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): January 12,
2007
KREIDO
BIOFUELS, INC.
(f/k/a
Gemwood Productions, Inc.)
(Exact
name of registrant as specified in its charter)
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Nevada
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333-130606
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20-3240178
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(State
or other jurisdiction
of
incorporation)
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(Commission
File Number)
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(I.R.S.
Employer
Identification
Number)
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1140
Avenida Acaso
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Camarillo,
CA
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93012
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(Address
of principal executive offices)
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(Zip
Code)
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(805)
389-3499
(Registrant’s
telephone number, including area code)
88
West 44th Avenue, Vancouver, British Columbia, V5Y 2V1,
Canada
(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 (see General Instruction A.2. below):
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Written
communications pursuant to Rule 425 under the Securities Act (17
CFR
230.425)
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¨
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Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
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Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17
CFR
240.14d-2(b))
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¨
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Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17
CFR
240.13e-4(c))
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FORWARD-LOOKING
STATEMENTS
This
Current Report on Form 8-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). This Current Report includes statements regarding
our plans, goals, strategies, intent, beliefs or current expectations. These
statements are expressed in good faith and are based upon a reasonable basis
when made, but there can be no assurance that these expectations will be
achieved or accomplished. These forward-looking statements can be identified
by
the use of terms and phrases such as “believe,” “plan,” “intend,” “anticipate,”
“target,” “estimate,” “expect,” and the like, and/or future-tense or conditional
constructions (“will,” “may,” “could,” “should,” etc.). Items contemplating or
making assumptions about actual or potential future sales, market size,
collaborations, and trends or operating results also constitute such
forward-looking statements.
Although
forward-looking statements in this report reflect
the
good
faith judgment of management, forward-looking statements are inherently subject
to known and unknown risks, business, economic and other risks and uncertainties
that may cause actual results to be materially different from those discussed
in
these forward-looking statements. Readers are urged not to place undue reliance
on these forward-looking statements, which speak only as of the date of this
report. We assume no obligation to update any forward-looking statements in
order to reflect any event or circumstance that may arise after the date of
this
report, other than as may be required by applicable law or regulation. Readers
are urged to carefully review and consider the various disclosures made by
us in
our reports filed with the Securities and Exchange Commission (“SEC”) which
attempt to advise interested parties of the risks and factors that may affect
our business, financial condition, results of operation and cash flows. If
one
or more of these risks or uncertainties materialize, or if the underlying
assumptions prove incorrect, our actual results may vary materially from those
expected or projected.
EXPLANATORY
NOTE
On
November 2, 2006, Gemwood Productions, Inc., a Nevada corporation (“Gemwood”),
changed its name to Kreido Biofuels, Inc. On January 12, 2007 Gemwood completed
a reverse merger (the “Merger”) whereby Kreido Acquisition Corp., a California
corporation and a wholly-owned subsidiary of Gemwood (“Acquisition Sub”), merged
with and into Kreido Laboratories, a California corporation (“Kreido”). Gemwood
acquired the business of Kreido pursuant to the Merger and will continue the
existing business operations of Kreido, its wholly-owned subsidiary, as a
publicly-traded company under the name Kreido Biofuels, Inc. (the
“Company”).
The
terms
“the Company,” “we,” “us,” and “our” refer to Kreido Biofuels, Inc. and its
wholly-owned subsidiary, Kreido Laboratories, after giving effect to the Merger,
unless otherwise stated or the context clearly indicates otherwise. The term
“Gemwood” refers to Kreido Biofuels, Inc. (f/k/a Gemwood Productions, Inc.)
before giving effect to the Merger, and the term “Kreido” refers to Kreido
Laboratories before giving effect to the Merger. This Current Report on Form
8-K
contains summaries of the material terms of various agreements executed in
connection with the transactions described herein. The summaries of these
agreements are subject to, and qualified in their entirety by, reference to
these agreements, all of which are incorporated herein by
reference.
Item
1.01.
Entry
into a Material Definitive Agreement.
On
January 12, 2007, the Company completed the Merger. For a description of the
Merger and the material agreements entered into in connection therewith, please
see Item 2.01 of this Current Report on Form 8-K, which disclosure is
incorporated herein by reference.
Item
2.01(a)-(e).
Completion
of Acquisition or Disposition of Assets.
THE
MERGER AND RELATED TRANSACTIONS
The
Merger
On
January 12, 2007 (the “Closing Date”), Gemwood, the Acquisition Sub and Kreido
entered into an Agreement and Plan of Merger and Reorganization (the “Merger
Agreement”) and on the same date consummated the Merger. Before their entry into
the Merger Agreement, no material relationship existed between Gemwood (or
its
subsidiaries) and Kreido. A copy of the Merger Agreement is attached as Exhibit
2.1 to this Current Report on Form 8-K and is incorporated herein by
reference.
Pursuant
to the Merger Agreement, on the Closing Date, the Acquisition Sub, a
wholly-owned subsidiary of Gemwood, merged with and into Kreido, with Kreido
remaining as the surviving entity. Gemwood acquired the business of Kreido
pursuant to the Merger and will continue the existing business operations of
Kreido as a publicly-traded company under the name Kreido Biofuels, Inc. As
a
result of the Merger, Kreido is a wholly-owned subsidiary of the
Company.
On
the
Closing Date and in connection with the Merger, the holders of Kreido’s issued
and outstanding common stock before the Merger (the “Kreido Shareholders”)
surrendered all of their issued and outstanding common stock of Kreido and
received common stock of the Company, par value $0.001 per share (“Common
Stock”).
On
the
Closing Date, all of the issued and outstanding options to purchase shares
of
Kreido common stock that were issued under Kreido’s 1997 Stock Compensation
Program (the “1997 Program”) were exchanged for options (the “New Options”) to
purchase shares of the Company’s Common Stock. Also on the Closing Date, holders
of all of the issued and outstanding warrants to purchase
shares
of
Kreido’s capital stock prior to the Merger received warrants (the “New
Warrants”) to purchase shares of the Company’s Common Stock. The number of
shares of Common Stock issuable under, and the price per share upon exercise
of,
the New Options and New Warrants were calculated based upon the terms of the
original options and warrants of Kreido, as adjusted by the conversion ratio
in
the Merger, which is described in the Merger Agreement. The New Options will
be
administered under the 1997 Program, which was assumed by the Company in the
Merger.
An
aggregate of 27,000,000 shares of Common Stock was issuable to Kreido
Shareholders and the holders of outstanding Kreido options and warrants on
the
Closing Date, of which 25,263,683
shares
of
Common Stock were issued to Kreido Shareholders, and an aggregate of
1,736,317
shares
of
Common Stock was reserved for issuance upon the exercise of the New Warrants
and
New Options.
The
Kreido Shareholders who received Common Stock in the Merger have agreed not
to
engage, directly or indirectly, in certain Prohibited Transactions (as defined
in the Merger Agreement) beginning on the Closing Date and ending on the first
anniversary thereof
.
The
stockholders of Gemwood before the Merger (the “Gemwood Stockholders”) retained
8,750,000 shares of Common Stock.
The
Merger Agreement contains customary representations, warranties and covenants
of
Gemwood, Kreido and, as applicable, Acquisition Sub, for like transactions.
Breaches of representations and warranties are secured by customary
indemnification provisions. The Merger Agreement contains a post-closing
adjustment to the number of shares of Common Stock issued to the Kreido
Shareholders in an amount up to 2,000,000 shares of Common Stock, issued on
a
pro rata basis, for any breach of the Merger Agreement by Gemwood discovered
during the two-year period following the Closing Date. In order to secure the
indemnification obligations of the Kreido Shareholders pursuant to the Merger
Agreement, 5% of the shares of Common Stock to which the Kreido Shareholders
are
entitled in exchange for their shares of Kreido in connection with the Merger
will be held in escrow for a period of two years pursuant to an Escrow
Agreement, a copy of which agreement is attached as Exhibit 10.1 to this Current
Report on Form 8-K and is incorporated herein by reference.
The
Merger will be treated as a recapitalization of the Company for financial
accounting purposes. The historical financial statements of Gemwood before
the
Merger will be replaced with the historical financial statements of Kreido
before the Merger in all future filings with the SEC.
On
the
Closing Date, Stephen B. Jackson and
Victor
Manuel Savceda
, constituting
all of the directors of Gemwood before the Merger, appointed Betsy Wood Knapp,
Joel A. Balbien, G.A. Ben Binninger and Joseph Marks to fill vacancies on the
Board of Directors (the “Board”). Also on the Closing Date, Messrs. Jackson
and Savceda resigned from the Board, and the then-current officer of Gemwood
resigned and new executive officers designated by Kreido were appointed. The
current officers and directors of the Company are identified on page 47 under
“Directors and Executive Officers.”
Before
the Merger, the 2006 Equity Incentive Plan (the “2006 Plan”) was adopted by the
Board and the Gemwood Stockholders. As of the Closing Date, 3,850,000 shares
of
Common Stock were reserved for issuance under the 2006 Plan as incentive awards
for executive officers, key employees, consultants and directors.
The
parties have taken all actions necessary to ensure that the Merger is treated
as
a “tax free exchange” under Section 368(a) of the Internal Revenue Code of 1986,
as amended.
The
Offering and Bridge Financing
Concurrently
with the closing of the Merger, the Company consummated a private offering
(the
“Offering”) of 18,518,519 units of its securities (the “Units”), at a purchase
price of $1.35 per Unit, each Unit consisting of one share of Common Stock
and a
warrant to purchase one share of Common Stock (the “Investor Warrants”).
The
Investor Warrants are exercisable for a period of five (5) years from the date
of issuance at an exercise price of $1.85 per share, provided that the holder
provides the Company written notice at least 61 days prior to the intended
date
of exercise. The Investor Warrants are callable by the Company under certain
circumstances.
The
Offering was made only to accredited investors as defined under Regulation
D,
Rule 501(a) promulgated by the SEC.
In
November and December 2006, to facilitate the completion of the Merger and
to
enable Kreido to meet specific working capital requirements, certain
shareholders of Kreido provided bridge financing (the “Bridge Financing”) to
Kreido. The Bridge Financing was evidenced by unsecured promissory notes, as
amended (the “Bridge Notes”), in the aggregate face amount of $370,004 which
were scheduled to mature on January 10, 2007 and bore no interest. The holders
of the Bridge Notes issued in November agreed to convert their Bridge Notes
into
Units in the Offering at the rate of one Unit for each $1.35 of debt (such
November Bridge Notes hereinafter referred to as the “Converting Bridge Notes”).
The holders of the Bridge Notes issued in December were repaid in full at
Closing from the proceeds of the Offering.
On
the
Closing Date, investors in the Offering, including the holders of the Converting
Bridge Notes, collectively purchased 18,518,519 Units for a total consideration
of $24,749,996 in cash and $250,004
in
cancelled indebtedness pursuant to those certain Subscription Agreements dated
as of the Closing Date, the form of which Subscription Agreement
is
attached as Exhibit 10.2 to this Current Report on Form 8-K and is incorporated
herein by reference.
The
sale
of the Units in the Offering was exempt from registration under Section 4(2)
of
the Securities Act, and Rule 506 of Regulation D as promulgated by the SEC.
In
the Offering, no general solicitation was made by us or any person acting on
our
behalf. The Units were sold pursuant to transfer restrictions, and the
certificates for shares of Common Stock and Investor Warrants underlying the
Units sold in the Offering contain appropriate legends stating that such
securities are not registered under the Securities Act and may not be offered
or
sold absent registration or an exemption therefrom.
Pursuant
to the Subscription Agreements entered into on the Closing Date between the
Company and each investor in the Offering, the Company is obligated to notify
investors in the Offering at least 15 business days prior to the closing of
any
subsequent financing of the Company which occurs within two years of the Closing
Date, and the investors have the right to participate in any such subsequent
financing on the same terms, conditions and price provided for in such
subsequent offering. The notice requirements and terms of the investors’
participation in the subsequent financings are described in more detail in
the
Subscription Agreement.
Sanders
Morris Harris, Inc. acted as a placement agent in connection with the Offering
and received fees of $359,460. Gamma Capital Partners, LLC and
Capitol
Securities Management, Inc.
provided
financial advisory services to the Company in connection with the Offering
and
received fees of $400,000 and $14,000.
The
form
of the Company’s Investor Warrant issued in the Offering is attached as Exhibit
4.1 to this Current Report on Form 8-K and is incorporated herein by
reference.
The
Merger, the Offering and the other transactions related thereto are collectively
referred to herein as the “Transactions.”
Registration
Rights
On
the
Closing Date, the Company entered into a Registration Rights Agreement with
the
investors in the Offering. Under the terms of the Registration Rights Agreement,
the Company has committed to file a Registration Statement covering the resale
of the Common Stock underlying the Units (including the Common Stock issuable
upon exercise of the Investor Warrants) within 60 days from the Closing Date
and
is obligated to use commercially reasonable efforts to cause such Registration
Statement to become effective no later than 90 days after the date filed (or
120
days if such Registration Statement is subject to a review by the SEC).
Also pursuant to the Registration Rights Agreement, the Company is obligated
to
use commercially reasonable efforts to maintain the effectiveness of this
Registration Statement until all of the Common Stock covered by such
Registration Statement has been sold or may be sold under Rule 144(k) of the
Securities Act. The Company will be liable for penalties payable under the
Registration Rights Agreement in shares of its Common Stock as follows:
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5%
of the shares sold in the Offering if the Registration Statement
is not
filed or does not become effective on the date by which the Company
is
required to cause it to be filed or to become effective, consistent
with
the terms and provisions of the Registration Rights
Agreement;
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an
additional 5% payable if the Registration Statement is not filed
within 90
days after the Closing Date;
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an
additional 5% payable if the Registration Statement is not filed
within
120 days after the Closing Date, for a maximum penalty of 15% with
respect
to the Registration Statement not being filed by the date on which
the
Company is required to cause it to be filed;
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an
additional 5% payable if effectiveness does not occur within 120
days
after filing, if not reviewed by the SEC, or within 150 days after
filing,
if reviewed by the SEC; and
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an
additional 5% payable if effectiveness does not occur within 150
days
after filing, if not reviewed by the SEC, or within 180 days after
filing,
if reviewed by the SEC, for a maximum penalty of 15% with respect
to the
Registration Statement not becoming effective by the date on which
the
Company is required to cause it to become
effective.
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The
form
of Registration Rights Agreement
is
attached as Exhibit 10.3 to this Current Report on Form 8-K and is incorporated
herein by reference.
Split-Off
Agreement
Contemporaneously
with the closing of the Merger, the Company split-off its wholly-owned
subsidiary, Gemwood Leaseco, Inc., a Nevada corporation (“Leaseco”), through the
sale of all of the outstanding capital stock of Leaseco (the “Split-Off”). On
the Closing Date, the Company executed a Split-Off Agreement with Victor Manuel
Savceda and Leaseco, a copy of which is attached as Exhibit 10.4 to this Current
Report on Form 8-K and is incorporated herein by reference.
Lock-Up
Agreements
On
the
Closing Date, each of the officers and directors of the Company, and each Kreido
Shareholder holding more than 1% of Kreido’s outstanding common stock prior to
the Merger has agreed not to offer, sell, contract to sell or otherwise dispose
of or transfer title to any of the shares of Common Stock acquired pursuant
to
or in connection with the Merger Agreement, during the period commencing on
the
Closing Date and ending on the 12-month anniversary of the Closing Date, without
the prior written consent of the Company and Tompkins Capital Group. Such
agreements are set forth in written Lock-Up Agreements dated as of the Closing
Date. A form of the Lock-Up Agreement entered into by the officers, directors
and principal Kreido Shareholders is attached as Exhibit 4.2 to this Current
Report on Form 8-K.
Pro
Forma Ownership
Immediately
after giving effect to the Merger, there were issued and outstanding on a fully
diluted basis (including the shares of Common Stock underlying the warrants
and
options, and the shares authorized for issuance under the Company’s 2006 Plan),
76,637,038 shares of Common Stock, as follows:
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the
Kreido Shareholders (including former holders of Kreido stock options
and
warrants) beneficially owned 27,000,000 shares of Common Stock, of
which
approximately 25,263,683
shares
were issued and outstanding (including the shares held in escrow
to
satisfy indemnification obligations under the Merger
Agreement);
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the
Gemwood Stockholders held 8,750,000 shares of Common
Stock;
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the
investors in the Offering (including the holders of the Kreido Converting
Bridge Notes who received Units in exchange for the cancellation
of
indebtedness) held 18,518,519 shares of Common Stock and Investor
Warrants
to acquire 18,518,519 shares of Common Stock;
and
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the
2006 Plan authorized 3,850,000 shares of Common Stock for issuance,
of
which options for the purchase of 1,205,384 shares were
outstanding.
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Item
2.01(f).
PART
I
1.
DESCRIPTION OF BUSINESS
Company
Overview
Immediately
following the Merger, the business of Kreido became the business of the Company.
Kreido was founded in 1995 to develop proprietary technology for building
micro-composite materials for electronic applications. We thereafter sought
to
develop the technology to improve the speed, completeness and efficiency of
certain chemical reactions, including esterifications and transesterifications,
in the pharmaceutical and special chemical industries. The U.S. Environmental
Protection Agency (the “EPA”) has been using our STT
®
Reactor-based technology in one of its largest laboratories since 2004 to
develop and evaluate new chemical processes and optimize protocols for use
of
the STT
®
Reactor
by public and private entities.
Beginning
in the last quarter of 2005, we began to evaluate the advantages of the
STT
®
Reactor
specifically for the production of biodiesel. We have developed a lower-cost,
higher output system for the production of diesel motor fuel that is derived
from vegetable oils rather than petroleum and is classified under industry
standards as biodiesel. Our business goal is to commercialize our proprietary
equipment system for biodiesel production on an industrial scale and to become
a
leading provider of biodiesel in the United States and elsewhere. In the first
quarter of 2006, we elected to focus exclusively on the biodiesel industry
and
began to prepare and execute our current business plan. See “Risk Factors--Risks
Related to Our Contemplated Conduct of Our Business” and “Competition.” We
expect to execute our business plan by generating revenues from multiple sources
- by building and operating our own STT
®
Reactor-based Biodiesel Production Units with an anticipated aggregate capacity
of 90 million gallons annually (“MMgpy”) by 2008, by licensing our
STT
®
Reactor-based technology to others and, in the longer term, by investing in
businesses that will develop or use our STT
®
Reactor-based technology for production of biodiesel.
Biodiesel
fuel is a sustainable, renewable transportation fuel with a growing market
in
the United States and internationally. Under current and projected market
conditions, there are significant amounts of unsatisfied demand for biodiesel.
As an alternative to petrodiesel and other petroleum-based fuels, biodiesel
has
several advantages, including:
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extending
domestic diesel fuel supplies;
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reducing
dependence on foreign crude oil
supplies;
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expanding
markets for domestic and international agricultural
products;
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reducing
emissions of greenhouse gases and other gases that are regulated
by the
EPA; and
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being
usable by existing diesel engines, while extending their useful
lives.
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As
a
result of the benefits that are expected from the widespread use of biodiesel,
legislation, as well as taxation and public policy, favor and, in some
jurisdictions, require the increasing use of biodiesel instead of petrodiesel.
Concurrently, we believe that diesel will increasingly replace gasoline as
a
transportation fuel.
To
address the anticipated unsatisfied market demand for biodiesel, we have
developed our STT
®
30G
Biodiesel Production Unit (the “STT
®
Production Unit”), a system of chemical processing equipment based on a highly
efficient fluid dynamics-based process. This process permits accelerated rates
of transesterification and increased yields over shortened production cycles,
among other advantages. Our STT
®
Reactor-based technology as applied to the production of biodiesel is the
subject of four issued U.S. patents (plus one provisional application and one
pending application for U.S. patents), as well as
international
counterparts for most of these patents and applications. These issued patents
expire between 2011 and 2021. See “Licensing and Intellectual Property
Protection,” and “Risk Factors--Our success will depend in part on our ability
to obtain and maintain protection of our intellectual property.” Our
STT
®
Production Unit is made up of four basic components: (1) the feedstock delivery
system, (2) our STT
®
Reactor,
(3) the biodiesel/glycerin separator and polishing system and (4) the methanol
recovery system. We expect to manufacture the STT
®
Reactors
ourselves and to construct the STT
®
Production Unit by securing the services of qualified third-party
contractors.
The
spinning tube-in-tube technology employed in our STT
®
Reactor
optimizes the specific chemical reactions required for transesterification,
the
process by which biodiesel is produced from vegetable oils. Our STT
®
Production Unit is based on the STT
®
Reactor
and is “pipe to pipe,” meaning that it includes all the equipment necessary for
the manufacturing process, from the ingestion of raw materials, or feedstocks,
to the output of finished biodiesel fuel ready to burn. We believe that our
STT
®
Production Unit will reduce the cost of production of biodiesel and make it
economically competitive with petroleum-based fuels over a broad range of crude
oil prices. We also believe that the design features of the STT
®
Reactor
reduce the time required for manufacturing scale-up and, therefore, result
in
faster returns on the cost of installation than conventional reactor
systems.
We
have
been developing our technology for 11 years at a total incurred cost of $20
million, principally for use in the pharmaceutical and chemical industries.
More
recently, we have focused on the application of our system to the large-scale
continuous production of biodiesel in commercial quantities. We will use the
majority of the proceeds of the Offering to advance the commercialization of
our
technology. We have constructed two pilot units to demonstrate the commercial
potential of our technology. Additionally, we plan to construct three
STT
®
Production Units that we expect to operate on sites shared with bulk liquids
distributors. If we are successful in bringing our three plants on line, we
will
have the capacity as early as 2008 to produce up to 90 MMgpy of biodiesel per
year. If we achieve these levels of production, then we are likely to seek
to
build, install and operate additional production units within the U.S. and
license the STT
®
Production Units primarily to offshore biodiesel producers. We anticipate that
completion of these projects will demonstrate that we can build production
plants in less time and at lower costs, operate these plants with greater cost
efficiencies and produce greater yields than conventional biodiesel plants.
We
also believe that STT
®
Production Units will be less toxic to the environment and safer to
operate.
We
plan
to directly market and distribute the biodiesel that we produce in our owned
and
operated facilities to diesel blenders and other distributors of diesel products
through our own team that we plan to recruit and develop with proceeds of the
Offering. We plan to use diversified feedstock in our plants.
The
Biodiesel Industry
Diesel
fuel is the motor fuel that is used in a compression-ignition engine which
causes fuel to combust not by igniting the fuel with a spark, but by injecting
the fuel into a highly pressurized combustion chamber. There are two principal
types of diesel fuel--petrodiesel and biodiesel. Petrodiesel is made from
petroleum feedstock and comprises substantially all of the diesel fuel sold
in
the United States and elsewhere. Diesel fuel made from vegetable oil or animal
fat renewable feedstocks is called biodiesel.
To
be
sold and distributed as biodiesel, the fuel must meet governmental standards,
such as ASTM D6751-06a in the United States and EN14214:2003 in the European
Union.
Petrodiesel
currently comprises all but less than 1% of the diesel transportation fuel
market. According to the Energy Information Association (“EIA”) of the U.S.
Department of Energy (“DOE”),
on-highway
petrodiesel consumption in 2005 was approximately 39 billion gallons in the
United States, or 22% of all ground transportation fuel currently consumed,
and
228 billion gallons globally. Total United States diesel sales in 2005 were
$93
billion, nearly double the 2000 level. We believe that on-highway consumption
of
diesel is growing at over 3% annually,
1
and
that
use of diesel will increase as a percentage of total on-highway ground
transportation in the United States for several reasons, including:
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after
compliance with new low-sulfur requirements, diesel will become less
toxic;
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diesel
is more fuel efficient than
gasoline;
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use
of diesel engines in larger numbers of commercially successful
automobiles; and
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clean
diesel light vehicles provide governmentally-owned fleets with an
option
for increasing vehicle efficiency.
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Sales
of
“clean diesel” vehicles are projected to increase from 43,000 units in 2004 to
over 1,500,000 in 2015,
2
driving
increased diesel fuel sales for those vehicles.
Despite
these trends that indicate increased demand for diesel, the price of petrodiesel
fuel closely tracks the cost of petroleum crude oil. Significantly since 2002,
worldwide demand for petroleum-based products has been growing faster than
supply.
Beginning
on June 1, 2006, new federal laws went into effect that are likely to
significantly affect the market for petrodiesel. These laws limit the amount
of
sulfur content allowed in diesel fuel, reducing the portion of sulfur allowed
in
diesel fuel for on-highway use by more than 95%. As a result, ultra low sulfur
diesel (“ULSD”) may result in price increases to users of the fuel. Low sulfur
diesel imports currently approximate 2 billion gallons per year and are
growing.
3
Biodiesel
is diesel fuel produced from vegetable oils or animal fats. In the U.S., the
ASTM biodiesel specification (ASTM D6751-06a) defines biodiesel fuel as a fuel
comprised of mono-alkyl esters of long-chain fatty acids derived from vegetable
oils or animal fats. In Europe, the biodiesel specification is defined as fatty
acid methyl esters. Biodiesel can be used in its pure form, known as B100,
or
blended in any ratio with conventional petrodiesel fuel. Typical biodiesel
blends are 2% (“B2”), 5% (“B5”) and 20% (“B20”). Biodiesel can run in any
vehicle that can run on petrodiesel with few or no modifications. According
to
the National Biodiesel Board, biodiesel is available nationwide. It can be
purchased in the U.S. directly from biodiesel producers and marketers, more
than
1,259 biodiesel distributors, or at 1,016 retail pumping stations.
4
Projected
Demand for Biodiesel.
Market
demand for biodiesel has grown significantly based principally on the advantages
of biodiesel over petrodiesel. Those advantages include:
|
·
|
Biodiesel
is made from renewable resources.
|
|
·
|
When
burned, biodiesel results in a substantial reduction of unburned
hydrocarbons, carbon monoxide and particulate
matter.
|
|
·
|
Biodiesel
is biodegradable, nontoxic and not considered a hazardous material
when
spilled.
|
1
|
U.S.
Department of Energy’s Energy Information Administration based on U.S.
diesel quantity sales from 1999-2004, the last year in which it reported
these data.
|
2
|
2005
Ricardo diesel report.
|
3
|
Department
of Energy’s Energy Information
Administration.
|
4
|
National
Biodiesel Board website on November 1,
2006.
|
|
·
|
Biodiesel
produces fewer hazardous emissions and unburned hydrocarbons than
when
burned (with the possible exception of nitrous
oxide).
|
|
·
|
Biodiesel
is essentially free of sulfur and
aromatics.
|
|
·
|
The
overall ozone (smog) forming potential of the hydrocarbon exhaust
emissions from biodiesel is nearly 50% less than that for petrodiesel
fuel.
|
|
·
|
Biodiesel
is registered as a fuel and fuel additive with the EPA and meets
clean
diesel standards established by the California Air Resources Board.
B100
biodiesel has been designated as an alternative fuel by the DOE and
the
U.S. Department of Transportation
(“DOT”).
|
|
·
|
Biodiesel
is safer to manufacture and handle.
|
|
·
|
Because
of its greater lubricity, biodiesel is used as a premium additive
to
petrodiesel to improve engine performance and durability, to reduce
wear
on engines and to extend their life. The addition of as little as
1% of
biodiesel will significantly increase the reduced lubricity of ULSD
fuel.
|
|
·
|
Biodiesel
can use domestic feedstock,
reducing
the $250 billion the United States pays other countries each year
for
crude oil.
|
|
·
|
Biodiesel
is made from renewable resources that can be grown when and where
needed.
|
|
·
|
Primarily
as a result of higher petroleum crude oil prices, increased petrodiesel
refining costs, increased agricultural productivity, improvements
in
biodiesel processing technology and government subsidies, it has
recently
become less expensive to produce biodiesel than
petrodiesel.
|
|
·
|
Public
policy, both as enacted into law and as enunciated by governmental
agencies in the United States and elsewhere, favors the production
and use
of biodiesel fuel.
|
Based
on
these advantages, we believe that demand for biodiesel will continue to grow
at
accelerated rates both in the United States and internationally over the next
several years and that biodiesel will account for as much as 4% of all the
diesel fuel produced in the U.S. and globally by 2010. Biodiesel was less than
1% of the approximately 39 billion gallons of on-highway diesel fuel consumed
in
the United States in 2005 and less than .05% of total on-highway fuel consumed
in the United States in that year. We expect that governmental incentives and
requirements will be a principal driver of the forecasted increase in demand.
See “Governmental Legislation.” One of the key biodiesel production legislative
incentives in the United States is the Biodiesel Tax Credit of $1.00 per gallon
of biodiesel blended with petrodiesel that is part of the Energy Policy Act
of
1992 (“EPAct 1992”) and extended to 2008 in the Energy Policy Act of 2005
(“EPAct 2005”). Although this tax credit is due to expire in 2008, there is
proposed legislation to extend this tax credit. See “Risk Factors--Both supply
and demand in the United States biodiesel industry are highly dependent upon
federal and state legislation.”
Another
key element of biodiesel that supports this increase in estimated growth is
the
broad functionality of biodiesel. Biodiesel can be blended with petrodiesel
in
any ratio. In fact, blends of only 1% biodiesel are often used to improve the
lubricity of petrodiesel fuel by as much as 65%, and blends of 99.9% biodiesel
are often blended to reap the benefits of “pure” biodiesel while still receiving
the
maximum
tax incentives of “blending” biodiesel with petrodiesel. Since biodiesel can be
blended with petrodiesel in any ratio, the potential market size is the $93
billion (39 billion gallons) of on-highway petrodiesel fuel consumed each year
in the United States and several times that amount worldwide.
The
rising demand for biodiesel may also reflect or track the increasing amounts
of
biodiesel that are forecasted to be produced through 2010. Although the
existence of production capacity does not necessarily result in increased
demand, we believe that increased availability of biodiesel as an alternative
fuel will result in wider voluntary consumer adoption and increased production
of both diesel vehicles capable of burning blends of biodiesel and petrodiesel
as well as vehicles that will burn mixes in which biodiesel predominates.
Projected
Biodiesel Supply.
Biodiesel use is still in its infancy, but its production in the United States
is expected to grow substantially and reduce dependency on petrodiesel. In
2010,
United States production is expected to be 1.8 Bgpy
(
billion
gallons per year), and global production is expected to be 5.5 Bgpy. Currently,
77 biodiesel plants, concentrated in the Midwest, are in operation in the United
States. These plants have a total of 558 MMgpy in existing capacity and 7.2
MMgpy in average capacity. The existing United States biodiesel production
capacity of 558 MMgpy is only 1.4% of the total diesel fuel consumed in the
United States in 2005 (39 billion gallons). In addition, according to
Biodiesel
Magazine
,
33 new
biodiesel plants with 807 MMgpy in additional aggregate capacity and an average
capacity of 25 MMgpy currently are under construction.
Economics
with Respect to Petrodiesel
.
The EIA
reported that in August 2006 the average refinery gate price for a gallon of
petrodiesel fuel produced by the petroleum industry as a whole in the U.S.
was
$2.32, comprised of $1.64 in crude oil costs and $0.68 in refinery processing
costs and profit.
5
Assuming
crude oil prices of $60 per barrel, the Company estimates that the refinery
gate
price for a
5
|
The
EIA’s monthly report of diesel fuel cost components history, “What We Pay
for a Gallon of Diesel Fuel,” at
http://tonto.eia.doe.gov/oog/info/gdu/dieselpump.html.
|
gallon
of
petrodiesel would be $2.11.
6
To
be
comparable to biodiesel, additional costs of roughly 5¢ per gallon would be
incurred for desulfurization and added lubricity, bringing the refinery gate
price per gallon for petrodiesel comparable to biodiesel to be $2.16, excluding
the impact of all biodiesel incentives.
According
to the Energy Management Institute’s Alternative Fuels Index
sm
,
the
average wholesale price of B100 biodiesel across 52 major metropolitan areas
in
the United States over the six-month period from June to November 2006 ranged
between $2.89 and $3.39 per gallon, while the average wholesale price of
petrodiesel ranged between $1.77 and $2.50 per gallon in those same regions
over
the same time frame (excluding all taxes). Biodiesel sells for a premium to
petrodiesel for several reasons. Firstly, B100 biodiesel is sold to fuel
blenders, who are entitled to a $1.00
7
tax
credit for each gallon of biodiesel blended with petrodiesel. See “Governmental
Legislation.” Secondly, as noted below under “Governmental Legislation,”
purchases of biodiesel are subject to legislative usage mandates. Thirdly,
biodiesel serves end-users’ desires or requirements to use biodiesel because of
lower toxicity, higher lubricity, absence of sulfur and other environmental
and
operational benefits.
The
Company currently estimates the variable cost for a Kreido biodiesel production
plant built on a greenfield site to produce a gallon of biodiesel fuel
(excluding federal and state tax credits, return on investment, income and
other
taxes, and depreciation) using its STT
®
Production Unit to be $2.48. This cost assumes prices per gallon of biodiesel
produced of approximately $2.4248 for raw materials, including feedstock,
alcohol, catalysts and chemicals, plus approximately $0.0524 per gallon in
processing costs (net of a 5¢ per gallon tax incentive for small agri-biodisel
producers
8
).
The
cost also assumes no incremental transportation cost for the feedstock.
Amortization of anticipated plant construction costs would add another $0.0400
per gallon to the economic cost under the assumptions in our model. Thus, the
total cost to produce biodiesel using a plant-built STT
®
Production Unit on a greenfield site is $2.52 per gallon under the above
assumptions. With respect to this estimate, see “Cautionary Language Regarding
Forward-Looking Statements and Industry Data” and “Risk Factors--We have based
our business plan for biodiesel production in substantial part on assumptions
regarding financial advantages that are estimates and therefore may not be
correct” in this Current Report on Form 8-K.
6
|
There
are 42 gallons in a barrel of crude oil. The EIA’s report that the crude
oil cost component of $1.64 per gallon in August 2006
(http://tonto.eia.doe.gov/oog/info/gdu/dieselpump.html) is based
on crude
oil prices of $68.88 per barrel ($1.64 per gallon x 42 gallons per
barrel). $60 per barrel for crude oil equates to a per-gallon cost
of
$1.43 ($60 per barrel / 42 gallons per barrel). When the EIA’s refining
margin estimate of $0.68 per gallon is added, the total refinery
gate
price of petrodiesel is $2.11 ($1.43 + $0.68). For additional information
regarding these estimates, see “Cautionary Language Regarding
Forward-Looking Statements and Industry Data” and “Risk Factors--We have
based our business plan for biodiesel production in substantial part
on
assumptions regarding financial advantages that are estimates and
therefore may not be correct” in this Current Report on Form
8-K.
|
7
|
The
$1.00 per gallon credit applies to biodiesel produced from virgin
vegetable oil feedstocks that is blended with petrodiesel. Companies
that
blend biodiesel produced from waste vegetable oil feedstocks, such
as
so-called yellow grease or brown grease, are entitled to a $0.50
credit
per gallon of biodiesel blended with
petrodiesel.
|
8
|
The
tax incentive for small agri-biodiesel producers provides a 10¢ per gallon
tax credit on the first 15 million gallons produced each year by
biodiesel
producers that have an aggregate production capacity of 60 MMgpy
or less.
|
Source:
EIA; USDA’s Economic Research Service; and Kreido Laboratories
As
shown
in the graph above, only recently have crude petroleum prices and petrodiesel
refining margins increased to such an extent that, after giving effect to
incentives for biodiesel blenders, it has become less costly to produce
biodiesel than petrodiesel.
In
May of
2002, the EIA began to report monthly on the cost components that make up the
retail price of petrodiesel. These cost components include: refiners’ cost plus
profit, distribution & marketing, taxes, and crude oil. For May 2002, the
EIA reported the refining cost component to be $0.07 per gallon. For August
2006, the EIA reported the refining cost component to be $0.68 per gallon,
with
steadily increasing values in between. A leading cause for this increase in
refining costs relates to reduction of over 95% in sulfur content as mandated
by
law and described below. See “Governmental Legislation.” Moreover, since sulfur
is an important contributor to petrodiesel’s lubricity, some refiners must
employ other means to increase the fuel’s lubricity so as to not damage diesel
engines. Most petroleum refiners use costly additives to accomplish this, adding
further to the ultimate cost of the fuel.
The
Biodiesel Production Process
Biodiesel
can be made from renewable sources, such as:
|
·
|
refined
virgin vegetable oils;
|
|
·
|
refined
animal fats; and
|
|
·
|
used
cooking oils and trap grease.
|
The
choice of feedstock is determined primarily by the price and availability of
each feedstock variety and the capabilities of the producer’s biodiesel
production technology. In the U.S. the majority of biodiesel historically has
been made from domestically produced soybean oil. However, palm oil imported
from Malaysia and Indonesia is quickly growing as a viable alternative due
to
price, availability and expected supply elasticity.
The
biodiesel manufacturing process has three distinct steps -- the chemical
reaction step, the separation step and the polishing step.
Chemical
Reaction
.
In the
chemical reaction step, a mix of biodiesel glycerin and soap is created from
the
selected feedstock, alcohol and a catalyst. The collection of equipment that
performs this chemical reaction step in producing biodiesel is referred to
as
the “reactor,” and the process typically requires an extended period of time.
Depending on the type of reactor used, the mix of biodiesel glycerin and soap
produced requires differing degrees of further processing to separate the methyl
esters comprising the biodiesel from the glycerin and soap, to clean or “polish”
both the biodiesel and glycerin and to recover excess alcohol from both the
biodiesel and glycerin. Generally, the more efficient the reactor, the less
downstream processing that is required. If the feedstock used is high in free
fatty acids, an esterification step is required before in which two chemicals
(typically an alcohol and an acid) form an ester.
Separation.
The
methyl esters are separated from the glycerin and soap from the chemical
reaction step effluent.
Polishing
.
The
methyl esters are polished to remove impurities, if any. Any excess water and
alcohol is also removed and may be recycled into earlier steps in the production
process train.
Biodiesel
Feedstocks.
Although
biodiesel can be made from virgin vegetable oils, animal fats and used cooking
oils, most biodiesel producers consider virgin vegetable oils the only viable
biodiesel feedstock for large-scale production, due to their relatively
homogeneous and consistent compositions and reliable, scalable and abundant
supplies. Prices for virgin vegetable oils have demonstrated greater long-term
price stability and less short-term price volatility than crude petroleum oil.
In addition, vegetable oil prices have remained relatively stable in recent
years even as crude oil prices have increased.
The
ability to produce biodiesel from various vegetable oils results in biodiesel
being more attractive to a fuel producer than a fuel that relies on a single
feedstock, such as crude oil. It also makes it that much more important that
the
fuel producer have a biodiesel production unit that can use a variety of
feedstocks and that can switch between them quickly and economically, one of
the
benefits of our STT
®
Production Units.
Worldwide
biodiesel feedstock production has been increasing steadily. In 2005, worldwide
production of palm oil surpassed soybean oil to take the lead as the most
abundant vegetable oil produced worldwide. In the future, significant feedstock
supplies may also be derived from algae and a small tree known as jatropha
carcus.
Source:
USDA’s Economic Research Service
Farmers
continue to leverage farming technology and methodology improvements to get
more
yield from their farmland. For example, according to the USDA’s Economic
Research Service, soybean crop yields in the U.S. have increased 84% in the
last
45 years, from 23.5 bushels per acre in 1960 to 43.3 in 2005.
Our
Business Plan
Our
business strategy is to exploit our proprietary biodiesel production technology,
fast time to market and low-cost leadership advantages to establish us as a
leading developer of biodiesel processing technology and a leading biodiesel
fuel producer in the world. We plan to do so by generating revenues from
diversified sources. Our business model is to own and operate biodiesel
production plants in the United States that are equipped with our
STT
®
Production Units and located at bulk liquids handling facilities near developed
port facilities. We plan to license our STT
®
Production Units internationally to third-party plants in exchange for licensing
fees, equity interests and royalties. In the near term, as feedstock or
biodiesel prices change or as the demand for superior biodiesel production
technology increases, we may consider licensing or otherwise supplying
STT
®
Production Units to selected producers in the United States in exchange for
additional processing capacity, feedstock supply commitments, equity, licensing
fees or production royalties in lieu of or in addition to building our second
and third plants as soon as we currently plan. The solutions we offer to third
parties range from providing STT
®
Production Units for greenfield projects to supplying STT
®
Production
Units for brownfield biodiesel sites seeking retrofit or expansion including
converted chemical plants.
We
believe that it is important for us to have STT
®
Production Units installed in the field producing biodiesel to prove their
merit
as commercial biodiesel production units. If our field units are
successful,
then we may be able to secure bank project financing and insurance for our
biodiesel production plants in the U.S. and to license STT
®
Production Units to third parties.
Internationally,
if ownership interests are not appropriate, we will license and supply our
STT
®
Biodiesel Production Units in countries that are subject to the Patent
Cooperation Treaty (the “PCT”) or that have progressive policies on protecting
foreign intellectual property. We will charge a combination of prepaid and
recurring annual license fees and quarterly production royalties with an initial
focus on joint ventures with offshore suppliers of feedstock located in Central
and South America and Southeast Asia.
We
anticipate that we will execute our business strategy with the following
actions:
|
·
|
place
two pilot STT
®
Production Units in the field, producing ASTM-quality
biodiesel;
|
|
·
|
hire
additional construction project management, manufacturing, production
plant operations, sales, marketing and business development
personnel;
|
|
·
|
begin
construction of three owned production plants equipped with
STT
®
Production Units; and
|
|
·
|
negotiate
licenses for providing STT
®
Production Units to both domestic and international biodiesel
producers.
|
We
are
developing three biodiesel production plants, each of which will employ our
STT
®
Production Units. As feedstock and biodiesel prices change or as the demand
for
superior biodiesel production technology increases, we may determine that it
is
in our best interest to sell or license our STT
®
Production Units in the near term in lieu of building our second and third
plants as soon as we currently plan. We believe that we will be able to build
our biodiesel production plants in less time and for significantly less cost
than conventional plants. We expect that our plants will have lower operational
and biodiesel production costs, provide greater production yields, emit less
toxic waste into the environment and be safer to operate. With respect to these
estimates of plant cost and operating costs, see “Cautionary Language Regarding
Forward-Looking Statements and Industry Data” and “Risk Factors--We have based
our business plan for biodiesel production in substantial part on assumptions
regarding financial advantages that are estimates and therefore may not be
correct” in this Current Report on Form 8-K. The three plants under development
are:
|
·
|
Port
of Chicago, Chicago, Illinois.
|
|
·
|
Port
of Indiana, Burns Harbor, Indiana.
|
|
·
|
Port
of Wilmington, Wilmington, North
Carolina.
|
The
anticipated combined capacity of these three plants is 90 MMgpy. Further, we
anticipate that these three plants may go on line as early as 2008.
See
“Risk
Factors--Risks Related to Our Contemplated Conduct of Our
Business.”
To
be
brought on line, each plant must proceed through the following initial stages
of
development, among others:
|
·
|
identification
of specific sites and parcels;
|
|
·
|
receipt
of initial proposals from liquids handling partners at each of the
plant
site locations and negotiations for tolling fees and for the use
of
terminal infrastructures;
|
|
·
|
construction
of STT
®
Reactors and fabrication of the STT
®
Production Units;
|
|
·
|
identification
of diesel blenders with facilities in proximity to the
sites;
|
|
·
|
negotiations
with onshore and offshore feedstock providers; and
|
|
·
|
data
collection for the permitting
process.
|
We
expect
to use diversified feedstock in our plants.
We
are
negotiating agreements for a range of services required for the transport of
materials to and from our facilities with major global bulk liquids handling
terminal operators for the plants in Illinois, Indiana and North
Carolina.
Our
Biodiesel Production Technology
The
STT
®
Reactor. W
e
have
designed our STT
®
Reactor
to be the heart of our STT
®
Production Unit. The STT
®
Reactor
is the component of the STT
®
Production Unit in which the biodiesel transesterification chemical reaction
occurs. Using our “spinning tube-in-tube” design configuration, our
STT
®
Reactor
employs a flowing film concept instead of the volume-based methodology used
in
most conventional biodiesel reactor systems. Our flowing film format mixes
reactants in an extremely narrow gap that is created between a highly-polished,
rapidly-spinning rotor and a non-rotating stator. Reactants placed in this
environment experience forces that induce highly efficient mixing at the
molecular level. This level of mixing helps to dramatically improve the speed
and yield of reactions which occur during the manufacturing process and enhances
the quality and uniformity of the end product being produced. The flowing film
format also helps to avoid problems and inefficiencies that affect traditional
volume-based production, such as large temperature gradients, scale-up
constraints, excessive waste and downstream processing.
In
tests
to date, our STT
®
Reactor
has accelerated the speed of chemical reactions by up to three orders of
magnitude and significantly improved yields. It also has enabled the control
and
quality of chemical processes in real time and dramatically decreased the time
required for manufacturing scale-up. With a footprint of less than 30 square
feet, our 10 MMgpy STT
®
Reactor
is also relatively compact, allowing for additional cost savings and
efficiencies on installation, maintenance and operations.
When
producing biodiesel it is essential to precisely control the following reaction
variables in the chemical reactor:
|
·
|
relative
reactant volumes (
i.e
.,
ratio of feedstock to alcohol to
catalyst);
|
|
·
|
reaction
temperature (and ensuring that the temperature is consistent everywhere
in
the reactor);
|
|
·
|
reactor
residence time; and
|
The
STT
®
Reactor
addresses these controls in the manner which we believe is superior relative
to
conventional reactor designs and methods.
The
favorable characteristics of the STT
®
Reactor
also provide our STT
®
Production Units with advantages when it is used in building or retrofitting
a
plant. A 30 MMgpy Production Unit requires just 2,500 square feet versus more
than 5,000 square feet for a conventional production unit. As a result, we
anticipate that less capital and less time are required to build a plant and
to
install a STT
®
Production Unit. We also expect that it will require less time to obtain
required permits for plants that use our systems and that these will be greater
options for the siting of these plants. With respect to our expectations
regarding plant cost and related data, see “Cautionary Language Regarding
Forward-Looking Statements and Industry Data” and “Risk Factors--We have based
our business plan for biodiesel
production
in substantial part on assumptions regarding financial advantages that are
estimates and therefore may not be correct” in this Current Report on Form 8-K.
The
STT
®
Reactor
is protected by issued and pending United States and international patents,
including PCT applications. Our issued patents expire between 2011 and 2021.
Corresponding foreign patent applications are filed in a number of countries
at
the proper time in the PCT application process. See “Licensing and Intellectual
Property Protection” below.
The
STT
®
Production Unit.
The
STT
®
Production Unit is a complete, pipe-to-pipe biodiesel production unit that
includes all of the components necessary to take feedstock in on one end and
deliver ASTM-quality biodiesel out of the other end. We have designed 10G and
30G STT
®
Production Units with the capacity to produce up to 10 million and 30 million
gallons respectively (or 33,000 and 100,000 metric tons respectively) of
biodiesel per year. The biodiesel production unit is made up of four basic
components: (1) the feedstock delivery system, (2) the STT
®
Reactor,
(3) the biodiesel/glycerin separator and polishing system and (4) the methanol
recovery system.
Based
on
the favorable advantages of our STT
®
Reactor,
we believe that our STT
®
Production Unit offers operational advantages, including the
following:
|
·
|
dramatically
reduced biodiesel reactor residence time of less than one second,
compared
to more than 30 minutes total reactor residence time required by
conventional systems;
|
|
·
|
more
efficient transesterification process that produces negligible soap
and
requires less downstream
processing;
|
|
·
|
multi-feedstock
flexibility that enables switching between alternative feedstocks
in a few
hours rather than days for conventional production
units;
|
|
·
|
less
energy consumption; and
|
|
·
|
absence
of contaminated production waste
water.
|
Overview
of Our System.
The
biodiesel manufacturing process begins when the reactant materials comprised
of
the biodiesel feedstock and an alcohol/catalyst mixture are introduced into
the
STT
®
Reactor
through ports in the rotor/stator assembly, which is driven by the electric
motor unit. These reactants enter the narrow annular zone between the stator
and
the rapidly spinning rotor where they are thoroughly mixed by high shear forces
into a flowing film in a few milliseconds. A heat exchanger jacketing the stator
controls the temperature of the mixture.
The
end
product (
i.e.
,
the
biodiesel, glycerin and negligible soap) of the reaction exits through a port
at
the other end of the rotor/stator assembly. Standard sensors for measuring
temperature, monitoring reaction progress or gathering other information
relative to the manufacturing process are incorporated along the rotor/stator
assembly to dynamically monitor the reaction process. The STT
®
Reactor
can also employ the same plumbing, wiring, controls and ancillary equipment
(
e.g.
,
heaters
and chillers) as a conventional stirred tank reactor, facilitating ease of
installation in existing production plants.
The
STT
®
Reactor
achieves these advantages by inducing a physical phenomenon that is ideal for
the mixing of reactants called Couette flow. The STT
®
Reactor
induces Couette flow by mixing reactants
in
a
narrow gap so that the reactants move as a coherent thin film in a high-shear
field. We understand that we are the first company that has been able to
practically apply Couette flow to chemical manufacturing.
Governmental
Regulation
To
be
sold and distributed as biodiesel, the fuel must meet governmental standards,
such as ASTM D6751-06a in the United States and EN14214:2003 in the European
Union.
Agencies
of the United States government, including the DOE, the EPA, the Internal
Revenue Service (the “IRS”), the Department of Agriculture (“USDA”) and more
than half of the states and over 15 foreign countries offer biodiesel incentives
or have mandates for the use of biodiesel, or both. There are other governmental
incentives that do not directly reduce the net cost of producing or blending
biodiesel, but that drive the demand for the fuel. For example, the IRS offers
tax credits for investment in qualifying refueling property, the EPA will pay
50-100% of the cost for schools to upgrade and/or replace their buses and
programs administered by the DOE indirectly require government fleet operators
to purchase substantial amounts of biodiesel.
The
principal federal incentives that we believe will have the greatest positive
effect on our business are the following:
EPAct
1992.
The
Energy Policy Act of 1992, or EPAct 1992, requires government fleet operators
to
use a certain percentage of alternatively fueled vehicles (“AFVs”). EPAct 1992
established a goal of replacing 10% of motor fuels with non-petroleum
alternatives by 2000, increasing to 30% by the year 2010. Currently, 75% of
all
federal vehicles purchased are required to have alternative fuel capability
to
set an example for the private automotive and fuel industries.
Under
the
Energy Conservation Reauthorization Act of 1998 (which amended Title III of
EPAct 1992), vehicle fleets that are required to purchase AFVs can generate
credit toward this requirement by purchasing and using biodiesel in a
conventional vehicle. Since there are few cost-effective options for purchasing
heavy-duty AFVs, federal and state fleet providers can meet up to 50% of their
heavy-duty AFV purchase requirements with biodiesel fuel.
The
biodiesel fuel use credit allows fleets to purchase and use 450 gallons of
biodiesel in vehicles in excess of 8,500 pounds gross vehicle weight instead
of
AFVs. Fleets must purchase and use the equivalent of 450 gallons of pure
biodiesel in a minimum of a 20% blend to earn one AFV credit. Covered fleets
earn one vehicle credit for every light-duty vehicle (“LDV”) AFV they acquire
annually beyond their base vehicle acquisition requirements. Credits can be
banked or sold. Compliance with the requirements under EPAct 1992 is a principal
reason underlying the position of the U.S. Department of Defense as the largest
domestic purchaser of biodiesel.
The
Biodiesel Tax Credit.
In
October 2004, Congress passed a biodiesel tax incentive, structured as a federal
excise tax credit, as part of the American Jobs Creation Act of 2004 (the “JOBS
Act”). The credit amounts to a penny for each percentage point of vegetable oil
biodiesel that is blended with petroleum diesel (and one-half penny per cent
for
recycled oils and other non-agricultural biodiesel). Thus, for example, blenders
that blend B20 made from soy, canola and other vegetable oils would receive
a 20
cent per gallon excise tax credit, while blenders of B5 would receive a 5 cent
per gallon excise tax credit. Biodiesel made from recycled restaurant oils
(“yellow grease”) would receive half of this credit; for example, B20 blenders
would receive a 10 cent per gallon credit and B5 blenders would receive a 2.5
cent per gallon credit.
The
tax
incentive generally is taken by petroleum distributors and substantially passed
on to the consumer. It is designed to lower the cost of biodiesel to consumers
in both taxable and tax-exempt markets. The tax credit under the JOBS Act was
scheduled to expire at the end of 2006, but was extended in EPAct 2005 to the
end of 2008. There are proposals pending in Congress to extend the tax credit
to
the end of the decade and beyond.
EPAct
2005.
Congress
enacted the Energy Policy Act of 2005, or EPAct 2005, in August 2005 and
included a number of provisions intended to spur the production and use of
biodiesel. In particular, EPAct 2005’s provisions include biodiesel as part of
the applicable volume in the renewable fuels standard (the “RFS”), although the
EPA is directed to determine the share allocated to biodiesel and other details
through its rulemaking process. EPAct 2005 also extended the biodiesel tax
credit to 2008 and included a new tax credit for renewable diesel.
The
RFS
requires a specific amount of renewable fuel to be used each year in the
nationwide gasoline and diesel pool. The volume increases each year, from 4
billion gallons per year in 2006 to 7.5 billion gallons per year in 2012.
EPAct
2005 requires the EPA, beginning in 2006, to publish by November 30 of each
year, “renewable fuel obligations” that will be applicable to refineries,
blenders and importers in the contiguous 48 states. There must be no geographic
restrictions on where renewable fuel may be used or per-gallon obligations
for
the use of renewable fuel. The renewable fuel obligations are required to be
expressed in terms of a volume percentage of gasoline sold or introduced into
commerce and consist of a single applicable percentage that will apply to all
categories of refineries, blenders and importers. The renewable fuel obligations
are to be based on estimates that the EIA provides to the EPA on the volumes
of
gasoline it expects will be sold or introduced into commerce.
In
terms
of implementing the RFS for the year 2006, the EPA recently released a rule
determining that the RFS target for 2006, 4.0 billion gallons of renewable
fuel
in the gasoline and diesel pool, will be considered to be met, given the current
expectations of production of both ethanol and biodiesel for this year. If
the
EPA had determined the 2006 target was not being met, refiners, blenders and
importers would be obligated to make up the shortfall in the year 2007. The
EPA
is expected to release the final rule to implement the RFS by the end of
2006.
Tax
Incentives for Small Agri-Biodiesel Producers.
EPAct
2005 also creates a new tax credit for small
agri-biodiesel
producers
with
production capacity, not in excess of 60 million gallons, of 10 cents per gallon
for the first 15 million gallons of agri-biodiesel produced.
Other
Incentive Programs Offered at the Federal and State Levels.
The
federal government offers other programs as summarized in the table
below.
Federal
Agency that
Administers/Oversees
|
Type
of
Incentive
|
Who
Receives
Incentive
|
Commonly
Known
As
|
Summary
|
IRS
|
income
tax credit
|
infrastructure
providers
|
Alternative
Fuel Infrastructure Credit
|
Provides
a tax credit in an amount equal to 30% of the cost of any qualified
non-residential AFV refueling property placed into service in the
United
States, subject to limits.
|
EPA
|
grant
program
|
school
districts
|
Clean
School Bus Program
|
Clean
School Bus USA reduces operating costs and children’s exposure to harmful
diesel exhaust by limiting bus idling, implementing pollution reduction
technology, improving route logistics and switching to biodiesel.
The
Energy Bill of 2005 utilizes this EPA program to grant up to a 50%
cost
share (depending on the age and emissions of original bus) to replace
school buses with buses that operate on alternative fuels or low-sulfur
diesel, or up to 100% for retrofit projects.
|
USDA
|
grant
program
|
agricultural
producers & small businesses
|
Renewable
Energy Systems and Energy Efficiency Improvements Grant
|
In
fiscal year 2005, USDA’s Office of Rural Development made available $22.8
million in competitive grant funds and guaranteed loans for the purchase
of renewable energy systems and energy improvements for agricultural
producers and small rural businesses. Eligible projects include biofuels,
hydrogen, and energy efficiency improvements, as well as solar,
geothermal, and wind.
|
Source:
Compiled by the IFQC Biofuels Center, 2005.
Many
states are following the federal government’s lead and are offering similar
programs and incentives to spur biodiesel production and use. For example,
Illinois and Minnesota have mandated the use of B2 in all diesel fuel sold
in
their respective states subject to certain conditions that include sufficient
annual production capacity (defined as at least 8 million gallons). The mandate
took effect in Minnesota in September 2005 and in Illinois in July
2006.
Approximately
31 states provide either user or producer incentives for biodiesel. Several
provide both types of incentives. A handful of states, currently approximately
nine, provide incentives to biodiesel producers to build facilities in their
states, typically offering tax credits, grants and other financial incentives.
Two states provide fuel rebate programs, and two provide revolving funds for
fleet biodiesel purchases.
International
Biodiesel Developments and Public Policy Initiatives.
Various
non-European countries have also instituted public policy initiatives to
encourage biodiesel production and use, and have done so generally through
a
combination of fiscal incentives and mandates or voluntary targets, including
Argentina, Australia, Brazil, Canada, Indonesia, Malaysia and New
Zealand.
The
following eight European countries have duty exemptions and, in most cases,
mandates to incent and require the use of biodiesel: Austria, France, Germany,
Italy, the Netherlands, Spain, Sweden and the United Kingdom. These countries
account for more than 80% of the EU25’s potential biodiesel market.
Environmental
Laws.
In
executing its business plan, the Company intends to comply with all applicable
environmental laws relating to the building and operation of its production
facilities.
Sales
and Marketing
To
date,
we have conducted all of our business development and sales efforts through
our
officers and executives who are active in other roles. We intend to build
dedicated sales, marketing, and business development teams, which will develop
and execute their respective strategies.
Research
and Development
We
have
been developing our technology for 11 years and have incurred total research
and
development costs of approximately $14,317,027 as of the fiscal year ended
December 31, 2005, of which approximately $4,504,437 was incurred in the last
two fiscal years. To maintain and expand our technology leadership, if we are
able to generate substantial amounts of revenues, we may expand both the
capabilities and capacity of our STT
®
Reactors
and our STT
®
Production Units. We plan to allocate less than 6% of any of the net proceeds
of
the Offering specifically to research and development.
Engineering
and Manufacturing
To
date,
we have accomplished the development of our STT
®
Reactor
and STT
®
Production Unit by outsourcing to a professional engineering firm and a
manufacturer of engineered packaged systems. Our engineering partner is R.C.
Costello & Assoc. Inc. of Redondo Beach, California. This firm provides
engineering design and improvements for chemical plants, natural gas plants
and
refineries, with an emphasis on process intensification. The firm has 11 years’
experience in reaction engineering, distillation and process
safety.
Our
manufacturing partner is Certified Technical Services L.P. of Pasadena, Texas.
This firm has been a heavy industrial contractor and manufacturer of engineered
packaged systems for 20 years.
Licensing
and Intellectual Property Protection
We
rely
on and will use a combination of patent, copyright, and trade secret laws and
know-how to establish and protect our proprietary technologies and products.
Our
success depends in part on our ability to obtain patent protection for our
products and processes, to preserve our copyrights and trade secrets, to operate
without infringing the proprietary rights of third parties and to acquire
licenses related to enabling technology or products used with our
STT
®
Reactor-based technology.
Our
STT
®
Reactor
as applied to the production of biodiesel is protected by four issued U.S.
patents (plus one provisional application and one pending application for U.S.
patents), as well as international counterparts for most of those patents and
applications. Each patent expires approximately 20 years after its issue date.
These issued patents expire between 2011 and 2021. Our principal patents related
to our STT
®
technology and to the production of biodiesel, and their issue and expiration
dates are
as
follows:
Title
|
|
U.S.
Issue Number
U.S.
Issue Date
|
|
Expiration
Date
|
“METHODS
AND APPARATUS FOR TREATING MATERIALS IN LIQUIDS”
|
|
US
5,279,463
1/18/1994
|
|
1/18/2011
|
“METHODS
AND APPARATUS FOR HIGH-SHEAR MATERIAL TREATMENT”
|
|
US
5,538,191
7/23/1996
|
|
7/23/2013
|
“METHODS
AND APPARATUS FOR MATERIALS PROCESSING”
|
|
US
6,471,392B1
10/29/2002
|
|
3/7/2021
|
“METHODS
AND APPARATUS FOR MATERIALS PROCESSING”
|
|
US
6,752,529
6/22/2004
|
|
3/7/2021
|
“METHODS
AND APPARATUS FOR HIGH-SHEAR MIXING AND REACTING OF MATERIALS”
|
|
Pending
|
|
|
We
hold
approximately 12 additional issued patents on technology not directly related
to
biodiesel.
STT
®
,
Magellan
®
and
Innovator
®
are
trademarks that we have registered with the U.S. Patent and Trademark Office.
We
also use Cytovator and Kreido as our trademarks.
Competition
Since
our
business model calls for us to be both a provider of biodiesel production
technology to other companies and also to own and operate our own biodiesel
production plants, we compete broadly with companies that provide biodiesel
production solutions and companies that produce biodiesel fuel.
We
face
competition from companies that are developing products similar to those we
are
developing. The petroleum/fossil fuels industry has spawned a large number
of
efforts to create technologies to help reduce or eliminate harmful emissions
from burning fuels and fuels that utilize non-petroleum feedstock. Fully
integrated major oil/chemical companies have substantially greater access to
resources needed to successfully enter the emerging alternative fuels market.
These companies have significantly greater financial, managerial, marketing,
distribution and other infrastructure resources than the Company.
Based
on
the favorable advantages of our STT
®
Reactor,
we believe that our STT
®
Production Unit offers operational advantages compared to existing technologies,
including the following:
|
·
|
dramatically
reduced biodiesel reactor residence time of less than one second,
compared
to more than 30 minutes total reactor residence time required by
conventional systems;
|
|
·
|
more
efficient transesterification process that produces negligible soap
and
requires less downstream
processing;
|
|
·
|
multi-feedstock
flexibility that enables switching between alternative feedstocks
in a few
hours rather than days for conventional production
units;
|
|
·
|
less
energy consumption; and
|
|
·
|
absence
of contaminated production waste
water.
|
Employees
As
of the
Closing Date, we had eight full-time employees. None of our employees is
represented by a labor union, and we consider our employee relations to be
good.
We believe that our future success will depend in part on our continued ability
to attract, hire and retain qualified personnel.
Legal
Proceedings
From
time
to time we may be named in claims arising in the ordinary course of business.
Currently, no legal proceedings, government actions, administrative actions,
investigations or claims are pending against us or involve us that, in the
opinion of our management, could reasonably be expected to have a material
adverse effect on our business and financial condition.
Available
Information
We
are
subject to the reporting requirements of the Securities Exchange Act of 1934,
as
amended. Reports filed with the SEC pursuant to the Exchange Act, including
annual and quarterly reports, and other reports we file, can be inspected and
copied at the public reference facilities maintained by the SEC at 100 F Street,
N.E., Washington, D.C. 20549. Investors may obtain information on the operation
of the public reference room by calling the SEC at 1-800-SEC-0330. Investors
can
request copies of these documents upon payment of a duplicating fee by writing
to the SEC. The reports we file with the SEC are also available on the SEC’s
website (http://www.sec.gov).
RISK
FACTORS
An
investment in shares of Common Stock is highly speculative and involves a high
degree of risk. Only those investors who can bear the risk of loss of their
entire investment should participate. Prospective investors should carefully
consider the following risk factors in evaluating an investment in the
Company.
RISKS
RELATED TO OUR CONTEMPLATED CONDUCT OF OUR BUSINESS
We
have
had no operating history as a producer of biodiesel or as a producer of
equipment system
s
for the
biodiesel industry. Our anticipated results of operation and financial condition
are planned and estimated on the basis of our assumptions with respect to our
anticipated operations.
We
have
no operating history in our contemplated biodiesel production business and,
to
date, have not earned any revenues in connection with that business. We have
no
experience operating, selling, or licensing processing equipment or complete
systems to the biodiesel or other fuel industry. We have only recently, in
the
fourth quarter of 2005, begun to pursue commercial applications for the
STT
®
Reactor
in the biodiesel industry. Accordingly, it may be difficult for investors to
evaluate our business prospects or our ability to achieve our business
objectives. If our efforts do not result in both revenues and profits, we may
be
forced to cease operations and liquidate, and investors may lose their entire
investment.
If
we
cannot successfully address these risks, our contemplated business and the
anticipated results of our contemplated operations and financial condition
would
suffer.
We
have
been a development stage company since 1995 and have
a
history
of significant operating losses.
We
may
not
ever achieve or maintain profitability.
We
have
incurred
significant operating losses since our inception, and, as
o
f
September 30, 2006,
we
have
accumulated
a deficit of approximately $
22,100,000
.
We
may
continue to incur operating losses, depending largely upon the commercial
success of
our
STT
®
Reactor
and STT
®
Production Units
.
To
date,
we have neither sold nor licensed any commercial-scale products. We
will
need
to generate revenues in excess of
our
expenses
to become profitable, and
we
may be
unable to do so. If
we
do
not
become profitable, the value of
the
C
ommon
S
tock
may
decline.
Our
operating
losses may increase as
we
continue
to incur costs for manufacturing, sales and marketing, research and
development
and
legal
and general corporate activities. Whether
we
achieve
and maintain profitability depends in part upon
our
ability,
alone or with others, to successfully complete the development of
biodiesel
production facilities, to sell biodiesel at a profit, to successfully complete
the development of our equipment systems
and
to
sell
or
license those equipment systems at
prices
that
enable us to generate a profitable return
.
We
may be
required to implement our business plan other than
as
described herein.
We
may
find it necessary or advisable to substantially alter or materially change
our
commercialization activities to respond to changes that occur in the
future.
Although
our core business model is to own and operate biodiesel production plants in
the
United States for our own account, part of our contemplated business strategy
is
to license STT
®
Production Units to others. The portion of our contemplated business model
that
calls for us to license STT
®
Production Units to others is dependent on the market’s willingness to adopt a
new biodiesel production technology. Our STT
®
Production Unit has been developed to the commercial stage but we may
never
gain
acceptance from the biodiesel market, which would put in jeopardy that portion
of our business model that relies on licensing STT
®
Production Units to others. This risk is amplified by the fact that, although
we
are currently building our first commercial-scale STT
®
Production Units, we have not completed building our first such unit. None
of
our products are currently being used to produce biodiesel on a commercial
scale.
Should
biodiesel producers fail to adopt our STT
®
Biodiesel Production Units, or should a superior competing technology be
developed, it may not be possible to fund our operations as expected. The degree
of market acceptance of our STT
®
Biodiesel Production Units will depend on numerous factors, including the
effectiveness of our product and the biodiesel market’s willingness to use a new
processing technology.
Our
ability to execute our business plan is dependent on the growth and maintenance
of substantial demand for biodiesel in the United States. It is impossible
to
predict what the current demand for biodiesel is since so little of it is
currently being produced and all that is being produced is being sold.
Accordingly, the failure of a biodiesel market to develop could adversely affect
our anticipated results of operations and financial condition.
We
have
not produced or operat
ed
any
commercial-scale STT
®
Reactors
or STT
®
Production Units.
We
have
designed, built, and sold several STT
®
Reactors
to the specialty chemical and pharmaceutical markets. We have designed and
built
smaller-scale STT
®
Reactors
and have designed a commercial STT
®
Production Unit for producing biodiesel. We have yet to license our first
STT
®
Production Unit or install one in our own biodiesel production plant. We do
not
know if our commercial-scale STT
®
Production Unit will produce biodiesel fuel to ASTM standard in the volumes
that
we anticipate or whether our equipment systems will gain commercial acceptance
in the biodiesel industry. Therefore, we are uncertain whether we will be able
to sell, license, or lease any STT
®
Biodiesel Production Units to any third parties. If we are unable to produce
and
operate our equipment systems on a commercial scale and generate biodiesel
to
ASTM standard, then we may be forced to cease operations or to raise additional
capital to further develop our equipment systems. Additional capital may not
be
available on terms acceptable to us or at all.
