absence of an effective
registration of such securities or an exemption therefrom, any certificates
for
such securities shall bear a legend similar to the legend set forth in Section
7(c) hereof. The Holder understands that it must bear the economic
risk of its investment in this Warrant and any securities obtainable upon
exercise of this Warrant for an indefinite period of time, as this Warrant
and
such securities have not been registered under Federal or state securities
laws
and therefore cannot be sold unless subsequently registered under such laws,
unless as exemption from such registration is available.
(b) The
Holder, by his acceptance of this Warrant, represents to the Company that it
is
acquiring this Warrant and will acquire any securities obtainable upon exercise
of this Warrant for its own account for investment and not with a view to,
or
for sale in connection with, any distribution thereof in violation of the
Securities Act. The Holder agrees that this Warrant and
any
such
securities will not be sold or otherwise transferred unless (i) a registration
statement with respect to such transfer is effective under the Securities Act
and any applicable state securities laws or (ii) such sale or transfer is made
pursuant to one or more exemptions from the Securities Act.
(c) All
certificates representing Warrant Shares issued upon exercise hereof shall
be
stamped or imprinted with a legend in substantially the following
form:
THE
SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES
SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY STATE
SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF A
REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO SUCH SECURITIES UNDER THE
SECURITIES ACT OR AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS
OF
THE SECURITIES ACT. ANY SUCH TRANSFER MAY ALSO BE SUBJECT TO
COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS.
8.
Miscellaneous
(a) This
Warrant may be amended only by mutual written agreement of the Company and
the
Holder or, if such amendment shall apply to all outstanding Class D Warrants
issued by the Company of even date herewith (“
Class D Warrants
”), with
the written consent of the Company and the registered holders of Class D
Warrants to purchase a majority of the shares of Common Stock or other
securities or property issuable upon exercise of all outstanding Class D
Warrants (the “
Warrant Majority
”); provided, however, without the consent
of the Holder of this Warrant, no such amendment may be approved that would
have
the effect of (i) increasing the Per Share Exercise Price of this Warrant,
(ii)
decreasing the number of shares of Common Stock for which this Warrant is
exercisable, (iii) accelerating the Termination Date; or (iv) except as
permitted by the following proviso, waive any adjustment under Section 3 of
this
Agreement; provided, further, that the Warrant Majority may waive the
application of any adjustment under Subsection 3(d) of this Agreement, however,
that (x) such waiver must be given in writing prior to the date such adjustment
would otherwise become effective, and (y) for purposes of determining a Warrant
Majority for such purpose any holder of Class D Warrants (and any Class D
Warrants held by such holders) participating in the transaction that would
otherwise give rise to such adjustment shall be excluded from such
determination. Furthermore, the Company may take any action herein
prohibited or omit to take any action herein required to be performed by it,
and
any breach of any covenant, agreement, warranty or representation may be waived,
if the Company has obtained the written consent or waiver of the
Holder. Any amendments approved in compliance with this Section 8
shall bind the Holder’s successors and assigns.
(b) This
Agreement shall be governed by and construed in accordance with the laws of
the
State of New York, without giving effect to principles governing conflicts
of
law that would defer to the substantive law of another
jurisdiction.
(c)
Notice
. Any
notice or other communication required or permitted to be given hereunder shall
be in writing and shall be mailed by certified mail, return receipt requested,
or by Federal Express, Express Mail or similar guaranteed overnight delivery
or
courier service or delivered in person against receipt to the party to whom
it
is to be given,
Nephros,
Inc.
3960
Broadway
New
York,
New York 10032
Attn:
President
(ii) with
a copy to,
Kramer
Levin Naftalis & Frankel LLP
1177
Avenue of the Americas
New
York,
New York 10036
Attention: Thomas
D. Balliett, Esq.
|
|
(iii)
|
if
to the Holder, at the address set forth on the Company’s
records,
|
or
in
either case, to such other address as the party shall have furnished in writing
in accordance with the provisions of this Section 8(c). Any notice
given by means permitted by this Section 8(c) shall be deemed given at the
time of receipt thereof at the address specified in this Section
8(c).
(d)
Interpretation
. If
any term or provision of this Warrant shall be held invalid, illegal or
unenforceable, the validity of all other terms and provisions hereof shall
in no
way be affected thereby.
(e)
Successors
and Assigns
. Subject to the restrictions on transfer contained in
Section 7 of this Agreement, this Warrant shall be binding upon the Company
and
its successors and assigns and shall inure to the benefit of the Holder and
its
successors and registered assigns.
(f)
Assignment
by the Company
. Neither this Warrant nor any of the rights,
interests or obligations hereunder may be assigned, by operation of law or
otherwise, in whole or in part, by the Company without the prior written consent
of the Holder.
(g)
Saturdays,
Sundays, Holidays
. If any date that may at any time be specified
in this Warrant as a date for the taking of any action under this Warrant shall
fall on Saturday, Sunday or on a day which in New York shall be a legal holiday,
then the date for the making of that payment shall be the next subsequent day
which is not a Saturday, Sunday or legal holiday.
(h)
Jurisdiction;
Forum
. Any dispute arising out of or relating to this Warrant
shall be resolved, and all suits, actions and proceedings brought by the Company
or Holder hereunder shall be brought only in, any state court sitting in the
County of New York or federal court sitting in the Southern District of the
State of New York. The Company waives, and upon
delivery
of a Notice of Election the Holder waives, any objection to the laying of venue
in such courts and any claim that any such action has been brought in an
inconvenient forum. To the extent permitted by law, any judgment in
respect of a dispute arising out of or relating to this Warrant may be enforced
in any other jurisdiction within or outside the United States by suit on the
judgment, a certified copy of such judgment being conclusive evidence of the
fact and amount of such judgment.
(i)
Attorneys’
Fees
. In the event of any litigation or other proceeding
concerning this Warrant or the transactions contemplated hereby, including
any
such litigation or proceeding with respect to the enforcement of this Warrant
against any defaulting party, the prevailing party in such litigation or
proceeding shall be entitled to reimbursement from the party opposing such
prevailing party for all attorneys’ fees and costs incurred by such prevailing
party in such litigation or proceeding.
9.
Registration
Rights
.
The Company pursuant to that
certain Registration Rights Agreement dated September ___, 2007 by and among
the
Company and the persons listed on Schedule I thereto (the “
Registration
Rights Agreement
”) has agreed to file one or more Resale Registration
Statements as such term is defined in the Registration Rights
Agreement. The Warrant Shares shall be registered on one or more of
such Resale Registration Statements and the Resale Registration Statement or
Statements in which the Warrant Shares shall be included shall be determined
in
accordance with Section 3(b) of the Registration Rights Agreement (treating
the
Warrant Shares as “Registrable Securities” and as “shares of Common Stock
issuable upon exercise of the Class D Warrants” and treating the holders of
Warrants as “holders of the Class D Warrants”). The registration
rights with respect to the Warrant Shares issuable upon the exercise of this
Warrant by any subsequent Holder may only be assigned in accordance with the
terms and provisions of the Registrations Rights Agreement. The
Holder, by acceptance of this Warrant, represents, warrants and covenants to
the
Company as follows:
(a) As
a condition to the inclusion of its Warrant Shares in any Resale Registration
Statement, Holder shall furnish to the Company such information regarding Holder
and the distribution proposed by Holder as the Company may request in writing
or
as shall be required in connection with any registration, qualification or
compliance referred to in the Registration Rights Agreement.
(b) Holder
hereby covenants with the Company (i) not to make any sale of the Warrant
Shares pursuant to a Resale Registration Statement without effectively causing
the prospectus delivery requirements under the Securities Act to be satisfied,
and (ii) if such Warrant Shares are to be sold by any method or in any
transaction other than on a national securities exchange or in the
over-the-counter market, in privately negotiated transactions, or in a
combination of such methods, to notify the Company at least 5 Business Days
prior to the date on which Holder first offers to sell any such Warrant
Shares.
(c) Holder
acknowledges and agrees that the Warrant Shares sold pursuant to a Resale
Registration Statement described in the Registration Rights Agreement are not
transferable on the books of the Company unless the stock certificate submitted
to the Company’s transfer agent evidencing such Warrant Shares is accompanied,
if requested by the transfer agent, by a certificate reasonably satisfactory
to
the transfer agent to the effect that
(i) the
Warrant Shares have been sold in accordance with such Resale Registration
Statement and (ii) the requirement of delivering a current Prospectus has
been satisfied.
(d) Holder
shall not take any action with respect to any distribution deemed to be made
pursuant to such Resale Registration Statement, which would constitute a
violation of Regulation M under the Exchange Act, or any other applicable rule,
regulation or law.
(e) Holder
shall suspend, upon request of the Company, any disposition of Warrant Shares
pursuant to the Resale Registration Statement and Prospectus contemplated by
the
Registration Rights Agreement during (i) any period not to exceed two 30-day
periods within any one 12-month period the Company requires in connection with
a
primary underwritten offering of equity securities and (ii) any period, not
to
exceed one 45-day period per circumstance or development, when the Company
determines in good faith that offers and sales pursuant thereto should not
be
made by reason of the presence of material undisclosed circumstances or
developments with respect to which the disclosure that would be required in
such
a prospectus is premature, would have an adverse effect on the Company or is
otherwise inadvisable;
provided
,
however
, the aggregate number of
days that such suspensions may apply during any 365-day period is 90
days. In the event of a delay period or suspension, the Company will
use its commercially reasonable best efforts to ensure that the use of the
Prospectus may be resumed as promptly as is practicable.
(f) Holder
agrees to provide the indemnification set forth in Section 5(c) of the
Registration Rights Agreement to the same extent as if Holder was a “Holder” as
defined in the Registration Rights Agreement and the Warrant Shares were
“Registrable Securities” as defined in the Registration Rights
Agreement.
For
purposes of Sections 9(a) through (f) only, any capitalized terms not otherwise
defined in this Warrant shall have the respective meanings set forth in the
Registration Rights Agreement.
10.
Headings
. The
headings of the Sections of this Warrant are for convenience of reference only
and shall not, for any purpose, be deemed a part of this Warrant.
[REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK]
IN
WITNESS WHEREOF, the Company has executed this Warrant as of the day and year
first above written.
NEPHROS,
INC.
By: _________________________________________
Name:
Title:
Accepted:
[Name
of
Holder]
By: _______________________________________
Name:
Title:
NOTICE
OF EXERCISE-CASH PAYMENT
The
undersigned, ____________________________, pursuant to the provisions of the
foregoing Warrant, hereby elects to exercise the within Warrant to the extent
of
purchasing _____________________ shares of Common Stock of Nephros, Inc.
thereunder and hereby makes payment of $_______________ by certified or official
bank check in payment of the exercise price therefor. The undersigned
hereby confirms the representations, warranties and covenants made by it in
the
Warrant.
Dated:_______________
Signature:_____________________________
Address:______________________________
NOTICE
OF EXERCISE-CASHLESS EXERCISE
The
undersigned, ____________________________, pursuant to the provisions of the
foregoing Warrant, hereby elects to exercise the within Warrant as it relates
to
_____________________ shares of Common Stock of Nephros, Inc. by means of a
cashless exercise pursuant to Section 1(d) of the Warrant. As a
result of such exercise, and based on a VWAP of $_______ per share, the
undersigned is entitled to receive _____________ shares of Common
Stock. The undersigned hereby confirms the representations,
warranties and covenants made by it in the Warrant.
Dated:_______________
Signature:_____________________________
Address:______________________________
ASSIGNMENT
FOR
VALUE
RECEIVED _______________________________________ hereby sells, assigns and
transfers unto _____________________________________ the foregoing Warrant
and
all rights evidenced thereby, and does irrevocably constitute and appoint
_____________________________, attorney, to transfer said Warrant on the books
of Nephros, Inc.
Dated:_______________
Signature:_____________________________
Address:______________________________
PARTIAL
ASSIGNMENT
FOR
VALUE
RECEIVED __________________________ hereby assigns and transfers unto
_________________________ the right to purchase __________ shares of the Common
Stock, $0.001 par value per share, of Nephros, Inc. covered by the foregoing
Warrant, and a proportionate part of said Warrant and the rights evidenced
thereby, and does irrevocably constitute and appoint __________________________,
attorney, to transfer that part of said Warrant on the books of Nephros,
Inc.
Dated:_______________
Signature:___________________________
Address:____________________________
17
Exhibit
10.1
Name
of
Subscriber:
NEPHROS,
INC.
SUBSCRIPTION
AGREEMENT
Nephros,
Inc.
3960
Broadway
New
York,
New York 10032
Ladies
and Gentlemen:
1.
Subscription
. (a) The
undersigned, intending to be legally bound, hereby irrevocably subscribes to
purchase from Nephros, Inc., a Delaware corporation (the “
Company
”), the
principal amount of Series A 10% Secured Convertible Notes due 2008 (the
“
Notes
”), of the Company, set forth on the signature page hereof (the
“
Subscription Amount
”), for a purchase price equal to the Subscription
Amount. The Company, intending to be legally bound, hereby accepts
the foregoing subscription and agrees to sell and issue to the undersigned
a
Note having a principal amount equal to the Subscription Amount for a purchase
price equal to the Subscription Amount. This subscription is made in
accordance with and subject to the terms and conditions described in this
Subscription Agreement (this “
Agreement
”). The terms of the
Notes shall be substantially as set forth in the form of Series A 10% Secured
Convertible Note due 2008 attached hereto as
Exhibit A
(the “
Form of
Note
”).
(b)
The
Notes
that are the subject of this Agreement are part of an offering by the Company
(the “
Offering
”) of up to fifteen million dollars ($15,000,000) aggregate
principal amount of Notes (the “
Maximum Amount
”) convertible into shares
of the Company’s common stock, par value $0.001 per share (the “
Common
Stock
”), at a per share conversion price (subject to adjustment as set forth
in the Form of Note) of $0.706, and Class D warrants for the purchase of shares
of Common Stock (the “
Warrants
”), in the form attached hereto as
Exhibit B
(the “
Form of Warrant
”). The Company is
offering Notes until September 28, 2007, although the Company reserves the
right, in its sole discretion, to extend the Offering period until some later
date (such date, as the same may be extended, the “
Expiration
Date
”). The undersigned and each person purchasing Notes in the
Offering (collectively, the “
Purchasers
”) shall enter into a registration
rights agreement among the Company and the Holders (as defined therein), in
substantially the form attached hereto as
Exhibit C
(the “
Registration
Rights Agreement
”).
2.
Closing
.
(a)
Subject
to the satisfaction of the conditions and upon the terms set forth in this
Agreement, the first closing of the transactions contemplated by this Agreement
(the
“
First
Closing
”) shall occur at any time on or prior to the Expiration Date with
the execution and delivery of this Agreement by the parties
hereto. The First Closing shall be conducted at the offices of Kramer
Levin Naftalis & Frankel LLP, 1177 Avenue of the Americas, New York, New
York or such other location as the parties shall mutually agree.
(b)
Following
the First Closing, the Company may continue to sell Notes up to the Maximum
Amount and may conduct closings from time to time for additional Notes sold
(each an “
Additional Closing
”, and the First Closing and each Additional
Closing shall be considered a “
Closing
”). A final closing will
be held promptly on the earlier to occur of (i) the Expiration Date and (ii)
acceptance of subscriptions for sale of the Maximum Amount.
(c)
The
undersigned acknowledges that, concurrently with the consummation of the First
Closing, the Company will exchange its 6% Secured Convertible Notes due 2012
(“
Old Notes
”) with the holders thereof and all accrued but unpaid
interest and obligations thereon, for new Series B 10% Secured Convertible
Notes
due 2008 in an aggregate principal amount of $5,300,000 (the “
New Notes
”
and together with the Notes, the “
2007 Notes
”). The terms of
the New Notes shall be substantially as set forth in the form of Series B 10%
Secured Convertible Note due 2008 attached as an exhibit to the Exchange
Agreement (as defined below) (the “
Form of New Note
”). The New
Notes will be convertible into shares of the Company’s Common Stock at a per
share conversion price (subject to adjustment as set forth in the Form of New
Note) of $0.706 per share and are not included in the Maximum
Amount.
(d)
The
obligations of the Company hereunder in connection with the Closing are subject
to the following conditions being satisfied:
(i)
each
of the representations and
warranties of the undersigned shall be true and correct in all material respects
as of the date when made and as of the Closing as though made at that time,
except for representations and warranties that speak as of a particular date,
which shall be true and correct in all material respects as of such
date;
(ii)
the
undersigned shall have performed,
satisfied and complied in all material respects with all covenants, agreements
and conditions required by this Agreement to be performed, satisfied or complied
with by the undersigned at or prior to the Closing;
(iii)
at
the First Closing, the Company will
have received, in the aggregate, not less than ten million dollars ($10,000,000)
pursuant to executed acceptances of subscriptions from Purchasers in the
Offering;
(iv)
to
the extent not already delivered,
the tender of delivery at the Closing by the undersigned of the items set forth
in Section 2(g) of this Agreement; and
(v)
no
statute, rule, regulation, executive
order, decree, ruling or injunction shall have been enacted, entered,
promulgated, endorsed or threatened or is pending by or before any governmental
authority of competent jurisdiction which prohibits or threatens to prohibit
the
consummation of any of the transactions contemplated by the Transaction
Documents (as defined below) or the Exchange Agreement.
(e)
The
obligations of the undersigned hereunder in connection with the Closing are
subject to the following conditions being satisfied:
(i)
each
of the representations and
warranties of the Company shall be true and correct in all material respects
as
of the date when made and as of the Closing as though made at that time, except
for representations and warranties that speak as of a particular date, which
shall be true and correct in all material respects as of such date;
(ii)
the
Company shall have performed,
satisfied and complied in all material respects with all covenants, agreements
and conditions required by this Agreement to be performed, satisfied or complied
with by the Company at or prior to the Closing;
(iii)
to
the extent not already delivered,
the tender of delivery at the Closing by the Company of the items set forth
in
Section 2(f) of this Agreement;
(iv)
the
Company and the holders of the Old
Notes shall have duly executed and delivered the Exchange Agreement in the
form
attached hereto as
Exhibit D
(the “
Exchange Agreement
”) and the
Investor Rights Agreement in the form attached hereto as
Exhibit E
(the
“
Investor Rights Agreement
”), and the transactions contemplated by the
Exchange Agreement shall be consummated simultaneous with the First
Closing;
(v)
the
holders of a majority of the
outstanding Common Stock as of the First Closing shall have executed and
delivered to the Company written consents, in a form reasonably acceptable
to
the undersigned (the “
Stockholder Consents
”), consenting to (x) the
issuance of the 2007 Notes, the Common Stock and Warrants issuable upon the
conversion of the 2007 Notes and the Common Stock issuable upon the exercise
of
the Warrants, and (y) approving an amendment to the Company’s Certificate of
Incorporation to increase the number of shares of Common Stock that it is
authorized to issue to 60,000,000 shares (the “
Certificate of
Amendment
”);
(vi)
(x)
two individuals designated by
Lambda Investors LLC (“
Lambda
”) (such individuals hereafter known as the
“
New
Directors
”) shall be duly elected to the board of
directors of the Company (the “
Board of Directors
”) effective at the
First Closing; (y) Lambda shall have consented to the election of any new
members of the Board of Directors of the Company or the Subsidiary elected
in
connection with the First Closing; and (z) no more than four members of the
Board of Directors of the Company that Lambda has requested to resign shall
have
submitted resignations to the Company (which resignations shall include releases
in a form reasonably satisfactory to Lambda) with such resignations to become
effective at the First Closing;
(vii)
at
the First Closing, the Company shall
have received an extension, until October 4, 2007, to serve its opposition
to
the motion of the Receiver for Lancer Offshore, Inc. to enforce the Company’s
settlement agreement with the Receiver and for entry of final default judgment;
and
(viii)
no
statute, rule, regulation, executive
order, decree, ruling or injunction shall have been enacted, entered,
promulgated, endorsed or threatened or is pending by or before any governmental
authority of competent jurisdiction which prohibits or threatens to prohibit
the
consummation of any of the transactions contemplated by the Transaction
Documents (as defined below) or the Exchange Agreement.
(f)
At
the
Closing, the Company shall deliver or cause to be delivered to the undersigned
the following (to the extent not previously delivered):
(i)
an
executed acceptance of subscription
relating to this Agreement;
(ii)
a
Note in the principal amount of the
Subscription Amount, registered in the name of the undersigned;
(iii)
the
Registration Rights Agreement duly
executed by the Company and all other parties thereto other than the Purchasers,
and the Investor Rights Agreement duly executed by the Company and all other
parties thereto other than the Purchasers;
(iv)
a
certificate, duly executed by the
Chief Executive Officer of the Company, to the effect that the conditions set
forth in clauses (i), (ii), (iv), (v), (vi), (vii) and (viii) of Section 2(e)
have been satisfied;
(v)
copies
of the duly executed Exchange
Agreement, Stockholder Consents and resignations of directors; and
(vi)
waivers
from Eric A. Rose, M.D., Norman
J. Barta, William J. Fox and Lawrence Centella waiving any right held by such
persons pursuant to agreements entered into prior to the date hereof to have
securities of the Company registered under the Registration Rights
Agreement.
(g)
At
the
Closing, the undersigned shall deliver or cause to be delivered to the Company
the following (to the extent not previously delivered):
(i)
an
executed copy of the signature page
of and
Exhibit F
to this Agreement and the Investor Rights Agreement duly
executed by the undersigned;
(ii)
immediately
available funds in the
amount of the Subscription Amount, delivered by wire transfer to the following
account:
|
Bank:
|
Bank
of America
|
|
ABA
No.:
|
026009593
|
|
Account
Name:
|
Nephros,
Inc.
|
|
Account
No.:
|
94293
70902
|
|
Apply
To:
|
Nephros,
Inc.
|
|
Attention:
|
Client
Manager
|
|
|
|
(iii)
an
executed copy of the signature page,
or counterpart signature page, to the Registration Rights Agreement;
and
(iv)
a
certificate, duly executed by a duly
authorized officer, manager or member of the undersigned, to the effect that
the
conditions set forth in clauses (i) and (ii) of Section 2(d) have been
satisfied.
3.
Representations
and Warranties of the Company
. The Company represents and
warrants to the undersigned as follows, in each case as of the date hereof
and
in all material respects as of the date of any Closing, except, where the
following representations and warranties are made or deemed to be made after
the
First Closing, for any changes resulting solely from any Closing that has
previously been consummated or the consummation of the transactions contemplated
by the Exchange Agreement:
(a)
The
Company is duly organized, validly existing and in good standing under the
laws
of the jurisdiction of its organization with full power and authority to own,
lease, license and use its properties and assets and to carry out the business
in which it proposes to engage.
Nephros International
Limited (the “
Subsidiary
”) is duly organized, validly existing and in
good standing under the laws of the jurisdiction of its organization with full
power and authority to own, lease, license and use its properties and assets
and
to carry out the business in which it proposes to engage. Each of the
Company and the Subsidiary is duly qualified to conduct business and is in
good
standing as a foreign corporation or other entity in each jurisdiction in which
the nature of the business conducted or property owned by it makes such
qualification necessary, except where the failure to be so qualified or in
good
standing, as the case may be, could not have or reasonably be expected to result
in a (x) material adverse effect on the legality, validity or
enforceability of any Transaction Document (as defined below) or the Exchange
Agreement, (y) material adverse effect on the results of operations,
assets, business, prospects or condition (financial or otherwise) of the Company
and the Subsidiary, taken as a whole, or (z) material adverse effect on the
Company’s ability to perform in any material respect on a timely basis its
obligations under any Transaction Document (as defined below) or the Exchange
Agreement (any of (x), (y) or (z), a “
Material Adverse
Effect
”). The Company owns all of the capital stock or other
equity interests of the Subsidiary free and clear of any liens or encumbrances,
other than Permitted Liens, and all of the issued and outstanding shares of
capital stock of the Subsidiary are validly issued and are fully paid,
non-assessable and free of preemptive and similar rights to subscribe for or
purchase securities. The Company does not own, and never has owned,
any capital stock of or equity interest in any entity other than the
Subsidiary. Neither the Company nor the Subsidiary is in violation or
default of any of the provisions of its respective certificate or articles
of
incorporation, bylaws or other organizational or charter documents.
(b)
The
Company has all requisite corporate power and authority to execute, deliver
and
perform its obligations under this Agreement and to issue and sell the Notes
subscribed for hereunder, the shares of Common Stock and Warrants issuable
upon
conversion thereof, and the shares of Common Stock issuable upon exercise of
the
Warrants (collectively, the “
Subject Securities
”). Subject to
the Stockholder Consents becoming effective, all necessary proceedings of the
Company have been duly taken to authorize the execution, delivery, and
performance of this Agreement, the Notes, the Warrants, the Registration Rights
Agreement and the Investor Rights Agreement (collectively, the “
Transaction
Documents
”), the Exchange Agreement and the New Notes. The
Transaction Documents and Exchange Agreement have been duly authorized by the
Company and, when executed and delivered by the Company will
constitute
the legal, valid and binding obligation of the Company enforceable against
the
Company in accordance with their terms except as limited by general equitable
principles and applicable bankruptcy, insolvency, reorganization, moratorium
and
other laws of general application affecting enforcement of creditors’ rights
generally. The Common Stock issuable upon conversion of the 2007
Notes and the Common Stock issuable upon exercise of the Warrants, when issued
in compliance with the provisions of the Transaction Documents, will be validly
issued, fully paid and nonassessable and free of any liens or encumbrances
other
than any liens or encumbrances created by the undersigned. The 2007
Notes are duly authorized, and when issued pursuant to the Transaction Documents
and the Exchange Agreement, will be validly issued. The Warrants are
duly authorized, and when issued, pursuant to the Transaction Documents, will
be
validly issued.
(c)
No
consent of any party to any contract, agreement, instrument, lease or license
to
which the Company or the Subsidiary is a party or to which any of the Company’s
or the Subsidiary’s properties or assets are subject is required for the
execution, delivery or performance by the Company of its obligations under
any
of the Transaction Documents or the Exchange Agreement or the issuance and
sale
of the Subject Securities. The Company is not required to obtain any
consent, waiver, authorization or order of, give any notice to, or make any
filing or registration with, any court or other federal, state, local or other
governmental authority or other person or entity in connection with the
execution, delivery and performance by the Company of the Transaction Documents
and Exchange Agreement, other than (i) the filing with the Securities and
Exchange Commission (the “
Commission
”) of the registration statement or
registration statements pursuant to the Registration Rights Agreement, a
Schedule 14C information statement and a Form 8-K and related press release
announcing the Offering and changes in directors and officers of the Company,
(ii) the notice and/or application(s) to the American Stock Exchange for
the issuance and sale of the Subject Securities and the listing for trading
thereon in the time and manner required thereby, (iii) the filing of Form D
with the Commission and such filings as are required to be made under applicable
state securities laws, (iv) the Stockholder Consents, and (v) the filing
with the Delaware Secretary of State of the Certificate of
Amendment.
(d)
Except
as
disclosed on Schedule 3(d), the execution, delivery and performance of the
Transaction Documents and the Exchange Agreement and the issuance of the Subject
Securities will not (i) violate or result in a breach of, or entitle any party
(with or without the giving of notice or the passage of time or both) to
terminate, amend, accelerate, cancel or call a default under any contract or
agreement to which the Company or the Subsidiary is a party or result in the
creation of any lien, charge or encumbrance upon any of the properties or assets
of the Company or the Subsidiary, other than the liens, charges or encumbrances
created by the undersigned, (ii) conflict with, violate or result in a breach
of
any term of the certificate of incorporation or by-laws of the Company or the
Subsidiary, or (iii) violate any law, rule, regulation, order, judgment or
decree binding upon the Company or the Subsidiary or to which any of their
respective operations, businesses, properties or assets are subject, except,
in
the case of a breach, termination, violation or default referenced in clauses
(i) or (iii), would not reasonably be expected to have a Material Adverse
Effect.
(e)
The
capitalization of the Company is as set forth on
Schedule 3(e)
, which
Schedule 3(e)
shall also include the number of shares of Common Stock
owned
beneficially,
and of record, by officers or directors of the Company or holders of 5% or
more
of the outstanding Common Stock, in each case as of the date
hereof. The Company has not issued any capital stock since its most
recently filed periodic report under the Securities Exchange Act of 1934, as
amended (the “
Exchange Act
”), other than shares of Common Stock issued
pursuant to the exercise of employee stock options under the Company’s stock
option plans. No person or entity has any right of first refusal,
preemptive right, right of participation, or any similar right to participate
in
the transactions contemplated by the Transaction Documents. Except as
a result of the purchase and sale of the Subject Securities or as set forth
on
Schedule 3(e)
, there are no outstanding options, warrants, scrip rights
to subscribe to, calls or commitments of any character whatsoever relating
to,
or securities, rights or obligations convertible into or exercisable or
exchangeable for, or giving any Person any right to subscribe for or acquire,
any shares of Common Stock or other capital stock or securities of the Company,
or contracts, commitments, understandings or arrangements by which the Company
is or may become bound to issue additional shares of Common Stock or other
capital stock or securities of the Company. The issuance and sale of
the Subject Securities will not obligate the Company to issue shares of Common
Stock or other capital stock or securities of the Company to any person or
entity (other than the Purchasers and the holders of the Old Notes) and will
not
result in a right of any holder of Company securities to adjust the exercise,
conversion, exchange or reset price under any of such securities. All
of the outstanding shares of capital stock of the Company are validly issued,
fully paid and nonassessable, have been issued in compliance with all federal
and state securities laws, and none of such outstanding shares was issued in
violation of any preemptive rights or similar rights to subscribe for or
purchase securities. There are no stockholders agreements or voting
agreements with respect to the Company’s capital stock to which the Company is a
party or, to the knowledge of the Company, between or among any of the Company’s
stockholders.
(f)
Except
as
set forth on
Schedule 3(f)
, there are no brokerage commissions, finder’s
fees or similar fees or commissions payable by the Company in connection with
the transactions contemplated by the Transaction Documents or Exchange Agreement
based on any agreement, arrangement or understanding with or known to the
Company. The Purchasers will have no obligation with respect to any
brokerage commissions, finder’s fees or similar fees or commissions described on
Schedule 3(f).
(g)
Except
as
disclosed on
Schedule 3(g)
, as disclosed in the reports, schedules,
forms, statements and other documents filed by the Company under the Exchange
Act on or after April 10, 2007 (the “
Current SEC Filings
”) or as would
not reasonably be expected to have a Material Adverse Effect, neither the
Company nor the Subsidiary is in violation or default of any provisions of
any
instrument, judgment, order, writ or decree, or any provision of any contract
or
agreement, to which it is a party or by which it is bound or of any provision
of
statute, rule or regulation of any country, state, province or other local
governmental unit applicable to the Company, the Subsidiary or their respective
businesses.
(h)
Except
as
disclosed on
Schedule 3(h)
, neither the Company nor the Subsidiary is a
party to any litigation, action, suit, proceeding or investigation, and, to
the
knowledge of the Company, no litigation, action, suit, proceeding or
investigation has been threatened against the Company or the
Subsidiary. There has not been, and to the knowledge of the Company,
there is not pending or contemplated, any investigation by the Commission
involving the Company or any current or former director or officer of the
Company. The
Commission
has not issued any stop order or other order suspending the effectiveness of
any
registration statement filed by the Company under the Exchange Act or the
Securities Act of 1933, as amended (the “
Securities
Act
”). Except as disclosed on
Schedule 3(g)
or in the
Current SEC Filings, since January 1, 2007 there has been no material adverse
effect on the products of the Company, the prospects of the products of the
Company or the status of the regulatory approval of the products of the
Company.
(i)
Each
of
the Company and the Subsidiary has good and marketable title to its properties
and assets (including without limitation
those assets
pledged as collateral pursuant to this Agreement) held in each case free and
clear of all liens, pledges, security interests, encumbrances, attachments
or
charges of any kind (each a “
Lien
”), except for (i) Liens for taxes that
are not yet due and payable, (ii) Liens that do not or are not reasonably likely
to result in a Material Adverse Effect, or (iii) Liens disclosed in the Current
SEC Filings (including the Liens securing the Old Notes, which Liens shall
be
released at the First Closing) or arising under the Offering (Liens described
in
clauses (i), (ii) and (iii) are referred to as “
Permitted
Liens
”). Neither the Company nor the Subsidiary owns, or has ever
owned, any real property. With respect to the property and assets it
leases, except as would not reasonably be expected to have a Material Adverse
Effect or as disclosed on
Schedule 3(i)
, the Company is in compliance
with such leases and, to the best of the Company’s knowledge, the Company holds
valid leasehold interests in such property and assets free and clear of any
Liens of any other party other than the lessors of such property and assets,
except for Permitted Liens. The properties and assets owned and
leased by the Company and the Subsidiary are sufficient to enable the Company
and the Subsidiary to conduct their respective business as presently
conducted.
(j)
Neither
the Company nor the Subsidiary has any liability or obligation of any nature
whatsoever (whether absolute, accrued, contingent, or otherwise and whether
due
or to become due) which would be required to be reflected on a balance sheet
or
in the notes thereto prepared in accordance with GAAP, except for (i) those
liabilities that are fully reflected or reserved against on the financial
statements included in the Current SEC Filings, described in the notes to such
financial statements, or expressly described elsewhere in the Current SEC
Filings, including without limitation, under the headings “Management’s
Discussion and Analysis or Plan of Operation” and “Controls and Procedures” in
the applicable Current SEC Filings, (ii) liabilities and obligations which
have
been incurred since June 30, 2007 in the ordinary course of business which
are not material in nature or amount, or (iii) liabilities and obligations
described on
Schedule 3(j)
.
(k)
Except
as
disclosed in the Current SEC Filings, each of the Company and the Subsidiary
owns, free and clear of all Liens, other than Permitted Liens, or is licensed
or
otherwise possesses legally enforceable rights to use, all patents, patent
applications, trademarks, trademark applications, trade names, service marks,
copyrights, know-how, trade secrets, inventions and similar rights necessary
to
permit the Company and the Subsidiary to conduct its respective business as
described in the Current SEC Filings (collectively, “
Intellectual
Property
”). To the Company’s knowledge, the Intellectual Property
does not violate or infringe upon the rights of any other person or entity,
and
neither the Company nor the Subsidiary has received a notice (written or
otherwise) claiming such infringement. To the knowledge of the
Company, all Intellectual Property is enforceable and there is no existing
infringement by another person or entity of any of the Intellectual
Property. The Company and
the
Subsidiary have taken reasonable security measures to protect the secrecy,
confidentiality and value of all of their intellectual properties, except where
failure to do so would not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect.
(l)
The
Company has filed all reports, schedules, forms, statements and other documents
required to be filed by the Company under the Securities Act and the Exchange
Act, including pursuant to Section 13(a) or 15(d) thereof, since September
20, 2004 (the reports, schedules, forms, statements and other documents filed
pursuant to the Securities Act and the Exchange Act on or after September 20,
2004, including the exhibits thereto and documents incorporated by reference
therein, being collectively referred to herein as the “
Nephros SEC
Filings
”). Except for the Company’s Annual Report on Form 10-KSB
for the year ended December 31, 2005, each Nephros SEC Filing that is an Annual
Report on Form 10-KSB, a Quarterly Report on Form 10-QSB or a Current Report
on
Form 8-K (other than a Current Report on Form 8-K that is required solely
pursuant to Item 1.01, 1.02, 2.03, 2.04, 2.05, 2.06, 4.02(a) or 5.02(e) of
Form
8-K) was filed on a timely basis or the Company received a valid extension
of
such time of filing and has filed such Nephros SEC Filing prior to the
expiration of such extension. Except as disclosed on
Schedule
3(l)
, as of their respective dates, the Nephros SEC Filings complied in all
material respects with the requirements of the Securities Act and the Exchange
Act, as applicable, and none of the Nephros SEC Filings, 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 disclosed on
Schedule 3(l)
, the
financial statements of the Company included in the Nephros SEC Filings complied
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 United States generally accepted accounting principles 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 and the Subsidiary 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 year-end audit adjustments.
(m)
The
Company is in material compliance with all provisions of the Sarbanes-Oxley
Act
of 2002 which are applicable to it as of the First Closing. Except as
disclosed in the Current SEC Filings, the Company and the Subsidiary maintain
a
system of internal accounting controls sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with
management’s general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with GAAP and to maintain asset accountability, (iii) access to
assets is permitted only in accordance with management’s general or specific
authorization, and (iv) the recorded accountability for assets is compared
with the existing assets at reasonable intervals and appropriate action is
taken
with respect to any differences. Except as disclosed in the Current
SEC Filings, the Company has established disclosure controls and procedures
(as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and
designed such disclosure controls and procedures to ensure that information
required to be disclosed by the Company in the reports it files or submits
under
the Exchange Act is recorded, processed, summarized and reported, within the
time periods
specified
in the Commission’s rules and forms. The Company’s certifying
officers have evaluated the effectiveness of the Company’s disclosure controls
and procedures as of the end of the period covered by the Company’s most
recently filed periodic report under the Exchange Act (such date, the
“
Evaluation Date
”). The Company presented in its most recently
filed periodic report under the Exchange Act the conclusions of the certifying
officers about the effectiveness of the disclosure controls and procedures
based
on their evaluations as of the Evaluation Date. Since the Evaluation
Date, there have been no changes in the Company’s internal control over
financial reporting (as such term is defined in the Exchange Act) that has
materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.
(n)
No
material labor dispute exists or, to the knowledge of the Company, is imminent
with respect to any of the employees of the Company which could reasonably
be
expected to result in a Material Adverse Effect. None of the
Company’s or the Subsidiary’s employees is a member of a union that relates to
such employee’s relationship with the Company, and neither the Company nor the
Subsidiary is a party to a collective bargaining agreement, and the Company
and
the Subsidiaries believe that their relationships with their employees are
good. No executive officer, to the knowledge of the Company, is, or
is now expected to be, in violation of any material term of any employment
contract, confidentiality, disclosure or proprietary information agreement
or
non-competition agreement, or any other contract or agreement or any restrictive
covenant, and the continued employment of each such executive officer does
not
subject the Company or any of its Subsidiaries to any liability with respect
to
any of the foregoing matters. The Company and its Subsidiaries are in compliance
with all federal, state, local and foreign laws and regulations relating to
employment and employment practices, terms and conditions of employment and
wages and hours, except where the failure to be in compliance could not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect.
(o)
The
Company and the Subsidiary possess all certificates, authorizations and permits
issued by the appropriate federal, state, local or foreign regulatory
authorities necessary to conduct their respective businesses as described in
the
Current SEC Filings, except where the failure to possess such permits could
not
have or reasonably be expected to result in a Material Adverse Effect
(“
Material Permits
”), and neither the Company nor the Subsidiary has
received any notice of proceedings relating to the revocation or modification
of
any Material Permit.
(p)
The
Company and the Subsidiary are insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as are prudent
and customary in the businesses in which the Company and the Subsidiary are
engaged, including, but not limited to, directors and officers insurance
coverage at least equal to $7,000,000. Neither the Company nor the
Subsidiary has any reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business without a significant increase in cost.
(q)
Except
as
set forth in the Current SEC Filings, none of the officers or directors of
the
Company and, to the knowledge of the Company, none of the employees of the
Company is presently a party to any transaction with the Company or the
Subsidiary,
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 officer, director or such
employee or, to the knowledge of the Company, any entity in which any officer,
director, or any such employee has a substantial interest or is an officer,
director, trustee or partner, in each case in excess of $120,000 other than
for
(i) payment of salary or consulting fees for services rendered,
(ii) reimbursement for expenses incurred on behalf of the Company and
(iii) other employee benefits, including stock option agreements under any
stock option plan of the Company.
(r)
Neither
the Company nor any person or entity acting on its behalf has offered or sold
any of the Subject Securities by any form of general solicitation or general
advertising. The Company has offered the Subject Securities for sale
only to the Purchasers and certain other “accredited investors” within the
meaning of Rule 501 under the Securities Act. Assuming the accuracy
of the undersigned’s representations and warranties set forth in Section 4
(and corresponding representations made by other Purchasers), no registration
under the Securities Act is required for the offer and sale of the Subject
Securities by the Company to the Purchasers as contemplated by the
Offering. Neither the Company, nor any of its affiliates, nor any
person or entity acting on its or their behalf has, directly or indirectly,
made
any offers or sales of any security or solicited any offers to buy any security,
under circumstances that would cause the Offering to be integrated with prior
offerings by the Company for purposes of the Securities Act or any applicable
shareholder approval provision of the American Stock
Exchange. Subject to the Stockholder Consents becoming effective and
the filing of an additional shares listing application with the American Stock
Exchange, the issuance and sale of the Subject Securities does not contravene
the rules and regulations of the American Stock Exchange.
(s)
The
Company is not, and is not an affiliate of, and immediately after receipt of
payment for the Notes, will not be or be an affiliate of, an “investment
company” within the meaning of the Investment Company Act of 1940, as amended.
The Company shall conduct its business in a manner so that it will not become
subject to the Investment Company Act of 1940, as amended.
(t)
Except
as
disclosed on
Schedule 3(t)
, as of the First Closing, no Person will have
any right to cause the Company to effect the registration under the Securities
Act of any securities of the Company except pursuant to the Registration Rights
Agreement.
(u)
The
Company’s Common Stock is registered pursuant to Section 12(b) of the
Exchange Act, and the Company has taken no action designed to, or which to
its
knowledge is likely to have the effect of, terminating the registration of
the
Common Stock under the Exchange Act nor has the Company received any
notification that the Commission is contemplating terminating such
registration. The Company’s outstanding Common Stock is listed for
trading on the American Stock Exchange and, since January 1, 2007, the trading
of the Company’s Common Stock on the American Stock Exchange has not been
de-listed or suspended. The Company has taken no action for the
purpose of de-listing the Common Stock from the American Stock Exchange or
suspending the trading of the Common Stock on the American Stock
Exchange. Except as described in the Current SEC Filings, the Company
has not, in the 12 months preceding the date hereof, received written notice
from the American Stock
Exchange
to the effect that the Company is not in compliance with the listing or
maintenance requirements of the American Stock Exchange or that the American
Stock Exchange is considering suspending the trading of or de-listing the
Company’s Common Stock from the American Stock Exchange.
(v)
The
Company and its Board of Directors have taken all necessary action, if any,
in
order to render inapplicable any control share acquisition, business
combination, shareholder rights plan (including any distribution under a rights
agreement) or other similar anti-takeover provision under the Company’s
certificate of incorporation (or similar charter documents) or the laws of
its
state of incorporation (including without limitation Section 203 of the Delaware
General Corporation Law) that is or could become applicable to the Purchasers
as
a result of the Purchasers and the Company fulfilling their obligations or
exercising their rights under the Transaction Documents and the Exchange
Agreement, including without limitation as a result of the Company’s issuance of
the Subject Securities and the Purchasers’ ownership of the Subject
Securities.
(w)
All
disclosure furnished by or on behalf of the Company in writing to the Purchasers
regarding the Company, its business and the transactions contemplated hereby,
including the Schedules to this Agreement, with respect to the representations
and warranties contained herein is true and correct in all material respects
with respect to such representations and warranties and does not contain any
untrue statement of a material fact or omit to state any material fact necessary
in order to make the statements made therein, in light of the circumstances
under which they were made, not misleading. The press releases
disseminated by the Company during the twelve months preceding the date of
this
Agreement taken as a whole do not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
in order to make the statements made therein, in light of the circumstances
under which they were made and when made, not misleading.
(x)
Based
on
the financial condition of the Company as of the First Closing, after giving
effect to the receipt by the Company of not less than ten million dollars
($10,000,000) from the Purchasers at the First Closing, and assuming
(counterfactually) that all of the 2007 Notes issued at the First Closing were
converted as of such date, (i) the fair saleable value of the Company’s
assets exceeds the amount that will be required to be paid on or in respect
of
the Company’s existing debts and other liabilities (including known contingent
liabilities) as they mature; (ii) the Company’s assets do not constitute
unreasonably small capital to carry on its business as now conducted and as
proposed to be conducted including its capital needs taking into account the
particular capital requirements of the business conducted by the Company, and
projected capital requirements and capital availability thereof; and
(iii) the current cash flow of the Company, together with the proceeds the
Company would receive, were it to liquidate all of its assets, after taking
into
account all anticipated uses of the cash, would be sufficient to pay all amounts
on or in respect of its liabilities when such amounts are required to be
paid. The Company has no knowledge of any facts or circumstances
which lead it to believe that it will file for reorganization or liquidation
under the bankruptcy or reorganization laws of any jurisdiction within one
year
from the First Closing.
Schedule 3(x)
sets forth as of the
date hereof all outstanding secured and unsecured Indebtedness of the Company
or
the Subsidiary, or for which the Company or the Subsidiary has
commitments. For the purposes of this Agreement,
“
Indebtedness
” means (a) any liabilities for borrowed money (other
than trade accounts payable
incurred
in the ordinary course of business), (b) every obligation of the Company
evidenced by bonds, debentures, notes or other similar instruments, (c) all
guaranties, endorsements and other contingent obligations in respect of
Indebtedness of others, whether or not the same are or should be reflected
in
the Company’s balance sheet (or the notes thereto), except guaranties by
endorsement of negotiable instruments for deposit or collection or similar
transactions in the ordinary course of business; and (d) the present value
of any lease payments due under leases required to be capitalized in accordance
with GAAP. Except as set forth on
Schedule 3(x)
, neither the
Company nor the Subsidiary is in default with respect to any
Indebtedness.
(y)
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 and the
Subsidiary have filed all necessary federal, state, local and foreign income,
franchise, employment and other tax returns and have paid or accrued all taxes
shown as due thereon, and the Company has no knowledge of a tax deficiency
which
has been asserted or threatened against the Company or the
Subsidiary.
(z)
Neither
the Company nor the Subsidiary, nor to the knowledge of the Company, any agent
or other person or entity acting on behalf of the Company or the Subsidiary,
has
(i) directly or indirectly, used any funds for unlawful contributions,
gifts, entertainment or other unlawful expenses related to foreign or domestic
political activity, (ii) made any unlawful payment to foreign or domestic
government officials or employees or to any foreign or domestic political
parties or campaigns from corporate funds, (iii) failed to disclose fully
any contribution made by the Company or the Subsidiary (or made by any person
or
entity acting on behalf of the Company or the Subsidiary) which is in violation
of law, or (iv) violated in any material respect any provision of the
Foreign Corrupt Practices Act of 1977, as amended.
(aa)
The
Company’s accounting firm is Rothstein Kass & Company, P.C. To
the knowledge of the Company, (i) such accounting firm is a registered public
accounting firm as required by the Exchange Act, and (ii) has been engaged
by the Company’s Audit Committee to conduct procedures to provide its opinion
with respect to the financial statements to be included in the Company’s Annual
Report on Form 10-KSB for the year ending December 31, 2007.
(bb)
Immediately
following the First Closing, no Indebtedness or other claim against the Company
is senior to the Notes in right of payment, whether with respect to interest
or
upon liquidation or dissolution, or otherwise, other than indebtedness secured
by purchase money security interests (which is senior only as to underlying
assets covered thereby) and capital lease obligations (which is senior only
as
to the property covered thereby).
(cc)
There
are
no disagreements of any kind presently existing, or reasonably anticipated
by
the Company to arise, between the Company and the accountants and lawyers
formerly or presently employed by the Company, and except as set forth on
Schedule 3(cc)
the Company is current with respect to any fees owed to
its accountants and lawyers.
(dd)
The
Company acknowledges and agrees that each of the Purchasers is acting solely
in
the capacity of an arm’s length purchaser with respect to the
Transaction
Documents and the transactions contemplated thereby. The Company
further acknowledges that no Purchaser is acting as a financial advisor or
fiduciary of the Company (or in any similar capacity) with respect to the
Transaction Documents and the transactions contemplated thereby and any advice
given by any Purchaser or any of their respective representatives or agents
in
connection with the Transaction Documents and the transactions contemplated
thereby is merely incidental to the Purchasers’ purchase of the Subject
Securities. The Company further represents to each Purchaser that the
Company’s decision to enter into this Agreement and the other Transaction
Documents has been based solely on the independent evaluation of the
transactions contemplated hereby by the Company and its
representatives.
(ee)
The
Company has not, and to its knowledge no one acting on its behalf has,
(i) taken, directly or indirectly, any action designed to cause or to
result in the stabilization or manipulation of the price of any security of
the
Company to facilitate the sale or resale of any of the Subject Securities,
(ii) sold, bid for, purchased, or paid any compensation for soliciting
purchases of, any of the securities of the Company, or (iii) paid or agreed
to pay to any person or entity any compensation for soliciting another to
purchase any other securities of the Company, other than, in the case of clauses
(ii) and (iii), compensation paid to the Company’s placement agent in
connection with the Offering.
(ff)
The
Company (i) is in compliance with any and all Environmental Laws (as
hereinafter defined), (ii) has received all permits, licenses or other
approvals required of it under applicable Environmental Laws to conduct its
business and (iii) is in compliance with all terms and conditions of any
such permit, license or approval where, in each of the foregoing clauses (i),
(ii) and (iii), the failure to so comply would be reasonably expected to
have, individually or in the aggregate, a Material Adverse Effect. The term
“
Environmental Laws
” means all federal, state, local or foreign laws
relating to pollution or protection of human health or the environment
(including, without limitation, ambient air, surface water, groundwater, land
surface or subsurface strata), including, without limitation, laws relating
to
emissions, discharges, releases or threatened releases of chemicals, pollutants,
contaminants, or toxic or hazardous substances or wastes (collectively,
“
Hazardous Materials
”) into the environment, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Hazardous Materials, as well as all authorizations,
codes, decrees, demands or demand letters, injunctions, judgments, licenses,
notices or notice letters, orders, permits, plans or regulations issued,
entered, promulgated or approved thereunder.
(gg)
In
accepting the subscription and entering into this Agreement, the Company is
not
relying on any representations and warranties of the undersigned other than
those in this Agreement.
(hh)
The
Company acknowledges that the representations, warranties and agreements made
by
the Company herein shall survive the execution and delivery of this Agreement
and the purchase of the Notes, the conversion of the Notes and the exercise
of
the Warrants.
(ii)
The
Company has received the written consent from at least 50.1% of the
outstanding Common Stock as of the date hereof approving the Offering in
accordance with Rule 713 of the American Stock Exchange Company
Guide.
4.
Representations,
Warranties and Covenants of the Subscriber
. The undersigned
hereby represents and warrants to, and agrees with, the Company as
follows:
(a)
The
undersigned is an Accredited Investor, as specifically indicated in
Exhibit
F
to this Agreement, which is being delivered to the Company
herewith.
(b)
If
a
natural person, the undersigned is: a bona fide resident of the state or
non-United States jurisdiction contained in the address set forth on the
signature page of this Agreement as the undersigned’s home address; at least
twenty-one (21) years of age; and legally competent to execute the Transaction
Documents. If an entity, the undersigned has its principal offices or
principal place of business in the state or non-United States jurisdiction
contained in the address set forth on the signature page of this Agreement
and
the individual signing on behalf of the undersigned is duly authorized to
execute the Transaction Documents.
(c)
When
executed and delivered by the undersigned, each of the Transaction Documents
to
which the undersigned is party will constitute the legal, valid and binding
obligation of the undersigned, enforceable against the undersigned in accordance
with its terms except as limited by general equitable principles and applicable
bankruptcy, insolvency, reorganization, moratorium and other laws of general
application affecting enforcement of creditors’ rights generally.
(d)
Neither
the execution, delivery nor performance of the Transaction Documents by the
undersigned violates or conflicts with, creates (with or without the giving
of
notice or the lapse of time, or both) a default under or a lien or encumbrance
upon any of the undersigned’s assets or properties pursuant to, or requires the
consent, approval or order of any government or governmental agency or other
person or entity under (i) any note, indenture, lease, license or other
agreement to which the undersigned is a party or by which it or any of its
assets or properties is bound or (ii) any statute, law, rule, regulation or
court decree binding upon or applicable to the undersigned or its assets or
properties. If the undersigned is not a natural person, the
execution, delivery and performance by the undersigned of the Transaction
Documents have been duly authorized by all necessary corporate or other action
on behalf of the undersigned and such execution, delivery and performance does
not and will not constitute a breach or violation of, or default under, the
charter or by-laws or equivalent governing documents of the
undersigned.
(e)
The
undersigned has received from the Company, or has been directed to, all
materials which have been requested by the undersigned and the Nephros SEC
Filings. The undersigned has had a reasonable opportunity to ask
questions of the Company and its representatives, and the Company has answered
to the satisfaction of the undersigned all inquiries that the undersigned or
the
undersigned’s representatives have put to it.
(f)
The
undersigned or the undersigned’s purchaser representative has such knowledge and
experience in finance, securities, taxation, investments and other business
matters so as to be capable of evaluating the merits and risks of an investment
in the Subject Securities. The undersigned can afford to bear such
risks, including, without limitation, the risk of losing its entire
investment.
(g)
The
undersigned acknowledges that no liquid market for the Notes and Warrants
presently exists and none may develop in the future and that the undersigned
may
find it impossible to liquidate the investment at a time when it may be
desirable to do so, or at any other time.
(h)
The
undersigned has been advised by the Company and understands that none of the
Subject Securities have been registered under the Securities Act, that the
Subject Securities are being offered and issued on the basis of the statutory
exemption provided by Section 4(2) of the Securities Act, Regulation D
promulgated thereunder or both, relating to transactions by an issuer not
involving any public offering and under similar exemptions under certain state
securities laws; that this transaction has not been reviewed by, passed on
or
submitted to any United States Federal or state agency or self-regulatory
organization where an exemption is being relied upon; and that the Company’s
reliance thereon is based in part upon the representations made by the
undersigned in this Agreement.
(i)
The
undersigned will acquire the Subject Securities for the undersigned’s own
account (or, if such individual is married, for the joint account of the
undersigned and the undersigned’s spouse either in joint tenancy, tenancy by the
entirety or tenancy in common) for investment and not with a view to the sale
or
distribution thereof or the granting of any participation therein, in each
case
in violation of applicable securities laws, and has no present intention of
distributing or selling to others any of such Subject Securities or granting
any
participation therein, in each case in violation of applicable securities
laws.
(j)
In
subscribing for Notes, the undersigned is not relying on any representations
and
warranties of the Company other than those in this Agreement.
(k)
The
undersigned acknowledges that the representations, warranties and agreements
made by the undersigned herein shall survive the execution and delivery of
this
Agreement and the purchase of the Notes, the conversion of the Notes and the
exercise of the Warrants.
(l)
Except
as
set forth on the signature page hereto, the undersigned has not engaged any
broker or other person or entity that is entitled to a commission, fee or other
remuneration as a result of the execution, delivery or performance of this
Agreement.
(m)
The
undersigned is not subscribing for Notes as a result of any advertisement,
article, notice or other communication published in any newspaper, magazine
or
similar media or broadcast over television or radio, or presented at any seminar
or meeting, or any solicitation of a subscription by a person other than a
representative of the Company with whom the undersigned had a pre-existing
relationship.
(n)
The
undersigned is not with respect to the undersigned’s subscription a person or
entity (a “
Person
”) with whom a United States citizen, entity organized
under the laws of the United States or its territories or entity having its
principal place of business within the United States or any of its territories
(collectively, a “
U.S. Person
”), is prohibited from transacting business
of the type contemplated by this Agreement, whether such prohibition arises
under United States law, regulation or executive orders and lists published
by
the
Office of Foreign Assets Control, Department of the Treasury (“
OFAC
”)
(including those executive orders and lists published by OFAC with respect
to
Persons that have been designated by executive order or by the sanction
regulations of OFAC as Persons with whom U.S. Persons may not transact business
or must limit their interactions to types approved by OFAC “
Specially
Designated Nationals and Blocked Persons
”). Neither the
undersigned nor any Person who owns an interest in the undersigned
(collectively, a “
Purchaser Party
”) is a Person with whom a U.S. Person,
including a United States Financial Institution as defined in 31 U.S.C. Section
5312, as amended (“
Financial Institution
”), is prohibited from
transacting business of the type contemplated by this Agreement, whether such
prohibition arises under United States law, regulation or executive orders
and
lists published by the OFAC (including those executive orders and lists
published by OFAC with respect to Specially Designated Nationals and Blocked
Persons).
(o)
To
the
actual knowledge of the undersigned, the funds used to pay to the Company the
purchase price for the Subject Securities were derived: (i) from transactions
that do not violate United States law or, to the extent such funds originate
outside the United States, do not violate the laws of the jurisdiction in which
they originated; and (ii) from permissible sources under United States law
and
to the extent such funds originate outside the United States, under the laws
of
the jurisdiction in which they originated.
(p)
To
the
actual knowledge of the undersigned, neither the undersigned nor any Purchaser
Party, nor any Person providing funds to the undersigned: (i) is under
investigation by any governmental authority for, or has been charged with,
or
convicted of, money laundering, drug trafficking, terrorist related activities,
any crimes which in the United States would be predicate crimes to money
laundering, or any violation of any Anti-Money Laundering Laws (as hereinafter
defined in this
Section 4(p)
); (ii) has been assessed civil or criminal
penalties under any Anti-Money Laundering Laws; or (iii) has had any of its
funds seized or forfeited in any action under any Anti-Money Laundering
Laws. For purposes of this
Section 4(p)
, the term
“
Anti-Money Laundering Laws
” shall mean laws, regulations and sanctions,
state and federal, criminal and civil, that: (i) limit the use of
and/or seek the forfeiture of proceeds from illegal transactions; (ii) limit
commercial transactions with designated countries or individuals believed to
be
terrorists, narcotics dealers or otherwise engaged in activities contrary to
the
interests of the United States; (iii) require identification and documentation
of the parties with whom a Financial Institution conducts business; or (iv)
are
designed to disrupt the flow of funds to terrorist
organizations. Such laws, regulations and sanctions shall be deemed
to include the USA PATRIOT Act of 2001, Pub. L. No. 107-56 (the “
Patriot
Act
”), the Bank Secrecy Act, 31 U.S.C. Section 5311 et. seq. (the “
Bank
Secrecy Act
”), the Trading with the Enemy Act, 50 U.S.C. Appendix, the
International Emergency Economic Powers Act, 50 U.S.C. Section 1701 et. seq.,
and the sanction regulations promulgated pursuant thereto by the OFAC, as well
as laws relating to prevention and detection of money laundering in 18 U.S.C.
Sections 1956 and 1957.
(q)
The
undersigned is in compliance in all material respects with any and all
applicable provisions of the Patriot Act, including, without limitation,
amendments to the Bank Secrecy Act. If the undersigned is a Financial
Institution, it has established and is in compliance in all material respects
with all procedures, if any, required by the Patriot Act and the Bank Secrecy
Act.
(r)
The
undersigned represents and warrants that, since July 15, 2007, the undersigned
has not engaged in any short sale of any equity security of the
Company.
5.
Covenants
of the Company
.
(a)
Except
for the 2007 Notes, without the prior written consent of the Secured Party
(as
defined in Section 8 herein), the Company shall not create, issue, incur (by
conversion, exchange or otherwise), assume, guarantee or otherwise become or
remain directly or indirectly liable for any Indebtedness while the 2007 Notes
are outstanding. In addition, so long as the 2007 Notes are
outstanding, without the prior written consent of the 2007 Notes Majority
Holders (as defined in section 7(b) hereof) the Company shall not and shall
not
permit the Subsidiary to:
(i)
sell,
assign (by operation of law or otherwise), lease, license, exchange or otherwise
transfer or dispose of any Collateral (as defined in the Form of Note) other
than the sale of inventory in the ordinary course of business and the sale
or
other disposition of worn out or obsolete assets not necessary for the conduct
of its business;
(ii)
grant
any
Lien upon or with respect to any Collateral (as defined in the Form of Note)
or
create or suffer to exist any Lien upon or with respect to any Collateral (as
defined in the Form of Note) other than a Permitted Lien;
(iii)
declare,
set aside, or pay any dividends on, make any other distributions in respect
of,
redeem or otherwise repurchase any of its capital stock or other securities,
other than dividends and distributions by the Subsidiary to the Company, or
redeem or repurchase any of its capital stock or other securities;
(iv)
split,
combine or reclassify any of its capital stock;
(v)
a
dopt
or
amend any employee benefit plan;
(vi)
e
xcept
with respect to the compensation of Norman J. Barta, grant, award or enter
into
any compensation (including stock options or other awards under existing benefit
plans) or change of control arrangement with any employee or director of the
Company or the Subsidiary or amend the terms of employment or compensation
of
any employee or director of the Company or the Subsidiary; or
(vii)
increase
the size of the Board of Directors of the Company or the Subsidiary or, except
with respect to the New Directors, appoint any new members to the Board of
Directors of the Company or the Subsidiary.
(b)
No
later
than fifteen (15) business days after the First Closing, the Company will file
a
preliminary Schedule 14C information statement (the “
Preliminary Schedule
14C
”) with the Commission. The Company agrees to respond to the
initial and any subsequent Commission comments relating to the Preliminary
Schedule 14C as soon as practicable after receipt of such comments and to use
commercially reasonable efforts to address all of such Commission
comments. The Company agrees to file a definitive Schedule 14C
information
statement
with the Commission no later than the second business day after receiving
confirmation that the Commission has no further comments on the Preliminary
Schedule 14C.
(c)
As
long
as any Purchaser owns Subject Securities and the Company is required to file
reports pursuant to the Exchange Act, the Company covenants to use commercially
reasonable best efforts to timely file (or obtain extensions in respect thereof
and file within the applicable grace period) all reports required to be filed
by
the Company after the date hereof pursuant to the Exchange Act. As
long as any Purchaser owns Subject Securities, if the Company is not required
to
file reports pursuant to the Exchange Act, it will prepare and furnish to the
Purchasers and make publicly available in accordance with Rule 144(c) such
information as is required for the Purchasers to sell the Subject Securities
under Rule 144. The Company further covenants that it will take such further
action as any holder of Subject Securities may reasonably request, to the extent
required from time to time to enable such holder to sell such Subject Securities
without registration under the Securities Act within the requirements of the
exemption provided by Rule 144.
(d)
The
Company shall not sell, offer for sale or solicit offers to buy or otherwise
negotiate in respect of any security (as defined in Section 2 of the
Securities Act) that would be integrated with the offer or sale of the Subject
Securities in a manner that would require the registration under the Securities
Act of the sale of the Securities to the Purchasers or that would be integrated
with the offer or sale of the Securities for purposes of the rules and
regulations of the American Stock Exchange.
(e)
Other
than in the case of a Form 8-K and any exhibits thereto, including any press
releases included therein, required to be filed with the Commission by the
Company, neither the Company nor the undersigned shall issue any press release
or otherwise make any public statement concerning the transactions contemplated
by the Transaction Documents and Exchange Agreement without the prior consent
of
the Company, with respect to any press release of the undersigned, or without
the prior consent of the undersigned, with respect to any press release of
the
Company or otherwise authorized by the Company, which consent shall not
unreasonably be withheld or delayed, except if such disclosure is required
by
law, in which case the disclosing party shall promptly provide the other party
with prior notice of such public statement or communication.
(f)
No
claim
will be made or enforced by the Company or, with the consent of the Company,
any
other person or entity, that any Purchaser is an “acquiring person” or
“interested stockholder” under any control share acquisition, business
combination, shareholder rights plan (including any distribution under a rights
agreement) or similar anti-takeover plan or arrangement in effect or hereafter
adopted by or applicable to the Company (including without limitation
Section 203 of the Delaware General Corporation Law), or that any Purchaser
could be deemed to trigger the provisions of any such plan or arrangement,
by
virtue of receiving Subject Securities under the Transaction Documents or under
any other agreement between the Company and the Purchasers.
(g)
Except
as
set forth on
Schedule 5(g)
, the Company shall use the net proceeds from
the sale of the Subject Securities for working capital purposes and shall
not
use
such
proceeds for the payment of any dividends or distributions or the redemption
or
repurchase of any Common Stock or other securities of the Company.
(h)
Promptly
after the Stockholder Consents become effective, the Company shall file the
Certificate of Amendment with the Secretary of State of the State of
Delaware. Thereafter, the Company shall maintain a reserve from its
duly authorized shares of Common Stock, free of all preemptive or preferential
rights, for issuance pursuant to the Transaction Documents in such amount as
may
be required to fulfill its obligations in full under the Transaction
Documents. Promptly following the conversion of the Notes, the
Company shall: (i) in the time and manner required by the American Stock
Exchange (or any subsequent trading market which is the principal trading market
on which the Common Stock is listed or quoted, as applicable, the “
Trading
Market
”), prepare and file with the Trading Market an additional shares
listing application covering a number of shares of Common Stock equal to the
number of shares of Common Stock issued upon the Conversion of the Notes and
issuable upon the exercise of the Warrants, (ii) take all steps necessary
to cause such shares of Common Stock to be approved for listing on such Trading
Market as soon as possible thereafter, (iii) provide to the Purchasers
evidence of such listing, and (iv) maintain the listing of such Common
Stock on such Trading Market or another Trading Market.
(i)
From
the
date hereof until 90 days after the date on which a registration statement
is
declared effective pursuant to the Registration Rights Agreement (the
“
Effective Date
”), neither the Company nor the Subsidiary shall issue
shares of Common Stock, any other capital stock or equity securities of the
Company or the Subsidiary, or any securities convertible into or exercisable
for
Common Stock, capital stock or equity securities of the Company or the
Subsidiary (collectively, “
Equity Securities
”);
provided
,
however
, the 90 day period set forth in this Section 5(i) shall be
extended for the number of days during such period in which (i) trading in
the Common Stock is suspended by the Trading Market, or (ii) following the
Effective Date, the Registration Statement is not effective or the prospectus
included in the Registration Statement may not be used by the Purchasers for
the
resale of Common Stock. This Section 5(i) shall not apply to any
“Exempt Issuance” as such term is defined in the Warrant.
(j)
From
the
Effective Date until the Cessation Date (as defined below), the Company will
not, directly or indirectly, effect any sale, issuance or exchange of any Equity
Securities (a “
Subsequent Placement
”) unless the Company shall have first
complied with this Section 5(j).
(i)
The
Company shall deliver to each
Purchaser and holder of New Notes (collectively, the “
2007 Holders
”) a
written notice (the “
Offer
”) of any proposed or intended sale, issuance
or exchange of the securities being offered (the “
Offered Securities
”) in
a Subsequent Placement, which Offer shall (w) identify and describe the Offered
Securities, (x) describe the price and other terms upon which they are to be
sold, issued or exchanged, and the number or amount of the Offered Securities
to
be sold, issued or exchanged, (y) identify the persons or entities to which
or
with which the Offered Securities are to be offered, sold, issued or exchanged,
and (z) offer to sell and issue to or exchange with each 2007 Holder (A) a
pro
rata portion of the Offered Securities based on such 2007 Holder’s pro rata
portion of the aggregate principal amount of the 2007 Notes purchased or
received by such 2007 Holder (the “
Basic Amount
”), and (B) with respect
to each 2007 Holder that elects to purchase its Basic Amount,
any
additional portion of the Offered Securities attributable to the Basic Amounts
of other 2007 Holders as such 2007 Holder shall indicate it will purchase or
acquire should the other 2007 Holders subscribe for less than their Basic
Amounts (the “
Undersubscription Amount
”).
(ii)
To
accept an Offer, in whole or in
part, a 2007 Holder must deliver a written notice to the Company prior to the
end of the 10 trading day period following receipt of the Offer, setting forth
the portion of the 2007 Holder’s Basic Amount that such 2007 Holder elects to
purchase and, if such 2007 Holder shall elect to purchase all of its Basic
Amount, the Undersubscription Amount, if any, that such 2007 Holder elects
to
purchase (in either case, the “
Notice of Acceptance
”). If the Basic
Amounts subscribed for by all 2007 Holders are less than the total of all of
the
Basic Amounts, then each 2007 Holder who has set forth an Undersubscription
Amount in its Notice of Acceptance shall be entitled to purchase, in addition
to
the Basic Amounts subscribed for, the Undersubscription Amount it has subscribed
for; provided, however, that if the Undersubscription Amounts subscribed for
exceed the difference between the total of all the Basic Amounts and the Basic
Amounts subscribed for (the “
Available Undersubscription Amount
”), each
2007 Holder who has subscribed for any Undersubscription Amount shall be
entitled to purchase only that portion of the Available Undersubscription Amount
as the Basic Amount of such 2007 Holder bears to the total Basic Amounts of
all
2007 Holders that have subscribed for Undersubscription Amounts.
(iii)
The
Company shall have 10 trading days
from the expiration of the period set forth in Section 5(j)(ii) above to sell,
issue or exchange all or any part of such Offered Securities as to which a
Notice of Acceptance has not been given by the 2007 Holders (the “
Refused
Securities
”), but only to the offerees described in the Offer and only upon
terms and conditions (including, without limitation, unit prices and interest
rates), taken as a whole, that are not more favorable to the acquiring persons
or entities or less favorable to the Company than those set forth in the
Offer.
(iv)
In
the event the Company shall propose
to sell less than all the Refused Securities (any such sale to be in the manner
and on the terms specified in Section 5(j)(iii) above), then each 2007 Holder
may, at its sole option and in its sole discretion, reduce the number or amount
of the Offered Securities specified in its Notice of Acceptance to an amount
that shall be not less than the number or amount of the Offered Securities
that
the 2007 Holder elected to purchase pursuant to Section 5(j)(ii) above
multiplied by a fraction, (i) the numerator of which shall be the number or
amount of Offered Securities the Company actually proposes to issue, sell or
exchange (including Offered Securities to be issued or sold to 2007 Holders
pursuant to Section 5(j)(ii) above prior to such reduction) and (ii) the
denominator of which shall be the original amount of the Offered
Securities. In the event that any 2007 Holder so elects to reduce the
number or amount of Offered Securities specified in its Notice of Acceptance,
the Company may not issue, sell or exchange more than the reduced number or
amount of the Offered Securities unless and until such securities have again
been offered to the 2007 Holders in accordance with Section 5(j)(i)
above.
(v)
Upon
the closing of the sale, issuance
or exchange of all or less than all of the Refused Securities, the 2007 Holders
shall acquire from the Company, and the Company shall issue to the 2007 Holders,
the number or amount of Offered Securities specified in the Notices of
Acceptance, as reduced pursuant to Section 5(j)(iv) above if the 2007
Holders
have
so
elected, upon the terms and conditions specified in the Offer. The
purchase by the 2007 Holders of any Offered Securities is subject in all cases
to the preparation, execution and delivery by the Company and the 2007 Holders
of a purchase agreement relating to such Offered Securities reasonably
satisfactory in form and substance to the 2007 Holders, the Company and their
respective counsel. Notwithstanding anything to the contrary
contained in this Agreement, if the Company does not consummate the closing
of
the sale, issuance or exchange of all or less than all of the Refused Securities
within 7 trading days after the expiration of the period set forth in Section
5(j)(ii), the Company shall issue to the 2007 Holders the number or amount
of
Offered Securities specified in the Notices of Acceptance, as reduced pursuant
to Section 5(j)(iv) above if the 2007 Holders have so elected (which, in this
case may be reduced to zero), upon the terms and conditions specified in the
Offer.
(vi)
The
Company and the 2007 Holders agree
that if any 2007 Holder elects to participate in the Offer, any registration
rights set forth in the agreement regarding the Subsequent Placement with
respect to such Offer or any other transaction documents related thereto
(collectively, the “
Subsequent Placement Documents
”) shall not entitle
the purchasers of any Offered Securities issued in such Subsequent Placement
to
participate in any registration statement filed under the Registration Rights
Agreement and shall not obligate the Company to file a registration statement
with respect to such Offered Securities unless one or more registration
statements covering all shares of Common Stock issued or issuable upon the
conversion of the 2007 Notes or the exercise of the Warrants are then
effective. The Subsequent Placement Documents shall not include any
term or provision whereby any 2007 Holder shall be required to agree to any
restrictions in trading as to any securities of the Company owned by such 2007
Holder prior to such Subsequent Placement if the 2007 Holders purchase all
of
the Offered Securities, and, in all other cases, such restrictions shall apply
only to 2007 Holders who participate in the Subsequent Placement and the period
of such restrictions shall not exceed ninety (90) days after the closing of
the
Subsequent Placement.
(vii)
Notwithstanding
anything to the
contrary in this Section 5(j) and unless otherwise agreed to by the 2007 Notes
Majority Holders (as defined in section 7(b) hereof), the Company shall either
confirm in writing to the 2007 Holders that the transaction with respect to
the
Subsequent Placement has been abandoned or shall publicly disclose its intention
to issue the Offered Securities, in either case in such a manner such that
the
2007 Holders will not be in possession of material non-public information as
a
result of having information concerning the proposed Subsequent Placement,
by
the seventeenth (17th) trading day following delivery of the Offer. If by the
seventeenth (17th) trading day following delivery of the Offer no public
disclosure regarding a transaction with respect to the Offered Securities has
been made, and no notice regarding the abandonment of such transaction has
been
received by the 2007 Holders, such transaction shall be deemed to have been
abandoned and the 2007 Holders shall not be deemed to be in possession of any
material, non-public information with respect to the Company as a result of
having information concerning the proposed Subsequent Placement. Should the
Company decide to pursue such transaction with respect to the Offered
Securities, the Company shall provide each 2007 Holder with another Offer Notice
and each 2007 Holder will again have the right of participation set forth in
this Section 5(j). The Company shall not be permitted to deliver more than
one
such Offer to the 2007 Holders in any 60 day period.
(viii)
Any
Offered Securities not acquired by the 2007 Holders or the offerees in
accordance with Section 5(j)(iii) above may not be issued, sold or exchanged
until they are again offered to the 2007 Holders under the procedures specified
in this Agreement.
(ix)
Th
is
Section 5(j) shall not apply to any “Exempt Issuance” as such term is defined in
the Form of Warrant.
(x)
For
purposes of this Agreement, the term “
Cessation Date
” shall mean the
first day on which the Purchasers (including transferees treated as Purchasers
pursuant to Section 11(c)) no longer hold: (x) prior to the conversion of the
Notes, Notes representing at least 25% of the aggregate principal amount of
all
Notes issued in the Offering, and (y) after the conversion of the Notes, (A)
if
the Per Share Exercise Price (as such term is defined in the Warrants) is
greater than the closing price of the Common Stock last reported by the Trading
Market prior to such day, shares of Common Stock representing at least 25%
of
the aggregate shares of Common Stock issued upon the conversion of the Notes
or
previously issued upon the exercise of any Warrants, or (B) if the Per Share
Exercise Price is less than the closing price of the Common Stock last reported
by the Trading Market prior to such day, shares of Common Stock representing
at
least 25% of the aggregate shares of Common Stock issued upon the conversion
of
the Notes, previously issued upon the exercise of any Warrants, or issuable
upon
the future exercise of any Warrants (treating the Purchasers as holding any
shares of Common Stock that would be issuable upon the exercise of any Warrants
then held by Purchasers).
(k)
The
Company acknowledges and agrees that the undersigned may from time to time
pledge pursuant to a bona fide margin agreement with a registered broker-dealer
or grant a security interest in some or all of the Subject Securities to a
financial institution that is an “accredited investor” as defined in Rule 501(a)
under the Securities Act and who agrees to be bound by the provisions of this
Agreement and the Registration Rights Agreement and, if required under the
terms
of such arrangement, the undersigned may transfer pledged or secured Subject
Securities to the pledgees or secured parties. Such a pledge or transfer would
not be subject to approval of the Company and no legal opinion of legal counsel
of the pledgee, secured party or pledgor shall be required in connection
therewith. Further, no notice shall be required of such
pledge. At the undersigned’s expense, the Company will execute and
deliver such reasonable documentation as a pledgee or secured party of Subject
Securities may reasonably request in connection with a pledge or transfer of
the
Subject Securities, including, if the Subject Securities are subject to
registration pursuant to the Registration Rights Agreement, the preparation
and
filing of any required prospectus supplement under Rule 424(b)(3) under the
Securities Act or other applicable provision of the Securities Act to
appropriately amend the list of selling stockholders thereunder.
(l)
Upon
the
terms and subject to the conditions hereof, the Company shall use its
commercially reasonable best efforts to take, or cause to be taken, all
appropriate actions and do, or cause to be done, all things necessary, proper
or
advisable to consummate and make effective as promptly as practicable the
transactions contemplated by this Agreement (including, without limitation,
to
cause the conditions in clauses (i), (ii), (iv), (v), (vi), (vii) and (viii)
of
Section 2(e) to be satisfied) and to cooperate with the undersigned in
connection with the foregoing.
(m)
From
the
date hereof until such time as no Purchaser holds any of the Subject Securities,
the Company will, at its own expense, maintain insurance (including, without
limitation, commercial general liability and property insurance, and directors
and officers liability insurance, including such directors and officers
liability insurance in respect of acts or omissions occurring prior to the
First
Closing covering each such person serving as an officer or director of the
Company immediately prior to the First Closing to the extent that such coverage
is in place as of the First Closing) in such amounts, against such risks, in
such form and with responsible and reputable insurance companies or associations
as is required by any governmental authority having jurisdiction with respect
thereto or as is carried generally in accordance with sound business practice
by
companies in similar businesses similarly situated and in any event, in amount,
adequacy, scope and with comparable insurance companies as the insurance in
place as of the date of this Agreement; provided, if the First Closing shall
not
have occurred prior to September 21, 2007 the directors and officers liability
coverage may be reduced to $7,000,000.
(n)
Except
with respect to the material terms and conditions of the transactions
contemplated by the Transaction Documents and the Exchange Agreement, the
Company covenants and agrees that neither it nor any other person or entity
acting on its behalf will, following the Closing, provide any Purchaser or
its
agents or counsel with any information that the Company believes constitutes
material non-public information, unless prior thereto such Purchaser shall
have
executed a written agreement (which may be in the form of an e-mail or other
electronic confirmation) regarding the confidentiality and use of such
information. The Company understands and confirms that each Purchaser
shall be relying on the foregoing representations in effecting transactions
in
securities of the Company. This Section 5(n) shall not apply to any
information provided, or limit the ability of the Company to provide any
information, to any Purchaser to whom knowledge of a member of the Board of
Directors of the Company is attributable.