We
may
require additional funding to execute our business plan, and additional funding
may not be available. If additional funding is available, it may not be offered
to us on te
rms
that
are satisfactory to our Board of Directors.
We
plan
to require additional capital in the future to sufficiently fund our operations.
We may not be able to obtain additional capital on terms favorable to us or
at
all. We have consumed substantial amounts of capital to date, and we expect
to
increase our operating expenses over the coming years as we expand our
facilities, infrastructure, and commercialization activities.
Based
upon our projected activities, we believe an additional $30 million from the
sale of our equity securities in the third quarter of 2007 will be sufficient
to
support our current operating plan. However, if this plan changes, we may
require additional financing at an earlier time. Financing may not be available
on terms acceptable to us or our investors, and may be available only on terms
that would negatively affect the existing shareholders. If adequate funds are
not available, we may not be successful in executing our business plan as
anticipated and, as a result, we may be forced to cease operations and
liquidate, in which case investors may not be able to receive any return of
their invested capital.
We
cannot
be certain that additional financing will not be needed beyond our current
and
projected needs or will be available when required and, if available, that
it
will be on terms satisfactory to us. Future financings may be dilutive to
existing stockholders. If we are unable to generate sufficient cash flow and
are
otherwise unable to obtain funds necessary to meet our funding requirements,
this would adversely affect our anticipated results of operations and financial
condition.
We
have based our business plan for biodiesel production in substantial part on
assumptions regarding financial advantages that are estimates and therefore
may
not be correct.
We
have
projected that our STT
®
Production Units will produce biodiesel with a 13.4¢ per gallon advantage over
conventional production units, producing gross margin that is 4% more than
the
gross margin of conventional plants. In calculating these differences, we have
relied on historical costs for process inputs, such as feedstocks and other
materials used in the production process. These historical costs may not remain
at or below the levels that we project through 2008, which is the time at which
we expect that our facilities will begin to produce biodiesel. If the costs
of
these inputs increase, then the costs advantages that we believe may not be
present, and we may not be able to achieve our expected profits or any profits
at all.
It
also
is possible that the costs that we project to construct our three planned
production facilities may be greater than expected. If this were to be the
case,
it would adversely affect the amortization of our capital costs. This in turn
would decrease or eliminate certain of our anticipated costs advantages with
respect to conventional plants.
Moreover,
in comparing the projected market price of biodiesel to the price of
petrodiesel, we have estimated that the wholesale price for B100 when we project
that our plants will first come on line will be $3.00 per gallon. This estimate
is based in part on the range of B100 prices over the six-month period between
June and November 2006. During that period, as reported by Energy Management
Institute’s Alternative Fuel Index, the per gallon price for B100 ranged between
$2.89 and $3.39. It is possible that this price range will not remain the
relevant price range for biodiesel until 2008. It is possible that potential
oversupply conditions may adversely affect the price level or that demand for
biodiesel may not be as strong as forecasted. If the wholesale price for
biodiesel does not remain at a level that permits us to generate revenues in
excess of our costs, after taking into account tax incentives and credits,
then
we may not become or remain profitable, in which case we might be forced to
cease operations and liquidate.
Our
ability to execute our business plan depends on conditions the satisfaction
of
which
is
not
under our control
.
Our
ability to successfully execute our business plan depends on the satisfaction
of
several conditions, including:
|
·
|
obtaining
all required permits and consents from government agencies and other
third
parties for our anticipated construction and operation of owned biodiesel
production plants and related facilities, as well as for the future
operation of those facilities;
|
|
·
|
entering
into satisfactory agreements to acquire or otherwise participate
in
planned biodiesel production plants which may or may not have sufficient
permits and consents at the time of
acquisition;
|
|
·
|
entering
into satisfactory licensing agreements with domestic and international
biodiesel producers for licensing STT
®
Production Units;
|
|
·
|
successfully
commercializing the STT
®
Reactor technology for biodiesel;
|
|
·
|
availability
of reasonably priced insurance to cover operating risks and other
adverse
outcomes which could impair the business;
and
|
|
·
|
market
conditions in the market for fuels that make biodiesel a competitively
priced product.
|
Since
we
have yet to begin full operation as a business, there is no certainty that
we
will be able to achieve satisfaction of any or all of the above conditions.
If
we fail to do so, we may be forced to cease operations and to liquidate, in
which case investors may not be able to receive any return of their invested
capital.
We
are
dependent upon our officers for management and direction, and the loss of any
of
these persons could adversely affect our anticipated results of
operations and financial condition.
We
are
dependent upon our officers for implementation of our proposed expansion
strategy and execution of our contemplated business objectives. The loss of
any
of our officers could have a material adverse effect upon the anticipated
results of our contemplated operations and financial condition. We do not
maintain “key person” life insurance for any of our officers. The loss of any of
our officers could delay or prevent the achievement of our contemplated business
objectives.
We
may
be unable to effectively manage our growth.
Our
strategy envisions expanding our business beyond our status as a development
stage company.
We
anticipate significant expansion in our manpower, facilities and infrastructure
in the future and expect that greater expansion will be necessary to address
potential growth in our customer base and market opportunities. To manage the
expected growth of our operations and personnel, we will need to improve our
transaction processing, operational and financial systems, procedures and
controls. The current and planned personnel, systems, procedures and controls
may not be adequate to support our future operations. We may be unable to hire,
train, retain and manage required personnel or to identify and take advantage
of
existing and potential strategic relationships and market
opportunities.
If
we
fail to effectively manage our growth, our anticipated results of operation
and
financial condition could be adversely affected. Growth may place a strain
on
our management systems and resources. We must continue to refine and expand
our
business development capabilities, our systems and processes, and our access
to
financing sources. As we grow, we must continue to hire, train, supervise and
manage new employees. We cannot assure that if we do expand our business that
we
will be able to:
|
·
|
meet
our capital needs;
|
|
·
|
expand
our systems effectively, efficiently or in a timely manner;
|
|
·
|
allocate
our human resources optimally;
|
|
·
|
identify
and hire qualified employees or retain valued employees; or
|
|
·
|
incorporate
effectively the components of any business that we may acquire in
our
effort to achieve growth.
|
We
may
be unable to attract and retain key personnel.
Our
development and success is dependent upon our management’s ability to effectuate
our transition into a biodiesel technology-development and production company.
Our anticipated product development and manufacturing efforts capability will
require additional management not yet part of us. There is intense competition
for qualified management, research, development and manufacturing personnel
in
the chemical, engineering and biofuels fields. Therefore, we may not be
successful in attracting and retaining the qualified personnel necessary to
develop our business.
The
loss
of any key personnel or the material diversion of the time commitment of that
personnel to matters other than those relating to us could have an adverse
effect on our performance. Furthermore, our failure to recruit additional key
scientific, technical and managerial personnel in a timely manner would harm
our
product development programs, our ability to manage day-to-day operations,
build
biodiesel production plants, license STT
®
Biodiesel Production Units, attract and retain other employees and generate
revenues and could adversely affect our anticipated results of operations and
financial condition. Our contemplated competitive position, financial condition
and anticipated results of operations may be adversely affected by technological
advances.
The
development and implementation of new technologies may result in a significant
reduction in the costs of biodiesel production. For instance, any technological
advances in catalysis and/or large scale micro-channel reactor systems could
have an adverse effect on our contemplated business. We cannot predict whether
new technologies may become available, the rate of acceptance of new
technologies by competitors or the costs associated with new technologies.
In
addition, advances in the development of alternatives to biodiesel could
significantly reduce demand for or eliminate the need for
biodiesel.
Any
advances in technology that require significant capital expenditures to remain
competitive or that reduce demand or prices for biodiesel could adversely affect
our anticipated results of operations and financial condition.
Strategic
relationships with feedstock suppliers, fabricators, building contractors,
equipment suppliers and other unrelated third parties on which we rely are
subject to change.
Our
ability to develop our business will depend on our ability to identify feedstock
suppliers, construction contractors, equipment fabricators and customers and
to
enter into suitable commercial arrangements with those suppliers, contractors,
fabricators and customers and on maintaining close working relationships with
these and other industry participants. Our success in this area will also depend
on our ability to select and evaluate suitable projects, as well as to
consummate transactions in a highly competitive environment.
The
demand for construction and contract manufacturing companies that are qualified
to build biodiesel production plant and equipment has increased. Some companies
report that their construction backlogs are as many as four years. We do not
have the capability in-house to construct and fabricate our own biodiesel
production plant and equipment and intend to rely on strategic relationships
with third-party construction and fabrication companies, some of which we have
not yet developed. Furthermore, the recent growth in biodiesel plant
construction has caused a backlog on certain specialized equipment. One example
of such specialized equipment is centrifuges, for which there is a reported
backlog of six months for some models. The failure to secure agreements with
construction companies and/or for the requisition of such specialized equipment
may adversely affect our anticipated results of operations and financial
condition.
To
develop our business, we plan to use the business relationships of our
management to form strategic relationships. These relationships may take the
form of joint ventures with other private parties or local government bodies,
contractual arrangements with other companies, including those that supply
feedstock that we will use in our business, or minority investments from third
parties. We may not be able to establish these strategic relationships, or,
if
established, we may not be able to maintain these relationships, particularly
if
members of the management team leave us. In addition, the dynamics of our
relationships with strategic partners may require us to incur expenses or
undertake activities we would not otherwise be inclined to incur or undertake
to
fulfill our obligations to these partners or maintain these relationships.
If we
do not successfully establish or maintain strategic relationships, we may not
be
able to
achieve
our business goals and that could adversely affect our anticipated results
of
operations and financial condition.
Our
anticipated production, sale, and distribution of biodiesel is dependent on
the
sufficiency of necessary infrastructure, which may not be put into place on
a
timely basis, if at all. In this case, our anticipated results of operations
and
financial condition would be adversely affected by these infrastructure
disruptions.
Substantial
development of infrastructure will be required by persons and entities outside
our control for our operations, and the biodiesel industry generally, to grow.
Areas requiring expansion include, but are not limited to:
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adequate
rail capacity, including sufficient numbers of dedicated tanker
cars;
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sufficient
storage facilities for feedstock and
biodiesel;
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increases
in truck fleets capable of transporting biodiesel within localized
markets; and
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expansion
of blending facilities and pipelines to handle biodiesel.
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Substantial
investments required for these infrastructure changes and expansions may not
be
made or may not be made on a timely basis. Any delay or failure in making the
changes to or expansion of infrastructure could hurt the demand and/or prices
for our products, impede our delivery of products, impose additional costs
on us
or otherwise have a material adverse effect on our anticipated results of
operations or financial condition. Our business is dependent on the continuing
availability of infrastructure, and any infrastructure disruptions could
adversely affect our anticipated results of operations and financial
condition.
We
may be
unable to locate suitable properties and obtain the development rights needed
to
build and expand our business, in which case we will not be able to produce
our
anticipated results of operations
and
financial condition.
Our
business plan focuses in part on designing, building and operating biodiesel
production plants for our own account within existing liquids handling terminals
adjacent to river, lake and seaports. Our ability to secure quality and reliable
properties to locate plants in the future may be unpredictable and we may be
required to delay construction of our facilities, which may create unanticipated
costs and delays. If we are not successful in identifying and obtaining
development rights on suitable properties for building and operating biodiesel
production plants, our future prospects for profitability will likely be
substantially limited, and adversely affect our anticipated results of
operations and financial condition.
We
may
be adversely affected by environmental, health and safety laws, regulations
and
requirements, any of which could require us to pay or satisfy costs or incur
expenses substantially in excess of our business plan.
As
we
pursue our business plan, we will become subject to various federal, state,
local and foreign environmental laws and regulations, including those relating
to the discharge of materials into the air, water and ground, the generation,
storage, handling, use, transportation and disposal of hazardous materials,
and
the health and safety of our employees. In addition, some of these laws and
regulations require our contemplated facilities to operate under permits that
are subject to renewal and/or modification. These laws, regulations and permits
often require expensive pollution control equipment and/or operational changes
to limit actual and/or potential impacts to the environment. A violation of
these laws, regulations and/or permit conditions can result in substantial
fines, natural resource damages, criminal sanctions, permit revocations and/or
facility shutdowns.
Furthermore,
upon effecting our plan, we may become liable for the investigation and cleanup
of environmental contamination at each of the properties that we own or operate
and at off-site locations where we may arrange for the disposal of hazardous
substances. If these substances have been or are disposed of or released at
sites that undergo investigation and/or remediation by regulatory agencies,
we
may be responsible under the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, or CERCLA, or other environmental laws for all or
part of the costs of investigation and/or remediation, and for damages to
natural resources. We may also be subject to related claims by private parties
alleging property damage and personal injury due to exposure to hazardous or
other materials at or from those properties. Some of these matters may require
expending significant amounts for investigation, cleanup, or other
costs.
In
addition, new laws, new interpretations of existing laws, increased governmental
enforcement of environmental laws or other developments could require us to
make
additional significant expenditures. Continued government and public emphasis
on
environmental issues can be expected to result in increased future investments
for environmental controls at biodiesel production plants. Current and future
environmental laws and regulations (and interpretations thereof) applicable
to
biodiesel operations, more vigorous enforcement policies and discovery of
currently unknown conditions may require substantial expenditures that could
have a material adverse effect on the anticipated results of our contemplated
operations and financial condition.
The
hazards and risks associated with producing and transporting biodiesel (such
as
fires, natural disasters, explosions and abnormal pressures and blowouts) may
also result in personal injury claims or damage to property and third parties.
As protection against operating hazards, we maintain insurance coverage against
some, but not all, potential losses. However, we could sustain losses for
uninsurable or uninsured risks, or in amounts in excess of existing insurance
coverage. Events that result in significant personal injury or damage to our
property or third parties or other losses that are not fully covered by
insurance could have a material adverse effect on the anticipated results of
our
contemplated operations and financial condition.
Our
anticipated results of operation and financial condition will suffer if we
cannot obtain or maintain governmental permits or licenses that are necessary
for the operation of our biodiesel production units by us or by our anticipated
licensees.
Our
operations, and the operations of third parties to whom we grant licenses,
will
require licenses, permits and, in some cases, renewals of these licenses and
permits from various governmental authorities. We believe that we will be able
to obtain all necessary licenses and permits to carry on the activities that
we
contemplate, and that we will be able to obtain the licenses and permits
necessary for our future biodiesel production plants and operations. However,
our ability to obtain, sustain, or renew such licenses and permits on acceptable
terms are subject to change, as, among other things, the regulations and
policies of applicable governmental authorities may change. Our inability to
obtain, loss or denial of extension as to any of these licenses or permits
may
have a material adverse effect on our anticipated results from operations and
financial condition.
Our
success will depend in part on our ability to obtain and maintain protection
of
our intellectual property.
Our
success, competitive position and future revenues will depend in large part
on
our ability, and to some extent on our partners’ abilities, to obtain, secure
and defend patent protection for our products, methods, processes and other
technologies, to preserve our trade secrets, to prevent third parties from
infringing on our proprietary rights and to operate without infringing on the
proprietary rights of third parties. Our interest in these rights is complex
and
uncertain.
We
hold
four issued patents (plus one provisional application and one pending
application for U.S. patents) on our STT
®
technology for biodiesel production in the United States and internationally.
These issued patents expire between 2011 and 2021. We will also seek to obtain
additional patents that we believe may be required to commercialize our
products, technologies and methods. We also have patent applications pending
in
several foreign jurisdictions. We anticipate filing additional patent
applications both in the United States and in other countries, as appropriate.
However, we cannot predict:
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the
degree and range of protection any patents will afford us against
competitors, including whether third parties will find ways to invalidate
or otherwise circumvent our
patents;
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if
and when patents will issue;
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if
our issued patents will be valid or
enforceable;
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whether
or not others will obtain patents claiming aspects similar to those
covered by our patents and patent applications;
or
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whether
we will need to initiate litigation or administrative proceedings
which
may be costly whether we win or
lose.
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Even
issued patents may later be found unenforceable, or be restricted or invalidated
in proceedings instituted by third parties before various patent offices and
courts. Changes in either the patent laws or in the interpretation of patent
laws in the United States and other countries may diminish the value of our
intellectual property. We are therefore unable to predict the scope of any
patent claims in our or in third-party patents that may be issued or may be
enforceable.
Our
success also depends upon the skills, knowledge and experience of our scientific
and technical personnel, our consultants and adviso
r
s
as well
as our licensors and contractors. To help protect our proprietary know-how
and
our inventions for which patents may be unobtainable or difficult to obtain,
we
rely on trade secret protection and confidentiality agreements. To this end,
we
require all of our employees, consultants and advisors to enter into agreements
which prohibit the disclosure of confidential information and, where applicable,
require disclosure and assignment to us of the ideas, developments, discoveries
and inventions important to our business. These agreements may not provide
adequate protection for our trade secrets, know-how or other proprietary
information in the event of any unauthorized use or disclosure or the lawful
development by others of such information. If any of our trade secrets, know-how
or other proprietary information is disclosed, the value of our trade secrets,
know-how and other proprietary rights would be significantly impaired and our
business and competitive position would suffer.
It
is
also possible that our technologies may infringe on patents or other
intellectual property rights of others. A dispute regarding the infringement
or
misappropriation of our proprietary rights or the proprietary rights of others
could be costly and result in delays in our commercialization activities. Our
success depends, in part, on our ability to operate without infringing on or
misappropriating the property rights of others.
Any
legal
action against us, or our partners, claiming damages or seeking to enjoin
commercial activities relating to the affected products, methods, and processes
could require us, or our partners, to obtain a license to continue to use,
manufacture or market the affected products, methods or processes, which may
not
be available on commercially reasonable terms, if at all, or could prevent
us
from making, using or selling the subject matter claimed in patents held by
others and subject us to potential liability damages or could consume a
substantial portion of our managerial and financial resources whether we win
or
lose.
The
Company may have liabilities arising from the prior business of Gemwood. If
material, these liabilities may adversely affect our anticipated results of
operation and financial condition.
Simultaneous
with the closing of the Offering, the Company acquired Kreido’s business
pursuant to the Merger and, with the proceeds of the Offering, will continue
Kreido’s existing business operations as a publicly-traded company. There is a
risk that not all of Gemwood’s liabilities were identified or known at the time
of the Merger and that those liabilities may impair the Company’s future
financial performance or condition.
We
may
incur significant fees in connection with transactions that are not
consummated.
In
many
instances, we will engage outside consultants and advisers, including legal,
financial and technical advisors, to assist us in connection with making,
operating or disposing of our investments. The costs of providing these services
are expected to be material. There can be no assurance that we will close all
transactions on which material costs are incurred. All such costs for deals
not
consummated will be expensed. These amounts may be significant and could have
an
adverse impact on our anticipated results of operations and financial
condition.
RISKS
RELATED TO OUR PARTICIPATION IN THE BIODIESEL INDUSTRY
Increases
in the construction of biodiesel production plants may cause excess biodiesel
production capacity in the market. Excess capacity may adversely affect the
price at which we are able to sell the biodiesel that we produce and may also
adversely affect our anticipated results of operation and financial
condition.
In
2005,
only 66 million gallons of biodiesel were produced in the United States.
Currently, there is a reported 558 MMgpy of biodiesel production capacity in
the
United States, with another 807 MMgpy under construction (for a total of 1,365
MMgpy).
9
With
such
an increase in biodiesel production capacity in the United States, compared
to
historical production levels, there is risk that there will be a significant
amount of excess biodiesel production capacity. Although this existing and
pending capacity growth is very large compared to historical production levels,
we believe that the market will purchase as much biodiesel as is available,
so
long as the prices for biodiesel (net of the impact of tax credits and other
similar incentives) are competitive with those of petrodiesel.
Our
anticipated results of operations, financial
condition
and business outlook will be highly dependent on commodity prices and the
availability of supplies, both of which are subject to significant volatility
and uncertainty.
Our
results are substantially dependent on commodity prices, especially prices
for
feedstock, biodiesel, petroleum diesel, equipment and materials used in the
construction and operation of our biodiesel production plants. As a result
of
the volatility of the prices and the scarcity of these items, our results may
fluctuate substantially, and we may experience periods of declining prices
for
our products and increasing costs for our raw materials, which could result
in
operating losses. Although we may attempt to offset a portion of the effects
of
fluctuations in prices by entering into forward contracts to supply biodiesel
or
purchase feedstock or other items or by engaging in transactions involving
exchange-traded futures contracts, the amount and duration of these hedging
and
other risk mitigation activities may vary substantially over time, and these
activities also involve substantial risks.
9
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Biodiesel
Magazine
as
of October 30, 2006.
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The
price
of feedstock is influenced by market demand, weather conditions, animal
processing and rendering plant decisions, and factors affecting crop yields,
farmer planting decisions and general economic, market and regulatory factors.
These factors include government policies and subsidies with respect to
agriculture and international trade, and global and local demand and supply.
The
significance and relative effect of these factors on the price of feedstock
is
difficult to predict.
Any
event
that tends to negatively affect the supply of feedstock, such as increased
demand, adverse weather or crop disease, could increase feedstock prices and
potentially harm our business. In addition, we may also have difficulty, from
time to time, in physically sourcing feedstock on economical terms due to supply
shortages. Such a shortage could require us to suspend operations until
feedstock is available at economical terms, which would have a material adverse
effect on our business, anticipated results of operations and financial
condition. The price we pay for feedstock at a facility could increase if an
additional multi-feedstock biodiesel production plant is built in the same
general vicinity or if alternative uses are found for lower cost
feedstock.
Biodiesel
fuel is a commodity whose price is determined based in part on the price of
petroleum diesel, world demand, supply and other factors, all of which are
beyond our control. World prices for biodiesel fuel have fluctuated widely
in
recent years. We expect that prices will continue to fluctuate in the future.
Price fluctuations will have a significant impact upon our revenue, the return
on our investment in biodiesel production plants and our general financial
condition. Price fluctuations for biodiesel fuel may also impact the investment
market and our ability to raise investor capital. Although market prices for
biodiesel fuel rose to near-record levels during 2005, there is no assurance
that these prices will remain at current levels. Future decreases in the prices
of biodiesel or petroleum diesel fuel may have a material adverse effect on
our
financial condition and anticipated results of operations.
Both
supply and demand in the United States biodiesel industry are highly dependent
upon federal and state legislation.
The
production of biodiesel is made significantly more competitive by federal and
state tax incentives. The federal excise tax incentive program for biodiesel
was
originally enacted as part of the American Jobs Creation Act of 2004 (the “JOBS
Act”) but is scheduled to expire on December 31, 2008. This program provides
blenders, generally distributors, with a one cent tax credit for each percentage
point of virgin vegetable oil-derived biodiesel blended with petroleum diesel.
For example, distributors that blend virgin soybean-derived biodiesel with
petroleum diesel into a B20 blend biodiesel would receive a 20 cent per gallon
excise tax credit. The program also provides blenders of recycled oils, such
as
yellow grease from restaurants, with a one-half cent tax credit for each
percentage point of recycled oil-derived biodiesel blended with petroleum
diesel. For example, distributors that blend recycled oil-derived biodiesel
with
petroleum diesel into a B20 blend biodiesel would receive a 10 cent per gallon
excise tax credit. In addition, approximately 31 states provide mandates,
programs and other incentives to increase biodiesel production and use, such
as
mandates for fleet use or for overall use within the state, tax credits,
financial grants, tax deductions, financial assistance, tax exemptions and
fuel
rebate programs. These incentives are meant to lower the end-users’ cost of
biodiesel in comparison to petroleum diesel. The elimination or significant
reduction in the federal excise tax incentive program or state incentive
programs benefiting biodiesel could adversely affect our anticipated results
of
operations and financial condition.
Reductions
in support of biodiesel from government, consumer or special interest groups
could adversely impact our business plan and our anticipated results of
operation and financial condition.
Federal
and state governments in the United States and governments abroad have
implemented incentives and mandates in support of biodiesel. Similarly, there
has been support from consumers and special interest groups, such as
agricultural and environmental groups. Support has even come from
the
petroleum
industry itself, such as BP’s (formerly known as British Petroleum) “beyond
petroleum” marketing campaign, and the automobile industry, such as General
Motors’ “live green, go yellow” flex-fuel ethanol marketing campaign. The loss
of these incentives, including the failure to renew incentives that terminate,
could adversely affect our anticipated results of operations and financial
condition.
We
may
be unable to effectively compete in the biodiesel industry.
In
many
instances, our competitors and potential competitors have, or will have,
substantially greater financial, technical, research, and other resources and
larger, more established marketing, sales, distribution, and service
organizations than we have. Moreover, competitors may have greater name
recognition than we have, and competitors may offer discounts as a competitive
tactic. Our competitors may succeed in developing or marketing technologies
or
products that are more effective or commercially attractive than our products,
or that would render our technologies and products obsolete. Also, we may not
have the financial resources, technical expertise, or marketing, distribution,
or support capabilities to compete successfully in the future.
We
anticipate that competition for the licensing of biodiesel reactors will come
primarily from companies that offer competing novel biodiesel production
technologies. To compete effectively in licensing biodiesel production
technology, we will need to demonstrate the advantages of our STT
®
Reactor
over well-established, traditional chemical reactors, as well as novel
technologies and systems. We will also experience competition from other
producers of biodiesel.
We
also
face competition from other biodiesel producers with respect to procuring
feedstock, obtaining suitable properties for constructing biodiesel production
plants and selling biodiesel and related products. Competition will likely
increase as energy prices on the commodities market, including biodiesel and
petrodiesel, rise as they have in recent years. This increased competition
may
also have an adverse impact on our ability to obtain additional capital from
investors.
A
substantial reduction in crude petroleum oil prices could have an adverse impact
on our contemplated business plan by making biodiesel fuel relatively more
expensive compared to petrodiesel. Were such a reduction to occur, it would
likely adversely affect our anticipated results of operation and financial
condition.
With
the
current elevated prices compared to historical prices of crude petroleum oil,
and by extension, petrodiesel, biodiesel can be produced for a cost that is
economically practical when compared to the cost to produce petrodiesel.
However, if the price of crude petroleum oil should drop substantially, this
could have a material adverse effect on the entire biodiesel industry and
us.
RISKS
RELATED TO INVESTMENT IN OUR COMMON STOCK
We
have
broad discretion over the use of a significant portion of the net proceeds
of
the
Offering. Our management will determine, with our Board of Directors, but
without the need for stockholder approval, how to allocate a significant portion
of these proceeds. If we do not wisely allocate the proceeds, our business
plan
could be seriously impacted.
We
have
broad discretion to allocate a significant portion of the net proceeds of the
Offering, subject to certain limitations imposed by the parties who arranged
the
Offering. The timing and amount of our actual expenditures are subject to change
and will be based on many factors, including:
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competition,
market and other developments;
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our
ability to attract and retain quality
employees;
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our
ability to implement our sales, marketing, product development,
manufacturing and investor/public relations plans;
and
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the
on-going accounting, legal and other costs of being a publicly-traded
company.
|
T
he
offering price of the Units was arbitrarily determined.
The
offering price for the Units should not be considered an indication of the
actual value of the Units and was not based on the Company’s expected net worth
or expected earnings.
Investors
may be liable as underwriters for selling or distributing the securities
purchased in
the
Offering.
Investors
who purchased Units in the Offering with a view to sell or otherwise distribute
those securities may be considered to be underwriters, subjecting the investors
to potential liability under Section 11 of the Securities Act. Further, if
deemed an underwriter, the investor could not rely on Rule 144 of the Securities
Act to sell or otherwise distribute the securities purchased in the Offering.
We
have agreed to indemnify the investors for liabilities to which they may become
subject in connection with the Offering, but the indemnification rights of
the
investors may not be enforceable against us as a matter of public policy.
Additionally, if an investor is considered an underwriter and seeks to sell
or
otherwise distribute the Units purchased in the Offering, then the investor
would be obligated to deliver a prospectus in accordance with the rules
promulgated under the Securities Act.
If
the
SEC does not declare a registration statement effective, the investors may
not
be able to sell shares in the amounts or at the times they might otherwise
wish
to do so.
We
and
the investors entered into a Registration Rights Agreement on the Closing Date.
Under the Registration Rights Agreement, we are obligated to file a registration
statement providing for the resale of all, or a portion of, the shares included
in the Units and all, or a portion of, the shares underlying the warrants that
are included in the Units within 60 days after the Closing Date. If the
registration statement that we have filed does not become effective within
90
days after the date on which we have filed it
(or 120
days if such Registration Statement is subject to a review by the
SEC),
then we
must pay liquidated damages. Although we believe that we and our advisors will
be able to take all steps necessary to permit the SEC to declare our
registration statement effective, it is possible that the SEC may, by
application of policies or procedures that vary from past policies and
procedures, delay the effectiveness of the registration statement or make it
impractical for us to respond to the SEC in a manner which permits it to declare
the registration statement effective. If we are not able to bring the
registration statement effective, then investors will need to rely on exemptions
from the registration requirements of the Securities Act, such as Rule 144.
Such
exemptions typically limit the amount of shares that an investor can sell,
require that the shares be sold in certain types of transactions, require that
an investor have held the shares to be sold for a minimum period of time and
limit the number of times that an investor may sell its shares.
There
is no active public market for our Common Stock and investors may not be able
to
resell their shares at or above the offering price, if at all.
Although
the Company’s Common Stock is currently quoted for trading on the OTC Bulletin
Board, there currently is no active public market for the Common Stock. An
active public market for the Common Stock may not develop or be sustained.
The
offering price of the Offering is not indicative of future market
prices.
Investors
purchasing shares of Common Stock in the Offering did not pay a price that
was
established in a competitive market. The public market may not agree with or
accept the valuation, in which case investors may not be able to sell their
Common Stock at or above the offering price, if at all. The market price of
the
Common Stock may fluctuate significantly in response to factors, some of which
are beyond our control, including the following:
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actual
or anticipated variations in operating
results;
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the
limited number of holders of the Common Stock, and the limited liquidity
available through the OTC Bulletin
Board;
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changes
in financial estimates by securities
analysts;
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changes
in the economic performance and/or market valuations of other energy
companies;
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our
announcement of significant acquisitions, strategic partnerships,
joint
ventures or capital commitments;
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additions
or departures of key personnel;
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sales
or other transactions involving our capital
stock;
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changes
in the market for biodiesel fuel commodities or the capital markets
generally, or both;
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changes
in the availability of feedstock on commercially economic
terms;
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changes
in the demand for biodiesel fuel, including changes resulting from
the
expansion of other alternative
fuels;
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changes
in the social, political and/or legal
climate;
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|
announcements
of technological innovations or new products available to the biodiesel
production industry; and/or
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announcements
by relevant domestic and foreign government agencies related to incentives
for alternative energy development
programs.
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Although
becoming
public by means of a reverse merger with an existing company, we may not be
able
to attract the attention of major brokerage firms and, as a public company,
will
incur substantial expenses.
Additional
risks may exist since we became public through a “reverse merger.” Because we
have not yet actively commenced business, security analysts of major brokerage
firms may not provide coverage of us. Moreover, brokerage firms may not desire
to provide coverage, to provide financial advisory services or to conduct
secondary offerings on our behalf in the future.
We
are
subject to the information and reporting requirements of United States
securities laws. These securities laws require, among other things, review,
audit, and public reporting of the Company’s financial results, business
activities, and other matters. Recent SEC regulation, including regulation
enacted as a result of the Sarbanes-Oxley Act of 2002, has also substantially
increased the accounting, legal, and other costs related to becoming and
remaining an SEC reporting company. The public company costs of preparing and
filing annual and quarterly reports, and other information with the SEC and
furnishing audited reports to stockholders, will cause our expenses to be higher
than they were before we entered into the Merger. In addition, we will incur
substantial expenses in connection with the preparation of the registration
statement to register the securities issued in the Offering and related
documents with respect to the registration of the securities issued in the
Offering. These increased costs may be material and may include the hiring
of
additional employees and/or the retention of additional advisors and
professionals. Our failure to comply with federal securities laws could result
in private or governmental legal action against us and/or our officers and
directors, which could have a detrimental effect on our business and finances,
the value of our stock, and the ability of stockholders to resell their stock.
The
Common Stock may be considered “a penny stock” and may be difficult to
sell.
The
SEC
has adopted regulations which generally define “penny stock” to be an equity
security that has a market price of less than $5.00 per share or an exercise
price of less than $5.00 per share, subject to specific exemptions. Initially,
the market price of the Common Stock is likely to be less than $5.00 per share
and therefore may be designated as a “penny stock” according to SEC rules. This
designation requires any broker or dealer selling these securities to disclose
certain information concerning the transaction, obtain a written agreement
from
the purchaser and determine that the purchaser is reasonably suitable to
purchase the securities. These rules may restrict the ability of brokers or
dealers to sell the Common Stock and may affect the ability of investors to
sell
their shares. In addition, since the Common Stock is currently traded on the
OTC
Bulletin Board, investors may find it difficult to obtain accurate quotations
of
the Common Stock and may experience a lack of buyers to purchase such stock
or a
lack of market makers to support the stock price.
A
significant number of our shares will be eligible for sale, and their sale
could
depress the market price of our stock.
Sales
of
a significant number of shares of the Common Stock in the public market
following the Offering could harm the market price of the Common Stock. As
additional shares of the Common Stock become available for resale in the public
market pursuant to the registration of the Common Stock issued in the Offering,
and otherwise, the supply of the Common Stock will increase, which could
decrease our price. Some or all of the shares of Common Stock may be offered
from time to time in the open market pursuant to Rule 144, and these sales
may
have a depressive effect on the market for the shares of Common Stock. In
general, a person who has held restricted shares for a period of one year may,
upon filing with the SEC a notification on Form 144, sell into the market Common
Stock in an amount equal to the greater of 1% of the outstanding shares or
the
average weekly number of shares sold in the last four weeks prior to such sale.
Such sales may be repeated once every three months, and any of the restricted
shares may be sold by a non-affiliate after they have been held for two
years.
The
securities sold in the Offering were “restricted” securities that have not been
registered under federal or state securities laws and are not freely
transferable. Purchasers of these securities must be prepared to bear the
economic risks of investment for an indefinite period of time since the
securities cannot be sold unless they are subsequently registered or an
exemption from registration is available. We entered into a Registration Rights
Agreement with each investor in the Offering pursuant to which we granted
certain registration rights under the Securities Act with respect to the Common
Stock sold in the Offering, which registration rights are described in this
Current Report on Form 8-K.
Our
principal stockholders will have significant voting power and may take actions
that may not be in the best interests of other stockholders.
Our
officers, directors, principal stockholders, and their affiliates control a
significant percentage of the outstanding Common Stock. If these stockholders
act together, they will be able to exert significant control over our management
and affairs requiring stockholder approval, including approval of significant
corporate transactions. This concentration of ownership may have the effect
of
delaying or preventing a change in control and might adversely affect the market
price of the Common Stock. This concentration of ownership may not be in the
best interests of all our stockholders.
Investors
should not anticipate receiving cash dividends on our stock.
We
have
never declared or paid any cash dividends or distributions on our capital stock.
We currently intend to retain future earnings to support operations and to
finance expansion and therefore do not anticipate paying any cash dividends
on
the Common Stock in the foreseeable future.
Our
management team does not have extensive experience in public company
matters.
Our
management team has had limited public company management experience and
responsibilities, which could impair our ability to comply with legal and
regulatory requirements such as the Sarbanes-Oxley Act of 2002 and applicable
federal securities laws including filing required reports and other information
required on a timely basis. There can be no assurance that our management will
be able to implement and effect programs and policies in an effective and timely
manner that adequately respond to increased legal, regulatory compliance and
reporting requirements imposed by such laws and regulations. Our failure to
comply with such laws and regulations could lead to the imposition of fines
and
penalties and further result in the deterioration of our business.
Even
though
the
Company is not a California corporation, your Common Stock could still be
subject to a number of key provisions of the California General Corporation
Law.
Under
Section 2115 of the California General Corporation Law (the “CGCL”),
corporations not organized under California law may still be subject to a number
of key provisions of the CGCL. This determination is based on whether the
corporation has significant business contacts with California and if more than
50% of its voting securities are held of record by persons having addresses
in
California. In the immediate future, we will continue the business and
operations of Kreido and a majority of the business operations, revenue and
payroll will be conducted in, derived from, and paid to residents of California.
Therefore, depending on the Company’s ownership, we could be subject to certain
provisions of the CGCL. Among the more important provisions are those relating
to the election and removal of directors, cumulative voting, standards of
liability and indemnification of directors, distributions, dividends and
repurchases of shares, shareholder meetings, approval of certain corporate
transactions, dissenters’ and appraisal rights and inspection of corporate
records.
2.
MANAGEMENT’S DISCUSSION AND ANALYSIS
The
following Management’s Discussion and Analysis should be read in conjunction
with the Company’s financial statements and the related notes thereto. The
Management’s Discussion and Analysis contains forward-looking statements that
involve risks and uncertainties, such as statements of our plans, objectives,
expectations and intentions. Any statements that are not statements of
historical fact are forward-looking statements. When used, the words
“believe,”
“plan,” “intend,” “anticipate,” “target,” “estimate,” “expect,” and the like,
and/or future-tense or conditional constructions (“will,” “may,” “could,”
“should,” etc.), or
similar
expressions, identify certain of these forward-looking statements. These
forward-looking statements are subject to risks and uncertainties that could
cause actual results or events to differ materially from those expressed or
implied by the forward-looking statements in this Current Report on Form 8-K.
The Company’s actual results and the timing of events could differ materially
from those anticipated in these forward-looking statements as a result of
several factors. The Company does not undertake any obligation to update
forward-looking statements to reflect events or circumstances occurring after
the date of this Current Report on Form 8-K.
As
the
result of the Merger, the Split-Off and the change in the business and
operations of the Company from a day spa and salon services company to
a
technology
company focusing on the
production
of biofuel
,
a
discussion of the past financial results of Gemwood is not pertinent and the
financial results of Kreido, the accounting acquirer, are considered the
financial results of the Company on a going forward basis.
Kreido
Laboratories is a corporation founded to develop proprietary technology for
building micro-composite materials for electronic applications. In 1995, we
began to develop the technology used in the design and assembly of our
STT
®
Reactor.
We thereafter sought to develop the technology to improve the speed,
completeness and efficiency of certain chemical reactions, including
esterifications and transesterifications, in the pharmaceutical and special
chemical industries. One of the EPA’s largest laboratories has been using our
STT
®
Reactor-based technology since 2004 to develop and evaluate new chemical
processes and develop and optimize protocols for use of the STT
®
Reactor
by public and private entities. Beginning in the last quarter of 2005, we began
to evaluate the advantages of the STT
®
Reactor
specifically for the production of biodiesel. In the first quarter of 2006,
we
elected to focus exclusively on the biodiesel industry and began to prepare
and
execute our current business plan. See “Risk Factors--Risks Related to Our
Contemplated Business” and “Competition.”
Plan
of Operations
We
plan
to commercialize our proprietary equipment system for biodiesel production
on an
industrial scale and to become a leading provider of biodiesel in the United
States and elsewhere. We expect to execute our business plan by generating
revenues from multiple sources - by building and operating our own
STT
®
Reactor-based Biodiesel Production Units with an anticipated aggregate capacity
of 90 million gallons annually (“MMgpy”) by 2008, by licensing our
STT
®
Reactor-based technology to others and, in the longer term, by investing in
businesses that will develop or use our STT
®
Reactor-based technology for production of biofuels.
Because
of the benefits that are expected to result from the widespread use of
biodiesel, legislation, as well as taxation and public policy, favor and, in
some jurisdictions, require the increasing use of biodiesel instead of
petrodiesel. Concurrently, we believe that diesel will increasingly replace
gasoline as a transportation fuel.
To
address the anticipated unsatisfied market demand for biodiesel, we have
developed our STT
®
Production Unit, a system of chemical processing equipment based on a highly
efficient fluid dynamics-based process. This process permits accelerated rates
of transesterification and increased yields over shortened production cycles,
among other advantages. We expect to manufacture the STT
®
Reactors
ourselves and to construct the STT
®
Production Unit by securing the services of qualified third-party
contractors.
We
plan
to directly market and distribute the biodiesel that we produce in our owned
and
operated facilities to diesel blenders and other distributors of diesel products
through our own team that we plan to recruit and develop with proceeds of the
Offering. We plan to use diversified feedstock in our plants.
We
anticipate that we will execute our business strategy with the following
actions:
|
·
|
place
two pilot STT
®
Production Units in the field, producing ASTM-quality
biodiesel;
|
|
·
|
hire
additional construction project management, manufacturing, production
plant operations, sales, marketing and business development
personnel;
|
|
·
|
begin
construction of three owned production plants equipped with
STT
®
Production Units; and
|
|
·
|
negotiate
licenses for providing STT
®
Production Units to both domestic and international biodiesel
producers.
|
We
are
developing three biodiesel production plants, each of which will employ our
STT
®
Production Units. The development of the biodiesel production plants will
require significant expenditures on equipment and materials and we expect to
use
approximately $15,000,000 of the proceeds of the Offering in the development
of
such plants.
As
feedstock and biodiesel prices change or as the demand for superior biodiesel
production technology increases, we may determine that it is in our best
interest to sell or license our STT
®
Production Units in the near term in lieu of building our second and third
plants as soon as we currently plan. We believe that we will be able to build
our biodiesel production plants in less time and for significantly less cost
than conventional plants. We expect that our plants will have lower operational
and biodiesel production costs, provide greater production yields, emit less
toxic waste into the environment and be safer to operate. In the execution
of
our business plan, we anticipate that we will increase our number of employees
in the next 12 months to approximately 85 employees.
The
three
plants under development are:
|
·
|
Port
of Chicago, Chicago, Illinois.
|
|
·
|
Port
of Indiana, Burns Harbor, Indiana.
|
|
·
|
Port
of Wilmington, Wilmington, North
Carolina.
|
We
believe that the Company can satisfy its cash requirements for at least the
next
12 months.
Results
of Operations for the Nine Months Ended September 30, 2006
Operating
Expenses
Loss
from
operations for the nine-month period ended September 30, 2006 was $1,696,779,
resulting from $1,135,297 of research and development expenses and $561,482
of
general and administrative expenses.
Other
Income (Expense)
Other
income (expense) for the nine months ended September 30, 2006 was ($561,455),
comprised principally of interest expense of $652,855, offset by other income.
Net
Loss
Net
loss
for the nine months ended September 30, 2006 was $2,259,034, equivalent to
a
loss of $0.08 per common share.
Comparison
of Years ended December 31, 2005 and 2004
Operating
Expenses
Operating
expenses totaled $2,543,445 for the year ended December 31, 2005, compared
to
operating expenses of $3,453,372 for the year ended December 31, 2004.
Other
Income (Expense)
Other
income (expense) for 2005 and 2004 was ($654,112) and ($2,023) respectively.
In
2005, other expense was comprised principally of interest expense of $534,269
and loss from retirement of assets of $275,163, offset by other income. In
2004,
other expense was comprised of interest expense of $233,640, offset by other
income.
Net
Loss
Net
loss
for the year ended December 31, 2005 was $3,198,357, compared to net loss of
$3,456,195 for the year ended December 31, 2004. There were no net sales or
gross profit for the years ended December 31, 2005 and 2004.
Liquidity
and Capital Resources
Net
cash
used by operating activities for the nine months ended September 30, 2006 and
the years ended December 31, 2005 and 2004 was $1,455,963, $2,065,427 and
$2,972,729, respectively.
Net
cash
used by investing activities for the nine months ended September 30, 2006 and
the years ended December 31, 2005 and 2004 was $174,589, $167,275 and $310,298,
respectively.
Net
cash
provided by financing activities for the nine months ended September 30, 2006
and the years ended December 31, 2005 and 2004 was $694,734, $3,152,959 and
$3,325,808, respectively. The cash inflow for the year ended December 31, 2005
primarily resulted from the issuance of long-term debt, while the cash inflow
for the year ended December 31, 2004 resulted from the issuance of Series B1
preferred stock and long-term debt.
The
Company has issued convertible Series A1 Preferred Stock and Series B1 Preferred
Stock. For the year ended December 31, 2005, the Company issued Series A1 and
Series B1 Convertible Preferred Stock in the aggregate principal amounts of
$3,628,369 and $10,011,355, respectively. Each fiscal year, the shareholders
of
Series B1 Preferred Stock, before any dividends are paid or declared and set
aside from the Series A1 Preferred Stock or the Common Stock, and the
shareholders of Series A1 Preferred Stock, before any dividends are paid or
declared and set aside from the Common Stock, are entitled to receive out of
funds legally available for that purpose, cumulative dividends at a rate of
eight percent (8%) per annum. Such cumulative dividends accrue from the date
of
issuance and are calculated through the earliest of (i) the conversion of the
preferred stock into common stock, (ii) the redemption of the preferred stock
or
(iii) the liquidation, dissolution or winding up of the Company. The holders
of
the Series B1 Preferred Stock and Series A1 Preferred Stock are entitled to
participate, on an as-converted basis, in all dividends, whether payable in
cash, property or stock, that are declared on any of the Common Stock.
Cumulative dividends for Series B1 Preferred Stock as of December 31, 2005
and
2004 were $1,353,864 and $552,956, respectively. Cumulative dividends for Series
A1 Preferred Stock as of December 31, 2005 and 2004 were $534,267 and $218,209,
respectively.
Related
Party Transactions
During
2005 and 2004, law firms, of which certain members were shareholders of Kreido,
were paid $53,765 and $97,955 for legal services performed on behalf of Kreido.
As of December 31, 2005 and 2004, amounts due to the law firms were $892 and
$0,
respectively.
Summary
of Significant Accounting Policies
Basis
of Presentation
- The
accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of
America.
Revenue
Recognition
- The
Company’s revenues are expected to be derived from licensing its patented
processes, leasing its patented equipment to carry out the licensed processes
providing on-going technical support and know-how, and in the future, the sale
of biodiesel. Revenues from product sales will be recorded upon shipment.
Revenues from technology licensing will be, based upon the nature of the
licensing agreement, recorded upon billing due date established by contractual
agreement with the customer or over the term of the agreement. For sales
arrangements with multiple elements, the Company will allocate the undelivered
elements based on the price charged when an element is sold separately. Through
the end of 2005, the Company had recognized no significant commercial or
licensing revenue. It is anticipated that once the Company has built and begins
operating the commercial biodiesel production plants, the majority of revenue
will be based upon the sale of biodiesel to distributors.
Cash
and Cash Equivalents
-
The
Company considers all highly liquid investments with a maturity of three months
or less when purchased to be cash equivalents.
Use
of Estimates
-
Preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and reported amounts of revenues and expenses during
the reporting periods covered by the financial statements and accompanying
notes. Actual results could differ from those estimates.
Depreciation
and Amortization
-
Depreciation
of property and equipment is calculated on a straight-line method over the
estimated useful lives of the related assets, generally ranging from five to
seven years. Leasehold improvements are amortized over the shorter of the useful
life of the related asset and the lease term.
Patents
-
Capitalized
patent costs consist of direct costs associated with obtaining patents. Patent
costs are amortized on a straight-line basis over 15 years, which is the
expected life.
Impairment
of Long-Lived Assets
-
The
Company continually evaluates whether events and circumstances have occurred
that indicate the remaining estimated useful life of long-lived assets may
warrant revision or that the remaining balance of long-lived assets may not
be
recoverable in accordance with SFAS No. 144,
Accounting
for the Impairment or Disposal of Long-Lived Assets
.
When
factors indicate that long-lived assets should be evaluated for possible
impairment, the Company uses an estimate of the related undiscounted future
cash
flows over the remaining life of the long-lived assets in measuring whether
they
are recoverable. If the estimated undiscounted future cash flows exceed the
carrying value of the asset, a loss is recorded as the excess of the asset’s
carrying value over its fair value. No assets were determined to be impaired
in
2005 or 2004.
Income
Taxes
-
The
Company accounts for income taxes under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to
taxable income in the years in which those temporary differences are expected
to
be recovered or settled. The effect on deferred tax assets and liabilities
of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Stock-Based
Compensation
-
Stock-based
compensation is accounted for under Statement of Financial Accounting Standards
No. 123 (
“
SFAS 123
”
),
Accounting
for Stock-Based Compensation
.
Under
SFAS 123, entities either recognize the fair value of all stock-based awards
as
expense over the vesting period or continue to apply the provisions of APB
Opinion No. 25 for financial statement purposes and provide pro forma net income
disclosures of the SFAS 123 treatment of such awards. The Company has elected
to
apply the provisions of APB Opinion No. 25 and provide the pro forma
information.
If
the
Company had elected to recognize compensation cost based on the fair value
at
the date of grant, consistent with the method as prescribed by SFAS 123,
net
loss would have changed to the pro forma amounts indicated below:
|
2005
|
2004
|
Period
from January 13, 1995 (Inception) to December 31, 2005
|
Net
Loss:
|
|
|
|
As
reported
|
$(3,198,357)
|
$(3,456,195)
|
$(19,858,748)
|
Add:
stock-based employee compensation expense included in reported net
loss
|
33,123
|
63,710
|
690,952
|
Deduct:
total stock-based employee compensation expense determined under
fair
value based method for all awards
|
(66,422)
|
(122,883)
|
(965,336)
|
Pro
forma
|
$(3,231,656)
|
$
(3,515,368)
|
$
(20,133,132)
|
The
fair
value of options granted during 2005 and 2004 was determined using a minimum
value pricing model with the following assumptions: risk-free interest rates
from 3.24% to 4.46%, expected lives of five to ten years and volatility of
0.01%.
Research
and Development
-
Research
and development costs related to the design, development, demonstration, and
testing of reactor technology are charged to operations as
incurred.
Comprehensive
Loss
-
Except
for net loss, the Company has no material components of comprehensive loss,
and
accordingly, the comprehensive loss is the same as the net loss for all periods
presented.
Recent
Accounting Pronouncements
-
In
June
2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty
in
Income Taxes (“FIN 48”), which is an interpretation of SFAS No. 109,
Accounting for Income Taxes
(“SFAS 109”). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements in accordance with SFAS 109 and prescribes a recognition
threshold and measurement attribute for the financial statement recognition
and
measurement of a tax position taken or expected to be taken in a tax return.
FIN
48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. FIN 48
is
effective for fiscal years beginning after December 15, 2006. The Company does
not believe that the adoption of FIN 48 will have a significant effect on its
financial statements.
In
March
2006, the FASB issued SFAS No. 156,
Accounting for Servicing of Financial
Assets
–
An
Amendment of FASB Statement No. 140
(“SFAS 156”). SFAS 156 requires that
all separately recognized servicing assets and servicing liabilities be
initially measured at fair value, if practicable. The statement permits, but
does not require, the subsequent measurement of servicing assets and
servicing
liabilities
at fair value. SFAS 156 is effective as of the beginning of the first fiscal
year that begins after September 15, 2006, with earlier adoption permitted.
The
Company does not believe the adoption of SFAS 156 will have a significant effect
on its financial statements.
In
September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring
fair value and expands disclosure of fair value measurements. SFAS 157 applies
under other accounting pronouncements that require or permit fair value
measurements and, accordingly, does not require any new fair value measurements.
SFAS 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007. The Company does not believe that the adoption of
SFAS
157 will have a significant effect on its financial statements.
Off-Balance
Sheet Arrangements
We
do not
have any off-balance sheet arrangements as defined in Item 303(c) of
Regulation S-B, promulgated by the SEC.
3.
DESCRIPTION OF PROPERTY
Our
executive offices are located at 1140 Avenida Acaso, Camarillo, CA 93012
and
our
phone numbe
r
is
(805) 389-3499. Our executive offices total approximately 7,260 square feet.
We
currently lease such facilities for $4,525 per month, which lease ends in August
2007.
We
also
lease 1115 Avenida Acaso, Camarillo, CA 93012, which is approximately 2,800
square feet and which we use primarily for storage. The term of the lease for
this location expired in November 2006, and we are currently renting on a
month-to-month basis for $2,106 per month. We have requested a one-year
extension of the lease on similar terms.
4.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth certain information regarding the beneficial
ownership of our Common Stock as of the Closing Date by (i) each person who,
to
our knowledge, beneficially owns more than 5% of the outstanding shares of
the
Common Stock; (ii) each of our directors and executive officers; and (iii)
all
of our executive officers and directors as a group. Unless otherwise indicated
in the footnotes to the following table, each person named in the table has
sole
voting and investment power and that person’s address is c/o Kreido Biofuels,
Inc., 1140 Avenida Acaso, Camarillo, CA 93012. Shares of Common Stock subject
to
options or warrants currently exercisable or exercisable within 60 days of
the
Closing Date are deemed outstanding for computing the share ownership and
percentage of the person holding such options and warrants, but are not deemed
outstanding for computing the percentage of any other person.
|
|
Shares
Beneficially Owned
|
|
Name
and Address of Beneficial Owner
|
|
Number
of Shares Beneficially Owned
|
|
Percentage
of
Common
Stock Outstanding
1
|
|
Smart
Technology Ventures and affiliates
(2)
|
|
|
12,581,775
|
|
|
23.95
|
%
|
Joseph
Marks
(3)
|
|
|
|
|
|
23.95
|
%
|
Betsy
Wood Knapp
(4)
|
|
|
4,607,550
|
|
|
8.77
|
%
|
David
Mandel
|
|
|
3,530,676
|
|
|
6.72
|
%
|
David
R. Fuchs
(5)
|
|
|
4,030,887
|
|
|
7.67
|
%
|
Joel
A. Balbien
|
|
|
0
|
|
|
0
|
%
|
Ben
Binninger
(6)
|
|
|
260,683
|
|
|
*
|
|
Philip
Lichtenberger
(7)
|
|
|
463,115
|
|
|
*
|
|
Alan
McGrevy
(8)
|
|
|
328,278
|
|
|
*
|
|
Executive
Officers and Directors as a Group
|
|
|
18,241,401
|
|
|
34.72
|
%
|
|
|
|
|
|
|
|
|
1
|
Based
on 52,532,202 shares of the Company’s stock issued and outstanding as of
the Closing Date.
|
2
|
Address
is 1801 Century Park West, 5
th
Floor, Los Angeles, CA 90067. Includes shares to be held of record
by
Smart Technology Ventures Advisors, LLC (“STV Advisors”) and its
affiliates, Smart Technology Ventures III SBIC, L.P. (“STV III SBIC”),
Smart Technology Ventures, II, LLC, Smart Technology Ventures, III,
L.P.,
and the Y & S Nazarian Revocable Trust. The shares are the same shares
that are listed in the table as being beneficially owned by Mr.
Marks.
|
3
|
Mr.
Marks currently is a managing member of STV Advisors and as such
is the
beneficial owner of the 12,581,775 shares of our Common Stock held
of
record by STV Advisors and its affiliates, and has the investment
power
over such shares. Before the Merger, Dr. Balbien was also a managing
member of STV Advisors and was, therefore, a beneficial
owner.
|
4
|
Shares
are held of record by a trust of which Cleon T. Knapp and Betsy Wood
Knapp
are the trustees.
|
5
|
Includes
888,146 shares held of record by a charitable trust as to which Mr.
Fuchs
is a trustee and 567,392 shares held of record by an investment retirement
account as to which Mr. Fuchs is a
beneficiary.
|
6
|
Includes
33,848 shares underlying options and 22,683 shares underlying warrants
which are exercisable within 60 days of the Closing
Date.
|
7
|
Includes
165,477 shares underlying options and 1,636 shares underlying warrants
which are exercisable within 60 days of the Closing
Date.
|
8
|
Includes
165,477 shares underlying options which are exercisable within 60
days of
the Closing Date.
|
5.
DIRECTORS AND EXECUTIVE OFFICERS
The
following persons are the executive officers and directors of the Company
following the Merger and hold the offices set forth opposite their
names.
Name
|
Age
|
Position
|
Joel
A. Balbien, CFA , Ph.D.
|
52
|
President;
Chief
Executive Officer;
Director
|
G.A.
Ben Binninger
|
58
|
Chief
Operating Officer;
Director
|
Philip
Lichtenberger
|
50
|
Senior
Vice President;
Chief
Financial Officer
|
Alan
McGrevy
|
60
|
Vice
President of Engineering
|
Betsy
Wood Knapp
|
63
|
Chairperson
of the Board;
Director
|
Joseph
Marks
|
41
|
Director
|
Joel
A. Balbien, CFA, Ph.D.
,
President and Chief Executive Officer, Director.
Dr.
Balbien joined the Company in 2006 as President, Chief Executive Officer and
director. Dr. Balbien has 25 years of experience in the energy technology
sector. Since October 2005, Dr. Balbien has served as CEO for Kreido. Dr.
Balbien is also a board member of Kreido, a position he has held since 1999.
Dr.
Balbien is the co-founder, and was a Managing Member from 2000 until the Closing
Date, of Smart Technology Ventures Advisors, LLC (“STV Advisors”), a Southern
Californian venture capital firm and significant investor in Kreido.
Dr.
Balbien has been working with early stage growth companies for nearly ten years,
and was also a Managing Member of the venture capital fund Smart Technology
Ventures III, L.P. He was previously a Manager of Smart Technology Ventures
II,
LLC and the Chief Financial Officer of Smart Technology Ventures I, LLC. Dr.
Balbien has also served on the board of directors of STM Power, Clean Energy
Systems, Inc. and Sonics, Inc. Dr. Balbien received M.S. and Ph.D. degrees
in
Economics from the California Institute of Technology in Pasadena, California,
and earned a CFA credential from the CFA Institute.
G.A.
Ben Binninger,
Chief
Operating Officer, Director.
Mr.
Binninger joined the Company in 2006 as Chief Operating Officer and director.
Mr. Binninger has 30 years of experience in the chemicals and fuels industry.
Mr. Binninger has hands-on experience leading both large and small
technologically sophisticated global process and service businesses with
expertise in strategic positioning, profit enhancement, financial restructuring,
organizational realignment, mergers and acquisitions, cost control and
environmental matters. From 2003 to 2006, Mr. Binninger served as a consultant
relating to the development and evaluation of specialty chemical opportunities.
Prior to that, from 1993 to 2003, Mr. Binninger served as Senior Vice President
of Rio Tinto Borax, which operates California’s largest open pit mine in Boron,
California. Mr. Binninger has a
B.E.
degree in Chemical Engineering from Manhattan College and a M.B.A. from Harvard
University.
Philip
Lichtenberger,
Senior
Vice President and Chief Financial Officer.
Mr.
Lichtenberger joined the Company in 2006 as Senior Vice President and Chief
Financial Officer. Mr. Lichtenberger has 25 years of experience in technology
and engineering in senior roles in Fortune 500 companies. Mr. Lichtenberger
serves as Executive Vice President and Chief Operating Officer, and as a board
member, of Kreido, where he has been employed since 1997. Mr. Lichtenberger’s
operations background includes III-V semiconductors, optoelectronics,
microelectronics and networking equipment. His technical background includes
energy systems design and RF electronics. Mr. Lichtenberger has B.S. degrees
in
Physics and Philosophy from Beloit College in Beloit, Wisconsin.
Alan
McGrevy,
Vice President of Engineering.
Mr.
McGrevy joined the Company in 2006 as Vice President of Engineering. Mr. McGrevy
is a Research and Development Manager with 35 years of experience in commercial
engineering in large and small companies. Mr. McGrevy also serves as Vice
President of Engineering for Kreido, where he has been employed since 2000.
Mr.
McGrevy is a major contributor to the Company’s intellectual property and is
co-inventor of the STT
®
Reactor.
Mr. McGrevy is named in 11 additional patents outside of his work for Kreido
and
the Company. He has experience in conducting research and development and in
commercializing new technologies.
Betsy
Wood Knapp,
Chairperson
of the Board, Director.
Ms.
Knapp
joined the Company as Chairperson of the Board in 2006. Ms. Knapp is an
entrepreneur who has been investing and supporting early stage growth companies
for 33 years. In 1995, Ms. Knapp founded Los Angeles-based BigPicture Investors,
LLC to finance West Coast startups with patented enabling technologies. Ms.
Knapp also served as BigPicture Investors’ CEO from inception to date. She has
also been a founder or CEO of five software and new media companies. Ms. Knapp
has extensive management experience in creating strategic direction for business
growth. At the Anderson Graduate School of Management at UCLA, she is a founder
of the Entrepreneur’s Hall, serves on the Board of Visitors, is a repeat guest
lecturer in the MBA program and established the Knapp Competition for excellence
in business planning and venture initiation. Ms. Knapp is also a board member
of
the UCLA Foundation, where she serves as the Chairperson of the Philanthropy
Committee. Ms. Knapp is also a founding member of the Committee of 200, a highly
selective international organization of women entrepreneurs and corporate
executives. She received a B.A. degree in economics from Wellesley College
where
she also serves as a Trustee.
Joseph
Marks, CFA,
Director
.
Mr.
Marks joined the Company as director in 2006. He is a Managing Member of STV
Advisors and has been employed by STV Advisors since 2000. Mr. Marks also serves
on the board of directors of Kreido, Lucix Corporation, Availigent, Inc. and
FutureTrade Technologies, and is a board observer of Strategic Data Corp. Mr.
Marks graduated with honors receiving a B.A. in Economics from Stanford
University and received his J.D. and M.B.A. degrees from UCLA.
There
are
no family relationships among our above-listed directors and executive officers.
Further, they have been neither convicted in any criminal proceeding during
the
past five years nor parties to any judicial or administrative proceeding during
the past five years that resulted in a judgment, decree or final order enjoining
them from future violations of, or prohibiting activities subject to, federal
or
state securities laws or a finding of any violation of federal of state
securities laws or commodities laws. Similarly, no bankruptcy petitions have
been filed by or against any business or property of any of our directors or
officers, nor has any bankruptcy petition been filed against a partnership
or
business association in which these persons were general partners or executive
officers.
Pursuant
to the Amended & Restated Operating Agreements of Smart Technology Ventures
III Management, LLC and Smart Technology Ventures III SBIC Management, LLC,
Mr.
Marks, a member of such companies, is required to resign from the Board upon
(i)
the termination of his employment with Smart Technology Ventures, (ii) Mr.
Marks’ withdraw as a member of such companies or (iii) the written request of
David Nazarian.
Board
of Directors and Corporate Governance
The
Company expects that its Board of Directors will consist of five members. As
of
the Closing Date, Betsy Wood Knapp, Joel A. Balbien, G.A. Ben Binninger and
Joseph Marks serve on the Company’s Board. The Gemwood Stockholders have the
right to appoint the remaining director. We are looking for a qualified
candidate to fill the remaining vacancy on the Board. Our directors hold office
until the next meeting of the stockholders at which directors are elected,
or
until the earlier of their death, resignation or removal, or until their
successors have been qualified. On the Closing Date, Stephen B. Jackson and
Victor Manuel Savceda, constituting all of the directors of Gemwood before
the Merger, appointed Betsy Wood Knapp, Joel A. Balbien, G.A. Ben Binninger
and
Joseph Marks to fill vacancies on the Board. Also on the Closing Date,
Messrs. Jackson and Savceda resigned from the Board.
Board
Committees
The
Board
intends to appoint such persons and form such committees as are required to
meet
the corporate governance requirements imposed by the Sarbanes-Oxley Act of
2002
and the national securities exchanges. Therefore, we intend that a majority
of
our directors will eventually be independent directors and at least one director
will qualify as an “audit committee financial expert” within the meaning of Item
401(e) of Regulation S-B, as promulgated by the SEC.
Additionally, the Board is expected to appoint an audit committee, nominating
committee and compensation committee, and to adopt charters relative to each
such committee. Until further determination by the Board, the full Board will
undertake the duties of the audit committee, nominating committee and
compensation committee. We do not currently have an “audit committee financial
expert” since we currently do not have an audit committee in place.
Code
of Ethics
The
Company has not formally adopted a written code of ethics that applies to the
Company’s principal executive officer, principal financial officer or
controller, or persons performing similar functions. Based on the Company’s
small size, early development stage and limited financial and human resources,
Gemwood did not adopt a written code of ethics before the Merger. We intend
to
formalize and adopt a written code of ethics as soon as practicable following
the Closing Date.
6.
EXECUTIVE COMPENSATION
Executive
Compensation
The
table
below sets forth, for the last two fiscal years, the compensation earned by
our
Chief Executive Officer and the two most highly compensated executive officers
who received annual compensation in excess of $100,000.
Name
and
Principal
Position
|
|
Year
|
|
Annual
Salary
|
|
Stock
Awards
($)
(5)
|
|
Option
Awards
($)
(5)
|
|
All
Other
Compensation
($)
|
|
Total
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joel
A. Balbien
(1)
Chief
Executive Officer
|
|
|
2005
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael
R. Kozlowski
(2)
|
|
|
2005
|
|
|
0
|
|
|
23,514
|
|
|
8,053
|
|
|
163,877
|
(3)
|
|
195,444
|
|
Chief
Executive Officer
|
|
|
2004
|
|
|
196,787
|
|
|
0
|
|
|
0
|
|
|
54,995
|
(4)
|
|
251,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Philip
Lichtenberger
|
|
|
2005
|
|
|
170,604
|
|
|
26,235
|
|
|
8,053
|
|
|
0
|
|
|
204,892
|
|
Executive
Vice President &
|
|
|
2004
|
|
|
170,604
|
|
|
0
|
|
|
0
|
|
|
22,103
|
(4)
|
|
192,707
|
|
Chief
Operating Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alan
McGrevy
(6)
|
|
|
2005
|
|
|
149,949
|
|
|
14,430
|
|
|
8,053
|
|
|
0
|
|
|
172,432
|
|
Vice
President of Engineering
|
|
|
2004
|
|
|
150,051
|
|
|
0
|
|
|
0
|
|
|
4,949
|
(4)
|
|
155,000
|
|
Summary
Compensation Table
1
|
Dr.
Balbien joined Kreido as Chief Executive Officer in October 2005
and
compensation commenced in November
2006.
|
2
|
Mr.
Kozlowski’s employment with Kreido as Chief Executive Officer was
terminated in August 2004 and thereafter, Mr. Kozlowski became a
consultant to Kreido. Mr. Kozlowski ceased consulting for Kreido
in
January 2006.
|
3
|
Consulting
fees paid to Mr. Kozlowski.
|
4
|
“Gross
-ups,”
or reimbursement for payment of taxes, in the amounts of $17,235
to Mr.
Kozlowski, $22,103 to Mr. Lichtenberger and $4,949 to Mr.
McGrevy.
|
5
|
The
Company has recorded $64,179 and $24,159 of compensation expense
in 2005
relating to stock awards and stock options, respectively, issued
to
officers. The per share weighted average fair value of stock options
expensed for the year ended December 31, 2005 was $0.03 on the date
of
grant using the Black-Scholes option-pricing model with the following
weighted average assumptions in 2005: expected dividend yield Nil%;
expected volatility of 0.01%; risk-free interest rate of 4.13%; and
expected life of 10 years.
|
6
|
Mr.
McGrevy became Vice President of Engineering of Kreido in April 2005.
Prior to that time, he was the Director of Engineering of
Kreido.
|
Outstanding
Equity Awards at Fiscal-Year End
|
|
Option
Awards
|
|
Stock
Awards
|
|
Name
|
|
No.
Securities Under Unexercised Options (#)
Exercisable
|
|
No.
Securities Under Unexercised Options (#)
Unexercisable
|
|
Option
Exercise Price ($)
|
|
Option
Expiration Date
|
|
No.
Shares or Units of Stock Not Vested (#)
|
|
Market
Value of Shares or Units of Stock Not Vested ($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joel
A. Balbien
|
|
|
0
|
|
|
0
|
|
$
|
0
|
|
|
0
|
|
|
0
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael
R. Kozlowski
|
|
|
53,333
|
|
|
0
|
|
|
0.10
|
|
|
4/1/2015
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Philip
Lichtenberger
|
|
|
113,333
|
|
|
126,667
|
(1)
|
|
0.10
|
|
|
4/1/2015
|
|
|
41,396
|
(2)
|
|
4,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alan
McGrevy
|
|
|
113,333
|
|
|
126,667
|
(1)
|
|
0.10
|
|
|
4/1/2015
|
|
|
41,552
|
(2)
|
|
4,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
Option
was granted on April 1, 2005 and vests in 36 installments as follows:
(a)
on May 1, 2005, 6,668 shares; (b) in each subsequent month for 34
months,
an additional 6,667 shares; and (c) on March 1, 2008
the
remaining balance of 6,655 shares.
|
2
|
The
Forfeiture Condition (as defined in the Stock Grant Agreements) lapsed
on
the date of grant with respect to a portion of the shares and will
lapse
with respect to an additional 2.2% of the remaining shares each month
thereafter.
|
On
October 17, 2003, Kreido agreed to provide Mr. Lichtenberger with 90 days of
severance pay if he is terminated without cause. Also, pursuant to Dr. Balbien’s
employment agreement which was assumed by the Company at closing, if Dr. Balbien
terminates his Employment Agreement, described in more detail below, for Good
Reason (as defined in the agreement) or if the Company terminates Dr. Balbien’s
employment without Cause (as defined in the agreement), Dr. Balbien is entitled
to (i) any earned but unpaid base salary, unpaid bonus previously granted and
unused vacation days, (ii) severance pay in the amount of six months of base
salary and (iii) continued coverage at our expense under all benefit plans
through the scheduled end of his employment.
Employment
Agreement
On
the
Closing Date and in connection with the Merger, the Company assumed the
employment agreement between Kreido and Dr. Balbien pursuant to which Dr.
Balbien holds the positions of President and Chief Executive Officer. This
Employment Agreement has been attached as Exhibits 10.5 to this Current Report
on Form 8-K and is incorporated herein by reference.
Dr.
Balbien’s Employment Agreement provides for a term of one year with an annual
base salary of $200,000, and a bonus of up to $150,000 payable quarterly, with
the first installment of $37,500 payable upon the closing of the Offering.
The
remaining bonus, or a fraction of it, shall be paid at the end of each
subsequent quarter, based on achievement of performance-related financial and
operating targets agreed upon by Dr. Balbien and by the Compensation Committee
of our Board. Under the terms of the
agreement,
on the Closing Date, Dr. Balbien was granted non-qualified stock options to
purchase an aggregate of 1,205,384 shares of the Company’s Common Stock at an
exercise price of $1.35 per share. The term of the option is ten years from
the
date of grant. The option becomes vested and exercisable in eight (8) quarterly
installments of approximately 150,673 shares each, commencing on the quarterly
anniversary of the Closing Date. If Dr. Balbien’s employment is terminated for
Cause (as defined in the agreement), all the awards, whether or not vested,
immediately expire. If Dr. Balbien voluntarily terminates his employment without
Good Reason (as defined in the agreement), then all unvested awards immediately
expire, and vested awards expire on the later of (i) 90 days after the
termination of employment, and (ii) the expiration of the lock-up agreement.
If
Dr. Balbien’s employment is terminated in connection with a Change of Control
(as defined in the agreement), by the Company without Cause or by him for Good
Reason, one-half of all unvested installments of the option vest immediately,
up
to a maximum of options to purchase 301,346 shares, and become effective the
date of termination of employment, and remain exercisable up to one year
thereafter. Dr. Balbien is eligible to participate in our incentive, savings,
retirement and other welfare benefit plans in substantially the same manner
and
at substantially the same levels as we make such opportunities available to
all
of our managerial or salaried executive employees. We have agreed to purchase
and maintain directors, and officers, liability insurance in the amount of
at
least $1,000,000 covering our officers and directors, including Dr. Balbien,
as
soon as practicable after the Closing Date, but in no event later than 30 days
after the Closing Date.
Subject
to certain notice requirements, either we or Dr. Balbien will be entitled to
terminate the agreement at any time. Dr. Balbien may terminate the agreement
and
his employment for Good Reason and if he does so, or if we terminate the
agreement without Cause, we are obligated to pay him (i) any earned but unpaid
base salary, unpaid bonus previously granted and unused vacation days, (ii)
severance pay in the amount of six months of base salary and (iii) continued
coverage at our expense under all benefit plans through the scheduled end of
his
employment. Dr. Balbien may terminate the agreement and his employment at any
time other than for Good Reason by providing at least 90 days’ prior notice to
the Company, in which case, we have no further obligation or liability to him
except to pay any earned but unpaid base salary and unused vacation
days.
Under
the
agreement, Dr. Balbien is subject to traditional non-competition and employee
non-solicitation restrictions while he is employed by the Company and during
any
period in which he continues to receive his base salary following termination
of
the agreement.
The
Company intends to enter into employment agreements with the other executive
officers as soon as practicable after the Closing Date.
Director
Compensation
There
are
currently no compensation arrangements in place for members of the Board of
Directors. We expect to establish these arrangements as new members are
appointed to the Board of Directors.
2006
Equity Incentive Plan
Before
the Closing Date, our Board and the Gemwood Stockholders approved and adopted
the 2006 Equity Incentive Plan (the “2006 Plan”). A copy of the 2006 Plan is
attached as Exhibit 10.7 to this Current Report on Form 8-K.
As
of the
Closing Date, a total of 3,850,000 shares of our Common Stock were reserved
for
issuance under the 2006 Plan, of which awards for 1,205,384 shares were granted.
If an incentive award
granted
under the 2006 Plan expires, terminates, is unexercised or is forfeited, or
if
any shares are surrendered to us in connection with an incentive award, the
shares subject to such award and the surrendered shares will become available
for further awards under the 2006 Plan.
Shares
issued under the 2006 Plan through the settlement, assumption or substitution
of
outstanding awards or obligations to grant future awards as a condition of
acquiring another entity do not reduce the maximum number of shares available
under the 2006 Plan. In addition, the number of shares of Common Stock subject
to the 2006 Plan, any number of shares subject to any numerical limit in the
2006 Plan and the number of shares and terms of any incentive award shall be
adjusted in the event of any change in our outstanding Common Stock by reason
of
any stock dividend, spin-off, split-up, stock split, reverse stock split,
recapitalization, reclassification, merger, consolidation, liquidation, business
combination or exchange of shares or similar transaction.
Administration
It
is
expected that the compensation committee of the Board (or the Board in the
absence of such a committee) will administer the 2006 Plan. Subject to the
terms
of the 2006 Plan, the compensation committee would have complete authority
and
discretion to determine the terms of awards under the 2006 Plan.
Grants
The
2006
Plan authorizes the grant to 2006 Plan participants of nonqualified stock
options, incentive stock options, restricted stock awards, restricted stock
units, performance grants intended to comply with Section 162(m) of the Internal
Revenue Code (the “Code”), and stock appreciation rights, as described
below:
|
·
|
Options
granted under the 2006 Plan entitle the grantee, upon exercise, to
purchase a specified number of shares from us at a specified exercise
price per share. The exercise price for shares of Common Stock covered
by
an option cannot be less than the fair market value of the Common
Stock on
the date of grant unless agreed to otherwise at the time of the grant.
|
|
·
|
Restricted
stock awards and restricted stock units may be awarded on terms and
conditions established by the compensation committee, which may include
performance conditions for restricted stock awards and the lapse
of
restrictions on the achievement of one or more performance goals
for
restricted stock units.
|
|
·
|
The
compensation committee may make performance grants, each of which
will
contain performance goals for the award, including the performance
criteria, the target and maximum amounts payable and other terms
and
conditions.
|
|
·
|
The
2006 Plan authorizes the granting of stock awards. The compensation
committee will establish the number of shares of Common Stock to
be
awarded and the terms applicable to each award, including performance
restrictions.
|
|
·
|
Stock
appreciation rights (“SARs”) entitle the participant to receive a
distribution in an amount not to exceed the number of shares of Common
Stock subject to the portion of the SAR exercised multiplied by the
difference between the market price of a share
of
|
Common
Stock on the date of exercise of the SAR and the market price of a share of
Common Stock on the date of grant of the SAR.
Duration,
Amendment and Termination
The
Board
has the power to amend, suspend or terminate the 2006 Plan without stockholder
approval or ratification at any time or from time to time. No change may be
made
that increases the total number of shares of Common Stock reserved for issuance
pursuant to incentive awards or reduces the minimum exercise price for options
or exchange of options for other incentive awards, unless such change is
authorized by our stockholders within one year of the date of such change.
Unless sooner terminated, the 2006 Plan terminates ten years after it is
adopted.
On
the
Closing Date, options were granted to Dr. Balbien on
the
following terms:
NAME
|
#
OF SHARES
|
EXERCISE
PRICE
|
VESTING
SCHEDULE
|
EXPIRATION
|
Joel
A. Balbien
|
1,205,384
|
$1.35/share
|
Eight
quarterly installments commencing on the quarterly anniversary of
the
Closing Date
|
Ten
years from date of grant
|
7.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions
with Directors of Gemwood
Prior
to
the Closing Date, Gemwood transferred all of its operating assets and
liabilities to its wholly-owned subsidiary, Leaseco, and on the Closing Date,
split-off Leaseco through the sale of all of the outstanding capital stock
of
Leaseco. In connection with the Split-Off,
19,444,444
shares
of Common Stock held by Mr. Savceda, a former director of Gemwood (prior to
the
Merger), were surrendered and cancelled without further consideration.
Transactions
with Officers, Directors and Principal Shareholders of
Kreido
During
2004, 2005 and through October 31, 2006, we entered into a series of financing
transactions with the following officers, directors and principal shareholders
(the “Related Parties”):
|
·
|
STV
III SBIC, a limited partnership that, together with its affiliates,
Smart
Technology Ventures, II, LLC, and Smart Technology Ventures, III,
beneficially owns more than 5% of the Company’s issued and outstanding
voting securities. Joseph Marks, a member of our Board, is a managing
members of STV III SBIC and its affiliates, including STV Advisors.
Dr.
Joel A. Balbien, who is the Company’s Chief Executive Officer and
President and a member of the Company’s Board resigned as a managing
member of STV III SBIC and its affiliates as of the Closing
Date;
|
|
·
|
Betsy
Wood Knapp, the Chairperson of our Board and a beneficial owner of
more
than 5% of the Company’s issued and outstanding voting
securities;
|
|
·
|
David
Mandel, a beneficial owner of more than 5% of our issued and outstanding
voting securities; and
|
|
·
|
David
R. Fuchs, a beneficial owner of more than 5% of our issued and outstanding
voting securities.
|
In
the
financing transactions entered into during 2004 and through the first seven
months of 2005, we issued convertible promissory notes in the following
aggregate original principal amount of $3,242,121 to the Related Parties in
the
following respective aggregate principal amounts:
Related
Party
|
|
Aggregate
Principal
Amount
|
|
|
|
|
|
STV
III SBIC and affiliates
|
|
$
|
1,737,980
|
|
Ms.
Knapp
|
|
|
594,719
|
|
Mr.
Mandel
|
|
|
596,588
|
|
Mr.
Fuchs
|
|
|
312,834
|
|
The
notes
issued during this period bore interest at the rate of 10% per annum and were
due on January 31, 2007. As of October 31, 2006, no amount of the original
principal had been repaid. The notes, on their terms, were convertible into
shares of a class of convertible preferred stock issuable by
Kreido.
In
the
financing transactions that we entered into with the Related Parties in the
last
five months of 2005 and during the 10-month period ended October 31, 2006,
we
issued convertible promissory notes in the aggregate original principal amount
of $2,720,015 in the following respective aggregate principal
amounts:
Related
Party
|
|
Aggregate
Principal
Amount
|
|
|
|
|
|
STV
III SBIC and affiliates
|
|
$
|
1,200,000
|
|
Ms.
Knapp
|
|
|
400,001
|
|
Mr.
Mandel
|
|
|
400,013
|
|
Mr.
Fuchs and related entities
|
|
|
761,668
|
|
The
notes
bore interest at the rate of 12% per annum and are due on January 31, 2007.
As
of October 31, 2006, no amount of the original principal amount had been repaid.
The notes were convertible into shares of a class of convertible preferred
stock
issuable by Kreido.
In
November 2006, the Related Parties agreed to stop accrual of interest on the
notes as of October 31, 2006 and convert their convertible notes and accumulated
interest from the notes into shares of Kreido’s common stock at the rate of one
share for each $1.00 of outstanding principal and accrued interest. The Related
Parties received an aggregate of 7,184,891 shares of Kreido common stock which
converted into
8,106,375
shares of the Company’s Common Stock in the Merger, at the same exchange rate at
which all other common shares of Kreido were converted into shares of the
Company’s Common Stock. The number of shares issued to the Related Parties on
the Closing Date by virtue of their conversion of the aforementioned notes
were
as follows:
Related
Party
|
|
Shares
|
|
|
|
|
|
STV
III SBIC and affiliates
|
|
|
3,774,522
|
|
Ms.
Knapp
|
|
|
1,279,289
|
|
Mr.
Mandel
|
|
|
1,281,640
|
|
Mr.
Fuchs
|
|
|
1,305,427
|
|
In
addition, as part of their purchase of convertible promissory notes, the Related
Parties acquired warrants to acquire preferred shares of Kreido. In September
and October 2006, the Related Parties agreed to exercise their warrants on
a
cashless exercise basis and accept shares of Kreido’s common stock upon their
exercise at the rate of one share for each $1.54 of value to which the holder
is
entitled under the warrant. The shares issued to the Related Parties were
converted into shares of the Company’s Common Stock at the same exchange rate at
which all other common shares of Kreido were converted into shares of the
Company’s Common Stock. As a result, upon completion of the Merger, shares of
Common Stock were issued to the Related Parties, as follows:
Related
Party
|
|
Shares
|
|
|
|
|
|
STV
III SBIC and affiliates
|
|
|
1,025,249
|
|
Ms.
Knapp
|
|
|
348,998
|
|
Mr.
Mandel
|
|
|
349,819
|
|
Mr.
Fuchs
|
|
|
248,873
|
|
In
November 2006, Kreido issued promissory notes to certain of the Related Parties
as part of the Bridge Financing. These Related Parties agreed to convert this
$250,004 of indebtedness into Units in the Offering at the rate of one Unit
for
each $1.35 of debt. These Related Parties received an aggregate of 185,188
Units, designated as follows:
Related
Party
|
|
Aggregate
Principal
Amount
|
|
Units
in
Offering
|
|
|
|
|
|
|
|
Y
& S Nazarian Revocable Trust
|
|
$
|
125,000
|
|
|
92,593
|
|
Ms.
Knapp
|
|
|
41,667
|
|
|
30,864
|
|
Mr.
Mandel
|
|
|
41,670
|
|
|
30,867
|
|
Mr.
Fuchs
|
|
|
41,667
|
|
|
30,864
|
|
The
Y
& S Nazarian Revocable Trust is partner of STV III SBIC and its related
entities.
In
December 2006, Kreido issued additional promissory notes in the aggregate
principal amount of $120,000 to certain Related Parties as part of the Bridge
Financing. These Related Parties agreed to have their promissory notes repaid
with the proceeds of the Offering.
See
“Compensation of Executive Officers” under “Management and Board of Directors”
above for information regarding arrangements between Kreido and each of Dr.
Balbien and other Related Parties with respect to compensation paid to them
since January 1, 2004.
Board
Independence
Betsy
Wood Knapp, Joel A. Balbien, G.A. Ben Binninger and Joseph Marks currently
serve
as directors on the Company’s Board. The Board has determined that
Ms.
Knapp
and Mr. Marks are “independent” directors as that term is defined by applicable
listing standards of the Nasdaq Stock Market and SEC rules. The Company does
not
currently have a separately designated audit, nominating or compensation
committee. Ms. Knapp and Mr. Marks are “independent” as that term is used
relating to the independence standards of an audit committee based on the
applicable listing standards of the Nasdaq Stock Market and the non-employee
director definition of Rule 16b-3 promulgated under the Exchange
Act.
8.
DESCRIPTION OF SECURITIES
Authorized
Capital Stock
Immediately
prior to the Merger, the authorized capital stock of Kreido consisted of
150,000,000 shares of common stock and 100,000,000 shares of preferred stock,
no
par value, of which 549,474 shares were designated as Series A1 Convertible
Preferred Stock and 13,783,783 shares were designated as Series B1 Convertible
Preferred Stock.
Following
the Merger, the Company’s amended Articles of Incorporation, filed with the
Secretary of State of the State of Nevada on November 2, 2006, authorize the
issuance of 310,000,000 shares of capital stock, of which there are authorized
300,000,000 shares of Common Stock, par value $0.001 per share, and 10,000,000
shares of blank-check preferred stock.
Capital
Stock Issued and Outstanding
As
of the
Closing Date, after giving effect to the Transactions, and taking into account
the warrants to acquire shares of Common Stock and the grant of options under
the 2006 Plan, including the New Options issued to former holders of options
to
purchase shares of Kreido’s common stock, there were 76,637,038 shares of the
Company’s Common Stock issued and outstanding, on a fully diluted basis,
including:
|
·
|
52,532,202
shares of Common Stock;
|
|
·
|
options
to purchase 2,370,367 shares of Common Stock which include options
to
purchase 1,205,384 shares administered under the 2006 Plan and New
Options
to purchase
1,164,983
shares
administered under the 1997 Program;
and
|
|
·
|
Investor
Warrants to purchase 18,518,519 shares of Common Stock issued to
the
investors in the Offering and New Warrants to purchase 571,334 shares
of
Common Stock issued to former Kreido warrant
holders.
|
Description
of Common Stock
The
Company is authorized to issue 300,000,000 shares of Common Stock,
52,532,202
of
which
were issued and outstanding as of the Closing Date. Holders of the Common Stock
are entitled to one vote for each share on all matters submitted to a
stockholder vote and vote together in one class, except as required by
applicable law. Holders of the Common Stock do not have cumulative voting
rights. Therefore, holders of a majority of the shares of the Common Stock
voting for the election of directors can elect all of the directors. Holders
of
the Common Stock representing a majority of the voting power of the capital
stock issued, outstanding and entitled to vote, represented in person or by
proxy, are necessary to constitute a quorum at any meeting of stockholders.
A
vote by the holders of a majority of the outstanding shares of the Common Stock
is required to effectuate certain fundamental corporate changes such as
liquidation, merger or an amendment to the articles of
incorporation.
Holders
of the Common Stock are entitled to share equally on a pro rata basis in all
dividends that its Board of Directors, in its discretion, declares from legally
available funds. In the event of liquidation, dissolution or winding up, each
outstanding share of the Common Stock entitles its holder to participate pro
rata in all assets that remain after payment of liabilities. Holders of the
Common Stock have no preemptive
rights
and no conversion rights, and there are no redemption provisions applicable
to
the Common Stock.
In
accordance with the Registration Rights Agreement, the Company expects to file
within 60 days of the Closing Date, a registration statement (the “Registration
Statement”) registering for resale all, or under the terms of the Registration
Rights Agreement, some, of the shares of Common Stock underlying the Units
(including 18,518,519 shares included in the Units and 18,518,519
shares
issuable upon exercise of the Investor Warrants included in the Units) acquired
by investors and Bridge Note holders in the Offering consistent with the terms
and provisions of the Registration Rights Agreement, attached hereto as Exhibit
10.3. The Company agreed to use commercially reasonable efforts to cause this
Registration Statement to become effective no later than 90 days after the
date
filed
(or
120
days if such Registration Statement is subject to a review by the
SEC)
.
The Company also agreed to use commercially reasonable efforts to maintain
the
effectiveness of this Registration Statement until all of the Common Stock
covered by such Registration Statement has been sold or may be sold under Rule
144(k) of the Securities Act.
The
Company will be liable for penalties under the Registration Rights Agreement
payable in shares of its Common Stock as follows:
|
·
|
5%
of the shares sold in the Offering if the Registration Statement
is not
filed or does not become effective on the date by which the Company
is
required to cause it to be filed or to become effective, consistent
with
the terms and provisions of the Registration Rights
Agreement;
|
|
·
|
an
additional 5% payable if the Registration Statement is not filed
within 90
days after the Closing Date;
|
|
·
|
an
additional 5% payable if the Registration Statement is not filed
within
120 days after the Closing Date, for a maximum penalty of 15% with
respect
to the Registration Statement not being filed by the date on which
the
Company is required to cause it to be filed;
|
|
·
|
an
additional 5% payable if effectiveness does not occur within 120
days
after filing, if not reviewed by the SEC, or within 150 days after
filing,
if reviewed by the SEC; and
|
|
·
|
an
additional 5% payable if effectiveness does not occur within 150
days
after filing, if not reviewed by the SEC, or within 180 days after
filing,
if reviewed by the SEC, for a maximum penalty of 15% with respect
to the
Registration Statement not becoming effective by the date on which
the
Company is required to cause it to become
effective.
|
Description
of Preferred Stock
The
Company is authorized to issue 10 million shares of “blank check” preferred
stock, $0.001 par value per share, none of which as of the date hereof is
designated or outstanding. The Board of Directors is vested with authority
to
divide the shares of preferred stock into series and to fix and determine the
relative rights and preferences of the shares of any such series. Once
authorized, the dividend or interest rates, conversion rates, voting rights,
redemption prices, maturity dates and similar characteristics of the preferred
stock will be determined by the Board of Directors, without the necessity of
obtaining approval of the Company’s stockholders.
Description
of Warrants
After
the
consummation of Merger and the Offering, on the Closing Date, there were
Investor Warrants issued to purchase 18,518,519 shares of Common Stock, held
by
investors purchasing Units in the Offering. The Investor Warrants gave the
holders the right to purchase such shares of Common Stock for a period of five
years at an exercise price of $1.85 per share provided that the holder give
the
Company written notice at least 61 days prior to the intended date of exercise.
The Investor Warrants are callable by the Company under certain
circumstances.
The
Investor Warrants issued in the Offering are callable by the Company under
certain circumstances. At the option of the holder, the Investor Warrants may
be
exercised by cash payment of the exercise price or, in the event that the
Registration Statement is not declared effective by the SEC within one year
of
the Closing Date, by “cashless exercise.” A “cashless exercise” means that in
lieu of paying the aggregate purchase price for the shares being purchased
upon
exercise of the warrants in cash, the holder will forfeit a number of shares
underlying the Investor Warrants with a “fair market value” equal to such
aggregate exercise price. The Company will not receive additional proceeds
if
the Investor Warrants are exercised by cashless exercise.
The
exercise price and number of shares of Common Stock issuable on exercise of
the
Investor Warrants may be adjusted in certain circumstances including in the
event of a stock dividend, or our recapitalization, reorganization, merger
or
consolidation.
No
fractional shares will be issued upon exercise of the Investor Warrants. If,
upon exercise of the Investor Warrants, a holder would be entitled to receive
a
fractional interest in a share, we will, upon exercise, round up to the nearest
whole number, the number of shares of Common Stock to be issued to the Investor
Warrant holder.
Also
outstanding after the consummation of the Merger are New Warrants to purchase
571,334 shares of the Company’s Common Stock. The New Warrants were issued to
holders of warrants to purchase an aggregate of 506,389 shares of Kreido’s
capital stock prior to the Merger.
Description
of Options
Joel
A.
Balbien, our President and Chief Executive Officer, was granted options to
purchase 1,205,384 shares of Common Stock on the Closing Date. Such options
were
issued pursuant the 2006 Plan at an exercise price equal to the fair market
value of the Common Stock on the date of grant. There are also issued and
outstanding, New Options to purchase
1,164,983
shares
of
Common Stock which will be administered under the 2006 Plan, issued to the
holders of Kreido options before the Merger.
PART
II
1.
MARKET PRICE OF AND DIVIDENDS ON COMMON EQUITY AND OTHER STOCKHOLDER
MATTERS
The
Company’s Common Stock is currently available for trading in the
over-the-counter market and is quoted on the OTC Bulletin Board under the symbol
“KRBF.OB.” There is no established trading market for the Common Stock, as it
has been traded only on a limited basis.
As
of the
Closing Date, there were approximately 128 holders of record of shares of the
Common Stock.
Trades
in
the Common Stock may be subject to Rule 15g-9 of the Exchange Act, which rule
imposes certain requirements on broker/dealers who sell securities subject
to
the rule to persons other than established customers and accredited investors.
For transactions covered by the rule, brokers/dealers must make a special
suitability determination for purchasers of the securities and receive the
purchaser’s written agreement to the transaction before the sale. The SEC also
has rules that regulate broker/dealer practices in connection with transactions
in “penny stocks.” Penny stocks generally are equity securities with a price of
less than $5.00 (other than securities registered on certain national securities
exchanges, provided that current price and volume information with respect
to
transactions in that security are
provided
by the applicable exchange or system). The penny stock rules require a
broker/dealer, before effecting a transaction in a penny stock not otherwise
exempt from the rules, to deliver a standardized risk disclosure document
prepared by the SEC that provides information about penny stocks and the nature
and level of risks in the penny stock market. The broker/dealer also must
provide the customer with current bid and offer quotations for the penny stock,
the compensation of the broker/dealer and its salesperson in the transaction
and
monthly account statements showing the market value of each penny stock held
in
the customer’s account. The bid and offer quotations, and the broker/dealer and
salesperson compensation information, must be given to the customer orally
or in
writing before effecting the transaction, and must be given to the customer
in
writing before or with the customer’s confirmation. These disclosure
requirements may have the effect of reducing the level of trading activity
in
the secondary market for shares of the Common Stock. As a result of these rules,
investors may find it difficult to sell their shares.
As
of the
Closing Date, there were 52,532,202
shares
of
Common Stock issued and outstanding with an additional 21,460,220 shares of
Common Stock issuable upon the exercise of outstanding warrants and options.
The
43,782,202
shares of Common Stock issued in connection with the Transactions (including
the
Common Stock issued to the Kreido Shareholders and the investors in the
Offering) are “restricted securities” which may be sold or otherwise transferred
only if such shares are first registered under the Securities Act or are exempt
from such registration requirements.
As
discussed elsewhere in this Current Report on Form 8-K, we have agreed to file
a
registration statement within 60 days of the Closing Date to register up to
37,037,038 shares of Common Stock (including 18,518,519 shares of Common Stock
issuable upon exercise of the Investor Warrants).
Dividend
Policy
The
Company has never declared or paid dividends. The Company intends to retain
earnings, if any, to support the development of the business and therefore
does
not anticipate paying cash dividends for the foreseeable future. Payment of
future dividends, if any, will be at the discretion of the Company’s Board of
Directors after taking into account various factors, including current financial
condition, operating results and current and anticipated cash needs.
Securities
Authorized for Issuance Under Equity Compensation Plans
As
of the
end of fiscal year 2005, Kreido had the following securities authorized for
issuance under the 1997 Program.
Plan
category
|
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights
(
1)
|
Weighted-average
exercise price of outstanding options, warrants and
rights
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
(
2)
|
|
(a)
|
(b)
|
(c)
|
Equity
compensation plans approved by security holders
|
0
|
0
|
0
|
Equity
compensation plans not approved by security
holders
|
1,180,731
|
$0.26
|
689,269
|
Total
|
1,180,731
|
$0.26
|
689,269
|
1
|
Prior
to the Closing, 1,032,555 securities were issuable upon exercise
of
outstanding options, warrants and rights associated with the 1997
Program.
|
2
|
As
of the Closing Date, the 1997 Program is frozen and no additional
securities are available for future
issuance.
|
The
1997
Program provides for grants of incentive stock options and nonqualified stock
options. Under the 1997 Program, options may be granted from time to time for
an
aggregate of no more than 1,870,000 shares of Kreido common stock as determined
by Kreido’s board of directors. The options typically vest over a four-year
period with 25% vested per year, or in accordance with individual agreements
as
determined by Kreido’s board of directors.
The
2006
Plan was adopted by the Company in fiscal year 2006.
From
time
to time the Company may be named in claims arising in the ordinary course of
business. Currently, no legal proceedings or claims are pending against or
involve the Company that, in the opinion of management, could reasonably be
expected to have a material adverse effect on its business and financial
condition.
3.
CHANGES IN ACCOUNTANTS
Before
the Merger, the independent registered public accounting firm for Gemwood was
De
Joya Griffith & Company, LLC (“De Joya Griffith”), and the independent
registered public accounting firm for Kreido was Vasquez & Company LLP
(“Vasquez & Co.”). Because the above-described transactions were treated as
a reverse acquisition for accounting purposes, future historical financial
reports filed by the Company will be those of Kreido, the accounting acquirer.
Accordingly, the Company’s Board determined to change its independent registered
public accounting firm from De Joya Griffith to Vasquez & Co. De Joya
Griffith was dismissed as the independent registered public accounting firm
of
the Company on
January
12, 2007
and
Vasquez & Co. was engaged as the independent registered public accounting
firm of the Company on the same date. As a result of being the auditors of
Kreido, Vasquez & Co. consulted with Kreido and the Company regarding the
above-described transactions.
The
reports of De Joya Griffith on the Company’s financial statements since its
inception did not contain an adverse opinion or a disclaimer of opinion and
were
not qualified or modified as to uncertainty, audit scope, or accounting
principles, but did include an explanatory paragraph relating to the Company’s
ability to continue as a “going concern.”
In
connection with the audit of the Company’s financial statements since inception,
and through the date of the dismissal, there were no disagreements with De
Joya
Griffith on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which, if not resolved
to
the satisfaction of De Joya Griffith, would have caused De Joya Griffith to
make
reference to the matter in its reports.
The
Company has provided De Joya Griffith with a copy of this Current Report on
Form
8-K and has requested De Joya Griffith furnish the Company with a letter
addressed to the SEC stating whether it agrees with the above statements and,
if
not, to state the respects in which it does not agree with such statements.
A
copy of that letter
will
be
filed as an amendment to this Current Report on Form 8-K.
4.
RECENT SALES OF UNREGISTERED SECURITIES
Shares
Issued by Gemwood
On
August
25, 2005, 1,000,000 shares of Common Stock were issued to Victor Manuel Savceda,
the officer and director of Gemwood as founders’ shares. On October 25, 2005, an
additional 1,000,000 shares were issued to him. The shares were issued in
exchange for $0.01 per share, or an aggregate of $20,000. These shares were
exempt from registration under Section 4(2) of the Securities Act. The
securities were issued to the promoter of Gemwood, a non-US resident.
During
February and March 2006, a total of 900,000 shares of Common stock were issued
to 42 unaffiliated stockholders at a price of $0.03 per share for the sum of
$27,000 in cash. These shares were issued to accredited investors as defined
under Regulation D, Rule 501(a) promulgated by the SEC.
Shares
Issued by Kreido before the Merger
From
January to March 2004, Kreido issued convertible notes payable for a total
cash
consideration of $850,000 and in connection therewith, Kreido issued detachable
warrants to purchase 300,000 shares of Series B1 convertible preferred stock
and
issued detachable warrants to purchase 62,500 shares of common stock to the
convertible note holders. The warrants were exercisable for a period of five
years and the convertible notes and warrants were issued to accredited investors
as that term is defined under Regulation D, Rule 501(a) promulgated by the
SEC.
In
April
2004, Kreido issued 1,587,572 shares of new Series B1 convertible preferred
stock for total cash consideration of $720,000 and conversion of notes payable
of $867,572 (including interest).
In
connection with this financing, notes that expired in December 2003 were
renegotiated and warrants to purchase 95,803 shares of common stock at an
exercise price of $0.85 for a period of five years, were issued as part of
the
financing. These securities were issued to venture capital firms and private
investors,
all
accredited investors, as defined under Regulation D, Rule 501(a) promulgated
by
the SEC.
Also
in
April 2004, Kreido issued a total of 1,062,534 shares of restricted common
stock
to the holders of certain of its stock options, all of which were accredited
investors, as defined under Regulation D, Rule 501(a), in exchange for the
cancellation of certain stock options.
From
June
to October 2004, Kreido issued convertible notes payable for a total cash
consideration of $1,405,040 and in connection therewith, Kreido issued
detachable warrants to purchase 890,290 shares of its Series B1 convertible
preferred stock to the convertible note holders. The warrants were exercisable
for a period of five years and were issued to accredited investors as that
term
is defined under Regulation D, Rule 501(a) promulgated by the SEC.
In
November 2004, the convertible notes issued from June to October 2004 and the
associated interest were cancelled with the issuance of new convertible notes
totaling $1,898,302 and in connection therewith, Kreido issued detachable
warrants to purchase 1,898,302 shares of its Series B1 convertible preferred
stock to the convertible note holders. Additionally, new convertible notes
payable for a total cash consideration of $475,000 were issued and Kreido issued
detachable warrants to purchase 566,226 shares of its Series B1 convertible
preferred stock to the note holders. The warrants were exercisable for a period
of five years and were issued to accredited investors as that term is defined
under Regulation D, Rule 501(a) promulgated by the SEC.
From
January 2005 to October 2006, Kreido issued convertible notes payable for a
total cash consideration of $4,253,516, and in connection therewith, Kreido
issued warrants to purchase 3,000,595 shares of its Series B1 preferred stock.
The warrants were exercisable for a term of five years and were issued to
accredited investors as that term is defined under Regulation D, Rule 501(a)
promulgated by the SEC.
In
November 2006, Kreido issued convertible notes payable for a total cash
consideration of $250,004. These notes were cancelled in exchange for Units
in
the Offering.
The
notes
were issued to accredited investors as that term is defined under Regulation
D,
Rule 501(a) promulgated by the SEC.
In
December 2006, Kreido issued convertible notes payable for a total cash
consideration of $120,000. These notes were repaid out of the proceeds of the
Offering. The notes were issued to accredited investors as that term is defined
under Regulation D, Rule 501(a) promulgated by the SEC.
The
transactions described above were exempt from registration under Section 4(2)
of
the Securities Act. None of the shares were sold through an underwriter and
accordingly, there were no underwriting discounts or commissions
involved.
Shares
Issued in Connection with the Offering
On
the
Closing Date, the Company closed a private offering of 18,518,519 Units of
its
securities to accredited investors, as defined under Regulation D, Rule 501(a)
promulgated by the SEC, raising an aggregate of $25,000,000 in cash and
cancelled indebtedness, each Unit consisting of one share of Common Stock and
an
Investor Warrant to purchase one share of Common Stock for a period of five
years at an exercise price of $1.85 per share.
The
transactions described above were exempt from registration under Section 4(2)
of
the Securities Act and Rule 506 of Regulation D as promulgated by the
SEC.
None
of
the securities were sold through an underwriter and, accordingly, there were
no
underwriting discounts or commissions involved.
Shares
Issued in Connection with the Merger
On
the
Closing Date and in connection with the Merger, the Kreido Shareholders
surrendered all of their issued and outstanding common stock of Kreido and
received Common Stock of the Company.
On
the
Closing Date, all of the issued and outstanding options to purchase shares
of
Kreido common stock were exchanged for New Options to purchase shares of the
Company’s Comm
on
Stock,
and the holders of warrants to purchase
8,254,307
shares
of
Kreido’s capital stock prior to the Merger received New Warrants to purchase
shares of the Company’s Common Stock in connection with the Merger. In addition,
571,334 and 1,164,983
shares
of
Common Stock are reserved for issuance upon exercise of the New Warrants
and
New
Options.
The
Gemwood Stockholders retained 8,750,000 shares of Common Stock.
Concurrently
with the Merger, the Company granted options for the purchase of 1,205,384
shares of Common Stock under the 2006 Plan. The options granted expire ten
years
after the date of grant, are exercisable at a price of $1.35 per share and
vest
in eight (8) quarterly installments beginning with the first quarter anniversary
after the Closing Date. An additional 2,644,616 shares are reserved for
issuance
of
stock
options and other incentive awards pursuant to the 2006 Plan. The 2006 Plan
has
been attached as Exhibit 10.7 to this Current Report on Form 8-K and is
incorporated herein by reference.
The
transactions described above were exempt from registration under Section 4(2)
of
the Securities Act and Rule 506 of Regulation D as promulgated by the
SEC.
None
of
the securities were sold through an underwriter and accordingly, there were
no
underwriting discounts or commissions involved.
5.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Nevada
Revised Statutes (“NRS”) Sections 78.7502 and 78.751 provide us with the power
to indemnify any of our directors and officers. The director or officer must
have conducted himself/herself in good faith and reasonably believe that his/her
conduct was in, or not opposed to, our best interests. In a criminal action,
the
director, officer, employee or agent must not have had reasonable cause to
believe his/her conduct was unlawful.
Under
NRS
Section 78.751, advances for expenses may be made by agreement if the director
or officer affirms in writing that he/she believes he/she has met the standards
and will personally repay the expenses if it is determined such officer or
director did not meet the standards.
Our
Bylaws include an indemnification provision under which we have the power to
indemnify our directors, officers and former directors and officers (including
heirs and personal representatives) against all costs, charges and expenses
actually and reasonably incurred, including an amount paid to settle an action
or satisfy a judgment to which the director or officer is made a party by reason
of being or having been a director or officer of the Company.
On
the
Closing Date, the Company entered into an Indemnity Agreement with each of
Betsy
Wood Knapp and Joseph Marks by reason of the fact that Ms. Knapp and Mr. Marks
are agents of the Company. The Indemnity Agreements provide for indemnification
of certain expenses, judgments, fines, and settlement amounts incurred by Ms.
Knapp and Mr. Marks in any action or proceeding, including any action by or
in
the right of the Company arising out of their services to the Company, to any
of
the Company’s subsidiaries, or to any other company or enterprise to which Ms.
Knapp and Mr. Marks provide services at the Company’s request. The Indemnity
Agreements provide for the advancement of expenses, make indemnification
contingent on Ms. Knapp’s and Mr. Marks’ good faith in acting or failing to act
and except the obligation to indemnify for expenses or liabilities paid directly
to Ms. Knapp and Mr. Marks by directors’ and officers’ insurance. A copy of the
form of Indemnity Agreement is attached as Exhibit 10.6 to this Current Report
on Form 8-K and incorporated by reference herein.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted for our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion
of
the SEC such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
Anti-Takeover
Effects of Provisions of Nevada State Law
We
may be
or in the future we may become subject to Nevada’s control share law. A
corporation is subject to Nevada’s control share law if it has more than 200
stockholders, at least 100 of whom are stockholders of record and residents
of
Nevada, and if the corporation does business in Nevada or through an affiliated
corporation.
The
law
focuses on the acquisition of a “controlling interest” which means the ownership
of outstanding voting shares is sufficient, but for the control share law,
to
enable the acquiring person to exercise the following proportions of the voting
power of the corporation in the election of directors: (1) one-fifth or more
but
less than one-third, (2) one-third or more but less than a majority, or (3)
a
majority or more. The ability to exercise such voting power may be direct or
indirect, as well as individual or in association with others.
The
effect of the control share law is that the acquiring person, and those acting
in association with that person, obtain only such voting rights in the control
shares as are conferred by a resolution of the stockholders of the corporation,
approved at a special or annual meeting of stockholders. The control share
law
contemplates that voting rights will be considered only once by the other
stockholders. Thus, there is no authority to take away voting rights from the
control shares of an acquiring person once those rights have been approved.
If
the stockholders do not grant voting rights to the control shares acquired
by an
acquiring person, those shares do not become permanent non-voting shares. The
acquiring person is free to sell its shares to others. If the buyers of those
shares themselves do not acquire a controlling interest, their shares do not
become governed by the control share law.
If
control shares are accorded full voting rights and the acquiring person has
acquired control shares with a majority or more of the voting power, any
stockholder of record, other than an acquiring person, who has not voted in
favor of approval of voting rights is entitled to demand fair value for such
stockholder’s shares.
Nevada’s
control share law may have the effect of discouraging corporate
takeovers.
In
addition to the control share law, Nevada has a business combination law, which
prohibits certain business combinations between Nevada corporations and
“interested stockholders” for three years after the “interested stockholder”
first becomes an “interested stockholder” unless the corporation’s board of
directors approves the combination in advance. For purposes of Nevada law,
an
“interested stockholder” is any person who is (1) the beneficial owner, directly
or indirectly, of ten percent or more of the voting power of the outstanding
voting shares of the corporation, or (2) an affiliate or associate of the
corporation and at any time within the three previous years was the beneficial
owner, directly or indirectly, of ten percent or more of the voting power of
the
then outstanding shares of the corporation. The definition of the term “business
combination” is sufficiently broad to cover virtually any kind of transaction
that would allow a potential acquirer to use the corporation’s assets to finance
the acquisition or otherwise to benefit its own interests rather than the
interests of the corporation and its other stockholders.
The
effect of Nevada’s business combination law is to potentially discourage parties
interested in taking control of the Company from doing so if it cannot obtain
the approval of our Board of Directors.
PART
F/S
Reference
is made to the disclosure set forth under Item 9.01 of this Current Report
on
Form 8-K, which disclosure is incorporated herein by reference.
PART
III
1.
INDEX
TO EXHIBITS
See
Item
9.01(d) below, which is incorporated by reference herein.
2.
DESCRIPTION
OF EXHIBITS
See
Exhibit Index below and the corresponding exhibits, which are incorporated
by
reference herein.
Item
3.02.
Unregistered
Sales of Equity Securities.
Reference
is made to the disclosure set forth under Item 2.01 of this Current Report
on
Form 8-K,
which
disclosure is incorporated herein by reference.
Item
4.01.
Changes
in Registrant’s Certifying Accountant.
Reference
is made to the disclosure set forth under Item 2.01 of this Current Report
on
Form 8-K, which disclosure is incorporated herein by reference.
Item
5.01.
Changes
in Control of Registrant.
Reference
is made to the disclosure set forth under Item 2.01 of this Current Report
on
Form 8-K, which disclosure is incorporated herein by reference.
Item
5.02.
Departure
of Directors or Principal Officers; Election of Directors; Appointment of
Principal Officers.
Reference
is made to the disclosure set forth under Item 2.01 of this Current Report
on
Form 8-K, which disclosure is incorporated herein by reference.
Item
5.03.
Change
in Fiscal Year.
On
the
Closing Date and in accordance with the Company’s bylaws, the Company’s Board
approved a change in the Company’s fiscal year, such that the Company’s fiscal
year end is December 31
st
.
The
Company’s former fiscal year end was September 30
th
.
Because
the Merger was accounted for as a reverse acquisition and the Company is
adopting the fiscal year of the accounting acquirer, Kreido, no transition
report is necessary and the Company will begin to file reports based on the
reporting periods for a fiscal year ending December 31
st
,
commencing with the period in which the Merger was consummated, which is the
quarter ending March 31, 2007.
Item
5.06.
Change
in Shell Company Status.
Reference
is made to the disclosure set forth under Item 2.01 of this Current Report
on
Form 8-K, which disclosure is incorporated herein by reference. As a result
of
the Merger described under Item 2.01 of this Current Report on Form 8-K, the
registrant believes that it is no longer a “shell company” as that term is
defined in Rule 405 of the Securities Act and Rule 12b-2 of the Exchange
Act.
Item
9.01.
Financial
Statements and Exhibits.
(a)
|
Financial
Statements of Businesses
Acquired.
|
(b)
|
Pro
Forma Financial
Information.
|
The
financial statements of the Company, which are the financial statements of
the
financial acquirer, Kreido Laboratories, for the periods and dates indicated
below are filed with this report.
|
|
Page
|
Audited
Financial Statements
|
|
|
Kreido
Laboratories:
|
|
|
Report
of Independent Registered Public Accounting Firm.
|
|
F-1
|
Balance
Sheets as of December 31, 2004 and 2005.
|
|
F-2
|
Statements
of Operations for the period from January 13, 1995 (Inception)
to December
31, 2005.
|
|
F-3
|
Statement
of Stockholders’ Equity (Capital Deficit) for the period from January 13,
1995 (Inception) to December 31, 2005.
|
|
F-4
|
Statement
of Cash Flows for the period from January 13, 1995 (Inception)
to December
31, 2005.
|
|
F-5
- F-6
|
Notes
to Financial Statements.
|
|
F-
7 - F-23
|
|
|
|
Unaudited
Financial Statements:
|
|
|
Kreido
Laboratories:
|
|
|
Balance
Sheet as of September 30, 2005 and 2006.
|
|
F-24
|
Statements
of Operations for period from January 13, 1995 (Inception) to September
30, 2006.
|
|
F-25
|
Statements
of Stockholders’ Equity (Capital Deficit) for period from January 13, 1995
(Inception) to September 30, 2006.
|
|
F-26
|
Statements
of Cash Flows for period from January 13, 1995 to September 30,
2006.
|
|
F-27
- F-28
|
Notes
to the Financial Statements.
|
|
F-29
- F-45
|
Pro
Forma Unaudited Consolidated Financial
Statements:
|
|
|
Kreido
Biofuels, Inc.:
|
|
|
Introductory Statement.
|
|
F-46
|
Pro
Forma Consolidated Balance Sheet as of September 30, 2006.
|
|
F-47
|
Pro
Forma Consolidated Statement of Operations for the year ended September
30, 2006.
|
|
F-48
|
Notes
to Unaudited Consolidated Financial Statements.
|
|
F-49
|
Audited
Financial Statements
Kreido
Laboratories
(A
Development Stage Company)
Years
ended December 31, 2005 and 2004
with
Report of Independent Auditors
Kreido
Laboratories
(A
Development Stage Company)
|
|
PAGE
|
|
Report
of Independent Registered Public Accounting Firm
|
|
|
F-1
|
|
|
|
|
|
|
Audited
Financial Statements
|
|
|
|
|
Balance
Sheets
|
|
|
F-2
|
|
Statements
of Operations
|
|
|
F-3
|
|
Statements
of Stockholders’ Equity (Capital Deficit)
|
|
|
F-4
|
|
Statements
of Cash Flows
|
|
|
F-5
- F-6
|
|
Notes
to Financial Statements
|
|
|
F-7
- F-23
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO
THE BOARD OF DIRECTORS AND STOCKHOLDERS
Kreido
Laboratories
We
have
audited the accompanying balance sheets of Kreido Laboratories, formerly known
as Holl Technologies Company (a development stage company), as of
December 31, 2005 and 2004, and the related statements of operations,
stockholders’ equity (capital deficit) and cash flows for the years then ended
and for the period from January 13, 1995 (inception) to December 31, 2005.
These
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based
on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Kreido Laboratories as of December
31, 2005 and 2004, and the results of its operations and its cash flows for
the
years then ended and for the period from January 13, 2005 (inception) to
December 31, 2005, in conformity with accounting principles generally accepted
in the United States of America.
The
accompanying financial statements have been prepared assuming the Company will
continue as a going concern. As more fully discussed in Note 3 to the financial
statements, the Company has incurred significant losses in recent years, has
an
accumulated deficit of $19,858,748 and a total capital deficit of $2,846,239
at
December 31, 2005. It has used all of its available cash in its operating
activities in recent years and has a significant working capital deficiency.
These matters raise substantial doubt about the Company’s ability to continue as
a going concern. Management’s plans in these regards are also discussed in Note
3 to the financial statements. The aforementioned financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
Los
Angeles, California
October
30, 2006
Registered
with Public Company Oversight Board
Member
of
Private Companies Practice Section & Center for Public Company Audit
Firms
Kreido
Laboratories
(A
Development Stage Company)
|
|
December
31
|
|
|
|
2005
|
|
2004
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,002,081
|
|
$
|
81,824
|
|
Accounts
receivable
|
|
|
734
|
|
|
16,957
|
|
Total
current assets
|
|
|
1,002,815
|
|
|
98,781
|
|
|
|
|
|
|
|
|
|
Property
and equipment
-
net (Note 4)
|
|
|
252,474
|
|
|
605,139
|
|
Patents
,
less accumulated amortization of $215,639 and
|
|
|
|
|
|
|
|
$157,684
in 2005 and 2004, respectively
|
|
|
753,346
|
|
|
729,821
|
|
Other
assets
|
|
|
5,775
|
|
|
22,978
|
|
Total
assets
|
|
$
|
2,014,410
|
|
$
|
1,456,719
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
Current
portion of convertible notes payable, net of discount of
|
|
|
|
|
|
|
|
$1,171,541
and $570,339 (Note 9)
|
|
$
|
4,139,660
|
|
$
|
1,509,179
|
|
Current
portion of capital leases (Note 8)
|
|
|
30,848
|
|
|
69,209
|
|
Accounts
payable
|
|
|
225,903
|
|
|
181,155
|
|
Accrued
expenses (Note 9)
|
|
|
435,009
|
|
|
88,422
|
|
Total
current liabilities
|
|
|
4,831,420
|
|
|
1,847,965
|
|
|
|
|
|
|
|
|
|
Capital
leases
,
less current portion (Note 8)
|
|
|
29,229
|
|
|
69,591
|
|
Total
liabilities
|
|
|
4,860,649
|
|
|
1,917,556
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity (capital deficit)
(Notes
6 and 10)
|
|
|
|
|
|
|
|
Series
C convertible preferred stock, no par value. Authorized
|
|
|
|
|
|
|
|
8,600,000
shares; no shares issued and outstanding
|
|
|
-
|
|
|
-
|
|
Series
B convertible preferred stock, no par value. Authorized
|
|
|
|
|
|
|
|
200,000
shares; no shares issued and outstanding
|
|
|
-
|
|
|
-
|
|
Series
A convertible preferred stock, no par value. Authorized
|
|
|
|
|
|
|
|
500,000
shares; no shares issued and outstanding
|
|
|
-
|
|
|
-
|
|
Series
A1 convertible preferred stock, no par value. Authorized
|
|
|
|
|
|
|
|
549,474
shares; issued and outstanding 549,474 shares;
|
|
|
|
|
|
|
|
liquidation
preference $4,945,266
|
|
|
3,628,369
|
|
|
3,628,369
|
|
Series
B1 convertible preferred stock, no par value. Authorized
|
|
|
|
|
|
|
|
13,783,783
shares; issued and outstanding 10,011,355 shares;
|
|
|
|
|
|
|
|
liquidation
preference $10,011,355
|
|
|
10,011,355
|
|
|
10,011,355
|
|
Common
stock, no par value. Authorized 150,000,000 shares;
|
|
|
|
|
|
|
|
issued
and outstanding 720,501 shares
|
|
|
103,200
|
|
|
103,200
|
|
Restricted
common stock, no par value; issued and outstanding
|
|
|
|
|
|
|
|
641,786
shares
|
|
|
64,179
|
|
|
64,179
|
|
Additional
paid-in capital
|
|
|
3,240,643
|
|
|
2,460,811
|
|
Deferred
compensation
|
|
|
(35,237
|
)
|
|
(68,360
|
)
|
Deficit
accumulated during the development stage
|
|
|
(19,858,748
|
)
|
|
(16,660,391
|
)
|
Net
stockholders' equity (capital deficit)
|
|
|
(2,846,239
|
)
|
|
(460,837
|
)
|
Total
liabilities and stockholders' equity (capital
deficit)
|
|
$
|
2,014,410
|
|
$
|
1,456,719
|
|
See
notes to financial
statements.
Kreido
Laboratories
(A
Development Stage Company)
|
|
|
|
|
|
Period
from
|
|
|
|
|
|
|
|
January
13,
|
|
|
|
|
|
|
|
1995
|
|
|
|
Year
Ended
|
|
Year
Ended
|
|
(Inception)
to
|
|
|
|
December
31,
|
|
December
31,
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
Research
and develoment
|
|
$
|
1,913,338
|
|
$
|
2,591,099
|
|
$
|
14,317,027
|
|
General
and administrative expenses (Note 11)
|
|
|
630,107
|
|
|
862,273
|
|
|
3,848,041
|
|
Loss
from operations
|
|
|
(2,543,445
|
)
|
|
(3,453,372
|
)
|
|
(18,165,068
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses)
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(534,269
|
)
|
|
(233,640
|
)
|
|
(2,253,941
|
)
|
Interest
income
|
|
|
2,827
|
|
|
237
|
|
|
61,076
|
|
Other
income
|
|
|
178,252
|
|
|
252,528
|
|
|
1,002,264
|
|
Loss
on sale of property and equipment
|
|
|
(25,759
|
)
|
|
-
|
|
|
(65,046
|
)
|
Loss
from retirement of assets
|
|
|
(275,163
|
)
|
|
-
|
|
|
(275,163
|
)
|
Other
expenses
|
|
|
-
|
|
|
(21,148
|
)
|
|
(154,070
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes
|
|
|
(3,197,557
|
)
|
|
(3,455,395
|
)
|
|
(19,849,948
|
)
|
Income
tax expense
|
|
|
800
|
|
|
800
|
|
|
8,800
|
|
Net
loss
|
|
$
|
(3,198,357
|
)
|
$
|
(3,456,195
|
)
|
$
|
(19,858,748
|
)
|
See
notes to financial
statements.
Kreido
Laboratories
(A
Development Stage Company)
Statements
of Stockholders’ Equity (Capital Deficit)
Period
from January 13, 1995 (Inception) to December 31, 2005
|
|
Series
C Convertible Preferred Stock
|
|
Series
B Convertible Preferred Stock
|
|
Series
A Convertible Preferred Stock
|
|
Series
A1 Convertible Preferred Stock
|
|
Series
B1 Convertible Preferred Stock
|
|
Common
Stock
|
|
Restricted
Common Stock
|
|
Additional
Paid-In
Capital
|
|
Deferred
Compensation
|
|
Deficit
Accumulated During the Development
Stage
|
|
Stockholders'
Equity (Capital Deficit)
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock to founders
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
-
|
|
|
750,000
|
|
$
|
99,967
|
|
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
99,967
|
|
Net
loss (unaudited)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(67,507
|
)
|
|
(67,507
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December
31, 1995
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
750,000
|
|
|
99,967
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(67,507
|
)
|
|
32,460
|
|
Net
loss (unaudited)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(129,975
|
)
|
|
(129,975
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December
31, 1996
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
750,000
|
|
|
99,967
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(197,482
|
)
|
|
(97,515
|
)
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(329,352
|
)
|
|
(329,352
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December
31, 1997
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
750,000
|
|
|
99,967
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(526,834
|
)
|
|
(426,867
|
)
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(291,711
|
)
|
|
(291,711
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December
31, 1998
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
750,000
|
|
|
99,967
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(818,545
|
)
|
|
(718,578
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Series A preferred stock
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
242,561
|
|
|
1,480,425
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
217,496
|
|
|
-
|
|
|
-
|
|
|
1,697,921
|
|
Stock
option issuances
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
317,590
|
|
|
(286,892
|
)
|
|
-
|
|
|
30,698
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(717,965
|
)
|
|
(717,965
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December
31, 1999
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
242,561
|
|
|
1,480,425
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
750,000
|
|
|
99,967
|
|
|
-
|
|
|
-
|
|
|
535,086
|
|
|
(286,892
|
)
|
|
(1,536,510
|
)
|
|
292,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of notes to Series A preferred stock
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
106,925
|
|
|
637,378
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
637,378
|
|
Retirement
of common stock
|
|
|
-
|
|
|
-
|
|
|
200,000
|
|
|
1,500,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(30,073
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,500,000
|
|
Issuance
of Series B preferred stock
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
10,578
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
10,578
|
|
Deferred
compensation - options/warrants
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
100,566
|
|
|
(100,566
|
)
|
|
-
|
|
|
-
|
|
Compensation
expense
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
87,590
|
|
|
-
|
|
|
87,590
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,934,715
|
)
|
|
(1,934,715
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December
31, 2000
|
|
|
-
|
|
|
-
|
|
|
200,000
|
|
|
1,510,578
|
|
|
349,486
|
|
|
2,117,803
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
719,927
|
|
|
99,967
|
|
|
-
|
|
|
-
|
|
|
635,652
|
|
|
(299,868
|
)
|
|
(3,471,225
|
)
|
|
592,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock grant
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
575
|
|
|
3,234
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,234
|
|
Issuance
of warrants in connection with convertible debt
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
304,078
|
|
|
-
|
|
|
-
|
|
|
304,078
|
|
Deferred
compensation options
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
259,350
|
|
|
(259,350
|
)
|
|
-
|
|
|
-
|
|
Compensation
expense
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
140,601
|
|
|
-
|
|
|
140,601
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3,307,882
|
)
|
|
(3,307,882
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December
31, 2001
|
|
|
-
|
|
|
-
|
|
|
200,000
|
|
|
1,510,578
|
|
|
349,486
|
|
|
2,117,803
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
720,502
|
|
|
103,201
|
|
|
-
|
|
|
-
|
|
|
1,199,080
|
|
|
(418,617
|
)
|
|
(6,779,107
|
)
|
|
(2,267,062
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Series C preferred stock
|
|
|
1,995,000
|
|
|
1,995,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,995,000
|
|
Conversion
of notes, accrued interest and accounts payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
Series C preferred stock
|
|
|
5,255,785
|
|
|
5,255,785
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
5,255,785
|
|
Issuance
of warrants in connnection with convertible debt
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
287,645
|
|
|
-
|
|
|
-
|
|
|
287,645
|
|
Deferred
compensation options
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
60,500
|
|
|
(60,500
|
)
|
|
-
|
|
|
-
|
|
Compensation
expense
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
182,882
|
|
|
-
|
|
|
182,882
|
|
Repricing
of warrants
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
130,851
|
|
|
-
|
|
|
-
|
|
|
130,851
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3,436,074
|
)
|
|
(3,436,074
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2002
|
|
|
7,250,785
|
|
|
7,250,785
|
|
|
200,000
|
|
|
1,510,578
|
|
|
349,486
|
|
|
2,117,803
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
720,502
|
|
|
103,201
|
|
|
-
|
|
|
-
|
|
|
1,678,076
|
|
|
(296,235
|
)
|
|
(10,215,181
|
)
|
|
2,149,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Series C preferred stock
|
|
|
428,500
|
|
|
428,500
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
428,500
|
|
Conversion
of notes and accrued interest payable to Series C
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
preferred
stock
|
|
|
744,510
|
|
|
744,510
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
744,510
|
|
Issuance
of warrants in connection with convertible debt
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
73,853
|
|
|
-
|
|
|
-
|
|
|
73,853
|
|
Compensation
expense
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
183,046
|
|
|
-
|
|
|
183,046
|
|
Buy
back of fractional shares
|
|
|
(12
|
)
|
|
(12
|
)
|
|
(3
|
)
|
|
(3
|
)
|
|
(9
|
)
|
|
(9
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1
|
)
|
|
(1
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(25
|
)
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,989,015
|
)
|
|
(2,989,015
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December
31, 2003
|
|
|
8,423,783
|
|
|
8,423,783
|
|
|
199,997
|
|
|
1,510,575
|
|
|
349,477
|
|
|
2,117,794
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
720,501
|
|
|
103,200
|
|
|
-
|
|
|
-
|
|
|
1,751,929
|
|
|
(113,189
|
)
|
|
(13,204,196
|
)
|
|
589,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Series B1 preferred stock
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
720,000
|
|
|
720,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
720,000
|
|
Coversion
of notes and accrued interest payable to Series B1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
preferred
stock
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
867,572
|
|
|
867,572
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
867,572
|
|
Issuance
of consulting warrants and warrants in connection
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
convertible
debt
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
708,882
|
|
|
-
|
|
|
-
|
|
|
708,882
|
|
Conversion
of Series C preferred stock to Series B1 preferred stock
|
|
|
(8,423,783
|
)
|
|
(8,423,783
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
8,423,783
|
|
|
8,423,783
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Conversion
of Series B preferred stock to Series A1 preferred stock
|
|
|
-
|
|
|
-
|
|
|
(199,997
|
)
|
|
(1,510,575
|
)
|
|
-
|
|
|
-
|
|
|
199,997
|
|
|
1,510,575
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Coversion
of Series A preferred stock to Series A1 preferred stock
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(349,477
|
)
|
|
(2,117,794
|
)
|
|
349,477
|
|
|
2,117,794
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Compensation
expense
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
109,008
|
|
|
-
|
|
|
109,008
|
|
Issuance
of restricted stock
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
641,786
|
|
|
64,179
|
|
|
-
|
|
|
(64,179
|
)
|
|
-
|
|
|
-
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3,456,195
|
)
|
|
(3,456,195
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December
31, 2004
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
549,474
|
|
|
3,628,369
|
|
|
10,011,355
|
|
|
10,011,355
|
|
|
720,501
|
|
|
103,200
|
|
|
641,786
|
|
|
64,179
|
|
|
2,460,811
|
|
|
(68,360
|
)
|
|
(16,660,391
|
)
|
|
(460,837
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of warrants in connection with convertible debt
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
760,876
|
|
|
-
|
|
|
-
|
|
|
760,876
|
|
Issuance
of consulting warrants
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
14,903
|
|
|
-
|
|
|
-
|
|
|
14,903
|
|
Issuance
of stock options
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4,053
|
|
|
-
|
|
|
-
|
|
|
4,053
|
|
Compensation
expense
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
33,123
|
|
|
-
|
|
|
33,123
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3,198,357
|
)
|
|
(3,198,357
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December
31, 2005
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
-
|
|
|
549,474
|
|
$
|
3,628,369
|
|
|
10,011,355
|
|
$
|
10,011,355
|
|
|
720,501
|
|
$
|
103,200
|
|
|
641,786
|
|
$
|
64,179
|
|
$
|
3,240,643
|
|
$
|
(35,237
|
)
|
$
|
(19,858,748
|
)
|
$
|
(2,846,239
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes to financial
statements.
Kreido
Laboratories
(A
Development Stage Company)
|
|
|
|
|
|
Period
from
|
|
|
|
|
|
|
|
January
13,
|
|
|
|
|
|
|
|
1995
|
|
|
|
Year
Ended
|
|
Year
Ended
|
|
(Inception)
to
|
|
|
|
December
31,
|
|
December
31,
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(3,198,357
|
)
|
$
|
(3,456,195)
$
|
|
|
(19,858,748
|
)
|
Adjustments
to reconcile net loss to net cash used in
|
|
|
|
|
|
|
|
|
|
|
operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
195,493
|
|
|
231,368
|
|
|
1,207,077
|
|
Loss
on disposal of assets
|
|
|
25,759
|
|
|
-
|
|
|
65,046
|
|
Loss
on retirement of assets
|
|
|
275,163
|
|
|
-
|
|
|
275,163
|
|
Noncash
stock compensation
|
|
|
37,176
|
|
|
109,008
|
|
|
774,235
|
|
Amortization
of convertible debt discount
|
|
|
159,674
|
|
|
108,764
|
|
|
917,514
|
|
Inducement
to convert debt
|
|
|
-
|
|
|
21,148
|
|
|
151,999
|
|
Warrants
issued to consult
|
|
|
14,903
|
|
|
8,631
|
|
|
40,034
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
16,224
|
|
|
408
|
|
|
(733
|
)
|
Other
assets
|
|
|
17,203
|
|
|
(15,388
|
)
|
|
(56,634
|
)
|
Accounts
payable
|
|
|
44,748
|
|
|
(34,416
|
)
|
|
255,403
|
|
Accrued
expenses
|
|
|
346,587
|
|
|
53,943
|
|
|
965,573
|
|
Net
cash used in operating activities
|
|
|
(2,065,427
|
)
|
|
(2,972,729
|
)
|
|
(15,264,071
|
)
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(9,566
|
)
|
|
(65,894
|
)
|
|
(701,911
|
)
|
Proceeds
from sale of assets
|
|
|
85,248
|
|
|
-
|
|
|
85,248
|
|
Investments
in patent application
|
|
|
(242,957
|
)
|
|
(244,404
|
)
|
|
(1,137,016
|
)
|
Net
cash used in investing activities
|
|
|
(167,275
|
)
|
|
(310,298
|
)
|
|
(1,753,679
|
)
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
Procceds
from the issuance of Series A convertible
|
|
|
|
|
|
|
|
|
|
|
preferred
stock
|
|
|
-
|
|
|
-
|
|
|
937,504
|
|
Proceeds
from the issuance of Series B convertible
|
|
|
|
|
|
|
|
|
|
|
preferred
stock
|
|
|
-
|
|
|
-
|
|
|
1,500,000
|
|
Proceed
from the issuance of Series C convertible
|
|
|
|
|
|
|
|
|
|
|
preferred
stock
|
|
|
-
|
|
|
-
|
|
|
2,423,500
|
|
Proceeds
from the issuance of Series B1 preferred stock
|
|
|
-
|
|
|
720,000
|
|
|
720,000
|
|
Proceeds
from the issuance of common stock warrants
|
|
|
-
|
|
|
-
|
|
|
217,496
|
|
Proceeds
from the issuance of common stock
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Proceeds
from issuance of long-term debt
|
|
|
3,232,933
|
|
|
2,747,291
|
|
|
13,011,709
|
|
Principal
repayment of long-term debt and capital leases
|
|
|
(79,974
|
)
|
|
(141,483
|
)
|
|
(790,353
|
)
|
Buy
back of fractional shares
|
|
|
-
|
|
|
-
|
|
|
(25
|
)
|
Net
cash provided by financing activities
|
|
|
3,152,959
|
|
|
3,325,808
|
|
|
18,019,831
|
|
Net
increase in cash and cash equivalents
|
|
|
920,257
|
|
|
42,781
|
|
|
1,002,081
|
|
Cash
and cash equivalents at beginning of period
|
|
|
81,824
|
|
|
39,043
|
|
|
-
|
|
Cash
and cash equivalents at end of period
|
|
$
|
1,002,081
|
|
$
|
81,824
|
|
$
|
1,002,081
|
|
See
notes to financial statements.
Kreido
Laboratories
(A
Development Stage Company)
|
|
|
|
|
|
Period
from
|
|
|
|
|
|
|
|
January
13,
|
|
|
|
|
|
|
|
1995
|
|
|
|
Year
Ended
|
|
Year
Ended
|
|
(Inception)
to
|
|
|
|
December
31,
|
|
December
31,
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
25,794
|
|
$
|
35,383
$
|
|
|
326,303
|
|
Income
taxes
|
|
|
800
|
|
|
800
|
|
|
8,800
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of noncash investing and
|
|
|
|
|
|
|
|
|
|
|
financing
activities
|
|
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment through capital leases
|
|
$
|
-
|
|
$
|
-
$
|
|
|
638,023
|
|
Additions
to machinery and equipment through settlement
|
|
|
|
|
|
|
|
|
|
|
of
capital lease
|
|
|
-
|
|
|
-
|
|
|
61,437
|
|
Additions
to patent and property and equipment through
|
|
|
|
|
|
|
|
|
|
|
issuance
of common stock
|
|
|
-
|
|
|
-
|
|
|
99,967
|
|
Conversion
of notes payable into Series A preferred stock
|
|
|
-
|
|
|
-
|
|
|
1,180,299
|
|
Conversion
of notes payable into Series C preferred stock
|
|
|
-
|
|
|
-
|
|
|
5,529,875
|
|
Conversion
of accounts payable into Series C preferred
|
|
|
|
|
|
|
|
|
|
|
stock
|
|
|
-
|
|
|
-
|
|
|
29,500
|
|
Conversion
of accrued interest into Series C preferred
|
|
|
|
|
|
|
|
|
|
|
stock
|
|
|
-
|
|
|
-
|
|
|
440,920
|
|
Warrants
issued in connection with convertible notes
|
|
|
760,876
|
|
|
596,607
|
|
|
2,006,559
|
|
Conversion
of Series A preferred stock into Series A1
|
|
|
|
|
|
|
|
|
|
|
preferred
stock
|
|
|
-
|
|
|
2,117,794
|
|
|
2,117,794
|
|
Conversion
of Series B preferred stock into Series A1
|
|
|
|
|
|
|
|
|
|
|
preferred
stock
|
|
|
-
|
|
|
1,510,575
|
|
|
1,510,575
|
|
Conversion
of Series C preferred stock into Series B1
|
|
|
|
|
|
|
|
|
|
|
preferred
stock
|
|
|
-
|
|
|
8,423,783
|
|
|
8,423,783
|
|
Conversion
of notes payable into Series B1 preferred stock
|
|
|
-
|
|
|
850,000
|
|
|
850,000
|
|
Conversion
of accrued interest into Series B1 preferred stock
|
|
|
-
|
|
|
17,572
|
|
|
17,572
|
|
Conversion
of accrued interest into notes payable
|
|
|
-
|
|
|
72,072
|
|
|
72,072
|
|
See
notes to financial statements.