(o)
From
the
date hereof until such time as no Purchaser holds any of the Subject Securities,
the Company shall not effect or enter into an agreement to effect any financing
involving a Variable Rate Transaction. “
Variable Rate
Transaction
” means a transaction in which the Company issues or sells
(i) any Equity Securities that are convertible into, exchangeable or
exercisable for, or include the right to receive additional shares of Common
Stock either (A) at a conversion, exercise or exchange rate or other price
that is based upon and/or varies with the trading prices of or quotations for
the shares of Common Stock at any time after the initial issuance of such Equity
Security, or (B) with a conversion, exercise or exchange price that is
subject to being reset at some future date after the initial issuance of such
Equity Security or upon the occurrence of specified or contingent events
directly or indirectly related to the business of the Company or the market
for
the Common Stock or (ii) enters into any agreement, including, but not
limited to, an equity line of credit, whereby the Company may sell securities
at
a future determined price.
(p)
Notwithstanding
Section 6(b), the Company agrees to issue or reissue certificates of Common
Stock without a legend if at such time, prior to making any transfer of any
Common Stock, the undersigned shall give written notice to the Company making
such request and: (i) a registration statement covering the resale of
such Common Stock is effective under the Securities Act, or (ii) the
undersigned provides the Company or its counsel
with
reasonable assurances that such security can be sold pursuant to Rule 144
promulgated under the Securities Act or any successor or replacement rule (as
applicable, “
Rule 144
”) (which may include an opinion of counsel provided
by the Company), or (iii) the undersigned provides the Company or its
counsel with reasonable assurances that such security can be sold pursuant
to
section (k) of Rule 144 (or a corresponding successor or replacement section,
as
applicable, “
Rule 144(k)
”), or (iv) the Company has received other
evidence reasonably satisfactory to the Company that such legend is not required
under applicable requirements of the Securities Act and state securities laws
(including judicial interpretations and pronouncements issued by the staff
of
the Commission). The Company shall cause its counsel to issue a legal
opinion to its transfer agent, after the undersigned has provided the Company’s
counsel with all necessary documentation required by such counsel to issue
such
an opinion, if such legal opinion is required by the transfer agent to effect
the removal of the legend hereunder. If all or any portion of a Note
or Warrant is converted or exercised (as applicable) at a time when there is
an
effective registration statement to cover the resale of the Common Stock issued
upon such conversion or exercise, or if such shares of Common Stock may be
sold
under Rule 144(k) or if such legend is not otherwise required under applicable
requirements of the Securities Act (including judicial interpretations and
pronouncements issued by the staff of the Commission) then certificates
representing such shares of Common Stock shall be issued free of all
legends. The Company agrees that at such time as such legend is no
longer required under this Section 5(p) and the undersigned has complied
with this Section 5(p), it will, no later than three trading days following
the
delivery by the undersigned to the Company or the transfer agent of a
certificate representing shares of Common Stock issued with a restrictive
legend, deliver or cause to be delivered to the undersigned a certificate
representing such shares that is free from all restrictive and other legends.
The Company may not make any notation on its records or give instructions to
the
transfer agent that enlarge the restrictions on transfer set forth in this
Section 5(p). Certificates for shares of Common Stock subject to
legend removal hereunder shall, at the direction of the undersigned, be
transmitted by the transfer agent of the Company to the undersigned by crediting
the account of the undersigned’s prime broker with the Depository Trust Company
System.
(q)
At
all
times until the Investor Rights Agreement has terminated in accordance with
its
terms (the “
Designation Period
”), the Company will cause two individuals
designated by Lambda (the individuals whom Lambda has so designated from time
to
time are referred to herein as the “
Lambda Designees
”) to be members of
the Board of Directors of the Company except to the extent that (i) Lambda
otherwise consents in writing, or (ii) a member of the Board of Directors
originally designated by Lambda resigns and Lambda has not yet designated a
successor. Without limiting the generality of the foregoing, during
the Designation Period the Company will cause the Lambda Designees to be elected
or nominated to the Board of Directors, to promptly remove any Lambda Designee
from the Board of Directors upon the written direction of Lambda, and to
promptly elect or appoint any successor designated by Lambda having reasonably
appropriate business experience and background to fill any vacancy caused by
any
Lambda Designee ceasing to be a member of the Board of Directors for any
reason.
(r)
Prior
to
the Automatic Conversion Date (as defined in the Form of Note), the Company
will
not enter into any agreement for additional financing through equity or
equity-linked securities on terms that are materially different or more
beneficial to the purchasers
of
such
equity or equity-linked securities than those contained in this Agreement and
all exhibits hereto without the prior consent of the 2007 Notes Majority Holders
(as defined in section 7(b) hereof).
6.
Covenants
of the Undersigned
.
(a)
The
undersigned agrees that no sale, assignment or transfer of any of the Subject
Securities acquired by the undersigned shall be valid or effective, and the
Company shall not be required to give any effect to such a sale, assignment
or
transfer, unless (i) the sale, assignment or transfer of such Subject Securities
is registered under the Securities Act, it being understood that the Subject
Securities are not currently registered for sale and that the Company has no
obligation or intention to so register the Subject Securities, except as
provided by the Registration Rights Agreement; (ii) the Subject Securities
are
sold, assigned or transferred in accordance with all the requirements and
limitations of an exemption from registration under the Securities
Act. Without limiting the generality of the foregoing, the
undersigned agrees that following the removal of the restrictive legend from
certificates representing Common Stock, the undersigned will sell any such
Common Stock pursuant to either the registration requirements of the Securities
Act, including any applicable prospectus delivery requirements, or an exemption
therefrom, and that if shares of Common Stock are sold pursuant to a
Registration Statement, they will be sold in compliance with the plan of
distribution set forth therein.
(b)
The
undersigned agrees to the imprinting, so long as is required by
Section 6(a), of a legend on any of the Securities in the following or a
substantially similar form and such other legends as may be required by state
blue sky laws:
“THE
SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES
SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY STATE
SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF A
REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO SUCH SECURITIES UNDER THE
SECURITIES ACT OR AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS
OF
THE SECURITIES ACT. ANY SUCH TRANSFER MAY ALSO BE SUBJECT TO
COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS.”
(c)
The
undersigned hereby agrees that from the date hereof and continuing until the
Cessation Date, the undersigned shall not, without the prior written consent
of
the Company, directly or indirectly, through related parties, affiliates or
otherwise, (i) sell “short” or “short against the box” (as those terms are
generally understood) any equity security of the Company or (ii) otherwise
engage in any transaction which involves hedging of the undersigned’s position
in any equity security of the Company, provided, however, that it shall not
be a
violation of this Section 6(c), if the undersigned places a sell order for
shares of Common Stock underlying the Notes or Warrants at or following the
time
of conversion or exercise of such Notes or Warrants and all conditions to
exercise of such Warrants have been satisfied, relies on the Company to deliver
such Common Stock in accordance with the Form of
Note
or
Warrants as the case may be, and completes the sale of such Common Stock before
the Company delivers the Common Stock to the undersigned.
(d)
Upon
the
terms and subject to the conditions hereof, the undersigned shall use its
commercially reasonable best efforts to take, or cause to be taken, all
appropriate actions and do, or cause to be done, all things necessary, proper
or
advisable to consummate and make effective as promptly as practicable the
transactions contemplated by this Agreement (including, without limitation,
to
cause the conditions in clauses (i) and (ii) of Section 2(d) to be satisfied
and
to execute and deliver at the First Closing the Registration Rights Agreement
and Investor Rights Agreement) and to cooperate with the Company in connection
with the foregoing.
(e)
After
the
Closing, upon the request of the Company the undersigned shall provide to the
Company such additional information and documentation concerning the
undersigned’s legal or beneficial ownership, policies, procedures and sources of
funds as is reasonably necessary to enable the Company to comply with Anti-Money
Laundering Laws now in existence or hereafter enacted or amended.
7.
Indemnification
.
(a)
General
. The
Company shall indemnify and hold harmless the undersigned and each officer,
director, partner, employee, agent and controlling person of the undersigned
(within the meaning of Section 15 of the Securities Act and Section 20
of the Exchange Act), past, present or future (each, an “
Indemnified
Party
”), from and against any and all claims, losses, damages, liabilities,
judgments, fines, penalties, charges, costs, and expense, including reasonable
attorneys fees and disbursements including those incurred in enforcing this
Section 7(a) (collectively, “
Losses
”), due to or arising out of (i) a
breach of any representation, warranty, covenant or agreement by the Company
in
this Agreement or any other Transaction Document, or (ii) a claim against the
undersigned by a third party based on the transactions contemplated by the
Transaction Documents (other than a claim based on a breach by the undersigned
of any representation, warranty or covenant of the undersigned in the
Transaction Documents to which it is a party). No knowledge by the
undersigned of any breach or inaccuracy of any representation, warranty,
covenant or agreement by the Company in this Agreement shall impair, limit,
release or otherwise impair any rights of the undersigned pursuant to this
Section 7.
(b)
Limitation
on Indemnification
. The maximum amount payable by the Company to
all Indemnified Parties in respect of claims made for indemnification under
clause (i) of Section 7(a) shall not exceed, in the aggregate, the Subscription
Amount plus the Indemnified Parties’ reasonable out-of-pocket expenses incurred
in connection with (i) the Transaction Documents and the transactions
contemplated thereby, (ii) enforcing its rights under Section 7(a) and (iii)
defending itself against any claim related to the Transaction Documents or
the
transactions contemplated thereby. No Indemnified Party shall be
entitled to bring a claim with respect to Losses due to or arising out of a
breach by the Company of any representation or warranty contained in Sections
3(e) through (ii) (including a claim permitted by clause (i) or (ii) of Section
7(c)) unless such claim is brought by, or the bringing of such claim is
consented to in writing by, the 2007 Notes Majority Holders. For
purposes of this Section 7(b), the “
2007 Notes
Majority
Holders
” shall be (x) prior to the conversion of the 2007 Notes, holders of
2007 Notes having a principal amount greater than fifty percent (50%) of the
principal amount of all 2007 Notes then outstanding, and (y) after the
conversion of the 2007 Notes, the holders of a majority of the shares of Common
Stock that were issued upon the conversion of the 2007 Notes or were issued
or
are issuable upon the exercise of the Warrants (excluding from such analysis
any
shares of Common Stock that have been sold pursuant to an effective registration
statement or Rule 144 and the holders thereof). Once a claim has been
brought or approved by the 2007 Notes Majority Holders, each Indemnified Party
may continue to prosecute such claim even if the persons or entities bringing
or
approving such claim subsequently cease to constitute the 2007 Notes Majority
Holders.
(c)
Sole
Remedy
. The parties hereto agree and acknowledge that the
indemnification rights provided in this
Section 7
shall be the exclusive
remedy of the parties hereto for breaches of the representations and warranties
contained in this Agreement except with respect to (i) claims involving fraud
or
a knowing breach of the representations and warranties or (ii) any equitable
relief to which any party may be entitled, including without limitation,
rescission.
(d)
Notice
. With
respect to any Loss related to a claim by a third party, an Indemnified Party
shall give written notice thereof to the Company (in such capacity, the
“
Indemnifying Party
”) promptly after receipt of any written claim by such
third party and in any event not later than twenty (20) business days after
receipt of any such written claim (or not later than ten (10) business days
after the receipt of any such written claim in the event such written claim
is
in the form of a formal complaint filed with a court of competent jurisdiction
and served on the Indemnified Party), specifying in reasonable detail the
amount, nature and source of the claim, and including therewith copies of any
notices or other documents received from third parties with respect to such
claim;
provided
,
however
, that failure to give such notice
shall not limit the right of an Indemnified Party to recover indemnity or
reimbursement except to the extent that the Indemnifying Party suffers any
prejudice or harm with respect to such claim as a result of such
failure. The Indemnified Party shall also provide the Indemnifying
Party with such further information concerning any such claims as the
Indemnifying Party may reasonably request by written notice.
(e)
Payment
of Losses
. Within thirty (30) calendar days after receiving
notice of a claim for indemnification or reimbursement, the Indemnifying Party
shall, by written notice to the Indemnified Party, either (i) concede or deny
liability for the claim in whole or in part, or (ii) in the case of a claim
asserted by a third party, advise that the matters set forth in the notice
are,
or will be, subject to contest or legal proceedings not yet finally
resolved. If the Indemnifying Party concedes liability in whole or in
part, it shall, within twenty (20) business days of such concession, pay the
amount of the claim to the Indemnified Party to the extent of the liability
conceded. Any such payment shall be made in immediately available
funds equal to the amount of such claim so payable. If the
Indemnifying Party denies liability in whole or in part or advises that the
matters set forth in the notice are, or will be, subject to contest or legal
proceedings not yet finally resolved, then the Indemnifying Party shall make
no
payment (except for the amount of any conceded liability payable as set forth
above) until the matter is resolved in accordance with this
Agreement.
(f)
Defense
of Claims
. In the case of any third party claim, if within 20
days after receiving the notice described in the preceding Section 7(d), the
Indemnifying Party (i) gives written notice to the Indemnified Party stating
that the Indemnifying Party would be liable under the provisions hereof for
indemnity in the amount of such claim if such claim were valid and that the
Indemnifying Party disputes and intends to defend against such claim, liability
or expense at the Indemnifying Party’s own cost and expense, and (ii) provides
assurance reasonably acceptable to such Indemnified Party that such
indemnification will be paid fully and promptly if required and such Indemnified
Party will not incur cost or expense during the proceeding, then the
Indemnifying Party shall be entitled to assume the defense of such claim and
to
choose counsel for the defense (subject to the consent of such Indemnified
Party
which consent shall not be unreasonably withheld) and such Indemnified Party
shall not be required to make any payment with respect to such claim, liability
or expense as long as the Indemnifying Party is conducting a good faith and
diligent defense at its own expense; provided, however, that the assumption
of
the defense of any such matters by the Indemnifying Party shall relate solely
to
the claim, liability or expense that is subject or potentially subject to
indemnification. If the Indemnifying Party assumes such defense in
accordance with the preceding sentence, it shall have the right to settle
indemnifiable matters related to claims by third parties where (x) the only
obligation of the Indemnified Party and Indemnifying Party in connection with
such settlement is the payment of money damages and such money damages are
satisfied in full by the Indemnifying Party, and (ii) the settlement includes
a
complete release of the relevant Indemnified Party or Parties. Any
other settlement of a claim for which the Indemnifying Party has assumed the
defense shall require the prior written consent of the relevant Indemnified
Party or Parties, which consent shall not be unreasonably
withheld. No Indemnified Party shall settle any claim with respect to
which the Indemnifying Party has assumed the defense, without the prior written
consent of the Indemnifying Party. The Indemnifying Party shall keep
such Indemnified Party apprised of the status of the claim, liability or expense
and any resulting suit, proceeding or enforcement action, shall furnish such
Indemnified Party with all documents and information that such Indemnified
Party
shall reasonably request and shall consult with such Indemnified Party prior
to
acting on major matters, including settlement
discussions. Notwithstanding anything herein stated, such Indemnified
Party shall at all times have the right to participate in, but not control,
such
defense at its own expense directly or through counsel;
provided
,
however
, if the named parties to the action or proceeding include
both
the Indemnifying Party and the Indemnified Party and representation of both
parties by the same counsel would be inappropriate under applicable standards
of
professional conduct, the reasonable expense of separate counsel for such
Indemnified Party shall be paid by the Indemnifying Party provided that such
Indemnifying Party shall be obligated to pay for only one such
counsel. If no such notice of intent to dispute and defend is given
by the Indemnifying Party, or if such diligent good faith defense is not being
or ceases to be conducted, such Indemnified Party may undertake the defense
of
(with counsel selected by such Indemnified Party, which selection shall require
the consent of the Indemnifying Party, which consent shall not be unreasonably
withheld, and paid by the Indemnifying Party), and shall have the right to
compromise or settle, such claim, liability or expense (exercising reasonable
business judgment) with the consent of the Indemnifying Party, which consent
shall not be unreasonably withheld. Such Indemnified Party shall make
available all information and assistance that the Indemnifying Party may
reasonably request and shall cooperate with the Indemnifying Party in such
defense.
8.
Creation
of Security Interest
.
(a)
Grant
of Security Interest
. The Company hereby grants and pledges to
Lambda (the “
Secured Party
”) a continuing security interest in the
Collateral (as defined in the Form of Note) in order to secure prompt payment
of
the principal of, interest on and all other amounts due and payable under the
2007 Notes (collectively, the “
Obligations
”). Such security
interest shall automatically terminate upon the (i) earlier of the payment
of
principal and interest on the 2007 Notes; (ii) such time as the Company
designates sufficient funds (which may be proceeds from the sale of Collateral)
for the payment of the 2007 Notes and (iii) the Automatic Conversion Date (as
defined in the Form of Note) (the “
Security Interest Termination
Date
”).
(b)
Designation
of Secured Party as Agent
. The undersigned hereby irrevocably
designates the Secured Party to act as Secured Party on the undersigned’s
behalf. The undersigned hereby irrevocably authorizes, and each
holder of any Subject Securities, by such holder’s acceptance of such Subject
Securities, shall be deemed irrevocably to authorize, the Secured Party to
take
such action on its behalf under the provisions of this Agreement and any other
instruments and agreements referred to herein or therein and to exercise such
powers and to perform such duties hereunder and thereunder as are specifically
delegated to, or required of, the Secured Party by the terms hereof or thereof
and such other powers as are reasonably incidental thereto. The
undersigned, on behalf of itself and future holders of the Subject Securities
issued to the undersigned, hereby authorizes and directs the Secured Party,
from
time to time in the Secured Party’s discretion, to take any action and promptly
to execute and deliver on the undersigned’s behalf any document or instrument
that the Company may reasonably request to effect, confirm or evidence the
provisions of this Section 8, the occurrence of the Security Interest
Termination Date, any subordination agreement, or otherwise. Pursuant
to Section 9-509(d) of the Uniform Commercial Code as in effect on the date
hereof in the State of New York, the Secured Party hereby authorizes the Company
to file a termination statement upon the occurrence of the Security Interest
Termination Date; the Secured Party agrees to provide any further authorizations
of such filing if requested by the Company. In no event shall the
Secured Party have any liability or other obligation to the Company or the
undersigned whatsoever as a result of any act or omission taken or failed to
be
taken in its capacity as the Secured Party, and the Company and the undersigned
hereby irrevocably release the Secured Party from any and all such liabilities
or other obligations.
(c)
Delivery
of Additional Documentation Required
. The Company shall from time
to time execute and deliver to Secured Party, at the request of Secured Party,
all financing statements and other documents that Secured Party may reasonably
request and take any action that Secured Party may reasonably request to perfect
and continue perfected Secured Party’s security interests in the
Collateral. Without limiting the generality of the foregoing, the
Company shall, upon the Secured Party’s written request, duly execute and
deliver any (i) assignment for security with respect to Intellectual
Property in a form reasonably requested by the Secured Party, and (ii) any
account control agreement with respect to any account holding Collateral in
a
form reasonably requested by the Secured Party. Notwithstanding the
foregoing, the Company need not deliver possession or control of any Collateral
to the Secured Party or take any action to perfect the security interest granted
hereby other than the filing of financing statements under the Uniform
Commercial Code, the delivery and filing of any assignments for
security
with respect to Intellectual Property and the entry into account control
agreements with respect to accounts holding Collateral. The Secured
Party may, at any time and from time to time, file financing statements,
continuation statements and amendments thereto that describe the Collateral
as
all assets of the Company or words of similar effect.
(d)
Remedies
of Secured Party
. If any Event of Default as defined in the Notes
shall have occurred and be continuing, the Secured Party may exercise in respect
of the Collateral, in addition to any other rights and remedies provided for
herein or otherwise available to it, all of the rights and remedies of a secured
party upon default under the Uniform Commercial Code (whether or not the Uniform
Commercial Code applies to the affected Collateral), and also may (i) take
absolute control of the Collateral, including, without limitation, transfer
into
the Secured Party’s name or into the name of its nominee or nominees (to the
extent the Secured Party has not theretofore done so) and thereafter receive,
for the benefit of the holders of 2007 Notes, all payments made thereon, give
all consents, waivers and ratifications in respect thereof and otherwise act
with respect thereto as though it were the outright owner thereof,
(ii) require the Company to, and the Company hereby agrees that it will at
its expense and upon request of the Secured Party forthwith, assemble all or
part of its respective Collateral as directed by the Secured Party and make
it
available to the Secured Party at a place or places to be designated by the
Secured Party that is reasonably convenient to both parties, and the Secured
Party may enter into and occupy any premises owned or leased by the Company
where the Collateral or any part thereof is located or assembled for a
reasonable period in order to effectuate the Secured Party’s rights and remedies
hereunder or under law, without obligation to the Company in respect of such
occupation, and (iii) without notice except as specified below and without
any obligation to prepare or process the Collateral for sale, (A) sell the
Collateral or any part thereof in one or more parcels at public or private
sale,
at any of the Secured Party’s offices or elsewhere, for cash, on credit or for
future delivery, and at such price or prices and upon such other terms as the
Secured Party may deem commercially reasonable and/or (B) lease, license or
dispose of the Collateral or any part thereof upon such terms as the Secured
Party may deem commercially reasonable. The Company agrees that, to
the extent notice of sale or any other disposition of its respective Collateral
shall be required by law, at least 10 days’ notice to the Company of the
time and place of any public sale or the time after which any private sale
or
other disposition of its Collateral is to be made shall constitute reasonable
notification. The Secured Party shall not be obligated to make any
sale or other disposition of any Collateral regardless of notice of sale having
been given. The Secured Party may adjourn any public or private sale
from time to time by announcement at the time and place fixed therefor, and
such
sale may, without further notice, be made at the time and place to which it
was
so adjourned. The Company hereby waives any claims against the
Secured Party and the holders of 2007 Notes arising by reason of the fact that
the price at which the Collateral may have been sold at a private sale was
less
than the price which might have been obtained at a public sale or was less
than
the aggregate amount of the Obligations, even if the Secured Party accepts
the
first offer received and does not offer such Collateral to more than one
offeree, and waives all rights that the Company may have to require that all
or
any part of such Collateral be marshaled upon any sale (public or private)
thereof. The Company hereby acknowledges that (x) any such sale of the
Collateral by the Secured Party shall be made without warranty, (y) the
Secured Party may specifically disclaim any warranties of title, possession,
quiet enjoyment or the like, and (z) such actions set forth in clauses
(x) and (y) above shall not adversely affect the commercial reasonableness
of any such sale of Collateral. In addition to the foregoing,
(A) upon written
notice
to
the Company from the Secured Party after and during the continuance of an Event
of Default, the Company shall cease any use of the Intellectual Property for
any
purpose described in such notice; (B) the Secured Party may, at any time
and from time to time after and during the continuance of an Event of Default,
upon 10 days’ prior notice to the Company, license, whether general,
special or otherwise, and whether on an exclusive or non-exclusive basis, any
of
the Intellectual Property, throughout the universe for such term or terms,
on
such conditions, and in such manner, as the Secured Party shall in its sole
discretion determine; and (C) the Secured Party may, at any time, pursuant
to the authority granted in Section 8 hereof (such authority being
effective upon the occurrence and during the continuance of an Event of
Default), execute and deliver on behalf of the Company, one or more instruments
of assignment of the Intellectual Property (or any application or registration
thereof), in form suitable for filing, recording or registration in any
country.
(e)
Benefits
to Holders of 2007 Notes
. The rights of the Secured Party are for
the ratable benefit of the holders of the 2007 Notes (including the Secured
Party). Any proceeds or other Collateral received or recovered by the
Secured Party in its capacity as such shall, in the sole discretion of the
Secured Party, either (i) be held (or sold, liquidated or otherwise converted
into another form of proceeds or other Collateral that is held) by the Secured
Party for the ratable benefit of the holders of the 2007 Notes, as collateral
security for the Obligations (whether matured or unmatured), (ii) after and
during the continuance of an Event of Default, be retained by the Secured Party
to reimburse the Secured Party for its reasonable costs and expenses, including
attorneys fees and disbursements, incurred in serving as the Secured Party,
and/or (iii) after and during the continuance of an Event of Default, be
distributed to the holders of the 2007 Notes on a pro rata basis based on the
respective amounts then due and owing to the respective holders of the 2007
Notes. After and during the continuance of an Event of Default, the Secured
Party shall distribute any cash Collateral then held by the Secured Party in
accordance with clause (iii) of the proceeding sentence to the extent that
such
cash Collateral exceeds the costs or expenses described in clause (ii) of the
preceding sentence that have already been incurred or are reasonably expected
by
the Secured Party to be incurred unless the Secured Party has determined, upon
the advice of counsel, that it is not entitled to distribute such cash
Collateral at such time, in which case the Secured Party shall make such
distributions as soon as practicable after the Secured Party determines that
it
is entitled to distribute such cash Collateral.
9.
Confidentiality
. The
undersigned acknowledges and agrees that all information, written and oral,
concerning the Company furnished from time to time to the undersigned and
identified as confidential has been and is provided on a confidential basis
pursuant to a confidentiality agreement between the undersigned and the
Company.
10.
Expenses
. The
Company shall pay, in connection with the preparation, execution and delivery
of
this Agreement, the other Transaction Documents and the consummation of the
transactions contemplated hereby and thereby, all reasonable fees and out of
pocket expenses incurred by Lambda in connection with the Offering up to an
aggregate maximum amount of $75,000, whether or not the transactions
contemplated by the Transaction Documents are consummated.
11.
Miscellaneous
.
(a)
This
Agreement, including the exhibits hereto, sets forth the entire understanding
of
the parties with respect to the undersigned’s purchase of Notes from the
Company, supersedes all existing agreements among them concerning such subject
matter, and, subject to paragraph (h) below, may be modified, and the provisions
hereof may be waived, only by a written instrument duly executed by the party
to
be charged;
provided
,
however
, the obligations of the Company
under Sections 5(b), (e), (g), (i), (j), (m) and (o) may be amended or
waived following the First Closing by the 2007 Notes Majority Holders;
provided
,
further
, that any amendment or waiver to any of such
Sections by the 2007 Notes Majority Holders must apply to the corresponding
Sections of all of the subscription agreements entered into by the Company
in
connection with the Offering and the corresponding Sections of the Exchange
Agreement.
(b)
Except
as
otherwise specifically provided herein, any notice or other communication
required or permitted to be given hereunder shall be in writing and shall be
mailed by certified mail, return receipt requested, or by Federal Express,
Express Mail or similar guaranteed overnight delivery or courier service or
delivered in person against receipt to the party to whom it is to be
given,
(i)
if
to the
Company,
Nephros,
Inc.
3960
Broadway
New
York,
New York 10032
Attn: President
(ii)
with
a copy to,
Kramer
Levin Naftalis & Frankel LLP
1177
Avenue of the Americas
New
York,
New York 10036
Attention: Thomas
D. Balliett, Esq.
(ii)
if
to the undersigned, at the address set forth on the signature page
hereof,
or
in
either case, to such other address as the party shall have furnished in writing
in accordance with the provisions of this Section 11(b). Any notice
given by means permitted by this Section 11(b) shall be deemed given at the
time
of receipt thereof at the address specified in this Section 11(b).
(c)
This
Agreement shall be binding upon and inure to the benefit of the parties and
their successors and permitted assigns. The Company may not assign this
Agreement or any rights or obligations hereunder without the prior written
consent of the undersigned or, after the Closing, the Majority
Holders. The undersigned may assign any or all of its rights under
this Agreement to any person or entity to whom the undersigned assigns or
transfers any Subject Securities, provided that such transferee agrees in
writing to be bound, with respect to the transferred Subject Securities, by
the
provisions of the Transaction Documents that
apply
to
such Subject Securities. In the event of any assignment pursuant to
this Section 11(c), the transferee shall be treated as the “undersigned” and a
“Purchaser” to the same extent as if such transferee were the original party to
this Agreement. Notwithstanding anything in this Section 11(c) to the
contrary, in the event of any assignment pursuant to this Section 11(c), the
undersigned shall not be entitled to assign any rights under this Agreement
to a
purchaser of shares of Common Stock sold by the undersigned pursuant to an
effective registration statement or Rule 144.
(d)
The
headings in this Agreement are solely for convenience of reference and shall
be
given no effect in the construction or interpretation of this
Agreement.
(e)
This
Agreement may be executed in any number of counterparts, each of which shall
be
deemed an original, but all of which together shall constitute one and the
same
instrument.
(f)
This
Agreement shall be governed by and construed in accordance with the laws of
the
State of New York, without giving effect to principles governing conflicts
of
law that would defer to the substantive law of another
jurisdiction.
(g)
In
the
event that any provision of this Agreement shall be determined to be illegal
or
unenforceable, that provision will be limited or eliminated to the minimum
extent necessary so that this Agreement shall otherwise remain in full force
and
effect and enforceable.
(h)
This
Agreement does not create, and shall not be construed as creating, any rights
enforceable by any person not a party to this Agreement other than the Secured
Party and each Indemnified Party. The Company and the undersigned
acknowledge that the Secured Party’s consent to serve in such capacity is based
in part on the effectiveness of the provisions in Section 8 of this Agreement,
and the Company and the undersigned agree that the provisions of Section 8
of
this Agreement may be enforced by, and may not be modified or waived, without
the prior written consent of the Secured Party.
(i)
Each
party hereto consents and submits to the exclusive jurisdiction of any state
court sitting in the County of New York or federal court sitting in the Southern
District of the State of New York in connection with any dispute arising out
of
or relating to this Agreement, and agrees that all suits, actions and
proceedings brought by such party hereunder shall be brought only in such
jurisdictions. Each party hereto waives any objection to the laying
of venue in such courts and any claim that any such action has been brought
in
an inconvenient forum. To the extent permitted by law, any judgment
in respect of a dispute arising out of or relating to this Agreement may be
enforced in any other jurisdiction within or outside the United States by suit
on the judgment, a certified copy of such judgment being conclusive evidence
of
the fact and amount of such judgment. Each party hereto agrees that
personal service of process may be effected by any of the means specified in
Section 12(b), addressed to such party. The foregoing shall not limit
the rights of any party to serve process in any other manner permitted by
law.
(j)
In
the
event of any litigation or other proceeding concerning this Agreement or the
transactions contemplated hereby, including any such litigation or proceeding
with respect to the enforcement of this Agreement against any defaulting party,
the prevailing party in such litigation or proceeding shall be entitled to
reimbursement from the party opposing such prevailing party for all attorneys’
fees and costs incurred by such prevailing party in such litigation or
proceeding.
[Signature
page follows immediately]
SIGNATURE
PAGE
IN
WITNESS WHEREOF,
the parties hereto have executed this Agreement as of
the day and year this subscription has been accepted by the Company as set
forth
below.
Aggregate
principal amount of Notes subscribed from (and purchase
price):
Print
Name of
Subsicriber:
$
____________________
________________________________
_________________________________
Social
Security
Number
or
other
Taxpayer
ID
Number
By:
______________________________
(Signature of
Subscriber
or Authorized Signatory)
Name:
_____________________________
Title:
__________________________
Address:
___________________________
___________________________
Telephone
:__________________________
Fax:___________________________________
If
the
Notes
will
be
held
as
joint
tenants
,
tenants
in common
,
or
community
property,
please
complete
the following
:
_________________________________
Print
name of spouse
or other co-subscriber
_________________________________
Signature
of spouse
or other co-subscriber
_________________________________
Social
Security Number or other Taxpayer ID Number
_________________________________
Print
manner in which
shares will be held
If
the
Notes have been purchased through a broker or other intermediary, please
identify such entity:
[Please
complete Signature Page for
each
subscriber.]
ACCEPTANCE
OF SUBSCRIPTION
_____________________________
Name
of
Subscriber
ACCEPTED
BY:
NEPHROS,
INC.
By:
____________________________
Name: Norman
J. Barta
Title:
President and Chief Executive Officer
Date:
_______________________, 2007
Accepted
for $ __________________________ principal amount of
Notes
EXHIBIT
A
(Form
of
Note)
EXHIBIT
B
(Form
of
Warrant)
EXHIBIT
C
(Form
of
Registration Rights Agreement)
EXHIBIT
D
(Form
of
Exchange Agreement)
EXHIBIT
E
(Form
of
Investor Rights Agreement)
EXHIBIT
F
ACCREDITED
INVESTOR STATUS
The
subscriber represents that it is an Accredited Investor on the basis that it
is
(check all that apply):
_____(i) A
bank as defined in Section 3(a)(2) of the Act, or a 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; a broker dealer registered pursuant
to
Section 15 of the Securities Exchange Act of 1934; an insurance company as
defined in Section 2(13) of the Act; an investment company registered under
the
Investment Company Act of 1940 (the “
Investment Company Act
”) or a
business development company as defined in Section 2(a)(48) of the Investment
Company Act; 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; a plan established and maintained by a state, 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; an employee benefit plan within the meaning
of
the Employee Retirement Income Security Act of 1974 (“
ERISA
”), if the
investment decision is made by a plan fiduciary, as defined in Section 3(21)
of
ERISA, 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.
_____(ii) A
private business development company as defined in Section 202(a)(22) of the
Investment Advisers Act of 1940.
_____(iii) An
organization described in Section 501(c)(3) of the Internal Revenue Code,
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.
_____(iv) A
director or executive officer of the Company.
_____(v) A
natural person whose individual net worth, or joint net worth with that person’s
spouse, at the time of his or her purchase exceeds $1,000,000.
_____(vi) 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.
_____(vii) 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) (i.e., a person who
has
such knowledge and experience in financial and business matters that he is
capable of evaluating the merits and risks of the prospective
investment).
_____(viii) An
entity in which all of the equity owners are accredited
investors. (If this alternative is checked, the undersigned must
identify each equity owner and provide statements signed by each demonstrating
how each is qualified as an accredited investor. Further, the
undersigned represents that it has made such investigation as is reasonably
necessary in order to verify the accuracy of this alternative.)
Exhibit
10.2
EXCHANGE
AGREEMENT
This
Exchange Agreement (this “
Agreement
”) is dated as of September 19, 2007,
by and among Nephros, Inc., a Delaware corporation (the “
Company
”), and
the holders of the Company’s 6% Secured Convertible Notes due 2012 the (“
Old
Notes
”) whose signatures appear on the signature page attached hereto (the
“
Holders
”).
Recitals
:
WHEREAS,
each Holder purchased its Old Note from the Company pursuant to a Subscription
Agreement between such Holder and the Company in June 2006 (the “
2006
Subscription Agreement
”);
WHEREAS,
in connection with the purchase of the Old Notes, the Holders and the Company
entered into a Registration Rights Agreement dated as of June 1, 2006 (the
“
2006 Registration Rights Agreement
” and together with the 2006
Subscription Agreement and any other documents or agreements referred to therein
or made a part thereof, the “
2006 Transaction Documents
”);
WHEREAS,
the Holders currently hold the Old Notes in an aggregate principal amount plus
accrued interest of $5,609,892.85 issued to the Holders on the dates and in
the
amounts set forth on
Exhibit A
attached hereto;
WHEREAS,
subject to the terms and conditions set forth herein, the Company desires to
cancel the Old Notes and the Holders are willing to exchange (the
“
Exchange
”) the Old Notes, and all accrued but unpaid interest and
obligations thereon, for new Series B 10% Secured Convertible Notes due 2008
in
an aggregate principal amount of $5,300,000 (the “
New Notes
”), in
substantially the form attached hereto as
Exhibit B
, issued to the
Holders in the amounts set forth on
Exhibit C
attached
hereto. The New Notes are convertible into shares of the Company’s
common stock, par value $0.001 per share (the “
Common Stock
”), at a per
share conversion price of $0.706 per share; and
WHEREAS,
concurrently with the Exchange, the Company is engaging in an offering (the
“
Offering
”) pursuant to those several Subscription Agreements
(collectively, the “Subscription Agreement”), the form of which is attached
hereto as
Exhibit D
, of up to fifteen million dollars ($15,000,000)
aggregate principal amount (the “Maximum Amount”) of Series A 10% Secured
Convertible Notes due 2008 (the “
Purchased Notes
”, a copy of which is
attached to the Subscription Agreement as Exhibit A, and together with the
New
Notes, the “
2007 Notes
”) convertible into shares of the Company’s Common
Stock, at a per share conversion price of $0.706, and Class D warrants for
the
purchase of shares of Common Stock (the “
Warrants
”, a copy of which is
attached to the Subscription Agreement as Exhibit B) with certain other
investors. The Company is offering the Purchased Notes until
September 28, 2007, although the Company reserves the right, in its sole
discretion, to extend the Offering period until some later date (such date,
as
the same may be extended, the “
Expiration Date
”). Pursuant to
the Subscription Agreement, each person purchasing Purchased Notes in the
Offering (collectively, the “
Purchasers
”, and together with the Holders,
the “
2007 Holders
”) shall enter into a
registration
rights agreement among the Company and the Holders, in substantially the form
attached hereto as
Exhibit E
(the “
2007 Registration Rights
Agreement
”).
NOW,
THEREFORE, for good and valuable consideration, the receipt and sufficiency
of
which are hereby agreed and acknowledged, the parties hereby agree as
follows:
AGREEMENT:
1.
Securities
Exchange
.
(a)
Subject
to the satisfaction of the conditions and upon the terms set forth in this
Agreement and in consideration of and in express reliance upon the
representations, warranties, covenants, terms and conditions of this Agreement,
each Holder agrees to deliver to the Company the Old Notes in exchange for
the
New Notes and the Company agrees to issue and deliver the New Notes to the
Holders in exchange for the Old Notes.
(b)
The
closing under this Agreement (the “
Closing
”) shall take place at the
offices of Kramer Levin Naftalis & Frankel LLP, 1177 Avenue of the Americas,
New York, NY 10036 upon the satisfaction of each of the conditions set forth
herein (the “
Closing Date
”).
(c)
At
the
Closing, the Company shall issue the New Notes in an aggregate principal amount
of $5,300,000 to the Holders in the amounts set forth on
Exhibit C
attached hereto and the Holders shall deliver to the Company for cancellation
the Old Notes.
(d)
Each
Holder shall enter into the 2007 Registration Rights Agreement.
(e)
Each
Holder shall enter into an investor rights agreement among the Company, the
Purchasers and the other parties thereto, in substantially the form attached
hereto as
Exhibit F
(the “
Investor Rights
Agreement
”).
(f)
It
is
understood and agreed that this Agreement is made subject to the execution
and
delivery of the 2007 Registration Rights Agreement by all parties thereto and
the Company’s acceptance of the Holders as “Holders” thereunder, the execution
and delivery of the Subscription Agreement by all parties thereto resulting
in a
minimum investment made by the holders of the Purchased Notes of $10,000,000,
the satisfaction of all conditions thereunder and the funding of the Purchased
Notes, and the execution and delivery of the Investor Rights Agreement by all
parties thereto.
(g)
Upon
the
satisfaction of all conditions to the Exchange, any and all contracts,
agreements, arrangements, and understandings arising under the 2006 Transaction
Documents are hereby terminated and of no further force or effect, and no
rights, duties, obligations, or liabilities arising thereunder or relating
thereto shall survive this termination.
2.
Closing
Conditions.
(a)
The
obligations of the Company hereunder in connection with the Closing are subject
to the following conditions being satisfied:
(i)
each
of
the representations and warranties of each Holder shall be true and correct
in
all material respects as of the date when made and as of the Closing as though
made at that time, except for representations and warranties that speak as
of a
particular date, which shall be true and correct in all material respects as
of
such date;
(ii)
each
Holder shall have performed, satisfied and complied in all material respects
with all covenants, agreements and conditions required by this Agreement to
be
performed, satisfied or complied with by each Holder at or prior to the
Closing;
(iii)
at
the
Closing, the Company will have received, in the aggregate, not less than ten
million dollars ($10,000,000) pursuant to executed acceptances of subscriptions
from Purchasers in the Offering;
(iv)
to
the
extent not already delivered, the tender of delivery at the Closing by each
Holder of the items set forth in Section 2(d) of this
Agreement;
(v)
each
Holder shall have executed and delivered this Agreement;
(vi)
each
Holder shall have delivered the Old Notes to the Company; and
(vii)
no
statute, rule, regulation, executive order, decree, ruling or injunction shall
have been enacted, entered, promulgated, endorsed or threatened or is pending
by
or before any governmental authority of competent jurisdiction which prohibits
or threatens to prohibit the consummation of any of the transactions
contemplated by the Subscription Agreement or the 2007 Transaction Documents
(as
defined below).
(b)
The
obligations of each Holder hereunder in connection with the Closing are subject
to the following conditions being satisfied:
(i)
each
of
the representations and warranties of the Company shall be true and correct
in
all material respects as of the date when made and as of the Closing as though
made at that time, except for representations and warranties that speak as
of a
particular date, which shall be true and correct in all material respects as
of
such date;
(ii)
the
Company shall have performed, satisfied and complied in all material respects
with all covenants, agreements and conditions required by this Agreement to
be
performed, satisfied or complied with by the Company at or prior to the
Closing;
(iii)
to
the
extent not already delivered, the tender of delivery at the Closing by the
Company of the items set forth in Section 2(c) of this
Agreement;
(iv)
the
Company and all parties to the Subscription Agreement shall have duly executed
and delivered the Subscription Agreement, the Investor Rights Agreement, and
the
2007 Registration Rights Agreement, all in the forms attached hereto, and the
transactions contemplated by the Subscription Agreement shall be consummated
simultaneous
with
the
Closing hereof, resulting in a minimum investment made by the holders of the
Purchased Notes of $10,000,000;
(v)
the
holders of a majority of the outstanding Common Stock as of the Closing shall
have executed and delivered to the Company written consents, in a form
reasonably acceptable to each Holder (the “
Stockholder
Consents
”), consenting to (x) the issuance of the 2007 Notes, the Common
Stock and Warrants issuable upon the conversion of the 2007 Notes and the Common
Stock issuable upon the exercise of the Warrants, and (y) approving an amendment
to the Company’s Certificate of Incorporation to increase the number of shares
of Common Stock that it is authorized to issue to 60,000,000 shares (the
“
Certificate of Amendment
”);
(vi)
(x)
two
individuals designated by Lambda Investors LLC (“
Lambda
”) (such
individuals hereafter known as the “
New Directors
”) shall be duly elected
to the board of directors of the Company (the “
Board of Directors
”)
effective at the Closing; (y) Lambda shall have consented to the election of
any
new members of the Board of Directors of the Company or the Subsidiary elected
in connection with the Closing; and (z) no more than four members of the Board
of Directors of the Company that Lambda has requested to resign shall have
submitted resignations to the Company (which resignations shall include releases
in a form reasonably satisfactory to Lambda) with such resignations to become
effective at the Closing;
(vii)
at
the
Closing, the Company shall have received an extension, until October 4, 2007,
to
serve its opposition to the motion of the Receiver for Lancer Offshore, Inc.
to
enforce the Company’s settlement agreement with the Receiver and for entry of
final default judgment; and
(viii)
no
statute, rule, regulation, executive order, decree, ruling or injunction shall
have been enacted, entered, promulgated, endorsed or threatened or is pending
by
or before any governmental authority of competent jurisdiction which prohibits
or threatens to prohibit the consummation of any of the transactions
contemplated by the 2007 Transaction Documents or the Subscription
Agreement.
(c)
At
the
Closing, the Company shall deliver or cause to be delivered to each Holder
the
following (to the extent not previously delivered):
(i)
an
executed signature page to this Agreement;
(ii)
New
Notes
in the aggregate principal amount of $5,300,000, registered in the name of
each
Holder;
(iii)
the
2007
Registration Rights Agreement duly executed by the Company and all other parties
thereto other than the Holders, and the Investor Rights Agreement duly executed
by the Company and all other parties thereto other than the
Holders;
(iv)
a
certificate, duly executed by the Chief Executive Officer of the Company, to
the
effect that the conditions set forth in clauses (i), (ii), (iv), (v), (vi),
(vii) and (viii) of Section 2(b) have been satisfied;
(v)
copies
of
the duly executed Subscription Agreement, Stockholder Consents and resignations
of directors; and
(vi)
waivers
from Eric A. Rose, M.D., Norman J. Barta, William J. Fox and Lawrence Centella
waiving any right held by such persons pursuant to agreements entered into
prior
to the date hereof to have securities of the Company registered under the 2007
Registration Rights Agreement.
(d)
At
the
Closing, each Holder shall deliver or cause to be delivered to the
Company the following (to the extent not previously delivered):
(i)
an
executed copy of the signature page of and
Exhibit G
to this Agreement,
the Investor Rights Agreement and the 2007 Registration Rights
Agreement;
(ii)
the
original of the Old Note held by such Holder; and
(iii)
a
certificate, duly executed by a duly authorized officer, manager or member
of
each Holder , to the effect that the conditions set forth in clauses (i) and
(ii) of Section 2(b) have been satisfied.
3.
Representations
and Warranties of the Company
.
The Company
represents and warrants to each Holder as follows, in each case as of the date
hereof and in all material respects as of the date of the Closing, except for
any changes resulting from the Exchange or the Offering:
(a)
The
Company is duly organized, validly existing and in good standing under the
laws
of the jurisdiction of its organization with full power and authority to own,
lease, license and use its properties and assets and to carry out the business
in which it proposes to engage.
Nephros International
Limited (the “
Subsidiary
”) is duly organized, validly existing and in
good standing under the laws of the jurisdiction of its organization with full
power and authority to own, lease, license and use its properties and assets
and
to carry out the business in which it proposes to engage. Each of the
Company and the Subsidiary is duly qualified to conduct business and is in
good
standing as a foreign corporation or other entity in each jurisdiction in which
the nature of the business conducted or property owned by it makes such
qualification necessary, except where the failure to be so qualified or in
good
standing, as the case may be, could not have or reasonably be expected to result
in a (x) material adverse effect on the legality, validity or
enforceability of any 2007 Transaction Document (as defined below),
(y) material adverse effect on the results of operations, assets, business,
prospects or condition (financial or otherwise) of the Company and the
Subsidiary, taken as a whole, or (z) material adverse effect on the
Company’s ability to perform in any material respect on a timely basis its
obligations under any 2007 Transaction Document (as defined below) (any of
(x),
(y) or (z), a “
Material Adverse Effect
”). The Company
owns all of the capital stock or other equity interests of the Subsidiary free
and clear of any liens or encumbrances, other than Permitted Liens, and all
of
the issued and outstanding shares of capital stock of the Subsidiary are validly
issued and are fully paid, non-assessable and free of preemptive and similar
rights to subscribe for or purchase securities. The Company does not
own, and never has owned, any capital stock of or equity interest in any entity
other than the Subsidiary. Neither the Company nor the Subsidiary is
in
violation
or default of any of the provisions of its respective certificate or articles
of
incorporation, bylaws or other organizational or charter documents.
(b)
The
Company has all requisite corporate power and authority to execute, deliver
and
perform its obligations under this Agreement and to issue the New Notes to
be exchanged hereunder and the shares of Common Stock issuable upon conversion
thereof (collectively, the “
Subject Securities
”). Subject to
written consents of the stockholders of the Company that the Company has
obtained (the “
Stockholder Consents
”) becoming effective, all necessary
proceedings of the Company have been duly taken to authorize the execution,
delivery, and performance of this Agreement, the New Notes, the 2007
Registration Rights Agreement and the Investor Rights Agreement (collectively,
the “
2007 Transaction Documents
”). The 2007 Transaction
Documents have been duly authorized by the Company and, when executed and
delivered by the Company will constitute the legal, valid and binding obligation
of the Company enforceable against the Company in accordance with their terms
except as limited by general equitable principles and applicable bankruptcy,
insolvency, reorganization, moratorium and other laws of general application
affecting enforcement of creditors’ rights generally. The Common
Stock issuable upon conversion of the New Notes, when issued in compliance
with
the provisions of the 2007 Transaction Documents, will be validly issued, fully
paid and nonassessable and free of any liens or encumbrances other than any
liens or encumbrances created by the respective Holder thereof. The
New Notes are duly authorized, and when issued pursuant to the 2007 Transaction
Documents, will be validly issued.
(c)
No
consent of any party to any contract, agreement, instrument, lease or license
to
which the Company or the Subsidiary is a party or to which any of the Company’s
or the Subsidiary’s properties or assets are subject is required for the
execution, delivery or performance by the Company of its obligations under
any
of the 2007 Transaction Documents or the issuance and sale of the Subject
Securities. The Company is not required to obtain any consent,
waiver, authorization or order of, give any notice to, or make any filing or
registration with, any court or other federal, state, local or other
governmental authority or other person or entity in connection with the
execution, delivery and performance by the Company of the 2007 Transaction
Documents, other than (i) the filing with the Securities and Exchange
Commission (the “
Commission
”) of the registration statement or
registration statements pursuant to the 2007 Registration Rights Agreement,
a
Schedule 14C information statement and a Form 8-K and related press release
announcing the Offering and changes in directors and officers of the Company,
(ii) the notice and/or application(s) to the American Stock Exchange for
the issuance and sale of the Subject Securities and the listing for trading
thereon in the time and manner required thereby, (iii) the filing of Form D
with the Commission and such filings as are required to be made under applicable
state securities laws, (iv) the Stockholder Consents, and (v) the filing
with the Delaware Secretary of State of a Certificate of Amendment to increase
the capitalization of the Company.
(d)
Except
as
set forth on Schedule 3(d), the execution, delivery and performance of 2007
Transaction Documents and the issuance of the Subject Securities will not (i)
violate or result in a breach of, or entitle any party (with or without the
giving of notice or the passage of time or both) to terminate, amend,
accelerate, cancel or call a default under any contract or agreement to which
the Company or the Subsidiary is a party or result in the creation
of
any
lien, charge or encumbrance upon any of the properties or assets of the Company
or the Subsidiary, other than the liens, charges or encumbrances created by
the
applicable Holder, (ii) conflict with, violate or result in a breach of any
term
of the certificate of incorporation or by-laws of the Company or the Subsidiary,
or (iii) violate any law, rule, regulation, order, judgment or decree binding
upon the Company or the Subsidiary or to which any of their respective
operations, businesses, properties or assets are subject, except, in the case
of
a breach, termination, violation or default referenced in clauses (i) or (iii),
would not reasonably be expected to have a Material Adverse Effect.
(e)
The
capitalization of the Company is as set forth on
Schedule 3(e)
, which
Schedule 3(e)
shall also include the number of shares of Common Stock
owned beneficially, and of record, by officers or directors of the Company
or
holders of 5% or more of the outstanding Common Stock, in each case as of the
date hereof. The Company has not issued any capital stock since its
most recently filed periodic report under the Securities Exchange Act of 1934,
as amended (the “
Exchange Act
”), other than shares of Common Stock issued
pursuant to the exercise of employee stock options under the Company’s stock
option plans. No person or entity has any right of first refusal,
preemptive right, right of participation, or any similar right to participate
in
the transactions contemplated by the 2007 Transaction
Documents. Except as a result of the purchase and sale of the Subject
Securities or as set forth on
Schedule 3(e)
, there are no outstanding
options, warrants, scrip rights to subscribe to, calls or commitments of any
character whatsoever relating to, or securities, rights or obligations
convertible into or exercisable or exchangeable for, or giving any Person any
right to subscribe for or acquire, any shares of Common Stock or other capital
stock or securities of the Company, or contracts, commitments, understandings
or
arrangements by which the Company is or may become bound to issue additional
shares of Common Stock or other capital stock or securities of the
Company. The issuance and sale of the Subject Securities will not
obligate the Company to issue shares of Common Stock or other capital stock
or
securities of the Company to any person or entity (other than the Holders)
and
will not result in a right of any holder of Company securities to adjust the
exercise, conversion, exchange or reset price under any of such
securities. All of the outstanding shares of capital stock of the
Company are validly issued, fully paid and nonassessable, have been issued
in
compliance with all federal and state securities laws, and none of such
outstanding shares was issued in violation of any preemptive rights or similar
rights to subscribe for or purchase securities. There are no
stockholders agreements or voting agreements with respect to the Company’s
capital stock to which the Company is a party or, to the knowledge of the
Company, between or among any of the Company’s stockholders.
(f)
Except
as
set forth on
Schedule 3(f)
, there are no brokerage commissions, finder’s
fees or similar fees or commissions payable by the Company in connection with
the transactions contemplated by the 2007 Transaction Documents or the Offering
based on any agreement, arrangement or understanding with or known to the
Company. The Holders will have no obligation with respect to any
brokerage commissions, finder’s fees or similar fees or commissions described on
Schedule 3(f).
(g)
Except
as
disclosed on
Schedule 3(g)
, as disclosed in the reports, schedules,
forms, statements and other documents filed by the Company under the Exchange
Act on or after April 10, 2007 (the “
Current SEC Filings
”) or as would
not reasonably be expected to
have
a
Material Adverse Effect, neither the Company nor the Subsidiary is in violation
or default of any provisions of any instrument, judgment, order, writ or decree,
or any provision of any contract or agreement, to which it is a party or by
which it is bound or of any provision of statute, rule or regulation of any
country, state, province or other local governmental unit applicable to the
Company, the Subsidiary or their respective businesses.
(h)
Except
as
disclosed on
Schedule 3(h)
, neither the Company nor the Subsidiary is a
party to any litigation, action, suit, proceeding or investigation, and, to
the
knowledge of the Company, no litigation, action, suit, proceeding or
investigation has been threatened against the Company or the
Subsidiary. There has not been, and to the knowledge of the Company,
there is not pending or contemplated, any investigation by the Commission
involving the Company or any current or former director or officer of the
Company. The Commission has not issued any stop order or other order
suspending the effectiveness of any registration statement filed by the Company
under the Exchange Act or the Securities Act of 1933, as amended (the
“
Securities Act
”). Except as disclosed on
Schedule 3(g)
or in the Current SEC Filings, since January 1, 2007 there has been no material
adverse effect on the products of the Company, the prospects of the products
of
the Company or the status of the regulatory approval of the products of the
Company.
(i)
Each
of
the Company and the Subsidiary has good and marketable title to its properties
and assets (including without limitation
those assets
pledged as collateral pursuant to this Agreement) held in each case free and
clear of all liens, pledges, security interests, encumbrances, attachments
or
charges of any kind (each a “
Lien
”), except for (i) Liens for taxes that
are not yet due and payable, (ii) Liens that do not or are not reasonably likely
to result in a Material Adverse Effect, or (iii) Liens disclosed in the Current
SEC Filings or arising under the Offering (Liens described in clauses (i),
(ii)
and (iii) are referred to as “
Permitted Liens
”). Neither the
Company nor the Subsidiary owns, or has ever owned, any real
property. With respect to the property and assets it leases, except
as would not reasonably be expected to have a Material Adverse Effect or as
disclosed on
Schedule 3(i)
, the Company is in compliance with such leases
and, to the best of the Company’s knowledge, the Company holds valid leasehold
interests in such property and assets free and clear of any Liens of any other
party other than the lessors of such property and assets, except for Permitted
Liens. The properties and assets owned and leased by the Company and
the Subsidiary are sufficient to enable the Company and the Subsidiary to
conduct their respective business as presently conducted.
(j)
Neither
the Company nor the Subsidiary has any liability or obligation of any nature
whatsoever (whether absolute, accrued, contingent, or otherwise and whether
due
or to become due) which would be required to be reflected on a balance sheet
or
in the notes thereto prepared in accordance with GAAP, except for (i) those
liabilities that are fully reflected or reserved against on the financial
statements included in the Current SEC Filings, described in the notes to such
financial statements, or expressly described elsewhere in the Current SEC
Filings, including without limitation, under the headings “Management’s
Discussion and Analysis or Plan of Operation” and “Controls and Procedures” in
the applicable Current SEC Filings, (ii) liabilities and obligations which
have
been incurred since June 30, 2007 in the ordinary course of business which
are not material in nature or amount, or (iii) liabilities and obligations
described on
Schedule 3(j)
.
(k)
Except
as
disclosed in the Current SEC Filings, each of the Company and the Subsidiary
owns, free and clear of all Liens, other than Permitted Liens, or is licensed
or
otherwise possesses legally enforceable rights to use, all patents, patent
applications, trademarks, trademark applications, trade names, service marks,
copyrights, know-how, trade secrets, inventions and similar rights necessary
to
permit the Company and the Subsidiary to conduct its respective business as
described in the Current SEC Filings (collectively, “
Intellectual
Property
”). To the Company’s knowledge, the Intellectual Property
does not violate or infringe upon the rights of any other person or entity,
and
neither the Company nor the Subsidiary has received a notice (written or
otherwise) claiming such infringement. To the knowledge of the
Company, all Intellectual Property is enforceable and there is no existing
infringement by another person or entity of any of the Intellectual
Property. The Company and the Subsidiary have taken reasonable
security measures to protect the secrecy, confidentiality and value of all
of
their intellectual properties, except where failure to do so would not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect.
(l)
The
Company has filed all reports, schedules, forms, statements and other documents
required to be filed by the Company under the Securities Act and the Exchange
Act, including pursuant to Section 13(a) or 15(d) thereof, since September
20, 2004 (the reports, schedules, forms, statements and other documents filed
pursuant to the Securities Act and the Exchange Act on or after September 20,
2004, including the exhibits thereto and documents incorporated by reference
therein, being collectively referred to herein as the “
Nephros SEC
Filings
”). Except for the Company’s Annual Report on Form 10-KSB
for the year ended December 31, 2005, each Nephros SEC Filing that is an Annual
Report on Form 10-KSB, a Quarterly Report on Form 10-QSB or a Current Report
on
Form 8-K (other than a Current Report on Form 8-K that is required solely
pursuant to Item 1.01, 1.02, 2.03, 2.04, 2.05, 2.06, 4.02(a) or 5.02(e) of
Form
8-K) was filed on a timely basis or the Company received a valid extension
of
such time of filing and has filed such Nephros SEC Filing prior to the
expiration of such extension. Except as disclosed on
Schedule
3(l)
, as of their respective dates, the Nephros SEC Filings complied in all
material respects with the requirements of the Securities Act and the Exchange
Act, as applicable, and none of the Nephros SEC Filings, 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 disclosed on
Schedule 3(l)
, the
financial statements of the Company included in the Nephros SEC Filings complied
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 United States generally accepted accounting principles 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 and the Subsidiary 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 year-end audit adjustments.
(m)
The
Company is in material compliance with all provisions of the Sarbanes-Oxley
Act
of 2002 which are applicable to it as of the Closing. Except as
disclosed in
the
Current SEC Filings, the Company and the Subsidiary maintain a system of
internal accounting controls sufficient to provide reasonable assurance that
(i) transactions are executed in accordance with management’s general or
specific authorizations, (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with GAAP and to
maintain asset accountability, (iii) access to assets is permitted only in
accordance with management’s general or specific authorization, and
(iv) the recorded accountability for assets is compared with the existing
assets at reasonable intervals and appropriate action is taken with respect
to
any differences. Except as disclosed in the Current SEC Filings, the
Company has established disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and designed such
disclosure controls and procedures to ensure that information required to be
disclosed by the Company in the reports it files or submits under the Exchange
Act is recorded, processed, summarized and reported, within the time periods
specified in the Commission’s rules and forms. The Company’s
certifying officers have evaluated the effectiveness of the Company’s disclosure
controls and procedures as of the end of the period covered by the Company’s
most recently filed periodic report under the Exchange Act (such date, the
“
Evaluation Date
”). The Company presented in its most recently
filed periodic report under the Exchange Act the conclusions of the certifying
officers about the effectiveness of the disclosure controls and procedures
based
on their evaluations as of the Evaluation Date. Since the Evaluation
Date, there have been no changes in the Company’s internal control over
financial reporting (as such term is defined in the Exchange Act) that has
materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.
(n)
No
material labor dispute exists or, to the knowledge of the Company, is imminent
with respect to any of the employees of the Company which could reasonably
be
expected to result in a Material Adverse Effect. None of the
Company’s or the Subsidiary’s employees is a member of a union that relates to
such employee’s relationship with the Company, and neither the Company nor the
Subsidiary is a party to a collective bargaining agreement, and the Company
and
the Subsidiaries believe that their relationships with their employees are
good. No executive officer, to the knowledge of the Company, is, or
is now expected to be, in violation of any material term of any employment
contract, confidentiality, disclosure or proprietary information agreement
or
non-competition agreement, or any other contract or agreement or any restrictive
covenant, and the continued employment of each such executive officer does
not
subject the Company or any of its Subsidiaries to any liability with respect
to
any of the foregoing matters. The Company and its Subsidiaries are in compliance
with all federal, state, local and foreign laws and regulations relating to
employment and employment practices, terms and conditions of employment and
wages and hours, except where the failure to be in compliance could not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect.
(o)
The
Company and the Subsidiary possess all certificates, authorizations and permits
issued by the appropriate federal, state, local or foreign regulatory
authorities necessary to conduct their respective businesses as described in
the
Current SEC Filings, except where the failure to possess such permits could
not
have or reasonably be expected to result in a Material Adverse Effect
(“
Material Permits
”), and neither the Company nor the Subsidiary has
received any notice of proceedings relating to the revocation or modification
of
any Material Permit.
(p)
The
Company and the Subsidiary are insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as are prudent
and customary in the businesses in which the Company and the Subsidiary are
engaged, including, but not limited to, directors and officers insurance
coverage at least equal to $7,000,000. Neither the Company nor the
Subsidiary has any reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business without a significant increase in cost.
(q)
Except
as
set forth in the Current SEC Filings, none of the officers or directors of
the
Company and, to the knowledge of the Company, none of the employees of the
Company is presently a party to any transaction with the Company or the
Subsidiary, 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 officer,
director or such employee or, to the knowledge of the Company, any entity in
which any officer, director, or any such employee has a substantial interest
or
is an officer, director, trustee or partner, in each case in excess of $120,000
other than for (i) payment of salary or consulting fees for services
rendered, (ii) reimbursement for expenses incurred on behalf of the Company
and (iii) other employee benefits, including stock option agreements under
any stock option plan of the Company.
(r)
Neither
the Company nor any person or entity acting on its behalf has offered or sold
any of the Subject Securities by any form of general solicitation or general
advertising. The Company has offered the Subject Securities only to
the Holders. Assuming the accuracy of each Holder’s representations
and warranties set forth in Section 4, no registration under the Securities
Act is required for the issuance of the Subject Securities by the Company to
the
Holders pursuant to this Agreement. Neither the Company, nor any of
its affiliates, nor any person or entity acting on its or their behalf has,
directly or indirectly, made any offers or sales of any security or solicited
any offers to buy any security, under circumstances that would cause the
issuance of the Subject Securities to be integrated with prior offerings by
the
Company for purposes of the Securities Act or any applicable shareholder
approval provision of the American Stock Exchange. Subject to the
Stockholder Consents becoming effective and the filing of an additional shares
listing application with the American Stock Exchange, the issuance of the
Subject Securities does not contravene the rules and regulations of the American
Stock Exchange.
(s)
The
Company is not, and is not an affiliate of, and immediately after receipt of
payment for the Notes, will not be or be an affiliate of, an “investment
company” within the meaning of the Investment Company Act of 1940, as amended.
The Company shall conduct its business in a manner so that it will not become
subject to the Investment Company Act of 1940, as amended.
(t)
Except
as
disclosed on
Schedule 3(t)
, as of the Closing, no Person will have any
right to cause the Company to effect the registration under the Securities
Act
of any securities of the Company except pursuant to the 2007 Registration Rights
Agreement.
(u)
The
Company’s Common Stock is registered pursuant to Section 12(b) of the
Exchange Act, and the Company has taken no action designed to, or which to
its
knowledge is likely to have the effect of, terminating the registration of
the
Common Stock under the Exchange Act nor has the Company received any
notification that the Commission is contemplating terminating such
registration. The Company’s outstanding Common Stock is listed for
trading on the American Stock Exchange and, since January 1, 2007, the trading
of the Company’s Common Stock on the American Stock Exchange has not been
de-listed or suspended. The Company has taken no action for the
purpose of de-listing the Common Stock from the American Stock Exchange or
suspending the trading of the Common Stock on the American Stock
Exchange. Except as described in the Current SEC Filings, the Company
has not, in the 12 months preceding the date hereof, received written notice
from the American Stock Exchange to the effect that the Company is not in
compliance with the listing or maintenance requirements of the American Stock
Exchange or that the American Stock Exchange is considering suspending the
trading of or de-listing the Company’s Common Stock from the American Stock
Exchange.
(v)
The
Company and its Board of Directors have taken all necessary action, if any,
in
order to render inapplicable any control share acquisition, business
combination, shareholder rights plan (including any distribution under a rights
agreement) or other similar anti-takeover provision under the Company’s
certificate of incorporation (or similar charter documents) or the laws of
its
state of incorporation (including without limitation Section 203 of the Delaware
General Corporation Law) that is or could become applicable to the Holders
as a
result of the Holders and the Company fulfilling their obligations or exercising
their rights under the 2007 Transaction Documents, including without limitation
as a result of the Company’s issuance of the Subject Securities and the Holders’
ownership of the Subject Securities.
(w)
All
disclosure furnished by or on behalf of the Company in writing to the Holders
regarding the Company, its business and the transactions contemplated hereby,
including the Schedules to this Agreement, with respect to the representations
and warranties contained herein is true and correct in all material respects
with respect to such representations and warranties and does not contain any
untrue statement of a material fact or omit to state any material fact necessary
in order to make the statements made therein, in light of the circumstances
under which they were made, not misleading. The press releases
disseminated by the Company during the twelve months preceding the date of
this
Agreement taken as a whole do not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
in order to make the statements made therein, in light of the circumstances
under which they were made and when made, not misleading.
(x)
Based
on
the financial condition of the Company as of the Closing, after giving effect
to
the receipt by the Company of not less than ten million dollars ($10,000,000)
from the Offering, and assuming (counterfactually) that all of the 2007 Notes
issued as of the Closing were converted as of such date, (i) the fair
saleable value of the Company’s assets exceeds the amount that will be required
to be paid on or in respect of the Company’s existing debts and other
liabilities (including known contingent liabilities) as they mature;
(ii) the Company’s assets do not constitute unreasonably small capital to
carry on its business as now conducted and as proposed to be conducted including
its capital needs taking into account the
particular
capital requirements of the business conducted by the Company, and projected
capital requirements and capital availability thereof; and (iii) the
current cash flow of the Company, together with the proceeds the Company would
receive, were it to liquidate all of its assets, after taking into account
all
anticipated uses of the cash, would be sufficient to pay all amounts on or
in
respect of its liabilities when such amounts are required to be
paid. The Company has no knowledge of any facts or circumstances
which lead it to believe that it will file for reorganization or liquidation
under the bankruptcy or reorganization laws of any jurisdiction within one
year
from the Closing.
Schedule 3(x)
sets forth as of the date
hereof all outstanding secured and unsecured Indebtedness of the Company or
the
Subsidiary, or for which the Company or the Subsidiary has
commitments. For the purposes of this Agreement,
“
Indebtedness
” means (a) any liabilities for borrowed money (other
than trade accounts payable incurred in the ordinary course of business), (b)
every obligation of the Company evidenced by bonds, debentures, notes or other
similar instruments, (c) all guaranties, endorsements and other contingent
obligations in respect of Indebtedness of others, whether or not the same are
or
should be reflected in the Company’s balance sheet (or the notes thereto),
except guaranties by endorsement of negotiable instruments for deposit or
collection or similar transactions in the ordinary course of business; and
(d) the present value of any lease payments due under leases required to be
capitalized in accordance with GAAP. Except as set forth on
Schedule 3(x)
, neither the Company nor the Subsidiary is in default with
respect to any Indebtedness.
(y)
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 and the
Subsidiary have filed all necessary federal, state, local and foreign income,
franchise, employment and other tax returns and have paid or accrued all taxes
shown as due thereon, and the Company has no knowledge of a tax deficiency
which
has been asserted or threatened against the Company or the
Subsidiary.
(z)
Neither
the Company nor the Subsidiary, nor to the knowledge of the Company, any agent
or other person or entity acting on behalf of the Company or the Subsidiary,
has
(i) directly or indirectly, used any funds for unlawful contributions,
gifts, entertainment or other unlawful expenses related to foreign or domestic
political activity, (ii) made any unlawful payment to foreign or domestic
government officials or employees or to any foreign or domestic political
parties or campaigns from corporate funds, (iii) failed to disclose fully
any contribution made by the Company or the Subsidiary (or made by any person
or
entity acting on behalf of the Company or the Subsidiary) which is in violation
of law, or (iv) violated in any material respect any provision of the
Foreign Corrupt Practices Act of 1977, as amended.
(aa)
The
Company’s accounting firm is Rothstein Kass & Company, P.C. To
the knowledge of the Company, (i) such accounting firm is a registered public
accounting firm as required by the Exchange Act, and (ii) has been engaged
by the Company’s Audit Committee to conduct procedures to provide its opinion
with respect to the financial statements to be included in the Company’s Annual
Report on Form 10-KSB for the year ending December 31, 2007.
(bb)
Immediately
following the Closing, no Indebtedness or other claim against the Company is
senior to the New Notes in right of payment, whether with respect to interest
or
upon liquidation or dissolution, or otherwise, other than indebtedness secured
by purchase
money
security interests (which is senior only as to underlying assets covered
thereby) and capital lease obligations (which is senior only as to the property
covered thereby).
(cc)
There
are
no disagreements of any kind presently existing, or reasonably anticipated
by
the Company to arise, between the Company and the accountants and lawyers
formerly or presently employed by the Company, and except as set forth on
Schedule 3(cc)
the Company is current with respect to any fees owed to
its accountants and lawyers.
(dd)
The
Company acknowledges and agrees that each of the Holders is acting solely in
the
capacity of an arm’s length counterparty with respect to the 2007 Transaction
Documents and the transactions contemplated thereby. The Company
further acknowledges that no Holder is acting as a financial advisor or
fiduciary of the Company (or in any similar capacity) with respect to the 2007
Transaction Documents and the transactions contemplated thereby and any advice
given by any Holder or any of their respective representatives or agents in
connection with the 2007 Transaction Documents and the transactions contemplated
thereby is merely incidental to the Holders’ acquisition of the Subject
Securities. The Company further represents to each Holder that the
Company’s decision to enter into this Agreement and the other 2007 Transaction
Documents has been based solely on the independent evaluation of the
transactions contemplated hereby by the Company and its
representatives.
(ee)
The
Company has not, and to its knowledge no one acting on its behalf has,
(i) taken, directly or indirectly, any action designed to cause or to
result in the stabilization or manipulation of the price of any security of
the
Company to facilitate the sale or resale of any of the Subject Securities,
(ii) sold, bid for, purchased, or paid any compensation for soliciting
purchases of, any of the securities of the Company, or (iii) paid or agreed
to pay to any person or entity any compensation for soliciting another to
purchase any other securities of the Company, other than, in the case of clauses
(ii) and (iii), compensation paid to the Company’s placement agent in
connection with the Offering.
(ff)
The
Company (i) is in compliance with any and all Environmental Laws (as
hereinafter defined), (ii) has received all permits, licenses or other
approvals required of it under applicable Environmental Laws to conduct its
business and (iii) is in compliance with all terms and conditions of any
such permit, license or approval where, in each of the foregoing clauses (i),
(ii) and (iii), the failure to so comply would be reasonably expected to
have, individually or in the aggregate, a Material Adverse Effect. The term
“
Environmental Laws
” means all federal, state, local or foreign laws
relating to pollution or protection of human health or the environment
(including, without limitation, ambient air, surface water, groundwater, land
surface or subsurface strata), including, without limitation, laws relating
to
emissions, discharges, releases or threatened releases of chemicals, pollutants,
contaminants, or toxic or hazardous substances or wastes (collectively,
“
Hazardous Materials
”) into the environment, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Hazardous Materials, as well as all authorizations,
codes, decrees, demands or demand letters, injunctions, judgments, licenses,
notices or notice letters, orders, permits, plans or regulations issued,
entered, promulgated or approved thereunder.
(gg)
In
entering into this Agreement, the Company is not relying on any representations
and warranties of the Holders other than those in this Agreement.
(hh)
The
Company acknowledges that the representations, warranties and agreements made
by
the Company herein shall survive the execution and delivery of this Agreement,
the Closing and the issuance and conversion of the New Notes.
(ii)
The
Company has received the written consent from at least 50.1% of the outstanding
Common Stock as of the date hereof approving the Offering in accordance with
Rule 713 of the American Stock Exchange Company Guide.
4.
Representations,
Warranties and Covenants of the
Holders
.
Each of the Holders hereby
makes the following representations and warranties to the Company, and covenants
for the benefit of the Company, with respect solely to itself and not with
respect to any other Holder:
(a)
Each
Holder is an Accredited Investor, as specifically indicated in
Exhibit F
to this Agreement, which is being delivered to the Company
herewith.
(b)
If
a
natural person, such Holder is: a bona fide resident of the state or non-United
States jurisdiction contained in the address set forth on the signature page
of
this Agreement as such Holder’s home address; at least twenty-one (21) years of
age; and legally competent to execute the 2007 Transaction
Documents. If an entity, such Holder has its principal offices or
principal place of business in the state or non-United States jurisdiction
contained in the address set forth on the signature page of this Agreement,
the
individual signing on behalf of such Holder is duly authorized to execute the
2007 Transaction Documents.
(c)
When
executed and delivered by each Holder, each of the 2007 Transaction Documents
to
which the Holders are parties will constitute the legal, valid and binding
obligation of the Holders, enforceable against the Holders in accordance with
its terms except as limited by general equitable principles and applicable
bankruptcy, insolvency, reorganization, moratorium and other laws of general
application affecting enforcement of creditors’ rights generally.
(d)
Neither
the execution, delivery nor performance of the 2007 Transaction Documents by
each Holder violates or conflicts with, creates (with or without the giving
of
notice or the lapse of time, or both) a default under or a lien or encumbrance
upon any of such Holder’s assets or properties pursuant to, or requires the
consent, approval or order of any government or governmental agency or other
person or entity under (i) any note, indenture, lease, license or other
agreement to which such Holder is a party or by which it or any of its assets
or
properties is bound or (ii) any statute, law, rule, regulation or court decree
binding upon or applicable to such Holder or its assets or
properties. If such Holder is not a natural person, the execution,
delivery and performance by such Holder of the 2007 Transaction Documents,
have
been duly authorized by all necessary corporate or other action on behalf of
such Holder and such execution, delivery and performance does not and will
not
constitute a breach or violation of, or default under, the charter or by-laws
or
equivalent governing documents of such Holder.
(e)
Each
Holder has received from the Company, or has been directed to, all materials
which have been requested by such Holder and the Nephros SEC
Filings. Each Holder has had a reasonable opportunity to ask
questions of the Company and its representatives, and
the
Company has answered to the satisfaction of such Holder all inquiries that
such
Holder or such Holder’s representatives have put to it.
(f)
Each
Holder or such Holder’s purchaser representative has such knowledge and
experience in finance, securities, taxation, investments and other business
matters so as to be capable of evaluating the merits and risks of an investment
in the Subject Securities. Each Holder can afford to bear such risks,
including, without limitation, the risk of losing its entire
investment.
(g)
Each
Holder acknowledges that no liquid market for the New Notes presently exists
and
none may develop in the future and that such Holder may find it impossible
to
liquidate the investment at a time when it may be desirable to do so, or at
any
other time.
(h)
Each
Holder has been advised by the Company and understands that none of the Subject
Securities have been registered under the Securities Act, that the Subject
Securities are being offered and issued on the basis of the statutory exemption
provided by Section 4(2) of the Securities Act, Regulation D promulgated
thereunder or both, relating to transactions by an issuer not involving any
public offering and under similar exemptions under certain state securities
laws; that this transaction has not been reviewed by, passed on or submitted
to
any United States Federal or state agency or self-regulatory organization where
an exemption is being relied upon; and that the Company’s reliance thereon is
based in part upon the representations made by such Holder in this
Agreement.
(i)
Each
Holder will acquire the Subject Securities for such Holder’s own account (or, if
such individual is married, for the joint account of such Holder and such
Holder’s spouse either in joint tenancy, tenancy by the entirety or tenancy in
common) for investment and not with a view to the sale or distribution thereof
or the granting of any participation therein, in each case in violation of
applicable securities laws, and has no present intention of distributing or
selling to others any of such Subject Securities or granting any participation
therein, in each case in violation of applicable securities laws.
(j)
In
entering into this Agreement and acquiring the New Notes, such Holder is not
relying on any representations and warranties of the Company other than those
in
this Agreement.
(k)
Each
Holder acknowledges that the representations, warranties and agreements made
by
such Holder herein shall survive the execution and delivery of this Agreement,
the Closing and the purchase and conversion of the New Notes.
(l)
Except
as
set forth on the signature page hereto, such Holder has not engaged any broker
or other person or entity that is entitled to a commission, fee or other
remuneration as a result of the execution, delivery or performance of this
Agreement.
(m)
Such
Holder is not entering into this Agreement or acquiring New Notes as a result
of
any advertisement, article, notice or other communication published in any
newspaper, magazine or similar media or broadcast over television or radio,
or
presented at any
seminar
or meeting, or any solicitation by a person other than a representative of
the
Company with whom such Holder had a pre-existing relationship.
(n)
Each
Holder is not with respect to such Holder’s acquisition of New Notes a person or
entity (a “
Person
”) with whom a United States citizen, entity organized
under the laws of the United States or its territories or entity having its
principal place of business within the United States or any of its territories
(collectively, a “
U.S. Person
”), is prohibited from transacting business
of the type contemplated by this Agreement, whether such prohibition arises
under United States law, regulation or executive orders and lists published
by
the Office of Foreign Assets Control, Department of the Treasury (“
OFAC
”)
(including those executive orders and lists published by OFAC with respect
to
Persons that have been designated by executive order or by the sanction
regulations of OFAC as Persons with whom U.S. Persons may not transact business
or must limit their interactions to types approved by OFAC “
Specially
Designated Nationals and Blocked Persons
”). Neither such Holder
nor any Person who owns an interest in such Holder (collectively, a “
Holder
Party
”) is a Person with whom a U.S. Person, including a United States
Financial Institution as defined in 31 U.S.C. Section 5312, as amended
(“
Financial Institution
”), is prohibited from transacting business of the
type contemplated by this Agreement, whether such prohibition arises under
United States law, regulation or executive orders and lists published by the
OFAC (including those executive orders and lists published by OFAC with respect
to Specially Designated Nationals and Blocked Persons).