Kreido
Laboratories
(A
Development Stage Company)
Notes
to Financial Statements
Years
ended December 31, 2005 and 2004
NOTE
1
ORGANIZATION
Kreido
Laboratories, formerly known as Holl Technologies Company (“Kreido” or “the
Company”), was incorporated on January 13, 1995 under the laws of the State
of California. Since incorporation, the Company has been engaged in activities
required to develop, patent and commercialize its products. The market for
these
products is developing in parallel to the Company’s activities. The Company
considers itself a development stage enterprise because it has not yet earned
significant revenue from its commercial products. The Company creates and
intends to license innovative chemical and bio-chemical reacting
systems.
The
Company is the creator of reactor technology that is designed to enhance the
manufacturing of a broad range of chemical products. Leveraging its proprietary
STT
(
TM)
reactor
technology (named for its spinning tube-in-tube design), Kreido partners with
clients to deliver cost-effective manufacturing solutions. The Company continues
to develop partnerships with a variety of global companies. Committed to the
progress of green chemistry, Kreido Laboratories has collaborations with
academia, industry, and government agencies like the Environmental Protection
Agency (EPA).
The
cornerstone of the Company’s technology is its patented STT
(
TM)
(Spinning Tube in Tube) diffusional chemical reacting system, which is both
a
licensable process and a licensable system. In 2005, the Company demonstrated
how the STT™ could make biodiesel from vegetable oil in less than a second with
complete conversion and less undesirable by-product. The Company has continued
to pursue this activity and has designed a complete commercial biodiesel
production factory, demonstrated the factory at the pilot production level,
and
is now working toward the building of three commercial 30 million gallon per
year production plants in the United States.
NOTE
2
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Revenue
Recognition
The
Company’s revenues are expected to be derived from licensing its patented
processes, leasing its patented equipment to carry out the licensed processes,
providing on-going technical support and know-how, and in the future, the sale
of biodiesel. Revenues from product sales will be recorded upon shipment.
Revenues from technology licensing will be, based upon the nature of the
licensing agreement, recorded upon billing due date established by contractual
agreement with the customer or over the term of the agreement. For sales
arrangements with multiple elements, the Company will allocate the undelivered
elements based on the price charged when an element is sold separately. Through
the end of 2005, the Company had recognized no significant commercial or
licensing revenue. It is anticipated that once the company has built and begins
operating the commercial biodiesel production plants, the majority of revenue
will be based upon the sale of biodiesel to distributors.
Kreido
Laboratories
(A
Development Stage Company)
Notes
to Financial Statements
Years
ended December 31, 2005 and 2004
NOTE
2
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with a maturity of three months
or less when purchased to be cash equivalents.
Depreciation
and Amortization
The
provision for depreciation of property and equipment is calculated on the
straight-line method over the estimated useful lives of the related assets,
generally ranging from five to seven years. Leasehold improvements are amortized
over the shorter of the useful life of the related asset or the lease
term.
Patents
Capitalized
patent costs consist of direct costs associated with obtaining patents. Patent
costs are amortized on a straight-line basis over 15 years, which is the
expected life.
Research
and Development Costs
Research
and development costs related to the design, development, demonstration, and
testing of reactor technology are charged to expense as incurred.
Income
Taxes
The
Company accounts for income taxes under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to
taxable income in the years in which those temporary differences are expected
to
be recovered or settled. The effect on deferred tax assets and liabilities
of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Stock-Based
Compensation
Stock-based
compensation is accounted for under Statement of Financial Accounting Standards
No. 123 (SFAS No. 123),
Accounting
for Stock-Based Compensation
.
Under
SFAS No. 123, entities either recognize the fair value of all stock-based
awards as expense over the vesting period or continue to apply the provisions
of
APB Opinion No. 25 for financial statement purposes and provide pro forma
net income disclosures of the SFAS No. 123 treatment of such awards. The
Company has elected to apply the provisions of APB Opinion No. 25 and
provide the pro forma information.
Kreido
Laboratories
(A
Development Stage Company)
Notes
to Financial Statements
Years
ended December 31, 2005 and 2004
NOTE
2
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
If
the
Company had elected to recognize compensation cost based on the fair value
at
the date of grant, consistent with the method as prescribed by SFAS
No. 123, net loss would have changed to the pro forma amounts indicated
below:
|
|
Year
ended December 31,
2005
|
|
Year
ended
December
31,
2004
|
|
Period
from
January
13, 1995 (Inception) to December 31, 2005
|
|
|
|
|
|
|
|
|
|
Net
Loss:
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
(3,198,357
|
)
|
$
|
(3,456,195
|
)
|
$
|
(19,858,748
|
)
|
Add:
stock-based employee
compensation
expense included in reported net loss
|
|
|
33,123
|
|
|
63,710
|
|
|
690,952
|
|
Deduct:
total stock-based employee
compensation
expense determined
under
fair value based method for
all
awards
|
|
|
(66,422
|
)
|
|
(122,883
|
)
|
|
(965,336
|
)
|
Pro
forma
|
|
$
|
(3,231,656
|
)
|
$
|
(3,515,368
|
)
|
$
|
(20,133,132
|
)
|
The
fair
value of options granted during 2005 and 2004 was determined using a minimum
value pricing model with the following assumptions: risk-free interest rates
from 3.24% to 4.46%, expected lives of five to ten years and volatility of
0.01%.
Use
of Estimates
The
Company’s management has made a number of estimates and assumptions relating to
the reporting of assets and liabilities and expenses and disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with accounting principles generally accepted in the United States
of
America. Actual results could differ from those estimates.
Fair
Value of Financial Instruments
The
carrying values reflected in the balance sheets for cash and cash equivalents,
accounts receivable, accounts payable and accrued expenses approximate their
fair values due to the short maturity of these instruments. The carrying value
of convertible notes payable and capital leases estimates their fair value
based
upon current market borrowing rates with similar terms and
maturities.
Comprehensive
Loss
Except
for net loss, the Company has no material components of comprehensive loss,
and
accordingly, the comprehensive loss is the same as the net loss for all periods
presented.
Kreido
Laboratories
(A
Development Stage Company)
Notes
to Financial Statements
Years
ended December 31, 2005 and 2004
NOTE
2
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Effect
of New Accounting Pronouncement
In
December 2004, SFAS No. 123R, “Share-based Payment” was issued and replaces SFAS
No. 123, “Accounting for Stock-Based Compensation” and supersedes Accounting
Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to
Employees.” SFAS 123R requires the measurement of all employee share-based
payments, including grants of employee stock options, using a fair-value based
model. Deferred compensation calculated under the fair value method would
then be amortized into income over the respective vesting period of the stock
option. The accounting provisions of SFAS 123R are effective for reporting
periods beginning after June 15, 2005. The Company will adopt the provisions
of
SFAS No. 123R for the year ended December 31, 2006 (see related disclosure
under
Stock-Based Compensation).
NOTE
3
LIQUIDITY
AND
GOING
CONCERN ISSUES
The
Company is a development stage company, has suffered recurring losses from
operations and has a net capital deficiency that raise substantial doubt about
its ability to continue as a going concern.
It
currently expects that cash raised from financing will continue to provide
sufficient cash to fund its projected operations for the immediately foreseeable
future and believes additional financing will be available if and when needed.
If
the
Company is unable to achieve projected operating results and/or obtain such
additional financing if and when needed, management will be required to curtail
growth plans and scale back planned development activities. No assurances can
be
given that the Company will be successful in raising additional financing should
such financing be required by future operations.
Subsequent
Events
The
2004
financing provided sufficient cash to fund the Company’s operation through June
2006. All previous convertible note due dates have been extended to December
31,
2006. In July, August, September and October 2006, additional notes and warrants
were issued under similar terms as the previous notes and warrants to finance
on-going monthly activities.
Kreido
Laboratories
(A
Development Stage Company)
Notes
to Financial Statements
Years
ended December 31, 2005 and 2004
NOTE
3
LIQUIDITY
AND
GOING
CONCERN ISSUES
(CONTINUED)
Company
Financing Plans
In
September 2006, the Company engaged the Tompkins Capital Group to assist the
Company and a US publicly traded company in connection with a reverse triangular
merger and a Private Placement Offering (PPO) to execute the Company’s plan to
build three commercial biodiesel production facilities in the United States.
The
reverse triangular merger and PPO are projected to close in November 2006.
In
the course of this transaction, it is anticipated that, prior to the merger,
all
Preferred Stock and convertible notes will convert to Common Stock and payment
of all accumulated Preferred stock dividends will be waived. It is anticipated
that all outstanding warrants will be converted to Common Stock on a net
exercise basis as determined by the Board of Directors in conjunction with
the
reverse merger.
NOTE
4
PROPERTY
AND EQUIPMENT
Property
and equipment at December 31, 2005 and 2004 is summarized as
follows:
|
|
2005
|
|
2004
|
|
Furniture
and fixtures
|
|
$
|
43,472
|
|
$
|
52,739
|
|
Machinery
and equipment
|
|
|
460,654
|
|
|
1,212,387
|
|
Office
equipment
|
|
|
110,314
|
|
|
106,928
|
|
Leasehold
improvements
|
|
|
46,710
|
|
|
39,433
|
|
Total
|
|
|
661,150
|
|
|
1,411,487
|
|
Less
accumulated depreciation and amortization
|
|
|
(408,676
|
)
|
|
(806,348
|
)
|
Net
book value
|
|
$
|
252,474
|
|
$
|
605,139
|
|
NOTE
5
INCOME
TAXES
Income
taxes principally consist of minimum franchise taxes for the State of
California. At December 31, 2005 and 2004, the Company had available net
operating loss carry forwards totaling approximately $14,500,000 and $12,300,000
for federal income tax purposes, and approximately $13,300,000 and $11,100,000
for California state purposes, which expires beginning in tax year
2010.
Additionally, at December 31, 2005 and 2004, the Company had state tax credits
of approximately $400,000. For federal net operating loss generated before
1997,
the carryforward period is 15 years. For federal net operating loss generated
after 1997, the carryforward period is 20 years. For California state purposes,
Kreido’s net operating losses were classified under Eligible Small Business
(ESB). For ESB net operating loss generated from January 1, 1994 through
December 31, 1999, the carryforward period is 5 years. For ESB net operating
loss generated beginning January 1, 2000, the carryforward period is 10
years.
Kreido
Laboratories
(A
Development Stage Company)
Notes
to Financial Statements
Years
ended December 31, 2005 and 2004
NOTE
5
INCOME
TAXES (CONTINUED)
Deferred
tax assets consist principally of the tax effect of net operating loss carry
forwards. In assessing the potential realization of deferred tax assets,
management considers whether it is more likely than not that some portion or
all
of the deferred tax assets will be realized. The ultimate realization of
deferred tax assets is dependent upon the Company attaining future taxable
income during the periods in which those temporary differences become
deductible. Due to the uncertainty surrounding the realization of the benefits
of its tax attributes, including net operating loss carry forwards in future
tax
returns, the Company has fully reserved its deferred tax assets as of
December 31, 2005 and 2004.
In
addition, the utilization of net operating loss carry forwards may be limited
due to restrictions imposed under applicable federal and state tax laws due
to a
change in ownership.
NOTE
6
STOCK-BASED
COMPENSATION
The
Company’s Board of Directors approved the 1997 Stock Incentive Plan (the Plan)
during 1997, which provides for grants of incentive stock options and
nonqualified stock options. Under the Plan, options may be granted from time
to
time for an aggregate of no more than 1,870,000 shares of common stock as
determined by the Board of Directors. The options typically vest over a
four-year period with 25% vested per year, or in accordance with individual
agreements as determined by the Board of Directors. The options are exercisable
from three to ten years from the date of grant. There were 521,352 options
vested at December 31, 2005, of which no options had been
exercised.
Summary
stock option activity is as follows:
|
|
Number
of
Options
|
|
Weighted
Average Exercise Price
|
|
|
|
|
|
|
|
Balance
at December 31, 2003
|
|
|
1,222,274
|
|
$
|
0.96
|
|
Granted
|
|
|
310,524
|
|
|
0.16
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
Cancelled
|
|
|
(1,060,945
|
)
|
|
0.08
|
|
Balance
at December 31, 2004
|
|
|
471,853
|
|
|
0.70
|
|
Granted
|
|
|
861,786
|
|
|
0.14
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
Cancelled
|
|
|
(152,908
|
)
|
|
0.96
|
|
Balance
at December 31, 2005
|
|
|
1,180,731
|
|
$
|
0.26
|
|
For
options granted under the intrinsic-value-based method, the Company recorded
$4,053 of deferred compensation as additional paid-in capital based on the
difference between the market price of common stock and the option exercise
price at the date of grant during 2005. Related compensation expense of $33,123
and $63,710 was recognized in 2005 and 2004, respectively.
Kreido
Laboratories
(A
Development Stage Company)
Notes
to Financial Statements
Years
ended December 31, 2005 and 2004
NOTE
6
STOCK-BASED
COMPENSATION (CONTINUED)
The
following table summarizes information regarding options outstanding and options
exercisable at December 31, 2005:
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
Range
of Exercise
Prices
|
|
Outstanding
at
December
31, 2005
|
|
Weighted-Average
Remaining
Contractual
Life
|
|
Weighted-Average
Exercise Price
|
|
Exercisable
at
December
31,
2005
|
|
Weighted-Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.10
|
|
|
963,048
|
|
$
|
7.9
|
|
$
|
0.10
|
|
|
338,172
|
|
$
|
0.10
|
|
$0.70
|
|
|
3,000
|
|
|
3.7
|
|
|
0.70
|
|
|
3,000
|
|
|
0.70
|
|
$0.85
|
|
|
138,648
|
|
|
5.8
|
|
|
0.85
|
|
|
104,145
|
|
|
0.85
|
|
$1.00
|
|
|
47,156
|
|
|
4.4
|
|
|
1.00
|
|
|
47,156
|
|
|
1.00
|
|
$1.40
|
|
|
22,779
|
|
|
1.8
|
|
|
1.40
|
|
|
22,779
|
|
|
1.40
|
|
$2.10
|
|
|
6,100
|
|
|
2.3
|
|
|
2.10
|
|
|
6,100
|
|
|
2.10
|
|
|
|
|
1,180,731
|
|
$
|
7.37
|
|
$
|
0.26
|
|
|
521,352
|
|
$
|
0.41
|
|
NOTE
7
COMMITMENTS
Operating
Leases
The
Company has entered into two operating leases for corporate offices and
laboratory space, with termination dates ranging from November 14, 2006 to
August 31, 2007. Rent expense for the years ended December 31, 2005 and 2004
was
$93,868 and $100,832, respectively.
At
December 31, 2005, future minimum payments under these noncancelable lease
agreements are as follows:
Year
Ending December 31,
|
|
Amount
|
|
2006
|
|
$
|
75,906
|
|
2007
|
|
|
35,160
|
|
|
|
$
|
111,066
|
|
Kreido
Laboratories
(A
Development Stage Company)
Notes
to Financial Statements
Years
ended December 31, 2005 and 2004
NOTE
8
CAPITAL
LEASES
The
Company has entered into capital leases for various equipment.
At
December 31, 2005, future minimum lease payments on these leases are as
follows:
Year
ending December 31,
|
|
Amount
|
|
2006
|
|
$
|
38,393
|
|
2007
|
|
|
36,636
|
|
Total
lease payments
|
|
|
75,029
|
|
Less
- interest
|
|
|
14,952
|
|
Present
value of lease payments
|
|
|
60,077
|
|
Less
- current portion
|
|
|
30,848
|
|
|
|
$
|
29,229
|
|
Equipment
recorded under capital leases totaled $226,169 and $489,143 at December 31,
2005 and 2004, respectively.
NOTE
9
CONVERTIBLE
NOTES PAYABLE
During
2001, the Company issued $2,519,296 of unsecured convertible notes payable
with
interest rate of 9% and due at various dates from January through
November 2002. The notes were automatically convertible into the Series of
Preferred Stock having the lowest conversion price of Series A, B or C Preferred
Stock upon the occurrence of certain events, as defined.
During
2002, the Company secured additional financing of $2,575,000 in convertible
notes payable. On April 12, 2002, the Company amended all existing notes to
a
due date of November 30, 2002 in accordance with a Bridge Financing -
Series C Preferred Stock offering. Warrant coverage was provided for extension
of existing loans as well as new bridge financing. In December 2002,
$4,803,375 of these notes, including accrued interest of $422,910 and accounts
payable of $29,500, were converted into Series C Convertible Preferred Stock
(Note 10).
The
remaining convertible two notes of $170,921 bore interest of 8% per annum and
were due December 24, 2003. In April 2004, the balance of these notes,
including accrued interest of $20,547 were converted into new notes with
interest at 10% per annum and extended the maturity dates to May 31, 2004 and
December 31, 2004.
During
2003, the Company issued secured convertible notes for $726,500. On October
1,
2003, the Company amended all the notes issued in 2003 to a due date of November
30, 2003 in accordance with a Bridge Financing - Series C preferred stock second
closing. On November 13, 2003, these notes and accrued interest of $18,010
were
converted into Series C convertible preferred stock (Note 10).
Kreido
Laboratories
(A
Development Stage Company)
Notes
to Financial Statements
Years
ended December 31, 2005 and 2004
NOTE
9
CONVERTIBLE NOTES PAYABLE (CONTINUED)
From
January to March 2004, the Company issued secured convertible notes for
$850,000. These notes bore interest of 10% per annum and were due June 30,
2004.
In April 2004 the Company converted these notes, including accrued interest
of
$17,575 into Series B1 preferred stock (Note 10).
Also
in
April, notes held by SOG due December 24, 2003 were converted to new convertible
notes bearing an interest of 10% per annum for $191,605 due December 31,
2004.
From
June
to October 2004, the Company issued convertible notes for $1,405,040. These
notes bore interest of 10% per annum and were due November 29, 2004. In November
2004 the Company paid off all existing notes and raised additional working
funds
by issuing new secured convertible notes totaling $2,068,028 bearing an interest
of 10% per annum and due July 29, 2005. Some of the new money was held in escrow
to be released by the loan holders in January 2005 at their discretion.
From
January to October 2005, the Company issued convertible notes totaling
$3,232,933. These notes bore interest ranging from 10% to 12% per annum and
were
due February 28, 2006. Some of the new money was held in escrow to be released
by the loan holders in 2006 at their discretion.
The
balances of convertible notes payable at December 31, 2005 and 2004 were
$5,300,961 and $2,068,028, respectively.
In
2004,
the Company issued a no interest unsecured note payable to a former officer
in
the amount of $17,236. This note was payable in monthly installments of $2,873
and was fully paid in April 2005. In 2005, in conjunction with a consulting
contract, the Company issued a new no interest unsecured note payable to this
same former officer in the amount of $12,239 payable in full on December 31,
2008 with an initial payment of $2,000. The balance of this note payable at
December 31, 2005 was $10,240.
NOTE
10
STOCKHOLDERS’ EQUITY (CAPITAL DEFICIT)
The
Company’s Amended and Restated Articles of Incorporation (Articles) authorize
the issuance of two classes of shares designated as common stock and preferred
stock, each having no par value. The numbers of shares of common stock and
preferred stock authorized are 150,000,000 and 100,000,000, respectively.
Preferred stock currently consists of Series A1 (549,474 shares designated)
and
Series B1 (13,783,783 shares designated).
Kreido
Laboratories
(A
Development Stage Company)
Notes
to Financial Statements
Years
ended December 31, 2005 and 2004
NOTE
10
STOCKHOLDERS’ EQUITY (CAPITAL DEFICIT) (CONTINUED)
Common
Stock
Common
stockholders are entitled to receive dividends when and if declared by the
Board
of Directors, to share ratably in the proceeds of any dissolution or winding
up
of the Company and to vote on certain matters as provided in the Articles.
No
dividends can be declared or paid to common stockholders unless and until all
accrued and unpaid dividends on the Series B1 preferred stock have been paid
to
Series B1 preferred stockholders. Shares of common stock are subject to transfer
restrictions and certain rights of first refusal relating to the securities
laws, the bylaws of the Company and, in certain cases, specific agreements
with
the Company and the preferred stockholders.
Restricted
Common Stock
Restricted
common stock has all the rights of a common stock but is subject to certain
vesting schedules as defined in the individual stock grant
agreements.
During
1999, in conjunction with the issuance of convertible notes payable, a
shareholder of the Company placed 32,221 shares of common stock in escrow.
The
shares were subject to forfeiture if the convertible notes were converted into
shares of Series A convertible preferred stock. In 2000, the convertible debt
was converted into Series A convertible preferred stock. The amount of shares
forfeited by the shareholder was reduced to 30,073 shares and 2,148 shares
were
returned to the shareholder. The value of the shares returned to the shareholder
was not material to the financial statements.
In
April
2004 the Company issued a total of 1,062,534 shares of restricted common in
exchange for the cancellation of certain stock options. Upon the departure
of
one of the holders, 420,748 shares were cancelled. The total amount of vested
shares was 513,469 as of December 31, 2005.
In
August 1999, the Company issued 165,000 shares of Series A convertible
preferred stock for total cash consideration of $1,155,000. These shares were
issued to venture capital firms and private investors. In December 1999,
the Company issued an additional 77,561 shares of Series A convertible preferred
stock to private investors as consideration for convertible promissory notes
payable totaling $542,921.
In
August 2000, the Company issued 200,000 shares of Series B convertible
preferred stock for total cash consideration of $1,500,000. These shares were
issued to venture capital firms and private investors. In addition, throughout
2000, the Company issued an additional 106,916 shares of Series A convertible
preferred stock to private investors as consideration for convertible promissory
notes payable and accrued interest totaling $637,378.
In
December 2002, the Company issued 7,250,785 shares of Series C convertible
preferred stock for a total cash consideration of $1,995,000 and conversion
of
notes payable of $4,803,375, including accrued interest of $422,910 and accounts
payable of $29,500. These shares were issued to venture capital firms and
private investors.
Kreido
Laboratories
(A
Development Stage Company)
Notes
to Financial Statements
Years
ended December 31, 2005 and 2004
NOTE
10
STOCKHOLDERS’ EQUITY (CAPITAL DEFICIT) (CONTINUED)
In
November 2003, the Company issued 1,173,010 shares of Series C convertible
preferred stock for a total cash consideration of $428,500 and conversion of
notes payable of $744,510, which included accrued interest of $18,010. These
shares were issued to venture capital firms and private investors.
On
November 26, 2003, the Company’s Board of Directors declared a 10 to 1 reverse
stock split of all the Company’s issued and outstanding shares of common stock,
Series A preferred stock, Series B preferred stock and Series C preferred stock.
The number of shares, warrants and options outstanding and per share data has
been restated to reflect the reverse stock split.
In
connection with the reverse stock split, the Company repurchased the following
split shares of common and convertible stock:
|
|
Number
of
Shares
|
|
Amount
|
|
Common
Stock
|
|
|
1
|
|
$
|
1
|
|
Series
A
|
|
|
9
|
|
|
9
|
|
Series
B
|
|
|
3
|
|
|
3
|
|
Series
C
|
|
|
12
|
|
|
12
|
|
|
|
|
25
|
|
$
|
25
|
|
In
April
2004, the Company converted the outstanding amount of Series A and Series B
convertible preferred stock into 549,474 shares of Series A1 convertible
preferred stock for total of $3,628,369.
In
April
2004, the Company issued 10,011,355 shares of Series B1 convertible preferred
stock for total cash consideration of $720,000, conversion of notes payable
of
$867,572, which included accrued interest of $17,572 and conversion of all
the
outstanding Series C convertible preferred stock of $8,423,783. These shares
were issued to venture capital firms and private investors.
Certain
notes that expired in December 2003 were renegotiated in April 2004 and warrants
to purchase 95,803 shares of Common at $0.85 were issued as part of the
financing. The warrants expire in 5 years.
The
rights, preferences and privileges of the Series A1 and Series B1 preferred
stock are listed below:
Conversion
Rights
Each
share of the preferred stock outstanding is convertible, at the option of the
holder, into common stock at the rate of one share of common stock for each
share of the preferred stock, adjustable for certain dilutive
events.
Kreido
Laboratories
(A
Development Stage Company)
Notes
to Financial Statements
Years
ended December 31, 2005 and 2004
NOTE
10
STOCKHOLDERS’
EQUITY (CAPITAL DEFICIT) (CONTINUED)
Such
conversion will occur automatically upon the closing of a registered public
offering of the Company’s common stock that yields aggregate proceeds to the
Company of at least $30,000,000 at a per share price of at least
$5.
Dividend
Rights
Each
fiscal year, the holders of shares of Series B1 Preferred Stock are entitled
to
receive, before any dividends are paid or declared and set aside for the Series
A1 Preferred Stock or the Common Stock, out of funds legally available for
that
purpose, cumulative dividends at a rate of eight percent (8%) per annum, payable
in cash only. Such cumulative dividends accrue from the date of issuance and
are
calculated through the earliest of (I) the conversion of Series B1 Preferred
Stock into Common Stock, (ii) the redemption of Series B1 Preferred Stock or
(iii) the liquidation, dissolution or winding up of the Company. The holders
of
the Series B1 Preferred Stock are entitled to participate, on an as-converted
basis, in all dividends, whether payable in cash, property or stock, that are
declared on any of the Common Stock. Cumulative dividends for Series B1
Preferred Stock as of December 31, 2005 and 2004 were $1,353,864 and
$552,956, respectively.
Each
fiscal year, the holders of shares of Series A1 Preferred Stock are entitled
to
receive, before any dividends are paid or declared and set aside for the Common
Stock, out of funds legally available for that purpose, cumulative dividends
at
a rate of eight percent (8%) per annum, payable in cash only. Such cumulative
dividends accrue from the date of issuance and are calculated through the
earliest of (i) the conversion of Series A1 Preferred Stock into Common Stock,
(ii) the redemption of Series A1 Preferred Stock or (iii) the liquidation,
dissolution or winding up of the Company. The holders of the Series A1 Preferred
Stock are entitled to participate, on an as-converted basis, in all dividends,
whether payable in cash, property or stock, that are declared on any of the
Common Stock. Cumulative dividends for Series A1 Preferred Stock as of
December 31, 2005 and 2004 were $534,267 and $218,209,
respectively.
Preference
Events
Any
transactions or series of related transactions, resulting in the sale of 50%
or
more of the voting power or assets of the Company and any merger, consolidation
or similar transaction will be deemed liquidation, triggering the liquidation
preference on the Preferred Stock. In the case of any liquidation involving
a
merger, consolidation, or similar transaction, accrued but unpaid dividends
shall be paid to the extent earned.
Kreido
Laboratories
(A
Development Stage Company)
Notes
to Financial Statements
Years
ended December 31, 2005 and 2004
NOTE
10
STOCKHOLDERS’ EQUITY (CAPITAL DEFICIT) (CONTINUED)
Liquidation
Preference
On
any
liquidation of the Company holders of Series B1 Stock will receive their
purchase price per share, plus accrued but unpaid dividends, if any, which
liquidation rights shall be senior to the rights of holders of all other classes
or series of capital stock of the Company. After the Series B1 Stockholders
have
received their liquidation preference, the holders of the Series A1 shall
receive $9.00 per share, plus accrued but unpaid dividends. Thereafter, any
remaining proceeds shall be divided among the holders of the Preferred Stock
(on
an as converted basis) and the holders of the Company’s Common on a pro-rata
basis.
The
Company is required to redeem any and all outstanding shares of Convertible
Preferred Stock any time prior to the Redemption Deadline, as defined, upon
the
written request from the holders of at least a majority of the outstanding
Convertible Preferred Stock, voting together as a single class on an
as-converted basis, to the extent legally permitted, in accordance with the
schedule and percentages below:
On
or
before the fifth anniversary of the Original Issue Date (the "First Redemption
Date"), the Company shall redeem 33-1/3% of all shares of Convertible Preferred
Stock outstanding on the First Redemption Date (determined on a pro rata basis
in accordance with the number of such shares held by each holder thereof).
No
redemptions of the Series A1 Preferred Stock shall occur unless and until
33-1/3% of all shares of Series B1 Preferred Stock outstanding on the First
Redemption Date have been redeemed.
Provided
that the Company has fully satisfied the redemption obligations set forth above,
on or before the sixth anniversary of the Original Issue Date (the "Second
Redemption Date"), the Company shall redeem 50% of all shares of Convertible
Preferred Stock outstanding on the Second Redemption Date (determined on a
pro
rata basis in accordance with the number of such shares held by each holder
thereof). No redemptions of the Series A1 Preferred Stock shall occur unless
and
until 50% of all shares of Series B1 Preferred Stock outstanding on the Second
Redemption Date have been redeemed.
Provided
that the Company has fully satisfied the redemption obligations set forth above,
on or before the seventh anniversary of the Original Issue Date (the "Third
Redemption Date"), the Company shall redeem 100% of all shares of Convertible
Preferred Stock outstanding on the Third Redemption Date. No redemptions of
the
Series A1 Preferred Stock shall occur unless and until 100% of all shares of
Series B1 Preferred Stock outstanding on the Third Redemption Date have been
redeemed.
The
price
per share to be paid by the Company for the redemption of the Convertible
Preferred Stock shall be the then-effective Stated Value of each such share
of
Convertible Preferred Stock.
Kreido
Laboratories
(A
Development Stage Company)
Notes
to Financial Statements
Years
ended December 31, 2005 and 2004
NOTE
10
STOCKHOLDERS’ EQUITY (CAPITAL DEFICIT)
Voting
Rights
Holders
of preferred stock are generally entitled to vote together with holders of
common stock on matters presented for shareholder action as if such shares
were
converted to common stock.
Warrants
On
November 7, 2000, the Company issued detachable stock purchase warrants to
a bank to purchase 2,333 shares of Series B preferred stock at $7.50 per share
in connection with an equipment note payable. The warrants expire on
November 7, 2007. The fair value of the warrants on the date of issuance of
$10,578 was calculated using the Black-Scholes option pricing model and the
following assumptions: contractual life of seven years; no dividends; risk
free
interest rate of 6.50%; and volatility of 50%. The fair value of the warrants
was recorded as debt issuance costs and offset against the Series B
convertible preferred stock in the accompanying balance sheet. Debt issuance
costs were amortized to interest expense over the term of the note.
In
connection with the issuance of convertible notes payable in 2002 (Note 9),
the
Company issued detachable stock purchase warrants to purchase 371,125 shares
of
common stock to the note holders. The warrants expire in five years. The fair
value of the warrants at the dates of issuance of $287,645 was calculated using
the Black-Scholes option pricing model and the following assumptions:
contractual life of five years; no dividends; risk free interest rates of 3.03%
to 4.5%; and volatility of 0.01%. The fair value of the warrants was recorded
as
a discount to the convertible notes and additional paid-in capital in the
accompanying balance sheet. This discount was amortized to interest expense
upon
the conversion of the related notes to Series C convertible preferred
stock.
In
connection with the issuance of Series C convertible preferred stock in 2002,
the Company modified the terms of the existing 779,763 warrants outstanding
and
adjusted the exercise price to $1.00 per share and the term to six years as
an
inducement to the note holders to convert. The fair value of the warrants as
a
result of the modification was $130,851 calculated using the Black-Scholes
option pricing model with the following assumptions: contractual life of six
years; no dividends; risk free rate of 3.0%; and volatility of 0.01%. The fair
value of repriced warrants was recorded as other expense.
Kreido
Laboratories
(A
Development Stage Company)
Notes
to Financial Statements
Years
ended December 31, 2005 and 2004
NOTE
10
STOCKHOLDERS’
EQUITY (CAPITAL DEFICIT) (CONTINUED)
In
connection with the issuance of convertible notes payable in 2003 (Note 9),
the
Company issued detachable stock purchase warrants to purchase 213,677 shares
of
common stock to the note holders. The warrants expire in five years. The fair
value of the warrants at the date of issuance of $57,353 was calculated using
the Black-Scholes option pricing model and the following assumptions:
contractual life of five years; no dividends; risk free interest rates of 2.97%
and volatility of 0.01%. The fair value of the warrants was recorded as a
discount to the convertible notes and additional paid-in capital in the
accompanying balance sheet. This discount was amortized to interest expense
upon
the conversion of the related notes to Series C convertible preferred
stock.
In
2003,
the Company issued 71,250 warrants to purchase common stock and Series C
preferred stock to a consultant. The warrants expire in six years. The fair
value of the warrants at the date of issuance of $16,500 was calculated using
the Black-Scholes option pricing model and the following assumptions:
contractual life of five years; no dividends; risk free interest rates of 2.97%
and volatility of $0.01%.
In
connection with the issuance of convertible notes payable from January to March
2004 (Note 9), the Company issued detachable stock purchase warrants to purchase
300,000 shares of Series B1 convertible preferred stock and issued detachable
stock purchase warrants to purchase 62,500 shares of common stock to the note
holders. The warrants were to expire in five years. The fair value of the
warrants at the date of issuance of $40,496 was calculated using the
Black-Scholes option pricing model and the following assumptions: contractual
life of five years; no dividends; risk free interest rates from 3.03% to 3.58%
and volatility of 0.01%. Additionally, convertible debt had a beneficial
conversion feature of $42,000. The fair value of the warrants and beneficial
conversion feature was recorded as a discount to the convertible notes and
additional paid-in capital in the accompanying balance sheet. This discount
was
amortized to interest expense upon the conversion of the related notes to
Series B1 convertible preferred stock.
In
connection with the conversion of the notes to Series B1 convertible
preferred stock, the Company exchanged existing warrants to purchase 1,057,414
of common and preferred stock into new warrants to purchase common stock at
$0.10 per share. The fair value of the new warrants was $21,148 calculated
using
the Black-Scholes option pricing model with the following assumptions:
contractual life of five years; no dividends; risk free rate of 3.58%; and
volatility of 0.01%. The fair value of exchanged warrants was recorded as other
expense.
Kreido
Laboratories
(A
Development Stage Company)
Notes
to Financial Statements
Years
ended December 31, 2005 and 2004
NOTE
10
STOCKHOLDERS’
EQUITY (CAPITAL DEFICIT)
(CONTINUED)
In
connection with the issuance of convertible notes payable from June to October
2004 (Note 9), the Company issued warrants to purchase 890,289 shares of
Series B1 preferred stock and warrants to purchase 1,102,552 shares of default
stock. The warrants expire in five years. The fair value of the warrants at
the
date of issuance of $596,607 was calculated by using the Black-Scholes option
pricing model and the following assumptions: contractual life of five years;
no
dividends; risk free interest rates from 3.40% to 3.72% and volatility of 0.01%.
With
the
issuance of convertible notes payable from January to October 2005
(Note 9), the Company issued warrants to purchase 2,388,065 shares of
Series B1 preferred stock. The warrants expire in five years. The fair value
of
the warrants at the date of issuance of $760,876 was calculated by using the
Black-Scholes option pricing model with the following assumptions: contractual
life of five years; no dividends; risk free interest rates from 3.72% to 4.32%
and volatility of 0.01%.
The
fair
value of the warrants was recorded as a discount to the convertible notes and
additional paid-in capital in the accompanying balance sheet. This discount
is
being amortized to interest expense over the term of the related convertible
notes. The net unamortized discount at December 31, 2005 and 2004 were
$1,171,541 and $570,339, respectively.
In
2005
and 2004, the Company issued 80,950 and 54,200, respectively, warrants to
purchase Series B1 preferred stock to three consultants. The warrants expire
in
five years. The fair value of the warrants at the date of issuance of $14,903
in
2005 and $8,631 in 2004 was calculated using the Black-Scholes option pricing
model and the following assumptions: contractual life of five years; no
dividends; risk free interest rates of 3.37% to 4.35% and volatility of
0.01%.
A
summary
of warrant activity is as follows:
|
|
Number
of
Options
|
|
Weighted
Average Exercise Price
|
|
|
|
|
|
|
|
Balance
at December 31, 2003
|
|
|
1,084,690
|
|
$
|
0.98
|
|
Granted
|
|
|
3,562,758
|
|
|
0.71
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
Cancelled
|
|
|
(1,057,414
|
)
|
|
1.00
|
|
Balance
at December 31, 2004
|
|
|
3,590,034
|
|
|
0.73
|
|
Granted
|
|
|
3,658,796
|
|
|
1.00
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
-
|
|
Balance
at December 31, 2005
|
|
|
7,248,830
|
|
$
|
0.87
|
|
The
weighted average exercise price assumes the default preferred strike price
will
be $1.00.
Kreido
Laboratories
(A
Development Stage Company)
Notes
to Financial Statements
Years
ended December 31, 2005 and 2004
NOTE
11
RELATED
PARTY TRANSACTIONS
During
2005 and 2004, law firms, of which certain members are shareholders of the
Company, were paid $53,765 and $97,555 for legal services performed on behalf
of
the Company. As of December 31, 2005 and 2004, amounts due to the law firms
were $892 and $0, respectively.
Unaudited
Financial Statements
Kreido
Laboratories
(A
Development Stage Company)
Nine-month
periods ended September 30, 2006 and 2005
Kreido
Laboratories
(A
Development Stage Company)
Table
of Contents
|
|
PAGE
|
|
|
|
Unaudited
Financial Statements
|
|
|
Balance
Sheets
|
|
F-24
|
Statements
of Operations
|
|
F-25
|
Statements
of Stockholders’ Equity (Capital Deficit)
|
|
F-26
|
Statements
of Cash Flows
|
|
F-27
- F-28
|
Notes
to Financial Statements
|
|
F-29
- F-45
|
Kreido
Laboratories
(A
Development Stage Company)
Balance
Sheets
(Unaudited)
|
|
September
30
|
|
|
|
2006
|
|
2005
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
66,263
|
|
$
|
100,986
|
|
Accounts
receivable
|
|
|
508
|
|
|
10,734
|
|
Total
current assets
|
|
|
66,771
|
|
|
111,720
|
|
|
|
|
|
|
|
|
|
Property
and equipment
,
net (Note 4)
|
|
|
333,024
|
|
|
273,792
|
|
Patents
,
less accumulated amortization of $274,808 and
|
|
|
|
|
|
|
|
$204,430
in 2006 and 2005, respectively
|
|
|
828,012
|
|
|
885,881
|
|
Other
assets
|
|
|
5,775
|
|
|
5,775
|
|
Total
assets
|
|
$
|
1,233,582
|
|
$
|
1,277,168
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
Current
portion of convertible notes payable, net of discount of
|
|
|
|
|
|
|
|
$1,108,688
and $465,733 (Note 9)
|
|
$
|
4,952,524
|
|
$
|
3,262,967
|
|
Current
portion of capital leases (Note 8)
|
|
|
54,453
|
|
|
31,049
|
|
Accounts
payable
|
|
|
191,960
|
|
|
271,780
|
|
Accrued
expenses (Note 9)
|
|
|
891,421
|
|
|
304,011
|
|
Total
current liabilities
|
|
|
6,090,358
|
|
|
3,869,807
|
|
|
|
|
|
|
|
|
|
Capital
leases
,
less current portion (Note 8)
|
|
|
71,958
|
|
|
38,289
|
|
Total
liabilities
|
|
|
6,162,316
|
|
|
3,908,096
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity (capital deficit)
(Notes
6 and 10)
|
|
|
|
|
|
|
|
Series
C convertible preferred stock, no par value. Authorized
|
|
|
|
|
|
|
|
8,600,000
shares; no shares issued and outstanding
|
|
|
-
|
|
|
-
|
|
Series
B convertible preferred stock, no par value. Authorized
|
|
|
|
|
|
|
|
200,000
shares; no shares issued and outstanding
|
|
|
-
|
|
|
-
|
|
Series
A convertible preferred stock, no par value. Authorized
|
|
|
|
|
|
|
|
500,000
shares; no shares issued and outstanding
|
|
|
-
|
|
|
-
|
|
Series
A1 convertible preferred stock, no par value. Authorized
|
|
|
|
|
|
|
|
549,474
shares; issued and outstanding 549,474 shares;
|
|
|
|
|
|
|
|
liquidation
preference $4,945,266
|
|
|
3,628,369
|
|
|
3,628,369
|
|
Series
B1 convertible preferred stock, no par value. Authorized
|
|
|
|
|
|
|
|
13,783,783
shares; issued and outstanding 10,011,355 shares;
|
|
|
|
|
|
|
|
liquidation
preference $10,011,355
|
|
|
10,011,355
|
|
|
10,011,355
|
|
Common
stock, no par value. Authorized 150,000,000 shares;
|
|
|
|
|
|
|
|
issued
and outstanding 720,501 shares
|
|
|
103,200
|
|
|
103,200
|
|
Restricted
common stock, no par value; issued and outstanding
|
|
|
|
|
|
|
|
641,786
shares
|
|
|
64,179
|
|
|
64,179
|
|
Additional
paid-in capital
|
|
|
3,403,667
|
|
|
2,464,337
|
|
Deferred
compensation
|
|
|
(21,722
|
)
|
|
(43,518
|
)
|
Deficit
accumulated during the development stage
|
|
|
(22,117,782
|
)
|
|
(18,858,850
|
)
|
Net
stockholders' equity (capital deficit)
|
|
|
(4,928,734
|
)
|
|
(2,630,928
|
)
|
Total
liabilities and stockholders' equity (capital deficit)
|
|
$
|
1,233,582
|
|
$
|
1,277,168
|
|
See
notes to financial statements.
Kreido
Laboratories
(A
Development Stage Company)
Statements
of Operations
(Unaudited)
|
|
|
|
|
|
Period
from
|
|
|
|
|
|
|
|
January
13,
|
|
|
|
Nine
Months
|
|
Nine
Months
|
|
1995
|
|
|
|
Ended
|
|
Ended
|
|
(Inception)
to
|
|
|
|
September
30,
|
|
September
30,
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
Operating
expenses
|
|
|
|
|
|
|
|
Research
and develoment
|
|
$
|
1,135,297
|
|
$
|
1,424,910
|
|
$
|
15,452,324
|
|
General
and administrative expenses (Note 11)
|
|
|
561,482
|
|
|
478,142
|
|
|
4,409,523
|
|
Loss
from operations
|
|
|
(1,696,779
|
)
|
|
(1,903,052
|
)
|
|
(19,861,847
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses)
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(652,855
|
)
|
|
(345,384
|
)
|
|
(2,906,796
|
)
|
Interest
income
|
|
|
2,524
|
|
|
570
|
|
|
63,600
|
|
Other
income
|
|
|
102,766
|
|
|
182,483
|
|
|
1,105,030
|
|
Loss
on sale of property and equipment
|
|
|
(13,890
|
)
|
|
(11,422
|
)
|
|
(78,936
|
)
|
Loss
from retirement of assets
|
|
|
-
|
|
|
(120,847
|
)
|
|
(275,163
|
)
|
Other
expenses
|
|
|
-
|
|
|
-
|
|
|
(154,070
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes
|
|
|
(2,258,234
|
)
|
|
(2,197,652
|
)
|
|
(22,108,182
|
)
|
Income
tax expense
|
|
|
800
|
|
|
807
|
|
|
9,600
|
|
Net
loss
|
|
$
|
(2,259,034
|
)
|
$
|
(2,198,459
|
)
|
$
|
(22,117,782
|
)
|
See
notes to financial
statements.
Kreido
Laboratories
(A
Development Stage Company)
Statements
of Stockholders’ Equity (Capital Deficit)
Period
from January 13, 1995 (Inception) to September 30, 2006
(Unaudited)
|
|
Series
C Convertible Preferred Stock
|
|
Series
B Convertible Preferred Stock
|
|
Series
A Convertible Preferred Stock
|
|
Series
A1 Convertible Preferred Stock
|
|
Series
B1 Convertible Preferred Stock
|
|
Common
Stock
|
|
Restricted
Common Stock
|
|
Additional
Paid-In
Capital
|
|
Deferred
Compensation
|
|
Deficit
Accumulated During the Development
Stage
|
|
Stockholders'
Equity (Capital Deficit)
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock to founders
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
-
|
|
|
750,000
|
|
$
|
99,967
|
|
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
99,967
|
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(67,507
|
)
|
|
(67,507
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December
31, 1995
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
750,000
|
|
|
99,967
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(67,507
|
)
|
|
32,460
|
|
|
Net
loss (unaudited)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(129,975
|
)
|
|
(129,975
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December
31, 1996
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
750,000
|
|
|
99,967
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(197,482
|
)
|
|
(97,515
|
)
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(329,352
|
)
|
|
(329,352
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December
31, 1997
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
750,000
|
|
|
99,967
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(526,834
|
)
|
|
(426,867
|
)
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(291,711
|
)
|
|
(291,711
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December
31, 1998
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
750,000
|
|
|
99,967
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(818,545
|
)
|
|
(718,578
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Series A preferred stock
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
242,561
|
|
|
1,480,425
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
217,496
|
|
|
-
|
|
|
-
|
|
|
1,697,921
|
|
|
Stock
option issuances
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
317,590
|
|
|
(286,892
|
)
|
|
-
|
|
|
30,698
|
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(717,965
|
)
|
|
(717,965
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December
31, 1999
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
242,561
|
|
|
1,480,425
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
750,000
|
|
|
99,967
|
|
|
-
|
|
|
-
|
|
|
535,086
|
|
|
(286,892
|
)
|
|
(1,536,510
|
)
|
|
292,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of notes to Series A preferred stock
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
106,925
|
|
|
637,378
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
637,378
|
|
|
Retirement
of common stock
|
|
|
-
|
|
|
-
|
|
|
200,000
|
|
|
1,500,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(30,073
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,500,000
|
|
|
Issuance
of Series B preferred stock
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
10,578
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
10,578
|
|
|
Deferred
compensation - options/warrants
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
100,566
|
|
|
(100,566
|
)
|
|
-
|
|
|
-
|
|
|
Compensation
expense
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
87,590
|
|
|
-
|
|
|
87,590
|
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,934,715
|
)
|
|
(1,934,715
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December
31, 2000
|
|
|
-
|
|
|
-
|
|
|
200,000
|
|
|
1,510,578
|
|
|
349,486
|
|
|
2,117,803
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
719,927
|
|
|
99,967
|
|
|
-
|
|
|
-
|
|
|
635,652
|
|
|
(299,868
|
)
|
|
(3,471,225
|
)
|
|
592,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock grant
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
575
|
|
|
3,234
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,234
|
|
|
Issuance
of warrants in connection with convertible debt
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
304,078
|
|
|
-
|
|
|
-
|
|
|
304,078
|
|
|
Deferred
compensation options
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
259,350
|
|
|
(259,350
|
)
|
|
-
|
|
|
-
|
|
|
Compensation
expense
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
140,601
|
|
|
-
|
|
|
140,601
|
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3,307,882
|
)
|
|
(3,307,882
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December
31, 2001
|
|
|
-
|
|
|
-
|
|
|
200,000
|
|
|
1,510,578
|
|
|
349,486
|
|
|
2,117,803
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
720,502
|
|
|
103,201
|
|
|
-
|
|
|
-
|
|
|
1,199,080
|
|
|
(418,617
|
)
|
|
(6,779,107
|
)
|
|
(2,267,062
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Series C preferred stock
|
|
|
1,995,000
|
|
|
1,995,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,995,000
|
|
|
Conversion
of notes, accrued interest and accounts payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
Series C preferred stock
|
|
|
5,255,785
|
|
|
5,255,785
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
5,255,785
|
|
|
Issuance
of warrants in connnection with convertible debt
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
287,645
|
|
|
-
|
|
|
-
|
|
|
287,645
|
|
|
Deferred
compensation options
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
60,500
|
|
|
(60,500
|
)
|
|
-
|
|
|
-
|
|
|
Compensation
expense
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
182,882
|
|
|
-
|
|
|
182,882
|
|
|
Repricing
of warrants
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
130,851
|
|
|
-
|
|
|
-
|
|
|
130,851
|
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3,436,074
|
)
|
|
(3,436,074
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2002
|
|
|
7,250,785
|
|
|
7,250,785
|
|
|
200,000
|
|
|
1,510,578
|
|
|
349,486
|
|
|
2,117,803
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
720,502
|
|
|
103,201
|
|
|
-
|
|
|
-
|
|
|
1,678,076
|
|
|
(296,235
|
)
|
|
(10,215,181
|
)
|
|
2,149,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Series C preferred stock
|
|
|
428,500
|
|
|
428,500
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
428,500
|
|
|
Conversion
of notes and accrued interest payable to Series C
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
preferred
stock
|
|
|
744,510
|
|
|
744,510
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
744,510
|
|
|
Issuance
of warrants in connection with convertible debt
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
73,853
|
|
|
-
|
|
|
-
|
|
|
73,853
|
|
|
Compensation
expense
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
183,046
|
|
|
-
|
|
|
183,046
|
|
|
Buy
back of fractional shares
|
|
|
(12
|
)
|
|
(12
|
)
|
|
(3
|
)
|
|
(3
|
)
|
|
(9
|
)
|
|
(9
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1
|
)
|
|
(1
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(25
|
)
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,989,015
|
)
|
|
(2,989,015
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December
31, 2003
|
|
|
8,423,783
|
|
|
8,423,783
|
|
|
199,997
|
|
|
1,510,575
|
|
|
349,477
|
|
|
2,117,794
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
720,501
|
|
|
103,200
|
|
|
-
|
|
|
-
|
|
|
1,751,929
|
|
|
(113,189
|
)
|
|
(13,204,196
|
)
|
|
589,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Series B1 preferred stock
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
720,000
|
|
|
720,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
720,000
|
|
|
Coversion
of notes and accrued interest payable to Series B1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
preferred
stock
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
867,572
|
|
|
867,572
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
867,572
|
|
|
Issuance
of consulting warrants and warrants in connection
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
convertible
debt
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
708,882
|
|
|
-
|
|
|
-
|
|
|
708,882
|
|
|
Conversion
of Series C preferred stock to Series B1 preferred stock
|
|
|
(8,423,783
|
)
|
|
(8,423,783
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
8,423,783
|
|
|
8,423,783
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Conversion
of Series B preferred stock to Series A1 preferred stock
|
|
|
-
|
|
|
-
|
|
|
(199,997
|
)
|
|
(1,510,575
|
)
|
|
-
|
|
|
-
|
|
|
199,997
|
|
|
1,510,575
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Coversion
of Series A preferred stock to Series A1 preferred stock
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(349,477
|
)
|
|
(2,117,794
|
)
|
|
349,477
|
|
|
2,117,794
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Compensation
expense
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
109,008
|
|
|
-
|
|
|
109,008
|
|
|
Issuance
of restricted stock
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
641,786
|
|
|
64,179
|
|
|
-
|
|
|
(64,179
|
)
|
|
-
|
|
|
-
|
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3,456,195
|
)
|
|
(3,456,195
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December
31, 2004
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
549,474
|
|
|
3,628,369
|
|
|
10,011,355
|
|
|
10,011,355
|
|
|
720,501
|
|
|
103,200
|
|
|
641,786
|
|
|
64,179
|
|
|
2,460,811
|
|
|
(68,360
|
)
|
|
(16,660,391
|
)
|
|
(460,837
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of warrants in connection with convertible debt
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
760,876
|
|
|
-
|
|
|
-
|
|
|
760,876
|
|
|
Issuance
of consulting warrants
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
14,903
|
|
|
-
|
|
|
-
|
|
|
14,903
|
|
|
Issuance
of stock options
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4,053
|
|
|
-
|
|
|
-
|
|
|
4,053
|
|
|
Compensation
expense
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
33,123
|
|
|
-
|
|
|
33,123
|
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3,198,357
|
)
|
|
(3,198,357
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December
31, 2005
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
549,474
|
|
|
3,628,369
|
|
|
10,011,355
|
|
|
10,011,355
|
|
|
720,501
|
|
|
103,200
|
|
|
641,786
|
|
|
64,179
|
|
|
3,240,643
|
|
|
(35,237
|
)
|
|
(19,858,748
|
)
|
|
(2,846,239
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of warrants in connection with convertible debt
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
145,695
|
|
|
-
|
|
|
-
|
|
|
145,695
|
|
|
Issuance
of consulting warrants
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
16,700
|
|
|
-
|
|
|
-
|
|
|
16,700
|
|
|
Issuance
of stock options
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
629
|
|
|
-
|
|
|
-
|
|
|
629
|
|
|
Compensation
expense
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
13,515
|
|
|
-
|
|
|
13,515
|
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,259,034
|
)
|
|
(2,259,034
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
September
30, 2006
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
-
|
|
|
549,474
|
|
$
|
3,628,369
|
|
|
10,011,355
|
|
$
|
10,011,355
|
|
|
720,501
|
|
$
|
103,200
|
|
|
641,786
|
|
$
|
64,179
|
|
$
|
3,403,667
|
|
$
|
(21,722
|
)
|
$
|
(22,117,782
|
)
|
$
|
(4,928,734
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes to financial
statements.
Kreido
Laboratories
(A
Development Stage Company)
Statements
of Cash Flows
(Unaudited)
|
|
|
|
|
|
Period
from
|
|
|
|
|
|
|
|
January
13,
|
|
|
|
Nine
Months
|
|
Nine
Months
|
|
1995
|
|
|
|
Ended
|
|
Ended
|
|
(Inception)
to
|
|
|
|
September
|
|
September
|
|
September
30,
|
|
|
|
30,
2006
|
|
30,
2005
|
|
2006
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(2,259,034
|
)
|
$
|
(2,198,459
|
)
|
$
|
(22,117,782
|
)
|
Adjustments
to reconcile net loss to net cash used in
|
|
|
|
|
|
|
|
|
|
|
operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
127,094
|
|
|
169,618
|
|
|
1,334,171
|
|
Loss
on disposal of assets
|
|
|
13,890
|
|
|
11,422
|
|
|
78,936
|
|
Loss
on retirement of assets
|
|
|
-
|
|
|
120,847
|
|
|
275,163
|
|
Noncash
stock compensation
|
|
|
14,144
|
|
|
28,368
|
|
|
788,379
|
|
Amortization
of convertible debt discount
|
|
|
208,548
|
|
|
104,606
|
|
|
1,126,062
|
|
Inducement
to convert debt
|
|
|
-
|
|
|
-
|
|
|
151,999
|
|
Warrants
issued to consultants
|
|
|
16,700
|
|
|
-
|
|
|
56,734
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
226
|
|
|
6,223
|
|
|
(507
|
)
|
Other
assets
|
|
|
-
|
|
|
17,203
|
|
|
(56,634
|
)
|
Accounts
payable
|
|
|
(33,943
|
)
|
|
90,625
|
|
|
221,460
|
|
Accrued
expenses
|
|
|
456,412
|
|
|
215,589
|
|
|
1,421,985
|
|
Net
cash used in operating activities
|
|
|
(1,455,963
|
)
|
|
(1,433,958
|
)
|
|
(16,720,034
|
)
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(24,308
|
)
|
|
(6,542
|
)
|
|
(726,219
|
)
|
Proceeds
from sale of assets
|
|
|
10,000
|
|
|
82,748
|
|
|
95,248
|
|
Investments
in patent application
|
|
|
(160,281
|
)
|
|
(202,806
|
)
|
|
(1,297,297
|
)
|
Net
cash used in investing activities
|
|
|
(174,589
|
)
|
|
(126,600
|
)
|
|
(1,928,268
|
)
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
Procceds
from the issuance of Series A convertible
|
|
|
|
|
|
|
|
|
|
|
preferred
stock
|
|
|
-
|
|
|
-
|
|
|
937,504
|
|
Proceeds
from the issuance of Series B convertible
|
|
|
|
|
|
|
|
|
|
|
preferred
stock
|
|
|
-
|
|
|
-
|
|
|
1,500,000
|
|
Proceed
from the issuance of Series C convertible
|
|
|
|
|
|
|
|
|
|
|
preferred
stock
|
|
|
-
|
|
|
-
|
|
|
2,423,500
|
|
Proceeds
from the issuance of Series B1 preferred stock
|
|
|
-
|
|
|
-
|
|
|
720,000
|
|
Proceeds
from the issuance of common stock warrants
|
|
|
-
|
|
|
-
|
|
|
217,496
|
|
Proceeds
from the issuance of common stock
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Proceeds
from issuance of long-term debt
|
|
|
750,011
|
|
|
1,662,672
|
|
|
13,761,720
|
|
Principal
repayment of long-term debt and capital leases
|
|
|
(55,277
|
)
|
|
(82,952
|
)
|
|
(845,630
|
)
|
Buy
back of fractional shares
|
|
|
-
|
|
|
-
|
|
|
(25
|
)
|
Net
cash provided by financing activities
|
|
|
694,734
|
|
|
1,579,720
|
|
|
18,714,565
|
|
Net
increase in cash and cash equivalents
|
|
|
(935,818
|
)
|
|
19,162
|
|
|
66,263
|
|
Cash
and cash equivalents at beginning of period
|
|
|
1,002,081
|
|
|
81,824
|
|
|
-
|
|
Cash
and cash equivalents at end of period
|
|
$
|
66,263
|
|
$
|
100,986
|
|
$
|
66,263
|
|
See
notes to financial statements.
Kreido
Laboratories
(A
Development Stage Company)
Statements
of Cash Flows
(Unaudited)
|
|
|
|
|
|
Period
from
|
|
|
|
|
|
|
|
January
13,
|
|
|
|
Nine
Months
|
|
Nine
Months
|
|
1995
|
|
|
|
Ended
|
|
Ended
|
|
(Inception)
to
|
|
|
|
September
|
|
September
|
|
September
30,
|
|
|
|
30,
2006
|
|
30,
2005
|
|
2006
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
5,869
|
|
$
|
22,208
|
|
$
|
332,172
|
|
Income
taxes
|
|
|
800
|
|
|
800
|
|
|
9,600
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of noncash investing and
|
|
|
|
|
|
|
|
|
|
|
financing
activities
|
|
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment through capital leases
|
|
$
|
121,610
|
|
$
|
-
|
|
$
|
759,633
|
|
Additions
to machinery and equipment through settlement
|
|
|
|
|
|
|
|
|
|
|
of
capital lease
|
|
|
-
|
|
|
-
|
|
|
61,437
|
|
Additions
to patent and property and equipment through
|
|
|
|
|
|
|
|
|
|
|
issuance
of common stock
|
|
|
-
|
|
|
-
|
|
|
99,967
|
|
Conversion
of notes payable into Series A preferred stock
|
|
|
-
|
|
|
-
|
|
|
1,180,299
|
|
Conversion
of notes payable into Series C preferred stock
|
|
|
-
|
|
|
-
|
|
|
5,529,875
|
|
Conversion
of accounts payable into Series C preferred
|
|
|
|
|
|
|
|
|
|
|
stock
|
|
|
-
|
|
|
-
|
|
|
29,500
|
|
Conversion
of accrued interest into Series C preferred
|
|
|
|
|
|
|
|
|
|
|
stock
|
|
|
-
|
|
|
-
|
|
|
440,920
|
|
Warrants
issued in connection with convertible notes
|
|
|
145,695
|
|
|
483,124
|
|
|
2,152,254
|
|
Conversion
of Series A preferred stock into Series A1
|
|
|
|
|
|
|
|
|
|
|
preferred
stock
|
|
|
-
|
|
|
-
|
|
|
2,117,794
|
|
Conversion
of Series B preferred stock into Series A1
|
|
|
|
|
|
|
|
|
|
|
preferred
stock
|
|
|
-
|
|
|
-
|
|
|
1,510,575
|
|
Conversion
of Series C preferred stock into Series B1
|
|
|
|
|
|
|
|
|
|
|
preferred
stock
|
|
|
-
|
|
|
-
|
|
|
8,423,783
|
|
Conversion
of notes payable into Series B1 preferred stock
|
|
|
-
|
|
|
-
|
|
|
850,000
|
|
Conversion
of accrued interest into Series B1 preferred stock
|
|
|
-
|
|
|
-
|
|
|
17,572
|
|
Conversion
of accrued interest into notes payable
|
|
|
-
|
|
|
-
|
|
|
72,072
|
|
See
notes to financial statements.
Kreido
Laboratories
(A
Development Stage Company)
Notes
to Financial Statements
Periods
ended September 30, 2006 and 2005
(Unaudited)
|
NOTE
1
|
|
ORGANIZATION
|
|
|
|
|
|
Kreido
Laboratories, formerly known as Holl Technologies Company (“Kreido” or
“the Company”), was incorporated on January 13, 1995 under the laws
of the State of California. Since incorporation, the Company
has been
engaged in activities required to develop, patent and commercialize
its
products. The market for these products is developing in parallel
to the
Company’s activities. The Company considers itself a development stage
enterprise because it has not yet earned significant revenue
from its
commercial products. The Company creates and intends to license
innovative
chemical and bio-chemical reacting systems.
|
|
|
|
|
|
The
Company is the creator of reactor technology that is designed
to enhance
the manufacturing of a broad range of chemical products. Leveraging
its
proprietary STT
®
reactor technology (named for its spinning tube-in-tube design),
Kreido
partners with clients to deliver cost-effective manufacturing
solutions.
The Company continues to develop partnerships with a variety
of global
companies. Committed to the progress of green chemistry, Kreido
Laboratories has collaborations with academia, industry, and
government
agencies like the Environmental Protection Agency
(EPA).
|
|
|
|
|
|
The
cornerstone of the Company’s technology is its patented STT
®
(Spinning Tube in Tube) diffusional chemical reacting system,
which is
both a licensable process and a licensable system. In 2005,
the company
demonstrated how the STT
®
could make biodiesel from vegetable oil in less than a second
with
complete conversion and less undesirable by-product. The Company
has
continued to pursue this activity and has designed a complete
commercial
biodiesel production factory, demonstrated the factory at the
pilot
production level, and is now working toward the building of
three
commercial 30 million gallon per year production plants in
the United
States.
|
|
|
|
|
|
|
NOTE
2
|
|
SUMMARY
OF
SIGNIFICANT ACCOUNTING POLICIES
|
|
|
|
|
|
Revenue
Recognition
|
|
|
|
|
|
The
Company’s revenues are expected to be derived from licensing its patented
processes, leasing its patented equipment to carry out the
licensed
processes, providing on-going technical support and know-how,
and in the
future, the sale of biodiesel. Revenues from product sales
will be
recorded upon shipment. Revenues from technology licensing
will be, based
upon the nature of the licensing agreement, recorded upon billing
due date
established by contractual agreement with the customer or over
the term of
the agreement. For sales arrangements with multiple elements,
the Company
will allocate the undelivered elements based on the price charged
when an
element is sold separately. Through the period ended September
30, 2006,
the Company had recognized no significant commercial or licensing
revenue.
It is anticipated that once the company has built and begins
operating the
commercial biodiesel production plants, the majority of revenue
will be
based upon the sale of biodiesel to
distributors.
|
Kreido
Laboratories
(A
Development Stage Company)
Notes
to Financial Statements
Periods
ended September 30, 2006 and 2005
NOTE
2
|
|
SUMMARY
OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
|
|
|
|
|
Cash
and Cash Equivalents
|
|
|
|
|
|
The
Company considers all highly liquid investments with a maturity
of three
months or less when purchased to be cash equivalents.
|
|
|
|
|
|
Depreciation
and Amortization
|
|
|
|
|
|
The
provision for depreciation of property and equipment is calculated
on the
straight-line method over the estimated useful lives of the
related
assets, generally ranging from five to seven years. Leasehold
improvements
are amortized over the shorter of the useful life of the related
asset or
the lease term.
|
|
|
|
|
|
Patents
|
|
|
|
|
|
Capitalized
patent costs consist of direct costs associated with obtaining
patents.
Patent costs are amortized on a straight-line basis over 15
years, which
is the expected life.
|
|
|
|
|
|
Research
and Development Costs
|
|
|
|
|
|
Research
and development costs related to the design, development, demonstration,
and testing of reactor technology are charged to expense as
incurred.
|
|
|
|
|
|
Income
Taxes
|
|
|
|
|
|
The
Company accounts for income taxes under the asset and liability
method.
Deferred tax assets and liabilities are recognized for the
future tax
consequences attributable to differences between the financial
statement
carrying amounts of existing assets and liabilities and their
respective
tax bases. Deferred tax assets and liabilities are measured
using enacted
tax rates expected to apply to taxable income in the years
in which those
temporary differences are expected to be recovered or settled.
The effect
on deferred tax assets and liabilities of a change in tax rates
is
recognized in income in the period that includes the enactment
date.
|
|
|
|
|
|
Stock-Based
Compensation
|
|
|
|
|
|
Prior
to January 1, 2006, the Company accounted for employee stock-based
compensation using the intrinsic value method supplemented
by pro forma
disclosures in accordance with APB 25 and SFAS 123 Accounting
for
Stock-Based Compensation" ("SFAS 123"). Under the intrinsic
value based
method, compensation cost is the excess, if any, of he quoted
market price
of the stock at grant date or other measurement date over the
amount an
employee must pay to acquire the stock.
|
|
|
|
|
|
Effective
January 1, 2006, the Company adopted SFAS 123R using the modified
prospective approach and accordingly prior periods have not
been restated
to reflect the impact of SFAS 123R. Under SFAS 123R, stock-based
awards
granted prior to its adoption will be expensed over the remaining
portion
of their vesting period. These awards will be expensed under
the straight
line amortization method using the same fair value measurements
which were
used in calculating pro forma stock-based compensation expense
under SFAS
123. For stock-based awards granted on or after January 1,
2006, the
Company will amortize stock-based compensation expense on
a
straight-line basis over the requisite service period, which
is generally
a five-year vesting period.
|
Kreido
Laboratories
(A
Development Stage Company)
Notes
to Financial Statements
Periods
ended September 30, 2006 and 2005
NOTE
2
|
|
SUMMARY
OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
|
|
|
|
|
Stock-Based
Compensation (continued)
|
|
|
|
|
|
SFAS
123R requires forfeitures to be estimated at the time of grant
and
revised, if necessary, in subsequent periods if actual forfeitures
differ
from initial estimates. Had there been stock-based compensation
in 2006,
stock-based compensation expense would have been recorded net
of estimated
forfeitures for the period ended September 30, 2006 such that
expense
would be recorded only for those stock-based awards that are
expected to
vest. Previously under APB 25 to the extent awards were forfeited
prior to
vesting, the corresponding previously recognized expense was
reversed in
the period of forfeiture.
|
|
|
|
|
|
If
the fair value based method under FAS 123 had been applied
in measuring
stock-based compensation expense for the period ended September
30, 2005,
the pro forma on net loss and net loss per share would have
been as
follows:
|
|
|
Nine-month
period
ended
September
30,
2005
|
|
Period
from
January
13,
1995
(Inception)
to
December
31,
2005
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
Net
Loss:
|
|
|
|
|
|
As
reported
|
|
$
|
(2,198,459
|
)
|
$
|
(18,858,850
|
)
|
Add:
stock-based employee
compensation
expense included in reported net loss
|
|
|
28,368
|
|
|
686,197
|
|
Deduct:
total stock-based employee
compensation
expense determined
under
fair value based method for
all
awards
|
|
|
(50,262
|
)
|
|
(949,176
|
)
|
Pro
forma
|
|
$
|
(2,220,353
|
)
|
$
|
(19,121,829
|
)
|
|
|
The
fair value of options granted during the nine-month periods ended
September 30, 2006 and 2005 was determined using a minimum value
pricing
model with the following assumptions: risk-free interest rates
from 3.63%
to 5.18%, expected lives of five to ten years and volatility of
0.01%.
|
|
|
|
|
|
Use
of Estimates
|
|
|
|
|
|
The
Company’s management has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and expenses
and
disclosure of contingent assets and liabilities to prepare these
financial
statements in conformity with accounting principles generally accepted
in
the United States of America. Actual results could differ from
those
estimates.
|
Kreido
Laboratories
(A
Development Stage Company)
Notes
to Financial Statements
Periods
ended September 30, 2006 and 2005
|
NOTE
2
|
|
SUMMARY
OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
|
|
|
|
|
Fair
Value of Financial Instruments
|
|
|
|
|
|
The
carrying values reflected in the balance sheets for cash and cash
equivalents, accounts receivable, accounts payable and accrued
expenses
approximate their fair values due to the short maturity of these
instruments. The carrying value of convertible notes payable and
capital
leases estimates their fair value based upon current market borrowing
rates with similar terms and maturities.
|
|
|
|
|
|
Comprehensive
Loss
|
|
|
|
|
|
Except
for net loss, the Company has no material components of comprehensive
loss, and accordingly, the comprehensive loss is the same as the
net loss
for all periods presented.
|
|
|
|
NOTE
3
|
|
LIQUIDITY
AND
GOING
CONCERN ISSUES
|
|
|
|
|
|
The
Company is a development stage company, has suffered recurring
losses from
operations and has a net capital deficiency that raise substantial
doubt
about its ability to continue as a going concern.
|
|
|
|
|
|
It
currently expects that cash raised from financing will continue
to provide
sufficient cash to fund its projected operations for the immediately
foreseeable future and believes additional financing will be available
if
and when needed.
|
|
|
|
|
|
If
the Company is unable to achieve projected operating results and/or
obtain
such additional financing if and when needed, management will be
required
to curtail growth plans and scale back planned development activities.
No
assurances can be given that the Company will be successful in
raising
additional financing should such financing be required by future
operations.
|
|
|
|
|
|
Subsequent
Events
|
|
|
|
|
|
The
2004 financing provided sufficient cash to fund the Company’s operation
through June 2006. All previous convertible note due dates have
been
extended to December 31, 2006. In July, August, September and October
2006, additional notes and warrants were issued under similar terms
as the
previous notes and warrants to finance on-going monthly activities.
In
November and December 2006, additional notes were issued which
could be
converted to equity in the Private Placement Offering (See Company
Financing Plans) or repaid from the proceeds of the Private Placement
Offering. If no Private Placement Offering was completed these
notes would
revert to the same terms and conditions as the previous notes and
warrants. The due date of the previous notes (2004 financing through
November 2006) has been extended to January 31, 2007. The December
notes
are due January 15, 2007.
|
Kreido
Laboratories
(A
Development Stage Company)
Notes
to Financial Statements
Periods
ended September 30, 2006 and 2005
|
NOTE
3
|
|
LIQUIDITY
AND
GOING
CONCERN ISSUES (CONTINUED)
|
|
|
|
|
|
Company
Financing Plans
|
|
|
|
|
|
In
January 2007, Kreido Biofuels, Inc. (formally known as Gemwood
Productions, Inc.), Kreido Acquisition Corp. (the acquisition subsidiary),
and Kreido Laboratories (the Company) entered into an agreement
and plan
of merger and reorganization (the Agreement).
Under
the Agreement, acquisition subsidiary merged with and into the
Company,
with the Company remaining as the surviving entity (the Merger).
In
connection with the Merger the stockholders of the Company received
common
stock of the Parent company in exchange for their capital stock
of the
Company.
Simultaneously
with the closing of the Merger, Kreido Biofuels, Inc. completed
a private
placement offering of 18,518,519 units (Private Placement Offering)
of its
securities at the purchase price of $1.35 per unit, each unit consisting
of one share of common stock of Kreido Biofuels, Inc. and a warrant
to
purchase one share of common stock at an exercise price of $1.85
per
share. The Private Placement Offering raised gross proceeds of
$25,000,000, consisting of cash and cancelled indebtedness.
Funds
distributed to the Company from the PPO will be less legal fees
of
approximately $325,000, advisory fees of $400,000, and commission
fees of
7% on $5 million of the money raised by brokerage firms (approximately
$350,000).
Contemporaneously
with the closing of the merger, Kreido Biofuels, Inc. split off
its wholly
owned subsidiary, Gemwood Leaseco, Inc., through the sale of all
the
outstanding capital stock, upon the terms and conditions of the
split off
agreement.
|
|
|
|
NOTE
4
|
|
PROPERTY
AND
EQUIPMENT
|
|
|
|
|
|
Property
and equipment at September 30, 2006 and 2005 is summarized as
follows:
|
|
|
2006
|
|
2005
|
|
Furniture
and fixtures
|
|
$
|
43,472
|
|
$
|
43,472
|
|
Machinery
and equipment
|
|
|
602,333
|
|
|
460,654
|
|
Office
equipment
|
|
|
114,554
|
|
|
110,039
|
|
Leasehold
improvements
|
|
|
46,710
|
|
|
46,710
|
|
Total
|
|
|
807,069
|
|
|
660,875
|
|
Less
accumulated depreciation and amortization
|
|
|
(474,045
|
)
|
|
(387,083
|
)
|
Net
book value
|
|
$
|
333,024
|
|
$
|
273,792
|
|
|
NOTE
5
|
|
INCOME
TAXES
|
|
|
|
|
|
Income
taxes principally consist of minimum franchise taxes for the State
of
California. At September 30, 2006 and 2005, the Company had available
net operating loss carry forwards totaling approximately $16,800,000
and
$14,500,000 for federal income tax purposes, and approximately
$15,500,000
and $13,100,000 for California state purposes, which expires beginning
in
tax year 2010.
Additionally, at September 30, 2006 and 2005, the Company had state
tax
credits of approximately $400,000. For federal net operating loss
generated before 1997, the carryforward period is 15 years. For
federal
net operating loss generated after 1997, the carryforward period
is 20
years. For California state purposes, Kreido’s net operating losses were
classified under Eligible Small Business (ESB). For ESB net operating
loss
generated from January 1, 1994 through December 31, 1999, the carryforward
period is 5 years. For ESB net operating loss generated beginning
January
1, 2000, the carryforward period is 10
years.
|
Kreido
Laboratories
(A
Development Stage Company)
Notes
to Financial Statements
Periods
ended September 30, 2006 and 2005
|
NOTE
5
|
|
INCOME
TAXES
(CONTINUED)
|
|
|
|
|
|
Deferred
tax assets consist principally of the tax effect of net operating
loss
carry forwards. In assessing the potential realization of deferred
tax
assets, management considers whether it is more likely than not
that some
portion or all of the deferred tax assets will be realized. The
ultimate
realization of deferred tax assets is dependent upon the Company
attaining
future taxable income during the periods in which those temporary
differences become deductible. Due to the uncertainty surrounding
the
realization of the benefits of its tax attributes, including net
operating
loss carry forwards in future tax returns, the Company has fully
reserved
its deferred tax assets as of September 30, 2006 and
2005.
|
|
|
|
|
|
In
addition, the utilization of net operating loss carry forwards
may be
limited due to restrictions imposed under applicable federal and
state tax
laws due to a change in ownership.
|
|
|
|
|
|
|
NOTE
6
|
|
STOCK-BASED
COMPENSATION
|
|
|
|
|
|
The
Company’s Board of Directors approved the 1997 Stock Incentive Plan (the
Plan) during 1997, which provides for grants of incentive stock
options
and nonqualified stock options. Under the Plan, options may be
granted
from time to time for an aggregate of no more than 1,870,000 shares
of
common stock as determined by the Board of Directors. The options
typically vest over a four-year period with 25% vested per year,
or in
accordance with individual agreements as determined by the Board
of
Directors. The options are exercisable from three to ten years
from the
date of grant. There were 752,992 options vested at September 30,
2006, of
which no options had been exercised.
|
|
|
|
|
|
Summary
stock option activity is as
follows:
|
|
|
|
|
Weighted
Average Exercise Price
|
|
|
|
|
|
|
|
Balance
at December 31, 2003
|
|
|
1,222,274
|
|
$
|
0.96
|
|
Granted
|
|
|
310,524
|
|
|
0.16
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
Cancelled
|
|
|
(1,060,945
|
)
|
|
0.08
|
|
Balance
at December 31, 2004
|
|
|
471,853
|
|
|
0.70
|
|
Granted
|
|
|
861,786
|
|
|
0.14
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
Cancelled
|
|
|
(152,908
|
)
|
|
0.96
|
|
Balance
at December 31, 2005
|
|
|
1,180,731
|
|
$
|
0.26
|
|
Granted
|
|
|
40,950
|
|
|
0.10
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
Cancelled
|
|
|
(199,125
|
)
|
|
0.10
|
|
Balance
at September 30, 2006
|
|
|
1,022,556
|
|
$
|
0.14
|
|
Kreido
Laboratories
(A
Development Stage Company)
Notes
to Financial Statements
Periods
ended September 30, 2006 and 2005
|
NOTE
6
|
|
STOCK-BASED
COMPENSATION (CONTINUED)
|
|
|
|
|
|
The
following table summarizes information regarding options outstanding
and
options exercisable at September 30,
2006:
|
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
Range
of Exercise Prices
|
|
Outstanding
at September 30, 2006
|
|
Weighted-
Average Remaining Contractual Life
|
|
Weighted-
Average Exercise Price
|
|
Exercisable
at September 30, 2006
|
|
Weighted-
Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.10
|
|
|
806,081
|
|
|
5.5
|
|
$
|
0.10
|
|
|
552,747
|
|
$
|
0.10
|
|
$0.70
|
|
|
3,000
|
|
|
2.9
|
|
|
0.70
|
|
|
3,000
|
|
|
0.70
|
|
$0.85
|
|
|
138,648
|
|
|
4.5
|
|
|
0.85
|
|
|
122,418
|
|
|
0.85
|
|
$1.00
|
|
|
45,948
|
|
|
3.7
|
|
|
1.00
|
|
|
45,948
|
|
|
1.00
|
|
$1.40
|
|
|
22,779
|
|
|
1.1
|
|
|
1.40
|
|
|
22,779
|
|
|
1.40
|
|
$2.10
|
|
|
6,100
|
|
|
1.5
|
|
|
2.10
|
|
|
6,100
|
|
|
2.10
|
|
|
|
|
1,022,556
|
|
|
5.11
|
|
$
|
0.28
|
|
|
752,992
|
|
$
|
0.34
|
|
|
NOTE
7
|
|
COMMITMENTS
|
|
|
|
|
|
Operating
Leases
|
|
|
|
|
|
The
Company has entered into two operating leases for corporate offices
and
laboratory space, with termination dates ranging from November
14, 2006 to
August 31, 2007. Rent expense for the nine-month periods ended
September
30, 2006 and 2005 was $63,164 and $74,365, respectively.
|
|
|
|
|
|
At
September 30, 2006, future minimum payments under these noncancelable
lease agreements are as
follows:
|
Year
Ending December 31,
|
|
Amount
|
|
2006
|
|
$
|
19,893
|
|
2007
|
|
|
59,366
|
|
|
|
$
|
79,259
|
|
Kreido
Laboratories
(A
Development Stage Company)
Notes
to Financial Statements
Periods
ended September 30, 2006 and 2005
|
NOTE
8
|
|
CAPITAL
LEASES
|
|
|
|
|
|
The
Company has entered into capital leases for various
equipment.
|
|
|
|
|
|
At
September 30, 2006, future minimum lease payments on these leases
are as
follows:
|
|
|
Amount
|
|
Three-month
period ending December 31, 2006
|
|
$
|
49,725
|
|
Year
ending December 31, 2007
|
|
|
82,555
|
|
Total
lease payments
|
|
|
132,280
|
|
Less
- interest
|
|
|
5,869
|
|
Present
value of lease payments
|
|
|
126,411
|
|
Less
- current portion
|
|
|
54,453
|
|
|
|
$
|
71,958
|
|
|
|
Equipment
recorded under capital leases totaled $126,410 and $69,338 at September
30, 2006 and 2005, respectively.
|
|
|
|
NOTE
9
|
|
CONVERTIBLE
NOTES PAYABLE
|
|
|
|
|
|
During
2001, the Company issued $2,519,296 of unsecured convertible notes
payable
with interest rate of 9% and due at various dates from January
through
November 2002. The notes were automatically convertible into the
Series of Preferred Stock having the lowest conversion price of
Series A,
B or C Preferred Stock upon the occurrence of certain events, as
defined.
|
|
|
|
|
|
During
2002, the Company secured additional financing of $2,575,000 in
convertible notes payable. On April 12, 2002, the Company amended
all
existing notes to a due date of November 30, 2002 in accordance with
a Bridge Financing - Series C Preferred Stock offering. Warrant
coverage
was provided for extension of existing loans as well as new bridge
financing. In December 2002, $4,803,375 of these notes, including
accrued interest of $422,910 and accounts payable of $29,500, were
converted into Series C Convertible Preferred Stock (Note
10).
|
|
|
|
|
|
The
remaining convertible two notes of $170,921 bore interest of 8%
per annum
and were due December 24, 2003. In April 2004, the balance of these
notes, including accrued interest of $20,547 were converted into
new notes
with interest at 10% per annum and extended the maturity dates
to May 31,
2004 and December 31, 2004.
|
|
|
|
|
|
During
2003, the Company issued secured convertible notes for $726,500.
On
October 1, 2003, the Company amended all the notes issued in 2003
to a due
date of November 30, 2003 in accordance with a Bridge Financing
- Series C
preferred stock second closing. On November 13, 2003, these notes
and
accrued interest of $18,010 were converted into Series C convertible
preferred stock (Note 10).
|
Kreido
Laboratories
(A
Development Stage Company)
Notes
to Financial Statements
Periods
ended September 30, 2006 and 2005
NOTE
9
|
|
CONVERTIBLE
NOTES PAYABLE (CONTINUED)
|
|
|
|
|
|
From
January to March 2004, the Company issued secured convertible notes
for
$850,000. These notes bore interest of 10% per annum and were due
June 30,
2004. In April 2004 the Company converted these notes, including
accrued
interest of $17,575 into Series B1 preferred stock (Note
10).
|
|
|
|
|
|
Also
in April, notes held by SOG due December 24, 2003 were converted
to new
convertible notes bearing an interest of 10% per annum for $191,605
due
December 31, 2004.
|
|
|
|
|
|
From
June to October 2004, the Company issued convertible notes for
$1,405,040.
These notes bore interest of 10% per annum and were due November
29, 2004.
In November 2004 the Company paid off all existing notes and raised
additional working funds by issuing new secured convertible notes
totaling
$2,068,028 bearing an interest of 10% per annum and due July 29,
2005.
Some of the new money was held in escrow to be released by the
loan
holders in January 2005 at their discretion.
|
|
|
|
|
|
From
January to October 2005, the Company issued convertible notes totaling
$3,232,933. These notes bore interest ranging from 10% to 12% per
annum
and were due February 28, 2006. Some of the new money was held
in escrow
to be released by the loan holders in 2006 at their discretion.
|
|
|
|
|
|
From
July to September 2006, the Company issued convertible notes for
$750,012.
These notes bear interest of 12% per annum and are due December
31,
2006.
|
|
|
|
|
|
The
balances of convertible notes payable at September 30, 2006 and
2005 were
$6,050,973 and $3,718,461, respectively.
|
|
|
|
|
|
In
2004, the Company issued a no interest unsecured note payable to
a former
officer in the amount of $17,236. This note was payable in monthly
installments of $2,873 and was fully paid in April 2005. In 2005, in
conjunction with a consulting contract, the Company issued a new
no
interest unsecured note payable to this same former officer in
the amount
of $12,239 payable in full on December 31, 2008 with an initial
payment of
$2,000. The balance of this note payable at September 30, 2006
was
$10,240.
|
|
|
|
NOTE
10
|
|
STOCKHOLDERS’
EQUITY
(CAPITAL
DEFICIT)
|
The
Company’s Amended and Restated Articles of Incorporation (Articles) authorize
the issuance of two classes of shares designated as common stock and preferred
stock, each having no par value. The numbers of shares of common stock and
preferred stock authorized are 150,000,000 and 100,000,000, respectively.
Preferred stock currently consists of Series A1 (549,474 shares designated)
and
Series B1 (13,783,783 shares designated).
Kreido
Laboratories
(A
Development Stage Company)
Notes
to Financial Statements
Periods
ended September 30, 2006 and 2005
(Unaudited)
NOTE
10
STOCKHOLDERS’
EQUITY (CAPITAL DEFICIT) (CONTINUED)
Common
Stock
Common
stockholders are entitled to receive dividends when and if declared by the
Board
of Directors, to share ratably in the proceeds of any dissolution or winding
up
of the Company and to vote on certain matters as provided in the Articles.
No
dividends can be declared or paid to common stockholders unless and until all
accrued and unpaid dividends on the Series B1 preferred stock have been paid
to
Series B1 preferred stockholders. Shares of common stock are subject to transfer
restrictions and certain rights of first refusal relating to the securities
laws, the bylaws of the Company and, in certain cases, specific agreements
with
the Company and the preferred stockholders.
Restricted
Common Stock
Restricted
common stock has all the rights of a common stock but is subject to certain
vesting schedules as defined in the individual stock grant
agreements.
During
1999, in conjunction with the issuance of convertible notes payable, a
shareholder of the Company placed 32,221 shares of common stock in escrow.
The
shares were subject to forfeiture if the convertible notes were converted into
shares of Series A convertible preferred stock. In 2000, the convertible debt
was converted into Series A convertible preferred stock. The amount of shares
forfeited by the shareholder was reduced to 30,073 shares and 2,148 shares
were
returned to the shareholder. The value of the shares returned to the shareholder
was not material to the financial statements.
In
April
2004 the Company issued a total of 1,062,534 shares of restricted common in
exchange for the cancellation of certain stock options. Upon the departure
of
one of the holders, 420,748 shares were cancelled. The total amount of vested
shares was 513,469 as of December 31, 2005.
In
August 1999, the Company issued 165,000 shares of Series A convertible
preferred stock for total cash consideration of $1,155,000. These shares were
issued to venture capital firms and private investors. In December 1999,
the Company issued an additional 77,561 shares of Series A convertible preferred
stock to private investors as consideration for convertible promissory notes
payable totaling $542,921.
In
August 2000, the Company issued 200,000 shares of Series B convertible
preferred stock for total cash consideration of $1,500,000. These shares were
issued to venture capital firms and private investors. In addition, throughout
2000, the Company issued an additional 106,916 shares of Series A convertible
preferred stock to private investors as consideration for convertible promissory
notes payable and accrued interest totaling $637,378.
In
December 2002, the Company issued 7,250,785 shares of Series C convertible
preferred stock for a total cash consideration of $1,995,000 and conversion
of
notes payable of $4,803,375, including accrued interest of $422,910 and accounts
payable of $29,500. These shares were issued to venture capital firms and
private investors.
Kreido
Laboratories
(A
Development Stage Company)
Notes
to Financial Statements
Periods
ended September 30, 2006 and 2005
NOTE
10
STOCKHOLDERS’
EQUITY (CAPITAL DEFICIT) (CONTINUED)
In
November 2003, the Company issued 1,173,010 shares of Series C convertible
preferred stock for a total cash consideration of $428,500 and conversion of
notes payable of $744,510, which included accrued interest of $18,010. These
shares were issued to venture capital firms and private investors.
On
November 26, 2003, the Company’s Board of Directors declared a 10 to 1 reverse
stock split of all the Company’s issued and outstanding shares of common stock,
Series A preferred stock, Series B preferred stock and Series C preferred stock.
The number of shares, warrants and options outstanding and per share data has
been restated to reflect the reverse stock split.
In
connection with the reverse stock split, the Company repurchased the following
split shares of common and convertible stock:
|
|
Number
of Shares
|
|
Amount
|
|
Common
Stock
|
|
|
1
|
|
$
|
1
|
|
Series
A
|
|
|
9
|
|
|
9
|
|
Series
B
|
|
|
3
|
|
|
3
|
|
Series
C
|
|
|
12
|
|
|
12
|
|
|
|
|
25
|
|
$
|
25
|
|
In
April
2004, the Company converted the outstanding amount of Series A and Series B
convertible preferred stock into 549,474 shares of Series A1 convertible
preferred stock for total of $3,628,369.
In
April
2004, the Company issued 10,011,355 shares of Series B1 convertible preferred
stock for total cash consideration of $720,000, conversion of notes payable
of
$867,572, which included accrued interest of $17,572 and conversion of all
the
outstanding Series C convertible preferred stock of $8,423,783. These shares
were issued to venture capital firms and private investors.
Certain
notes that expired in December 2003 were renegotiated in April 2004 and warrants
to purchase 95,803 shares of Common at $0.85 were issued as part of the
financing. The warrants expire in 5 years.
The
rights, preferences and privileges of the Series A1 and Series B1 preferred
stock are listed below:
Kreido
Laboratories
(A
Development Stage Company)
Notes
to Financial Statements
Periods
ended September 30, 2006 and 2005
NOTE
10
STOCKHOLDERS’
EQUITY (CAPITAL DEFICIT) (CONTINUED)
Conversion
Rights
Each
share of the preferred stock outstanding is convertible, at the option of the
holder, into common stock at the rate of one share of common stock for each
share of the preferred stock, adjustable for certain dilutive
events.
Such
conversion will occur automatically upon the closing of a registered public
offering of the Company’s common stock that yields aggregate proceeds to the
Company of at least $30,000,000 at a per share price of at least
$5.
Dividend
Rights
Each
fiscal year, the holders of shares of Series B1 Preferred Stock are entitled
to
receive, before any dividends are paid or declared and set aside for the Series
A1 Preferred Stock or the Common Stock, out of funds legally available for
that
purpose, cumulative dividends at a rate of eight percent (8%) per annum, payable
in cash only. Such cumulative dividends accrue from the date of issuance and
are
calculated through the earliest of (i) the conversion of Series B1 Preferred
Stock into Common Stock, (ii) the redemption of Series B1 Preferred Stock or
(iii) the liquidation, dissolution or winding up of the Company. The holders
of
the Series B1 Preferred Stock are entitled to participate, on an as-converted
basis, in all dividends, whether payable in cash, property or stock, that are
declared on any of the Common Stock. Cumulative dividends for Series B1
Preferred Stock as of September 30, 2006 and 2005 were $1,954,545 and
$1,153,637, respectively.
Each
fiscal year, the holders of shares of Series A1 Preferred Stock are entitled
to
receive, before any dividends are paid or declared and set aside for the Common
Stock, out of funds legally available for that purpose, cumulative dividends
at
a rate of eight percent (8%) per annum, payable in cash only. Such cumulative
dividends accrue from the date of issuance and are calculated through the
earliest of (I) the conversion of Series A1 Preferred Stock into Common Stock,
(ii) the redemption of Series A1 Preferred Stock or (iii) the liquidation,
dissolution or winding up of the Company. The holders of the Series A1 Preferred
Stock are entitled to participate, on an as-converted basis, in all dividends,
whether payable in cash, property or stock, that are declared on any of the
Common Stock. Cumulative dividends for Series A1 Preferred Stock as of September
30, 2006 and 2005 were $771,310 and $455,252, respectively.
Preference
Events
Any
transactions or series of related transactions, resulting in the sale of 50%
or
more of the voting power or assets of the Company and any merger, consolidation
or similar transaction will be deemed liquidation, triggering the liquidation
preference on the Preferred Stock. In the case of any liquidation involving
a
merger, consolidation, or similar transaction, accrued but unpaid dividends
shall be paid to the extent earned.
Kreido
Laboratories
(A
Development Stage Company)
Notes
to Financial Statements
Periods
ended September 30, 2006 and 2005
NOTE
10
STOCKHOLDERS’
EQUITY (CAPITAL DEFICIT) (CONTINUED)
Liquidation
Preference
On
any
liquidation of the Company holders of Series B1 Stock will receive their
purchase price per share, plus accrued but unpaid dividends, if any, which
liquidation rights shall be senior to the rights of holders of all other classes
or series of capital stock of the Company. After the Series B1 Stockholders
have
received their liquidation preference, the holders of the Series A1 shall
receive $9.00 per share, plus accrued but unpaid dividends. Thereafter, any
remaining proceeds shall be divided among the holders of the Preferred Stock
(on
an as converted basis) and the holders of the Company’s Common on a pro-rata
basis.
The
Company is required to redeem any and all outstanding shares of Convertible
Preferred Stock any time prior to the Redemption Deadline, as defined, upon
the
written request from the holders of at least a majority of the outstanding
Convertible Preferred Stock, voting together as a single class on an
as-converted basis, to the extent legally permitted, in accordance with the
schedule and percentages below:
On
or
before the fifth anniversary of the Original Issue Date (the "First Redemption
Date"), the Company shall redeem 33-1/3% of all shares of Convertible Preferred
Stock outstanding on the First Redemption Date (determined on a pro rata basis
in accordance with the number of such shares held by each holder thereof).
No
redemptions of the Series A1 Preferred Stock shall occur unless and until
33-1/3% of all shares of Series B1 Preferred Stock outstanding on the First
Redemption Date have been redeemed.
Provided
that the Company has fully satisfied the redemption obligations set forth above,
on or before the sixth anniversary of the Original Issue Date (the "Second
Redemption Date"), the Company shall redeem 50% of all shares of Convertible
Preferred Stock outstanding on the Second Redemption Date (determined on a
pro
rata basis in accordance with the number of such shares held by each holder
thereof). No redemptions of the Series A1 Preferred Stock shall occur unless
and
until 50% of all shares of Series B1 Preferred Stock outstanding on the Second
Redemption Date have been redeemed.
Provided
that the Company has fully satisfied the redemption obligations set forth above,
on or before the seventh anniversary of the Original Issue Date (the "Third
Redemption Date"), the Company shall redeem 100% of all shares of Convertible
Preferred Stock outstanding on the Third Redemption Date. No redemptions of
the
Series A1 Preferred Stock shall occur unless and until 100% of all shares of
Series B1 Preferred Stock outstanding on the Third Redemption Date have been
redeemed.
The
price
per share to be paid by the Company for the redemption of the Convertible
Preferred Stock shall be the then-effective Stated Value of each such share
of
Convertible Preferred Stock.
Kreido
Laboratories
(A
Development Stage Company)
Notes
to Financial Statements
Periods
ended September 30, 2006 and 2005
NOTE
10
STOCKHOLDERS’
EQUITY (CAPITAL DEFICIT) (CONTINUED)
Voting
Rights
Holders
of preferred stock are generally entitled to vote together with holders of
common stock on matters presented for shareholder action as if such shares
were
converted to common stock.
Warrants
On
November 7, 2000, the Company issued detachable stock purchase warrants to
a bank to purchase 2,333 shares of Series B preferred stock at $7.50 per share
in connection with an equipment note payable. The warrants expire on
November 7, 2007. The fair value of the warrants on the date of issuance of
$10,578 was calculated using the Black-Scholes option pricing model and the
following assumptions: contractual life of seven years; no dividends; risk
free
interest rate of 6.50%; and volatility of 50%. The fair value of the warrants
was recorded as debt issuance costs and offset against the Series B
convertible preferred stock in the accompanying balance sheet. Debt issuance
costs were amortized to interest expense over the term of the note.
In
connection with the issuance of convertible notes payable in 2002 (Note 9),
the
Company issued detachable stock purchase warrants to purchase 371,125 shares
of
common stock to the note holders. The warrants expire in five years. The fair
value of the warrants at the dates of issuance of $287,645 was calculated using
the Black-Scholes option pricing model and the following assumptions:
contractual life of five years; no dividends; risk free interest rates of 3.03%
to 4.5%; and volatility of 0.01%. The fair value of the warrants was recorded
as
a discount to the convertible notes and additional paid-in capital in the
accompanying balance sheet. This discount was amortized to interest expense
upon
the conversion of the related notes to Series C convertible preferred
stock.
In
connection with the issuance of Series C convertible preferred stock in 2002,
the Company modified the terms of the existing 779,763 warrants outstanding
and
adjusted the exercise price to $1.00 per share and the term to six years as
an
inducement to the note holders to convert. The fair value of the warrants as
a
result of the modification was $130,851 calculated using the Black-Scholes
option pricing model with the following assumptions: contractual life of six
years; no dividends; risk free rate of 3.0%; and volatility of 0.01%. The fair
value of repriced warrants was recorded as other expense.
Kreido
Laboratories
(A
Development Stage Company)
Notes
to Financial Statements
Periods
ended September 30, 2006 and 2005
NOTE
10
STOCKHOLDERS’
EQUITY (CAPITAL DEFICIT) (CONTINUED)
In
connection with the issuance of convertible notes payable in 2003 (Note 9),
the
Company issued detachable stock purchase warrants to purchase 213,677 shares
of
common stock to the note holders. The warrants expire in five years. The fair
value of the warrants at the date of issuance of $57,353 was calculated using
the Black-Scholes option pricing model and the following assumptions:
contractual life of five years; no dividends; risk free interest rates of 2.97%
and volatility of 0.01%. The fair value of the warrants was recorded as a
discount to the convertible notes and additional paid-in capital in the
accompanying balance sheet. This discount was amortized to interest expense
upon
the conversion of the related notes to Series C convertible preferred
stock.
In
2003,
the Company issued 71,250 warrants to purchase common stock and Series C
preferred stock to a consultant. The warrants expire in six years. The fair
value of the warrants at the date of issuance of $16,500 was calculated using
the Black-Scholes option pricing model and the following assumptions:
contractual life of five years; no dividends; risk free interest rates of 2.97%
and volatility of $0.01%.
In
connection with the issuance of convertible notes payable from January to March
2004 (Note 9), the Company issued detachable stock purchase warrants to purchase
300,000 shares of Series B1 convertible preferred stock and issued detachable
stock purchase warrants to purchase 62,500 shares of common stock to the note
holders. The warrants were to expire in five years. The fair value of the
warrants at the date of issuance of $40,496 was calculated using the
Black-Scholes option pricing model and the following assumptions: contractual
life of five years; no dividends; risk free interest rates from 3.03% to 3.58%
and volatility of 0.01%. Additionally, convertible debt had a beneficial
conversion feature of $42,000. The fair value of the warrants and beneficial
conversion feature was recorded as a discount to the convertible notes and
additional paid-in capital in the accompanying balance sheet. This discount
was
amortized to interest expense upon the conversion of the related notes to
Series B1 convertible preferred stock.
In
connection with the conversion of the notes to Series B1 convertible
preferred stock, the Company exchanged existing warrants to purchase 1,057,414
of common and preferred stock into new warrants to purchase common stock at
$0.10 per share. The fair value of the new warrants was $21,148 calculated
using
the Black-Scholes option pricing model with the following assumptions:
contractual life of five years; no dividends; risk free rate of 3.58%; and
volatility of 0.01%. The fair value of exchanged warrants was recorded as other
expense.
Kreido
Laboratories
(A
Development Stage Company)
Notes
to Financial Statements
Periods
ended September 30, 2006 and 2005
NOTE
10
STOCKHOLDERS’
EQUITY (CAPITAL DEFICIT)
(CONTINUED)
In
connection with the issuance of convertible notes payable from June to October
2004 (Note 9), the Company issued warrants to purchase 890,289 shares of
Series B1 preferred stock and warrants to purchase 1,102,552 shares of default
stock. The warrants expire in five years. The fair value of the warrants at
the
date of issuance of $596,607 was calculated by using the Black-Scholes option
pricing model and the following assumptions: contractual life of five years;
no
dividends; risk free interest rates from 3.40% to 3.72% and volatility of 0.01%.
With
the
issuance of convertible notes payable from January to October 2005
(Note 9), the Company issued warrants to purchase 2,388,065 shares of
Series B1 preferred stock. The warrants expire in five years. The fair value
of
the warrants at the date of issuance of $760,876 was calculated by using the
Black-Scholes option pricing model with the following assumptions: contractual
life of five years; no dividends; risk free interest rates from 3.72% to 4.32%
and volatility of 0.01%.
With
the
issuance of convertible notes payable from July to September 2006, the Company
issued warrants to purchase 375,006 shares of Series B1 preferred stock. The
warrants expire in five years. The fair value of the warrants at the date of
issuance of $145,695 was calculated by using the Black-Scholes option pricing
model with the following assumptions: contractual life of five years; no
dividends; risk free interest rates from 4.73% to 5.19% and volatility of
0.01%.
The
fair
value of the warrants was recorded as a discount to the convertible notes and
additional paid-in capital in the accompanying balance sheet. This discount
is
being amortized to interest expense over the term of the related convertible
notes. The net unamortized discount at September 30, 2006 and 2005 were
$1,108,688 and $674,945, respectively.
In
2005
and 2004, the Company issued 80,950 and 54,200, respectively, warrants to
purchase Series B1 preferred stock to three consultants. The warrants expire
in
five years. The fair value of the warrants at the date of issuance of $14,903
in
2005 and $8,631 in 2004 was calculated using the Black-Scholes option pricing
model and the following assumptions: contractual life of five years; no
dividends; risk free interest rates of 3.37% to 4.35% and volatility of
0.01%.
In
2006,
the Company issued 61,103 warrants to purchase Series B1 preferred stock to
two
consultants. The warrants expire in five years. The fair value of the warrants
at the date of issuance of $16,700 was calculated using the Black-Scholes option
pricing model and the following assumptions: contractual life of five years;
no
dividends; risk free interest rates of 4.47% to 5.10% and volatility of
0.01%.
Kreido
Laboratories
(A
Development Stage Company)
Notes
to Financial Statements
Periods
ended September 30, 2006 and 2005
NOTE
10
STOCKHOLDERS’
EQUITY (CAPITAL DEFICIT)
(CONTINUED)
A
summary
of warrant activity is as follows:
|
|
|
|
Weighted
Average Exercise Price
|
|
|
|
|
|
|
|
Balance
at December 31, 2003
|
|
|
1,084,690
|
|
$
|
0.98
|
|
Granted
|
|
|
3,562,758
|
|
|
0.71
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
Cancelled
|
|
|
(1,057,414
|
)
|
|
1.00
|
|
Balance
at December 31, 2004
|
|
|
3,590,034
|
|
|
0.73
|
|
Granted
|
|
|
3,658,796
|
|
|
1.00
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
-
|
|
Balance
at December 31, 2005
|
|
|
7,248,830
|
|
$
|
0.87
|
|
Granted
|
|
|
436,109
|
|
|
1.00
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
-
|
|
Balance
at September 30, 2006
|
|
|
7,684,939
|
|
$
|
0.99
|
|
The
weighted average exercise price assumes the default preferred strike price
will
be $1.00.
NOTE
11
RELATED
PARTY TRANSACTIONS
For
the
nine months ended September 30, 2006 and 2005, law firms, of which certain
members are shareholders of the Company, were paid $38,507 and $53,192 for
legal
services performed on behalf of the Company. As of September 30, 2006 and 2005,
amounts due to the law firms were $107,107 and $42,640,
respectively.
KREIDO
BIOFUELS, INC.
AS
OF SEPTEMBER 30, 2006
UNAUDITED
INTRODUCTORY
STATEMENT
The
following unaudited pro forma consolidated financial statements (the “Pro Forma
Statements”) give effect to the reverse acquisition of Kreido Biofuels, Inc.
(formerly Gemwood Productions, Inc.) (the “Parent”) by Kreido Laboratories, (the
“Company”) and are based on the estimates and assumptions set forth herein and
in the notes to such statements.
On
January 12, 2007, the Parent, Kreido Acquisition Corp. (the acquisition
subsidiary of the Parent) and the Company entered into an agreement and plan
of
merger and reorganization (the “Agreement”). The Agreement provides for the
merger (the “Merger”) of the acquisition subsidiary with and into the Company,
with the Company remaining as the surviving entity after the Merger, and as
a
result of which, the stockholders of the Company will receive common stock
of
the Parent (the “Parent Common Stock”) in exchange for their shares of the
capital stock of the Company.
Simultaneously
with the closing of the Merger, the Parent will complete a private placement
offering the (“Private Placement Offering,” or “PPO,” and together with the
Merger, the “Transaction”), of 18,518,519 units of the securities of the Parent
at the purchase price of $1.35 per unit (the “PPO Price”), with each unit
consisting of one share of the Parent Common stock and a five year warrant
to
purchase one share of the Parent Common Stock at an exercise price of $1.85
per
share.
Contemporaneously
with the closing of the Merger, the Parent intends to split off its wholly
owned
subsidiary, Gemwood Leaseco, Inc. (“Leaseco”) through the sale of all the
outstanding capital stock.
The
transaction is being accounted for as a reverse acquisition and
recapitalization. The Company is the acquirer for accounting
purposes.
The
following unaudited pro forma financial information gives effect to the above.
The unaudited pro forma financial information was prepared from the audited
financial statements of the Parent for the fiscal year ended September 30,
2006
included in the Parent’s Form 10-KSB as filed with the Securities and Exchange
Commission, the audited financial statements of the Company for the year ended
December 31, 2005 and the unaudited financial statements of the Company for
the
twelve months ended September 30, 2006, which coincide with the fiscal year
end
of the Parent.
The
unaudited pro forma consolidated balance sheet at September 30, 2006 assumes
the
effects of the Transaction took place on September 30, 2006. The unaudited
pro
forma consolidated statement of operations for the year ended September 30,
2006
assumes the effects of the Transaction took place on October 1, 2005. The
unaudited pro forma consolidated financial information is presented for
illustrative purposes only and is not necessarily indicative of the operating
results or financial position that would have occurred if the Transaction had
been consummated at the dates indicated, nor is it necessarily indicative of
the
future operating results or financial position.
KREIDO
BIOFUELS, INC.
PRO
FORMA CONSOLIDATED BALANCE SHEET
AS
OF SEPTEMBER 30, 2006
UNAUDITED
ASSETS
|
|
Kreido
Laboratories
|
|
Kreido
Biofuels,
Inc.
(formerly
Gemwood
Productions,
Inc.)
|
|
Pro
Forma
Consolidating
Entry
|
|
Pro
Forma
Consolidated
|
|
Current
assets
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
66,262
|
|
$
|
10,291
|
|
$
|
23,925,000
|
(6)
|
$
|
24,001,553
|
|
Accounts
receivable
|
|
|
508
|
|
|
-
|
|
|
-
|
|
|
508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
66,770
|
|
|
10,291
|
|
|
23,925,000
|
|
|
24,002,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture
and equipment
|
|
|
-
|
|
|
6,326
|
|
|
-
|
|
|
6,326
|
|
Fixed
assets
|
|
|
333,025
|
|
|
-
|
|
|
-
|
|
|
333,025
|
|
Intangible
assets - patents
|
|
|
828,012
|
|
|
-
|
|
|
-
|
|
|
828,012
|
|
Other
assets
|
|
|
5,775
|
|
|
500
|
|
|
-
|
|
|
6,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
1,233,582
|
|
$
|
17,117
|
|
$
|
23,925,000
|
|
$
|
25,175,699
|
|
LIABILITIES
AND STOCKHOLDERS’ DEFICIT
Current
liabilities
|
|
|
|
|
|
|
|
|
|
Convertible
notes payable
|
|
$
|
4,952,525
|
|
$
|
-
|
|
$
|
(4,952,525
|
)
(1)
|
$
|
-
|
|
Current
portion of capital leases
|
|
|
16,293
|
|
|
-
|
|
|
-
|
|
|
16,293
|
|
Accounts
payable
|
|
|
191,960
|
|
|
500
|
|
|
-
|
|
|
192,460
|
|
Advances
payable
|
|
|
891,421
|
|
|
-
|
|
|
-
|
|
|
891,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
6,052,199
|
|
|
500
|
|
|
(4,952,525
|
)
|
|
1,100,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
leases less current portion
|
|
|
110,117
|
|
|
-
|
|
|
-
|
|
|
110,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
6,162,316
|
|
|
500
|
|
|
(4,952,525
|
)
|
|
1,210,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity (deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
A1 convertible preferred stock, no par value;
549,474
shares authorized;
549,474
issued and outstanding
|
|
|
3,628,369
|
|
|
-
|
|
|
(3,628,369
|
)
(2)
|
|
-
|
|
Series
B1 convertible preferred stock, no par value;
13,783,783
shares authorized; 10,011,355
issued
and outstanding
|
|
|
10,011,355
|
|
|
-
|
|
|
(10,011,355
|
)
(3)
|
|
-
|
|
Common
stock, no par value, 150,000,000 shares
authorized;
720,501 issued and outstanding
|
|
|
103,200
|
|
|
-
|
|
|
(103,200
|
)
(4)
|
|
-
|
|
Restricted
common stock, no par value, 641,786
issued
and outstanding
|
|
|
64,179
|
|
|
-
|
|
|
(64,179
|
)
(4)
|
|
-
|
|
Common
stock, $0.001 par value; 50,000,000 shares
authorized;
61,018,519 issued
and
outstanding
|
|
|
-
|
|
|
2,900
|
|
|
27,000
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
31,119
|
(6)
|
|
61,019
|
|
Warrant
valuation
|
|
|
-
|
|
|
-
|
|
|
9,272,000
|
(6)
|
|
9,272,000
|
|
Additional
paid-in capital
|
|
|
3,403,667
|
|
|
44,100
|
|
|
18,732,628
|
(5)
|
|
36,802,276
|
|
|
|
|
|
|
|
|
|
|
14,621,881
|
(6)
|
|
|
|
Accumulated
deficit
|
|
|
(22,117,781
|
)
|
|
(30,383
|
)
|
|
-
|
|
|
(22,148,164
|
)
|
Deferred
compensation
|
|
|
(21,723
|
)
|
|
-
|
|
|
-
|
|
|
(21,723
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ deficit
|
|
|
(4,928,734
|
)
|
|
16,617
|
|
|
28,877,525
|
|
|
23,965,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ deficit
|
|
$
|
1,233,582
|
|
$
|
17,117
|
|
$
|
23,925,000
|
|
$
|
25,175,699
|
|
The
accompanying notes are an integral part of these pro forma financial
statements
KREIDO
BIOFUELS, INC.
PRO
FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR
THE YEAR ENDED SEPTEMBER 30, 2006
UNAUDITED
|
|
Kreido
Laboratories
|
|
Kreido
Biofuels,
Inc.
(formerly
Gemwood
Productions,
Inc.)
|
|
Pro
Forma
Consolidating
Entry
|
|
Pro
Forma
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
1,623,725
|
|
|
-
|
|
|
-
|
|
|
1,623,725
|
|
Administrative
expenses
|
|
|
713,440
|
|
|
30,383
|
|
|
-
|
|
|
743,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(2,337,165
|
)
|
|
(30,383
|
)
|
|
-
|
|
|
(2,367,548
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(841,740
|
)
|
|
-
|
|
|
-
|
|
|
(841,740
|
)
|
Interest
income
|
|
|
4,781
|
|
|
-
|
|
|
-
|
|
|
4,781
|
|
Other
income
|
|
|
98,535
|
|
|
-
|
|
|
-
|
|
|
98,535
|
|
Loss
on sale of property and equipment
|
|
|
(28,227
|
)
|
|
-
|
|
|
-
|
|
|
(28,227
|
)
|
Loss
on retirement of assets
|
|
|
(154,316
|
)
|
|
-
|
|
|
-
|
|
|
(154,316
|
)
|
Income
tax expense
|
|
|
(800
|
)
|
|
-
|
|
|
-
|
|
|
(800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the period
|
|
$
|
(3,258,932
|
)
|
$
|
(30,383
|
)
|
$
|
-
|
|
$
|
(3,289,315
|
)
|
The
accompanying notes are an integral part of these pro forma financial
statements
KREIDO
BIOFUELS, INC.
NOTES
TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
AS
OF SEPTEMBER 30, 2006
UNAUDITED
(1)
|
Conversion
of notes payable into 10,224,177 shares of Kreido Biofuels, Inc.
common
stock.
|
|
|
(2)
|
Conversion
of Series A1 Preferred Stock into 619,946 shares of Kreido Biofuels,
Inc.
common stock.
|
|
|
(3)
|
Conversion
of Series B1 Preferred Stock into 12,065,114 shares of Kreido Biofuels,
Inc. common stock.
|
|
|
(4)
|
Exchange
of common stock and restricted common stock for 4,090,763 shares
of Kreido
Biofuels, Inc. common stock.
|
|
|
(5)
|
Issuance
of 27,000,000 shares of Kreido Biofuels, Inc. common stock for
all
outstanding common stock of Kreido Laboratories.
|
|
|
(6)
|
Allocation
of proceeds of private placement offering of $25,000,000, net of
approximately $750,000 in financing costs and $325,000 in legal
costs.
|
Exhibit
No.
|
Description
|
Reference
|
2.1
|
Agreement
and Plan of Merger and Reorganization, dated as of January 12,
2007, by
and among Kreido Biofuels, Inc., a Nevada corporation, Kreido Acquisition
Corp., a California corporation and Kreido Laboratories, a California
corporation.*
|
|
3.1
|
Amended
and Restated Articles of Incorporation of Kreido Biofuels, Inc.
(f/k/a
Gemwood Productions, Inc.).
|
Incorporated
by reference to Exhibit 3.1 to the Current Report on Form 8-K filed
with the Securities and Exchange Commission on November 3, 2006
(File No.
333-130606).
|
3.2
|
Bylaws
of Kreido Biofuels, Inc. (f/k/a Gemwood Productions,
Inc.).
|
Incorporated
by reference to Exhibit 3.2 to the Registration Statement on Form
SB-2 filed with the Securities and Exchange Commission on December
22,
2005 (File No. 333-130606).
|
4.1
|
Form
of Investor Warrant of Kreido Biofuels, Inc.*
|
|
4.2
|
Form
of Lock-Up Agreement by and between Tompkins Capital Group and
each of the
officers and directors of Kreido Biofuels, Inc., and certain stockholders
of Kreido Laboratories.*
|
|
10.1
|
Escrow
Agreement, dated as of January 12, 2007, by and between Kreido
Biofuels,
Inc., Joel A. Balbien and Gottbetter & Partners, LLP.*
|
|
10.2
|
Form
of Subscription Agreement, dated as of January 12, 2007, by and
between
Kreido Biofuels, Inc. and the investors in the Offering.*
|
|
10.3
|
Form
of Registration Rights Agreement, dated as of January 12, 2007,
by and
between Kreido Biofuels, Inc. and the investors in the
Offering.*
|
|
10.4
|
Split-Off
Agreement, dated as of January 12, 2007, by and among Kreido Biofuels,
Inc., Victor Manuel Savceda, Kreido Laboratories and Gemwood Leaseco,
Inc.*
|
|
10.5
|
Employment
Agreement, dated November 1, 2006, by and between Kreido Laboratories
and
Joel A. Balbien.*
|
|
10.6
|
Form
of Indemnity Agreement by and between Kreido Biofuels, Inc. and
Outside
Directors of Kreido Biofuels, Inc.*
|
|
10.7
|
2006
Equity Incentive Plan.*
|
|
10.8
|
Stock
Option Agreement by and between Kreido Biofuels, Inc. and Joel
A. Balbien
dated as of January 12, 2007.*
|
|
10.9
|
Form
of Incentive Stock Option Agreement by and between Kreido Biofuels,
Inc.
and participants under the 2006 Equity Incentive Plan.*
|
|
10.10
|
Form
of Non-Qualified Stock Option Agreement by and between Kreido Biofuels,
Inc. and participants under the 2006 Equity Incentive
Plan.*
|
|
21.1
|
Subsidiaries
of Kreido Biofuels, Inc.*
|
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Kreido
Biofuels, Inc.
Name:
Joel
A.
Balbien
Title:
President
& Chief Executive Officer
Dated:
January 16, 2007
EXHIBIT
INDEX
Exhibit
No.
|
Description
|
Reference
|
2.1
|
Agreement
and Plan of Merger and Reorganization, dated as of January 12,
2007, by
and among Kreido Biofuels, Inc., a Nevada corporation, Kreido Acquisition
Corp., a California corporation and Kreido Laboratories, a California
corporation.*
|
|
3.1
|
Amended
and Restated Articles of Incorporation of Kreido Biofuels, Inc.
(f/k/a
Gemwood Productions, Inc.).
|
Incorporated
by reference to Exhibit 3.1 to the Current Report on Form 8-K filed
with the Securities and Exchange Commission on November 3, 2006
(File No.
333-130606).
|
3.2
|
Bylaws
of Kreido Biofuels, Inc. (f/k/a Gemwood Productions,
Inc.).
|
Incorporated
by reference to Exhibit 3.2 to the Registration Statement on Form
SB-2 filed with the Securities and Exchange Commission on December
22,
2005 (File No. 333-130606).
|
4.1
|
Form
of Investor Warrant of Kreido Biofuels, Inc.*
|
|
4.2
|
Form
of Lock-Up Agreement by and between Tompkins Capital Group and
each of the
officers and directors of Kreido Biofuels, Inc., and certain stockholders
of Kreido Laboratories.*
|
|
10.1
|
Escrow
Agreement, dated as of January 12, 2007, by and between Kreido
Biofuels,
Inc., Joel A. Balbien and Gottbetter & Partners, LLP.*
|
|
10.2
|
Form
of Subscription Agreement, dated as of January 12, 2007, by and
between
Kreido Biofuels, Inc. and the investors in the Offering.*
|
|
10.3
|
Form
of Registration Rights Agreement, dated as of January 12, 2007,
by and
between Kreido Biofuels, Inc. and the investors in the
Offering.*
|
|
10.4
|
Split-Off
Agreement, dated as of January 12, 2007, by and among Kreido Biofuels,
Inc., Victor Manuel Savceda, Kreido Laboratories and Gemwood Leaseco,
Inc.*
|
|
10.5
|
Employment
Agreement, dated November 1, 2006, by and between Kreido Laboratories
and
Joel A. Balbien.*
|
|
10.6
|
Form
of Indemnity Agreement by and between Kreido Biofuels, Inc. and
Outside
Directors of Kreido Biofuels, Inc.*
|
|
10.7
|
2006
Equity Incentive Plan.*
|
|
10.8
|
Stock
Option Agreement by and between Kreido Biofuels, Inc. and Joel
A. Balbien
dated as of January 12, 2007.*
|
|
10.9
|
Form
of Incentive Stock Option Agreement by and between Kreido Biofuels,
Inc.
and participants under the 2006 Equity Incentive Plan.*
|
|
10.10
|
Form
of Non-Qualified Stock Option Agreement by and between Kreido Biofuels,
Inc. and participants under the 2006 Equity Incentive
Plan.*
|
|
21.1
|
Subsidiaries
of Kreido Biofuels, Inc.*
|
|
EXHIBIT
2.1
AGREEMENT
AND PLAN OF MERGER AND REORGANIZATION
AMONG
KREIDO
BIOFUELS, INC.
(formerly
known as Gemwood Productions, Inc.)
KREIDO
ACQUISITION CORP.
AND
KREIDO
LABORATORIES
January
12, 2007
TABLE
OF
CONTENTS
ARTICLE
I
|
THE
MERGER
|
1
|
1.1
|
THE
MERGER
|
1
|
1.2
|
THE
CLOSING
|
2
|
1.3
|
ACTIONS
AT THE CLOSING
|
2
|
1.4
|
ADDITIONAL
ACTIONS
|
3
|
1.5
|
CONVERSION
OF COMPANY SECURITIES
|
3
|
1.6
|
DISSENTING
SHARES
|
4
|
1.7
|
FRACTIONAL
SHARES
|
5
|
1.8
|
OPTIONS
AND WARRANTS
|
5
|
1.9
|
ESCROW
|
6
|
1.10
|
ARTICLES
OF INCORPORATION AND BYLAWS
|
6
|
1.11
|
NO
FURTHER RIGHTS
|
6
|
1.12
|
CLOSING
OF TRANSFER BOOKS
|
6
|
1.13
|
POST-CLOSING
ADJUSTMENT
|
6
|
1.14
|
EXEMPTION
FROM REGISTRATION
|
7
|
ARTICLE
II
|
REPRESENTATIONS
AND WARRANTIES OF THE COMPANY
|
8
|
2.1
|
ORGANIZATION,
QUALIFICATION AND CORPORATE POWER
|
8
|
2.2
|
CAPITALIZATION
|
8
|
2.3
|
AUTHORIZATION
OF TRANSACTION
|
9
|
2.4
|
NONCONTRAVENTION
|
9
|
2.5
|
SUBSIDIARIES
|
10
|
2.6
|
FINANCIAL
STATEMENTS
|
11
|
2.7
|
ABSENCE
OF CERTAIN CHANGES
|
12
|
2.8
|
UNDISCLOSED
LIABILITIES
|
12
|
2.9
|
TAX
MATTERS
|
12
|
2.10
|
ASSETS
|
14
|
2.11
|
OWNED
REAL PROPERTY
|
14
|
2.12
|
REAL
PROPERTY LEASES
|
14
|
2.13
|
CONTRACTS
|
15
|
2.14
|
ACCOUNTS
RECEIVABLE
|
16
|
2.15
|
POWERS
OF ATTORNEY
|
16
|
2.16
|
INSURANCE
|
17
|
2.17
|
LITIGATION
|
17
|
2.18
|
EMPLOYEES
|
17
|
2.19
|
EMPLOYEE
BENEFITS
|
18
|
2.20
|
ENVIRONMENTAL
MATTERS
|
20
|
2.21
|
LEGAL
COMPLIANCE
|
21
|
2.22
|
CUSTOMERS
AND SUPPLIERS
|
21
|
2.23
|
PERMITS
|
21
|
2.24
|
CERTAIN
BUSINESS RELATIONSHIPS WITH AFFILIATES
|
22
|
2.25
|
BROKERS’
FEES
|
22
|
2.26
|
BOOKS
AND RECORDS
|
22
|
2.27
|
INTELLECTUAL
PROPERTY
|
22
|
2.28
|
DISCLOSURE
|
23
|
2.29
|
DUTY
TO MAKE INQUIRY
|
23
|
2.30
|
BOARD
ACTIONS
|
23
|
ARTICLE
III
|
REPRESENTATIONS
AND WARRANTIES OF THE PARENT AND THE ACQUISITION
SUBSIDIARY
|
23
|
3.1
|
ORGANIZATION,
QUALIFICATION AND CORPORATE POWER
|
24
|
3.2
|
CAPITALIZATION
|
24
|
3.3
|
AUTHORIZATION
OF TRANSACTION
|
25
|
3.4
|
NONCONTRAVENTION
|
25
|
3.5
|
SUBSIDIARIES
|
26
|
3.6
|
EXCHANGE
ACT REPORTS
|
26
|
3.7
|
COMPLIANCE
WITH LAWS
|
27
|
3.8
|
FINANCIAL
STATEMENTS
|
27
|
3.9
|
ABSENCE
OF CERTAIN CHANGES
|
28
|
3.10
|
LITIGATION
|
28
|
3.11
|
UNDISCLOSED
LIABILITIES
|
28
|
3.12
|
TAX
MATTERS
|
28
|
3.13
|
ASSETS
|
30
|
3.14
|
OWNED
REAL PROPERTY
|
30
|
3.15
|
REAL
PROPERTY LEASES
|
30
|
3.16
|
CONTRACTS
|
31
|
3.17
|
ACCOUNTS
RECEIVABLE
|
32
|
3.18
|
POWERS
OF ATTORNEY
|
32
|
3.19
|
INSURANCE
|
32
|
3.20
|
WARRANTIES
|
32
|
3.21
|
EMPLOYEES
|
33
|
3.22
|
EMPLOYEE
BENEFITS
|
33
|
3.23
|
ENVIRONMENTAL
MATTERS
|
35
|
3.24
|
PERMITS
|
36
|
3.25
|
CERTAIN
BUSINESS RELATIONSHIPS WITH AFFILIATES
|
36
|
3.26
|
TAX-FREE
REORGANIZATION
|
36
|
3.27
|
SPLIT-OFF
|
37
|
3.28
|
BROKERS’
FEES
|
38
|
3.29
|
DISCLOSURE
|
38
|
3.30
|
INTERESTED
PARTY TRANSACTIONS
|
38
|
3.31
|
DUTY
TO MAKE INQUIRY
|
38
|
3.32
|
ACCOUNTANTS
|
38
|
3.33
|
MINUTE
BOOKS
|
39
|
3.34
|
BOARD
ACTION
|
39
|
ARTICLE
IV
|
COVENANTS
|
39
|
4.1
|
CLOSING
EFFORTS
|
39
|
4.2
|
GOVERNMENTAL
AND THIRTY PARTY NOTICES AND CONSENTS
|
39
|
4.3
|
CURRENT
REPORT
|
40
|
4.4
|
OPERATION
OF BUSINESS
|
40
|
4.5
|
ACCESS
TO INFORMATION
|
41
|
4.6
|
OPERATION
OF BUSINESS
|
42
|
4.7
|
ACCESS
TO INFORMATION
|
43
|
4.8
|
EXPENSES
|
44
|
4.9
|
INDEMNIFICATION
|
44
|
4.10
|
LISTING
OF MERGER SHARES
|
44
|
4.11
|
STOCK
SPLIT
|
44
|
4.12
|
NAME
CHANGE
|
44
|
4.13
|
SPLIT-OFF
|
44
|
4.14
|
STOCK
OPTION PLAN
|
45
|
4.15
|
INFORMATION
PROVIDED TO COMPANY STOCKHOLDERS
|
45
|
4.16
|
NO
REGISTRATION
|
45
|
4.17
|
NO
SHORTING
|
45
|
ARTICLE
V
|
CONDITIONS
TO CONSUMMATION OF MERGER
|
46
|
5.1
|
CONDITIONS
TO EACH PARTY’S OBLIGATIONS
|
46
|
5.2
|
CONDITIONS
TO OBLIGATIONS OF THE PARENT AND THE ACQUISITION
SUBSIDIARY
|
46
|
5.3
|
CONDITIONS
TO OBLIGATIONS OF THE COMPANY
|
48
|
ARTICLE
VI
|
INDEMNIFICATION
|
49
|
6.1
|
INDEMNIFICATION
BY THE COMPANY STOCKHOLDERS
|
49
|
6.2
|
INDEMNIFICATION
BY THE PARENT
|
50
|
6.3
|
INDEMNIFICATION
CLAIMS BY THE PARENT
|
50
|
6.4
|
SURVIVAL
OF REPRESENTATIONS AND WARRANTIES
|
53
|
6.5
|
LIMITATIONS
ON PARENT’S CLAIMS FOR INDEMNIFICATION
|
53
|
ARTICLE
VII
|
DEFINITIONS
|
54
|
ARTICLE
VIII
|
TERMINATION
|
57
|
8.1
|
TERMINATION
BY MUTUAL AGREEMENT
|
57
|
8.2
|
TERMINATION
FOR FAILURE TO CLOSE
|
57
|
8.3
|
TERMINATION
BY OPERATION OF LAW
|
57
|
8.4
|
TERMINATION
FOR FAILURE TO PERFORM COVENANTS OR CONDITIONS
|
57
|
8.5
|
EFFECT
OF TERMINATION OR DEFAULT; REMEDIES
|
58
|
8.6
|
REMEDIES;
SPECIFIC PERFORMANCE
|
58
|
ARTICLE
IX
|
MISCELLANEOUS
|
58
|
9.1
|
PRESS
RELEASES AND ANNOUNCEMENTS
|
58
|
9.2
|
NO
THIRD PARTY BENEFICIARIES
|
58
|
9.3
|
ENTIRE
AGREEMENT
|
58
|
9.4
|
SUCCESSION
AND ASSIGNMENT
|
59
|
9.5
|
COUNTERPARTS
AND FACSIMILE SIGNATURE
|
59
|
9.6
|
HEADINGS
|
59
|
9.7
|
NOTICES
|
59
|
9.8
|
GOVERNING
LAW
|
60
|
9.9
|
AMENDMENTS
AND WAIVERS
|
60
|
9.10
|
SEVERABILITY
|
60
|
9.11
|
SUBMISSION
TO JURISDICTION
|
61
|
9.12
|
CONSTRUCTION
|
61
|
EXHIBITS
Exhibit
A
|
Form
Split-Off Agreement
|
Exhibit
B
|
Form
Escrow Agreement
|
Exhibit
C
|
Opinion
of Counsel to the Company
|
Exhibit
D
|
Opinion
of Counsel to the Parent and the Acquisition
Subsidiary
|
AGREEMENT
AND PLAN OF MERGER AND REORGANIZATION
AGREEMENT
AND PLAN OF MERGER
(this
“Agreement”), dated as of January 12, 2007, by and among Kreido Biofuels, Inc.
(formerly known as Gemwood Productions, Inc.), a Nevada corporation (the
“Parent”), Kreido Acquisition Corp., a California corporation (the “Acquisition
Subsidiary”) and Kreido Laboratories, a California corporation (the “Company”).
The Parent, the Acquisition Subsidiary and the Company are each a “Party” and
referred to collectively herein as the “Parties.”
WHEREAS,
this Agreement contemplates a merger of the Acquisition Subsidiary with and
into
the Company, with the Company remaining as the surviving entity after the merger
(the “Merger”), whereby the stockholders of the Company will receive common
stock of the Parent in exchange for their capital stock of the Company;
WHEREAS,
simultaneously with the closing of the Merger, the Parent shall complete a
private placement of 18,518,519 units of securities of the Parent (the “Private
Placement Offering”) at the purchase price of $1.35 per unit (the “PPO Price”),
each unit consisting of one share of the Parent’s common stock and a five year
warrant to purchase one share of Parent common stock for an exercise price
of
$1.85 per whole share;
WHEREAS,
contemporaneously with the closing of the Merger, the Parent intends to
split-off its wholly owned subsidiary, Gemwood Leaseco, Inc., a Nevada
corporation (“Leaseco”), through the sale of all of the outstanding capital
stock of Leaseco (the “Split-Off”) upon the terms and conditions of a split-off
agreement by and among Parent, Victor Manuel Savceda (the “Buyer”), the Company
and Leaseco, substantially in the form of
Exhibit
A
attached
hereto (the “Split-Off Agreement”); and
WHEREAS,
the Parent, the Acquisition Subsidiary, and the Company desire that the Merger
qualifies as a “plan of reorganization” under Section 368(a) of the Internal
Revenue Code of 1986, as amended (the “Code”) and not subject the holders of
equity securities of the Company to tax liability under the Code.
NOW,
THEREFORE, in consideration of the representations, warranties and covenants
herein contained, and for other good and valuable consideration the receipt,
adequacy and sufficiency of which are hereby acknowledged, the Parties hereto,
intending legally to be bound, agree as follows:
ARTICLE
I
THE
MERGER
1.1
The
Merger
.
Upon
and subject to the terms and conditions of this Agreement, the Acquisition
Subsidiary shall merge with and into the Company at the Effective Time (as
defined below). From and after the Effective Time, the separate corporate
existence of the Acquisition Subsidiary shall cease and the Company shall
continue as the surviving corporation in the Merger (the “Surviving
Corporation”).
The
“Effective Time” shall be the time at which articles of merger and other
appropriate or required documents prepared and executed in accordance with
the
relevant provisions of the California Corporations Code (the “Agreement of
Merger”) are filed with the Secretary of State of California. The Merger shall
have the effects set forth in Section 1107 of the California General Corporation
Law (the “California Corporations Code”).
1.2
The
Closing
.
The
closing of the transactions contemplated by this Agreement (the “Closing”) shall
take place at the offices of Gottbetter & Partners, LLP in New York, New
York commencing at 10:00 a.m. local time on January 12, 2007, or, if all of
the
conditions to the obligations of the Parties to consummate the transactions
contemplated hereby have not been satisfied or waived by such date, on such
mutually agreeable later date as soon as practicable (and in any event not
later
than three (3) business days) after the satisfaction or waiver of all conditions
(excluding the delivery of any documents to be delivered at the Closing by
any
of the Parties) set forth in Article V hereof (the “Closing Date”).
1.3
Actions
at the Closing
.
At the
Closing:
(a)
the
Company shall deliver to the Parent and the Acquisition Subsidiary the various
certificates, instruments and documents referred to in Section 5.2;
(b)
the
Parent and the Acquisition Subsidiary shall deliver to the Company the various
certificates, instruments and documents referred to in Section 5.3;
(c)
the
Surviving Corporation shall file the Agreement of Merger with the Secretary
of
State of the State of California
;
(d)
each
of
the stockholders of record of the Company immediately prior to the Effective
Time (collectively, the “Company Stockholders”) shall deliver to the Parent the
certificate(s) representing his, her or its Company Shares (as defined
below);
(e)
the
Parent shall deliver certificates for the Initial Shares (as defined below)
to
each Company Stockholder in accordance with Section 1.5;
(f)
the
Parent shall deliver to the Company (i) evidence that the Parent’s board of
directors is authorized to consist of five individuals, (ii) the resignations
of
all individuals who served as directors and/or officers of the Parent
immediately prior to the Closing Date, which resignations shall be effective
as
of the Closing Date, (iii) evidence of the appointment of five directors to
serve immediately upon the Closing Date, four of whom shall have been designated
by the Company and one of whom shall have been designated by the Parent, and
(v)
evidence of the appointment of such executive officers of the Parent to serve
immediately upon the Closing Date as shall have been designated by the Company;
and
(g)
the
Parent, Joel A. Balbien (the “Indemnification Representative”) and Gottbetter
& Partners, LLP (the “Escrow Agent”) shall execute and deliver the Escrow
Agreement in substantially the form attached hereto as
Exhibit
B
(the
“Escrow Agreement”) and the Parent shall deliver to the Escrow Agent a
certificate for the Escrow Shares (as defined below) being placed in escrow
on
the Closing Date pursuant to Section 1.9.
1.4
Additional
Actions
.
If at
any time after the Effective Time the Surviving Corporation shall consider
or be
advised that any deeds, bills of sale, assignments or assurances or any other
acts or things are necessary, desirable or proper (a) to vest, perfect or
confirm, of record or otherwise, in the Surviving Corporation, its right, title
or interest in, to or under any of the rights, privileges, powers, franchises,
properties or assets of either the Company or the Acquisition Subsidiary or
(b)
otherwise to carry out the purposes of this Agreement, the Surviving Corporation
and its proper officers and directors or their designees shall be authorized
(to
the fullest extent allowed under applicable law) to execute and deliver, in
the
name and on behalf of either the Company or the Acquisition Subsidiary, all
such
deeds, bills of sale, assignments and assurances and do, in the name and on
behalf of the Company or the Acquisition Subsidiary, all such other acts and
things necessary, desirable or proper to vest, perfect or confirm its right,
title or interest in, to or under any of the rights, privileges, powers,
franchises, properties or assets of the Company or the Acquisition Subsidiary,
as applicable, and otherwise to carry out the purposes of this
Agreement.
1.5
Conversion
of Company Securities
.
Before
the Effective Time, each issued and outstanding share of the Company’s Series A1
and B1 Convertible Preferred Stock (the “Series A1 and B1 Preferred Stock”)
shall convert, on a one-for-one basis, into shares of the Company’s common stock
(“Company Shares”), as provided in the Company’s articles of incorporation, as
amended. At the Effective Time, by virtue of the Merger and without any action
on the part of any Party or the holder of any of the following
securities:
(a)
Each
Company Share issued and outstanding immediately prior to the Effective Time
(other than Company Shares owned beneficially by the Parent or the Acquisition
Subsidiary and Dissenting Shares (as defined below)) shall be converted into
and
represent the right to receive (subject to the provisions of Section 1.6) such
number of shares of common stock, $0.001 par value per share, of the Parent
(“Parent Common Stock”) as is equal to the Common Conversion Ratio (as defined
below). An aggregate of 27,000,000
shares
of
Parent Common Stock shall be issued to the Company Stockholders in connection
with the Merger and the holders of options (“Options”) granted under the
Company’s 1997 Stock Compensation Program to acquire Company Shares, of which
25,835,017 shares shall be issued to Company Stockholders upon conversion of
their Company Shares, as described above, and an aggregate of 1,164,983 shares
shall be reserved for issuance upon the exercise of the Parent Options (as
defined below,
provided
,
that if
the holders of any Existing Warrants (as defined in Section 1.5(b)) do not
agree
to accept Company Shares in settlement of their Existing Warrants prior to
the
Effective Time, then the Company Stockholders shall be issued 25,835,017 shares
of Common Stock less the number of shares of Common Stock for which such
Existing Warrants are exercisable under Section 1.8(a) and the number of shares
of Common Stock reserved for issuance shall be increased from 1,164,983 by
the
same number.
(b)
The
“Common Conversion Ratio” shall be obtained by dividing (i)
27,000,000
shares
of
Parent Common Stock by (ii) the total number of outstanding Company Shares
immediately prior to the Effective Time on a diluted basis after giving effect
to the exercise of all outstanding Parent Options (as defined in Section
1.8(a)), all outstanding warrants that have not been settled by the issuance
of
Company Shares as provided in Section 1.8(d) (“Existing Warrants”) and all other
rights to acquire Company Shares.