(o)
To
the
actual knowledge of each Holder, neither such Holder nor any Holder Party,
nor
any Person providing funds to such Holder: (i) is under investigation by any
governmental authority for, or has been charged with, or convicted of, money
laundering, drug trafficking, terrorist related activities, any crimes which
in
the United States would be predicate crimes to money laundering, or any
violation of any Anti-Money Laundering Laws (as hereinafter defined in this
Section 4(p)
); (ii) has been assessed civil or criminal penalties under
any Anti-Money Laundering Laws; or (iii) has had any of its funds seized or
forfeited in any action under any Anti-Money Laundering Laws. For
purposes of this
Section 4(p)
, the term “
Anti-Money Laundering
Laws
” shall mean laws, regulations and sanctions, state and federal,
criminal and civil, that: (i) limit the use of and/or seek the
forfeiture of proceeds from illegal transactions; (ii) limit commercial
transactions with designated countries or individuals believed to be terrorists,
narcotics dealers or otherwise engaged in activities contrary to the interests
of the United States; (iii) require identification and documentation of the
parties with whom a Financial Institution conducts business; or (iv) are
designed to disrupt the flow of funds to terrorist
organizations. Such laws, regulations and sanctions shall be deemed
to include the USA PATRIOT Act of 2001, Pub. L. No. 107-56 (the “
Patriot
Act
”), the Bank Secrecy Act, 31 U.S.C. Section 5311 et. seq. (the “
Bank
Secrecy Act
”), the Trading with the Enemy Act, 50 U.S.C. Appendix, the
International Emergency Economic Powers Act, 50 U.S.C. Section 1701 et. seq.,
and the sanction regulations promulgated pursuant thereto by the OFAC, as well
as laws relating to prevention and detection of money laundering in 18 U.S.C.
Sections 1956 and 1957.
(p)
Each
Holder is in compliance in all material respects with any and all applicable
provisions of the Patriot Act, including, without limitation, amendments to
the
Bank Secrecy Act. If a Holder is a Financial Institution, it has
established and is in compliance in all
material
respects with all procedures, if any, required by the Patriot Act and the Bank
Secrecy Act.
(q)
Each
Holder represents and warrants that, since July 15, 2007, such Holder has not
engaged in any short sale of any equity security of the Company.
5.
Covenants
of the Company
.
(a)
Except
for the 2007 Notes, without the prior written consent of the Secured Party
(as
defined in Section 8 herein), the Company shall not create, issue, incur (by
conversion, exchange or otherwise), assume, guarantee or otherwise become or
remain directly or indirectly liable for any Indebtedness while the 2007 Notes
are outstanding. In addition, so long as the 2007 Notes are
outstanding, without the prior written consent of the 2007 Notes Majority
Holders (as defined in section 7(b) hereof) the Company shall not and shall
not
permit the Subsidiary to:
(i)
sell,
assign (by operation of law or otherwise), lease, license, exchange or otherwise
transfer or dispose of any Collateral (as defined in the Form of Note) other
than the sale of inventory in the ordinary course of business and the sale
or
other disposition of worn out or obsolete assets not necessary for the conduct
of its business;
(ii)
grant
any
Lien upon or with respect to any Collateral (as defined in the Form of Note)
or
create or suffer to exist any Lien upon or with respect to any Collateral (as
defined in the Form of Note) other than a Permitted Lien;
(iii)
declare,
set aside, or pay any dividends on, make any other distributions in respect
of,
redeem or otherwise repurchase any of its capital stock or other securities,
other than dividends and distributions by the Subsidiary to the Company, or
redeem or repurchase any of its capital stock or other securities;
(iv)
split,
combine or reclassify any of its capital stock;
(v)
adopt
or
amend any employee benefit plan;
(vi)
except
with respect to the compensation of Norman J. Barta, grant, award or enter
into
any compensation (including stock options or other awards under existing benefit
plans) or change of control arrangement with any employee or director of the
Company or the Subsidiary or amend the terms of employment or compensation
of
any employee or director of the Company or the Subsidiary; or
(vii)
increase
the size of the Board of Directors of the Company or the Subsidiary or, except
with respect to the New Directors, appoint any new members to the Board of
Directors of the Company or the Subsidiary.
(b)
No
later
than fifteen (15) business days from the Closing date, the Company will file
a
preliminary Schedule 14C information statement (the “
Preliminary Schedule
14C
”) with the Commission. The Company agrees to respond to the
initial and any subsequent
Commission
comments relating to the Preliminary Schedule 14C as soon as practicable after
receipt of such comments and to use commercially reasonable efforts to address
all of such Commission comments. The Company agrees to file a
definitive Schedule 14C information statement with the Commission no later
than
the second business day after receiving confirmation that the Commission has
no
further comments on the Preliminary Schedule 14C.
(c)
Upon
the
terms and subject to the conditions hereof, the Company shall use its
commercially reasonable best efforts to take, or cause to be taken, all
appropriate actions and do, or cause to be done, all things necessary, proper
or
advisable to consummate and make effective as promptly as practicable the
transactions contemplated by this Agreement (including, without limitation,
to
cause the conditions in clauses (i), (ii), (iv), (v), (vi), (vii) and (viii)
of
Section 2(b) to be satisfied) and to cooperate with each Holder in
connection with the foregoing.
(d)
As
long
as any Holder owns Subject Securities and the Company is required to file
reports pursuant to the Exchange Act, the Company covenants to use commercially
reasonable best efforts to timely file (or obtain extensions in respect thereof
and file within the applicable grace period) all reports required to be filed
by
the Company after the date hereof pursuant to the Exchange Act. As
long as any Holder owns Subject Securities, if the Company is not required
to
file reports pursuant to the Exchange Act, it will prepare and furnish to the
Holders and make publicly available in accordance with Rule 144(c) such
information as is required for the Holders to sell the Subject Securities under
Rule 144. The Company further covenants that it will take such further action
as
any holder of Subject Securities may reasonably request, to the extent required
from time to time to enable such holder to sell such Subject Securities without
registration under the Securities Act within the requirements of the exemption
provided by Rule 144.
(e)
The
Company shall not sell, offer for sale or solicit offers to buy or otherwise
negotiate in respect of any security (as defined in Section 2 of the
Securities Act) that would be integrated with the offer or sale of the Subject
Securities in a manner that would require the registration under the Securities
Act of the sale of the Securities to the Purchasers or that would be integrated
with the offer or sale of the Securities for purposes of the rules and
regulations of the American Stock Exchange.
(f)
Other
than in the case of a Form 8-K and any exhibits thereto, including any press
releases included therein, required to be filed with the Commission by the
Company, neither the Company nor any Holder shall issue any press release or
otherwise make any public statement concerning the transactions contemplated
by
the 2007 Transaction Documents and Subscription Agreement without the prior
consent of the Company, with respect to any press release of any Holder, or
without the prior consent of each Holder, with respect to any press release
of
the Company or otherwise authorized by the Company, which consent shall not
unreasonably be withheld or delayed, except if such disclosure is required
by
law, in which case the disclosing party shall promptly provide the other party
with prior notice of such public statement or communication.
(g)
No
claim
will be made or enforced by the Company or, with the consent of the Company,
any
other person or entity, that any Holder is an “acquiring person” or “interested
stockholder” under any control share acquisition, business combination,
shareholder
rights
plan (including any distribution under a rights agreement) or similar
anti-takeover plan or arrangement in effect or hereafter adopted by or
applicable to the Company (including without limitation Section 203
of the Delaware General Corporation Law), or that any Holder could be deemed
to
trigger the provisions of any such plan or arrangement, by virtue of receiving
Subject Securities under this Agreement, the 2007 Transaction Documents or
under
any other agreement between the Company and the Holders.
(h)
Except
as
set forth on
Schedule 5(g)
to the Subscription Agreement, the Company
shall use the net proceeds from the sale of the Subject Securities for working
capital purposes and shall not use such proceeds for the payment of any
dividends or distributions or the redemption or repurchase of any Common Stock
or other securities of the Company.
(i)
Promptly
after the Stockholder Consents become effective, the Company shall file the
Certificate of Amendment with the Secretary of State of the State of
Delaware. Thereafter, the Company shall maintain a reserve from its
duly authorized shares of Common Stock, free of all preemptive or preferential
rights, for issuance pursuant to the 2007 Transaction Documents in
such amount as may be required to fulfill its obligations in full under the
2007
Transaction Documents. Promptly following the conversion of the
Notes, the Company shall: (i) in the time and manner required by the
American Stock Exchange (or any subsequent trading market which is the principal
trading market on which the Common Stock is listed or quoted, as applicable,
the
“
Trading Market
”), prepare and file with the Trading Market an additional
shares listing application covering a number of shares of Common Stock equal
to
the number of shares of Common Stock issued upon the Conversion of the Notes
and
issuable upon the exercise of the Warrants, (ii) take all steps necessary
to cause such shares of Common Stock to be approved for listing on such Trading
Market as soon as possible thereafter, (iii) provide to the Purchasers
evidence of such listing, and (iv) maintain the listing of such Common
Stock on such Trading Market or another Trading Market.
(j)
From
the
date hereof until 90 days after the date on which a registration statement
is
declared effective pursuant to the 2007 Registration Rights Agreement (the
“
Effective Date
”), neither the Company nor the Subsidiary shall issue
shares of Common Stock, any other capital stock or equity securities of the
Company or the Subsidiary, or any securities convertible into or exercisable
for
Common Stock, capital stock or equity securities of the Company or the
Subsidiary (collectively, “
Equity Securities
”);
provided
,
however
, the 90 day period set forth in this Section 5(j) shall be
extended for the number of days during such period in which (i) trading in
the Common Stock is suspended by the Trading Market, or (ii) following the
Effective Date, the Registration Statement is not effective or the prospectus
included in the Registration Statement may not be used by the Holders for the
resale of Common Stock. This Section 5(j) shall not apply to any
“Exempt Issuance” as such term is defined in the Warrant.
(k)
From
the
Effective Date until the Cessation Date (as defined below), the Company will
not, directly or indirectly, effect any sale, issuance or exchange of any Equity
Securities (a “
Subsequent Placement
”) unless the Company shall have first
complied with this Section 5(k).
(i)
The
Company shall deliver to each 2007 Holder a written notice (the “
Offer
”)
of any proposed or intended sale, issuance or exchange of the securities
being
offered
(the “
Offered Securities
”) in a Subsequent Placement, which Offer shall
(w) identify and describe the Offered Securities, (x) describe the price and
other terms upon which they are to be sold, issued or exchanged, and the number
or amount of the Offered Securities to be sold, issued or exchanged, (y)
identify the persons or entities to which or with which the Offered Securities
are to be offered, sold, issued or exchanged, and (z) offer to sell and issue
to
or exchange with each 2007 Holder (A) a pro rata portion of the Offered
Securities based on such 2007 Holder’s pro rata portion of the aggregate
principal amount of the 2007 Notes purchased or received by such 2007 Holder
(the “
Basic Amount
”), and (B) with respect to each 2007 Holder that
elects to purchase its Basic Amount, any additional portion of the Offered
Securities attributable to the Basic Amounts of other 2007 Holders as such
2007
Holder shall indicate it will purchase or acquire should the other 2007 Holders
subscribe for less than their Basic Amounts (the “
Undersubscription
Amount
”).
(ii)
To
accept
an Offer, in whole or in part, a 2007 Holder must deliver a written notice
to
the Company prior to the end of the 10 trading day period following receipt
of
the Offer, setting forth the portion of the 2007 Holder’s Basic Amount that such
2007 Holder elects to purchase and, if such 2007 Holder shall elect to purchase
all of its Basic Amount, the Undersubscription Amount, if any, that such 2007
Holder elects to purchase (in either case, the “
Notice of Acceptance
”).
If the Basic Amounts subscribed for by all 2007 Holders are less than the total
of all of the Basic Amounts, then each 2007 Holder who has set forth an
Undersubscription Amount in its Notice of Acceptance shall be entitled to
purchase, in addition to the Basic Amounts subscribed for, the Undersubscription
Amount it has subscribed for; provided, however, that if the Undersubscription
Amounts subscribed for exceed the difference between the total of all the Basic
Amounts and the Basic Amounts subscribed for (the “
Available
Undersubscription Amount
”), each 2007 Holder who has subscribed for any
Undersubscription Amount shall be entitled to purchase only that portion of
the
Available Undersubscription Amount as the Basic Amount of such 2007 Holder
bears
to the total Basic Amounts of all 2007 Holders that have subscribed for
Undersubscription Amounts.
(iii)
The
Company shall have 10 trading days from the expiration of the period set forth
in Section 5(k)(ii) above to sell, issue or exchange all or any part of such
Offered Securities as to which a Notice of Acceptance has not been given by
the
2007 Holders (the “
Refused Securities
”), but only to the offerees
described in the Offer and only upon terms and conditions (including, without
limitation, unit prices and interest rates), taken as a whole, that are not
more
favorable to the acquiring persons or entities or less favorable to the Company
than those set forth in the Offer.
(iv)
In
the
event the Company shall propose to sell less than all the Refused Securities
(any such sale to be in the manner and on the terms specified in Section
5(j)(iii) above), then each 2007 Holder may, at its sole option and in its
sole
discretion, reduce the number or amount of the Offered Securities specified
in
its Notice of Acceptance to an amount that shall be not less than the number
or
amount of the Offered Securities that the 2007 Holder elected to purchase
pursuant to Section 5(k)(ii) above multiplied by a fraction, (i) the numerator
of which shall be the number or amount of Offered Securities the Company
actually proposes to issue, sell or exchange (including Offered Securities
to be
issued or sold to 2007 Holders pursuant to Section 5(k)(ii) above prior to
such
reduction) and (ii) the denominator of
which
shall be the original amount of the Offered Securities. In the event
that any 2007 Holder so elects to reduce the number or amount of Offered
Securities specified in its Notice of Acceptance, the Company may not issue,
sell or exchange more than the reduced number or amount of the Offered
Securities unless and until such securities have again been offered to the
2007
Holders in accordance with Section 5(k)(i) above.
(v)
Upon
the
closing of the sale, issuance or exchange of all or less than all of the Refused
Securities, the 2007 Holders shall acquire from the Company, and the Company
shall issue to the 2007 Holders, the number or amount of Offered Securities
specified in the Notices of Acceptance, as reduced pursuant to Section 5(k)(iv)
above if the 2007 Holders have so elected, upon the terms and conditions
specified in the Offer. The purchase by the 2007 Holders of any
Offered Securities is subject in all cases to the preparation, execution and
delivery by the Company and the 2007 Holders of a purchase agreement relating
to
such Offered Securities reasonably satisfactory in form and substance to the
2007 Holders, the Company and their respective
counsel. Notwithstanding anything to the contrary contained in this
Agreement, if the Company does not consummate the closing of the sale, issuance
or exchange of all or less than all of the Refused Securities within 7 trading
days after the expiration of the period set forth in Section 5(k)(ii), the
Company shall issue to the 2007 Holders the number or amount of Offered
Securities specified in the Notices of Acceptance, as reduced pursuant to
Section 5(j)(iv) above if the 2007 Holders have so elected (which, in this
case
may be reduced to zero), upon the terms and conditions specified in the
Offer.
(vi)
The
Company and the 2007 Holders agree that if any 2007 Holder elects to participate
in the Offer, any registration rights set forth in the agreement regarding
the
Subsequent Placement with respect to such Offer or any other transaction
documents related thereto (collectively, the “
Subsequent Placement
Documents
”) shall not entitle the purchasers of any Offered Securities
issued in such Subsequent Placement to participate in any registration statement
filed under the Registration Rights Agreement and shall not obligate the Company
to file a registration statement with respect to such Offered Securities unless
one or more registration statements covering all shares of Common Stock issued
or issuable upon the conversion of the 2007 Notes or the exercise of the
Warrants are then effective. The Subsequent Placement Documents shall
not include any term or provision whereby any 2007 Holder shall be required
to
agree to any restrictions in trading as to any securities of the Company owned
by such 2007 Holder prior to such Subsequent Placement if the 2007 Holders
purchase all of the Offered Securities, and, in all other cases, such
restrictions shall apply only to 2007 Holders who participate in the Subsequent
Placement and the period of such restrictions shall not exceed ninety (90)
days
after the closing of the Subsequent Placement.
(vii)
Notwithstanding
anything to the contrary in this Section 5(k) and unless otherwise agreed to
by
the 2007 Notes Majority Holders (as defined in section 7(b) hereof), the Company
shall either confirm in writing to the 2007 Holders that the transaction with
respect to the Subsequent Placement has been abandoned or shall publicly
disclose its intention to issue the Offered Securities, in either case in such
a
manner such that the 2007 Holders will not be in possession of material
non-public information as a result of having information concerning the proposed
Subsequent Placement, by the seventeenth (17th) trading day following
delivery
of
the
Offer. If by the seventeenth (17th) trading day following delivery of the Offer
no public disclosure regarding a transaction with respect to the Offered
Securities has been made, and no notice regarding the abandonment of such
transaction has been received by the 2007 Holders, such transaction shall be
deemed to have been abandoned and the 2007 Holders shall not be deemed to be
in
possession of any material, non-public information with respect to the Company
as a result of having information concerning the proposed Subsequent Placement.
Should the Company decide to pursue such transaction with respect to the Offered
Securities, the Company shall provide each 2007 Holder with another Offer Notice
and each 2007 Holder will again have the right of participation set forth in
this Section 5(k). The Company shall not be permitted to deliver more than
one
such Offer to the 2007 Holders in any 60 day period.
(viii)
Any
Offered Securities not acquired by the 2007 Holders or the offerees in
accordance with Section 5(k)(iii) above may not be issued, sold or exchanged
until they are again offered to the 2007 Holders under the procedures specified
in this Agreement.
(ix)
This
Section 5(k) shall not apply to any “Exempt Issuance” as such term is defined in
the Form of Warrant.
(x)
For
purposes of this Agreement, the term “
Cessation Date
” shall mean the
first day on which the Purchasers (including transferees treated as Purchasers
pursuant to Section 11(c) of the Subscription Agreement) no longer hold: (x)
prior to the conversion of the Purchased Notes, Notes representing at least
25%
of the aggregate principal amount of all Purchased Notes issued in the Offering,
and (y) after the conversion of the Purchased Notes, (A) if the Per Share
Exercise Price (as such term is defined in the Warrants) is greater than the
closing price of the Common Stock last reported by the Trading Market prior
to
such day, shares of Common Stock representing at least 25% of the aggregate
shares of Common Stock issued upon the conversion of the Purchased Notes or
previously issued upon the exercise of any Warrants, or (B) if the Per Share
Exercise Price is less than the closing price of the Common Stock last reported
by the Trading Market prior to such day, shares of Common Stock representing
at
least 25% of the aggregate shares of Common Stock issued upon the conversion
of
the Purchased Notes, previously issued upon the exercise of any Warrants, or
issuable upon the future exercise of any Warrants (treating the Purchasers
as
holding any shares of Common Stock that would be issuable upon the exercise
of
any Warrants then held by Purchasers).
(l)
The
Company acknowledges and agrees that each Holder may from time to time pledge
pursuant to a bona fide margin agreement with a registered broker-dealer or
grant a security interest in some or all of the Subject Securities to a
financial institution that is an “accredited investor” as defined in Rule 501(a)
under the Securities Act and who agrees to be bound by the provisions of this
Agreement and the Registration Rights Agreement and, if required under the
terms
of such arrangement, each Holder may transfer pledged or secured
Subject Securities to the pledgees or secured parties. Such a pledge or transfer
would not be subject to approval of the Company and no legal opinion of legal
counsel of the pledgee, secured party or pledgor shall be required in connection
therewith. Further, no notice shall be required of such
pledge. At each Holder ’s expense, the Company will execute and
deliver such reasonable documentation as a pledgee or secured party of Subject
Securities may reasonably request in connection with a pledge or transfer of
the
Subject Securities, including, if the Subject Securities are subject to
registration pursuant to the Registration Rights Agreement, the preparation
and
filing
of
any required prospectus supplement under Rule 424(b)(3) under the Securities
Act
or other applicable provision of the Securities Act to appropriately amend
the
list of selling stockholders thereunder.
(m)
Prior
to
the Automatic Conversion Date (as defined in the Form of New Note), the Company
will not enter into any agreement for additional financing through equity or
equity-linked securities on terms that are materially different or more
beneficial to the purchasers of such equity or equity linked securities than
those contained in the Subscription Agreement and all exhibits thereto without
the prior consent of the 2007 Notes Majority Holders (as defined in section
7(b)
hereof).
(n)
From
the
date hereof until such time as no Holder holds any of the Subject Securities,
the Company will, at its own expense, maintain insurance (including, without
limitation, commercial general liability and property insurance, and directors
and officers liability insurance, including such directors and officers
liability insurance in respect of acts or omissions occurring prior to the
Closing covering each such person serving as an officer or director of the
Company immediately prior to the Closing to the extent that such coverage is
in
place as of the Closing) in such amounts, against such risks, in such form
and
with responsible and reputable insurance companies or associations as is
required by any governmental authority having jurisdiction with respect thereto
or as is carried generally in accordance with sound business practice by
companies in similar businesses similarly situated and in any event, in amount,
adequacy, scope and with comparable insurance companies as the insurance in
place as of the date of this Agreement; provided, if the Closing shall not
have
occurred prior to September 21, 2007 the directors and officers liability
coverage may be reduced to $7,000,000.
(o)
Except
with respect to the material terms and conditions of the transactions
contemplated by the 2007 Transaction Documents and the Subscription Agreement,
the Company covenants and agrees that neither it nor any other person or entity
acting on its behalf will, following the Closing, provide any Holder or its
agents or counsel with any information that the Company believes constitutes
material non-public information, unless prior thereto such Holder shall have
executed a written agreement (which may be in the form of an e-mail or other
electronic confirmation) regarding the confidentiality and use of such
information. The Company understands and confirms that each Holder
shall be relying on the foregoing representations in effecting transactions
in
securities of the Company.
(p)
From
the
date hereof until such time as no Holder holds any of the Subject Securities,
the Company shall not effect or enter into an agreement to effect any financing
involving a Variable Rate Transaction. “
Variable Rate
Transaction
” means a transaction in which the Company issues or sells
(i) any Equity Securities that are convertible into, exchangeable or
exercisable for, or include the right to receive additional shares of Common
Stock either (A) at a conversion, exercise or exchange rate or other price
that is based upon and/or varies with the trading prices of or quotations for
the shares of Common Stock at any time after the initial issuance of such Equity
Security, or (B) with a conversion, exercise or exchange price that is
subject to being reset at some future date after the initial issuance of such
Equity Security or upon the occurrence of specified or contingent events
directly or indirectly related to the business of the Company or the market
for
the Common Stock or (ii) enters into any
agreement,
including, but not limited to, an equity line of credit, whereby the Company
may
sell securities at a future determined price.
(q)
Notwithstanding
Section 6(b), the Company agrees to issue or reissue certificates of Common
Stock without a legend if at such time, prior to making any transfer of any
Common Stock, each Holder shall give written notice to the Company making such
request and: (i) a registration statement covering the resale of such
Common Stock is effective under the Securities Act, or (ii) each Holder
provides the Company or its counsel with reasonable assurances that such
security can be sold pursuant to Rule 144 promulgated under the Securities
Act
or any successor or replacement rule (as applicable, “
Rule 144
”) (which
may include an opinion of counsel provided by the Company), or (iii) each
Holder provides the Company or its counsel with reasonable assurances
that such security can be sold pursuant to section (k) of Rule 144 (or a
corresponding successor or replacement section, as applicable, “
Rule
144(k)
”), or (iv) the Company has received other evidence reasonably
satisfactory to the Company that such legend is not required under applicable
requirements of the Securities Act and state securities laws (including judicial
interpretations and pronouncements issued by the staff of the
Commission). The Company shall cause its counsel to issue a legal
opinion to its transfer agent, after each Holder has provided the Company’s
counsel with all necessary documentation required by such counsel to issue
such
an opinion, if such legal opinion is required by the transfer agent to effect
the removal of the legend hereunder. If all or any portion of a 2007
Note is converted or exercised (as applicable) at a time when there is an
effective registration statement to cover the resale of the Common Stock issued
upon such conversion or exercise, or if such shares of Common Stock may be
sold
under Rule 144(k) or if such legend is not otherwise required under applicable
requirements of the Securities Act (including judicial interpretations and
pronouncements issued by the staff of the Commission) then certificates
representing such shares of Common Stock shall be issued free of all
legends. The Company agrees that at such time as such legend is no
longer required under this Section 5(q) and each Holder has
complied with this Section 5(q), it will, no later than three trading days
following the delivery by each Holder to the Company or the transfer
agent of a certificate representing shares of Common Stock issued with a
restrictive legend, deliver or cause to be delivered to each Holder a
certificate representing such shares that is free from all restrictive and
other
legends. The Company may not make any notation on its records or give
instructions to the transfer agent that enlarge the restrictions on transfer
set
forth in this Section 5(q). Certificates for shares of Common Stock
subject to legend removal hereunder shall, at the direction of each Holder
, be
transmitted by the transfer agent of the Company to each Holder by
crediting the account of each Holder ’s prime broker with the Depository Trust
Company System.
(r)
At
all
times until the Investor Rights Agreement has terminated in accordance with
its
terms (the “
Designation Period
”), the Company will cause two individuals
designated by Lambda (the individuals whom Lambda has so designated from time
to
time are referred to herein as the “
Lambda Designees
”) to be members of
the Board of Directors of the Company except to the extent that (i) Lambda
otherwise consents in writing, or (ii) a member of the Board of Directors
originally designated by Lambda resigns and Lambda has not yet designated a
successor. Without limiting the generality of the foregoing, during
the Designation Period the Company will cause the Lambda Designees to be elected
or nominated to the Board of Directors, to promptly remove any Lambda Designee
from the Board of Directors upon the
written
direction of Lambda, and to promptly elect or appoint any successor designated
by Lambda having reasonably appropriate business experience and background
to
fill any vacancy caused by any Lambda Designee ceasing to be a member of the
Board of Directors for any reason.
6.
Covenants
of
the Holders
.
(a)
Each
Holder agrees that no sale, assignment or transfer of any of the Subject
Securities acquired by such Holder shall be valid or effective, and the Company
shall not be required to give any effect to such a sale, assignment or transfer,
unless (i) the sale, assignment or transfer of such Subject Securities is
registered under the Securities Act, it being understood that the Subject
Securities are not currently registered for sale and that the Company has no
obligation or intention to so register the Subject Securities, except as
provided by the 2007 Registration Rights Agreement; (ii) the Subject Securities
are sold, assigned or transferred in accordance with all the requirements and
limitations of an exemption from registration under the Securities
Act. Without limiting the generality of the foregoing, each Holder
agrees that following the removal of the restrictive legend from certificates
representing Common Stock, such Holder will sell any such Common Stock pursuant
to either the registration requirements of the Securities Act, including any
applicable prospectus delivery requirements, or an exemption therefrom, and
that
if shares of Common Stock are sold pursuant to a Registration Statement, they
will be sold in compliance with the plan of distribution set forth
therein.
(b)
Each
Holder agrees to the imprinting, so long as is required by Section 6(b)(i),
of a legend on any of the Securities in the following or a substantially similar
form and such other legends as may be required by state blue sky
laws:
“THE
SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES
SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY STATE
SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF A
REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO SUCH SECURITIES UNDER THE
SECURITIES ACT OR AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS
OF
THE SECURITIES ACT. ANY SUCH TRANSFER MAY ALSO BE SUBJECT TO
COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS.”
(c)
Each
Holder hereby agrees that from the date hereof and continuing until such Holder
no longer owns any Subject Securities, such Holder shall not, without the prior
written consent of the Company, directly or indirectly, through related parties,
affiliates or otherwise, (i) sell “short” or “short against the box” (as those
terms are generally understood) any equity security of the Company or (ii)
otherwise engage in any transaction which involves hedging of such Holder’s
position in any equity security of the Company, provided, however, that it
shall
not be a violation of this Section 6(b)(i), if such Holder places a sell order
for shares of Common Stock underlying the New Notes at or following the time
of
conversion of such New Notes, relies on the Company to deliver such Common
Stock
in accordance with the Form of
New
Note,
and completes the sale of such Common Stock before the Company delivers the
Common Stock to such Holder.
(d)
Upon
the
terms and subject to the conditions hereof, each Holder shall use its reasonable
best efforts to take, or cause to be taken, all appropriate actions and do,
or
cause to be done, all things necessary, proper or advisable to consummate and
make effective as promptly as practicable the transactions contemplated by
this
Agreement (including, without limitation, to cause the conditions in paragraphs
(a), (b) and (c) of Section 5 to be satisfied) and to cooperate with the Company
in connection with the foregoing.
(e)
After
the
Closing, upon the request of the Company each Holder shall provide to the
Company such additional information and documentation concerning such Holder’s
legal or beneficial ownership, policies, procedures and sources of funds as
is
reasonably necessary to enable the Company to comply with Anti-Money Laundering
Laws now in existence or hereafter enacted or amended.
7.
Indemnification
.
(a)
General
. The
Company shall indemnify and hold harmless each Holder and each
officer, director, partner, employee, agent and controlling person of each
Holder (within the meaning of Section 15 of the Securities Act and
Section 20 of the Exchange Act), past, present or future (each, an
“
Indemnified Party
”), from and against any and all claims, losses,
damages, liabilities, judgments, fines, penalties, charges, costs, and expense,
including reasonable attorneys fees and disbursements including those incurred
in enforcing this Section 7(a) (collectively, “
Losses
”), due to or
arising out of (i) a breach of any representation, warranty, covenant or
agreement by the Company in this Agreement or any other 2007 Transaction
Document, or (ii) a claim against any Holder by a third party based on the
transactions contemplated by the 2007 Transaction Documents (other than a claim
based on a breach by each Holder of any representation, warranty or covenant
of
each Holder in the 2007 Transaction Documents to which it is a
party). No knowledge by any Holder of any breach or inaccuracy of any
representation, warranty, covenant or agreement by the Company in this Agreement
shall impair, limit, release or otherwise impair any rights of any
Holder pursuant to this Section 7.
(b)
Limitation
on Indemnification
. The maximum amount payable by the Company to
all Indemnified Parties in respect of claims made for indemnification under
Section 7(a) shall not exceed, in the aggregate, the aggregate amount of the
New
Note(s) received by such Holder in the Exchange plus the Indemnified Parties’
reasonable out-of-pocket expenses incurred in connection with (i) the 2007
Transaction Documents and the transactions contemplated thereby, (ii)
enforcing its rights under Section 7(a) and (iii) defending itself against
any
claim related to the 2007 Transaction Documents or the transactions contemplated
thereby. No Indemnified Party shall be entitled to bring a claim with
respect to Losses due to or arising out of a breach by the Company of any
representation or warranty contained in Sections 3(e) through (ii) (including
a
claim permitted by clause (i) or (ii) of Section 7(c)) unless such claim is
brought by, or the bringing of such claim is consented to in writing by, the
2007 Notes Majority Holders. For purposes of this Section 7(b), the
“
2007 Notes Majority Holders
” shall be (x) prior to the conversion of the
2007 Notes, holders of 2007 Notes having a principal amount greater than fifty
percent (50%) of the principal amount of all 2007 Notes then outstanding, and
(y) after
the
conversion of the 2007 Notes, the holders of a majority of the shares of Common
Stock that were issued upon the conversion of the 2007 Notes or were issued
or
are issuable upon the exercise of the Warrants (excluding from such analysis
any
shares of Common Stock that have been sold pursuant to an effective registration
statement or Rule 144 and the holders thereof). Once a claim has been
brought or approved by the 2007 Notes Majority Holders, each Indemnified Party
may continue to prosecute such claim even if the persons or entities bringing
or
approving such claim subsequently cease to constitute the 2007 Notes Majority
Holders.
(c)
Sole
Remedy
. The parties hereto agree and acknowledge that subsequent
to the Closing, the indemnification rights provided in this
Section 7
shall be the exclusive remedy of the each party hereto against the Company,
for
breaches of the representations and warranties contained in this Agreement
except with respect to (i) claims involving fraud or a knowing breach of the
representations and warranties or (ii) any equitable relief to which any party
may be entitled, including without limitation, rescission.
(d)
Notice
. With
respect to any Loss related to a claim by a third party, an Indemnified Party
shall give written notice thereof to the Company (in such capacity, the
“
Indemnifying Party
”) promptly after receipt of any written claim by such
third party and in any event not later than twenty (20) business days after
receipt of any such written claim (or not later than ten (10) business days
after the receipt of any such written claim in the event such written claim
is
in the form of a formal complaint filed with a court of competent jurisdiction
and served on the Indemnified Party), specifying in reasonable detail the
amount, nature and source of the claim, and including therewith copies of any
notices or other documents received from third parties with respect to such
claim;
provided
,
however
, that failure to give such notice
shall not limit the right of an Indemnified Party to recover indemnity or
reimbursement except to the extent that the Indemnifying Party suffers any
prejudice or harm with respect to such claim as a result of such
failure. The Indemnified Party shall also provide the Indemnifying
Party with such further information concerning any such claims as the
Indemnifying Party may reasonably request by written notice.
(e)
Payment
of Losses
. Within thirty (30) calendar days after receiving
notice of a claim for indemnification or reimbursement, the Indemnifying Party
shall, by written notice to the Indemnified Party, either (i) concede or deny
liability for the claim in whole or in part, or (ii) in the case of a claim
asserted by a third party, advise that the matters set forth in the notice
are,
or will be, subject to contest or legal proceedings not yet finally
resolved. If the Indemnifying Party concedes liability in whole or in
part, it shall, within twenty (20) business days of such concession, pay the
amount of the claim to the Indemnified Party to the extent of the liability
conceded. Any such payment shall be made in immediately available
funds equal to the amount of such claim so payable. If the
Indemnifying Party denies liability in whole or in part or advises that the
matters set forth in the notice are, or will be, subject to contest or legal
proceedings not yet finally resolved, then the Indemnifying Party shall make
no
payment (except for the amount of any conceded liability payable as set forth
above) until the matter is resolved in accordance with this
Agreement.
(f)
Defense
of Claims
. In the case of any third party claim, if within 20
days after receiving the notice described in the preceding Section 7(d), the
Indemnifying Party (i) gives written notice to the Indemnified Party stating
that the Indemnifying Party would be liable
under
the
provisions hereof for indemnity in the amount of such claim if such claim were
valid and that the Indemnifying Party disputes and intends to defend against
such claim, liability or expense at the Indemnifying Party’s own cost and
expense, and (ii) provides assurance reasonably acceptable to such Indemnified
Party that such indemnification will be paid fully and promptly if required
and
such Indemnified Party will not incur cost or expense during the proceeding,
then the Indemnifying Party shall be entitled to assume the defense of such
claim and to choose counsel for the defense (subject to the consent of such
Indemnified Party which consent shall not be unreasonably withheld) and such
Indemnified Party shall not be required to make any payment with respect to
such
claim, liability or expense as long as the Indemnifying Party is conducting
a
good faith and diligent defense at its own expense; provided, however, that
the
assumption of the defense of any such matters by the Indemnifying Party shall
relate solely to the claim, liability or expense that is subject or potentially
subject to indemnification. If the Indemnifying Party assumes such
defense in accordance with the preceding sentence, it shall have the right
to
settle indemnifiable matters related to claims by third parties where (x) the
only obligation of the Indemnified Party and Indemnifying Party in connection
with such settlement is the payment of money damages and such money damages
are
satisfied in full by the Indemnifying Party, and (ii) the settlement includes
a
complete release of the relevant Indemnified Party or Parties. Any
other settlement of a claim for which the Indemnifying Party has assumed the
defense shall require the prior written consent of the relevant Indemnified
Party or Parties, which consent shall not be unreasonably
withheld. No Indemnified Party shall settle any claim with respect to
which the Indemnifying Party has assumed the defense, without the prior written
consent of the Indemnifying Party. The Indemnifying Party shall keep
such Indemnified Party apprised of the status of the claim, liability or expense
and any resulting suit, proceeding or enforcement action, shall furnish such
Indemnified Party with all documents and information that such Indemnified
Party
shall reasonably request and shall consult with such Indemnified Party prior
to
acting on major matters, including settlement
discussions. Notwithstanding anything herein stated, such Indemnified
Party shall at all times have the right to participate in, but not control,
such
defense at its own expense directly or through counsel;
provided
,
however
, if the named parties to the action or proceeding include
both
the Indemnifying Party and the Indemnified Party and representation of both
parties by the same counsel would be inappropriate under applicable standards
of
professional conduct, the reasonable expense of separate counsel for such
Indemnified Party shall be paid by the Indemnifying Party provided that such
Indemnifying Party shall be obligated to pay for only one such
counsel. If no such notice of intent to dispute and defend is given
by the Indemnifying Party, or if such diligent good faith defense is not being
or ceases to be conducted, such Indemnified Party may undertake the defense
of
(with counsel selected by such Indemnified Party, which selection shall require
the consent of the Indemnifying Party, which consent shall not be unreasonably
withheld, and paid by the Indemnifying Party), and shall have the right to
compromise or settle, such claim, liability or expense (exercising reasonable
business judgment) with the consent of the Indemnifying Party, which consent
shall not be unreasonably withheld. Such Indemnified Party shall make
available all information and assistance that the Indemnifying Party may
reasonably request and shall cooperate with the Indemnifying Party in such
defense.
8.
Creation
of Security Interest
.
(a)
Grant
of Security Interest
. The Company hereby confirms that it has
granted and pledged to Lambda (the “
Secured Party
”) a continuing security
interest in the Collateral (as defined in the Form of New Note) in order to
secure prompt payment of the principal of, interest on and all other amounts
due
and payable under the 2007 Notes (collectively, the
“
Obligations
”). Such security interest will automatically
terminate upon the (i) earlier of the payment of principal and interest on
the
2007 Notes; (ii) such time as the Company designates sufficient funds (which
may
be proceeds from the sale of Collateral) for the payment of the 2007 Notes
and
(iii) the Automatic Conversion Date (as defined in the Form of New Note) (the
“
Security Interest Termination Date
”).
(b)
Designation
of Secured Party as Agent
. Each Holder hereby irrevocably
designates the Secured Party to act as Secured Party on such Holder’s
behalf. Each Holder hereby irrevocably authorizes, and each holder of
any Subject Securities, by such holder’s acceptance of such Subject Securities,
shall be deemed irrevocably to authorize, the Secured Party to take such action
on its behalf under the provisions of this Agreement and any other instruments
and agreements referred to herein or therein and to exercise such powers and
to
perform such duties hereunder and thereunder as are specifically delegated
to,
or required of, the Secured Party by the terms hereof or thereof and such other
powers as are reasonably incidental thereto. Each Holder, on behalf
of itself and future holders of the Subject Securities issued to such Holder,
hereby authorizes and directs the Secured Party, from time to time in the
Secured Party’s discretion, to take any action and promptly to execute and
deliver on such Holder’s behalf any document or instrument that the Company may
reasonably request to effect, confirm or evidence the provisions of this Section
8, the occurrence of the Security Interest Termination Date, any subordination
agreement, or otherwise. Pursuant to Section 9-509(d) of the Uniform
Commercial Code as in effect on the date hereof in the State of New York, the
Secured Party hereby authorizes the Company to file a termination statement
upon
the occurrence of the Security Interest Termination Date; the Secured Party
agrees to provide any further authorizations of such filing if requested by
the
Company. In no event shall the Secured Party have any liability or
other obligation to the Company or any Holder whatsoever as a result of any
act
or omission taken or failed to be taken in its capacity as the Secured Party,
and the Company and each Holder hereby irrevocably release the Secured Party
from any and all such liabilities or other obligations.