Stockholders
of record of the Company as of the Closing Date (the “Indemnifying
Stockholders”) shall be entitled to receive immediately
95%
of
the shares of Parent Common Stock into which their Company Shares were converted
pursuant to this Section 1.5 (the “Initial Shares”); the remaining
5%
of
the
shares of Parent Common Stock into which their Company Shares were converted
pursuant to this Section 1.5, rounded to the nearest whole number (with 0.5
shares rounded upward to the nearest whole number) (the “Escrow Shares”), shall
be deposited in escrow pursuant to Section 1.9 and shall be held and disposed
of
in accordance with the terms of the Escrow Agreement. The Initial Shares and
the
Escrow Shares shall together be referred to herein as the “Merger
Shares.”
(c)
Each
issued and outstanding share of common stock, par value $0.001 per share, of
the
Acquisition Subsidiary shall be converted into one validly issued, fully paid
and nonassessable share of Surviving Corporation Common Stock.
1.6
Dissenting
Shares
.
(a)
For
purposes of this Agreement, “Dissenting Shares” means Company Shares held as of
the Effective Time by a Company Stockholder who has not voted such Company
Shares in favor of the adoption of this Agreement and the Merger and with
respect to which appraisal shall have been duly demanded and perfected in
accordance with
Chapter
13 of the California Corporations Code
and not
effectively withdrawn or forfeited prior to the Effective Time. Dissenting
Shares shall not be converted into or represent the right to receive shares
of
Parent Common Stock unless such Company Stockholder’s right to appraisal shall
have ceased in accordance with
Section
1309 of the California Corporations Code
.
If such
Company Stockholder has so forfeited or withdrawn his, her or its right to
appraisal of Dissenting Shares, then, (i) as of the occurrence of such
event, such holder’s Dissenting Shares shall cease to be Dissenting Shares and
shall be converted into and represent the right to receive the Merger Shares
issuable in respect of such Company Shares pursuant to Section 1.5, and
(ii) promptly following the occurrence of such event, the Parent shall
deliver to such Company Stockholder a certificate representing 95% of the Merger
Shares to which such holder is entitled pursuant to Section 1.5 (which
shares shall be considered Initial Shares for all purposes of this Agreement)
and shall deliver to the Escrow Agent a certificate representing the remaining
5% of the Merger Shares to which such holder is entitled pursuant to
Section 1.5 (which shares shall be considered Escrow Shares for all
purposes of this Agreement).
(b)
The
Company shall give the Parent prompt notice of any written demands for appraisal
of any Company Shares, withdrawals of such demands, and any other instruments
that relate to such demands received by the Company. The Company shall not,
except with the prior written consent of the Parent, make any payment with
respect to any demands for appraisal of Company Shares or offer to settle or
settle any such demands.
1.7
Fractional
Shares
.
No
certificates or scrip representing fractional Initial Shares shall be issued
to
Company Stockholders on the surrender for exchange of certificates that
immediately prior to the Effective Time represented Company Shares converted
into Merger Shares pursuant to Section 1.5 (“Certificates”) and such Company
Stockholders shall not be entitled to any voting rights, rights to receive
any
dividends or distributions or other rights as a stockholder of the Parent with
respect to any fractional Initial Shares that would have otherwise been issued
to such Company Stockholders. In lieu of any fractional Initial Shares that
would have otherwise been issued, each former Company Stockholder that would
have been entitled to receive a fractional Initial Share shall, on proper
surrender of such person’s Certificates, receive such whole number of Initial
Shares as is equal to the precise number of Initial Shares to which such Company
Stockholder would be entitled, rounded up or down to the nearest whole number
(with a fractional interest equal to 0.5 rounded upward to the nearest whole
number); provided that each such Company Stockholder shall receive at least
one
Initial Share.
1.8
Options
and Warrants
.
(a)
As
of the
Effective Time, all Options to purchase Company Shares issued by the Company,
whether vested or unvested, (the “Old Options”) shall be automatically be
converted to become options to purchase shares of Parent Common Stock (“Parent
Options”) without further action by the holder thereof, all in accordance with
the applicable provisions of the Company’s Incentive Stock Option Plan,
Compensatory Stock Option Plan and Non-Employee Director Stock Option Plan,
all
as included within the Company’s 1997 Stock Compensation Program. The Parent
Option shall constitute an option to acquire such number of shares of Parent
Common Stock as is equal to the number of Company Shares subject to the
unexercised portion of the Old Options multiplied by the Common Conversion
Ratio
(with any fraction resulting from such multiplication to be rounded down to
the
nearest whole number). The exercise price per share of each Parent Option shall
be equal to $1.35. The Parent Options shall be granted under Parent’s 2006 Stock
Option Plan (the “Parent Option Plan”) and that plan’s terms, exercisability,
vesting schedule, and status as an “incentive stock option” under Section 422 of
the Code, if applicable. It is the Parties intention that any Old Options
intended to be “incentive stock options” under Section 422 of the Code shall
remain incentive stock options as Parent Options.
(b)
As
soon
as practicable after the Effective Time, the Parent or the Surviving Corporation
shall take appropriate actions to collect the Old Options and the agreements
evidencing the Old Options, which shall be deemed to be canceled and shall
entitle the holder to exchange the Old Options for Parent Options in the
Parent.
(c)
The
Parent shall take all corporate action necessary to reserve for issuance a
sufficient number of shares of Parent Common Stock for delivery upon exercise
of
the Parent Options to be issued for Old Options in accordance with this
Section 1.8.
(d)
Prior
to
the Effective Time, the Company will solicit the settlement of rights
represented by the Existing Warrants by the issuance of Company Shares in
amounts authorized to have been issued to holders of the Existing Warrants
by
the Company’s board of directors. If and to the extent that any holder of an
Existing Warrant does not agree to accept such Company Shares in settlement
of
such rights, then such Existing Warrants by their terms will become exercisable
for Parent Common Stock not to exceed an aggregate of 468,578 shares of the
Parent Common Stock, which shares of the Parent Common Stock shall then be
reserved for issuance upon the exercise of the Existing Warrants, subject to
such adjustment as the Company shall make to the terms of the Existing Warrants
to reflect the Common Conversion Ratio and the other terms and condition of
the
Merger.
1.9
Escrow
.
On the
Closing Date, the Parent shall deliver to the Escrow Agent a certificate (issued
in the name of the Escrow Agent or its nominee) representing the Escrow Shares,
as described in Section 1.5, for the purpose of securing the
indemnification obligations of the Indemnifying Stockholders set forth in this
Agreement. The Escrow Shares shall be held by the Escrow Agent pursuant to
the
Escrow Agreement, in substantially the form set forth in Exhibit B attached
hereto. The Escrow Shares shall be held as a trust fund and shall not be subject
to any lien, attachment, trustee process or any other judicial process of any
creditor of any Party, and shall be held and disbursed solely for the purposes
and in accordance with the terms of the Escrow Agreement.
1.10
Articles
of Incorporation and Bylaws
.
(a)
The
articles of incorporation of the Company in effect immediately prior to the
Effective Time shall be the articles of incorporation of the Surviving
Corporation until duly amended or repealed.
(b)
The
bylaws of the Company in effect immediately prior to the Effective Time shall
be
the bylaws of the Surviving Corporation until duly amended or
repealed.
1.11
No
Further Rights
.
From
and after the Effective Time, no Company Shares shall be deemed to be
outstanding, and holders of Certificates shall cease to have any rights with
respect thereto, except as provided herein or by law.
1.12
Closing
of Transfer Books
.
At the
Effective Time, the stock transfer books of the Company shall be closed and
no
transfer of Company Shares shall thereafter be made. If, after the Effective
Time, Certificates are presented to the Parent or the Surviving Corporation,
they shall be cancelled and exchanged for Initial Shares in accordance with
Section 1.5, subject to Section 1.9 and to applicable law in the case
of Dissenting Shares.
1.13
Post-Closing
Adjustment
.
In the
event that, during the period commencing from the Closing Date and ending on
the
second anniversary of the Closing Date, the Company (or its controlling
stockholders immediately prior to the Merger) incurs any Loss with respect
to,
in connection with, or arising from any Parent Liabilities, then promptly
following the filing by the Parent with the Securities and Exchange Commission
(the “SEC”) of a quarterly report relating to the most recent completed quarter
for which such determination has been made, the Parent shall issue to the
Company Stockholders and/or their designees such number of shares of Parent
Common Stock as would result from dividing
(x) the
whole dollar
amount
representing such Losses by (y) the PPO Price. The limit on the aggregate number
of shares of Parent Common Stock issuable under this Section 1.13 shall be
2,000,000 shares. As used in this Section 1.13: (a) “Loss” shall mean any and
all costs and expenses, including reasonable attorneys’ fees, court costs,
reasonable accountants’ fees, and damages and losses, net of any insurance
proceeds actually received by the Party suffering the Loss with respect thereto;
(b) “Claims” shall include, but are not limited to, any claim, notice, suit,
action, investigation, other proceedings (whether actual or threatened); and
(c)
“Parent Liabilities” shall mean all Claims against and liabilities, obligations
or indebtedness of any nature whatsoever of Leaseco, whenever accruing, and
of
the Parent, accruing on or before the Closing Date (whether primary, secondary,
direct, indirect, liquidated, unliquidated or contingent, matured or unmatured),
including, but not limited to (i) any breach by the Parent or the Acquisition
Subsidiary of any of their respective representations or warranties set forth
in
Article III herein, (ii) any litigation threatened, pending or for which a
basis
exists, that has resulted or may result in the entry of judgment in damages
or
otherwise against the Parent or any Parent Subsidiary (as defined in this
Agreement); (iii) any and all outstanding debts owed by the Parent or any Parent
Subsidiary; (iv) any and all internal or employee related disputes, arbitrations
or administrative proceedings threatened, pending or otherwise outstanding,
(v)
any and all liens, foreclosures, settlements, or other threatened, pending
or
otherwise outstanding financial, legal or similar obligations of the Parent
or
any Parent Subsidiary, (vi) any and all Taxes for which Parent or any of its
direct or indirect assets may be liable or subject, for any taxable period
(or
portion thereof) ending on or before the Closing Date, including, without
limitation, any and all Taxes resulting from or attributable to Parent’s
ownership or operation of the Leaseco assets, (vii) any and all Taxes for which
Parent or its assets may be liable or subject (including, without limitation,
the interests and assets of the Surviving Corporation and any Parent Subsidiary)
as a consequence of Parent’s acquisition, formation, capitalization, ownership,
and Split-Off of Leaseco, whether related to a taxable period (or portion
thereof) ending on or after the Closing Date, and (vii) all fees and expenses
incurred in connection with effecting the adjustments contemplated by this
Section 1.13, as such Parent Liabilities are determined by the Parent’s
independent auditors, on a quarterly basis.
1.14
Exemption
From Registration
.
Parent
and the Company intend that the shares of Parent Common Stock to be issued
pursuant to Section 1.5 hereof or upon exercise of Parent Options granted
pursuant to Section 1.8 hereof in each case in connection with the Merger will
be issued in a transaction exempt from registration under the Securities Act
of
1933, as amended (“Securities Act”), by reason of section 4(2) of the Securities
Act and/or Rule 506 of Regulation D promulgated by the SEC thereunder. Subject
to the provisions of Section 4.15, the shares of exempt from registration in
California under Section 25103 of the California Corporations Code.
ARTICLE
II
REPRESENTATIONS
AND WARRANTIES OF THE COMPANY
The
Company represents and warrants to the Parent that the statements contained
in
this Article II are true and correct, except as set forth in the disclosure
schedule provided by the Company to the Parent on the date hereof and accepted
in writing by the Parent (the “Disclosure Schedule”). The Disclosure Schedule
the Company prepares shall be arranged in paragraphs corresponding to the
numbered and lettered paragraphs contained in this Article II, and except
to the extent that it is clear from the context thereof that such disclosure
also applies to any other paragraph, the disclosures in any paragraph of the
Disclosure Schedule shall qualify only the corresponding paragraph in this
Article II.
For
purposes of this Article II, the phrase “to the knowledge of the Company”
or any phrase of similar import shall be deemed to refer to the actual knowledge
of the executive officers of the Company, as well as any other knowledge which
such executive officers would have possessed had they made reasonable inquiry
with respect to the matter in question.
2.1
Organization,
Qualification and Corporate Power
.
The
Company is a corporation duly organized, validly existing and in corporate
and
tax good standing under the laws of the State of California. The Company is
duly
qualified to conduct business and is in corporate and tax good standing under
the laws of each jurisdiction in which the nature of its businesses or the
ownership or leasing of its properties requires such qualification, except
where
the failure to be so qualified or in good standing, individually or in the
aggregate, has not had and would not reasonably be expected to have a Company
Material Adverse Effect (as defined below). The Company has all requisite
corporate power and authority to carry on the businesses in which it is engaged
and to own and use the properties owned and used by it. The Company has
furnished or made available to the Parent complete and accurate copies of its
articles of incorporation and bylaws. The Company is not in default under or
in
violation of any provision of its articles of incorporation, as amended to
date,
or its bylaws, as amended to date. For purposes of this Agreement, “Company
Material Adverse Effect” means a material adverse effect on the assets,
business, condition (financial or otherwise), results of operations or future
prospects of the Company.
2.2
Capitalization
.
The
authorized capital stock of the Company consists of 250,000,000 shares of which
150,000,000 are designated as shares of common stock and 100,000,000 shares
of
preferred stock of which, 549,474 shares are Series A1 Convertible Preferred
Stock and 13,783,783 shares are designated Series B1 Convertible Preferred
Stock. As of the date of this Agreement, 25,263,683 Company Shares were issued
and outstanding, no shares of any other class of the Company’s capital stock
were issued and outstanding and no Company Shares were held in the treasury
of
the Company. Section 2.2 of the Disclosure Schedule sets forth a complete
and accurate list of (i) all stockholders of the Company, indicating the
number and class of Company Shares held by each stockholder, (ii) all
outstanding Options and Existing Warrants, indicating (A) the holder
thereof, (B) the number of Company Shares subject to each Option and
Existing Warrant, (C) the exercise price, date of grant, vesting schedule
and expiration date for each Option or Existing Warrant, and (D) any terms
regarding the acceleration of vesting, and (iii) all stock option plans and
other stock or equity-related plans of the Company. All of the issued and
outstanding Company Shares, and all Company Shares that may be issued upon
exercise of Options or Existing Warrants will be (upon issuance in accordance
with their terms), duly authorized, validly issued, fully paid, nonassessable
and free of all preemptive rights. Other than the Options and Existing Warrants
listed in Section 2.2 of the Disclosure Schedule, there are no notes or
other indebtedness convertible into shares of any class of the Company's capital
stock (the “Convertible Notes”), outstanding or authorized options, warrants,
rights, agreements or commitments to which the Company is a party or which
are
binding upon the Company providing for the issuance or redemption of any of
its
capital stock. There are no outstanding or authorized stock appreciation,
phantom stock or similar rights with respect to the Company. Except as set
forth
in Section 2.2 of the Disclosure Schedule, there are no agreements to which
the
Company is a party or by which it is bound with respect to the voting (including
without limitation voting trusts or proxies), registration under the Securities
Act, or sale or transfer (including without limitation agreements relating
to
pre-emptive rights, rights of first refusal, co-sale rights or “drag-along”
rights) of any securities of the Company. To the knowledge of the Company,
there
are no agreements among other parties, to which the Company is not a party
and
by which it is not bound, with respect to the voting (including without
limitation voting trusts or proxies) or sale or transfer (including without
limitation agreements relating to rights of first refusal, co-sale rights or
“drag-along” rights) of any securities of the Company. All of the issued and
outstanding Company Shares were issued in compliance with applicable federal
and
state securities laws.
2.3
Authorization
of Transaction
.
The
Company has all requisite power and authority to execute and deliver this
Agreement and to perform its obligations hereunder. The execution and delivery
by the Company of this Agreement and, subject to the adoption of this Agreement
and the approval of the Merger by no less than a majority of the votes
represented by the outstanding Company Shares entitled to vote on this Agreement
and the Merger, the consummation by the Company of the transactions contemplated
hereby have been duly and validly authorized by all necessary corporate action
on the part of the Company. Without limiting the generality of the foregoing,
the board of directors of the Company (i) determined that the Merger is
fair and in the best interests of the Company and the Company Stockholders,
(ii) adopted this Agreement in accordance with the provisions of the
California
Corporations Code
,
and
(iii) directed that this Agreement and the Merger be submitted to the
Company Stockholders for their adoption and approval and resolved to recommend
that the Company Stockholders vote in favor of the adoption of this Agreement
and the approval of the Merger. This Agreement has been duly and validly
executed and delivered by the Company and constitutes a valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms.
2.4
Noncontravention
.
Except
as set forth in Section 2.4 of the Disclosure Schedule, and subject to the
filing of the
Agreement
of Merger as required by the California Corporations Code
,
neither
the execution and delivery by the Company of this Agreement, nor the
consummation by the Company of the transactions contemplated hereby, will
(a) conflict with or violate any provision of the articles of incorporation
or bylaws of the Company, as amended to date, bylaws or other organizational
document of any Subsidiary (as defined below), (b) require on the part of
the Company or any Subsidiary any filing with, or any permit, authorization,
consent or approval of, any court, arbitrational tribunal, administrative agency
or commission or other governmental or regulatory authority or agency (a
“Governmental Entity”), except for such permits, authorizations, consents and
approvals for which the Company is obligated to use its Reasonable Best Efforts
to obtain pursuant to Section 4.2(a), (c) conflict with, result in a breach
of, constitute (with or without due notice or lapse of time or both) a default
under, result in the acceleration of obligations under, create in any Party
the
right to terminate, modify or cancel, or require any notice, consent or waiver
under, any contract or instrument to which the Company or any Subsidiary is
a
party or by which the Company or any Subsidiary is bound or to which any of
their assets is subject, except for (i) any conflict, breach, default,
acceleration, termination, modification or cancellation in any contract or
instrument set forth in Section 2.4 of the Disclosure Schedule, for which the
Company is obligated to use its Reasonable Best Efforts to obtain waiver,
consent or approval pursuant to Section 4.2(b), (ii) any conflict, breach,
default, acceleration, termination, modification or cancellation which,
individually or in the aggregate, would not have a Company Material Adverse
Effect and would not adversely affect the consummation of the transactions
contemplated hereby or (iii) any notice, consent or waiver the absence of
which, individually or in the aggregate, would not have a Company Material
Adverse Effect and would not adversely affect the consummation of the
transactions contemplated hereby, (d) result in the imposition of any
Security Interest (as defined below) upon any assets of the Company or any
Subsidiary or (e) violate any order, writ, injunction, decree, statute,
rule or regulation applicable to the Company, any Subsidiary or any of their
properties or assets. For purposes of this Agreement: “Security Interest” means
any mortgage, pledge, security interest, encumbrance, charge or other lien
(whether arising by contract or by operation of law), other than
(i) mechanic’s, materialmen’s, and similar liens, (ii) liens arising
under worker’s compensation, unemployment insurance, social security,
retirement, and similar legislation, and (iii) liens on goods in transit
incurred pursuant to documentary letters of credit, in each case arising in
the
Ordinary Course of Business (as defined below) of the Company and not material
to the Company; and “Ordinary Course of Business” means the ordinary course of
the Company’s business, consistent with past custom and practice (including with
respect to frequency and amount).
2.5
Subsidiaries
.
(a)
Section 2.5
of the Disclosure Schedule sets forth: (i) the name of each Company
Subsidiary; (ii) the number and type of outstanding equity securities of
each Subsidiary and a list of the holders thereof; (iii) the jurisdiction
of organization of each Subsidiary; (iv) the names of the officers and
directors of each Company Subsidiary; and (v) the jurisdictions in which
each Company Subsidiary is qualified or holds licenses to do business as a
foreign corporation or other entity. For purposes of this Agreement, a
“Subsidiary” shall mean any corporation, partnership, joint venture or other
entity in which a Party has, directly or indirectly, an equity interest
representing 50% or more of the equity securities thereof or other equity
interests therein (collectively, the “Subsidiaries”).
(b)
Each
Subsidiary is an entity duly organized, validly existing and in corporate and
tax good standing under the laws of the jurisdiction of its incorporation.
Each
Subsidiary is duly qualified to conduct business and is in corporate and tax
good standing under the laws of each jurisdiction in which the nature of its
businesses or the ownership or leasing of its properties requires qualification
to do business, except where the failure to be so qualified or in good standing,
individually or in the aggregate, has not had and would not reasonably be
expected to have a Company Material Adverse Effect. Each Subsidiary has all
requisite power and authority to carry on the businesses in which it is engaged
and to own and use the properties owned and used by it. The Company has
delivered or made available to the Parent complete and accurate copies of the
charter, bylaws or other organizational documents of each Subsidiary. No
Subsidiary is in default under or in violation of any provision of its charter,
bylaws or other organizational documents. All of the issued and outstanding
equity securities of each Subsidiary are duly authorized, validly issued, fully
paid, nonassessable and free of preemptive rights. All equity securities of
each
Subsidiary that are held of record or owned beneficially by either the Company
or any Subsidiary are held or owned free and clear of any restrictions on
transfer (other than restrictions under the Securities Act and state securities
laws), claims, Security Interests, options, warrants, rights, contracts, calls,
commitments, equities and demands. There are no outstanding or authorized
options, warrants, rights, agreements or commitments to which the Company or
any
Subsidiary is a party or which are binding on any of them providing for the
issuance, disposition or acquisition of any equity securities of any Subsidiary.
There are no outstanding stock appreciation, phantom stock or similar rights
with respect to any Subsidiary. To the knowledge of the Company, there are
no
voting trusts, proxies or other agreements or understandings with respect to
the
voting of any equity securities of any Subsidiary.
(c)
Except
as
set forth in Section 2.5(c) of the Disclosure Schedule, the Company does not
control directly or indirectly or have any direct or indirect equity
participation or similar interest in any corporation, partnership, limited
liability company, joint venture, trust or other business association which
is
not a Subsidiary.
2.6
Financial
Statements
.
The
Company has provided or made available to the Parent: (a) the audited balance
sheet of the Company (the “Company Balance Sheet”) at December 31, 2005 (the
“Company Balance Sheet Date”), and the related statements of operations and cash
flows for the period from December 31, 1999 through December 31, 2005 (the
“Year-End Financial Statements”); and (b) the unaudited balance sheet of the
Company (the “Company Interim Balance Sheet”) at September 30, 2006 and the
related statement of operations and cash flows for the nine months ended
September 30, 2006 (the “Company Interim Financial Statement” and together with
the Year-End Financial Statements, the “Company Financial Statements”). The
Company Financial Statements have been prepared in accordance with United States
generally accepted accounting principles (“GAAP”) applied on a consistent basis
throughout the periods covered thereby, fairly present the financial condition,
results of operations and cash flows of the Company and the Subsidiaries as
of
the respective dates thereof and for the periods referred to therein, comply
as
to form with the applicable rules and regulations of the SEC for inclusion
of
such Company Financial Statements in the Parent’s filings with the SEC as
required by the Securities Exchange Act of 1934 (the “Exchange Act”) and are
consistent with the books and records of the Company and the
Subsidiaries.
2.7
Absence
of Certain Changes
.
Since
the Company Interim Balance Sheet Date, and except as set forth in Section
2.7
of the Disclosure Schedule, (a) there has occurred no event or development
which, individually or in the aggregate, has had, or could reasonably be
expected to have in the future, a Company Material Adverse Effect, and
(b) neither the Company nor any Subsidiary has taken any of the actions set
forth in paragraphs (a) through (m) of Section 4.4.
2.8
Undisclosed
Liabilities
.
None of
the Company and its Subsidiaries has any liability (whether known or unknown,
whether absolute or contingent, whether liquidated or unliquidated and whether
due or to become due), except for (a) liabilities shown on the Company
Balance Sheet referred to in Section 2.6, (b) liabilities which have
arisen since the Company Interim Balance Sheet Date in the Ordinary Course
of
Business and (c) contractual and other liabilities incurred in the Ordinary
Course of Business which are not required by GAAP to be reflected on a balance
sheet.
2.9
Tax
Matters
.
(a)
For
purposes of this Agreement, the following terms shall have the following
meanings:
(i)
“Taxes”
means all taxes, charges, fees, levies or other similar assessments or
liabilities, including without limitation income, gross receipts, ad valorem,
premium, value-added, excise, real property, personal property, sales, use,
transfer, withholding, employment, unemployment insurance, social security,
business license, business organization, environmental, workers compensation,
payroll, profits, license, lease, service, service use, severance, stamp,
occupation, windfall profits, customs, duties, franchise and other taxes imposed
by the United States of America or any state, local or foreign government,
or
any agency thereof, or other political subdivision of the United States or
any
such government, and any interest, fines, penalties, assessments or additions
to
tax resulting from, attributable to or incurred in connection with any tax
or
any contest or dispute thereof.
(ii)
“Tax
Returns” means all reports, returns, declarations, statements or other
information required to be supplied to a taxing authority in connection with
Taxes.
(b)
Each
of
the Company and the Subsidiaries has filed on a timely basis all Tax Returns
that it was required to file, and all such Tax Returns were complete and
accurate in all material respects. Neither the Company nor any Subsidiary is
or
has ever been a member of a group of corporations with which it has filed (or
been required to file) consolidated, combined or unitary Tax Returns, other
than
a group of which only the Company and the Subsidiaries are or were members.
Each
of the Company and the Subsidiaries has paid on a timely basis all Taxes that
were due and payable. The unpaid Taxes of the Company and the Subsidiaries
for
tax periods through the Company Interim Balance Sheet Date do not exceed the
accruals and reserves for Taxes (excluding accruals and reserves for deferred
Taxes established to reflect timing differences between book and Tax income)
set
forth on the Company Interim Balance Sheet. Neither the Company nor any
Subsidiary has any actual or potential liability for any Tax obligation of
any
taxpayer (including without limitation any affiliated group of corporations
or
other entities that included the Company or any Subsidiary during a prior
period) other than the Company and the Subsidiaries. All Taxes that the Company
or any Subsidiary is or was required by law to withhold or collect have been
duly withheld or collected and, to the extent required, have been paid to the
proper Governmental Entity.
(c)
The
Company has delivered or made available to the Parent complete and accurate
copies of all federal income Tax Returns, examination reports and statements
of
deficiencies assessed against or agreed to by the Company or any Subsidiary
since the Organization Date. The federal income Tax Returns of the Company
and
each Subsidiary have been audited by the Internal Revenue Service or are closed
by the applicable statute of limitations for all taxable years through the
taxable year specified in Section 2.9(c) of the Disclosure Schedule. No
examination or audit of any Tax Return of the Company or any Subsidiary by
any
Governmental Entity is currently in progress or, to the knowledge of the
Company, threatened or contemplated. Neither the Company nor any Subsidiary
has
been informed by any jurisdiction that the jurisdiction believes that the
Company or Subsidiary was required to file any Tax Return that was not filed.
Neither the Company nor any Subsidiary has waived any statute of limitations
with respect to Taxes or agreed to an extension of time with respect to a Tax
assessment or deficiency.
(d)
Neither
the Company nor any Subsidiary: (i) is a “consenting corporation” within
the meaning of Section 341(f) of the Code, and none of the assets of the
Company or the Subsidiaries are subject to an election under Section 341(f)
of the Code; (ii) has been a United States real property holding
corporation within the meaning of Section 897(c)(2) of the Code during the
applicable period specified in Section 897(c)(l)(A)(ii) of the Code;
(iii) has made any payments, is obligated to make any payments, or is a
party to any agreement that could obligate it to make any payments that may
be
treated as an “excess parachute payment” under Section 280G of the Code;
(iv) has any actual or potential liability for any Taxes of any person
(other than the Company and its Subsidiaries) under Treasury Regulation
Section 1.1502-6 (or any similar provision of federal, state, local, or
foreign law), or as a transferee or successor, by contract, or otherwise; or
(v) is or has been required to make a basis reduction pursuant to Treasury
Regulation Section 1.1502-20(b) or Treasury Regulation
Section 1.337(d)-2(b).
(e)
None
of
the assets of the Company or any Subsidiary: (i) is property that is
required to be treated as being owned by any other person pursuant to the
provisions of former Section 168(f)(8) of the Code; (ii) is
“tax-exempt use property” within the meaning of Section 168(h) of the Code;
or (iii) directly or indirectly secures any debt the interest on which is
tax exempt under Section 103(a) of the Code.
(f)
Neither
the Company nor any Subsidiary has undergone a change in its method of
accounting resulting in an adjustment to its taxable income pursuant to
Section 481 of the Code.
(g)
No
state
or federal “net operating loss” of the Company determined as of the Closing Date
is subject to limitation on its use pursuant to Section 382 of the Code or
comparable provisions of state law as a result of any “ownership change” within
the meaning of Section 382(g) of the Code or comparable provisions of any
state law occurring prior to the Closing Date.
2.10
Assets
.
Each of
the Company and the Subsidiaries owns or leases all tangible assets necessary
for the conduct of its businesses as presently conducted and as presently
proposed to be conducted. Except as set forth in Section 2.10 of the Disclosure
Schedule, each such tangible asset is free from material defects, has been
maintained in accordance with normal industry practice, is in good operating
condition and repair (subject to normal wear and tear) and is suitable for
the
purposes for which it presently is used. Except as set forth in Section 2.10
of
the Disclosure Schedule, no asset of the Company or any Subsidiary (tangible
or
intangible) is subject to any Security Interest.
2.11
Owned
Real Property
.
Neither
the Company nor any Subsidiary owns any real property, except as otherwise
listed in Section 2.11 of the Disclosure Schedule.
2.12
Real
Property Leases
.
Section 2.12 of the Disclosure Schedule lists all real property leased or
subleased to or by the Company or any Subsidiary and lists the term of such
lease, any extension and expansion options, and the rent payable thereunder.
The
Company has delivered or made available to the Parent complete and accurate
copies of the leases and subleases listed in Section 2.12 of the Disclosure
Schedule. Except as set forth in Section 2.12 of the Disclosure Schedule, with
respect to each lease and sublease listed in Section 2.12 of the Disclosure
Schedule:
(a)
the
lease
or sublease is legal, valid, binding, enforceable and in full force and
effect;
(b)
the
lease
or sublease will continue to be legal, valid, binding, enforceable and in full
force and effect immediately following the Closing in accordance with the terms
thereof as in effect immediately prior to the Closing;
(c)
neither
the Company nor any Subsidiary nor, to the knowledge of the Company, any other
party, is in breach or violation of, or default under, any such lease or
sublease, and no event has occurred, is pending or, to the knowledge of the
Company, is threatened, which, after the giving of notice, with lapse of time,
or otherwise, would constitute a breach or default by the Company or any
Subsidiary or, to the knowledge of the Company, any other party under such
lease
or sublease;
(d)
neither
the Company nor any Subsidiary has assigned, transferred, conveyed, mortgaged,
deeded in trust or encumbered any interest in the leasehold or subleasehold;
and
(e)
to
the
knowledge of the Company, there is no Security Interest, easement, covenant
or
other restriction applicable to the real property subject to such lease, except
for recorded easements, covenants and other restrictions which do not materially
impair the current uses or the occupancy by the Company or a Subsidiary of
the
property subject thereto.
2.13
Contracts
.
(a)
Section
2.13 of the Disclosure Schedule lists the following agreements (written or
oral)
to which the Company or any Subsidiary is a party as of the date of this
Agreement:
(i)
any
agreement (or group of related agreements) for the lease of personal property
from or to third parties providing for lease payments in excess of $25,000
per
annum or having a remaining term longer than 12 months;
(ii)
any
agreement (or group of related agreements) for the purchase or sale of products
or for the furnishing or receipt of services (A) which calls for
performance over a period of more than one year, (B) which involves more
than the sum of $25,000, or (C) in which the Company or any Subsidiary has
granted manufacturing rights, “most favored nation” pricing provisions or
exclusive marketing or distribution rights relating to any products or territory
or has agreed to purchase a minimum quantity of goods or services or has agreed
to purchase goods or services exclusively from a certain party;
(iii)
any
agreement which, to the knowledge of the Company, establishes a partnership
or
joint venture;
(iv)
any
agreement (or group of related agreements) under which it has created, incurred,
assumed or guaranteed (or may create, incur, assume or guarantee) indebtedness
(including capitalized lease obligations) involving more than $25,000 or under
which it has imposed (or may impose) a Security Interest on any of its assets,
tangible or intangible;
(v)
any
agreement concerning confidentiality or noncompetition;
(vi)
any
employment or consulting agreement;
(vii)
any
agreement involving any officer, director or stockholder of the Company or
any
affiliate, as defined in Rule 12b-2 under the Securities Exchange Act of
1934 (the “Exchange Act”), thereof (an “Affiliate”);
(viii)
any
agreement under which the consequences of a default or termination would
reasonably be expected to have a Company Material Adverse Effect;
(ix)
any
agreement which contains any provisions requiring the Company or any Subsidiary
to indemnify any other party thereto (excluding indemnities contained in
agreements for the purchase, sale or license of products entered into in the
Ordinary Course of Business); and
(x)
any
other
agreement (or group of related agreements) either involving more than $25,000
or
not entered into in the Ordinary Course of Business.
(b)
The
Company has delivered or made available to the Parent a complete and accurate
copy of each agreement listed in Section 2.13 of the Disclosure Schedule.
With respect to each agreement so listed, and except as set forth in Section
2.13 of the Disclosure Schedule: (i) the agreement is legal, valid, binding
and enforceable and in full force and effect; (ii) the agreement will
continue to be legal, valid, binding and enforceable and in full force and
effect immediately following the Closing in accordance with the terms thereof
as
in effect immediately prior to the Closing; and (iii) neither the Company
nor any Subsidiary nor, to the knowledge of the Company, any other party, is
in
breach or violation of, or default under, any such agreement, and no event
has
occurred, is pending or, to the knowledge of the Company, is threatened, which,
after the giving of notice, with lapse of time, or otherwise, would constitute
a
breach or default by the Company or any Subsidiary or, to the knowledge of
the
Company, any other party under such contract.
2.14
Accounts
Receivable
.
All
accounts receivable of the Company and the Subsidiaries reflected on the Company
Interim Balance Sheet are valid receivables subject to no setoffs or
counterclaims and are current and collectible (within 90 days after the date
on
which it first became due and payable), net of the applicable reserve for bad
debts on the Company Interim Balance Sheet. All accounts receivable reflected
in
the financial or accounting records of the Company that have arisen since the
Company Interim Balance Sheet Date are valid receivables subject to no setoffs
or counterclaims and are collectible (within 90 days after the date on which
it
first became due and payable), net of a reserve for bad debts in an amount
proportionate to the reserve shown on the Company Interim Balance
Sheet.
2.15
Powers
of Attorney
.
Except
as set forth in Section 2.15 of the Disclosure Schedule, there are no
outstanding powers of attorney executed on behalf of the Company or any
Subsidiary.
2.16
Insurance
.
Section 2.16 of the Disclosure Schedule lists each insurance policy
(including fire, theft, casualty, general liability, workers compensation,
business interruption, environmental, product liability and automobile insurance
policies and bond and surety arrangements) to which the Company or any
Subsidiary is a party. Such insurance policies are of the type and in amounts
customarily carried by organizations conducting businesses or owning assets
similar to those of the Company and the Subsidiaries. There is no material
claim
pending under any such policy as to which coverage has been questioned, denied
or disputed by the underwriter of such policy. All premiums due and payable
under all such policies have been paid, neither the Company nor any Subsidiary
may be liable for retroactive premiums or similar payments, and the Company
and
the Subsidiaries are otherwise in compliance in all material respects with
the
terms of such policies. The Company has no knowledge of any threatened
termination of, or material premium increase with respect to, any such policy.
Each such policy will continue to be enforceable and in full force and effect
immediately following the Effective Time in accordance with the terms thereof
as
in effect immediately prior to the Effective Time.
2.17
Litigation
.
As
of the
date of this Agreement, there is no action, suit, proceeding, claim, arbitration
or investigation before any Governmental Entity or before any arbitrator (a
“Legal Proceeding”) which is pending or has been threatened in writing against
the Company or any Subsidiary which (a) seeks either damages in excess of
$10,000 individually, or $25,000 in the aggregate, or equitable relief or
(b) if determined adversely to the Company or such Subsidiary, could have,
individually or in the aggregate, a Company Material Adverse
Effect.
2.18
Employees
.
(a)
Section
2.18 of the Disclosure Schedule contains a list of all employees of the Company
and each Subsidiary whose annual rate of compensation exceeds
$50,000
per
year,
along with the position and the annual rate of compensation of each such person.
Section 2.18 of the Disclosure Schedule contains a list of all employees of
the
Company or any Subsidiary who are a party to a non-competition agreement with
the Company or any Subsidiary; copies of such agreements have previously been
delivered to the Parent. To the knowledge of the Company, no key employee or
group of employees has any plans to terminate employment with the Company or
any
Subsidiary.
(b)
Neither
the Company nor any Subsidiary is a party to or bound by any collective
bargaining agreement, nor has any of them experienced any strikes, grievances,
claims of unfair labor practices or other collective bargaining disputes. To
the
knowledge of the Company, no organizational effort has been made or threatened,
either currently or within the past two years, by or on behalf of any labor
union with respect to employees of the Company or any Subsidiary. To the
knowledge of the Company there are no circumstances or facts which could
individually or collectively give rise to a suit based on discrimination of
any
kind.
2.19
Employee
Benefits
.
(a)
For
purposes of this Agreement, the following terms shall have the following
meanings:
(i)
“Employee
Benefit Plan” means any “employee pension benefit plan” (as defined in
Section 3(2) of ERISA), any “employee welfare benefit plan” (as defined in
Section 3(1) of ERISA), and any other written or oral plan, agreement or
arrangement involving direct or indirect compensation, including without
limitation insurance coverage, severance benefits, disability benefits, deferred
compensation, bonuses, stock options, stock purchase, phantom stock, stock
appreciation or other forms of incentive compensation or post-retirement
compensation.
(ii)
“ERISA”
means the Employee Retirement Income Security Act of 1974, as
amended.
(iii)
“ERISA
Affiliate” means any entity which is, or at any applicable time was, a member of
(1) a controlled group of corporations (as defined in Section 414(b)
of the Code), (2) a group of trades or businesses under common control (as
defined in Section 414(c) of the Code), or (3) an affiliated service
group (as defined under Section 414(m) of the Code or the regulations under
Section 414(o) of the Code), any of which includes or included the Company
or a Subsidiary.
(b)
Section 2.19(b)
of the Disclosure Schedule contains a complete and accurate list of all Employee
Benefit Plans maintained, or contributed to, by the Company, any Subsidiary
or
any ERISA Affiliate. Complete and accurate copies of (i) all Employee
Benefit Plans which have been reduced to writing, (ii) written summaries of
all unwritten Employee Benefit Plans, (iii) all related trust agreements,
insurance contracts and summary plan descriptions, and (iv) all annual
reports filed on IRS Form 5500, 5500C or 5500R and (for all funded plans) all
plan financial statements for the last five plan years for each Employee Benefit
Plan, have been delivered or made available to the Parent. Each Employee Benefit
Plan has been administered in all material respects in accordance with its
terms
and each of the Company, the Subsidiaries and the ERISA Affiliates has in all
material respects met its obligations with respect to such Employee Benefit
Plan
and has made all required contributions thereto. The Company, each Subsidiary,
each ERISA Affiliate and each Employee Benefit Plan are in compliance in all
material respects with the currently applicable provisions of ERISA and the
Code
and the regulations thereunder (including without limitation Section 4980 B
of the Code, Subtitle K, Chapter 100 of the Code and Sections 601
through 608 and Section 701 et seq. of ERISA). All filings and reports as
to each Employee Benefit Plan required to have been submitted to the Internal
Revenue Service or to the United States Department of Labor have been duly
submitted.
(c)
To
the
knowledge of the Company, there are no Legal Proceedings (except claims for
benefits payable in the normal operation of the Employee Benefit Plans and
proceedings with respect to qualified domestic relations orders) against or
involving any Employee Benefit Plan or asserting any rights or claims to
benefits under any Employee Benefit Plan that could give rise to any material
liability.
(d)
All
the
Employee Benefit Plans that are intended to be qualified under
Section 401(a) of the Code have received determination letters from the
Internal Revenue Service to the effect that such Employee Benefit Plans are
qualified and the plans and the trusts related thereto are exempt from federal
income taxes under Sections 401(a) and 501(a), respectively, of the Code,
no such determination letter has been revoked and revocation has not been
threatened, and no such Employee Benefit Plan has been amended since the date
of
its most recent determination letter or application therefor in any respect,
and
no act or omission has occurred, that would adversely affect its qualification
or materially increase its cost. Each Employee Benefit Plan which is required
to
satisfy Section 401(k)(3) or Section 401(m)(2) of the Code has been
tested for compliance with, and satisfies the requirements of,
Section 401(k)(3) and Section 401(m)(2) of the Code for each plan year
ending prior to the Closing Date.
(e)
Neither
the Company, any Subsidiary, nor any ERISA Affiliate has ever maintained an
Employee Benefit Plan subject to Section 412 of the Code or Title IV of
ERISA.
(f)
At
no
time has the Company, any Subsidiary or any ERISA Affiliate been obligated
to
contribute to any “multiemployer plan” (as defined in Section 4001(a)(3) of
ERISA).
(g)
There
are
no unfunded obligations under any Employee Benefit Plan providing benefits
after
termination of employment to any employee of the Company or any Subsidiary
(or
to any beneficiary of any such employee), including but not limited to retiree
health coverage and deferred compensation, but excluding continuation of health
coverage required to be continued under Section 4980B of the Code or other
applicable law and insurance conversion privileges under state law. The assets
of each Employee Benefit Plan which is funded are reported at their fair market
value on the books and records of such Employee Benefit Plan.
(h)
No
act or
omission has occurred and no condition exists with respect to any Employee
Benefit Plan maintained by the Company, any Subsidiary or any ERISA Affiliate
that would subject the Company, any Subsidiary or any ERISA Affiliate to (i)
any
material fine, penalty, tax or liability of any kind imposed under ERISA or
the
Code or (ii) any contractual indemnification or contribution obligation
protecting any fiduciary, insurer or service provider with respect to any
Employee Benefit Plan.
(i)
No
Employee Benefit Plan is funded by, associated with or related to a “voluntary
employee’s beneficiary association” within the meaning of Section 501(c)(9)
of the Code.
(j)
Each
Employee Benefit Plan is amendable and terminable unilaterally by the Company
at
any time without liability to the Company as a result thereof and no Employee
Benefit Plan, plan documentation or agreement, summary plan description or
other
written communication distributed generally to employees by its terms prohibits
the Company from amending or terminating any such Employee Benefit
Plan.
(k)
Section
2.19(k) of the Disclosure Schedule discloses each: (i) agreement with any
stockholder, director, executive officer or other key employee of the Company
or
any Subsidiary (A) the benefits of which are contingent, or the terms of
which are materially altered, upon the occurrence of a transaction involving
the
Company or any Subsidiary of the nature of any of the transactions contemplated
by this Agreement, (B) providing any term of employment or compensation
guarantee or (C) providing severance benefits or other benefits after the
termination of employment of such director, executive officer or key employee;
(ii) agreement, plan or arrangement under which any person may receive
payments from the Company or any Subsidiary that may be subject to the tax
imposed by Section 4999 of the Code or included in the determination of
such person’s “parachute payment” under Section 280G of the Code; and
(iii) agreement or plan binding the Company or any Subsidiary, including
without limitation any stock option plan, stock appreciation right plan,
restricted stock plan, stock purchase plan, severance benefit plan or Employee
Benefit Plan, any of the benefits of which will be increased, or the vesting
of
the benefits of which will be accelerated, by the occurrence of any of the
transactions contemplated by this Agreement or the value of any of the benefits
of which will be calculated on the basis of any of the transactions contemplated
by this Agreement. The accruals for vacation, sickness and disability expenses
are accounted for on the Company Interim Balance Sheet and are adequate and
properly reflect the expenses associated therewith in accordance with generally
accepted accounting principles.
2.20
Environmental
Matters
.
(a)
Each
of
the Company and the Subsidiaries has complied with all applicable Environmental
Laws (as defined below), except for violations of Environmental Laws that,
individually or in the aggregate, have not had and would not reasonably be
expected to have a Company Material Adverse Effect. There is no pending or,
to
the knowledge of the Company, threatened civil or criminal litigation, written
notice of violation, formal administrative proceeding, or investigation, inquiry
or information request by any Governmental Entity, relating to any Environmental
Law involving the Company or any Subsidiary, except for litigation, notices
of
violations, formal administrative proceedings or investigations, inquiries
or
information requests that, individually or in the aggregate, have not had and
would not reasonably be expected to have a Company Material Adverse Effect.
For
purposes of this Agreement, “Environmental Law” means any federal, state or
local law, statute, rule or regulation or the common law relating to the
environment, including without limitation any statute, regulation,
administrative decision or order pertaining to (i) treatment, storage,
disposal, generation and transportation of industrial, toxic or hazardous
materials or substances or solid or hazardous waste; (ii) air, water and
noise pollution; (iii) groundwater and soil contamination; (iv) the
release or threatened release into the environment of industrial, toxic or
hazardous materials or substances, or solid or hazardous waste, including
without limitation emissions, discharges, injections, spills, escapes or dumping
of pollutants, contaminants or chemicals; (v) the protection of wild life,
marine life and wetlands, including without limitation all endangered and
threatened species; (vi) storage tanks, vessels, containers, abandoned or
discarded barrels, and other closed receptacles; (vii) health and safety of
employees and other persons; and (viii) manufacturing, processing, using,
distributing, treating, storing, disposing, transporting or handling of
materials regulated under any law as pollutants, contaminants, toxic or
hazardous materials or substances or oil or petroleum products or solid or
hazardous waste. As used above, the terms “release” and “environment” shall have
the meaning set forth in the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended (“CERCLA”).
(b)
Set
forth
in Section 2.20(b) of the Disclosure Schedule is a list of all documents
(whether in hard copy or electronic form) that contain any environmental
reports, investigations and audits relating to premises currently or previously
owned or operated by the Company or a Subsidiary (whether conducted by or on
behalf of the Company or a Subsidiary or a third party, and whether done at
the
initiative of the Company or a Subsidiary or directed by a Governmental Entity
or other third party) which were issued or conducted during the past five years
and which the Company has possession of or access to. A complete and accurate
copy of each such document has been provided to the Parent.
(c)
To
the
knowledge of the Company there is no material environmental liability with
respect to any solid or hazardous waste transporter or treatment, storage or
disposal facility that has been used by the Company or any
Subsidiary.
2.21
Legal
Compliance
.
Each of
the Company and the Subsidiaries, and the conduct and operations of their
respective businesses, are in compliance with each applicable law (including
rules and regulations thereunder) of any federal, state, local or foreign
government, or any Governmental Entity, except for any violations or defaults
that, individually or in the aggregate, have not had and would not reasonably
be
expected to have a Company Material Adverse Effect.
2.22
Customers
and Suppliers
.
Section 2.22 of the Disclosure Schedule sets forth a list of each customer
that accounted for more than 5% of the consolidated revenues of the Company
during the last full fiscal year or the interim period through the Company
Interim Balance Sheet date and the amount of revenues accounted for by such
customer during such period. No such customer has notified the Company in
writing within the past year that it will stop buying services from the Company
or any Subsidiary.
2.23
Permits
.
Section
2.23 of the Disclosure Schedule sets forth a list of all permits, licenses,
registrations, certificates, orders or approvals from any Governmental Entity
(including without limitation those issued or required under Environmental
Laws
and those relating to the occupancy or use of owned or leased real property)
(“Permits”) issued to or held by the Company or any Subsidiary. Such listed
Permits are the only Permits that are required for the Company and the
Subsidiaries to conduct their respective businesses as presently conducted
except for those the absence of which, individually or in the aggregate, have
not had and would not reasonably be expected to have a Company Material Adverse
Effect. Each such Permit is in full force and effect and, to the knowledge
of
the Company, no suspension or cancellation of such Permit is threatened and
there is no basis for believing that such Permit will not be renewable upon
expiration. Each such Permit will continue in full force and effect immediately
following the Closing.
2.24
Certain
Business Relationships With Affiliates
.
Except
as listed in Section 2.24 of the Disclosure Schedule, no Affiliate of the
Company or of any Subsidiary (a) owns any property or right, tangible or
intangible, which is used in the business of the Company or any Subsidiary,
(b) has any claim or cause of action against the Company or any Subsidiary,
or (c) owes any money to, or is owed any money by, the Company or any
Subsidiary. Section 2.24 of the Disclosure Schedule describes any
transactions involving the receipt or payment in excess of $25,000 in any fiscal
year between the Company or a Subsidiary and any Affiliate thereof which have
occurred or existed since the Organization Date, other than employment
agreements.
2.25
Brokers’
Fees
.
Neither
the Company nor any Subsidiary has any liability or obligation to pay any fees
or commissions to any broker, finder or agent with respect to the transactions
contemplated by this Agreement, except as listed in Section 2.25 of the
Disclosure Schedule.
2.26
Books
and Records
.
The
minute books and other similar records of the Company and each Subsidiary
contain complete and accurate records of all actions taken at any meetings
of
the Company’s or such Subsidiary’s stockholders, board of directors or any
committees thereof and of all written consents executed in lieu of the holding
of any such meetings. The books and records of the Company and each Subsidiary
accurately reflect in all material respects the assets, liabilities, business,
financial condition and results of operations of the Company or such Subsidiary
and have been maintained in accordance with good business and bookkeeping
practices.
2.27
Intellectual
Property
.
Each
of
the Company and the Subsidiaries owns or has the right to use all Intellectual
Property (as defined below) necessary (i) to use, manufacture, market and
distribute the products manufactured, marketed, sold or licensed, and to provide
the services provided, by the Company or the Subsidiaries to other parties
(together, the “Customer Deliverables”) and (ii) to operate the internal
systems of the Company or the Subsidiaries that are material to its business
or
operations, including, without limitation, computer hardware systems, software
applications and embedded systems (the “Internal Systems”; the Intellectual
Property owned by or licensed to the Company or the Subsidiaries and
incorporated in or underlying the Customer Deliverables or the Internal Systems
is referred to herein as the “Company Intellectual Property”). Each item of
Company Intellectual Property will be owned or available for use by the
Surviving Corporation immediately following the Closing on substantially
identical terms and conditions as it was immediately prior to the Closing.
The
Company or the appropriate Subsidiary has taken all reasonable measures to
protect the proprietary nature of each item of Company Intellectual Property.
To
the knowledge of the Company, (a) no other person or entity has any rights
to
any of the Company Intellectual Property owned by the Company or a Subsidiary
except pursuant to agreements or licenses entered into by the Company and such
person in the ordinary course, and (b) no other person or entity is infringing,
violating or misappropriating any of the Company Intellectual Property. For
purposes of this Agreement, “Intellectual Property” means all (i) patents and
patent applications, (ii) copyrights and registrations thereof, (iii) computer
software, data and documentation, (iv) trade secrets and confidential business
information, whether patentable or unpatentable and whether or not reduced
to
practice, know-how, manufacturing and production processes and techniques,
research and development information, copyrightable works, financial, marketing
and business data, pricing and cost information, business and marketing plans
and customer and supplier lists and information, (v) trademarks, service marks,
trade names, domain names and applications and registrations therefor and (vi)
other proprietary rights relating to any of the foregoing.
2.28
Disclosure
.
No
representation or warranty by the Company contained in this Agreement, and
no
statement contained in the Company’s Disclosure Schedule or any other document,
certificate or other instrument delivered or to be delivered by or on behalf
of
the Company pursuant to this Agreement, contains or will contain any untrue
statement of a material fact or omits or will omit to state any material fact
necessary, in light of the circumstances under which it was or will be made,
in
order to make the statements herein or therein not misleading. The Company
has
disclosed to the Parent all material information relating to the business of
the
Company or any Subsidiary or the transactions contemplated by this
Agreement.
2.29
Duty
to Make Inquiry
.
To the
extent that any of the representations or warranties in this Article II are
qualified by “knowledge” or “belief,” the Company represents and warrants that
it has made due and reasonable inquiry and investigation concerning the matters
to which such representations and warranties relate, including, but not limited
to, diligent inquiry by its directors, officers and key personnel.
2.30
Board
Actions
.
The
Company’s board of directors (a) has unanimously determined that the Merger is
fair and in the best interests of the Company Stockholders and is on terms
that
are fair to the Company Stockholders and has recommended the Merger to the
Company Stockholders, and (b) shall submit the Merger and this Agreement to
the
vote and approval of the Company Stockholders or the approval of the Company
Stockholders by written consent.
ARTICLE
III
REPRESENTATIONS
AND WARRANTIES OF THE PARENT
AND
THE ACQUISITION SUBSIDIARY
Each
of
the Parent and the Acquisition Subsidiary represents and warrants to the Company
that the statements contained in this Article III are true and correct,
except as set forth in the Parent Disclosure Schedule provided by the Parent
and
the Acquisition Subsidiary to the Company on the date hereof and accepted in
writing by the Parent (the “Parent Disclosure Schedule”). The Parent Disclosure
Schedule shall be arranged in paragraphs corresponding to the numbered and
lettered paragraphs contained in this Article III, and except to the extent
that it is clear from the context thereof that such disclosure also applies
to
any other paragraph, the disclosures in any paragraph of the Parent Disclosure
Schedule shall qualify only the corresponding paragraph in this Article
III.
For
purposes of this Article III, the phrase “to the knowledge of the Parent”
or any phrase of similar import shall be deemed to refer to the actual knowledge
of the executive officers of the Parent, as well as any other knowledge which
such executive officers would have possessed had they made reasonable inquiry
with respect to the matter in question.
3.1
Organization,
Qualification and Corporate Power
.
The
Parent is a corporation duly organized, validly existing and in good standing
under the laws of the State of Nevada and the Acquisition Subsidiary is a
corporation duly organized, validly existing and in good standing under the
laws
of the State of California. The Parent is duly qualified to conduct business
and
is in corporate and tax good standing under the laws of each jurisdiction in
which the nature of its businesses or the ownership or leasing of its properties
requires such qualification, except where the failure to be so qualified or
in
good standing would not have a Parent Material Adverse Effect (as defined
below). The Parent has all requisite corporate power and authority to carry on
the businesses in which it is engaged and to own and use the properties owned
and used by it. The Parent has furnished or made available to the Company
complete and accurate copies of its certificate of incorporation and bylaws.
For
purposes of this Agreement, “Parent Material Adverse Effect” means a material
adverse effect on the assets, business, condition (financial or otherwise),
results of operations or future prospects of the Parent and its subsidiaries,
taken as a whole.
3.2
Capitalization
.
The
authorized capital stock of the Parent consists of 300,000,000 shares of Parent
Common Stock, of which 28,194,448 shares were issued and outstanding as of
the
date of this Agreement, after giving effect to a 9.7222223 for one forward
stock
split in the form of a stock dividend (the “Stock Split”) to shareholders of
record on November 17, 2006, and 10,000,000 shares of preferred stock, $0.001
par value per share, of which no shares are outstanding. The Parent Common
Stock
is presently eligible for quotation and trading on the NASD Over-the-Counter
Bulletin Board (the “OTCBB”) in all 50 states of the United States.
All
of
the issued and outstanding shares of Parent Common Stock are duly authorized,
validly issued, fully paid, nonassessable and free of all preemptive rights.
There are no outstanding or authorized options, warrants, rights, agreements
or
commitments to which the Parent is a party or which are binding upon the Parent
providing for the issuance or redemption of any of its capital stock. There
are
no outstanding or authorized stock appreciation, phantom stock or similar rights
with respect to the Parent. There are no agreements to which the Parent is
a
party or by which it is bound with respect to the voting (including without
limitation voting trusts or proxies), registration under the Securities Act,
or
sale or transfer (including without limitation agreements relating to
pre-emptive rights, rights of first refusal, co-sale rights or “drag-along”
rights) of any securities of the Parent. To the knowledge of the Parent, there
are no agreements among other parties, to which the Parent is not a party and
by
which it is not bound, with respect to the voting (including without limitation
voting trusts or proxies) or sale or transfer (including without limitation
agreements relating to rights of first refusal, co-sale rights or “drag-along”
rights) of any securities of the Parent. All of the issued and outstanding
shares of Parent Common Stock were issued in compliance with applicable federal
and state securities laws. The 27,000,000
Merger
Shares to be issued at the Closing pursuant to Section 1.5 hereof, when issued
and delivered in accordance with the terms hereof and of the Agreement of
Merger, shall be duly and validly issued, fully paid and nonassessable and
free
of all preemptive rights. Immediately prior to the Effective Time, after giving
effect to (i) the surrender of 19,444,445 shares of Parent Common Stock by
the
former officer of the Parent (the “Share Contribution”) in connection with the
Split-Off and (ii) the Stock Split, there will be 8,750,000 shares of Parent
Common Stock issued and outstanding.
3.3
Authorization
of Transaction
.
Each of
the Parent and the Acquisition Subsidiary has all requisite power and authority
to execute and deliver this Agreement and (in the case of the Parent) the Escrow
Agreement and to perform its obligations hereunder and thereunder. The execution
and delivery by the Parent and the Acquisition Subsidiary of this Agreement
and
(in the case of the Parent) the Split-Off Agreement, and the agreements
contemplated hereby and thereby (collectively, the “Transaction Documentation”)
and the consummation by the Parent and the Acquisition Subsidiary of the
transactions contemplated hereby and thereby have been duly and validly
authorized by all necessary corporate action on the part of the Parent and
Acquisition Subsidiary, respectively. This Agreement has been duly and validly
executed and delivered by the Parent and the Acquisition Subsidiary and
constitutes a valid and binding obligation of the Parent and the Acquisition
Subsidiary, enforceable against them in accordance with its terms.
3.4
Noncontravention
.
Subject
to compliance with the applicable requirements of the Securities Act and any
applicable state securities laws, the Exchange Act, the regulations of the
OTCBB
and the filing of the
Agreement
of Merger as required by the California Corporations Code
,
neither
the execution and delivery by the Parent or the Acquisition Subsidiary of this
Agreement or the Transaction Documentation , nor the consummation by the Parent
or the Acquisition Subsidiary of the transactions contemplated hereby or
thereby, will (a) conflict with or violate any provision of the certificate
of incorporation or bylaws of the Parent or the Acquisition Subsidiary,
(b) require on the part of the Parent or the Acquisition Subsidiary any
filing with, or permit, authorization, consent or approval of, any Governmental
Entity, (c) conflict with, result in breach of, constitute (with or without
due notice or lapse of time or both) a default under, result in the acceleration
of obligations under, create in any Party any right to terminate, modify or
cancel, or require any notice, consent or waiver under, any contract or
instrument to which the Parent or the Acquisition Subsidiary is a party or
by
which either is bound or to which any of their assets are subject, except for
(i) any conflict, breach, default, acceleration, termination, modification
or cancellation which would not adversely affect the consummation of the
transactions contemplated hereby or (ii) any notice, consent or waiver the
absence of which would not adversely affect the consummation of the transactions
contemplated hereby, or (d) violate any order, writ, injunction, decree,
statute, rule or regulation applicable to the Parent or the Acquisition
Subsidiary or any of their properties or assets.
3.5
Subsidiaries
.
(a)
Parent
has no Subsidiaries other than the Acquisition Subsidiary and Leaseco. Each
of
the Acquisition Subsidiary and Leaseco is a corporation duly organized, validly
existing and in corporate and tax good standing under the laws of the
jurisdiction of its incorporation. The Acquisition Subsidiary was formed solely
to effectuate the Merger, Leaseco was formed solely to effectuate the Split-Off,
and neither of them has conducted any business operations since its
organization. The Parent has delivered or made available to the Company complete
and accurate copies of the charter, bylaws or other organizational documents
of
the Acquisition Subsidiary. The Acquisition Subsidiary has no assets other
than
minimal paid-in capital, it has no liabilities or other obligations, and it
is
not in default under or in violation of any provision of its charter, bylaws
or
other organizational documents. All of the issued and outstanding shares of
capital stock of the Acquisition Subsidiary are duly authorized, validly issued,
fully paid, nonassessable and free of preemptive rights. All shares of the
Acquisition Subsidiary are owned by Parent free and clear of any restrictions
on
transfer (other than restrictions under the Securities Act and state securities
laws), claims, Security Interests, options, warrants, rights, contracts, calls,
commitments, equities and demands. There are no outstanding or authorized
options, warrants, rights, agreements or commitments to which the Parent or
the
Acquisition Subsidiary is a party or which are binding on any of them providing
for the issuance, disposition or acquisition of any capital stock of any Parent
Subsidiary. There are no outstanding stock appreciation, phantom stock or
similar rights with respect to the Acquisition Subsidiary. There are no voting
trusts, proxies or other agreements or understandings with respect to the voting
of any capital stock of the Acquisition Subsidiary.
(b)
At
all
times from January 17, 2005, which was the date of incorporation of the Parent,
through the date of this Agreement, the business and operations of the Parent
have been conducted exclusively through Parent.
3.6
Exchange
Act Reports
.
The
Parent has furnished or made available to the Company complete and accurate
copies, as amended or supplemented, of its (a) Registration Statement on Form
SB-2, which contained audited financial statements for the period January 17,
2005 (inception) through September 30, 2005, as filed with the SEC, (b)
Quarterly Report on Form 10-QSB for the quarterly period ended June 30, 2006
and
(c) all other reports filed by the Parent under Section 13 or
subsections (a) or (c) of Section 14 of the Exchange Act with the SEC since
February 13, 2006 (such reports are collectively referred to herein as the
“Parent Reports”). The Parent Reports constitute all of the documents required
to be filed by the Parent under Section 13 or subsections (a) or (c) of
Section 14 of the Exchange Act with the SEC from February 13, 2006
through
the date of this Agreement. The Parent Reports complied in all material respects
with the requirements of the Exchange Act and the rules and regulations
thereunder when filed. As of their respective dates, the Parent Reports did
not
contain any 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.
3.7
Compliance
with Laws
.
Each of
the Parent and its Subsidiaries:
(a)
and
the
conduct and operations of their respective businesses, are in compliance with
each applicable law (including rules and regulations thereunder) of any federal,
state, local or foreign government, or any Governmental Entity, except for
any
violations or defaults that, individually or in the aggregate, have not had
and
would not reasonably be expected to have a Parent Material Adverse
Effect;
(b)
has
complied with all federal and state securities laws and regulations, including
being current in all of its reporting obligations under such federal and state
securities laws and regulations;
(c)
has
not,
and the past and present officers, directors and Affiliates of the Parent have
not, been the subject of, nor does any officer or director of the Parent have
any reason to believe that Parent or any of its officers, directors or
Affiliates will be the subject of, any civil or criminal proceeding or
investigation by any federal or state agency alleging a violation of securities
laws;
(d)
has
not
been the subject of any voluntary or involuntary bankruptcy proceeding, nor
has
it been a party to any material litigation;
(e)
has
not,
and the past and present officers, directors and Affiliates have not, been
the
subject of, nor does any officer or director of the Parent have any reason
to
believe that the Parent or any of its officers, directors or affiliates will
be
the subject of, any civil, criminal or administrative investigation or
proceeding brought by any federal or state agency having regulatory authority
over such entity or person;
(f)
does
not
and will not on the Closing, have any liabilities, contingent or otherwise,
including but not limited to notes payable and accounts payable, and is not
a
party to any executory agreements; and
(g)
is
not a
“blank check company” as such term is defined by Rule 419 of the Securities
Act.
3.8
Financial
Statements
.
The
audited financial statements and unaudited interim financial statements of
the
Parent included in the Parent Reports (collectively, the “Parent Financial
Statements”) (i) complied as to form in all material respects with applicable
accounting requirements and, as appropriate, the published rules and regulations
of the SEC with respect thereto when filed, (ii) were prepared in accordance
with GAAP applied on a consistent basis throughout the periods covered thereby
(except as may be indicated therein or in the notes thereto, and in the case
of
quarterly financial statements, as permitted by Form 10-QSB under the Exchange
Act), (iii) fairly present the consolidated financial condition, results of
operations and cash flows of the Parent as of the respective dates thereof
and
for the periods referred to therein, and (iv) are consistent with the books
and
records of the Parent.
3.9
Absence
of Certain Changes
.
Since
the date of the balance sheet contained in the most recent Parent Report, there
has occurred no event or development which, individually or in the aggregate,
has had, or could reasonably be expected to have in the future, a Parent
Material Adverse Effect.
3.10
Litigation
.
Except
as disclosed in the Parent Reports, as of the date of this Agreement, there
is
no Legal Proceeding which is pending or, to the Parent’s knowledge, threatened
against the Parent or any subsidiary of the Parent which, if determined
adversely to the Parent or such subsidiary, could have, individually or in
the
aggregate, a Parent Material Adverse Effect or which in any manner challenges
or
seeks to prevent, enjoin, alter or delay the transactions contemplated by this
Agreement. For purposes of this Section 3.10, any such pending or threatened
Legal Proceedings where the amount at issue exceeds or could reasonably be
expected to exceed the lesser of $10,000 per Legal Proceeding or $25,000 in
the
aggregate shall be considered to possibly result in a Parent Material Adverse
Effect hereunder.
3.11
Undisclosed
Liabilities
.
None of
the Parent and its Subsidiaries has any liability (whether known or unknown,
whether absolute or contingent, whether liquidated or unliquidated and whether
due or to become due), except for (a) liabilities shown on the balance
sheet contained in the most recent Parent Report, (b) liabilities which
have arisen since the date of the balance sheet contained in the most recent
Parent Report in the Ordinary Course of Business and (c) contractual and
other liabilities incurred in the Ordinary Course of Business which are not
required by GAAP to be reflected on a balance sheet.
3.12
Tax
Matters
.
(a)
Except
as
set forth in Section 3.12 of the Parent Disclosure Schedule, each of the Parent
and the Subsidiaries has filed on a timely basis all Tax Returns that it was
required to file, and all such Tax Returns were complete and accurate in all
material respects. Neither the Parent nor any Subsidiary is or has ever been
a
member of a group of corporations with which it has filed (or been required
to
file) consolidated, combined or unitary Tax Returns, other than a group of
which
only the Parent and the Subsidiaries are or were members. Each of the Parent
and
the Subsidiaries has paid on a timely basis all Taxes that were due and payable.
The unpaid Taxes of the Parent and the Subsidiaries for tax periods through
the
date of the balance sheet contained in the most recent Parent Report do not
exceed the accruals and reserves for Taxes (excluding accruals and reserves
for
deferred Taxes established to reflect timing differences between book and Tax
income) set forth on such balance sheet. Neither the Parent nor any Subsidiary
has any actual or potential liability for any Tax obligation of any taxpayer
(including without limitation any affiliated group of corporations or other
entities that included the Parent or any Subsidiary during a prior period)
other
than the Parent and the Subsidiaries. All Taxes that the Parent or any
Subsidiary is or was required by law to withhold or collect have been duly
withheld or collected and, to the extent required, have been paid to the proper
Governmental Entity.
(b)
The
Parent has delivered or made available to the Company complete and accurate
copies of all federal income Tax Returns, examination reports and statements
of
deficiencies assessed against or agreed to by the Parent or any Subsidiary
since
January 17, 2005. The federal income Tax Returns of the Parent and each
Subsidiary have been audited by the Internal Revenue Service or are closed
by
the applicable statute of limitations for all taxable years through the taxable
year specified in Section 3.12(b) of the Parent Disclosure Schedule. No
examination or audit of any Tax Return of the Parent or any Subsidiary by any
Governmental Entity is currently in progress or, to the knowledge of the Parent,
threatened or contemplated. Neither the Parent nor any Subsidiary has been
informed by any jurisdiction that the jurisdiction believes that the Parent
or
Subsidiary was required to file any Tax Return that was not filed. Neither
the
Parent nor any Subsidiary has waived any statute of limitations with respect
to
Taxes or agreed to an extension of time with respect to a Tax assessment or
deficiency.