(c)
Delivery
of Additional Documentation Required
. The Company shall from time
to time execute and deliver to Secured Party, at the request of Secured Party,
all financing statements and other documents that Secured Party may reasonably
request and take any action that Secured Party may reasonably request to perfect
and continue perfected Secured Party’s security interests in the
Collateral. Without limiting the generality of the foregoing, the
Company shall, upon the Secured Party’s written request, duly execute and
deliver any (i) assignment for security with respect to Intellectual
Property in a form reasonably requested by the Secured Party, and (ii) any
account control agreement with respect to any account holding Collateral in
a
form reasonably requested by the Secured Party. Notwithstanding the
foregoing, the Company need not deliver possession or control of any Collateral
to the Secured Party or take any action to perfect the security interest granted
hereby other than the filing of financing
statements
under the Uniform Commercial Code, the delivery and filing of any assignments
for security with respect to Intellectual Property and the entry into account
control agreements with respect to accounts holding Collateral. The
Secured Party may, at any time and from time to time, file financing statements,
continuation statements and amendments thereto that describe the Collateral
as
all assets of the Company or words of similar effect.
(d)
Remedies
of Secured Party
. If any Event of Default as defined in the New
Notes shall have occurred and be continuing, the Secured Party may exercise
in
respect of the Collateral, in addition to any other rights and remedies provided
for herein or otherwise available to it, all of the rights and remedies of
a
secured party upon default under the Uniform Commercial Code (whether or not
the
Uniform Commercial Code applies to the affected Collateral), and also may
(i) take absolute control of the Collateral, including, without limitation,
transfer into the Secured Party’s name or into the name of its nominee or
nominees (to the extent the Secured Party has not theretofore done so) and
thereafter receive, for the benefit of the holders of the 2007 Notes, all
payments made thereon, give all consents, waivers and ratifications in respect
thereof and otherwise act with respect thereto as though it were the outright
owner thereof, (ii) require the Company to, and the Company hereby agrees
that it will at its expense and upon request of the Secured Party forthwith,
assemble all or part of its respective Collateral as directed by the Secured
Party and make it available to the Secured Party at a place or places to be
designated by the Secured Party that is reasonably convenient to both parties,
and the Secured Party may enter into and occupy any premises owned or leased
by
the Company where the Collateral or any part thereof is located or assembled
for
a reasonable period in order to effectuate the Secured Party’s rights and
remedies hereunder or under law, without obligation to the Company in respect
of
such occupation, and (iii) without notice except as specified below and
without any obligation to prepare or process the Collateral for sale,
(A) sell the Collateral or any part thereof in one or more parcels at
public or private sale, at any of the Secured Party’s offices or elsewhere, for
cash, on credit or for future delivery, and at such price or prices and upon
such other terms as the Secured Party may deem commercially reasonable and/or
(B) lease, license or dispose of the Collateral or any part thereof upon
such terms as the Secured Party may deem commercially reasonable. The
Company agrees that, to the extent notice of sale or any other disposition
of
its respective Collateral shall be required by law, at least 10 days’
notice to the Company of the time and place of any public sale or the time
after
which any private sale or other disposition of its Collateral is to be made
shall constitute reasonable notification. The Secured Party shall not
be obligated to make any sale or other disposition of any Collateral regardless
of notice of sale having been given. The Secured Party may adjourn
any public or private sale from time to time by announcement at the time and
place fixed therefor, and such sale may, without further notice, be made at
the
time and place to which it was so adjourned. The Company hereby
waives any claims against the Secured Party and the holders of the 2007 Notes
arising by reason of the fact that the price at which the Collateral may have
been sold at a private sale was less than the price which might have been
obtained at a public sale or was less than the aggregate amount of the
Obligations, even if the Secured Party accepts the first offer received and
does
not offer such Collateral to more than one offeree, and waives all rights that
the Company may have to require that all or any part of such Collateral be
marshaled upon any sale (public or private) thereof. The Company hereby
acknowledges that (x) any such sale of the Collateral by the Secured Party
shall be made without warranty, (y) the Secured Party may specifically
disclaim any warranties of title, possession, quiet enjoyment or the like,
and
(z) such
actions set forth in clauses (x) and (y) above shall not adversely affect
the commercial reasonableness of any such sale of Collateral. In
addition to the foregoing, (A) upon written notice to the Company from the
Secured Party after and during the continuance of an Event of Default, the
Company shall cease any use of the Intellectual Property for any purpose
described in such notice; (B) the Secured Party may, at any time and from
time to time after and during the continuance of an Event of Default, upon
10 days’ prior notice to the Company, license, whether general, special or
otherwise, and whether on an exclusive or non-exclusive basis, any of the
Intellectual Property, throughout the universe for such term or terms, on such
conditions, and in such manner, as the Secured Party shall in its sole
discretion determine; and (C) the Secured Party may, at any time, pursuant
to the authority granted in Section 8 hereof (such authority being
effective upon the occurrence and during the continuance of an Event of
Default), execute and deliver on behalf of the Company, one or more instruments
of assignment of the Intellectual Property (or any application or registration
thereof), in form suitable for filing, recording or registration in any
country.
(e)
Benefits
to Holders of 2007 Notes
. The rights of the Secured Party are for
the ratable benefit of the holders of the 2007 Notes (including the Secured
Party). Any proceeds or other Collateral received or recovered by the
Secured Party in its capacity as such shall, in the sole discretion of the
Secured Party, either (i) be held (or sold, liquidated or otherwise converted
into another form of proceeds or other Collateral that is held) by the Secured
Party for the ratable benefit of the holders of the 2007 Notes, as collateral
security for the Obligations (whether matured or unmatured), (ii) after and
during the continuance of an Event of Default, be retained by the Secured Party
to reimburse the Secured Party for its reasonable costs and expenses, including
attorneys fees and disbursements, incurred in serving as the Secured Party,
and/or (iii) after and during the continuance of an Event of Default, be
distributed to the holders of the 2007 Notes on a pro rata basis based on the
respective amounts then due and owing to the respective holders of the 2007
Notes. After and during the continuance of an Event of Default, the
Secured Party shall distribute any cash Collateral then held by the Secured
Party in accordance with clause (iii) of the proceeding sentence to the extent
that such cash Collateral exceeds the costs or expenses described in clause
(ii)
of the preceding sentence that have already been incurred or are reasonably
expected by the Secured Party to be incurred unless the Secured Party has
determined, upon the advice of counsel, that it is not entitled to distribute
such cash Collateral at such time, in which case the Secured Party shall make
such distributions as soon as practicable after the Secured Party determines
that it is entitled to distribute such cash Collateral.
9.
Confidentiality
. Each
Holder acknowledges and agrees that all information, written and oral,
concerning the Company furnished from time to time to such Holder and identified
as confidential has been and is provided on a confidential basis pursuant to
a
confidentiality agreement between such Holder and the Company.
10.
Expenses
. The
Company shall pay, in connection with the preparation, execution and delivery
of
this Agreement, the other 2007 Transaction Documents and the consummation of
the
transactions contemplated hereby and thereby, all reasonable fees and out of
pocket expenses incurred by the Holders in connection with the Exchange up
to an
aggregate maximum amount of $10,000, whether or not the transactions
contemplated by the 2007 Transaction Documents are consummated.
11.
Miscellaneous
.
(a)
This
Agreement, including the exhibits hereto, sets forth the entire understanding
of
the parties with respect to each Holder’s Exchange of Old Notes for New Notes
with the Company, supersedes all existing agreements among them concerning
such
subject matter, and, subject to paragraph (h) below, may be modified, and the
provisions hereof may be waived, only by a written instrument duly executed
by
the party to be charged;
provided
,
however
, the obligations of the
Company under Sections 5(b), (f), (h), (j), (k), (n) and (p) may be amended
or
waived following the Closing by the 2007 Notes Majority Holders; provided,
further, that any amendment or waiver to any such Sections by the 2007 Notes
Majority Holders must apply to the corresponding Sections of all of the
subscription agreements entered into by the Company in connection with the
Offering.
(b)
Except
as
otherwise specifically provided herein, any notice or other communication
required or permitted to be given hereunder shall be in writing and shall be
mailed by certified mail, return receipt requested, or by Federal Express,
Express Mail or similar guaranteed overnight delivery or courier service or
delivered in person against receipt to the party to whom it is to be
given,
(i)
if
to the
Company,
Nephros,
Inc.
3960
Broadway
New
York,
New York 10032
Attn: President
(ii)
with
a copy to,
Kramer
Levin Naftalis & Frankel LLP
1177
Avenue of the Americas
New
York,
New York 10036
Attention: Thomas
D. Balliett, Esq.
(ii)
if
to a Holder, at the address set forth on the signature page hereof, with a
copy
to,
Stroock
& Stroock & Lavan LLP
180
Maiden Lane
New
York,
New York 10038
Attention: Kristopher
M. Hansen, Esq.
or
in
either case, to such other address as the party shall have furnished in writing
in accordance with the provisions of this
Section 11(b)
. Any
notice given by means permitted by this
Section 11(b)
shall be deemed
given at the time of receipt thereof at the address specified in this
Section
11(b)
.
(c)
This
Agreement shall be binding upon and inure to the benefit of the parties and
their successors and permitted assigns. The Company may not assign this
Agreement or any rights or obligations hereunder without the prior written
consent of each Holder or, after the Closing, the 2007 Majority
Holders. Each Holder may assign any or all of its rights under this
Agreement to any person or entity to whom such Holder assigns or transfers
any
Subject Securities, provided that such transferee agrees in writing to be bound,
with respect to the transferred Subject Securities, by the provisions of the
2007 Transaction Documents that apply to such Subject
Securities. In the event of any assignment pursuant to this Section
11(c), the transferee shall be treated as a Holder to the same extent as if
such
transferee were the original party to this Agreement. Notwithstanding
anything in this Section 11(c) to the contrary, in the event of any assignment
pursuant to this Section 11(c), Holders shall not be entitled to assign any
rights under this Agreement to a purchaser of shares of Common Stock sold by
such Holder pursuant to an effective registration statement or Rule
144.
(d)
The
headings in this Agreement are solely for convenience of reference and shall
be
given no effect in the construction or interpretation of this
Agreement.
(e)
This
Agreement may be executed in any number of counterparts, each of which shall
be
deemed an original, but all of which together shall constitute one and the
same
instrument.
(f)
This
Agreement shall be governed by and construed in accordance with the laws of
the
State of New York, without giving effect to principles governing conflicts
of
law that would defer to the substantive law of another
jurisdiction.
(g)
In
the
event that any provision of this Agreement shall be determined to be illegal
or
unenforceable, that provision will be limited or eliminated to the minimum
extent necessary so that this Agreement shall otherwise remain in full force
and
effect and enforceable.
(h)
This
Agreement does not create, and shall not be construed as creating, any rights
enforceable by any person not a party to this Agreement other than the Secured
Party and each Indemnified Party. The Company and the Holders acknowledge that
the Secured Party’s consent to serve in such capacity is based in part on the
effectiveness of the provisions in Section 8 of this Agreement, and the Company
and the Holders agree that the provisions of Section 8 of this Agreement may
be
enforced by, and may not be modified or waived, without the prior written
consent of the Secured Party.
(i)
Each
party hereto consents and submits to the exclusive jurisdiction of any state
court sitting in the County of New York or federal court sitting in the Southern
District of the State of New York in connection with any dispute arising out
of
or relating to this Agreement, and agrees that all suits, actions and
proceedings brought by such party hereunder shall be brought only in such
jurisdictions. Each party hereto waives any objection to the laying
of venue in such courts and any claim that any such action has been brought
in
an inconvenient forum. To the extent permitted by law, any judgment
in respect of a dispute arising out of or relating to this Agreement may be
enforced in any other jurisdiction within or outside the United States by suit
on the judgment, a certified copy of such judgment being conclusive evidence
of
the fact and amount of such judgment. Each party hereto agrees that
personal service of process
may
be
effected by any of the means specified in Section 12(b), addressed to such
party. The foregoing shall not limit the rights of any party to serve
process in any other manner permitted by law.
(j)
In
the
event of any litigation or other proceeding concerning this Agreement or the
transactions contemplated hereby, including any such litigation or proceeding
with respect to the enforcement of this Agreement against any defaulting party,
the prevailing party in such litigation or proceeding shall be entitled to
reimbursement from the party opposing such prevailing party for all attorneys’
fees and costs incurred by such prevailing party in such litigation or
proceeding
[THE
REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
IN
WITNESS WHEREOF, this Agreement was duly executed on the date first written
above.
|
NEPHROS,
INC.
|
|
By:
/s/ Norman J.
Barta
Name:
Norman
J. Barta
Title:
President and Chief Executive
Officer
|
|
HOLDER: Southpaw
Credit Opportunity Master Fund LP
By: Southpaw
GP LLC
|
|
By:
/s/ Kevin
Wyman
Name:
Kevin
Wyman
Title:Managing
Member
|
|
HOLDER: 3V
Capital Master Fund Ltd.
By: 3V
Capital Management LLC
|
|
By:
/s/ Scott A. Stagg
Name:
Scott
A. Stagg
Title: Managing
Member
|
|
HOLDER: Distressed/High
Yield Trading Opportunities, Ltd.
By:
Eliteperformance Fund, Ltd.
|
|
By:
/s/ Scott A. Stagg
Name:
Scott
A. Stagg
Title: Portfolio Manager
|
|
HOLDER: Kudu
Partners, LP
|
|
By:
/s/ Brian P. Lupien
Name:
Brian
P. Lupien
Title:
Treasurer
|
|
HOLDER: LJHS
Company
|
|
By:
/s/ Jack A. McLeod
Name:
Jack A.
McLeod
Title:
Agent
|
EXHIBIT
A
|
Holder
of Old Note
|
|
Amount
of Old Note
(including
accrued
interest)
|
|
|
|
|
|
|
|
|
Southpaw
Credit Opportunity Master Fund LP
|
|
$
|
2,157,651.10
|
|
|
3V
Capital Master Fund Ltd.
|
|
$
|
1,618,238.32
|
|
|
Distressed/High
Yield Trading Opportunities, Ltd.
|
|
$
|
1,618,238.32
|
|
|
Kudu
Partners
|
|
$
|
107,865.13
|
|
|
LJHS
Company
|
|
$
|
107,865.13
|
|
EXHIBIT
B
(Form
of
New Notes)
EXHIBIT
C
|
Holder
of New Note
|
|
Amount
of New
Note
|
|
|
|
|
|
|
|
|
Southpaw
Credit Opportunity Master Fund LP
|
|
$
|
2,038,461.54
|
|
|
3V
Capital Master Fund Ltd.
|
|
$
|
1,528,846.15
|
|
|
Distressed/High
Yield Trading Opportunities, Ltd.
|
|
$
|
1,528,846.15
|
|
|
Kudu
Partners
|
|
$
|
101,923.08
|
|
|
LJHS
Company
|
|
$
|
107,923.08
|
|
EXHIBIT
D
(Form
of
Subscription Agreement)
EXHIBIT
E
(Form
of
Registration Rights Agreement)
EXHIBIT
F
(Form
of
Investor Rights Agreement)
EXHIBIT
G
ACCREDITED
INVESTOR STATUS
The
Holder represents that it is an Accredited Investor on the basis that it is
(check all that apply):
_____(i) A
bank as defined in Section 3(a)(2) of the Act, or a 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; a broker dealer registered pursuant
to
Section 15 of the Securities Exchange Act of 1934; an insurance company as
defined in Section 2(13) of the Act; an investment company registered under
the
Investment Company Act of 1940 (the “
Investment Company Act
”) or a
business development company as defined in Section 2(a)(48) of the Investment
Company Act; 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; a plan established and maintained by a state, 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; an employee benefit plan within the meaning
of
the Employee Retirement Income Security Act of 1974 (“
ERISA
”), if the
investment decision is made by a plan fiduciary, as defined in Section 3(21)
of
ERISA, 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.
_____(ii) A
private business development company as defined in Section 202(a)(22) of the
Investment Advisers Act of 1940.
_____(iii) An
organization described in Section 501(c)(3) of the Internal Revenue Code,
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.
_____(iv) A
director or executive officer of the Company.
_____(v) A
natural person whose individual net worth, or joint net worth with that person’s
spouse, at the time of his or her purchase exceeds $1,000,000.
_____(vi) 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.
_____(vii) 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) (i.e., a person who
has
such knowledge and experience in financial and business matters that he is
capable of evaluating the merits and risks of the prospective
investment).
_____(viii) An
entity in which all of the equity owners are accredited
investors. (If this alternative is checked, each
Holder must identify each equity owner and provide statements signed
by each demonstrating how each is qualified as an accredited
investor. Further, each Holder represents that it has made
such investigation as is reasonably necessary in order to verify the accuracy
of
this alternative.)
Exhibit
10.3
REGISTRATION
RIGHTS AGREEMENT
This
REGISTRATION RIGHTS AGREEMENT (this “Agreement”) is made and entered into as of
September 19, 2007, among NEPHROS, INC., a Delaware corporation (the “Company”),
and holders of securities of the Company listed as Investors on
Schedule
1
attached hereto (collectively, the “Holders”).
WHEREAS,
the
Holders are the beneficial owners of certain securities issued by the Company;
and
WHEREAS,
the Company and the Holders deem it to be in their respective best interests
to
set forth the rights of the Holders in connection with Registrable Securities
(as defined below).
NOW,
THEREFORE, in consideration of the premises and mutual covenants and obligations
hereinafter set forth, the Company and the Holders, intending legally to be
bound, hereby agree as follows.
Section
1.
Definitions
. As
used in this Agreement, the following terms shall have the following
meanings:
“Affiliate”
of any person means any other person who either directly or indirectly is in
control of, is controlled by, or is under common control with such
person.
“Automatic
Conversion Date” shall mean the twenty-first (21
st
) day after
the
Company sends or gives its stockholders a definitive Schedule 14C information
statement.
“Business
Day” shall mean any Monday, Tuesday, Wednesday, Thursday or Friday that is not a
day on which banking institutions in The City of New York are authorized by
law,
regulation or executive order to close.
“Class
D
Warrants” shall mean the Class D Warrants for the purchase of shares of Common
Stock of the Company.
“Common
Stock” shall mean the common stock, par value $0.001 per share, of the
Company.
“Conversion
Amount” shall mean the principal amount of the Note and all accrued but unpaid
interest thereon as of the Automatic Conversion Date.
“Effectiveness
Date” shall mean, with respect to the Initial Resale Registration Statement, the
one hundred eightieth (180
th
) day following
the
Filing Date;
provided
that
, if the Effectiveness Date falls
on a Saturday, Sunday or any other day which shall be a legal holiday or a
day
on which the SEC is authorized or required by law or other government actions
to
close, the Effectiveness Date shall be the following Business Day.
“Effectiveness
Period” shall have the meaning set forth in Section 3(a).
“Exchange
Act” shall mean the Securities Exchange Act of 1934, as amended (or any similar
successor federal statute), and the rules and regulations thereunder, as the
same are in effect from time to time.
“Exchanged
Notes” shall mean 10% Secured Convertible Notes due 2008 convertible into shares
of Common Stock.
“Filing
Date” shall mean, subject to Section 3(b) hereof, the sixtieth (60
th
) day after
the
date the Company files a definitive Schedule 14C information statement with
the
SEC;
provided
that
, if the Filing Date falls on a Saturday,
Sunday or any other day which shall be a legal holiday or a day on which the
SEC
is authorized or required by law or other government actions to close, the
Filing Date shall be the following Business Day.
“Holder”
shall have the meaning assigned to such term in the preamble
hereof.
“Initial
Resale Registration Statement” shall mean the Registration Statement referred to
in Section 3(a).
“Losses”
shall have the meaning set forth in Section 5(a).
“Notes”
shall mean the Exchanged Notes and the Purchased Notes.
“Person”
shall mean an individual, partnership, corporation, limited liability company,
joint venture, trust or unincorporated organization, a government or agency
or
political subdivision thereof or any other entity.
“Placement
Agent Warrants” shall mean, collectively, each Placement Agent Warrant for the
Purchase of Shares of Common Stock issued by the Company of even date with
the
Class D Warrants.
“Prospectus”
shall mean the prospectus included in any Registration Statement, as amended
or
supplemented by a prospectus supplement with respect to the terms of the
offering of any portion of the Registrable Securities covered by such
Registration Statement and by all other amendments and supplements to the
prospectus, including post-effective amendments and all material incorporated
by
reference in such prospectus.
“Purchased
Notes” shall mean the 10% Secured Convertible Notes due 2008 convertible into
shares of the Company’s Common Stock and Class D Warrants.
“Registrable
Securities” shall mean (i) shares of Common Stock issuable upon conversion of
the Notes or exercise of Class D Warrants, and (ii) any other securities issued
as a result of, or in connection with, any stock dividend, stock split or
reverse stock split, combination, recapitalization, reclassification, merger
or
consolidation, exchange or distribution in respect of the Common Stock referred
to above.
“Registration
Statement” shall mean any registration statement which covers any of the
Registrable Securities pursuant to the provisions of this Agreement, including
the Prospectus included therein, all amendments and supplements to such
Registration Statement, including post-effective amendments, all exhibits and
all material incorporated by reference in such Registration
Statement.
“Resale
Registration Statement” shall have the meaning set forth in Section 3(b)
hereof.
“Restricted
Securities” shall have the meaning set forth in Section 2 hereof.
“Rule
144” shall mean Rule 144 promulgated under the Securities Act, as amended from
time to time, or any similar successor rule thereto that may be promulgated
by
the SEC.
“Rule
415” shall mean Rule 415 promulgated under the Securities Act, as amended from
time to time, or any similar successor rule thereto that may be promulgated
by
the SEC.
“SEC”
shall mean the Securities and Exchange Commission, or any other federal agency
at the time administering the Securities Act.
“Securities
Act” shall mean the Securities Act of 1933, as amended (or any similar successor
federal statute), and the rules and regulations thereunder, as the same are
in
effect from time to time.
“Underwritten
Offering” shall mean a registered offering in which securities of the Company
are sold to an underwriter for reoffering to the public.
Section
2.
Securities
Subject to this Agreement
. The securities entitled to
the benefits of this Agreement are the Registrable Securities but, with respect
to any particular Registrable Security, only so long as such security continues
to be a Restricted Security. A Registrable Security that has ceased
to be a Restricted Security cannot thereafter become a Restricted
Security. As used herein, a Restricted Security shall cease to be a
Restricted Security, and will no longer be a Registrable Security hereunder,
when: (i) it has been registered under the Securities Act, the
registration statement in connection therewith has been declared effective
and
it has been disposed of pursuant to such effective registration statement;
(ii)
it is eligible to be sold or distributed pursuant to Rule 144 within any
consecutive three month period (including, without limitation, pursuant to
Rule
144(k)) without volume limitations; or (iii) it shall have ceased to be
outstanding.
Section
3.
Required
Resale Registration
(a)
On
or
prior to the Filing Date, the Company shall prepare and file with the SEC an
initial “resale” Registration Statement (once declared effective by the SEC, the
“Initial Resale Registration Statement”) providing for the resale of (i) all
Registrable Securities, and (ii) the other securities set forth in
Schedule 3(a)
hereto (the “Other Registrable Securities”; provided, such
securities shall cease to be Other Registrable Securities if the warrants
pursuant to
which
such securities may be purchased expire without being exercised) for an offering
to be made on a continuous basis pursuant to Rule 415. The Initial
Resale Registration Statement shall be on Form SB-2 (except if the Company
is
not then eligible to register for resale the Registrable Securities on Form
SB-2, in which case such registration shall be on another appropriate form
in
accordance herewith and with the Securities Act and the rules promulgated
thereunder). Such Initial Resale Registration Statement shall cover,
to the extent allowable under the Securities Act and the rules promulgated
thereunder (including Rule 416), such indeterminate number of additional shares
of Common Stock resulting from stock splits, stock dividends or similar
transactions with respect to the Registrable Securities. The Company
shall use its commercially reasonable best efforts to cause the Initial Resale
Registration Statement to be declared effective under the Securities Act as
promptly as possible after the filing thereof, but in any event prior to the
Effectiveness Date, and to keep such Initial Resale Registration Statement
continuously effective under the Securities Act until all of the Registrable
Securities have ceased to be Restricted Securities (the “Effectiveness
Period”). The Company shall immediately notify the Holders via
facsimile or electronic mail of the effectiveness of the Initial Resale
Registration Statement on the same trading day that the Company telephonically
confirms effectiveness with the SEC, which date shall be the date effectiveness
of the Initial Resale Registration Statement is granted by the SEC.
(b)
Notwithstanding
anything to the contrary set forth in this Section 3, in the event it is
determined that the Company is unable to register all of the Registrable
Securities and Other Registrable Securities in the Initial Resale Registration
Statement in order to comply with applicable securities rules and regulations,
including, without limitation, Rule 415, then the Company shall register in
the
Initial Resale Registration Statement such number of Registrable Securities
and
Other Registrable Securities determined on a
pro
rata
basis
among the Holders thereof and the holders of Other Registrable
Securities. The Company will use its commercially reasonable best
efforts to register the remaining Registrable Securities and Other Registrable
Securities as soon as reasonably practicable on additional “resale” Registration
Statement(s) (each, an “Additional Resale Registration Statement” and together
with the Initial Resale Registration Statement, the “Resale Registration
Statement”) after such registration is permitted, in each case in accordance
with applicable securities rules and regulations and including such number
of
Registrable Securities and Other Registrable Securities determined on a
pro
rata
basis among the Holders of the Registrable
Securities and the holders of the Other Registrable Securities, until all
Registrable Securities and Other Registrable Securities have been
registered. The number of Registrable Securities to be included in
any Resale Registration Statement shall be equal to the total number of
securities that may be included in such Resale Registration Statement multiplied
by a fraction, the numerator of which is the total number of Registrable
Securities and the denominator of which is the sum of the total number of
Registrable Securities and the number of Other Registrable Securities, in each
case as of the filing of such Resale Registration Statement. The
actual Registrable Securities to be included in any Resale Registration
Statement shall be determined in the following order: (i) first, the shares
of
Common Stock issuable upon conversion of the Notes shall be registered on a
pro
rata
basis among the holders of the Notes, and (ii)
second, the shares of Common Stock issuable upon exercise of the Class D
Warrants shall be registered on a
pro
rata
basis among the
holders of the Class D Warrants. The actual Other Registrable
Securities to be included in any Resale Registration Statement shall
be allocated among the holders of the Other Registrable Securities on a
pro
rata
basis. For purposes of this Section 3(b),
“Filing Date” means with respect to each
Additional
Resale Registration Statement filed pursuant hereto, the later of (i) sixty
(60)
days following the sale of substantially all of the Registrable Securities
included in the Initial Resale Registration Statement or any Additional Resale
Registration Statement and (ii) six (6) months following the effective date
of
the Initial Resale Registration Statement or any Additional Resale Registration
Statement, as applicable, or such earlier date as permitted by the
SEC. The Company shall immediately notify the Holders via facsimile
or electronic mail of the effectiveness of any Additional Resale Registration
Statement on the same trading day that the Company telephonically confirms
effectiveness with the SEC, which date shall be the date effectiveness of any
such Additional Resale Registration Statement is granted by the
SEC.
(c)
The
Company and the Holders agree that the Holders will suffer damages if the
Initial Resale Registration Statement is not declared effective by the SEC
on or
prior to the Effectiveness Date. The Company and the Holders further
agree that it would not be feasible to ascertain the extent of such damages
with
precision. Accordingly, if the Initial Resale Registration Statement
is not declared effective by the SEC on or prior to the Effectiveness Date
and
to the extent that the Holders owning a majority of the outstanding Registrable
Securities have not waived the application of this Section 3(c), for each thirty
(30) day period after the Effectiveness Date or portion thereof during which
the
Initial Resale Registration Statement has not been declared effective, the
Company shall pay an amount as liquidated damages to each Holder, payable in
cash, equal to (i) one percent (1.0%) of the amount of such Holder’s Conversion
Amount for each of the first ten (10) 30-day periods after the Effectiveness
Date and two percent (2%) of the amount of such Holder’s Conversion Amount for
each 30-day period thereafter, until the Initial Resale Registration Statement
is declared effective by the SEC. Liquidated damages payable by the
Company pursuant to this Section 3(c) shall be payable on the first (1
st
) Business
Day of
each thirty (30) day period following the Effectiveness Date. If the
Company fails to pay any liquidated damages pursuant to this Section 3(c) in
full within ten (10) business days after the date payable, the Company will
pay
interest thereon at a rate of fifteen percent (15%) per annum (or such lesser
maximum amount that is permitted to be paid by applicable law) to the Holder,
accruing daily from the date such liquidated damages are due until such amounts,
plus all such interest thereon, are paid in full. In the event the
Initial Resale Registration Statement is not declared effective by the SEC
on or
prior to the Effectiveness Date, the Holders’ sole remedy shall be receipt of
the liquidated damages payable pursuant to this Section 3(c);
provided
,
nothing in this Section 3(c) shall limit the Holders’ right to specific
performance of the Company’s obligations under this Agreement. For
the avoidance of doubt: (x) if the Initial Resale Registration Statement is
declared effective on or before the Effectiveness Date, no liquidated damages
will be payable for any Holder’s Conversion Amount that corresponds to
Registrable Securities not permitted to be included in the Initial Resale
Registration Statement by applicable securities rules and regulations, and
(y)
otherwise, after the Initial Resale Registration Statement is declared effective
by the SEC no further liquidated damages will be payable for any Holder’s
Conversion Amount that corresponds to Registrable Securities not permitted
to be
included in the Initial Resale Registration Statement by applicable securities
rules and regulations.
(d)
As
a
condition to the inclusion of its Registrable Securities in any Resale
Registration Statement, each Holder shall furnish to the Company such
information regarding such Holder and the distribution proposed by such Holder
as the Company may request in
writing
or as shall be required in connection with any registration, qualification
or
compliance referred to in this Agreement.
(e)
In
connection with the Company’s registration obligations hereunder, the Company
shall:
(A) Prepare
and file with the SEC such amendments, including post-effective amendments,
to
the Resale Registration Statement and the Prospectus used in connection
therewith as may be necessary to keep such Resale Registration Statement
continuously effective as to the applicable Registrable Securities for the
Effectiveness Period; (ii) cause the related Prospectus to be amended or
supplemented by any required Prospectus supplement (subject to the terms of
this
Agreement), and as so supplemented or amended to be filed pursuant to Rule
424
of the Securities Act; (iii) respond as promptly as reasonably possible to
any
comments received from the SEC with respect to such Resale Registration
Statement or any amendment thereto; and (iv) comply in all material respects
with the provisions of the Securities Act and the Exchange Act with respect
to
the disposition of all Registrable Securities covered by such Resale
Registration Statement during the applicable period in accordance (subject
to
the terms of this Agreement) with the intended methods of disposition by the
Holders thereof set forth in the Resale Registration Statement as so amended
or
in such Prospectus as so supplemented.
(B) Notify
the Holders of Registrable Securities to be sold (which notice shall, pursuant
to clauses (ii) through (v) hereof, be accompanied by an instruction to suspend
the use of the Prospectus until the requisite changes have been made) as
promptly as reasonably possible and (if requested by any such Holder) confirm
such notice in writing no later than one trading day following the day (i)(X)
when a Prospectus or any Prospectus supplement or post-effective amendment
to
the Resale Registration Statement is filed; and (Y) with respect to the Resale
Registration Statement or any post-effective amendment, when the same has become
effective; (ii) of any request by the SEC or any other Federal or state
governmental authority for amendments or supplements to the Resale Registration
Statement or Prospectus or for additional information; (iii) of the issuance
by
the SEC or any other federal or state governmental authority of any stop order
suspending the effectiveness of the Resale Registration Statement covering
any
or all of the Registrable Securities or the initiation of any proceedings for
that purpose; (iv) of the receipt by the Company of any notification with
respect to the suspension of the qualification or exemption from qualification
of any of the Registrable Securities for sale in any jurisdiction, or the
initiation or threatening of any proceeding for such purpose; and (v) of the
occurrence of any event or passage of time that makes the financial statements
included in the Resale Registration Statement ineligible for inclusion therein
or any statement made in the Resale Registration Statement or Prospectus or
any
document incorporated or deemed to be incorporated therein by reference untrue
in any material respect or that requires any revisions to the Resale
Registration Statement, Prospectus or other documents so that, in the case
of
the Resale Registration Statement or the Prospectus, as the case may be, it
will
not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made,
not
misleading;
provided
that any and all of such information provided pursuant to clause
(v) above shall remain confidential to each Holder until such information
otherwise becomes public, unless disclosure by a Holder is required by law;
provided
,
further
, notwithstanding each Holder’s agreement to keep
such information confidential, the Holders make no acknowledgement that any
such
information is material, non-public information.
(C) Use
its commercially reasonable best efforts to avoid the issuance of, or, if
issued, obtain the withdrawal of (i) any order suspending the effectiveness
of
the Resale Registration Statement, or (ii) any suspension of the qualification
(or exemption from qualification) of any of the Registrable Securities for
sale
in any jurisdiction, at the earliest practicable moment.
(D) Furnish
to each Holder, upon written request of such Holder, without charge, at least
one conformed copy of the Resale Registration Statement and each amendment
thereto, including financial statements and schedules, all documents
incorporated or deemed to be incorporated therein by reference to the extent
requested by such Holder, and all exhibits to the extent requested by such
Holder (including those previously furnished or incorporated by
reference).
(E) Promptly
deliver to each Holder, upon written request of such Holder, without charge,
as
many copies of the Prospectus or Prospectuses (including each form of
prospectus) and each amendment or supplement thereto as such Holders may
reasonably request in connection with resales by the Holder of Registrable
Securities. Subject to the terms of this Agreement, the Company
hereby consents to the use of such Prospectus and each amendment or supplement
thereto by each of the selling Holders in connection with the offering and
sale
of the Registrable Securities covered by such Prospectus and any amendment
or
supplement thereto, except after the giving of any notice pursuant to Section
3(e)(B).
(F) Prior
to any resale of Registrable Securities by a Holder, use its commercially
reasonable efforts to register or qualify or cooperate with the selling Holders
in connection with the registration or qualification (or exemption from the
registration or qualification) of such Registrable Securities for the resale
by
the Holder under the securities or Blue Sky laws of such jurisdictions within
the United States as any Holder reasonably requests in writing, to keep each
registration or qualification (or exemption therefrom) effective during the
Effectiveness Period and to do any and all other acts or things reasonably
necessary to enable the disposition in such jurisdictions of the Registrable
Securities covered by each Resale Registration Statement; provided that the
Company shall not be required to qualify generally to do business in any
jurisdiction where it is not then so qualified or subject the Company to any
material tax in any such jurisdiction where it is not then so subject or file
a
general consent to service of process in any such jurisdiction.
(G) If
requested by the Holders, use its commercially reasonable best efforts to cause
its transfer agent to prepare and deliver certificates representing Registrable
Securities to a transferee pursuant to the Resale Registration Statement
within
three
(3)
trading days of delivery to the transfer agent of certificates bearing
restrictive legends, which certificates shall be free, to the extent permitted
by the Subscription Agreement, of all restrictive legends, and to enable such
Registrable Securities to be in such denominations and registered in such names
as any such Holders may request.
(H) Upon
the occurrence of any event contemplated by Section 3(e)(B), as promptly as
reasonably possible under the circumstances taking into account the Company’s
good faith assessment of any adverse consequences to the Company and its
shareholders of the premature disclosure of such event, prepare a supplement
or
amendment, including a post-effective amendment, to the Resale Registration
Statement or a supplement to the related Prospectus or any document incorporated
or deemed to be incorporated therein by reference, and file any other required
document so that, as thereafter delivered, neither the Resale Registration
Statement nor such Prospectus will contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading. If the Company notifies the Holders in
accordance with clauses (ii) through (v) of Section 3(e)(B) above to suspend
the
use of any Prospectus until the requisite changes to such Prospectus have been
made, then the Holders shall suspend use of such Prospectus. The
Company will use its commercially reasonable best efforts to ensure that the
use
of the Prospectus may be resumed as promptly as is practicable. The
Company shall be entitled to exercise its right under this Section 3(e)(H)
to
suspend the availability of the Resale Registration Statement and Prospectus
for
a period not to exceed 90 days (which need not be consecutive days) in any
365-day period.
(I) Comply
in all material respects with all applicable rules and regulations of the SEC
and the American Stock Exchange (or any successor entity or any other national
securities exchange or automated quotation system on which the Common Stock
is
then listed or quoted).
(J) If
requested by a Holder, the Company shall (i) as soon as reasonably practicable
incorporate in a prospectus supplement or post-effective amendment such
information as is reasonably required to be included therein relating to any
proposed sale and distribution of Registrable Securities by such Holder,
including, without limitation, information with respect to the number of
Registrable Securities being offered or sold, the purchase price being paid
therefor and any other terms of the offering of the Registrable Securities
to be
sold in such offering, and (ii) as soon as reasonably practicable make all
required filings of such prospectus supplement or post-effective amendment
after
being notified of the matters to be incorporated in such prospectus supplement
or post-effective amendment.
(K) Unless
waived by Holders owning a majority of the outstanding Registrable Securities,
include in such Resale Registration Statement, amendment thereto, or prospectus
or prospectus supplement all material non-public information made available
by
the Company to any Holder prior to the filing thereof, except for material
non-public information made available to a Holder to whom knowledge of a member
of the Board of Directors of the Company is attributable.
(f)
Holder
hereby covenants with the Company (i) not to make any sale of the
Registrable Securities pursuant to a Resale Registration Statement without
effectively causing the prospectus delivery requirements under the Securities
Act to be satisfied, and (ii) if such Registrable Securities are to be sold
by any method or in any transaction other than on a national securities exchange
or in the over-the-counter market, in privately negotiated transactions, or
in a
combination of such methods, to notify the Company at least 5 Business Days
prior to the date on which the Holder first offers to sell any such Registrable
Securities.
(g)
Holder
acknowledges and agrees that the Registrable Securities sold pursuant to the
Registration Statement described in this Agreement are not transferable on
the
books of the Company unless the stock certificate submitted to the Company’s
transfer agent evidencing such Registrable Securities is accompanied, if
requested by the transfer agent, by a certificate reasonably satisfactory to
the
transfer agent to the effect that (i) the Registrable Securities have been
sold in accordance with such Resale Registration Statement and (ii) the
requirement of delivering a current Prospectus has been satisfied.
(h)
Holder
shall not take any action with respect to any distribution deemed to be made
pursuant to such Resale Registration Statement, which would constitute a
violation of Regulation M under the Exchange Act, or any other applicable rule,
regulation or law.
Section
4.
Registration
Expenses
. All expenses incident to the Company’s
performance of or compliance with this Agreement will be borne by the Company,
regardless of whether a Resale Registration Statement becomes effective,
including, without limitation: (i) all registration and filing fees;
(ii) all reasonable fees and expenses of compliance with federal securities
and state blue sky or securities laws; (iii) all reasonable expenses of printing
(including printing Prospectuses), messenger and delivery services and
telephone; (iv) all reasonable fees and disbursements of counsel for the
Company; (v) all applications and filing fees in connection with listing the
Registrable Securities on a national securities exchange or automated quotation
system pursuant to the requirements hereof; (vi) Securities Act liability
insurance, if the Company so desires such insurance and (vii) all reasonable
fees and disbursements of independent certified public accountants of the
Company (including the expenses of any special audit and comfort letters
required by or incident to such performance). Notwithstanding
anything in this Section 4 to the contrary, the Company shall not be
required to pay any underwriting discounts, commissions or transfer taxes,
if
any, relating to the sale or disposition of any Holder’s Restricted
Securities.
The
Company will, in any event, bear its internal expenses (including, without
limitation, all salaries and expenses of its officers and employees performing
legal or accounting duties), the expenses of any annual audit and the fees
and
expenses of any person, including special experts, retained by the
Company.
Section
5.
Indemnification
.
(a)
Indemnification
by the Company
. To the fullest extent permitted by law, the Company shall,
notwithstanding any termination of this Agreement, indemnify and hold harmless
each Holder of the Registrable Securities (including, its officers, directors,
members, partners, agents, brokers, investment advisors and employees of each
of
them) and each person
controlling
such Holder within the meaning of Section 15 of the Securities Act (including
the officers, directors, members, partners, agent and employees of each such
controlling person), with respect to which any registration has been effected
pursuant to this Agreement, against all claims, losses, damages, liabilities,
judgments, fines, penalties, charges, costs (including, without limitation,
reasonable attorneys’ fees and disbursements) and expenses (collectively,
“Losses”), as incurred, including any Losses incurred in settlement of any
litigation, commenced or threatened (subject to Subsection 5(c) below), arising
out of or based on any untrue or alleged untrue statement of a material fact
contained in any Resale Registration Statement, Prospectus or offering circular,
or any amendment or supplement thereof, incident to any such registration,
or
based on any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, in light of the circumstances in which they were made;
provided
, that the Company shall not be liable in any such case to the
extent that any untrue or alleged untrue statement or omission or alleged
omission is made in reliance upon and in conformity with information furnished
to the Company by or on behalf of any Holder and stated to be specifically
for
use in preparation of such Resale Registration Statement, Prospectus or offering
circular;
provided
,
further
, that the Company shall not be liable
in any such case where the Losses arise out of, or are related to, the failure
of any Holder to comply with the covenants and agreements contained in this
Agreement. The Company will also indemnify underwriters participating
in the distribution, their officers, directors, employees, partners and agents,
and each Person who controls such underwriters (within the meaning of the
Securities Act), to the same extent as provided above with respect to the
indemnification of the Holders of Registrable Securities, if so
requested. The Company shall notify the Holders promptly of the
institution, threat or assertion of any legal proceeding arising from or in
connection with the transactions contemplated by this Agreement of which the
Company is aware.
(b)
Indemnification
by Holders of Registrable Securities
. In connection with any
Resale Registration Statement in which a Holder of Registrable Securities is
participating, each such Holder will furnish to the Company in writing such
information and affidavits as the Company reasonably requests for use in
connection with any such Resale Registration Statement or Prospectus. Each
Holder will severally and not jointly, if Registrable Securities held by such
Holder are included in the securities as to which such registration is being
effected, indemnify the Company, each of its directors and officers, each
underwriter of an underwritten offering of the Registrable Securities in which
such Holder participates, each other Holder whose Securities are included in
such Resale Registration Statement and each person who controls the Company
within the meaning of Section 15 of the Securities Act (collectively, “Holder
Indemnitees”), against all Losses, as incurred, including any Losses incurred in
settlement of any litigation, commenced or threatened (subject to Subsection
5(c) below), arising out of, or based on, any untrue or alleged untrue statement
of a material fact contained in any Resale Registration Statement, Prospectus
or
offering circular, or any amendment or supplement thereof, incident to any
such
registration, or based on any omission or alleged omission to state therein
a
material fact required to be stated therein or necessary to make the statements
therein not misleading, in light of the circumstances in which they were made,
in each case to the extent, but only to the extent, that such untrue or alleged
untrue statement or omission or alleged omission is made in reliance upon and
in
conformity with written information and/or affidavits furnished to the Company
by or on behalf of such Holder;
provided
, that the indemnity shall not
apply to the extent that such Losses result from the fact that a current copy
of
the Prospectus was not made
available
to the Holders and such current copy of the Prospectus would have cured the
defect giving rise to such Losses. In no event shall the liability of
any selling Holder hereunder be greater in amount than the dollar amount of
the
net proceeds received by such Holder upon the sale of the Registrable Securities
covered by such Resale Registration Statement giving rise to such
indemnification obligation. The Holder Indemnitees shall be entitled
to receive indemnities from underwriters participating in the distribution,
to
the same extent as provided above, with respect to information furnished in
writing by such underwriters specifically for inclusion in any Registration
Statement, Prospectus or offering circular.
(c)
Conduct
of Indemnification Proceedings
. Any Person entitled to
indemnification hereunder will (i) give prompt notice to the indemnifying party
of any claim with respect to which it seeks indemnification and (ii) permit
such
indemnifying party to assume the defense of such claim with counsel of such
indemnifying party’s choice;
provided
,
however
, that any Person
entitled to indemnification hereunder shall have the right to employ separate
counsel and to participate in the defense of such claim, but the fees and
expenses of such counsel shall be at the expense of such indemnified party
unless (A) the indemnifying party shall have failed to assume the defense of
such claim and employ counsel reasonably satisfactory to the indemnified party
in a timely manner or (B) a written opinion of counsel reasonably acceptable
to
the indemnifying party, asserts that a conflict of interest exists between
such
person and the indemnifying party with respect to such claims (in which case,
if
the indemnified Person notifies the indemnifying party in writing that such
Person elects to employ separate counsel at the expense of the indemnifying
party, the indemnifying party shall not have the right to assume the defense
of
such claim on behalf of such Person). The indemnifying party will not
be subject to any liability for any settlement made without its
consent. No indemnified party will be required to consent to entry of
any judgment or enter into any settlement unless (x) such judgment or settlement
includes as an unconditional term thereof the giving by the claimant or
plaintiff to such indemnified party of a release from all liability in respect
of such claim or litigation, and (y) the only consequence to the indemnified
party under such judgment or settlement is the creation of an obligation to
pay
money damages, all of which are being satisfied by the indemnifying
party. An indemnifying party who is not entitled to, or elects not
to, assume the defense of the claim will not be obligated to pay the fees and
expenses of more than one counsel for all parties indemnified by such
indemnifying party with respect to such claim.
(d)
Contribution
. If
for any reason the indemnification provided for in Subsection 5(a) or Subsection
5(b) is unavailable to an indemnified party or insufficient to hold it harmless
as contemplated by Subsection 5(a) and Subsection 5(b), then the indemnifying
party shall contribute to the amount paid or payable by the indemnified party
as
a result of such Losses in such proportion as is appropriate to reflect not
only
the relative benefits received by the indemnifying party and the indemnified
party, but also the relative fault of the indemnifying party and the indemnified
party, as well as any other relevant equitable considerations. No
Person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any Person
who was not guilty of such fraudulent
misrepresentations. Notwithstanding the provisions of this Section
5(d), no Holder shall be required to contribute, in the aggregate,
any amount in excess of the amount by which the proceeds actually
received by such Holder from the sale of the Registrable Securities subject
to
the proceeding exceeds the amount of any damages that such Holder has otherwise
been
required
to pay by reason of such untrue or alleged untrue statement or omission or
alleged omission, except in the case of fraud by such Holder.
Section
6.
Participation
in Underwritten Registrations
.
(a)
One
or
more Holders may elect to retain an underwriter to conduct an Underwritten
Offering of all or a portion of the Registrable Securities held by such
Holders. In the event any Holders elect to conduct an Underwritten
Offering, each other Holder shall be entitled to participate in such
Underwritten Offering subject to Subsection 6(b) below.
(b)
No
Person
may participate in any Underwritten Offering hereunder unless such Person (i)
agrees to sell such Person’s Registrable Securities on the basis provided in any
underwriting arrangements approved by the Holders of a majority of the
Registrable Securities included in such Underwritten Offering and (ii) completes
and executes all questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents required under the terms of such underwriting
arrangements. Nothing in this Section 6 shall be construed to create
any additional rights regarding the registration of Registrable Securities
in
any Person otherwise than as set forth herein.
(c)
Nothing
in this Section 6 (i) shall obligate the Company to pay any underwriting
discounts or commissions in connection with any underwritten offering of
Registrable Securities, or (ii) entitle the Holders to select the underwriter
of
any underwritten primary offering of securities by the Company.
Section
7.
Rule
144
. The Company agrees with each Holder, for so long as any
Restricted Securities remain outstanding and during any period in which the
Company (i) is not subject to Section 13 or 15(d) of the Exchange Act, to
make available, upon request of such Holder in connection with any sale thereof
and any prospective purchaser of such Restricted Securities designated by the
Holder, the information required by Rule 144A(d)(4) under the Securities Act
in
order to permit resales of such Restricted Securities pursuant to Rule 144A,
and
(ii) is subject to Section 13 or 15(d) of the Exchange Act, to use
reasonable efforts to make all filings required thereby in a timely manner
in
order to permit resales of such Restricted Securities pursuant to Rule
144.
Section
8.
Legend
. Each
Holder consents to the placing of the following legend on all certificates
representing shares of Registrable Securities and on any certificate issued
at
any time in exchange or substitution for any certificate bearing such legend,
for so long as the securities represented thereby are Registrable
Securities:
THIS
CERTIFICATE IS ISSUED SUBJECT TO THE PROVISIONS OF A REGISTRATION RIGHTS
AGREEMENT, AND ANY TRANSFEREE OF THIS CERTIFICATE OR OF THE SHARES REPRESENTED
BY IT SHALL BE BOUND BY THE PROVISIONS OF SAID AGREEMENT, A COPY OF WHICH IS
ON
FILE WITH, AND AVAILABLE FROM, THE SECRETARY OF NEPHROS, INC.
Section
9.
Delay
Periods; Suspension of Sales
. Each Holder shall suspend,
upon request of the Company, any disposition of Registrable Securities pursuant
to the Resale
Registration
Statement and Prospectus contemplated herein during (i) any period not to exceed
two 30-day periods within any one 12-month period the Company requires in
connection with a primary underwritten offering of equity securities and (ii)
any period, not to exceed one 45-day period per circumstance or development,
when the Company determines in good faith that offers and sales pursuant thereto
should not be made by reason of the presence of material undisclosed
circumstances or developments with respect to which the disclosure that would
be
required in such a prospectus is premature, would have an adverse effect on
the
Company or is otherwise inadvisable;
provided
,
however
, the
aggregate number of days that such suspensions may apply during any 365-day
period is 90 days. In the event of a delay period or suspension, the
Company will use its commercially reasonable best efforts to ensure that the
use
of the Prospectus may be resumed as promptly as is
practicable. Nothing in this Section 9 shall operate to extend the
Effectiveness Date.
Section
10.
Miscellaneous
.
(a)
Amendments
and Waivers
. The provisions of this Agreement may not be amended,
modified or supplemented, and waivers or consents to or departures from the
provisions hereof may not be given, without the written consent of the Company
and the Holders of a majority of the outstanding Registrable Securities;
provided
,
however
, that no such amendment, modification,
supplement, waiver, consent or departure shall distinguish between Holders
or
groups of Holders unless any Holder adversely affected thereby shall have
consented thereto in writing.
(b)
Notices
. Except
where expressly stated otherwise herein, all notices and other communications
provided for or permitted hereunder shall be made in writing by hand-delivery,
first-class mail (registered, return receipt requested), or air courier
guaranteeing overnight delivery:
(i)
if
to any
Holder, at the address for such Holder set forth on the records of the Company;
and
(ii)
if
to the
Company,
Nephros,
Inc.
3960
Broadway
New
York,
New York 10032
Attention:
President
With
a
copy to:
Kramer
Levin Naftalis & Frankel LLP
1177
Avenue of the Americas
New
York,
New York 10036
Attention: Thomas
D. Balliett, Esq.
All
such
notices and communications shall be deemed to have been duly given: at the
time
delivered by hand, if personally delivered; five Business Days after being
deposited in
the
mail,
postage prepaid, if mailed; and on the next Business Day, if timely delivered
to
an air courier guaranteeing overnight delivery.
The
address or person or entity to whose attention any notice or communication
shall
be given may be changed by notice to the other parties in accordance with the
provisions of this Section 10(b).
(c)
Successors
and Assigns
; Third Party Beneficiaries
. This Agreement
shall inure to the benefit of and be binding upon the successors and assigns
of
each of the parties and shall inure to the benefit of each Holder, and it is
not
the intention of the parties to confer upon any other person or entity any
rights or remedies, except the rights, remedies, obligations and liabilities
of
Section 5 herein shall be conferred upon National Securities Corporation,
Dinosaur Securities, LLC, and registered persons of such entities that own
Placement Agent Warrants to the same extent as if they were Holders hereunder
and their shares issuable upon exercise of Placement Agent Warrants and included
in any Resale Registration Statement were Registrable Securities. The
Company may not assign its rights or obligations hereunder without the prior
written consent of the Holders of a majority of the outstanding Registrable
Securities. Each Holder may assign its respective rights hereunder to
any Person. If any transferee of a Holder shall acquire Registrable
Securities in any manner, whether by operation of law or otherwise, such
Registrable Securities shall be held subject to all of the terms of this
Agreement, and by taking and holding such Registrable Securities such person
shall be conclusively deemed to have agreed to be bound by and to perform all
of
the terms and provisions of this Agreement, including the restrictions on resale
set forth in this Agreement and such person shall be entitled to receive the
benefits hereof.
(d)
Counterparts
. This
Agreement may be executed in any number of counterparts and by the parties
hereto in separate counterparts, each of which when so executed shall be deemed
to be an original and all of which taken together shall constitute one and
the
same agreement.
(e)
Headings
. The
headings in this Agreement are for convenience of reference only and shall
not
limit or otherwise affect the meaning hereof.
(f)
Governing
Law
. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE
PRINCIPLES OF THE CONFLICT OF LAWS THEREOF.
(g)
Severability
. In
the event that any one or more of the provisions contained herein, or the
application thereof in any circumstance, is held invalid, illegal or
unenforceable, the validity, legality and enforceability of any such provision
in every other respect and of the remaining provisions contained herein shall
not be affected or impaired thereby.
(h)
Jurisdiction;
Forum
. Each party hereto consents and submits to the exclusive
jurisdiction of any state court sitting in the County of New York or federal
court sitting in the Southern District of the State of New York in connection
with any dispute arising out of or relating to this Agreement, and agrees that
all suits, actions and proceedings brought by such
party
hereunder shall be brought only in such jurisdictions. Each party
hereto waives any objection to the laying of venue in such courts and any claim
that any such action has been brought in an inconvenient forum. To
the extent permitted by law, any judgment in respect of a dispute arising out
of
or relating to this Agreement may be enforced in any other jurisdiction within
or outside the United States by suit on the judgment, a certified copy of such
judgment being conclusive evidence of the fact and amount of such
judgment. Each party hereto agrees that personal service of process
may be effected by any of the means specified in Section 10(b), addressed to
such party. The foregoing shall not limit the rights of any party to
serve process in any other manner permitted by law.
(i)
Entire
Agreement
. This Agreement is intended by the parties as a final
expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto with respect
to registration rights granted with respect to Registrable
Securities. There are no restrictions, promises, warranties or
undertakings, other than those set forth or referred to herein with respect
to
the registration rights granted with respect to the Registrable
Securities. This Agreement supersedes all prior agreements and
understandings between the parties with respect to such subject
matter.
(j)
Independent
Nature of Holders’ Obligations and Rights
. The obligations of
each Holder hereunder are several and not joint with the obligations of any
other Holder hereunder, and no Holder shall be responsible in any way for the
performance of the obligations of any other Holder hereunder. Nothing
contained herein or in any other agreement or document delivered at any closing,
and no action taken by any Holder pursuant hereto or thereto, shall be deemed
to
constitute the Holders as a partnership, an association, a joint venture or
any
other kind of entity, or create a presumption that the Holders are in any way
acting in concert with respect to such obligations or the transactions
contemplated by this Agreement. Each Holder shall be entitled to
protect and enforce its rights, including without limitation the rights arising
out of this Agreement, and it shall not be necessary for any other Holder to
be
joined as an additional party in any proceeding for such purpose.
(k)
Attorneys’
Fees
. In the event of any litigation or other proceeding
concerning this Agreement or the transactions contemplated hereby, including
any
such litigation or proceeding with respect to the enforcement of this Agreement
against any defaulting party, the prevailing party in such litigation or
proceeding shall be entitled to reimbursement from the party opposing such
prevailing party for all attorneys’ fees and costs incurred by such prevailing
party in such litigation or proceeding.
(l)
Inclusion
of Placement Agent Shares
. The parties hereto agree that the
shares of Common Stock issuable pursuant to the Placement Agent Warrants may
be
included in the Resale Registration Statements. For purposes of
making allocations pursuant to Section 3(b), such shares shall be treated as
“Registrable Securities” and as “shares of Common Stock issuable upon exercise
of the Class D Warrants” and the holders of such warrants shall be treated as
“holders of the Class D Warrants”.
[SIGNATURE
PAGE FOLLOWS IMMEDIATELY]
IN
WITNESS WHEREOF
, the parties hereto have executed this Agreement as of
the date first written above.
NEPHROS,
INC.
By:
/s/ Norman J. Barta
Name:
Norman J. Barta
Title:
President and Chief Executive Officer
INITIAL
HOLDER: Southpaw Credit Opportunity Master Fund
LP
By:
Southpaw GP
LLC
By:
/s/
Kevin
Wyman
Name:
Kevin
Wyman
Title:
Managing
Member
Address
for
Notices:
c/o
Southpaw Asset
Management LP
4
Greenwich Office Park
(Street
Address)
Greenwich,
CT 06831
(City)
(State/Country) (Zip Code)
Attention:
Bob
Thompson
INITIAL
HOLDER: Lambda Investors LLC
By:
/s/
Arthur
Amron
Name:
Arthur
Amron
Title:
Vice
President
Address
for
Notices:
c/o
Wexford Capital
LLC
411
West Putnam
Avenue
(Street
Address)
Greenwich,
CT
06830
(City)
(State/Country) (Zip
Code)
Attention:
Arthur
Amron
INITIAL
HOLDER: GPC 76, LLC
By:
Southpaw Asset
Management LP
By:
/s/
Kevin
Wyman
Name:
Kevin
Wyman
Title:
Investment
Manager
Address
for
Notices:
c/o
Southpaw Asset
Management LP
4
Greenwich Office
Park
(Street Address)
Greenwich,
CT
06831
(City)
(State/Country) (Zip Code)
Attention:
Bob
Thompson
INITIAL
HOLDER: 3V
Capital Master Fund Ltd.
By: 3V
Capital Management LLC
By:
/s/
Scott A.
Stagg
Name:
Scott A.
Stagg
Title:
Managing
Member
Address
for
Notices:
3
Greenwich Office
Park
(Street
Address)
Greenwich,
CT
06831
(City) (State/Country) (Zip
Code)
Attention:
Mark
Focht
INITIAL
HOLDER:
Distressed/High Yield Trading Opportunities, Ltd.
By: Eliteperformance
Fund, Ltd.
By:
/s/
Scott A.
Stagg
Name:
Scott A.
Stagg
Title:
Portfolio
Manager
Address
for
Notices:
3
Greenwich Office
Park
(Street
Address)
Greenwich,
CT
06831
(City) (State/Country) (Zip
Code)
Attention:
Mark
Focht
INITIAL
HOLDER: Lewis P. Schneider
By:
/s/
Lewis P.
Schneider
Name:
Lewis P.
Schneider
Title:
Address
for
Notices:
10
Dunmore
Road
(Street
Address)
New
City,
NY
10956
(City) (State/Country) (Zip
Code)
Attention:
Lewis P.
Schneider
INITIAL
HOLDER: Kudu Partners, LP
By:
/s/
Brian P.
Lupien
Name:
Brian P.
Lupien
Title:
Treasurer
Address
for
Notices:
1900 Country Road
124
(Street
Address)
Hesperus,
CO
81326
(City) (State/Country) (Zip
Code)
Attention:
Bill
Lupien
INITIAL
HOLDER: LJHS Company
By:
/s/
Jack A.
McLeod
Name:
Jack A.
McLeod
Title:
Agent
Address
for
Notices:
50
No. Sierra St.,
Palladio Apt. 1313
(Street
Address)
Reno,
NV
89501-1340
(City) (State/Country) (Zip
Code)
Attention:
Jack
McLeod
INITIAL
HOLDER: Enso Global Equities Partnership LP
By:
/s/
Joshua A.
Fink
Name: Joshua A. Fink
Title: Director
of GP
Address
for
Notices:
540
Madison
Avenue, 18
th
Floor
(Street
Address)
New
York, New York
10022
(City) (State/Country) (Zip
Code)
Attention:
Salina
Love
SCHEDULE
1
|
Investor
|
Registrable
Securities
|
|
|
|
|
L
ambda
Investors
Inc.
|
Common
Stock issuable upon exercise of $10,000,000 aggregate principal amount
of
Series A 10% Secured Convertible Notes due 2008 and Common Stock
issuable
upon exercise of Class D Warrants to purchase Common
Stock
|
|
|
|
|
Enso
Global Equities Partnership LP
|
Common
Stock issuable upon exercise of $2,400,000 aggregate principal amount
of
Series A 10% Secured Convertible Notes due 2008 and Common Stock
issuable
upon exercise of Class D Warrants to purchase Common
Stock
|
|
|
|
|
GPC
76, LLC
|
Common
Stock issuable upon exercise of $176,500 aggregate principal amount
of
Series A 10% Secured Convertible Notes due 2008 and Common Stock
issuable
upon exercise of Class D Warrants to purchase Common
Stock
|
|
|
|
|
Lewis
P. Schneider
|
Common
Stock issuable upon exercise of $100,000 aggregate principal amount
of
Series A 10% Secured Convertible Notes due 2008 and Common Stock
issuable
upon exercise of Class D Warrants to purchase Common
Stock
|
|
|
|
|
Southpaw
Credit Opportunity Master Fund L.P.
|
Common
Stock issuable upon exercise of $2,038,461.54 aggregate principal
amount
of Series B 10% Secured Convertible Notes due 2008
|
|
|
|
|
3V
Capital Master Fund Ltd.
|
Common
Stock issuable upon exercise of $1,528,846.15 aggregate principal
amount
of Series B 10% Secured Convertible Notes due 2008
|
|
|
|
|
Distressed/High
Yield Trading Opportunities Ltd.
|
Common
Stock issuable upon exercise of $1,528,846.15 aggregate principal
amount
of Series B 10% Secured Convertible Notes due 2008
|
|
|
|
|
Kudu
Partners
|
Common
Stock issuable upon exercise of $101,923.08 aggregate principal amount
of
Series B 10% Secured Convertible Notes due 2008
|
|
|
|
|
LJHS
Company
|
Common
Stock issuable upon exercise of $101,923.08 aggregate principal amount
of
Series B 10% Secured Convertible Notes due
2008
|
SCHEDULE
3(a)
Other
Registrable Securities
EXHIBIT
A
Form
of
Counterpart Signature Page
IN
WITNESS WHEREOF
, the undersigned has caused this counterpart to the
Registration Rights Agreement among Nephros, Inc. and the Holders (as defined
therein), dated as of ______ __, 2007, as amended from time to time, to be
duly
executed and delivered as of _______ __, ____.
[__________________],
as an additional Holder
By: ________________________________________
Name:
Title:
Notice
Address:
____________________________
____________________________
____________________________
Attention:
Tel:(___)
___-___
Fax:(___)
___-___
Accepted
and agreed to as of the
__
day of
_________, ____:
NEPHROS,
INC.
By:
Name:
Title:
Exhibit
10.4
INVESTOR
RIGHTS AGREEMENT
This
INVESTOR RIGHTS AGREEMENT
(this “
Agreement
”), dated as
of September 19, 2007, is entered into by and among
NEPHROS,
INC.
, a Delaware corporation (the “
Company
”),
LAMBDA
INVESTORS LLC
, a Delaware limited liability company (“
Lambda
”),
and the other parties named on the signature pages to this Agreement or who
subsequently become a party to this Agreement in accordance with the terms
hereof (collectively, the “
Covered Holders
”).
WHEREAS
,
to induce Lambda to make an investment in the Company, the Company and Covered
Holders have agreed to cause two individuals having reasonably appropriate
experience and background designated by Lambda from time to time (the “
Lambda
Nominees
”) to be elected to the Board of Directors of the Company (the
“
Board
”); and
WHEREAS
,
the parties hereto desire to enter into this Agreement to provide for the
election of the Nominees and to address certain matters relating to the service
of the Lambda Nominees as members of the Board.
NOW
THEREFORE
, in consideration of the foregoing and the covenants and
agreements contained in this Agreement, the sufficiency of which is hereby
acknowledged, the parties agree as follows:
1.
Board
Representation
.
(a)
The
Company, Lambda and the Covered Holders shall take such corporate actions as
may
be required to ensure that the number of directors constituting the Board is
at
all times no greater than seven (7) or such greater number as Lambda shall
have
agreed to in writing, provided, that a unanimous written consent of the Board,
including the consent of the Lambda Nominees, shall constitute a writing for
such purposes, and provided further, that a writing shall not be required if
a
majority of the directors on the Board approve a resolution at a Board meeting
to increase the size of the Board and the Lambda Nominees vote in the
majority.
(b)
Lambda
shall be entitled to (i) nominate the Lambda Nominees to the Board to serve
as
directors until their respective successor(s) are elected and qualified,
(ii) nominate each successor to the Lambda Nominees, provided that any
successor shall have reasonably appropriate experience and background, and
(iii)
direct the removal from the Board of any director nominated under the foregoing
clauses (i) or (ii).
(c)
Each
nomination or any direction to remove from the Board any Lambda Nominee shall
be
made by delivering to the Company a notice signed by Lambda. As
promptly as practicable, but in any event within ten (10) days after delivery
of
such notice, the Company shall take or cause to be taken such corporate actions
as may be reasonably required to cause the election or removal proposed in
such
notice. Such corporate actions may include calling a meeting or
soliciting a written consent of the Board, or calling a meeting or soliciting
a
written consent of the stockholders of the Company.
(d)
Upon
the
written request of Lambda, the Company and each Covered Holder shall take such
actions as may be reasonably required to cause the persons then serving on
the
Board
based
on
the nomination of Lambda to be appointed to the board of directors (or similar
governing body) of all direct and indirect subsidiaries of the
Company.
2.
Voting
Agreement
.
(a)
Each
Covered Holder covenants and agrees to vote all common stock, par value $.001
per share of the Company (“
Common Stock
”), and any other capital stock or
other securities of the Company held by such Covered Holder that are entitled
to
vote in the election of the Board (“
Voting Securities
”) for the election
to the Board of the Lambda Nominees in accordance with
Section 1(b)
and
for the removal from the Board of the Lambda Nominees proposed to be removed
in
accordance with
Section 1(b)
and shall take all actions required on its
behalf to give effect to the agreements set forth in this
Section
2
. Each Covered Holder covenants and agrees not to vote any
Voting Securities for the removal of any Lambda Director except pursuant to
direction from Lambda pursuant to
Section 1(b)(iii)
.
(b)
Each
Covered Holder hereby grants to Lambda an irrevocable proxy, coupled with an
interest, authorizing Lambda to act as proxy of such Covered Holder, with full
powers of substitution and resubstitution, and hereby authorizes Lambda to
vote,
give consents and in all other ways act in such Covered Holder’s place with
respect to all Voting Securities held by such Covered Holder in connection
with
such Covered Holder’s agreements contained in this
Section 2
to vote in
favor of or for the removal of the Lambda Nominees, which proxy shall be valid
and remain in effect until the termination of this Agreement.
3.
Vacancies
and Removal
.
(a)
The
Lambda Nominees designated pursuant to
Section 1(b)
will be elected at
any annual or special meeting of the stockholders of the Company (or by written
consent in lieu of a meeting of the stockholders) and will serve until their
successors are duly elected and qualified or until their earlier resignation
or
removal.
(b)
In
the
event a vacancy is created on the Board by reason of the death, removal or
resignation of any Lambda Nominee, Lambda shall be entitled to nominate a
successor Lambda Director having reasonably appropriate experience and
background and such vacancy shall be filled in accordance with the procedures
set forth in
Section 1(c)
.
4.
Meetings;
Expenses; Compensation; Insurance
.
(a)
The
Company shall convene meetings of the Board at least once every three
months. Upon any failure by the Company to convene any meeting
required by this paragraph, a Lambda Director shall be empowered to convene
such
meeting.
(b)
The
Lambda Nominees shall be entitled to compensation and reimbursement for expenses
on the same terms as other directors of the Company who are not officers or
employees of the Company.
(c)
The
Company shall maintain a directors’ and officers’ policy of insurance in the
amount of at least $7,000,000 per occurrence covering all
directors.
5.
Business
Opportunities
.
(a)
In
anticipation of Lambda becoming, indirectly or directly, a substantial
stockholder of the Company, and in recognition of (i) the benefits to be derived
by the Company through its continued contractual, corporate and business
relations with Lambda (including the services of officers, directors, partners,
managers, employees or affiliates of Lambda (collectively, “
Lambda
Persons
”) as directors of the Company) and (ii) the difficulties attendant
to any director who desires and endeavors fully to satisfy such director’s
fiduciary duties, in determining the full scope of such duties in any particular
situation, the provisions of this
Section 5
are set forth to regulate,
define and guide the conduct of certain affairs of the Company as they may
involve Lambda and any Lambda Persons, and the powers, rights, duties and
liabilities of the Company and its officers, directors and stockholders in
connection therewith.
(b)
Except
as
Lambda may otherwise agree in writing, Lambda shall have the right to (i)
engage, directly or indirectly, in the same or similar business activities
or
lines of business as the Company and (ii) do business with any client,
competitor or customer of the Company, with the result that the Company shall
have no right in or to such activities or any proceeds or benefits therefrom,
and neither Lambda nor any Lambda Person (except as provided in
Section
5(c)
) shall be liable to the Company or its stockholders for breach of any
fiduciary duty by reason of any such activities of Lambda or of such Lambda
Person’s participation therein. A Lambda Person who is serving as an
officer or director of the Company may not, at the same time, serve as an
officer or director of any entity whose principal business activity is (i)
the
development or sale of medical devices for the treatment of end stage renal
disease or (ii) water filtration. In the event that Lambda or any
Lambda Person acquires knowledge of a potential transaction or matter that
may
be a corporate opportunity for both Lambda and the Company other than in the
case of a director-related opportunity, Lambda and such Lambda Person shall
have
no duty to communicate or present such corporate opportunity to the Company
and
the Company hereby renounces any interest or expectancy it may have in such
corporate opportunity, with the result that Lambda or such Lambda Person shall
not be liable to the Company or its stockholders for breach of any fiduciary
duty, including for breach of any fiduciary duty as a director or stockholder
of
the Company, by reason of the fact that Lambda pursues or acquires such
corporate opportunity for itself, directs such corporate opportunity to another
person or entity, or does not present such corporate opportunity to the
Company.
(c)
In
the
event that a director of the Company who is a Lambda Person acquires knowledge
of a potential transaction or matter that may be a corporate opportunity for
both the Company and Lambda, such corporate opportunity shall belong to Lambda,
and the Company hereby renounces any interest or expectancy it may have in
such
corporate opportunity, unless such corporate opportunity is a director-related
opportunity, in which case such corporate opportunity shall belong to the
Company.
(d)
For
the
purposes of this
Section 5
, “
corporate opportunities
” shall not
include any business opportunities that the Company is not financially or
contractually able to undertake, or that are, from their nature, not in the
line
of the Company’s business or are of no practical advantage to it or that are
ones in which the Company has no interest or reasonable
expectancy. For the purposes of this
Section 5
, a
“
director-related opportunity
” means a potential transaction or matter
that may be a corporate opportunity for both the Company and Lambda
where
knowledge
of such corporate opportunity is made known to a Lambda Person who is serving
as
a director of the Company as a result of his serving as a director of the
Company prior to (x) Lambda or any other Lambda Person acquiring knowledge
of such corporate opportunity, or (y) such Lambda Person acquiring knowledge
of
such corporate opportunity other than as a result of such Lambda Person’s
serving as a director.
(e)
For
purposes of this
Section 5
only, the “
Company
” shall mean the
Company and all corporations, partnerships, joint ventures, associations and
other entities in which the Company beneficially owns (directly or indirectly)
fifty percent (50%) or more of the outstanding voting stock, voting power or
similar voting interests.
(f)
Neither
the Company nor any Covered Holder will take any action to approve any amendment
to the Certificate of Incorporation or Bylaws of the Company that is
inconsistent with any provision of this
Section 5
.
6.
Joinder
Agreements; Transfers
.
(a)
Except
as
Lambda may otherwise agree in writing, the Company shall require each person
or
entity who subscribes for or otherwise purchases any newly issued capital stock
of the Company, securities convertible into or exchangeable for shares of
capital stock of the Company, and all options, warrants, and other rights to
purchase or otherwise acquire from the Company shares of such capital stock
(collectively, “
Equity Securities
”), other than Excluded Securities (as
defined below), after the date hereof, as a condition to the effectiveness
of
such subscription or purchase, to execute a joinder to this Agreement,
substantially in the form attached hereto as
Exhibit A
(the “
Joinder
Agreement
”), agreeing to be treated as a Covered Holder, whereupon such
Person shall be a party to and bound by the provisions of this
Agreement. For purposes of this paragraph, “
Excluded
Securities
” means (i) options granted to directors, officers, bona fide
consultants and employees of the Company issued pursuant to an employee benefit
plan of the Company and shares of capital stock at any time issuable upon the
exercise of such options, (ii) shares of capital stock issuable upon conversion
of the Company’s Series A 10% Secured Convertible Notes Due 2008 or Series B 10%
Secured Convertible Notes Due 2008, (iii) warrants issuable upon conversion
of
the Company’s Series A 10% Secured Convertible Notes Due 2008 and shares of
capital stock at any time issuable upon the exercise of such warrants,
(iv) shares of Common Stock issuable upon the exercise of options, warrants
or other securities exchangeable or exercisable for, or convertible into, shares
of capital stock that are outstanding as of the date hereof, (v) shares of
capital stock issued by the Company in an underwritten public offering and
(vi)
Equity Securities issued after the date hereof to give effect to any stock
dividend or distribution, stock split, reverse stock split or combination or
other similar pro rata recapitalization event affecting capital
stock.
(b)
From
the
date hereof until two (2) regular annual meetings of stockholders of the Company
at which directors of the Company are elected have been conducted, no Covered
Holder shall sell, transfer, assign, pledge, hypothecate or otherwise dispose
of
any Equity Securities (each, a “
Transfer
”), and the Company shall not
record any such Transfer, unless and until the transferee (unless already
subject to this Agreement) executes and delivers to the Company a Joinder
Agreement, agreeing to be treated in the same manner as the Covered
Holder. Upon such Transfer and such execution and delivery, the
transferee shall be a party to
and
bound
by this Agreement with respect to the transferred Equity Securities in the
same
manner as the transferring Covered Holder. The provisions of this
Section 6(b)
shall apply to all Equity Securities now owned or hereafter
acquired by a Covered Holder. Any Transfer of Equity Securities by a
Covered Holder not made in accordance with this
Section 6(b)
shall be
void ab initio. The provisions of this Section 6(b) shall not apply
to any sale of shares of Common Stock by a Covered Holder pursuant to an
effective registration statement or Rule 144.
7.
Legend
.
Each certificate representing Equity Securities held by a
Covered Person shall, in addition to any other legends otherwise required,
bear
a legend substantially in the following form:
“THE
SALE, TRANSFER, ASSIGNMENT, PLEDGE OR ENCUMBRANCE OF THE SECURITIES REPRESENTED
BY THIS CERTIFICATE AND THE OBLIGATIONS OF THE HOLDER OF SUCH SECURITIES IN
RESPECT OF THE ELECTION OF DIRECTORS ARE SUBJECT TO AN INVESTOR RIGHTS AGREEMENT
DATED AS OF SEPTEMBER ___, 2007 (AS IT MAY BE AMENDED, RESTATED OR OTHERWISE
MODIFIED FROM TIME TO TIME), AMONG NEPHROS, INC. AND CERTAIN HOLDERS OF ITS
OUTSTANDING CAPITAL STOCK. COPIES OF SUCH AGREEMENT MAY BE OBTAINED AT NO COST
BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE
SECRETARY OF NEPHROS, INC.
Each
Covered Holder hereby agrees to promptly deliver to the Company upon execution
of this Agreement any certificates representing Equity Securities for the
purpose of adding the foregoing legend to such certificates.
8.
Termination
.
This
Agreement shall automatically terminate on the first day that the aggregate
number of shares of Common Stock held by Lambda or any Lambda Transferee (as
defined below), or issuable to Lambda or any Lambda Transferee upon the exercise
or conversion of Equity Securities held by Lambda or such Lambda Transferee
(whether or not then exercisable or convertible), represents less than ten
percent (10%) of the sum of the issued and outstanding shares of Common Stock
of
the Company plus the number of shares of Common Stock issuable to Lambda or
any
Lambda Transferee upon the exercise or conversion of Equity Securities held
by
Lambda (whether or not then exercisable or convertible). In addition,
Lambda may unilaterally terminate this Agreement at any time by giving written
notice of such termination to the Company. Upon the termination of
this Agreement, the Company shall give notice of such termination to Lambda
and
the Covered Holders and the Covered Holders shall be entitled, upon the
surrender of any certificates representing Equity Securities that bear the
legend set forth in
Section 7
, to receive a replacement certificate
representing such Equity Securities that does not bear such legend.
9.
Representations
and Warranties
.
Each
of the Covered Holders hereby makes the following representations and warranties
to Lambda with respect solely to itself and not with respect to any other
Covered Holder:
(a)
This
Agreement has been duly executed and delivered by each Covered Holder and
constitutes the legal, valid and binding obligation of each Covered Holder,
enforceable against such Covered Holder in accordance with its
terms.
(b)
Neither
the execution, delivery nor performance of this Agreement by each Covered Holder
violates or conflicts with, creates (with or without the giving of notice or
the
lapse of time, or both) a default under or a lien or encumbrance upon any of
such Covered Holder’s assets or properties pursuant to, or requires the consent,
approval or order of any government or governmental agency or other person
or
entity under (i) any note, indenture, lease, license or other agreement to
which
such Covered Holder is a party or by which it or any of its assets or properties
is bound or (ii) any statute, law, rule, regulation or court decree binding
upon
or applicable to such Covered Holder or its assets or properties. If
such Covered Holder is not a natural person, the execution, delivery and
performance by such Holder of this Agreement, have been duly authorized by
all
necessary corporate or other action on behalf of such Covered Holder and such
execution, delivery and performance does not and will not constitute a breach
or
violation of, or default under, the charter or by-laws or equivalent governing
documents of such Holder.
10.
Miscellaneous
.
(a)
This
Agreement, including the exhibits hereto, sets forth the entire understanding
of
the parties with respect to the subject matter hereof, supersedes all existing
agreements among them concerning such subject matter, and the provisions hereof
may be amended or waived, only by a written instrument duly executed by the
party to be charged; provided, that this Agreement may be amended by a written
instrument duly executed by the Company, Lambda and Covered Holders holding
a
majority of all shares of Common Stock then held by the Covered
Holders. Notwithstanding the foregoing, no such amendment,
modification, supplement, waiver, consent or departure shall distinguish between
Covered Holders or groups of Covered Holders unless any Covered Holder adversely
affected thereby shall have consented thereto in writing.