(c)
Neither
the Parent nor any Subsidiary: (i) is a “consenting corporation” within the
meaning of Section 341(f) of the Code, and none of the assets of the Parent
or the Subsidiaries are subject to an election under Section 341(f) of the
Code; (ii) has been a United States real property holding corporation
within the meaning of Section 897(c)(2) of the Code during the applicable
period specified in Section 897(c)(l)(A)(ii) of the Code; (iii) has
made any payments, is obligated to make any payments, or is a party to any
agreement that could obligate it to make any payments that may be treated as
an
“excess parachute payment” under Section 280G of the Code; (iv) has
any actual or potential liability for any Taxes of any person (other than the
Parent and its Subsidiaries) under Treasury Regulation Section 1.1502-6 (or
any similar provision of federal, state, local, or foreign law), or as a
transferee or successor, by contract, or otherwise; or (v) is or has been
required to make a basis reduction pursuant to Treasury Regulation
Section 1.1502-20(b) or Treasury Regulation
Section 1.337(d)-2(b).
(d)
None
of
the assets of the Parent or any Subsidiary: (i) is property that is
required to be treated as being owned by any other person pursuant to the
provisions of former Section 168(f)(8) of the Code; (ii) is
“tax-exempt use property” within the meaning of Section 168(h) of the Code;
or (iii) directly or indirectly secures any debt the interest on which is
tax exempt under Section 103(a) of the Code.
(e)
Neither
the Parent nor any Subsidiary has undergone a change in its method of accounting
resulting in an adjustment to its taxable income pursuant to Section 481 of
the Code.
(f)
No
state
or federal “net operating loss” of the Parent determined as of the Closing Date
is subject to limitation on its use pursuant to Section 382 of the Code or
comparable provisions of state law as a result of any “ownership change” within
the meaning of Section 382(g) of the Code or comparable provisions of any
state law occurring prior to the Closing Date.
3.13
Assets
.
Each of
the Parent and the Subsidiaries owns or leases all tangible assets necessary
for
the conduct of its businesses as presently conducted and as presently proposed
to be conducted. Each such tangible asset is free from material defects, has
been maintained in accordance with normal industry practice, is in good
operating condition and repair (subject to normal wear and tear) and is suitable
for the purposes for which it presently is used. No asset of the Parent or
any
Subsidiary (tangible or intangible) is subject to any Security
Interest.
3.14
Owned
Real Property
.
Neither
the Parent nor any Subsidiary owns any real property.
3.15
Real
Property Leases
.
Section
3.15 of the Parent Disclosure Schedule lists all real property leased or
subleased to or by the Parent or any Subsidiary and lists the term of such
lease, any extension and expansion options, and the rent payable thereunder.
The
Parent has delivered or made available to the Company complete and accurate
copies of the leases and subleases listed in Section 3.15 of the Parent
Disclosure Schedule. With respect to each lease and sublease listed in
Section 3.15 of the Parent Disclosure Schedule:
(a)
the
lease
or sublease is legal, valid, binding, enforceable and in full force and
effect;
(b)
the
lease
or sublease will continue to be legal, valid, binding, enforceable and in full
force and effect immediately following the Closing in accordance with the terms
thereof as in effect immediately prior to the Closing;
(c)
neither
the Parent nor any Subsidiary nor, to the knowledge of the Parent, any other
party, is in breach or violation of, or default under, any such lease or
sublease, and no event has occurred, is pending or, to the knowledge of the
Parent, is threatened, which, after the giving of notice, with lapse of time,
or
otherwise, would constitute a breach or default by the Parent or any Subsidiary
or, to the knowledge of the Parent, any other party under such lease or
sublease;
(d)
neither
the Parent nor any Subsidiary has assigned, transferred, conveyed, mortgaged,
deeded in trust or encumbered any interest in the leasehold or subleasehold;
and
(e)
the
Parent is not aware of any Security Interest, easement, covenant or other
restriction applicable to the real property subject to such lease, except for
recorded easements, covenants and other restrictions which do not materially
impair the current uses or the occupancy by the Parent or a Subsidiary of the
property subject thereto.
3.16
Contracts
.
(a)
Section
3.16 of the Parent Disclosure Schedule lists the following agreements (written
or oral) to which the Parent or any Subsidiary is a party as of the date of
this
Agreement:
(i)
any
agreement (or group of related agreements) for the lease of personal property
from or to third parties;
(ii)
any
agreement (or group of related agreements) for the purchase or sale of products
or for the furnishing or receipt of services (A) which calls for
performance over a period of more than one year, (B) which involves more
than the sum of $5,000, or (C) in which the Parent or any Subsidiary has
granted manufacturing rights, “most favored nation” pricing provisions or
exclusive marketing or distribution rights relating to any products or territory
or has agreed to purchase a minimum quantity of goods or services or has agreed
to purchase goods or services exclusively from a certain party;
(iii)
any
agreement establishing a partnership or joint venture;
(iv)
any
agreement (or group of related agreements) under which it has created, incurred,
assumed or guaranteed (or may create, incur, assume or guarantee) indebtedness
(including capitalized lease obligations) involving more than $5,000 or under
which it has imposed (or may impose) a Security Interest on any of its assets,
tangible or intangible;
(v)
any
agreement concerning confidentiality or noncompetition;
(vi)
any
employment or consulting agreement;
(vii)
any
agreement involving any officer, director or stockholder of the Parent or any
Affiliate thereof;
(viii)
any
agreement under which the consequences of a default or termination would
reasonably be expected to have a Parent Material Adverse Effect;
(ix)
any
agreement which contains any provisions requiring the Parent or any Subsidiary
to indemnify any other party thereto (excluding indemnities contained in
agreements for the purchase, sale or license of products entered into in the
Ordinary Course of Business); and
(x)
any
other
agreement (or group of related agreements) either involving more than $5,000
or
not entered into in the Ordinary Course of Business.
(b)
The
Parent has delivered or made available to the Company a complete and accurate
copy of each agreement listed in Section 3.16 of the Parent Disclosure
Schedule. With respect to each agreement so listed: (i) the agreement is
legal, valid, binding and enforceable and in full force and effect;
(ii) the agreement will continue to be legal, valid, binding and
enforceable and in full force and effect immediately following the Closing
in
accordance with the terms thereof as in effect immediately prior to the Closing;
and (iii) neither the Parent nor any Subsidiary nor, to the knowledge of
the Parent, any other party, is in breach or violation of, or default under,
any
such agreement, and no event has occurred, is pending or, to the knowledge
of
the Parent, is threatened, which, after the giving of notice, with lapse of
time, or otherwise, would constitute a breach or default by the Parent or any
Subsidiary or, to the knowledge of the Parent, any other party under such
contract.
3.17
Accounts
Receivable
.
All
accounts receivable of the Parent and the Subsidiaries reflected on the Parent
Reports are valid receivables subject to no setoffs or counterclaims and are
current and collectible (within 90 days after the date on which it first became
due and payable), net of the applicable reserve for bad debts on the balance
sheet contained in the most recent Parent Report. All accounts receivable
reflected in the financial or accounting records of the Parent that have arisen
since the date of the balance sheet contained in the most recent Parent Report
are valid receivables subject to no setoffs or counterclaims and are collectible
(within 90 days after the date on which it first became due and payable), net
of
a reserve for bad debts in an amount proportionate to the reserve shown on
the
balance sheet contained in the most recent Parent Report.
3.18
Powers
of Attorney
.
There
are no outstanding powers of attorney executed on behalf of the Parent or any
Subsidiary.
3.19
Insurance
.
Section 3.19 of the Parent Disclosure Schedule lists each insurance policy
(including fire, theft, casualty, general liability, workers compensation,
business interruption, environmental, product liability and automobile insurance
policies and bond and surety arrangements) to which the Parent or any Subsidiary
is a party. Such insurance policies are of the type and in amounts customarily
carried by organizations conducting businesses or owning assets similar to
those
of the Parent and the Subsidiaries. There is no material claim pending under
any
such policy as to which coverage has been questioned, denied or disputed by
the
underwriter of such policy. All premiums due and payable under all such policies
have been paid, neither the Parent nor any Subsidiary may be liable for
retroactive premiums or similar payments, and the Parent and the Subsidiaries
are otherwise in compliance in all material respects with the terms of such
policies. The Parent has no knowledge of any threatened termination of, or
material premium increase with respect to, any such policy. Each such policy
will continue to be enforceable and in full force and effect immediately
following the Closing in accordance with the terms thereof as in effect
immediately prior to the Closing.
3.20
Warranties
.
No
service sold or delivered by the Parent or any Subsidiary is subject to any
guaranty, warranty, right of credit or other indemnity other than the applicable
standard terms and conditions of sale of the Parent or the appropriate
Subsidiary, which are set forth in Section 3.20 of the Parent Disclosure
Schedule.
3.21
Employees
.
(a)
Section
3.21 of the Parent Disclosure Schedule contains a list of all employees of
the
Parent and each Subsidiary whose annual rate of compensation exceeds $50,000
per
year, along with the position and the annual rate of compensation of each such
person. Each current or past employee of the Parent or any Subsidiary has
entered into a confidentiality/assignment of inventions agreement with the
Parent or such Subsidiary, a copy or form of which has previously been delivered
to the Company. Section 3.21 of the Parent Disclosure Schedule contains a list
of all employees of the Parent or any Subsidiary who are a party to a
non-competition agreement with the Parent or any Subsidiary; copies of such
agreements have previously been delivered to the Company. To the knowledge
of
the Parent, no key employee or group of employees has any plans to terminate
employment with the Parent or any Subsidiary.
(b)
Neither
the Parent nor any Subsidiary is a party to or bound by any collective
bargaining agreement, nor have any of them experienced any strikes, grievances,
claims of unfair labor practices or other collective bargaining disputes. The
Parent has no knowledge of any organizational effort made or threatened, either
currently or within the past two years, by or on behalf of any labor union
with
respect to employees of the Parent or any Subsidiary.
3.22
Employee
Benefits
.
(a)
Section 3.22(a)
of the Parent Disclosure Schedule contains a complete and accurate list of
all
Employee Benefit Plans maintained, or contributed to, by the Parent, any
Subsidiary or any ERISA Affiliate. Complete and accurate copies of (i) all
Employee Benefit Plans which have been reduced to writing, (ii) written
summaries of all unwritten Employee Benefit Plans, (iii) all related trust
agreements, insurance contracts and summary plan descriptions, and (iv) all
annual reports filed on IRS Form 5500, 5500C or 5500R and (for all funded plans)
all plan financial statements for the last five plan years for each Employee
Benefit Plan, have been delivered or made available to the Parent. Each Employee
Benefit Plan has been administered in all material respects in accordance with
its terms and each of the Parent, the Subsidiaries and the ERISA Affiliates
has
in all material respects met its obligations with respect to such Employee
Benefit Plan and has made all required contributions thereto. The Parent, each
Subsidiary, each ERISA Affiliate and each Employee Benefit Plan are in
compliance in all material respects with the currently applicable provisions
of
ERISA and the Code and the regulations thereunder (including without limitation
Section 4980 B of the Code, Subtitle K, Chapter 100 of the Code and
Sections 601 through 608 and Section 701 et seq. of ERISA). All
filings and reports as to each Employee Benefit Plan required to have been
submitted to the Internal Revenue Service or to the United States Department
of
Labor have been duly submitted.
(b)
To
the
knowledge of the Parent, there are no Legal Proceedings (except claims for
benefits payable in the normal operation of the Employee Benefit Plans and
proceedings with respect to qualified domestic relations orders) against or
involving any Employee Benefit Plan or asserting any rights or claims to
benefits under any Employee Benefit Plan that could give rise to any material
liability.
(c)
All
the
Employee Benefit Plans that are intended to be qualified under
Section 401(a) of the Code have received determination letters from the
Internal Revenue Service to the effect that such Employee Benefit Plans are
qualified and the plans and the trusts related thereto are exempt from federal
income taxes under Sections 401(a) and 501(a), respectively, of the Code,
no such determination letter has been revoked and revocation has not been
threatened, and no such Employee Benefit Plan has been amended since the date
of
its most recent determination letter or application therefor in any respect,
and
no act or omission has occurred, that would adversely affect its qualification
or materially increase its cost. Each Employee Benefit Plan which is required
to
satisfy Section 401(k)(3) or Section 401(m)(2) of the Code has been
tested for compliance with, and satisfies the requirements of,
Section 401(k)(3) and Section 401(m)(2) of the Code for each plan year
ending prior to the Closing Date.
(d)
Neither
the Parent, any Subsidiary, nor any ERISA Affiliate has ever maintained an
Employee Benefit Plan subject to Section 412 of the Code or Title IV of
ERISA.
(e)
At
no
time has the Parent, any Subsidiary or any ERISA Affiliate been obligated to
contribute to any “multiemployer plan” (as defined in Section 4001(a)(3) of
ERISA).
(f)
There
are
no unfunded obligations under any Employee Benefit Plan providing benefits
after
termination of employment to any employee of the Parent or any Subsidiary (or
to
any beneficiary of any such employee), including but not limited to retiree
health coverage and deferred compensation, but excluding continuation of health
coverage required to be continued under Section 4980B of the Code or other
applicable law and insurance conversion privileges under state law. The assets
of each Employee Benefit Plan which is funded are reported at their fair market
value on the books and records of such Employee Benefit Plan.
(g)
No
act or
omission has occurred and no condition exists with respect to any Employee
Benefit Plan maintained by the Parent, any Subsidiary or any ERISA Affiliate
that would subject the Parent, any Subsidiary or any ERISA Affiliate to (i)
any
material fine, penalty, tax or liability of any kind imposed under ERISA or
the
Code or (ii) any contractual indemnification or contribution obligation
protecting any fiduciary, insurer or service provider with respect to any
Employee Benefit Plan.
(h)
No
Employee Benefit Plan is funded by, associated with or related to a “voluntary
employee’s beneficiary association” within the meaning of Section 501(c)(9)
of the Code.
(i)
Each
Employee Benefit Plan is amendable and terminable unilaterally by the Parent
at
any time without liability to the Parent as a result thereof and no Employee
Benefit Plan, plan documentation or agreement, summary plan description or
other
written communication distributed generally to employees by its terms prohibits
the Parent from amending or terminating any such Employee Benefit
Plan.
(j)
Section
3.22(j) of the Parent Disclosure Schedule discloses each: (i) agreement
with any stockholder, director, executive officer or other key employee of
the
Parent or any Subsidiary (A) the benefits of which are contingent, or the
terms of which are materially altered, upon the occurrence of a transaction
involving the Parent or any Subsidiary of the nature of any of the transactions
contemplated by this Agreement, (B) providing any term of employment or
compensation guarantee or (C) providing severance benefits or other
benefits after the termination of employment of such director, executive officer
or key employee; (ii) agreement, plan or arrangement under which any person
may receive payments from the Parent or any Subsidiary that may be subject
to
the tax imposed by Section 4999 of the Code or included in the
determination of such person’s “parachute payment” under Section 280G of
the Code; and (iii) agreement or plan binding the Parent or any Subsidiary,
including without limitation any stock option plan, stock appreciation right
plan, restricted stock plan, stock purchase plan, severance benefit plan or
Employee Benefit Plan, any of the benefits of which will be increased, or the
vesting of the benefits of which will be accelerated, by the occurrence of
any
of the transactions contemplated by this Agreement or the value of any of the
benefits of which will be calculated on the basis of any of the transactions
contemplated by this Agreement. The accruals for vacation, sickness and
disability expenses are accounted for on the Most Recent Balance Sheet and
are
adequate and properly reflect the expenses associated therewith in accordance
with generally accepted accounting principles.
3.23
Environmental
Matters
.
(a)
Each
of
the Parent and the Subsidiaries has complied with all applicable Environmental
Laws, except for violations of Environmental Laws that, individually or in
the
aggregate, have not had and would not reasonably be expected to have a Parent
Material Adverse Effect. There is no pending or, to the knowledge of the Parent,
threatened civil or criminal litigation, written notice of violation, formal
administrative proceeding, or investigation, inquiry or information request
by
any Governmental Entity, relating to any Environmental Law involving the Parent
or any Subsidiary, except for litigation, notices of violations, formal
administrative proceedings or investigations, inquiries or information requests
that, individually or in the aggregate, have not had and would not reasonably
be
expected to have a Parent Material Adverse Effect.
(b)
Set
forth
in Section 3.23(b) of the Parent Disclosure Schedule is a list of all
documents (whether in hard copy or electronic form) that contain any
environmental reports, investigations and audits relating to premises currently
or previously owned or operated by the Parent or a Subsidiary (whether conducted
by or on behalf of the Parent or a Subsidiary or a third party, and whether
done
at the initiative of the Parent or a Subsidiary or directed by a Governmental
Entity or other third party) which were issued or conducted during the past
five
years and which the Parent has possession of or access to. A complete and
accurate copy of each such document has been provided to the
Parent.
(c)
The
Parent is not aware of any material environmental liability of any solid or
hazardous waste transporter or treatment, storage or disposal facility that
has
been used by the Parent or any Subsidiary.
3.24
Permits
.
Section
3.24 of the Parent Disclosure Schedule sets forth a list of all permits,
licenses, registrations, certificates, orders or approvals from any Governmental
Entity (including without limitation those issued or required under
Environmental Laws and those relating to the occupancy or use of owned or leased
real property) (“Parent Permits”) issued to or held by the Parent or any
Subsidiary. Such listed Permits are the only Parent Permits that are required
for the Parent and the Subsidiaries to conduct their respective businesses
as
presently conducted except for those the absence of which, individually or
in
the aggregate, have not had and would not reasonably be expected to have a
Parent Material Adverse Effect. Each such Parent Permit is in full force and
effect and, to the knowledge of the Parent, no suspension or cancellation of
such Parent Permit is threatened and there is no basis for believing that such
Parent Permit will not be renewable upon expiration. Each such Parent Permit
will continue in full force and effect immediately following the
Closing.
3.25
Certain
Business Relationships With Affiliates
.
No
Affiliate of the Parent or of any Subsidiary (a) owns any property or
right, tangible or intangible, which is used in the business of the Parent
or
any Subsidiary, (b) has any claim or cause of action against the Parent or
any Subsidiary, or (c) owes any money to, or is owed any money by, the
Parent or any Subsidiary. Section 3.25 of the Parent Disclosure Schedule
describes any transactions involving the receipt or payment in excess of $5,000
in any fiscal year between the Parent or a Subsidiary and any Affiliate thereof
which have occurred or existed since the beginning of the time period covered
by
the Parent Financial Statements, other than employment agreements.
3.26
Tax-Free
Reorganization
.
(a)
The
Parent (i) is not an “investment company” as defined in
Section 368(a)(2)(F)(iii) and (iv) of the Code; (ii) has no present
plan or intention to liquidate the Surviving Corporation or to merge the
Surviving Corporation with or into any other corporation or entity, or to sell
or otherwise dispose of the stock of the Surviving Corporation which Parent
will
acquire in the Merger, or to cause the Surviving Corporation to sell or
otherwise dispose of its assets, all except in the ordinary course of business
or if such liquidation, merger, disposition is described in
Section 368(a)(2)(C) or Treasury Regulation Section 1.368-2(d)(4) or
Section 1368-2(k); and (iii) has no present plan or intention,
following the Merger, to issue any additional shares of stock of the Surviving
Corporation or to create any new class of stock of the Surviving
Corporation.
(b)
The
Acquisition Subsidiary is a wholly-owned subsidiary of the Parent, formed solely
for the purpose of engaging in the Merger, and will carry on no business prior
to the Merger.
(c)
Immediately
prior to the Merger, the Parent will be in control of Acquisition Subsidiary
within the meaning of Section 368(c) of the Code.
(d)
Immediately
following the Merger, the Surviving Corporation will hold at least 90% of the
fair market value of the net assets and at least 70% of the fair market value
of
the gross assets held by the Company immediately prior to the Merger (for
purposes of this representation, amounts used by the Company to pay
reorganization expenses, if any, will be included as assets of the Company
held
immediately prior to the Merger).
(e)
The
Parent has no present plan or intention to reacquire any of the Merger
Shares.
(f)
The
Acquisition Subsidiary will have no liabilities assumed by the Surviving
Corporation and will not transfer to the Surviving Corporation any assets
subject to liabilities in the Merger.
(g)
Following
the Merger, the Surviving Corporation will continue the Company’s historic
business or use a significant portion of the Company’s historic business assets
in a business as required by Section 368 of the Code and the Treasury
Regulations promulgated thereunder.
(h)
The Split-Off
Agreement will constitute a legally binding obligation between Parent and
Buyer prior to the Effective Time; immediately following consummation
of the Merger, Parent will distribute the stock of Leaseco to Buyer in
cancellation of the Purchase Price Shares (as such term is defined in the
Split-Off Agreement); no property other than the capital stock of
Leaseco will be distributed by Parent to Buyer in connection with
or following the Merger; upon execution of the Split-Off Agreement, Buyer
will have no right to sell or transfer the Purchased Shares to any person
without Parent's prior written consent, and Parent will not consent (nor
will it permit others to consent) to any such sale or transfer; upon execution
of the Split-Off Agreement, there will be no other plan, arrangement,
agreement, contract, intention, or understanding, whether written or verbal
and
whether or not enforceable in law or equity, that
would permit Buyer to vote the Purchased
Shares or receive any property or other distributions
from Parent with respect to the Purchased Shares other than the
capital stock of Leaseco.
3.27
Split-Off
.
As of
the Effective Time, the Parent will have discontinued all of its business
operations which it conducted prior to the Effective Time by closing the
transactions contemplated by the Split-Off Agreement. Upon the closing of the
transactions contemplated by the Split-Off Agreement, the Parent will have
no
material liabilities, contingent or otherwise in any way related to its
pre-Effective Time business operations.
3.28
Brokers’
Fees
.
Except
as set forth on Section 3.28 of the Parent Disclosure Schedule, neither the
Parent nor the Acquisition Subsidiary has any liability or obligation to pay
any
fees or commissions to any broker, finder or agent with respect to the
transactions contemplated by this Agreement.
3.29
Disclosure
.
No
representation or warranty by the Parent contained in this Agreement or in
any
of the Transaction Documentation, and no statement contained in the any
document, certificate or other instrument delivered or to be delivered by or
on
behalf of the Parent pursuant to this Agreement or therein, contains or will
contain any untrue statement of a material fact or omits or will omit to state
any material fact necessary, in light of the circumstances under which it was
or
will be made, in order to make the statements herein or therein not misleading.
The Parent has disclosed to the Company all material information relating to
the
business of the Parent or any Subsidiary or the transactions contemplated by
this Agreement.
3.30
Interested
Party Transactions
.
Except
for the Split-Off Agreement, to the knowledge of the Parent, no officer,
director or stockholder of Parent or any “affiliate” (as such term is defined in
Rule 12b-2 under the Exchange Act) or “associate” (as such term is defined
in Rule 405 under the Securities Act) of any such person has had, either
directly or indirectly, (a) an interest in any person that (i) furnishes or
sells services or products that are furnished or sold or are proposed to be
furnished or sold by Parent or any Parent Subsidiary or (ii) purchases from
or
sells or furnishes to Parent or any Parent Subsidiary any goods or services,
or
(b) a beneficial interest in any contract or agreement to which Parent or any
Parent Subsidiary is a party or by which it may be bound or affected. Neither
Parent or any Parent Subsidiary has extended or maintained credit, arranged
for
the extension of credit, or renewed an extension of credit, in the form of
a
personal loan to or for any director or executive officer (or equivalent
thereof) of the Parent or any Parent Subsidiary.
3.31
Duty
to Make Inquiry
.
To the
extent that any of the representations or warranties in this Article III are
qualified by “knowledge” or “belief,” Parent represents and warrants that it has
made due and reasonable inquiry and investigation concerning the matters to
which such representations and warranties relate, including, but not limited
to,
diligent inquiry by its directors, officers and key personnel.
3.32
Accountants
.
De Joya
Griffith & Company, LLC are and has been throughout the periods covered by
such financial statements (a) a registered public accounting firm (as defined
in
Section 2(a)(12) of the Sarbanes-Oxley Act of 2002, (b) “independent” with
respect to Parent within the meaning of Regulation S-X and (c) in compliance
with subsections (g) through (l) of Section 10A of the Exchange Act and the
related rules of the Commission and the Public Company Accounting Oversight
Board. Schedule 3.32 lists all non-audit services performed by De Joya Griffith
& Company, LLC for Parent and/or any Subsidiary since January 17, 2005. The
report of De Joya Griffith & Company, LLC on the financial statements of
Parent for the past fiscal year did not contain an adverse opinion or a
disclaimer of opinion, or was qualified as to uncertainty, audit scope, or
accounting principles. During Parent’s most recent fiscal year and the
subsequent interim periods, there were no disagreements with De Joya Griffith
& Company, LLC on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures. None of the
reportable events listed in Item 304(a)(1)(iv) of Regulation S-B occurred with
respect to De Joya Griffith & Company, LLC.
3.33
Minute
Books
.
The
minute books, if any, of Parent and each Subsidiary contain, in all material
respects, a complete and accurate summary of all meetings of directors and
stockholders or actions by written resolutions since the time of organization
of
each such corporation through the date of this Agreement, and reflect all
transactions referred to in such minutes and resolutions accurately, except
for
omissions which are not material. Parent has provided true and complete copies
of all such minute books, if any, to the Company’s representatives.
3.34
Board
Action
.
The
Parent’s Board of Directors (a) has unanimously determined that the Merger is
advisable and in the best interests of the Parent’s stockholders and is on terms
that are fair to such Parent stockholders and (b) has caused the Parent, in
its
capacity as the sole stockholder of the Acquisition Subsidiary, and the Board
of
Directors of the Acquisition Subsidiary, to approve the Merger and this
Agreement by written consent.
ARTICLE
IV
COVENANTS
4.1
Closing
Efforts
.
Each of
the Parties shall use its best efforts, to the extent commercially reasonable
(“Reasonable Best Efforts”), to take all actions and to do all things necessary,
proper or advisable to consummate the transactions contemplated by this
Agreement, including without limitation using its Reasonable Best Efforts to
ensure that (i) its representations and warranties remain true and correct
in all material respects through the Closing Date and (ii) the conditions
to the obligations of the other Parties to consummate the Merger are
satisfied.
4.2
Governmental
and Third-Party Notices and Consents
.
(a)
Each
Party shall use its Reasonable Best Efforts to obtain, at its expense, all
waivers, permits, consents, approvals or other authorizations from Governmental
Entities, and to effect all registrations, filings and notices with or to
Governmental Entities, as may be required for such Party to consummate the
transactions contemplated by this Agreement and to otherwise comply with all
applicable laws and regulations in connection with the consummation of the
transactions contemplated by this Agreement.
(b)
The
Company shall use its Reasonable Best Efforts to obtain, at its expense, all
such waivers, consents or approvals from third parties, and to give all such
notices to third parties, as are required to be listed in Section 2.4 of
the Disclosure Schedule.
4.3
Current
Report
.
As soon
as reasonably practicable after the execution of this Agreement, the Parties
shall prepare a current report on Form 8-K relating to this Agreement and the
transactions contemplated hereby (the “Current Report”). Each of the Company and
Parent shall use its reasonable efforts to cause the Current Report to be filed
with the SEC within four business days of the execution of this Agreement and
to
otherwise comply with all requirements of applicable federal and state
securities laws. Further, the Parties shall prepare and file with the SEC an
amendment to the Current Report within four business days after the Closing
Date, if such Current Report was filed before the Closing Date.
4.4
Operation
of Business
.
Except
as contemplated by this Agreement, during the period from the date of this
Agreement to the Effective Time, the Company shall (and shall cause each
Subsidiary to) conduct its operations in the Ordinary Course of Business and
in
compliance with all applicable laws and regulations and, to the extent
consistent therewith, use its Reasonable Best Efforts to preserve intact its
current business organization, keep its physical assets in good working
condition, keep available the services of its current officers and employees
and
preserve its relationships with customers, suppliers and others having business
dealings with it to the end that its goodwill and ongoing business shall not
be
impaired in any material respect. Without limiting the generality of the
foregoing, prior to the Effective Time, the Company shall not (and shall cause
each Subsidiary not to), without the written consent of the Parent:
(a)
issue
or
sell, or redeem or repurchase, any stock or other securities of the Company
or
any Warrants, Options or other rights to acquire any such stock or other
securities (except pursuant to the conversion or exercise of convertible
securities or Options or Warrants outstanding on the date hereof), or amend
any
of the terms of (including without limitation the vesting of) any such
convertible securities or Options or Warrants;
(b)
split,
combine or reclassify any shares of its capital stock; declare, set aside or
pay
any dividend or other distribution (whether in cash, stock or property or any
combination thereof) in respect of its capital stock;
(c)
create,
incur or assume any indebtedness (including obligations in respect of capital
leases); assume, guarantee, endorse or otherwise become liable or responsible
(whether directly, contingently or otherwise) for the obligations of any other
person or entity; or make any loans, advances or capital contributions to,
or
investments in, any other person or entity;
(d)
enter
into, adopt or amend any Employee Benefit Plan or any employment or severance
agreement or arrangement or (except for normal increases in the Ordinary Course
of Business for employees who are not Affiliates) increase in any manner the
compensation or fringe benefits of, or materially modify the employment terms
of, its directors, officers or employees, generally or individually, or pay
any
bonus or other benefit to its directors, officers or employees;
(e)
acquire,
sell, lease, license or dispose of any assets or property (including without
limitation any shares or other equity interests in or securities of any
Subsidiary or any corporation, partnership, association or other business
organization or division thereof), other than purchases and sales of assets
in
the Ordinary Course of Business;
(f)
mortgage
or pledge any of its property or assets or subject any such property or assets
to any Security Interest;
(g)
discharge
or satisfy any Security Interest or pay any obligation or liability other than
in the Ordinary Course of Business;
(h)
amend
its
charter, by-laws or other organizational documents;
(i)
change
in
any material respect its accounting methods, principles or practices, except
insofar as may be required by a generally applicable change in
GAAP;
(j)
enter
into, amend, terminate, take or omit to take any action that would constitute
a
violation of or default under, or waive any rights under, any material contract
or agreement;
(k)
institute
or settle any Legal Proceeding;
(l)
take
any
action or fail to take any action permitted by this Agreement with the knowledge
that such action or failure to take action would result in (i) any of the
representations and warranties of the Company set forth in this Agreement
becoming untrue or (ii) any of the conditions to the Merger set forth in
Article V not being satisfied; or
(m)
agree
in
writing or otherwise to take any of the foregoing actions.
4.5
Access
to Information
.
(a)
The
Company shall (and shall cause each Subsidiary to) permit representatives of
the
Parent to have full access (at all reasonable times, and in a manner so as
not
to interfere with the normal business operations of the Company and the
Subsidiaries) to all premises, properties, financial and accounting records,
contracts, other records and documents, and personnel, of or pertaining to
the
Company and each Subsidiary.
(b)
Each
of
the Parent and the Acquisition Subsidiary (i) shall treat and hold as
confidential any Company Confidential Information (as defined below),
(ii) shall not use any of the Company Confidential Information except in
connection with this Agreement, and (iii) if this Agreement is terminated
for any reason whatsoever, shall return to the Company all tangible embodiments
(and all copies) thereof which are in its possession. For purposes of this
Agreement, “Company Confidential Information” means any confidential or
proprietary information of the Company or any Subsidiary that is furnished
in
writing to the Parent or the Acquisition Subsidiary by the Company or any
Subsidiary in connection with this Agreement and is labeled confidential or
proprietary;
provided
,
however
,
that it
shall not include any information (A) which, at the time of disclosure, is
available publicly, (B) which, after disclosure, becomes available publicly
through no fault of the Parent or the Acquisition Subsidiary, (C) which the
Parent or the Acquisition Subsidiary knew or to which the Parent or the
Acquisition Subsidiary had access prior to disclosure, or (D) which the
Parent or the Acquisition Subsidiary rightfully obtains from a source other
than
the Company or a Subsidiary.
4.6
Operation
of Business
.
Except
as contemplated by this Agreement, during the period from the date of this
Agreement to the Effective Time, the Parent shall (and shall cause each
Subsidiary to) conduct its operations in the Ordinary Course of Business and
in
compliance with all applicable laws and regulations and, to the extent
consistent therewith, use its Reasonable Best Efforts to preserve intact its
current business organization, keep its physical assets in good working
condition, keep available the services of its current officers and employees
and
preserve its relationships with customers, suppliers and others having business
dealings with it to the end that its goodwill and ongoing business shall not
be
impaired in any material respect. Without limiting the generality of the
foregoing, prior to the Effective Time, the Parent shall not (and shall cause
each Subsidiary not to), without the written consent of the
Company:
(a)
issue
or
sell, or redeem or repurchase, any stock or other securities of the Parent
or
any rights, warrants or options to acquire any such stock or other securities,
except as contemplated by, and in connection with, the Private Placement
Offering and the Merger;
(b)
split,
combine or reclassify any shares of its capital stock; declare, set aside or
pay
any dividend or other distribution (whether in cash, stock or property or any
combination thereof) in respect of its capital stock, except as contemplated
by,
and in connection with, the Stock Split;
(c)
create,
incur or assume any indebtedness (including obligations in respect of capital
leases); assume, guarantee, endorse or otherwise become liable or responsible
(whether directly, contingently or otherwise) for the obligations of any other
person or entity; or make any loans, advances or capital contributions to,
or
investments in, any other person or entity;
(d)
enter
into, adopt or amend any Employee Benefit Plan or any employment or severance
agreement or arrangement or (except for normal increases in the Ordinary Course
of Business for employees who are not Affiliates) increase in any manner the
compensation or fringe benefits of, or materially modify the employment terms
of, its directors, officers or employees, generally or individually, or pay
any
bonus or other benefit to its directors, officers or employees, except for
the
adoption of Parent Option Plan covering 3,850,000 shares of Parent Common Stock
in connection with the Merger;
(e)
acquire,
sell, lease, license or dispose of any assets or property (including without
limitation any shares or other equity interests in or securities of any Parent
Subsidiary or any corporation, partnership, association or other business
organization or division thereof), other than purchases and sales of assets
in
the Ordinary Course of Business, except as contemplated by, and in connection
with, the Split-Off;
(f)
mortgage
or pledge any of its property or assets or subject any such property or assets
to any Security Interest;
(g)
discharge
or satisfy any Security Interest or pay any obligation or liability other than
in the Ordinary Course of Business;
(h)
amend
its
charter, by-laws or other organizational documents;
(i)
change
in
any material respect its accounting methods, principles or practices, except
insofar as may be required by a generally applicable change in
GAAP;
(j)
enter
into, amend, terminate, take or omit to take any action that would constitute
a
violation of or default under, or waive any rights under, any material contract
or agreement;
(k)
institute
or settle any Legal Proceeding;
(l)
take
any
action or fail to take any action permitted by this Agreement with the knowledge
that such action or failure to take action would result in (i) any of the
representations and warranties of the Parent and/or the Acquisition Subsidiary
set forth in this Agreement becoming untrue or (ii) any of the conditions
to the Merger set forth in Article V not being satisfied; or
(m)
agree
in
writing or otherwise to take any of the foregoing actions.
4.7
Access
to Information
.
(a)
The
Parent shall (and shall cause the Acquisition Subsidiary to) permit
representatives of the Company to have full access (at all reasonable times,
and
in a manner so as not to interfere with the normal business operations of the
Parent and the Acquisition Subsidiary) to all premises, properties, financial
and accounting records, contracts, other records and documents, and personnel,
of or pertaining to the Parent and the Acquisition Subsidiary.
(b)
The
Company (i) shall treat and hold as confidential any Parent Confidential
Information (as defined below), (ii) shall not use any of the Parent
Confidential Information except in connection with this Agreement, and
(iii) if this Agreement is terminated for any reason whatsoever, shall
return to the Parent all tangible embodiments (and all copies) thereof which
are
in its possession. For purposes of this Agreement, “Parent Confidential
Information” means any confidential or proprietary information of the Parent or
any Subsidiary that is furnished in writing to the Company by the Parent or
the
Acquisition Subsidiary in connection with this Agreement and is labeled
confidential or proprietary;
provided
,
however
,
that it
shall not include any information (A) which, at the time of disclosure, is
available publicly, (B) which, after disclosure, becomes available publicly
through no fault of the Company, (C) which the Company knew or to which the
Company had access prior to disclosure or (D) which the Company rightfully
obtains from a source other than the Parent or the Acquisition
Subsidiary.
4.8
Expenses
.
The
costs and expenses of the Parent and the Company (including legal fees and
expenses of the Parent and the Company) incurred in connection with this
Agreement and the transactions contemplated hereby shall be payable at Closing
from the proceeds of the Private Placement Offering.
4.9
Indemnification
.
(a)
The
Parent shall not, for a period of three years after the Effective Time, take
any
action to alter or impair any exculpatory or indemnification provisions now
existing in the articles of incorporation or bylaws of the Company for the
benefit of any individual who served as a director or officer of the Company
at
any time prior to the Effective Time, except for any changes which may be
required to conform with changes in applicable law and any changes which do
not
affect the application of such provisions to acts or omissions of such
individuals prior to the Effective Time.
(b)
From
and
after the Effective Time, the Parent agrees that it will, and will cause the
Surviving Corporation to, indemnify and hold harmless each present and former
director and officer of the Company (the “Indemnified Executives”) against any
costs or expenses (including attorneys’ fees), judgments, fines, losses, claims,
damages, liabilities or amounts paid in settlement incurred in connection with
any claim, action, suit, proceeding or investigation, whether civil, criminal,
administrative or investigative, arising out of or pertaining to matters
existing or occurring at or prior to the Effective Time, whether asserted or
claimed prior to, at or after the Effective Time, to the fullest extent
permitted under California law (and the Parent and the Surviving Corporation
shall also advance expenses as incurred to the fullest extent permitted under
California law, provided the Indemnified Executive to whom expenses are advanced
provides an undertaking to repay such advances if it is ultimately determined
that such Indemnified Executive is not entitled to
indemnification).
4.10
Listing
of Merger Shares
.
The
Parent shall take whatever steps are necessary to cause the Merger Shares to
be
eligible for quotation on the NASD’s OTC Bulletin Board.
4.11
Stock
Split
.
The
Parent shall take whatever steps are necessary to enable it to effect the Stock
Split prior to or as of the Effective Time.
4.12
Name
Change
.
As soon
as reasonably practicable after the Effective Time, the Parent shall take all
necessary steps to enable it to change its corporate name to such name as is
agreeable to the Company, if the Parent has not already done so prior to the
Effective Time.
4.13
Split-Off
.
The
Parent shall take whatever steps are necessary to enable it to effect the
Split-Off as of the Effective Time.
4.14
Stock
Option Plan
.
The
Board of Directors and shareholders of Parent shall adopt the Parent Option
Plan
reserving for issuance 3,850,000 shares of Parent Common Stock prior to or
as of
the Effective Time.
4.15
Information
Provided to Company Stockholders
.
The
Company shall prepare, with the cooperation of the Parent, information to be
sent to the holders of Company Shares and the holders of Series A1 and Series
B1
Preferred Stock, Existing Warrants and Convertible Notes in connection with
receiving their approval of the Merger, this Agreement and related transactions.
Such information shall constitute a disclosure of the offer and issuance of
the
shares of Parent Common Stock to be received by the Company Stockholders in
the
Merger. The Parent and the Company shall each use Reasonable Best Efforts to
cause information provided to such holders to comply with applicable federal
and
state securities laws requirements. Each of the Parent and the Company agrees
to
provide promptly to the other such information concerning its business and
financial statements and affairs as, in the reasonable judgment of the providing
party or its counsel, may be required or appropriate for inclusion in the
information sent, or in any amendments or supplements thereto, and to cause
its
counsel and auditors to cooperate with the other's counsel and auditors in
the
preparation of the information to be sent to the holders of Company Shares
and
the holders of Series A1 and Series B1 Preferred Stock, Existing Warrants and
Convertible Notes. The Company will promptly advise the Parent, and the Parent
will promptly advise the Company, in writing if at any time prior to the
Effective Time either the Company or the Parent shall obtain knowledge of any
facts that might make it necessary or appropriate to amend or supplement the
information sent in order to make the statements contained or incorporated
by
reference therein not misleading or to comply with applicable law. The
information sent shall contain the recommendation of the Board of Directors
of
the Company that the holders of Company Shares and the holders of Series A1
and
Series B1 Preferred Stock, Existing Warrants and Convertible Notes approve
the
Merger and this Agreement and the conclusion of the Board of Directors of the
Company that the terms and conditions of the Merger are advisable and fair
and
reasonable to the such holders. Anything to the contrary contained herein
notwithstanding, the Company shall not include in the information sent to such
holders any information with respect to the Parent or its affiliates or
associates, the form and content of which information shall not have been
approved by the Parent prior to such inclusion.
4.16
No
Registration
.
For a
period of one year following the Effective Time, the Parent shall not register,
nor shall it take any action to facilitate registration of, under the Securities
Act, the Merger Shares, including the Parent Common Stock issuable upon exercise
of Parent Options and New Warrants issued pursuant to Section 1.8 of this
Agreement.
4.17
No
Shorting
.
The
Company shall take whatever steps are necessary to ensure that each Company
Stockholder agrees that it will not, for a period commencing on the date hereof
and terminating one year after the Effective Time, directly or indirectly,
effect or agree to effect any short sale (as defined in Rule 200 under
Regulation SHO of the Exchange Act), whether or not against the box, establish
any “put equivalent position” (as defined in Rule 16a-1(h) under the Exchange
Act) with respect to the Parent Common Stock, borrow or pre-borrow any shares
of
Parent Common Stock, or grant any other right (including, without limitation,
any put or call option) with respect to the Parent Common Stock or with respect
to any security that includes, relates to or derives any significant part of
its
value from the Parent Common Stock or otherwise seek to hedge its position
in
the Parent Common Stock (each, a “Prohibited Transaction”).
ARTICLE
V
CONDITIONS
TO CONSUMMATION OF MERGER
5.1
Conditions
to Each Party’s Obligations
.
The
respective obligations of each Party to consummate the Merger are subject to
the
satisfaction of the following conditions:
(a)
this
Agreement and the Merger shall have received the approval of at least 90% of
the
votes represented by the outstanding Company Shares entitled to vote on this
Agreement and the Merger;
(b)
the
completion of the offer and sale of the Private Placement Offering;
(c)
satisfactory
completion by Parent and Company of all necessary legal due diligence; and
(d)
the
receipt of all information required to be included in the Current Report on
SEC
Form 8-K required to be filed by the Parent as a result of the
Merger.
5.2
Conditions
to Obligations of the Parent and the Acquisition Subsidiary
.
The
obligation of each of the Parent and the Acquisition Subsidiary to consummate
the Merger is subject to the satisfaction (or waiver by the Parent) of the
following additional conditions:
(a)
the
number of Dissenting Shares shall not exceed 2% of the number of outstanding
Company Shares as of the Effective Time;
(b)
the
Company and its Subsidiaries shall have obtained (and shall have provided copies
thereof to the Parent) all waivers, permits, consents, approvals or other
authorizations, and effected all of the registrations, filings and notices,
referred to in Section 4.2 which are required on the part of the Company or
the Subsidiaries, except for any the failure of which to obtain or effect would
not, individually or in the aggregate, have a Company Material Adverse Effect
or
a material adverse effect on the ability of the Parties to consummate the
transactions contemplated by this Agreement;
(c)
at
least
90% of the Existing Warrants (determined by reference to the number of
underlying Company Shares) shall have been exercised or such warrants rights
shall have been settled;
(d)
the
representations and warranties of the Company set forth in this Agreement shall
be true and correct as of the date of this Agreement and shall be true and
correct as of the Effective Time as though made as of the Effective Time, except
to the extent that the inaccuracy of any such representation or warranty is
the
result of events or circumstances occurring subsequent to the date of this
Agreement and any such inaccuracies, individually or in the aggregate, would
not
have a Company Material Adverse Effect or a material adverse effect on the
ability of the Parties to consummate the transactions contemplated by this
Agreement (it being agreed that any materiality qualifications in particular
representations and warranties shall be disregarded in determining whether
any
such inaccuracies would have a Company Material Adverse Effect for purposes
of
this Section 5.2(c));
(e)
the
Company shall have performed or complied in all material respects with its
agreements and covenants required to be performed or complied with under this
Agreement as of or prior to the Effective Time;
(f)
no
Legal
Proceeding shall be pending wherein an unfavorable judgment, order, decree,
stipulation or injunction would (i) prevent consummation of any of the
transactions contemplated by this Agreement, (ii) cause any of the
transactions contemplated by this Agreement to be rescinded following
consummation or (iii) have, individually or in the aggregate, a Company
Material Adverse Effect, and no such judgment, order, decree, stipulation or
injunction shall be in effect;
(g)
the
Company shall have delivered to the Parent and the Acquisition Subsidiary a
certificate (the “Company Certificate”) to the effect that each of the
conditions specified in clauses (a) and (c) of Section 5.1 and clauses
(a) through (e) (insofar as clause (e) relates to Legal Proceedings
involving the Company or a Subsidiary) of this Section 5.2 is satisfied in
all respects;
(h)
the
Company Stockholders named in Schedule 2.2 shall have entered into agreements
with the Parent pursuant to which they shall have agreed to certain restrictions
on the sale or other disposition of the Parent Common Stock received by them
in
connection with the Merger for a period of 12 months following the Closing
Date;
(i)
each
Company Stockholder shall have agreed in writing not to engage in any Prohibited
Transactions;
(j)
all
notes
and other indebtedness convertible into shares of any class of capital stock
of
the Company shall have been discharged or converted into Company
Shares;
(k)
the
Company shall have made arrangements satisfactory to the Parent to retire its
entire outstanding indebtedness simultaneously with, or prior to, the Closing;
and
(l)
the
Parent shall have received from McGuireWoods LLP, counsel to the Company, an
opinion with respect to the matters set forth in
Exhibit C
attached
hereto, addressed to the Parent and dated as of the Closing Date.
5.3
Conditions
to Obligations of the Company
.
The
obligation of the Company to consummate the Merger is subject to the
satisfaction of the following additional conditions:
(a)
the
Parent shall have obtained (and shall have provided copies thereof to the
Company and its Subsidiaries) all of the waivers, permits, consents, approvals
or other authorizations, and effected all of the registrations, filings and
notices, referred to in Section 4.2 which are required on the part of the
Parent, except for any the failure of which to obtain or effect would not,
individually or in the aggregate, have a Parent Material Adverse Effect or
a
material adverse effect on the ability of the Parties to consummate the
transactions contemplated by this Agreement;
(b)
the
representations and warranties of the Parent set forth in this Agreement shall
be true and correct as of the date of this Agreement and shall be true and
correct as of the Effective Time as though made as of the Effective Time, except
to the extent that the inaccuracy of any such representation or warranty is
the
result of events or circumstances occurring subsequent to the date of this
Agreement and any such inaccuracies, individually or in the aggregate, would
not
have a Parent Material Adverse Effect or a material adverse effect on the
ability of the Parties to consummate the transactions contemplated by this
Agreement (it being agreed that any materiality qualifications in particular
representations and warranties shall be disregarded in determining whether
any
such inaccuracies would have a Parent Material Adverse Effect for purposes
of
this Section 5.3(b));
(c)
each
of
the Parent and the Acquisition Subsidiary shall have performed or complied
with
its agreements and covenants required to be performed or complied with under
this Agreement as of or prior to the Effective Time;
(d)
no
Legal
Proceeding shall be pending wherein an unfavorable judgment, order, decree,
stipulation or injunction would (i) prevent consummation of any of the
transactions contemplated by this Agreement, (ii) cause any of the
transactions contemplated by this Agreement to be rescinded following
consummation or (iii) have, individually or in the aggregate, a Parent
Material Adverse Effect (as such term is modified, with respect to Legal
Proceedings, pursuant to Section 3.10 hereof), and no such judgment, order,
decree, stipulation or injunction shall be in effect;
(e)
the
Parent shall have delivered to the Company a certificate (the “Parent
Certificate”) to the effect that each of the conditions specified in clauses (b)
and (d) of Section 5.1 and clauses (a) through (d) (insofar as
clause (d) relates to Legal Proceedings involving the Parent and the
Acquisition Subsidiary) of this Section 5.3 is satisfied in all
respects;
(f)
the
Company shall have received from Gottbetter & Partners, LLP, counsel to the
Parent and the Acquisition Subsidiary, an opinion with respect to the matters
set forth in
Exhibit
E
attached
hereto, addressed to the Company and dated as of the Closing Date;
(g)
the
total
number of shares of Parent Common Stock issued and outstanding immediately
prior
to the Effective Time shall equal 8,750,000 shares, after giving effect to
the
Stock Split and the Share Contribution, but excluding (i) the shares of Parent
Common Stock to be issued to accredited investors in the Private Placement
Offering; and (ii) 27,000,000 shares of Parent Common Stock to be issued to
Company Stockholders in connection with the Merger.
(h)
Joel
A.
Balbien and the Parent shall have entered into employment agreements reasonably
satisfactory to Joel A. Balbien, the Parent and the Company relating to the
employment of Mr. Balbien by the Parent;
(i)
the
Parent shall have adopted the Parent Option Plan;
(j)
the
Company shall have received a certificate of Parent’s transfer agent and
registrar certifying that as of the Closing Date there are approximately
28,194,448 shares of Parent Common Stock issued and outstanding (without giving
effect to the approximately 19,444,445 shares of Parent Common Stock to be
retired in connection with the Split-Off, after which retirement there will
be
8,750,000 shares of Parent Common Stock issued and outstanding);
and
(k)
contemporaneously
with the closing of the Merger, the Parent, Leaseco, and the Buyer shall execute
the Split-Off Agreement, which Split-Off is effective simultaneous with the
Merger.
ARTICLE
VI
INDEMNIFICATION
6.1
Indemnification
by the Company Stockholders
.
The
Indemnifying Stockholders receiving the Merger Shares pursuant to
Section 1.5 shall indemnify the Parent in respect of, and hold it harmless
against, any and all debts, obligations and other liabilities (whether absolute,
accrued, contingent, fixed or otherwise, or whether known or unknown, or due
or
to become due or otherwise), monetary damages, fines, fees, penalties, interest
obligations, deficiencies, losses and expenses (including without limitation
amounts paid in settlement, interest, court costs, costs of investigators,
fees
and expenses of attorneys, accountants, financial advisors and other experts,
and other expenses of litigation) (“Damages”) incurred or suffered by the
Surviving Corporation or the Parent or any Affiliate thereof resulting from,
relating to or constituting:
(a)
any
misrepresentation, breach of warranty or failure to perform any covenant or
agreement of the Company contained in this Agreement or the Company
Certificate;
(b)
any
failure of any Company Stockholder to have good, valid and marketable title
to
the issued and outstanding Company Shares issued in the name of such Company
Stockholder, free and clear of all Security Interests; or
(c)
any
claim
by a stockholder or former stockholder of the Company, or any other person
or
entity, seeking to assert, or based upon: (i) ownership or rights to
ownership of any shares of stock of the Company; (ii) any rights of a
stockholder (other than the right to receive the Merger Shares pursuant to
this
Agreement or appraisal rights under the applicable provisions of the California
Corporations Code), including any option, preemptive rights or rights to notice
or to vote; (iii) any rights under the articles of incorporation or bylaws
of the Company; or (iv) any claim that his, her or its shares were
wrongfully repurchased by the Company.
6.2
Indemnification
by the Parent
.
(a)
The
Parent shall indemnify the Indemnifying Stockholders in respect of, and hold
them harmless against, any and all Damages incurred or suffered by the
Indemnifying Stockholders resulting from, relating to or constituting any
misrepresentation, breach of warranty or failure to perform any covenant or
agreement of the Parent or the Acquisition Subsidiary contained in this
Agreement or the Parent Certificate.
(b)
The
post-Closing adjustment mechanism set forth in Section 1.13 is intended to
secure the indemnification obligations of the Parent under this Agreement and
shall be the exclusive means for the Indemnifying Stockholders to collect any
Damages for which they are entitled to indemnification under this Article VI.
6.3
Indemnification
Claims by the Parent
.
(a)
In
the
event the Parent is entitled, or seeks to assert rights, to indemnification
under Section 6.1, Parent shall give written notification to the Indemnifying
Stockholders of the commencement of any suit or proceeding relating to a third
party claim for which indemnification pursuant to this Article VI may be
sought. Such notification shall be given within 20 business days after receipt
by the Parent of notice of such suit or proceeding, and shall describe in
reasonable detail (to the extent known by the Parent) the facts constituting
the
basis for such suit or proceeding and the amount of the claimed damages;
provided, however, that no delay on the part of the Parent in notifying the
Indemnifying Stockholders shall relieve the Indemnifying Stockholders of any
liability or obligation hereunder except to the extent of any damage or
liability caused by or arising out of such failure. Within 20 days after
delivery of such notification, the Indemnifying Stockholders may, upon written
notice thereof to the Parent, assume control of the defense of such suit or
proceeding with counsel reasonably satisfactory to the Parent; provided that
(i) the Indemnifying Stockholders may only assume control of such defense
if (A) it acknowledges in writing to the Parent that any damages, fines, costs
or other liabilities that may be assessed against the Parent in connection
with
such suit or proceeding constitute Damages for which the Parent shall be
indemnified pursuant to this Article VI and (B) the ad damnum is less than
or equal to the amount of Damages for which the Indemnifying Stockholders are
liable under this Article VI and (ii) the Indemnifying Stockholders may not
assume control of the defense of a suit or proceeding involving criminal
liability or in which equitable relief is sought against the Parent. If the
Indemnifying Stockholders do not so assume control of such defense, the Parent
shall control such defense. The party not controlling such defense (the
“Non-Controlling Party”) may participate therein at its own expense; provided
that if the Indemnifying Stockholders assume control of such defense and the
Parent reasonably concludes that the Indemnifying Stockholders and the Parent
have conflicting interests or different defenses available with respect to
such
suit or proceeding, the reasonable fees and expenses of counsel to the Parent
shall be considered “Damages” for purposes of this Agreement. The party
controlling such defense (the “Controlling Party”) shall keep the
Non-Controlling Party advised of the status of such suit or proceeding and
the
defense thereof and shall consider in good faith recommendations made by the
Non-Controlling Party with respect thereto. The Non-Controlling Party shall
furnish the Controlling Party with such information as it may have with respect
to such suit or proceeding (including copies of any summons, complaint or other
pleading which may have been served on such party and any written claim, demand,
invoice, billing or other document evidencing or asserting the same) and shall
otherwise cooperate with and assist the Controlling Party in the defense of
such
suit or proceeding. The Indemnifying Stockholders shall not agree to any
settlement of, or the entry of any judgment arising from, any such suit or
proceeding without the prior written consent of the Parent, which shall not
be
unreasonably withheld or delayed; provided that the consent of the Parent shall
not be required if the Indemnifying Stockholders agree in writing to pay any
amounts payable pursuant to such settlement or judgment and such settlement
or
judgment includes a complete release of the Parent from further liability and
has no other materially adverse effect on the Parent. The Parent shall not
agree
to any settlement of, or the entry of any judgment arising from, any such suit
or proceeding without the prior written consent of the Indemnifying
Stockholders, which shall not be unreasonably withheld or delayed.
(b)
In
order
to seek indemnification under this Article VI, Parent shall give written
notification (a “Claim Notice”) to the Indemnifying Stockholders which contains
(i) a description and the amount (the “Claimed Amount”) of any Damages incurred
or reasonably expected to be incurred by the Parent, (ii) a statement that
the
Parent is entitled to indemnification under this Article VI for such
Damages and a reasonable explanation of the basis therefor, and (iii) a demand
for payment (in the manner provided in paragraph (c) below) in the amount
of such Damages. The Indemnifying Stockholders shall deliver a copy of the
Claim
Notice to the Escrow Agent.
(c)
Within
20
days after delivery of a Claim Notice, the Indemnifying Stockholders shall
deliver to the Parent a written response (the “Response”) in which the
Indemnifying Stockholders shall: (i) agree that the Parent is entitled to
receive all of the Claimed Amount (in which case the Indemnifying Stockholders
and the Parent shall deliver to the Escrow Agent, within three days following
the delivery of the Response, a written notice executed by both parties
instructing the Escrow Agent to distribute to the Parent such number of Escrow
Shares as have an aggregate Value (as defined below) equal to the Claimed
Amount), (ii) agree that the Parent is entitled to receive part, but not
all, of the Claimed Amount (the “Agreed Amount”) (in which case the Indemnifying
Stockholders and the Parent shall deliver to the Escrow Agent, within three
days
following the delivery of the Response, a written notice executed by both
parties instructing the Escrow Agent to distribute to the Parent such number
of
Escrow Shares as have an aggregate Value (as defined below) equal to the Agreed
Amount) or (iii) dispute that the Parent is entitled to receive any of the
Claimed Amount. If the Indemnifying Stockholders in the Response disputes its
liability for all or part of the Claimed Amount, the Indemnifying Stockholders
and the Parent shall follow the procedures set forth in Section 6.3(d) for
the resolution of such dispute (a “Dispute”). For purposes of this
Article VI, the “Value” of any Escrow Shares delivered in satisfaction of
an indemnity claim shall be $1.35 per Escrow Share (subject to equitable
adjustment in the event of any stock split, stock dividend, reverse stock split
or similar event affecting the Parent Common Stock since the Closing Date),
multiplied by the number of such Escrow Shares.
(d)
During
the 60-day period following the delivery of a Response that reflects a Dispute,
the Indemnifying Stockholders and the Parent shall use good faith efforts to
resolve the Dispute. If the Dispute is not resolved within such 60-day period,
the Indemnifying Stockholders and the Parent shall discuss in good faith the
submission of the Dispute to a mutually acceptable alternative dispute
resolution procedure (which may be non-binding or binding upon the parties,
as
they agree in advance) (the “ADR Procedure”). In the event the Indemnifying
Stockholders and the Parent agree upon an ADR Procedure, such parties shall,
in
consultation with the chosen dispute resolution service (the “ADR Service”),
promptly agree upon a format and timetable for the ADR Procedure, agree upon
the
rules applicable to the ADR Procedure, and promptly undertake the ADR Procedure.
The provisions of this Section 6.3(d) shall not obligate the Indemnifying
Stockholders and the Parent to pursue an ADR Procedure or prevent either such
Party from pursuing the Dispute in a court of competent jurisdiction; provided
that, if the Indemnifying Stockholders and the Parent agree to pursue an ADR
Procedure, neither the Indemnifying Stockholders nor the Parent may commence
litigation or seek other remedies with respect to the Dispute prior to the
completion of such ADR Procedure. Any ADR Procedure undertaken by the
Indemnifying Stockholders and the Parent shall be considered a compromise
negotiation for purposes of federal and state rules of evidence, and all
statements, offers, opinions and disclosures (whether written or oral) made
in
the course of the ADR Procedure by or on behalf of the Indemnifying
Stockholders, the Parent or the ADR Service shall be treated as confidential
and, where appropriate, as privileged work product. Such statements, offers,
opinions and disclosures shall not be discoverable or admissible for any
purposes in any litigation or other proceeding relating to the Dispute (provided
that this sentence shall not be construed to exclude from discovery or admission
any matter that is otherwise discoverable or admissible). The fees and expenses
of any ADR Service used by the Indemnifying Stockholders and the Parent shall
be
shared equally by the Indemnifying Stockholders and the Parent. The Parent
and
the Indemnifying Stockholders shall deliver to the Escrow Agent, promptly
following the resolution of the Dispute (whether by mutual agreement, pursuant
to an ADR Procedure, as a result of a judicial decision or otherwise), a written
notice executed by both parties instructing the Escrow Agent as to what (if
any)
portion of the Escrow Shares shall be distributed to the Parent (which notice
shall be consistent with the terms of the resolution of the
Dispute).
(e)
Notwithstanding
the other provisions of this Section 6.3, if a third party asserts (other
than by means of a lawsuit) that the Parent is liable to such third party for
a
monetary or other obligation which may constitute or result in Damages for
which
such Parent may be entitled to indemnification pursuant to this Article VI,
and the Parent reasonably determines that it has a valid business reason to
fulfill such obligation, then (i) Parent shall be entitled to satisfy such
obligation, with prior notice to but without prior consent from the Indemnifying
Stockholders, (ii) Parent may subsequently make a claim for
indemnification in accordance with the provisions of this Article VI, and
(iii) Parent shall be reimbursed, in accordance with the provisions of
this Article VI, for any such Damages for which it is entitled to
indemnification pursuant to this Article VI (subject to the right of the
Indemnifying Stockholders to dispute the Parent’s entitlement to
indemnification, or the amount for which it is entitled to indemnification,
under the terms of this Article VI).
(f)
For
purposes of this Section 6.3 and the last two sentences of
Section 6.4, any references to the Indemnifying Stockholders (except
provisions relating to an obligation to make or a right to receive any payments
provided for in Section 6.3 or Section 6.4) shall be deemed to refer
to the Indemnification Representative. The Indemnification Representative shall
have full power and authority on behalf of each Indemnifying Stockholder to
take
any and all actions on behalf of, execute any and all instruments on behalf
of,
and execute or waive any and all rights of, the Indemnifying Stockholders under
this Article VI. The Indemnification Representative shall have no liability
to any Indemnifying Stockholder for any action taken or omitted on behalf of
the
Indemnifying Stockholders pursuant to this Article VI.
6.4
Survival
of Representations and Warranties
.
All
representations and warranties contained in this Agreement, the Company
Certificate or the Parent Certificate shall (a) survive the Closing and any
investigation at any time made by or on behalf of Parent or the Indemnifying
Stockholders and (b) shall expire on the date two years following the
Closing Date. If Parent delivers to an Indemnifying Stockholders, before
expiration of a representation or warranty, either a Claim Notice based upon
a
breach of such representation or warranty, or a notice that, as a result a
legal
proceeding instituted by or written claim made by a third party, the Parent
reasonably expects to incur Damages as a result of a breach of such
representation or warranty (an “Expected Claim Notice”), then such
representation or warranty shall survive until, but only for purposes of, the
resolution of the matter covered by such notice. If the legal proceeding or
written claim with respect to which an Expected Claim Notice has been given
is
definitively withdrawn or resolved in favor of the Parent, the Parent shall
promptly so notify the Indemnifying Stockholders; and if the Parent has
delivered a copy of the Expected Claim Notice to the Escrow Agent and Escrow
Shares have been retained in escrow after the Termination Date (as defined
in
the Escrow Agreement) with respect to such Expected Claim Notice, the
Indemnifying Stockholders and the Parent shall promptly deliver to the Escrow
Agent a written notice executed by both parties instructing the Escrow Agent
to
distribute such retained Escrow Shares to the Indemnifying Stockholders in
accordance with the terms of the Escrow Agreement.
6.5
Limitations
on Parent’s Claims for Indemnification
.
(a)
Notwithstanding
anything to the contrary herein, the Parent shall not be entitled to recover,
or
be indemnified for, Damages arising out of a misrepresentation or breach of
warranty set forth in Article II unless and until the aggregate of all such
Damages paid or payable by the Indemnifying Stockholders collectively exceeds
$50,000 (the “Damages Threshold”) and then, if such aggregate threshold is
reached, the Parent shall only be entitled to recover for Damages in excess
of
such respective threshold; and in no event shall any Indemnifying Stockholder
be
liable under this Article VI for an aggregate amount, whether paid in cash
or in
shares of Parent Common Stock, greater than the product of the number of Escrow
Shares held on account of such Indemnifying Stockholder, pursuant to Section
1.5
above, multiplied by the Value. For purposes of the preceding sentence, each
Escrow Share delivered by a party in payment of his or its obligations under
this Article VI shall be valued at the Value.
(b)
The
Escrow Agreement is intended to secure the indemnification obligations of the
Indemnifying Stockholders under this Agreement and shall be the exclusive means
for the Parent to collect any Damages for which it is entitled to
indemnification under this Article VI.
(c)
Except
with respect to claims based on fraud, after the Closing, the rights of the
Indemnified Stockholders and the Parent under this Article VI and the
Escrow Agreement shall be the exclusive remedy of the Indemnified Stockholders
and the Parent with respect to claims resulting from or relating to any
misrepresentation, breach of warranty or failure to perform any covenant or
agreement contained in this Agreement.
(d)
No
Indemnifying Stockholder shall have any right of contribution against the
Surviving Corporation with respect to any breach by the Company of any of its
representations, warranties, covenants or agreements. The amount of Damages
recoverable by Parent under this Article VI with respect to an indemnity
claim shall be reduced by (i) any proceeds received by Parent with respect
to the Damages to which such indemnity claim relates, from an insurance carrier
and (ii) the amount of any tax savings actually realized by Parent, for the
tax year in which such Damages are incurred, which are clearly attributable
to
the Damages to which such indemnity claim relates (net of any increased tax
liability which may result from the receipt of the indemnity payment or any
insurance proceeds relating to such Damages).
ARTICLE
VII
DEFINITIONS
For
purposes of this Agreement, each of the following defined terms is defined
in
the Section of this Agreement indicated below.
Defined
Term
|
Section
|
|
|
Acquisition
Subsidiary
|
Introduction
|
ADR
Procedure
|
6.3(d)
|
ADR
Service
|
6.3(d)
|
Affiliate
|
2.13(a)(vii)
|
Agreed
Amount
|
6.3(c)
|
Agreement
|
Introduction
|
Agreement
of Merger
|
1.1
|
Buyer
|
Introduction
|
California
Corporations Code
|
1.1
|
CERCLA
|
2.20(a)
|
Certificates
|
1.7
|
Claim
Notice
|
6.3(b)
|
Claimed
Amount
|
6.3(b)
|
Claims
|
1.13
|
Closing
|
1.2
|
Closing
Date
|
1.2
|
Code
|
Introduction
|
Common
Conversion Ratio
|
1.5(b)
|
Company
|
Introduction
|
Company
Balance Sheet
|
2.6
|
Company
Balance Sheet Date
|
2.6
|
Company
Certificate
|
5.3(e)
|
Company
Interim Balance Sheet
|
2.6
|
Company
Interim Balance Sheet Date
|
2.6
|
Company
Interim Financial Statements
|
2.6
|
Company
Stockholders
|
1.3(d)
|
Company
Confidential Information
|
4.5(b)
|
Company
Financial Statements
|
2.6
|
Company
Material Adverse Effect
|
2.1
|
Company
Shares
|
1.5(a)
|
Company
Stockholder
|
1.3(d)
|
Contemplated
Transactions
|
8.3
|
Controlling
Party
|
6.3(a)
|
Convertible
Notes
|
2.2
|
Current
Report
|
4.3
|
Damages
|
6.1
|
Damages
Threshold
|
6.5(a)
|
Defaulting
Party
|
8.6
|
Disclosure
Schedule
|
Article II
|
Dispute
|
6.3(c)
|
Dissenting
Shares
|
1.6(a)
|
Effective
Time
|
1.1
|
Employee
Benefit Plan
|
2.19(a)(i)
|
Environmental
Law
|
2.20(a)
|
ERISA
|
2.19(a)(ii)
|
ERISA
Affiliate
|
2.19(a)(iii)
|
Escrow
Agent
|
1.3(h)
|
Escrow
Agreement
|
1.3(h)
|
Escrow
Shares
|
1.5(b)
|
Exchange
Act
|
2.13(a)
|
Existing
Warrants
|
1.5(b)
|
Expected
Claim Notice
|
6.4
|
GAAP
|
2.6
|
Governmental
Entity
|
2.4
|
Indemnification
Representative
|
1.3(g)
|
Indemnified
Executives
|
4.9(b)
|
Indemnifying
Stockholders
|
1.5(b)
|
Initial
Shares
|
1.5(b)
|
Leaseco
|
Introduction
|
Legal
Proceeding
|
2.17
|
Loss
|
1.13
|
Merger
|
Introduction
|
Merger
Shares
|
1.5(b)
|
Non-Controlling
Party
|
6.3(a)
|
Non-Defaulting
Party
|
8.6
|
Old
Options
|
1.8(a)
|
Options
|
1.5(b)
|
Ordinary
Course of Business
|
2.4
|
OTCBB
|
3.2
|
Parent
|
Introduction
|
Parent
Certificate
|
5.3(e)
|
Parent
Common Stock
|
1.5(a)
|
Parent
Confidential Information
|
4.7(b)
|
Parent
Disclosure Schedule
|
Article
III
|
Parent
Liabilities
|
1.13
|
Parent
Material Adverse Effect
|
3.1
|
Parent
Options
|
1.8(a)
|
Parent
Option Plan
|
1.8(a)
|
Parent
Reports
|
3.6
|
Party
|
Introduction
|
Permit
Application
|
2.31
|
Permits
|
2.23
|
Prohibited
Transaction
|
4.17
|
PPO
Price
|
Introduction
|
Private
Placement Offering
|
Introduction
|
Reasonable
Best Efforts
|
4.1
|
Response
|
6.3(c)
|
SEC
|
1.13
|
Securities
Act
|
1.14
|
Security
Interest
|
2.4
|
Series
A1 and B1 Preferred Stock
|
1.5
|
Share
Contribution
|
3.2
|
Split-Off
|
Introduction
|
Split-Off
Agreement
|
Introduction
|
Stock
Split
|
3.2
|
Subsidiary
|
2.5(a)
|
Surviving
Corporation
|
1.1
|
Tax
Returns
|
2.9(a)(ii)
|
Taxes
|
2.9(a)(i)
|
Transaction
Documentation
|
3.3
|
Unit
|
Introduction
|
Value
|
6.3(c)
|
Year-End
Financial Statements
|
2.6
|
ARTICLE
VIII
TERMINATION
8.1
Termination
by Mutual Agreement
.