(b)
Except
as
otherwise specifically provided herein, any notice or other communication
required or permitted to be given hereunder shall be in writing and shall be
mailed by certified mail, return receipt requested, or by Federal Express,
Express Mail or similar guaranteed overnight delivery or courier service or
delivered in person against receipt to the party to whom it is to be
given,
(i)
if
to the
Company,
Nephros,
Inc.
3960
Broadway
New
York,
New York 10032
Attn: President
(ii)
with
a copy to,
Kramer
Levin Naftalis & Frankel LLP
1177
Avenue of the Americas
New
York,
New York 10036
Attention: Thomas
D. Balliett, Esq.
(ii)
if
to any other party, at the address of such party set forth on the stock transfer
records of the Company or its transfer agent,
or
in any
case, to such other address as the party shall have furnished in writing in
accordance with the provisions of this
Section 10(b)
. Any
notice given by means permitted by this
Section 10(b)
shall be deemed
given at the time of receipt thereof at the address specified in this
Section
10(b)
.
(c)
This
Agreement shall be binding upon and inure to the benefit of the parties and
their successors and permitted assigns. The Company may not assign this
Agreement or any rights or obligations hereunder without the prior written
consent of Lambda. Lambda may assign its rights, or a portion
thereof, to any person or entity to whom it Transfers Equity Securities,
provided that such transferee agrees in writing to be bound, with respect to
the
Transferred Equity Securities, by the provisions of this Agreement. A
person or entity to whom rights under this Agreement have been assigned by
Lambda (either simultaneous with or subsequent to a Transfer of Equity
Securities) is referred to herein as a “
Lambda Transferee
”; however, a
person or entity to whom Lambda has Transferred Equity Securities but has not
assigned rights under this Agreement shall not be treated as a Lambda
Transferee.
(d)
The
headings in this Agreement are solely for convenience of reference and shall
be
given no effect in the construction or interpretation of this
Agreement.
(e)
This
Agreement may be executed in any number of counterparts, each of which shall
be
deemed an original, but all of which together shall constitute one and the
same
instrument.
(f)
This
Agreement shall be governed by and construed in accordance with the laws of
the
State of Delaware, without giving effect to principles governing conflicts
of
law that would defer to the substantive law of another
jurisdiction.
(g)
In
the
event that any provision of this Agreement shall be determined to be illegal
or
unenforceable, that provision will be limited or eliminated to the minimum
extent necessary so that this Agreement shall otherwise remain in full force
and
effect and enforceable.
(h)
This
Agreement does not create, and shall not be construed as creating, any rights
enforceable by any person not a party to this Agreement.
(i)
Each
party hereto consents and submits to the exclusive jurisdiction of any state
court sitting in the County of New York or federal court sitting in the Southern
District of the State of New York in connection with any dispute arising out
of
or relating to this Agreement, and agrees that all suits, actions and
proceedings brought by such party hereunder shall be brought only in such
jurisdictions. Each party hereto waives any objection to the laying
of venue in such courts and any claim that any such action has been brought
in
an inconvenient forum. To the extent permitted by law, any judgment
in respect of a dispute arising out of or relating to this Agreement may be
enforced in any other jurisdiction within or outside the United States by suit
on the judgment, a certified copy of such judgment being conclusive evidence
of
the fact and amount of such judgment. Each party hereto agrees that
personal service of process may be effected by any of the means specified in
Section 10(b)
, addressed to such party. The foregoing shall
not limit the rights of any party to serve process in any other manner permitted
by law.
(j)
In
addition to being entitled to exercise all rights provided herein or granted
by
law, including recovery of damages, Lambda will be entitled to specific
performance under this Agreement. The parties agree that monetary
damages may not be adequate compensation for any loss incurred by reason of
any
breach by the Company or any Covered Holder of its respective obligations
contained in this Agreement and hereby agree to waive and not to assert in
any
action for specific performance of any such obligation the defense that a remedy
at law would be adequate.
(k)
In
the
event of any litigation or other proceeding concerning this Agreement or the
transactions contemplated hereby, including any such litigation or proceeding
with respect to the enforcement of this Agreement against any defaulting party,
the prevailing party in such litigation or proceeding shall be entitled to
reimbursement from the party opposing such prevailing party for all attorneys’
fees and costs incurred by such prevailing party in such litigation or
proceeding
[Signature
page follows immediately]
IN
WITNESS
WHEREOF
, the parties hereto have executed this Investor Rights Agreement
on the date first written abobe.
NEPHROS,
INC
.
By:
/s/
Norman J.
Barta
Name: Norman
J.
Barta
Title:
President and Chief
Executive Officer
LAMBDA
INVESTORS
LLC
By:
/s/
Arthur
Amron
Name:
Arthur
Amron
Title:
Vice
President
Purchaser:
GPC
76, LLC
By:
Southpaw
Asset
Management
LP
By:
/s/
Kevin
Wyman
Name:
Kevin
Wyman
Title:
Investment
Manager
Purchaser:
Lewis P.
Schneider
By:
/s/
Lewis P.
Schneider
Name:
Lewis P.
Schneider
Title:
Purchaser:
Enso
Global Equities Partnership LP
By:
/s/
Joshua A.
Fink
Name:
Joshua A.
Fink
Title:
Director of
GP
3V
Capital
Master Fund Ltd.
By:
3V
Capital Management LLC
By:
/s/
Scott A. Stagg
Name:
Scott A.
Stagg
Title: Managing Member
Distressed/High Yield Trading Opportunities, Ltd.
By:
Eliteperformance
Fund, Ltd.
By:
/s/ Scott A.
Stagg
Name: Scott A. Stagg
Title: Portfolio Manager
Southpaw
Credit Opportunity Master Fund LP
By:
Southpaw
GP LLC
By:
/s/
Kevin
Wyman
Name:
Kevin
Wyman
Title:
Managing
Member
Kudu
Partners,
L.P.
By:
/s/
Brian P.
Lupien
Name:
Brian P.
Lupien
Title:
Treasurer
LJHS
Company
By:
/s/
Jack A.
McLeod
Name:
Jack A.
McLeod
Title:
Agent
EXHIBIT
A
JOINDER
AGREEMENT
By
execution of this Joinder Agreement, the undersigned agrees to become a party
to
that certain Investor Rights Agreement, dated as of September ___, 2007, among
Nephros, Inc., and the other persons and entities that are parties thereto
(as
the same may be amended, restated or otherwise modified from time to
time). The undersigned shall have all the rights, and shall observe
all the obligations, applicable to a Covered Holder thereunder.
Name: __________________________
Address
for
with
copies
Notices:
to:
___________________________ ___________________________
___________________________ ___________________________
___________________________ ___________________________
___________________________ ___________________________
Exhibit
10.5
Nephros
,
Inc
.
3960
Broadway
New
York,
NY 10032
September
18,
2007
National
Securities Corporation
875
N.
Michigan Avenue, Suite 1560
Chicago,
IL 60611
Gentlemen:
Reference
is made to the transactions contemplated in those several Subscription
Agreements (each a “
Subscription Agreement
”) by and among
Nephros, Inc., a Delaware corporation, (the “
Company
”) and each
subscriber a party thereto (the “
Buyers
”) pursuant to which
Series A 10% Secured Convertible Notes due 2008 (collectively, the
“
Securities
”) are being sold to the Buyers in reliance upon the
exemption from securities registration afforded by Section 4(2) of the
Securities Act of 1933, as amended (“
1933 Act
”) and Regulation
D promulgated by the Securities and Exchange Commission (the
“
SEC
”) under the 1933 Act. Reference is also made to
that certain corporate finance engagement letter agreement dated June 8, 2007,
as amended (the “
Engagement Agreement
”) by and between the
Company, National Securities Corporation (“
NSC
”) and Dinosaur
Securities LLC (“
Dinosaur
”) pursuant to which the Company
engaged NSC and Dinosaur with respect to a proposed capital transaction, which
has resulted in the financing contemplated in the Subscription Agreement
(“
Financing
”). Any terms used and not otherwise
defined herein shall have the respective meanings set forth in the Subscription
Agreement.
1.
Representations
and Warranties of the Company
. For the benefit of NSC and Dinosaur, the
Company hereby incorporates by reference the representations and warranties
as
set forth in Sections 3(a), (b), (c), (d), (e), (f), (g), (h), (i), (j), (k),
(o), (q) and (r) of the Subscription Agreement with the same force and effect
as
if specifically set forth herein.
In addition, at each
closing of the Financing (“Closing”), the Company will provide NSC with copies
of all closing documents that are furnished to the Buyers pursuant to the
Subscription Agreement, as well as the Form D promptly following its filing
with
the SEC.
2.
Closing;
Fees
. Simultaneously with payment for and delivery of the Securities at each
Closing, the Company shall pay to NSC and Dinosaur the compensation (cash and
placement agent warrants) and expense reimbursement (NSC only) as set forth
in
the Engagement Agreement (“
General Expense Obligation
”) which
the Company shall disclose to investors in Schedule 3(f) of the disclosure
schedules to the Subscription Agreement. Lastly, upon the reasonable
determination by NSC that a FINRA Rule 2710 filing is required in connection
with the registration statement relating to the resale of the shares underlying
the placement agent warrants, the Company will pay all filing fees, costs and
reasonable legal fees in connection with such filing to be prepared by the
Placement Agent’s counsel (the “
2710 Filing Fee and Expense
Obligation
”). Notwithstanding anything contained herein, the
aggregate General Expense Obligation and 2710 Filing Fee and Expense Obligation
shall in no event exceed $25,000 in the aggregate.
3.
Miscellaneous
.
(a).
Survival
. Notwithstanding
anything contained herein, the Engagement Agreement remains in full force and
effect in accordance with its terms.
(b).
Representations,
Warranties and Covenants to Survive Delivery
. The Company
acknowledges that the representations and warranties from the Subscription
Agreement incorporated by reference herein by the Company shall survive the
execution and delivery of the Subscription Agreement for a period of one year
from the First Closing (as defined in the Subscription Agreement).
(c).
Applicable
Law
. This Agreement shall be governed by and construed
under the laws of the State of New York as applied to agreements among New
York
residents entered into and to be performed entirely within New
York. Each of the parties hereto (1) agree that any legal suit,
action or proceeding arising out of or relating to this Agreement shall be
instituted exclusively in New York State Supreme Court, County of New York,
or
in the United States District Court for the Southern District of New York,
(2)
waive any objection which the Company may have now or hereafter to the venue
of
any such suit, action or proceeding, and (3) irrevocably consent to the
jurisdiction of the New York State Supreme Court, County of New York, and the
United States District Court for the Southern District of New York in any such
suit, action or proceeding. Each of the parties hereto further agrees
to accept and acknowledge service of any and all process which may be served
in
any such suit, action or proceeding in the New York State Supreme Court, County
of New York, or in the United States District Court for the Southern District
of
New York and agree that service of process upon it mailed by certified mail
to
its address shall be deemed in every respect effective service of process upon
it, in any such suit, action or proceeding.
THE PARTIES
HERETO AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM
OR
CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY DOCUMENT
OR
AGREEMENT CONTEMPLATED HEREBY.
(d).
Counterparts
. This
Agreement may be signed in counterparts with the same effect as if both parties
had signed one and the same instrument.
(e).
Entire
Agreement
. This Agreement, together with the Engagement
Agreement, constitute the entire agreement between the parties hereto pertaining
to the subject matter hereof and supersede all prior and contemporaneous
agreements, understandings, documents, negotiations and discussions, whether
oral or written, of the parties hereto.
REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK
If
you find the foregoing is in
accordance with our understanding, kindly sign and return to us a counterpart
hereof, whereupon this instrument along with all counterparts will become a
binding agreement between us.
V
ery
truly
yours,
N
EPHROS,
INC.
By: ______________________________
Norman
J.
Barta
President and Chief Executive Officer
AGREED
AND ACCEPTED TO
AS
OF THE
DATE FIRST WRITTEN ABOVE:
NATIONAL
SECURITIES CORPORATION
By:
__________________________________________
Brian
Friedman
Managing
Director and Head of Investment Banking
DINOSAUR
SECURITIES, LLC
By:
__________________________________
Glenn
Grossman
President
Exhibit
10.6
SEPARATION
AGREEMENT AND RELEASE
This
Separation Agreement and Release (this “Agreement”), dated as of September 19,
2007, is made and entered into by and between William J. Fox and Nephros,
Inc.
DEFINITIONS
As
used
throughout this Agreement:
1. “Employee”
refers to William J. Fox, his heirs, executors, administrators, agents,
successors, assigns, and dependents.
2. “Company”
refers to Nephros, Inc., together with its past, present and future parents,
subsidiaries, and affiliates, and each of their respective past and present
officers, directors, agents, employees, representatives, successors, and
assigns, in both their individual and corporate capacities.
RECITALS
WHEREAS,
Employee has been employed by Company pursuant to an Employment Agreement made
as of July 1, 2006 (the “Employment Agreement”); and
WHEREAS,
the parties have mutually agreed that Employee’s employment with Company will
terminate; and
WHEREAS,
the parties have agreed to terminate the Employment Agreement on mutually agreed
upon terms set forth herein.
NOW,
THEREFORE, in consideration of the mutual covenants and agreements hereinafter
set forth, and intending to be and being legally bound hereby, the parties
agree
as follows:
AGREEMENT
1.
As
of the
Termination Date (defined below), the Employment Agreement and all existing
employment agreements between Employee and Company, whether oral or written,
are
hereby terminated, and neither Employee nor Company shall have any further
rights or obligations under any such agreements, except as otherwise expressly
provided herein. Except as otherwise expressly provided herein, the
parties agree that this Agreement supersedes the Employment Agreement (and
any
other existing employment agreements between the parties).
2.
Employee’s
employment with Company shall terminate effective as of September 19, 2007
(the
“Termination Date”). Employee agrees that he shall execute such
documents and take such action (if any) as may be necessary to remove Employee
from all such positions he holds with Company. Employee represents
that he does not have any claim, action, or proceeding pending against
Company.
3.
In
full
and complete consideration for Employee’s promises, covenants, and agreements
set forth herein:
a.
Company
will tender to Employee, and Employee will accept, an aggregate of $142,500,
paid in equal installments in accordance with the Company’s standard payroll
practices for a period of six months after the Termination Date. Such
payment shall be by wire transfer through the Company’s payroll system to the
Employee’s account shown therein. Upon at least 10 days prior written
notice, the Employee may elect a different account for the wire
transfer. The wire transfer shall be subject to all customary and
legally required withholdings and deductions.
b.
Company
will, no later than the next payroll cycle after the Termination Date, pay
to
Employee through the Company’s payroll system any accrued but unpaid Base Salary
(as defined in the Employment Agreement) for services rendered through the
Termination Date.
c.
Employee
currently holds vested stock options to purchase 250,333 shares of the Company’s
common stock (the “Vested Options”). On the Termination Date,
unvested stock options held by Employee to purchase 56,250 shares of the
Company’s common stock will vest and become fully exercisable on the Termination
Date (the “Accelerated Options” and together with the Vested Options, the
“Options”). Employee shall have the right to exercise the Options
within the period commencing on the Termination Date and ending ninety days
after the Termination Date (the “Options Exercise Period”). Any
Options not exercised by Employee within the Options Exercise Period shall
be
cancelled. In all other respects, all such Options shall be governed
by the plans, programs, agreements, and other documents pursuant to which such
Options were granted. Any unvested stock options held by Employee to
purchase shares of the Company’s common stock, other than the Accelerated
Options, shall be forfeited on the Termination Date.
d.
For
a
period of six months after the Termination Date, Employee shall continue to
participate in all employee benefit plans, programs, and arrangements providing
health, medical, disability and life insurance benefits in which Employee was
participating immediately prior to termination, the terms of which allow
Employee’s continued participation, as if Employee had continued in employment
with Company during such period. Alternatively, if such plans,
programs, or arrangements do not allow Employee’s continued participation, for
the six month period following the Termination Date, if Employee timely elects
COBRA continuation coverage or similar continuation coverage provided for under
New York law, Company will pay the monthly premiums of such coverage for the
level and types of coverage Employee maintained on the Termination
Date. In any case, at the end of the six month period and with no
further obligation of the Company, Employee may pursue alternative continuation
coverage at his own expense. The Company will provide Employee with
any notification as required by law with respect to such alternative
continuation coverage and reasonable assistance in completing any documents
relating to such alternative continuing coverage. The Company will no longer
make COBRA payments for Employee’s elder daughter.
e.
Reasonable
business expenses and disbursements incurred by Employee in connection with
the
performance of his duties prior to the Termination Date will be reimbursed
upon
submission by Employee of all appropriate documentation in accordance with
Company’s standard procedures, provided that any such documentation is submitted
by Employee within ten business days of the Termination Date.
f.
Company
will pay Employee $5,000 by check as reimbursement for his advance on the
premium for his directors and officers liability insurance simultaneous with
the
First Closing (as defined in the several subscription agreements between the
Company and each subscriber a party thereto) of (i) the offering by the Company
of up to fifteen million dollars ($15,000,000) aggregate principal amount of
Series A 10% Secured Convertible Notes due 2008 convertible into (A) shares
of
the Company’s common stock, par value $0.001 per share (“Common Stock”) and (B)
Class D Warrants for purchase of shares of Common Stock; and (ii) an exchange
of
its 6% Secured Convertible Notes due 2012 with the holders thereof, for new
Series B 10% Secured Convertible Notes due 2008 in an aggregate principal amount
of $5,300,000 convertible into shares of Common Stock.
g.
Employee
shall not be required to mitigate damages or the amount of any payment provided
to him under this Section 3 by seeking other employment or otherwise, nor shall
the amount of any payments provided to Employee under this Section 3 be reduced
by any compensation earned by Employee as the result of employment by another
employer after the termination of Employee’s employment or otherwise, so long as
such compensation is earned in accordance with this Agreement.
h.
Except
as
expressly provided in this Paragraph 3, Employee shall not be entitled to any
money or benefits from Company.
4.
Except
as
necessary to enforce the terms of this Agreement, and in exchange for and in
consideration of the promises, covenants, and agreements set forth herein,
Employee hereby agrees, for Employee, Employee’s heirs beneficiaries, devisees,
executors, administrators, attorneys, personal representatives, successors
and
assigns, forever to release, discharge, and covenant not to sue Company and
any
of Company’s past and present directors, officers, employees, agents and
attorneys, and agents and representatives of such entities, and employee benefit
plans in which Employee is or has been a participant by virtue of his employment
with Company (except to the extent that Employee continues to be entitled to
benefits under such employee benefit plans pursuant to this Agreement or the
terms of such employee benefit plans), to the maximum extent permitted by law,
from any and all claims, debts, demands, accounts, judgments, rights, causes
of
action, equitable relief, damages, costs, charges, complaints, obligations,
promises, agreements, controversies, suits, expenses, compensation,
responsibility and or liability of every kind and character whatsoever
(including attorneys fees and costs), whether in law or equity, known or
unknown, asserted or unasserted, suspected or unsuspected, which he has or
may
have had against such entities based on any events or circumstances arising
or
occurring on or prior to the execution of this Agreement, arising directly
or
indirectly out of, relating to, or in any other way involving in any manner
whatsoever, Employee’s employment with Company and the termination thereof, and
any and all claims arising under federal, state, or local laws relating to
employment, or securities, including
without
limitation claims of wrongful discharge, breach of express or implied contract,
fraud, misrepresentation, defamation, or liability in tort, claims of any kind
that may be brought in any court or administrative agency, any claims arising
under Title VII of the Civil Rights Act of 1964, as amended, the Americans
with
Disabilities Act, the Fair Labor Standards Act, the Family and Medical Leave
Act, the New York State Human Rights Law, the New York City Human Rights Law
and
the New York Executive Law, any claim under the New York Labor Law, any claim
under the Employee Retirement Income Security Act of 1974, any claim under
the
common law, and any claim for attorneys’ fees or costs. Employee
agrees that all disputes and disagreements between Employee and Company and
the
negotiation of this Agreement are and shall remain confidential. Employee
agrees not to disclose or to talk or write about disputes between the parties
and negotiation of this Agreement without the prior written consent of Company,
except (a) as required by law; (b) as required by regulatory authorities; or
(c)
as required in connection with any mediation, arbitration or litigation arising
out of this Agreement.
5.
Company
hereby agrees, forever to release, discharge, and covenants not to sue Employee,
from any and all claims, debts, demands, accounts, judgments, rights, causes
of
action, equitable relief, damages, costs, charges, complaints, obligations,
promises, agreements, controversies, suits, expenses, compensation,
responsibility and liability of every kind and character whatsoever (including
attorneys’ fees and costs) (collectively, “Claims”), which Company has or may
have had against Employee based on any events or circumstances arising or
occurring at any time on or prior to the Termination Date arising directly
or
indirectly out of, relating to, or in any other way involving in any manner
whatsoever, Employee’s employment with Company or the termination thereof, and
any and all Claims arising under federal, state, or
local
laws relating to employment or securities, in each case, where the Company
has
Knowledge of such Claim; provided, however, that nothing in this Agreement
shall
prevent Company from asserting any Claims against Employee for gross negligence
or willful misconduct by Employee during the course of his employment with
Company. For purposes of this paragraph, “Knowledge” shall mean the
actual knowledge of Norman J. Barta, the Company’s Chief Executive Officer and a
director, Lawrence Centella, a director, or Eric A. Rose, the lead
director. Company agrees that all disputes and disagreements
between Employee and Company and the negotiation of this Agreement are and
shall
remain confidential. Company agrees not to disclose or to talk or write
about disputes between the parties and negotiation of this Agreement without
the
prior written consent of Employee, except (a) as required by law; (b) as
required by regulatory authorities; or (c) as required in connection with any
mediation, arbitration or litigation arising out of this Agreement.
6.
No
party
shall have any further obligation under the Employment Agreement, except that
the following provisions, each of which are incorporated by reference herein,
shall remain in full force and effect: Section 6.2 (entitled
“Noncompetition; Nonsolicitation”) (except as provided below), Section 6.3
(entitled “Proprietary Information”), Section 6.4 (entitled “Confidentiality and
Surrender of Records”), Section 6.5 (entitled “Inventions and Patents”), Section
6.6 (entitled “Enforcement”), Section 8 (entitled “Assignability and Transfer”),
Section 9(c) (entitled “Cooperation”), Section 9(e) (entitled “Protection of
Reputation”), Section 9(j) (entitled “Severability”), Section 9(m) (entitled
“Notices”), Section 9(n) (entitled “Assistance in Proceedings, Etc.”), and
Section 9(o) (entitled “Survival ”). Notwithstanding the foregoing,
(i) “Post-Employment Period” in Section 6.2 of the Employment Agreement shall
mean the period beginning on the Termination Date and ending
six
months after the Termination Date and (ii) any reference in Section 6.2 of
the
Employment Agreement to amounts or benefits that may be paid to Employee after
the effective date of the Employment Agreement (including under Section 3 and
5
therein) shall mean amounts or benefits that may be paid to Employee under
this
Agreement.
7.
Employee
agrees and recognizes that should he breach any of the obligations set forth
in
Sections 6.2 (as applicable), 6.3, 6.4, 6.5, 8 and 9(e) of the Employment
Agreement, Company shall have the right to seek repayment of all consideration
paid to him under this Agreement, in addition to any other rights and remedies
under the Employment Agreement and applicable law.
8.
Without
limiting Section 9(c) of the Employment Agreement in any manner, which section
shall remain in full force and effect, Employee shall cooperate with Company,
as
reasonably requested by Company and without any additional compensation to
Employee, to effect a transition of Employee’s responsibilities and to ensure
that Company is aware of all matters being handled by Employee.
9.
Company
agrees that it will not make any official announcements or issue any press
releases which contain any disparaging statements about Employee; provided,
however, that nothing in this paragraph or this Agreement shall restrict
Company’s ability to provide complete information with respect to Employee’s
employment and the termination of such employment when required or expected
to
do so under applicable law, applicable regulatory requirements or pursuant
to
legal process or subpoena, or otherwise in connection with disclosures to
regulatory authorities. The Company agrees to include a favorable
quote from a
Company
executive or director concerning Employee in any press releases issued relating
to Employee’s termination.
10.
Employee
shall direct all requests for references from prospective employers to Company’s
Chief Financial Officer, who shall provide in response to any such inquiry
only
the dates of his employment and the position he occupied at the time of the
separation of employment from Company and state that company policy precludes
the disclosure of additional information.
11.
In
executing this Agreement, neither Company nor Employee admits any liability
or
wrongdoing, and the considerations exchanged herein do not constitute an
admission of any liability, error, contract violation, or violation of any
federal, state, or local law or regulation.
12.
Employee
confirms that he has returned to Company all keys, files, records (and copies
thereof), equipment (including, but not limited to, computer hardware, software
and printers, wireless handheld devices, cellular phones, pagers, etc.), Company
identification, Company vehicles and any other Company-owned property in his
possession or control and has left intact all electronic Company documents,
including but not limited to those which he developed or helped develop during
his employment. Notwithstanding the foregoing sentence, Employee may
retain his laptop computer and wireless handheld device so long as Employee
deletes or returns to the Company, as instructed by the Company, any Company
information stored therein. Employee understands that the Company no
longer assumes responsibility for any connectivity or service contracts relating
to the laptop computer or the wireless handheld device. Employee
further confirms that he has cancelled all accounts for his
benefit,
if any, in Company's name, including but not limited to, credit cards, telephone
charge cards, cellular phone and/or pager accounts, computer
accounts.
13.
To
the
extent any taxes may be due on the payments to Employee provided in this
Agreement beyond any withheld by Company, Employee agrees to pay them
himself. Employee further agrees to provide any and all information
pertaining to Employee upon request as reasonably necessary for Company and
other entities released herein to comply with applicable tax laws.
14.
Company
makes no representations regarding the tax implications of the compensation
and
benefits to be paid to Employee under this Agreement, including, without
limitation, under Section 409A of the Internal Revenue Code (the
“Code”). Employee acknowledges that Company has advised him to
consult his own tax advisor in this regard. Employee and Company
agree that in the event Company reasonably determines that the terms hereof
would result in Employee being subject to tax under Section 409A of the Code,
Employee and Company shall negotiate in good faith to amend this Agreement
to
the extent necessary to prevent the assessment of any such tax, including by
delaying the payment dates of any amounts hereunder.
15.
This
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and permitted assigns.
16.
The
unenforceability or invalidity of any provision or provisions of this Agreement
shall not render any other provision or provisions hereof unenforceable or
invalid.
17.
This
Agreement constitutes the entire agreement between the parties and cannot be
altered except in a writing signed by the parties. The parties
acknowledge that they entered into this Agreement voluntarily, that they fully
understand all of its provisions, and that no representations were made to
induce execution of this Agreement, which are not expressly contained
herein. This Agreement has been approved by the Company’s
Compensation Committee pursuant to Exhibit A attached hereto.
18.
This
Agreement may be amended only by a writing which makes express reference to
this
Agreement as the subject of such amendment and which is signed by Employee
and,
on behalf of Company, by its duly authorized officer.
19.
Any
waiver of any term or provision hereof, or of the application of any such term
or provision to any circumstances, shall be in writing signed by the party
charged with giving such waiver. Waiver by any of the parties hereto
of any breach hereunder by any other party shall not operate as a waiver of
any
other breach, whether similar to or different from the breach
waived. No delay on the part of any of the parties in the exercise of
any of their respective rights or remedies shall operate as a waiver thereof,
and no single or partial exercise by any of the parties of any such right or
remedy shall preclude other or further exercise thereof.
20.
This
Agreement shall be governed by and construed in accordance with the laws of
the
State of New York applicable to agreements made and to be wholly performed
within that State, without regard to its conflict of law provisions or where
the
parties are located at the time a dispute arises.
21.
Any
dispute or controversy arising under or in connection with this Agreement shall
be settled exclusively by arbitration in New York, New York by
three
arbitrators
in accordance with the rules of the American Arbitration Association in effect
at the time of submission to arbitration; provided, however, that Company shall
be entitled to commence an action in any court of competent jurisdiction to
enforce Section 10 of the Employment Agreement, in part or in its
entirety. Judgment may be entered on the arbitrators’ award in any
court having jurisdiction. For purposes of entering such judgment or
seeking enforcement of Section 6 of the Employment Agreement, Company and
Employee hereby consent to the jurisdiction of any or all of the following
courts: (i) the United States District Court for the Southern
District of New York; (ii) any of the courts of the State of New York or the
State of Delaware, or (iii) any other court having
jurisdiction. Company and Employee hereby waive, to the fullest
extent permitted by applicable law, any objection which either may now or
hereafter have to such jurisdiction and any defense of inconvenient
forum. Company and Employee hereby agree that a judgment upon an
award rendered by the arbitrators may be enforced in other jurisdictions by
suit
on the judgment or in any other manner provided by law.
22.
This
Agreement may be executed simultaneously in two or more counterparts, each
of
which shall be deemed an original but all of which together shall constitute
one
and the same instrument.
IN
WITNESS WHEREOF, the parties have executed this Agreement on the dates indicated
below.
NEPHROS,
INC.
/s/
William J.
Fox
By:
/s/
Norman J.
Barta
William
J. Fox
Norman
J.
Barta
President
and
CEO
Sworn
to
before me this
Sworn
to before me
this
19th
day of
September
, 2007
1
9th
day of
September
, 2007
Dominador E.
Almeda
Karli
A.
McDonnell
Notary
Public
Notary Public
12
Exhibit
99.1
FOR
IMMEDIATE RELEASE
Nephros
Raises $12.7 Million in New Financing
Company
to Use Proceeds for Clinical Trials, Product Marketing and Working
Capital
NEW
YORK, September 25, 2007 –
Nephros, Inc. (AMEX: NEP) announced today
that it has entered into several subscription agreements whereby Lambda
Investors LLC, GPC 76 LLC, Lewis P. Schneider and Enso Global Equities
Partnership LP will collectively purchase an aggregate of approximately $12.7
million principal amount of Series A 10% Secured Convertible Notes due 2008
of
Nephros
,
for the face
value thereof.
Concurrent
with the Company entering into the subscription agreements, Nephros entered
into
an exchange agreement with Southpaw Credit Opportunity Master Fund LP, 3V
Capital Master Fund Ltd, Distressed/High Yield Trading Opportunities, Ltd.,
Kudu
Partners, L.P. and LJHS Company, which each agreed to exchange the principal
and
accrued but unpaid interest under the outstanding $5,200,000 in initial
principal amount of the 6% Secured Convertible Notes due 2012 of Nephros, for
new Series B 10% Secured Convertible Notes due 2008, in an aggregate principal
amount of $5,300,000.
Stockholders
representing a majority of the outstanding shares of Nephros have agreed to
the
issuance of shares of the Company’s common stock upon the conversion of the
Series A and Series B Notes and exercise of the Class D Warrants issuable upon
such conversion. Stockholders representing a majority of the
outstanding shares also adopted an amendment to Nephros’ fourth amended and
restated certificate of incorporation to increase the authorized shares of
common stock of Nephros to 60 million. These approvals will become
effective twenty days after a definitive Schedule 14C Information Statement
is
sent or given the Company’s stockholders.
When
the
approval does become effective, all principal and accrued but unpaid interest
under the new Series A and Series B notes will automatically convert to Nephros
common stock at a conversion price per share equal to $0.706. In the
case of the Series A Notes, Class D Warrants also will be issued for the
purchase of shares of common stock in the amount of 50% of the number of new
shares issued at conversion, with an exercise price per share of common stock
equal to $0.90.
While
outstanding, the Series A and Series B Notes will accrue interest at a rate
of
10% per annum, compounded annually and payable in arrears at maturity or
conversion. The Series A and Series B Notes are secured by a first
lien and security interest on all of Nephros’ assets. The Class D
Warrants, when issued, will have a term of five years and will be non-callable
by Nephros.
“With
today’s announcement, Nephros will have the resources to accelerate and complete
its human clinical trial on the road to regulatory approval of the
Company’s
OLpūr™
H
2
H™
Hemodiafiltration Module and OLpūr™ MD 220 Hemodiafilter
in the United
States,” said Norman Barta, president and CEO. “At the same time,
we’re placing our water filtration products on the fast track, moving forward
with our marketing and sales in the hospital environment as well as our related
military product development. We look forward to this exciting new
phase of progress for Nephros.”
Board
Matters
On
September 19, 2007, in conjunction with the closing of the financing, William
J.
Fox resigned as Executive Chairman and director of the Board, and Judy S.
Slotkin, W. Townsend Ziebold, Jr. and Howard Davis resigned as directors of
the
board.
“
Bill
Fox has been a dedicated and committed executive chairman for Nephros,” noted
Dr. Eric A. Rose, lead director of the Company. “We wish him well in
his future endeavors. I also wish to acknowledge the good counsel of
Mr. Ziebold, Mr. Davis and Ms. Slotkin during their tenure on the Nephros
board.”
Effective
September 19, 2007, in conjunction with the closing of the financing, Paul
A.
Mieyal and Arthur H. Amron were appointed directors of Nephros. Dr.
Mieyal and Mr. Amron are employed by Wexford Capital LLC, a registered
investment advisory firm that manages Lambda.
Dr.
Mieyal is a Vice President of Wexford Capital. Prior to that, he was
Vice President in charge of health care investments for Wechsler & Co., Inc.
a private investment firm and registered broker dealer. Dr. Mieyal
serves as director of Danube Pharmaceuticals, inc., Epiphany Biosciences, Inc.,
GlobeImmune, Inc., Interventional Spine, Inc., Microbiogen Pty Ltd., Nile
Therapeutics, Inc., and Tigris Pharmaceuticals, Inc. Dr. Mieyal received his
Ph.D. in pharmacology from New York Medical College, a B.A. in chemistry and
psychology from Case Western Reserve University,
and is a Chartered
Financial Analyst.
Mr.
Amron
is a partner of Wexford Capital and serves as its General Counsel. He
actively participates in various private equity transactions, particularly
in
the bankruptcy and restructuring areas, and has served on the board committees
of a number of public and private companies in which Wexford has held
investments. Mr. Amron holds a JD from Harvard University, a B.A. in
political theory from Colgate University, and is a member of the New York
bar.
“Published
scientific studies from experts in the field, its growing acceptance in Europe
and the limitations of the current standard of care in the U.S. are compelling
evidence that the Nephros Hemodiafiltration system holds great promise for
success,” said Dr. Mieyal. “In addition, the critical need for water
free from bacteria, parasites and viruses, particularly in military, medical
and
emergency settings, makes the company’s Dual Stage Ultrafilter (DSU) an
immediate and logical solution.”
About
Nephros Inc.
Nephros,
Inc., headquartered in New York, is a medical device company developing and
marketing products designed to improve the quality of life for the End-Stage
Renal Disease (ESRD) patient, while addressing the critical financial and
clinical needs of the care provider.
ESRD
is a
disease state characterized by the irreversible loss of kidney function. Nephros
believes that its products, particularly its Mid-Dilution Hemodiafiltration
therapy, are designed to remove a range of harmful substances more effectively,
and more cost-effectively, than existing ESRD treatment methods; particularly
with respect to substances known collectively as “middle molecules,” due to
their molecular weight, that have been found to contribute to such conditions
as
dialysis-related amyloidosis, carpal tunnel syndrome, degenerative bone disease
and, ultimately, mortality in the ESRD patient. Nephros products are currently
being used in over fifty clinics in Europe, and are distributed in Italy, France
and Belgium.
Nephros
also markets a line of water filtration products, the Dual Stage Ultrafilter
(DSU). The Company’s patented dual stage cold sterilization Ultrafilter has the
capability to filter out bacteria and, due to its exceptional filtration levels,
filter out many viruses and parasites. The DSU proprietary design provides
dual-stage filtration which reduces the risk of filtration failure. With initial
focus on health care, the DSU is in a pilot-use program at a major medical
center and has been selected for further development by the US Marine Corps.
The
Company considers the DSU a significant breakthrough in providing affordable
and
reliable water filtration. The DSU is based on Nephros’ proprietary water
filtration technology originally designed for medical use in its H2H machine,
and is a complimentary product line to the Company’s main focus, the ESRD
therapy business.
For
more
information on Nephros please visit the Company’s website,
www.nephros.com
.
Forward
Looking Statements
This
news
release contains certain “forward-looking statements” within the meaning of the
Private Securities Litigation Reform Act of 1995, as amended. Such
statements include statements regarding the efficacy and intended use of the
Company’s technologies under development, the timelines for bringing such
products to market and the availability of funding sources for continued
development of such products and other statements that are not historical facts,
including statements which may be preceded by the words “intends,” “may,”
“will,” “plans,” “expects,” “anticipates,” “projects,” “predicts,” “estimates,”
“aims,” “believes,” “hopes,” “potential” or similar words. For such statements,
the Company claims the protection of the Private Securities Litigation Reform
Act of 1995.
Forward-looking
statements are not guarantees of future performance, are based on certain
assumptions and are subject to various known and unknown risks and
uncertainties, many of which are beyond the Company’s control. Actual
results may differ materially from the expectations contained in the
forward-looking statements. Factors that may cause such differences include
the
risks that: (i) Nephros may not be able to satisfy its obligations when
they become due and payable and meet its anticipated cash needs and may not
be
able to obtain funding if and when needed or on terms favorable to it in order
to continue operations or fund its clinical trials; (ii) Nephros may not be
able
to continue as a going concern; (iii) Nephros may be unable to show progress
consistent with its plan of compliance to meet the American Stock Exchange’s
continued listing standards or may be otherwise unable to timely regain
compliance with the AMEX listing standards; (iv) products that appeared
promising to Nephros in research or clinical trials may not demonstrate
anticipated efficacy, safety or cost savings in subsequent pre-clinical or
clinical trials; (v) Nephros may not obtain appropriate or necessary
governmental approvals to achieve its business plan or effectively market its
products; (vi) Nephros may encounter unanticipated internal control deficiencies
or weaknesses or ineffective disclosure controls and procedures; (vii) HDF
therapy may not be accepted in the United States and/or Nephros’ technology and
products may not be accepted in current or future target markets,
which
could
lead to failure to achieve market penetration of Nephros’ products; (viii)
Nephros may not be able to sell its ESRD therapy or water filtration products
at
competitive prices or profitably; (ix) Nephros may not be able to secure or
enforce adequate legal protection, including patent protection, for its
products; (x) FDA approval relating to Nephros’
OLpūr HD190
filter may not facilitate
or have any effect on the regulatory approval
process for its other products; and (xi) Nephros may not be able to achieve
sales growth in Europe or expand into other key geographic
markets. More detailed information about Nephros and the risk factors
that may affect the realization of forward-looking statements is set forth
in
Nephros’ filings with the Securities and Exchange Commission, including Nephros’
Annual Report on Form 10-KSB filed with the SEC for the fiscal year ended
December 31, 2006 and Nephros’ Quarterly Reports filed with the SEC on Form
10-QSB for the quarters ended June 30, 2007 and March 31,
2007. Investors and security holders are urged to read these
documents free of charge on the SEC’s web site at
www.sec.gov
. Nephros
does not undertake to publicly update or revise its forward-looking statements
as a result of new information, future events or otherwise.
CONTACTS:
Norman
Barta, CEO
Nephros,
Inc.
212
781-5113
Paul
G.
Henning
Cameron
Associates
212
554-5462
phenning@cameronassoc.com
#
#
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