This
Agreement may be terminated at any time by mutual consent of the parties hereto,
provided that such consent to terminate is in writing and is signed by each
of
the parties hereto.
8.2
Termination
for Failure to Close
.
This
Agreement shall be automatically terminated if the Closing Date shall not have
occurred by January 15, 2007.
8.3
Termination
by Operation of Law
.
This
Agreement may be terminated by any Party hereto if there shall be any statute,
rule or regulation that renders consummation of the transactions contemplated
by
this Agreement (the “Contemplated Transactions) illegal or otherwise prohibited,
or a court of competent jurisdiction or any government (or governmental
authority) shall have issued an order, decree or ruling, or has taken any other
action restraining, enjoining or otherwise prohibiting the consummation of
such
transactions and such order, decree, ruling or other action shall have become
final and nonappealable.
8.4
Termination
for Failure to Perform Covenants or Conditions
.
This
Agreement may be terminated prior to the Effective Time:
(a)
by
the
Parent and the Acquisition Subsidiary if: (i) any of the representations
and warranties made in this Agreement by the Company shall not be materially
true and correct, when made or at any time prior to consummation of the
Contemplated Transactions as if made at and as of such time; (ii) any of
the conditions set forth in Section 5.2 hereof have not been fulfilled in all
material respects by the Closing Date; (iii) the Company shall have failed
to observe or perform any of its material obligations under this Agreement;
or
(iv) as otherwise set forth herein; or
(b)
by
the
Company if: (i) any of the representations and warranties of the Parent or
the Acquisition Subsidiary shall not be materially true and correct when made
or
at any time prior to consummation of the Contemplated Transactions as if made
at
and as of such time; (ii) any of the conditions set forth in Section 5.3
hereof have not been fulfilled in all material respects by the Closing Date;
(iii) the Parent or the Acquisition Subsidiary shall have failed to observe
or perform any of their material respective obligations under this Agreement;
or
(iv) as otherwise set forth herein.
8.5
Effect
of Termination or Default; Remedies
.
In the
event of termination of this Agreement as set forth above, this Agreement shall
forthwith become void and there shall be no liability on the part of any Party
hereto, provided that such Party is a Non-Defaulting Party (as defined below).
The foregoing shall not relieve any Party from liability for damages actually
incurred as a result of such Party’s breach of any term or provision of this
Agreement.
8.6
Remedies;
Specific Performance
.
In the
event that any Party shall fail or refuse to consummate the Contemplated
Transactions or if any default under or beach of any representation, warranty,
covenant or condition of this Agreement on the part of any Party (the
“Defaulting Party”) shall have occurred that results in the failure to
consummate the Contemplated Transactions, then in addition to the other remedies
provided herein, the non-defaulting Party (the “Non-Defaulting Party”) shall be
entitled to seek and obtain money damages from the Defaulting Party, or may
seek
to obtain an order of specific performance thereof against the Defaulting Party
from a court of competent jurisdiction, provided that the Non-Defaulting Party
seeking such protection must file its request with such court within forty-five
(45) days after it becomes aware of the Defaulting Party’s failure, refusal,
default or breach. In addition, the Non-Defaulting Party shall be entitled
to
obtain from the Defaulting Party court costs and reasonable attorneys’ fees
incurred in connection with or in pursuit of enforcing the rights and remedies
provided hereunder.
ARTICLE
IX
MISCELLANEOUS
9.1
Press
Releases and Announcements
.
No
Party shall issue any press release or public announcement relating to the
subject matter of this Agreement without the prior written approval of the
other
Parties;
provided
,
however
,
that
any Party may make any public disclosure it believes in good faith is required
by applicable law, regulation or stock market rule (in which case the disclosing
Party shall use reasonable efforts to advise the other Parties and provide
them
with a copy of the proposed disclosure prior to making the
disclosure).
9.2
No
Third Party Beneficiaries
.
This
Agreement shall not confer any rights or remedies upon any person other than
the
Parties and their respective successors and permitted assigns;
provided
,
however
,
that
(a) the provisions in Article I concerning issuance of the Merger
Shares and Article VI concerning indemnification are intended for the
benefit of the Company Stockholders and (b) the provisions in
Section 4.9 concerning indemnification are intended for the benefit of the
individuals specified therein and their successors and assigns.
9.3
Entire
Agreement
.
This
Agreement (including the documents referred to herein) constitutes the entire
agreement among the Parties and supersedes any prior understandings, agreements
or representations by or among the Parties, written or oral, with respect to
the
subject matter hereof.
9.4
Succession
and Assignment
.
This
Agreement shall be binding upon and inure to the benefit of the Parties named
herein and their respective successors and permitted assigns. No Party may
assign either this Agreement or any of its rights, interests or obligations
hereunder without the prior written approval of the other Parties; provided
that
the Acquisition Subsidiary may assign its rights, interests and obligations
hereunder to a wholly-owned subsidiary of the Parent.
9.5
Counterparts
and Facsimile Signature
.
This
Agreement may be executed 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. This Agreement may be executed by facsimile signature.
9.6
Headings
.
The
section headings contained in this Agreement are inserted for convenience only
and shall not affect in any way the meaning or interpretation of this
Agreement.
9.7
Notices
.
All
notices, requests, demands, claims, and other communications hereunder shall
be
in writing. Any notice, request, demand, claim or other communication hereunder
shall be deemed duly delivered four business days after it is sent by registered
or certified mail, return receipt requested, postage prepaid, or one business
day after it is sent for next business day delivery via a reputable nationwide
overnight courier service, in each case to the intended recipient as set forth
below:
If
to the Company or the Parent (subsequent to the Closing):
|
|
Copy
to (which copy shall not constitute
notice
hereunder):
|
|
|
|
Kreido
Biofuels, Inc.
1140
Avenida Acaso
Camarrillo,
CA 93012
Attn:
Joel A. Balbien, Chief Executive Officer
Facsimile:
(805) 384-0989
|
|
McGuireWoods
LLP
1345
Avenue of the Americas
New
York, NY 10105
Attn:
Louis W. Zehil, Esq.
Facsimile:
(212) 548-2175
|
|
|
|
|
|
Additional
copies to
(which copy shall not constitute
notice
hereunder):
|
|
|
|
|
|
DLA
Piper
203
North LaSalle Street, Suite 1900
Chicago,
IL 60601-1293
Attn:
John H. Heuberger, Esq.
(312)
236-7516
|
|
|
|
|
|
Sheppard,
Mullin, Richter & Hampton LLP
1111
Chapala Street
Third
Floor
Santa
Barbara, CA 93101
Attn:
Joseph E. Nida, Esq.
(805)
879-1800
|
|
|
|
If to the
Parent or
the
Acquisition Subsidiary (prior to the
Closing):
|
|
Copy
to (which copy shall not constitute
notice
hereunder):
|
|
|
|
Kreido
Biofuels, Inc.
88
West 44th Avenue
Vancouver,
British Columbia, V5Y 2V1 Canada
Attn:
Stephen B. Jackson, President
|
|
Gottbetter
& Partners, LLP
488
Madison Avenue, 12
th
Floor
New
York, NY 10022
Attn:
Adam S. Gottbetter, Esq.
Facsimile:
(212) 400-6901
|
Any
Party
may give any notice, request, demand, claim or other communication hereunder
using any other means (including personal delivery, expedited courier, messenger
service, telecopy, telex, ordinary mail or electronic mail), but no such notice,
request, demand, claim or other communication shall be deemed to have been
duly
given unless and until it actually is received by the Party for whom it is
intended. Any Party may change the address to which notices, requests, demands,
claims, and other communications hereunder are to be delivered by giving the
other Parties notice in the manner herein set forth.
9.8
Governing
Law
.
This
Agreement shall be governed by and construed in accordance with the internal
laws of the State of New York without giving effect to any choice or conflict
of
law provision or rule (whether of the State of New York
or
any
other jurisdiction) that would cause the application of laws of any
jurisdictions other than those of the State of New York.
9.9
Amendments
and Waivers
.
The
Parties may mutually amend any provision of this Agreement at any time prior
to
the Effective Time. No amendment of any provision of this Agreement shall be
valid unless the same shall be in writing and signed by all of the Parties.
No
waiver of any right or remedy hereunder shall be valid unless the same shall
be
in writing and signed by the Party giving such waiver. No waiver by any Party
with respect to any default, misrepresentation or breach of warranty or covenant
hereunder shall be deemed to extend to any prior or subsequent default,
misrepresentation or breach of warranty or covenant hereunder or affect in
any
way any rights arising by virtue of any prior or subsequent such
occurrence.
9.10
Severability
.
Any
term or provision of this Agreement that is invalid or unenforceable in any
situation in any jurisdiction shall not affect the validity or enforceability
of
the remaining terms and provisions hereof or the validity or enforceability
of
the offending term or provision in any other situation or in any other
jurisdiction. If the final judgment of a court of competent jurisdiction
declares that any term or provision hereof is invalid or unenforceable, the
Parties agree that the court making the determination of invalidity or
unenforceability shall have the power to limit the term or provision, to delete
specific words or phrases, or to replace any invalid or unenforceable term
or
provision with a term or provision that is valid and enforceable and that comes
closest to expressing the intention of the invalid or unenforceable term or
provision, and this Agreement shall be enforceable as so modified.
9.11
Submission
to Jurisdiction
.
Each of
the Parties (a) submits to the jurisdiction of any state or federal court
sitting in the County of New York in the State of New York in any action or
proceeding arising out of or relating to this Agreement, (b) agrees that
all claims in respect of such action or proceeding may be heard and determined
in any such court, and (c) agrees not to bring any action or proceeding
arising out of or relating to this Agreement in any other court. Each of the
Parties waives any defense of inconvenient forum to the maintenance of any
action or proceeding so brought and waives any bond, surety or other security
that might be required of any other Party with respect thereto. Any Party may
make service on another Party by sending or delivering a copy of the process
to
the Party to be served at the address and in the manner provided for the giving
of notices in Section 9.7. Nothing in this Section 9.11, however,
shall affect the right of any Party to serve legal process in any other manner
permitted by law.
9.12
Construction
.
(a)
The
language used in this Agreement shall be deemed to be the language chosen by
the
Parties to express their mutual intent, and no rule of strict construction
shall
be applied against any Party.
(b)
Any
reference to any federal, state, local or foreign statute or law shall be deemed
also to refer to all rules and regulations promulgated thereunder, unless the
context requires otherwise.
[SIGNATURE
PAGE FOLLOWS]
IN
WITNESS WHEREOF, the Parties have executed this Agreement as of the date first
above written.
|
PARENT
|
|
KREIDO
BIOFUELS, INC.
|
|
|
|
By:
/s/ Stephen B. Jackson
|
|
Name: Stephen B. Jackson
|
|
Title:
President and Chief Executive Officer
|
|
|
|
|
|
ACQUISITION
SUBSIDIARY
|
|
KREIDO
ACQUISITION CORP.
|
|
|
|
By:
/s/ Stephen B. Jackson
|
|
Name: Stephen B. Jackson
|
|
Title:
President and Chief Executive Officer
|
|
|
|
|
|
COMPANY
|
|
KREIDO
LABORATORIES
|
|
|
|
By:
/s/ Joel A. Balbien
|
|
Name:
Joel
A. Balbien
|
|
Title:
Chief Executive Officer
|
EXHIBIT
4.1
Warrant
Certificate No. ___
NEITHER
THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES ISSUABLE
UPON
THE EXERCISE OF THIS WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT
OF
1933, AS AMENDED (THE “ACT”), OR ANY STATE SECURITIES LAWS, AND NEITHER SUCH
SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, ASSIGNED OR OTHERWISE
TRANSFERRED UNLESS (1) A REGISTRATION STATEMENT WITH RESPECT THERETO IS
EFFECTIVE UNDER THE ACT AND ANY APPLICABLE STATE
SECURITIES LAWS, OR (2) AN EXEMPTION FROM SUCH REGISTRATION EXISTS AND THE
COMPANY RECEIVES AN OPINION OF COUNSEL TO THE HOLDER OF SUCH SECURITIES, WHICH
COUNSEL AND OPINION ARE SATISFACTORY TO THE COMPANY, THAT SUCH SECURITIES MAY
BE
OFFERED, SOLD, PLEDGED, ASSIGNED OR TRANSFERRED IN THE MANNER CONTEMPLATED
WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR APPLICABLE STATE
SECURITIES
LAWS.
Dated:
January
12, 2007
|
Void After: January 12,
2012
|
KREIDO
BIOFUELS, INC.
WARRANT
TO PURCHASE COMMON STOCK
Kreido
Biofuels, Inc. (f/k/a Gemwood Productions, Inc.), a Nevada corporation (the
“Company”), for value received on January 12, 2007 (the “
Effective
Date
”),
hereby issues to
[
]
(the
“
Holder
”)
this
Warrant (the “
Warrant
”)
to
purchase,
[
]
shares
(each such share
as from
time to time adjusted as hereinafter provided
being a
“
Warrant
Share
”
and
all
such shares being the “
Warrant
Shares
”)
of the
Company’s Common Stock (as defined below), at the Exercise Price (as defined
below), as adjusted from time to time as provided herein, on or before January
12, 2012 (the “
Expiration
Date
”),
all
subject to the following terms and conditions. Unless otherwise defined in
this
Warrant, terms appearing in initial capitalized form shall have the meaning
ascribed to them in that certain Subscription Agreement of even date herewith
among the Company and the purchasers signatory thereto pursuant to which this
Warrant was issued (the “
Subscription
Agreement
”).
As
used
in this Warrant, (i) “
Business
Day
”
means
any day other than Saturday, Sunday or any other day on which commercial banks
in the City of New York, New York, are authorized or required by law or
executive order to close; (ii) “
Common
Stock
”
means
the common stock of the Company, $0.001 par value per share,
including
any securities issued or issuable with respect thereto or into which or for
which such shares may be exchanged for, or converted into, pursuant to any
stock
dividend, stock split, stock combination, recapitalization, reclassification,
reorganization or other similar event
;
(iii)
“
Exercise
Price
”
means
$1.85 per share of Common Stock, subject to adjustment as provided herein;
(iv)
“
Trading
Day
”
means
any
day
on which
the Common Stock is traded on the primary national or regional stock exchange
on
which the Common Stock is listed, or if not so listed, the NASD OTC Bulletin
Board if quoted thereon
is
open
for the transaction of business; and (v) “
Affiliate
”
means
any Person that, directly or indirectly, through one or more intermediaries,
controls, is controlled by, or is under common control with, a Person, as such
terms are used and construed in Rule 144
promulgated
under the Securities Act of 1933, as amended (the “
Securities
Act
”)
.
1.
DURATION
AND EXERCISE OF WARRANTS
(a)
Exercise
Period
.
The
Holder may exercise this Warrant in whole or in part on any Business Day on
or
before 5:00 P.M., Eastern Daylight Time, on the Expiration Date, at which time
this Warrant shall become void and of no value;
provided,
that the
Holder must give the Company notice of its intention to exercise the Warrant
at
least 61 days prior to the intended date of exercise. The Holder shall also
exercise the Warrant earlier on the Mandatory Exercise Date in accordance with
Section 1(b) if applicable, at which time this Warrant shall entitle the Holder
only to the Warrant Shares applicable upon such exercise.
(b)
Right
of Mandatory Exercise by Company
.
(i)
If
at any
time from and after the
SEC
Effective Date (as defined in the Registration Rights Agreement)
,
(i)
th
e
closing
sales price of the Common Stock for each Trading Day of any 20 consecutive
Trading Day period preceding the applicable Mandatory Exercise Eligibility
Date
exceeds $1.85 per share (subject to equitable adjustment for stock splits,
stock
dividends, combinations, and capital reorganizations, as applicable), (ii)
the
Registration Statement has been effective for a period of 45 Trading Days and
remains effective
or
the
Holder would be entitled to sell the Warrant Shares upon the exercise of the
Warrant pursuant to the Rule 144(k) promulgated under the Securities Act
(i.e.,
including
without
any volume limitations),
(iii)
the
Common Stock is listed on the New York Stock Exchange or the American Stock
Exchange, or quoted on the Nasdaq Market, and (iv)
the
average daily trading volume of the Common Stock over such 20 consecutive
Trading Day period equals or exceeds 3,500,000 shares
(the
“
Mandatory
Exercise Eligibility Date
”),
the
Company shall have the right to require the Holder to exercise this Warrant
in
whole or in part, subject to Sections 1(b)(ii) and (iii) below, as designated
in
the Mandatory Exercise Notice (as defined below), into fully paid, validly
issued and nonassessable shares of Common Stock in accordance with the terms
of
this Warrant at the Exercise Price as of the Mandatory Exercise Date (a
“
Mandatory
Exercise
”).
The
Company may exercise its right to require exercise under this Section 1(b)
by
delivering within not more than five (5) Trading Days after the Mandatory
Exercise Eligibility Date a written notice thereof by facsimile and overnight
courier to all, but not less than all, of the holders of Warrants and the
Transfer Agent (the “
Mandatory
Exercise Notice
”
and
the
first date by which all of the holders received such notice by facsimile is
referred to as the “
Mandatory
Exercise Notice Date
”).
The
Mandatory Exercise Notice shall be irrevocable. The Mandatory Exercise Notice
shall state (i) the Trading Day selected for the Mandatory Exercise in
accordance with this Section 1(b
)(i
)
,
which
Trading Day shall be at least twenty (20) Business Days but not more than sixty
(60) Business Days following the Mandatory Exercise Notice Date (the
“
Mandatory
Exercise Date
”),
(ii)
the aggregate number of Warrant Shares subject to Mandatory Exercise from the
Holder and all of the holders of the other Warrants pursuant to this Section
1(b) and (iii) the number of Warrant Shares to be issued to such Holder on
the
Mandatory Exercise Date
.
(ii)
If
the
Company elects to cause exercise of any amount of this Warrant pursuant to
Section 1(b)(i), then it must simultaneously take the same action in the same
proportion with respect to all other Warrants that contain a similar provision.
All amounts of this Warrant exercised by the Holder after the Mandatory Exercise
Notice Date shall reduce the amount of this Warrant required to be converted
on
the Mandatory Exercise Date. If the Company has elected a Mandatory Exercise,
the mechanics of exercise set forth in Section 1(c) shall apply, to the extent
applicable, as if the Company and the Transfer Agent had received from the
Holder on the Mandatory Exercise Date an Exercise Notice with respect to the
amount of this Warrant being converted pursuant to the Mandatory
Exercise.
(iii)
Notwithstanding
anything to the contrary contained in this Section 1(b), the aggregate number
of
Warrants as to which
the
Company shall have the right to
require
a
Mandatory Exercise at any given time under Section 1(b) shall be limited to
the
number
of Warrants such that number of Warrant Shares issuable upon exercise of the
Warrants so called does not exceed the total aggregate volume of the Company’s
Common Stock traded over the 20 consecutive Trading Days prior to the Mandatory
Exercise Eligibility Date. The Company shall not have the right to deliver
more
than one Mandatory Exercise Notice in any ninety (90) day period.
(c)
Exercise
Procedures
.
(i)
While
this Warrant remains outstanding and exercisable in accordance with Section
1(a), in addition to the manner set forth in Section 1(c)(ii) below, the Holder
may exercise this Warrant in whole or in part
at any
time and from time to time
by:
(A)
delivery
to the Company of a duly executed copy of the Notice of Exercise attached as
Exhibit
A
not less
than 61 days prior to the date upon which the Investor intends to exercise
the
Warrant;
(B)
surrender
of this Warrant to the Secretary of the Company at its principal offices or
at
such other office or agency as the Company may specify in writing to the Holder;
and
(C)
payment
of the
then
applicable
Exercise
Price per share multiplied by the number of Warrant Shares being purchased
upon
exercise of the Warrant (such amount, the “
Aggregate
Exercise Price
”)
made
in
the form of cash, or by certified check, bank draft or money order payable
in
lawful money of the United States of America
or in
the form of a Cashless Exercise
to the
extent permitted in Section 1(c)(
ii
)
below
.
(ii)
At
any
time
when
a
registration statement required by the Registration Rights Agreement covering
the resale of the Warrant Shares by the Holder is not available after the first
anniversary of the Effective Date
,
the
Holder may, in its sole discretion, exercise all or any part of the Warrant
in a
“cashless” or “net-issue” exercise (a “
Cashless
Exercise
”)
by
delivering to the Company (1) the Notice of Exercise and (2) the
Warrant
,
pursuant to which the Holder shall surrender the right to receive upon exercise
of this Warrant, a number of Warrant Shares having a value (as determined below)
equal to the Aggregate Exercise Price, in which case, the number of Warrant
Shares to be issued to the Holder upon such exercise shall be calculated using
the following formula:
X
=
Y
* (A
- B)
A
with:
X
=
the
number of Warrant Shares to be issued to the Holder
Y
=
the
number of Warrant Shares with respect to which the Warrant is being
exercised
A =
the
fair
value per share of
Common
Stock
on
the
date of exercise of this Warrant
B
=
the
then-current Exercise Price
of
the
Warrant
Solely
for the purposes of this paragraph, “fair value” shall be determined either (A)
reasonably and in good faith by the Board of Directors of the Company as of
the
date which the Notice of Exercise is deemed to have been sent to the Company,
or
(B) as the average of the closing sales prices, as quoted on the primary
national or regional stock exchange on which the Common Stock is listed,
or
,
if not
listed,
the NASD
OTC Bulletin Board if quoted thereon, on the
twenty
(
20
)
trading
days immediately preceding the date on which the Notice of Exercise is deemed
to
have been sent to the Company, whichever of (A) or (B) is greater.
Notwithstanding
the foregoing provisions of this Section 1(c)(ii), the Holder may not make
a
Cashless Exercise if and to the extent that such exercise would require the
Company to issue a number of shares of Common Stock in excess of its authorized
but unissued shares of Common Stock, less all amounts of Common Stock that
have
been reserved for issue upon the conversion of all outstanding securities
convertible into shares of Common Stock and the exercise of all outstanding
options, warrants and other rights exercisable for shares of Common Stock.
If
the Company does not have the requisite amount of authorized but unissued shares
of Common Stock to permit the Holder to make a Cashless Exercise, the Company
shall use its commercially best efforts to obtain the necessary shareholder
consent to increase the authorized number of shares of Common Stock to permit
such Holder to make a Cashless Exercise pursuant to this Section
1(c)(ii).
(iii)
Upon
th
e
exercise
of this
Warrant in compliance with the provisions of this Section 1(c) or pursuant
to a
Mandatory Exercise Notice in accordance with Section 1(b), and except as limited
pursuant to the last paragraph if Section 1(c)(ii), the Company shall promptly
issue and cause to be delivered to the Holder a certificate for the Warrant
Shares purchased by the Holder.
Each
exercise of this Warrant shall be effective
immediately prior to the close of business on the date (the “
Date
of Exercise
”)
which
(x)
the
conditions set forth in Section 1(b) have been satisfied in connection with
a
Mandatory Exercise Notice or (y) the conditions set forth in Section 1(c) have
been satisfied, as the case may be
.
On
or
before the first Business Day following the date on which the Company has
received each of the Exercise Notice and the Aggregate Exercise Price (or notice
of a Cashless Exercise in accordance with Section 1(c)(ii)) (the “
Exercise
Delivery Documents
”),
the
Company shall transmit by facsimile an acknowledgment of confirmation of receipt
of the Exercise Delivery Documents to the Holder and the Company’s transfer
agent (the “
Transfer
Agent
”).
On or
before the third Business Day following the date on which the Company has
received all of the Exercise Delivery Documents (the “
Share
Delivery Date
”),
the
Company shall (X) provide that the Transfer Agent is participating in The
Depository Trust Company (“
DTC
”)
Fast
Automated Securities Transfer Program, upon the request of the Holder, credit
such aggregate number of shares of Common Stock to which the Holder is entitled
pursuant to such exercise to the Holder’s or its designee’s balance account with
DTC through its Deposit Withdrawal Agent Commission system, or (Y) if the
Transfer Agent is not participating in the DTC Fast Automated Securities
Transfer Program, issue and dispatch by overnight courier to the address as
specified in the Exercise Notice, a certificate, registered in the Company’s
share register in the name of the Holder or its designee, for the number of
shares of Common Stock to which the Holder is entitled pursuant to such
exercise. Upon delivery of the Exercise Notice and Aggregate Exercise Price
referred to in
Section
1(c)(i
)(A)
above or
notification to the Company of a Cashless Exercise referred to in Section
1(c)(ii), the Holder shall be deemed for all corporate purposes to have become
the holder of record of the Warrant Shares with respect to which this Warrant
has been exercised, irrespective of the date of delivery of the certificates
evidencing such Warrant Shares. If this Warrant is submitted in connection
with
any exercise pursuant to Section 1(a) and the number of Warrant Shares
represented by this Warrant submitted for exercise is greater than the
actual
number
of
Warrant Shares being acquired upon
such
an
exercise, then the Company shall as soon as practicable and in no event later
than three (3) Business Days after any exercise and at its own expense, issue
a
new Warrant (in accordance with Section 1(c))
of like
tenor
representing the right to purchase the number of Warrant Shares purchasable
immediately prior to such exercise under this Warrant, less the number of
Warrant Shares with respect to which this Warrant is exercised. No fractional
shares of Common Stock are to be issued upon the exercise of this Warrant,
but
rather the number of shares of Common Stock to be issued shall be rounded up
to
the nearest whole number. The Company shall pay any and all taxes which may
be
payable with respect to the issuance and delivery of Warrant Shares upon
exercise of this Warrant.
(
iv)
If
the
Company shall fail for any reason or for no reason to issue to the Holder,
within three (3) Business Days of receipt of the Exercise Delivery Documents,
a
certificate for the number of shares of Common Stock to which the Holder is
entitled and register such shares of Common Stock on the Company’s share
register or to credit the Holder’s balance account with DTC for such number of
shares of Common Stock to which the Holder is entitled upon the Holder’s
exercise of this Warrant, and if on or after such Business Day the Holder
purchases (in an open market transaction or otherwise) shares of Common Stock
to
deliver in satisfaction of a sale by the Holder of shares of Common Stock
issuable upon such exercise that the Holder anticipated receiving from the
Company (a “
Buy-In
”),
then
the Company shall, within three (3) Business Days after the Holder’s request and
in the Holder’s discretion, either (i) 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 shares of Common Stock) shall terminate, or (ii) promptly honor its
obligation to deliver to the Holder a certificate or certificates representing
such shares of 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 (A) such number of
shares of Common Stock, times (B) the closing bid price
on
the
date of exercise.
(d)
Partial
Exercise
.
This
Warrant shall be exercisable, either in its entirety or, from time to time,
for
part only of the number of Warrant Shares referenced by this Warrant. If this
Warrant is exercised in part, the Company shall issue, at its expense, a new
Warrant, in substantially the form of this Warrant, referencing such reduced
number of Warrant Shares which remain subject to this Warrant.
(e)
Disputes
.
In the
case of a dispute as to the determination of the Exercise Price or the
arithmetic calculation of the Warrant Shares, the Company shall promptly issue
to the Holder the number of Warrant Shares that are not disputed and resolve
such dispute in accordance with Section 15.
2.
ISSUANCE
OF WARRANT SHARES
(a)
The
Company covenants that all Warrant Shares will, upon issuance in accordance
with
the terms of this Warrant, be (i) duly authorized, fully paid and
non-assessable, and (ii) free from all liens, charges and security interests,
with the exception of claims arising through the acts or omissions of any Holder
and except as arising from applicable Federal and state securities
laws.
(b)
The
Company shall register this Warrant upon records to be maintained by the Company
for that purpose in the name of the record holder of such Warrant from time
to
time. The Company may deem and treat the registered Holder of this Warrant
as
the absolute owner thereof for the purpose of any exercise thereof, any
distribution to the Holder thereof and for all other purposes.
(c)
The
Company will not, by amendment of its certificate of incorporation, by-laws
or
through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action, avoid
or
seek to avoid the observance or performance of any of the terms to be observed
or performed hereunder by the Company, but will at all times in good faith
assist in the carrying out of all the provisions of this Warrant and in the
taking of all the action as may be necessary or appropriate in order to protect
the rights of the Holder to exercise this Warrant
,
or
against impairment of such rights
.
3.
ADJUSTMENTS
OF EXERCISE PRICE, NUMBER AND TYPE OF WARRANT SHARES
(a)
The
Exercise Price and the number of shares purchasable upon the exercise of this
Warrant shall be subject to adjustment from time to time upon the occurrence
of
certain events described in this Section 3(a);
provided
,
that
notwithstanding the provisions of this Section 3, the Company shall not be
required to make any adjustment if and to the extent that such adjustment would
require the Company to issue a number of shares of Common Stock in excess of
its
authorized but unissued shares of Common Stock, less all amounts of Common
Stock
that have been reserved for issue upon the conversion of all outstanding
securities convertible into shares of Common Stock and the exercise of all
outstanding options, warrants and other rights exercisable for shares of Common
Stock. If the Company does not have the requisite amount of authorized but
unissued shares of Common Stock to make any adjustment, the Company shall use
its commercially best efforts to obtain the necessary shareholder consent to
increase the authorized number of shares of Common Stock to permit such
adjustment upon the occurrence of such events as described in this Section
3(a).
(i)
Subdivision
or Combination of Stock
.
In case
the Company shall at any time subdivide
(whether
by way of stock dividend, stock split or otherwise)
its
outstanding shares of Common Stock into a greater number of shares, the Exercise
Price in effect immediately prior to such subdivision shall be proportionately
reduced
and
the
Warrant Shares shall be proportionately increased
,
and
conversely, in case the outstanding shares of Common Stock of the Company shall
be combined
(whether
by way of stock combination, reverse stock split or otherwise)
into
a
smaller number of shares, the Exercise Price in effect immediately prior to
such
combination shall be proportionately increased
and the
number of Warrant Shares shall be proportionately decreased. The Exercise Price
and the Warrant Shares, as so adjusted, shall be readjusted in the same manner
upon the happening of any successive event or events described in this Section
3(a)(i)
.
(ii)
Dividends
in Stock, Property, Reclassification
.
If at
any time, or from time to time, the holders of Common Stock (or any shares
of
stock or other securities at the time receivable upon the exercise of this
Warrant) shall have received or become entitled to receive, without payment
therefore:
(A)
any
shares of stock or other securities which are at any time directly or indirectly
convertible into or exchangeable for Common Stock, or any rights or options
to
subscribe for, purchase or otherwise acquire any of the foregoing by way of
dividend or other distribution, or
(B)
additional
stock or other securities or property (including cash) by way of spin-off,
split-up, reclassification, combination of shares or similar corporate
rearrangement, (other than shares of Common Stock issued as a stock split or
adjustments in respect of which shall be covered by the terms of Section 3(a)(i)
above), then and in each such case, the
Exercise
Price and the number of Warrant Shares to be obtained upon exercise of this
Warrant shall be adjusted proportionately, and the
Holder
hereof shall, upon the exercise of this Warrant, be entitled to receive, in
addition to the number of shares of Common Stock receivable thereupon, and
without payment of any additional consideration therefor, the amount of stock
and other securities and property (including cash in the cases referred to
in
clause (ii) above) which such Holder would hold on the date of such exercise
had
he been the holder of record of such Common Stock as of the date on which
holders of Common Stock received or became entitled to receive such shares
or
all other additional stock and other securities and property.
The
Exercise Price and the Warrant Shares, as so adjusted, shall be readjusted
in
the same manner upon the happening of any successive event or events described
in this Section 3(a)(ii)
.
(iii)
Reorganization,
Reclassification, Consolidation, Merger or Sale
.
If any
recapitalization, reclassification or reorganization of the capital stock of
the
Company, or any consolidation or merger of the Company with another corporation,
or the sale of all or substantially all of its assets or
other
transaction shall be effected in such a way that holders of Common Stock shall
be entitled to receive stock, securities, or other assets or property (an
“
Organic
Change
”),
then,
as a condition of such Organic Change, lawful and adequate provisions shall
be
made by the Company whereby the Holder hereof shall thereafter have the right
to
purchase and receive (in lieu of the shares of the Common Stock of the Company
immediately theretofore purchasable and receivable upon the exercise of the
rights represented by this Warrant) such shares of stock, securities or other
assets or property as may be issued or payable with respect to or in exchange
for a number of outstanding shares of such Common Stock equal to the number
of
shares of such stock immediately theretofore purchasable and receivable assuming
the full exercise of the rights represented by this Warrant. In the event of
any
Organic Change, appropriate provision shall be made by the Company with respect
to the rights and interests of the Holder of this Warrant to the end that the
provisions hereof (including, without limitation, provisions for adjustments
of
the Exercise Price and of the number of shares purchasable and receivable upon
the exercise of this Warrant) shall thereafter be applicable, in relation to
any
shares of stock, securities or assets thereafter deliverable upon the exercise
hereof. The Company will not effect any such consolidation, merger or sale
unless, prior to the consummation thereof, the successor corporation (if other
than the Company) resulting from such consolidation or
merger
or
the
corporation purchasing such assets shall assume by written instrument reasonably
satisfactory in form and substance to the Holders executed and mailed or
delivered to the registered Holder hereof at the last address of such Holder
appearing on the books of the Company, the obligation to deliver to such Holder
such shares of stock, securities or assets as, in
accordance
with the foregoing provisions, such Holder may be entitled to
purchase.
If
there
is an Organic Change, then the Company shall cause to be mailed to the Holder
at
its last address as it shall appear on the books and records of the Company,
at
least 15 calendar days before the effective date of the Organic Change, a notice
stating the date on which such Organic Change is expected to become effective
or
close, and the date as of which it is expected that holders of the Common Stock
of record shall be entitled to exchange their shares for securities, cash,
or
other property delivered upon such Organic Change;
provided
,
that
the failure to mail such notice or any defect therein or in the mailing thereof
shall not affect the validity of the corporate action required to be specified
in such notice. The Holder is entitled to exercise this Warrant during the
15-day period commencing on the date of such notice to the effective date of
the
event triggering such notice.
In
any
event, the successor corporation (if other than the Company) resulting from
such
consolidation or merger or the corporation purchasing such assets shall be
deemed to assume such obligation to deliver to such Holder such shares of stock,
securities or assets even in the absence of a written instrument assuming such
obligation to the extent such assumption occurs by operation of law.
(b)
Certificate
as to Adjustments
.
Upon
the occurrence of each adjustment or readjustment pursuant to this Section
3,
the Company at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to each Holder
of
this Warrant a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is based.
The Company shall
promptly
furnish
or cause to be furnished to such Holder a like certificate setting forth: (i)
such adjustments and readjustments; and (ii) the number of shares and the
amount, if any, of other property which at the time would be received upon
the
exercise of the Warrant.
(c)
Certain
Events
.
If any
event occurs as to which the other provisions of this Section 3 are not strictly
applicable but the lack of any adjustment would not fairly protect the purchase
rights of the Holder under this Warrant in accordance with the basic intent
and
principles of such provisions, or if strictly applicable would not fairly
protect the purchase rights of the Holder under this Warrant in accordance
with
the basic intent and principles of such provisions, then the Company's Board
of
Directors will, in good faith, make an appropriate adjustment to protect the
rights of the Holder;
provided
,
that
no
such adjustment pursuant to this Section 3(c) will increase the Exercise Price
or decrease the number of Warrant Shares as otherwise determined pursuant to
this Section 3.
(d)
Adjustment
of Exercise Price Upon Issuance of Additional Shares of Common
Stock
.
In the
event
the
Company shall at any time prior to the eighteenth month anniversary of the
Effective Date issue Additional Shares of Common Stock, as defined below,
without consideration or for a consideration per share less than the Exercise
Price in effect immediately prior to such issue, then the Exercise Price shall
be reduced, concurrently with such issue, to a price (calculated to the nearest
cent) determined by multiplying such Exercise Price by a fraction, (A) the
numerator of which shall be (1) the number of shares of Common Stock outstanding
immediately prior to such issue plus (2) the number of shares of Common Stock
which the aggregate consideration received or to be received by the Company
for
the total number of Additional Shares of Common Stock so issued would purchase
at such Exercise Price; and (B) the denominator of which shall be the number
of
shares of Common Stock outstanding immediately prior to such issue plus the
number of such Additional Shares of Common Stock so issued;
provided
that,
(i) for the purpose of this Section 3(d), all shares of Common Stock issuable
upon conversion or exchange of convertible securities outstanding immediately
prior to such issue shall be deemed to be outstanding, and (ii) the number
of
shares of Common Stock deemed issuable upon conversion or exchange of such
outstanding convertible securities shall be determined without giving effect
to
any adjustments to the conversion or exchange price or conversion or exchange
rate of such convertible securities resulting from the issuance of Additional
Shares of Common Stock that is the subject of this calculation. For purposes
of
this Warrant, “Additional Shares of Common Stock” shall mean all shares of
Common Stock issued by the Company after the Effective Date (including without
limitation any shares of Common Stock issuable upon conversion or exchange
of
any convertible securities or upon exercise of any option or warrant, on an
as-converted basis), other than: (i) shares of Common Stock issued or
issuable upon conversion or exchange of any convertible securities or exercise
of any options outstanding on the Effective Date; (ii) shares of Common
Stock issued or issuable by reason of a dividend, stock split, split-up or
other
distribution on shares of Common Stock that is covered by Sections 3(a)(i)
through 3(a)(iii) above; or (iii) shares of Common Stock (or options with
respect thereto) issued or issuable to employees or directors of, or consultants
to, the Company or any of its subsidiaries pursuant to a plan, agreement or
arrangement approved by the Board of Directors of the Company. The provisions
of
this Section 3(d) shall not operate to increase the Exercise Price.
4.
TRANSFERS
AND EXCHANGES OF WARRANT AND WARRANT SHARES
(a)
Registration
of Transfers and Exchanges
.
Subject
to Section 4(c), upon the Holder’s surrender of this Warrant, with a duly
executed copy of the Assignment Notice attached as
Exhibit
B
,
to the
Secretary of the Company at its principal offices or at such other office or
agency as the Company may specify in writing to the Holder, the Company shall
register the transfer of all or any portion of this Warrant. Upon such
registration of transfer the Company shall issue a new Warrant, in substantially
the form of this Warrant, evidencing the acquisition rights transferred to
the
transferee and a new Warrant, in similar form, evidencing the remaining
acquisition rights not transferred, to the Holder requesting the
transfer.
(b)
Warrant
Exchangeable for Different Denominations
.
The
Holder may exchange this Warrant for a new Warrant or Warrants, in substantially
the form of this Warrant, evidencing in the aggregate the right to purchase
the
number of Warrant Shares which may then be purchased hereunder, each of such
new
Warrants to be dated the date of such exchange and to represent the right to
purchase such number of Warrant Shares as shall be designated by the Holder.
The
Holder shall surrender this Warrant with duly executed instructions regarding
such
re-certification of this Warrant to the Secretary of the Company at its
principal offices or at such other office or agency as the Company may specify
in writing to the Holder.
(c)
Restrictions
on Transfers
.
This
Warrant may not be transferred at any time without (i) registration under the
Securities Act or (ii) an exemption from such registration and a written opinion
of legal counsel addressed to the Company that the proposed transfer of the
Warrant may be effected without registration under the Securities Act, which
opinion will be in form and from counsel reasonably satisfactory to the
Company.
(d)
Permitted
Transfers and Assignments
.
Notwithstanding any provision to the contrary in this Section 4, the Holder
may
transfer, with or without consideration, this Warrant or any of the Warrant
Shares (or a portion thereof) to the Holder’s Affiliates without obtaining the
opinion from counsel that may be required by Section 4(c)(ii)
,
provided,
that the
Holder delivers to the Company and its counsel certification, documentation,
and
other assurances reasonably required by the Company’s counsel to enable the
Company’s counsel to render an opinion to the Company’s Transfer Agent that such
transfer does not violate applicable securities laws.
5.
MUTILATED
OR MISSING WARRANT CERTIFICATE
If
this
Warrant is mutilated, lost, stolen or destroyed, upon request by the Holder,
the
Company will
,
at its
expense,
issue,
in exchange for and upon cancellation of the mutilated Warrant, or in
substitution for the lost, stolen or destroyed Warrant, a new Warrant, in
substantially the form of this Warrant, representing the right to acquire the
equivalent number of Warrant Shares,
provided
,
that,
as a prerequisite to the issuance of a substitute Warrant, the Company may
require satisfactory evidence of loss, theft or destruction as well as an
indemnity from the Holder of a lost, stolen or destroyed Warrant.
6.
PAYMENT
OF TAXES
The
Company will pay all transfer and stock issuance taxes attributable to the
preparation, issuance and delivery of this Warrant and the Warrant Shares
(and
replacement Warrants)
including,
without limitation, all documentary and stamp taxes
;
provided, however, that the Company shall not be required to pay any tax in
respect of the transfer of this Warrant, or the issuance or delivery of
certificates for Warrant Shares or other securities in respect of the Warrant
Shares to any person or entity other than to the Holder or its
transferee.
7.
FRACTIONAL
WARRANT SHARES
No
fractional Warrant Shares shall be issued upon exercise of this Warrant. The
Company, in lieu of issuing any fractional Warrant Share, shall round up the
number of Warrant Shares issuable to nearest whole share.
8.
NO
STOCK
RIGHTS AND LEGEND
No
holder
of this Warrant, as such, shall be entitled to vote or be deemed the holder
of
any other securities of the Company which may at any time be issuable on the
exercise hereof, nor shall anything contained herein be construed to confer
upon
the holder of this Warrant, as such, the rights of a stockholder of the Company
or the right to vote for the election of directors or upon any matter submitted
to stockholders at any meeting thereof,
or give
or withhold consent to any corporate action or to receive notice of meetings
or
other actions affecting stockholders (except as provided herein), or to receive
dividends or subscription rights or otherwise (except as provide
herein).
Each
certificate for Warrant Shares initially issued upon the exercise of this
Warrant Certificate, and each certificate for Warrant Shares issued to any
subsequent transferee of any such certificate, shall be stamped or otherwise
imprinted with a legend in substantially the following form:
“THE
SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR ANY STATE SECURITIES LAWS,
AND NEITHER SUCH SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD,
PLEDGED, ASSIGNED OR OTHERWISE TRANSFERRED UNLESS (1) A REGISTRATION STATEMENT
WITH RESPECT THERETO IS EFFECTIVE UNDER THE ACT AND ANY APPLICABLE STATE
SECURITIES LAWS, OR (2) AN EXEMPTION FROM SUCH REGISTRATION EXISTS AND THE
COMPANY RECEIVES AN OPINION OF COUNSEL TO THE HOLDER OF SUCH SECURITIES, WHICH
COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH
SECURITIES MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR TRANSFERRED IN THE MANNER
CONTEMPLATED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR
APPLICABLE STATE SECURITIES LAWS.”
9.
REGISTRATION
UNDER THE SECURITIES ACT OF 1933
The
Company agrees to register the Warrant Shares for resale under the Securities
Act on the terms and subject to the conditions set forth in the Registration
Rights Agreement between the Company and each of the Investors party to the
Subscription Agreement, pursuant to which this Warrant was issued.
10.
NOTICES
All
notices, consents, waivers, and other communications under this Warrant must
be
in writing and will be deemed given to a party when (a) delivered to the
appropriate address by hand or by nationally recognized overnight courier
service (costs prepaid); (b) sent by facsimile or e-mail with confirmation
of
transmission by the transmitting equipment; (c) received or rejected by the
addressee, if sent by certified mail, return receipt requested, if to the
registered Holder hereof; or (d) seven days after the placement of the notice
into the mails (first class postage prepaid), to the Holder at the address,
facsimile number, or e-mail address furnished by the registered Holder to the
Company in accordance with the Subscription Agreement, or if to the Company,
to
it at 1140 Avenida Acaso, Camarillo, California 93012, Attention: Joel A.
Balbien (or to such other address, facsimile number, or e-mail addre
ss
as the
Holder or the Company as a party may designate by notice the other party) with
a
copy to McGuireWoods LLP, 1345 Avenue of the Americas, 7
th
Floor,
New York, New York 10105, Attention: Louis W. Zehil, Esq.
11.
SEVERABILITY
If
a
court of competent jurisdiction holds any provision of this Warrant invalid
or
unenforceable, the other provisions of this Warrant will remain in full force
and effect. Any provision of this Warrant held invalid or unenforceable only
in
part or degree will remain in full force and effect to the extent not held
invalid or unenforceable.
12.
BINDING
EFFECT
This
Warrant shall be binding upon and inure to the sole and exclusive benefit of
the
Company, its successors and assigns, the registered Holder or Holders from
time
to time of this Warrant and the Warrant Shares.
13.
SURVIVAL
OF RIGHTS AND DUTIES
This
Warrant shall terminate and be of no further force and effect on the earlier
of
5:00 P.M., Eastern Daylight Time, on the Expiration Date or the date on which
this Warrant has been exercised.
14.
GOVERNING
LAW
This
Warrant will be governed by and construed under the laws of the State of
New
York
without
regard to conflicts of laws principles that would require the application of
any
other law.
15.
DISPUTE
RESOLUTION
In
the
case of a dispute as to the determination of the Exercise Price or the
arithmetic calculation of the Warrant Shares, the Company shall submit the
disputed determinations or arithmetic calculations via facsimile within two
Business Days of receipt of the Exercise Notice giving rise to such dispute,
as
the case may be, to the Holder. If the Holder and the Company are unable to
agree upon such determination or calculation of the Exercise Price or the
Warrant Shares within three Business Days of such disputed determination or
arithmetic calculation being submitted to the Holder, then the Company shall,
within two Business Days submit via facsimile (a) the disputed determination
of
the Exercise Price to an independent, reputable investment bank selected by
the
Company and approved by the Holder or (b) the disputed arithmetic calculation
of
the Warrant Shares to the Company’s independent, outside accountant. The Company
shall cause at its expense the investment bank or the accountant, as the case
may be, to perform the determinations or calculations and notify the Company
and
the Holder of the results no later than ten (10) Business Days from the time
it
receives the disputed determinations or calculations. Such investment bank’s or
accountant’s determination or calculation, as the case may be, shall be binding
upon all parties absent demonstrable error.
16.
NOTICES
OF
RECORD
DATE
Upon
(a)
any
establishment
by the
Company of a record date of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend or other distribution, or right or option to acquire securities of
the
Company, or any other right, or (b) any capital reorganization,
reclassification, recapitalization, merger or consolidation of the Company
with
or into any other corporation, any transfer of all or substantially all the
assets of the Company, or any voluntary or involuntary dissolution, liquidation
or winding up of the Company, or the sale, in a single transaction, of a
majority of the Company’s voting stock (whether newly issued, or from treasury,
or previously issued and then outstanding, or any combination thereof), the
Company shall mail to the Holder at least ten (10) Business Days, or such longer
period as may be required by law, prior to the record date specified therein,
a
notice specifying (i) the date established as the record date for the purpose
of
such dividend, distribution, option or right and a description of such dividend,
option or right, (ii) the date on which any such reorganization,
reclassification, transfer, consolidation, merger, dissolution, liquidation
or
winding up, or sale is expected to become effective and (iii) the date, if
any,
fixed as to when the holders of record of Common Stock shall be entitled to
exchange their shares of Common Stock for securities or other property
deliverable upon such reorganization, reclassification, transfer, consolation,
merger, dissolution, liquidation or winding up.
17.
RESERVATION
OF SHARES
The
Company
shall reserve and keep available out of its authorized but unissued shares
of
Common
Stock
for
issuance upon the exercise of this Warrant, free from preemptive rights, such
number of shares of Common Stock for which this Warrant shall from time to
time
be exercisable.
The
Company will take all such reasonable action as may be necessary to assure
that
such Warrant Shares may be issued as provided herein without violation of any
applicable law or regulation. Except and to the extent as waived or consented
to
by the Holder, the Company shall not by any action, including, without
limitation, amending its certificate of incorporation
,
avoid or
seek to avoid the observance or performance of any of the terms of this Warrant,
and
will at
all times in good faith assist in the carrying out of all such terms and in
the
taking of all such actions as may be necessary or appropriate to protect the
rights of the Holder as set forth in this Warrant. Without limiting the
generality of the foregoing, the Company covenants that it will take all such
action as may be necessary or appropriate in order that the Company may validly
and legally issue fully paid and nonassessable Warrant Shares upon the exercise
of this Warrant and use commercially reasonable efforts to obtain all such
authorizations, exemptions or consents, including but not limited to consents
from the Company’s shareholders or Board of Directors or any public regulatory
body, as may be necessary to enable the Company to perform its obligations
under
this Warrant.
18.
NO
THIRD
PARTY
RIGHTS
This
Warrant
is
not
intended, and will not be construed, to create any rights in any parties other
than the Co
mpany
and
the Holder, and no person or entity may assert any rights as third-party
beneficiary hereunder.
[SIGNATURE
PAGE FOLLOWS]
IN
WITNESS WHEREOF, the Company has caused this Warrant to be executed by
its
officer thereunto duly authorized as of the date hereof.
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Kreido
Biofuels, Inc.
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By:
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Name:
Louis
W. Zehil
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Title:
Corporate
Secretary
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EXHIBIT
A
EXERCISE
FORM
(To
be
executed by the Holder of Warrant at least 61 days
prior
to
the date that such Holder
desires
to exercise Warrant)
To
Kreido
Biofuels, Inc.:
The
undersigned hereby irrevocably elects to exercise this Warrant on ______________
(date), which is at least 61 days from the date set forth below that this
Exercise Form was executed, and to purchase thereunder, ___________________
full
shares of Kreido Biofuels, Inc. common stock issuable upon exercise of the
Warrant and delivery of:
(1)
$_________
(in cash as provided for in the foregoing Warrant) and any applicable taxes
payable by the undersigned pursuant to such Warrant; and
(2)
__________
shares of Common Stock (pursuant to a Cashless Exercise in accordance with
Section 1(c)(ii) of the Warrant) (check here if the undersigned desires to
deliver an unspecified number of shares to be equal the number sufficient to
effect a Cashless Exercise [___]).
The
undersigned requests that certificates for such shares be issued in the name
of:
_________________________________________
(Please
print name, address and social security or federal employer
identification
number (if applicable))
_________________________________________
_________________________________________
If
the
shares issuable upon this exercise of the Warrant are not all of the Warrant
Shares which the Holder is entitled to acquire upon the exercise of the Warrant,
the undersigned requests that a new Warrant evidencing the rights not so
exercised be issued in the name of and delivered to:
_________________________________________
(Please
print name, address and social security or federal employer
identification
number (if applicable))
_________________________________________
_________________________________________
Name
of
Holder (print): ________________________
(Signature):
___________________________________
(By:)
_________________________________________
(Title:)
________________________________________
Dated:
________________________________________
EXHIBIT
B
FORM
OF
ASSIGNMENT
FOR
VALUE
RECEIVED, ___________________________________ hereby sells, assigns and
transfers to each assignee set forth below all of the rights of the undersigned
under the Warrant (as defined in and evidenced by the attached Warrant) to
acquire the number of Warrant Shares set opposite the name of such assignee
below and in and to the foregoing Warrant with respect to said acquisition
rights and the shares of Kreido Biofuels, Inc. issuable upon exercise of the
Warrant:
Name
of Assignee
|
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Address
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Number
of Shares
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If
the
total of the Warrant Shares are not all of the Warrant Shares evidenced by
the
foregoing Warrant, the undersigned requests that a new Warrant evidencing the
right to acquire the Warrant Shares not so assigned be issued in the name of
and
delivered to the undersigned.
Name
of
Holder (print): ________________________
(Signature):
___________________________________
(By:)
_________________________________________
(Title:)
________________________________________
Dated:
________________________________________
EXHIBIT
4.2
January
12, 2007
Tompkins
Capital Group
488
Madison Avenue,
New
York,
New York 10022
Attention:
Mr. Mark N. Tompkins
Mr.
Tompkins:
Reference
is made to that certain Term Sheet (the “Term Sheet”), dated September 1, 2006,
as amended on October 25, 2006 relating to a proposed business combination
between Kreido Biofuels, Inc. (f/k/a Gemwood Productions, Inc.), a Nevada
corporation (the “Company”) and Kreido Laboratories, a California corporation
(“Kreido”), and a related private placement financing (the “Transactions”). In
connection with the Transactions, the Company, Kreido, and Kreido Acquisition
Corp., a California corporation, entered into that certain Agreement and Plan
of
Merger and Reorganization (the “Merger Agreement”), dated as of January 12,
2007, pursuant to which Kreido stockholders received common stock, par value
$0.001 per share, of the Company (the “Common Stock”) in consideration for
shares of Kreido held by them at the effective time of the merger. In
consideration of the Company and Kreido entering into the Transactions, and
for
Tompkins Capital Group to facilitate the Transactions and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the undersigned hereby agrees as follows:
1.
The
undersigned hereby covenants and agrees, except as provided herein, not to
(1)
offer, sell, contract to sell or otherwise dispose of and (2) transfer title
to
(a “Prohibited Sale”) any of the shares (the “Acquired Shares”) of Common Stock
acquired by the undersigned pursuant to or in connection with the Merger
Agreement (including as a result of shares owned as a Kreido shareholder),
during the period commencing on the “Closing Date” (as that term is defined in
the Term Sheet) and ending on the 12-month anniversary of the Closing Date
(the
“Lockup Period”), without the prior written consent of the Company and Tompkins
Capital Group (which consent shall not be unreasonably withheld).
Notwithstanding the foregoing, the undersigned shall be permitted from time
to
time during the Lockup Period, without the prior written consent of the Company
or Tompkins Capital Group, as applicable, (i) to acquire shares of Common Stock
pursuant to the undersigned’s participation in the Company’s stock option plan,
or (ii) to transfer all or any part of the Acquired Shares to any family member,
for estate planning purposes or to an affiliate thereof (as such term is defined
in Rule 405 under the Securities Act of 1933, as amended), provided that such
transferee agrees with the Company and Tompkins Capital Group to be bound
hereby, and in any transaction in which holders of the Common Stock of the
Company participate or have the opportunity to participate pro rata, including,
without limitation, a merger, consolidation or binding share exchange involving
the Company, a disposition of the Common Stock in connection with the exercise
of any rights, warrants or other securities distributed to the Company’s
stockholders, or a tender or exchange offer for the Common Stock, and no
transaction contemplated by the foregoing clauses (i) or (ii) shall be deemed
a
Prohibited Sale for purposes of this Letter Agreement. All shares of Common
Stock and related warrants purchased by the undersigned pursuant to or in
connection with the private placement financing shall not be subject to this
Letter Agreement.
2.
This
Letter Agreement shall be governed by and construed in accordance with the
laws
of the State of New York, without regard to its conflict of laws
principles.
3.
This
Letter Agreement will become a binding agreement among the undersigned as of
the
Closing Date. This Letter Agreement (and the agreements reflected herein) may
be
terminated by the mutual agreement of the Company, Tompkins Capital Group and
the undersigned, and if not sooner terminated, will terminate upon the
expiration date of the Lockup Period. This Letter Agreement may be duly executed
by facsimile and in any number of counterparts, each of which shall be deemed
an
original, and all of which together shall be deemed to constitute one and the
same instrument. Signature pages from separate identical counterparts may be
combined with the same effect as if the parties signing such signature page
had
signed the same counterpart. This Letter Agreement may be modified or waived
only by a separate writing signed by each of the parties hereto expressly so
modifying or waiving such agreement.
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Very
truly
yours,
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Print
Name:
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Address:_____________________________
Number
of
shares of Common Stock owned: __________________________________
Certificate
Numbers: __________________
EXHIBIT
10.1
ESCROW
AGREEMENT
This
Escrow Agreement is entered into as of January 12, 2007, by and among Kreido
Biofuels, Inc. (f/k/a Gemwood Productions, Inc.), a Nevada corporation (the
“Parent”), Joel A. Balbien (the “Indemnification Representative”) and Gottbetter
& Partners, LLP (the “Escrow Agent”).
WHEREAS,
the Parent has entered into an Agreement and Plan of Merger and Reorganization
(the “Merger Agreement”) with Kreido Laboratories, a California corporation (the
“Company”), (i) pursuant to which a wholly-owned subsidiary of the Parent will
merge with and into the Company, with the Company surviving the merger and
(ii)
as a result of which the Company will become a wholly-owned subsidiary of the
Parent;
WHEREAS,
the Merger Agreement provides that an escrow account will be established to
secure the indemnification obligations of the stockholders of the Company as
of
the Closing Date, as such terms are defined in the Merger Agreement
(collectively, the “Indemnifying Stockholders”) to the Parent; and
WHEREAS,
the parties hereto desire to establish the terms and conditions pursuant to
which such escrow account will be established and maintained.
NOW,
THEREFORE, the parties hereto hereby agree as follows:
1.
Consent
of Company Stockholders
.
The
Indemnifying Stockholders have, either by virtue of their entry into the Merger
Agreement or through the execution of an instrument to such effect, consented
to: (a) the establishment of this escrow to secure the Indemnifying
Stockholders’ indemnification obligations under Article 6 of the Merger
Agreement in the manner set forth herein, (b) the appointment of the
Indemnification Representative as their representatives for purposes of this
Agreement and as attorneys-in-fact and agents for and on behalf of each
Indemnifying Stockholder, and the taking by the Indemnification Representative
of any and all actions and the making of any decisions required or permitted
to
be taken or made by them under this Agreement and (c) all of the other
terms, conditions and limitations in this Agreement.
2.
Escrow
and Indemnification
.
(a)
Escrow
of Shares
.
Simultaneously with the execution of this Agreement, the Parent shall deposit
with the Escrow Agent a certificate for 1,350,000 shares of common stock of
the
Parent, as determined pursuant to Section 1.5(b) of the Merger Agreement,
issued in the name of the Escrow Agent or its nominee. The Escrow Agent hereby
acknowledges receipt of such stock certificate. The shares deposited with the
Escrow Agent pursuant to the first sentence of this Section 2(a) are
referred to herein as the “Escrow Shares.” The Escrow Shares shall be held as a
trust fund and shall not be subject to any lien, attachment, trustee process
or
any other judicial process of any creditor of any party hereto. The Escrow
Agent
agrees to hold the Escrow Shares in an escrow account (the “Escrow Account”),
subject to the terms and conditions of this Agreement.
(b)
Indemnification
.
The
Indemnifying Stockholders have agreed in Section 6.1 of the Merger Agreement
to
indemnify and hold harmless the Parent from and against specified Damages (as
defined in Section 6.1 of the Merger Agreement). The Escrow Shares shall be
security for such indemnity obligation of the Indemnifying Stockholders, subject
to the limitations, and in the manner provided, in this Agreement.
(c)
Dividends,
Etc.
Any
securities distributed in respect of or in exchange for any of the Escrow
Shares, whether by way of stock dividends, stock splits or otherwise, shall
be
issued in the name of the Escrow Agent or its nominee, and shall be delivered
to
the Escrow Agent, who shall hold such securities in the Escrow Account. Such
securities shall be considered Escrow Shares for purposes hereof. Any cash
dividends or property (other than securities) distributed in respect of the
Escrow Shares shall promptly be distributed by the Escrow Agent to the
Indemnifying Stockholders in accordance with Section 3(c).
(d)
Voting
of Shares
.
The
Indemnification Representative shall have the right, in its sole discretion,
on
behalf of the Indemnifying Stockholders, to direct the Escrow Agent in writing
as to the exercise of any voting rights pertaining to the Escrow Shares, and
the
Escrow Agent shall comply with any such written instructions. In the absence
of
such instructions, the Escrow Agent shall not vote any of the Escrow Shares.
The
Indemnification Representative shall have no obligation to solicit consents
or
proxies from the Indemnifying Stockholders for purposes of any such
vote.
(e)
Transferability
.
The
respective interests of the Indemnifying Stockholders in the Escrow Shares
shall
not be assignable or transferable, other than by operation of law. Notice of
any
such assignment or transfer by operation of law shall be given to the Escrow
Agent and the Parent, and no such assignment or transfer shall be valid until
such notice is given.
3.
Distribution
of Escrow Shares
.
(a)
The
Escrow Agent shall distribute the Escrow Shares only in accordance with (i)
a
written instrument delivered to the Escrow Agent that is executed by both the
Parent and the Indemnification Representative and that instructs the Escrow
Agent as to the distribution of some or all of the Escrow Shares, (ii) an
order of a court of competent jurisdiction, a copy of which is delivered to
the
Escrow Agent by either the Parent or the Indemnification Representative, that
instructs the Escrow Agent as to the distribution of some or all of the Escrow
Shares, or (iii) the provisions of Section 3(b) hereof.
(b)
Within
five business days after January 12, 2008 (the “Termination Date”), the Escrow
Agent shall distribute to the Indemnifying Stockholders all of the Escrow Shares
then held in escrow, registered in the name of the Indemnifying Stockholders.
Notwithstanding the foregoing, if the Parent has previously delivered to the
Escrow Agent a copy of a Claim Notice and the Escrow Agent has not received
written notice of the resolution of the claim covered thereby, or if the Parent
has previously delivered to the Escrow Agent a copy of an Expected Claim Notice
and the Escrow Agent has not received written notice of the resolution of the
anticipated claim covered thereby, the Escrow Agent shall retain in escrow
after
the Termination Date such number of Escrow Shares as have a Value (as defined
in
Section 4 below) equal to the Claimed Amount covered by such Claim Notice
or equal to the estimated amount of Damages set forth in such Expected Claim
Notice, as the case may be. Any Escrow Shares so retained in escrow shall be
distributed only in accordance with the terms of clauses (i) or (ii) of
Section 3(a) hereof. For purposes of this Agreement, a Claim Notice means a
written notification under the Merger Agreement given by the Parent to the
Indemnifying Stockholders which contains (i) a description and the amount (the
“Claimed Amount”) of any Damages incurred or reasonably expected to be incurred
by the Parent, (ii) a statement that the Parent is entitled to indemnification
under Article 6 of the Merger Agreement for such Damages and a reasonable
explanation of the basis therefor, and (iii) a demand for payment (in the manner
provided in Article 9 of the Merger Agreement below) in the amount of such
Damages. For purposes of this Agreement, an Expected Claims Notice means a
notice delivered pursuant to the Merger Agreement by the Parent to an
Indemnifying Stockholder, before expiration of a representation or warranty,
to
the effect that, as a result a legal proceeding instituted by or written claim
made by a third party, the Parent reasonably expects to incur Damages as a
result of a breach of such representation or warranty.
(c)
Any
distribution of all or a portion of the Escrow Shares (or cash or other property
pursuant to Section 2(c)) to the Indemnifying Stockholders shall be made by
delivery of stock certificates issued in the name of the Indemnifying
Stockholders covering such percentage of the Escrow Shares being distributed
as
is calculated in accordance with the percentages set forth opposite such
holders’ respective names on
Attachment A
attached
hereto;
provided
,
however
,
that
the Escrow Agent shall withhold the distribution of the portion of the Escrow
Shares otherwise distributable to an Indemnifying Stockholder who has not,
according to a written notice provided by the Parent to the Escrow Agent, prior
to such distribution, surrendered pursuant to the terms of the Merger Agreement
his, her or its documents formerly representing equity interests of the Company.
Any such withheld shares shall be delivered to the Parent promptly after the
Termination Date, and shall be delivered by the Parent to the Indemnifying
Stockholders to whom such shares would have otherwise been distributed upon
surrender of documents evidencing their Company equity interests. Distributions
to the Indemnifying Stockholders shall be made by mailing stock certificates
to
such holders at their respective addresses shown on
Attachment A
(or such
other address as may be provided in writing to the Escrow Agent by any such
holder). No fractional Escrow Shares shall be distributed to Indemnifying
Stockholders pursuant to this Agreement. Instead, the number of shares that
each
Indemnifying Stockholder shall receive shall be rounded up or down to the
nearest whole number (provided that the Indemnification Representative shall
have the authority to effect such rounding in such a manner that the total
number of whole Escrow Shares to be distributed equals the number of Escrow
Shares then held in the Escrow Account).
4.
Valuation
of Escrow Shares
.
For
purposes of this Agreement, the “Value” of any Escrow Shares shall be $1.35 per
share, multiplied by the number of such Escrow Shares.
5.
Fees
and Expenses of Escrow Agent
.
The
Parent, on the one hand, and the Indemnifying Stockholders, on the other hand,
shall each pay one-half of the fees of the Escrow Agent for the services to
be
rendered by the Escrow Agent hereunder.
6.
Limitation
of Escrow Agent’s Liability
.
(a)
The
Escrow Agent shall incur no liability with respect to any action taken or
suffered by it in reliance upon any notice, direction, instruction, consent,
statement or other documents believed by it to be genuine and duly authorized,
nor for other action or inaction except its own willful misconduct or gross
negligence. The Escrow Agent shall not be responsible for the validity or
sufficiency of this Agreement. In all questions arising under the Escrow
Agreement, the Escrow Agent may rely on the advice of counsel, and the Escrow
Agent shall not be liable to anyone for anything done, omitted or suffered
in
good faith by the Escrow Agent based on such advice. The Escrow Agent shall
not
be required to take any action hereunder involving any expense unless the
payment of such expense is made or provided for in a manner reasonably
satisfactory to it. In no event shall the Escrow Agent be liable for indirect,
punitive, special or consequential damages.
(b)
The
Parent and the Indemnifying Stockholders agree to indemnify the Escrow Agent
for, and hold it harmless against, any loss, liability or expense incurred
without gross negligence or willful misconduct on the part of the Escrow Agent,
arising out of or in connection with its carrying out of its duties hereunder.
The Parent, on the one hand, and the Indemnifying Stockholders, on the other
hand, shall each be liable for one-half of such amounts.
7.
Liability
and Authority of Indemnification Representative; Successors and
Assignees
.
(a)
The
Indemnification Representative shall not incur any liability to the Indemnifying
Stockholders with respect to any action taken or suffered by him in reliance
upon any note, direction, instruction, consent, statement or other documents
believed by him to be genuinely and duly authorized, nor for other action or
inaction except his own willful misconduct or gross negligence. The
Indemnification Representative may, in all questions arising under the Escrow
Agreement, rely on the advice of counsel and the Indemnification Representative
shall not be liable to the Indemnifying Stockholders for anything done, omitted
or suffered in good faith by the Indemnification Representative based on such
advice.
(b)
In
the
event of the death or permanent disability of the Indemnification
Representative, or his or her resignation as an Indemnification Representative,
a successor Indemnification Representative shall be appointed by the other
Indemnification Representative or, absent its appointment, a successor
Indemnification Representative shall be elected by a majority vote of the
Indemnifying Stockholders, with each such Indemnifying Stockholder (or his,
her
or its successors or assigns) to be given a vote equal to the number of votes
represented by the shares of stock of the Company held by such Indemnifying
Stockholder immediately prior to the effective time of the share purchase under
the Merger Agreement. Each successor Indemnification Representative shall have
all of the power, authority, rights and privileges conferred by this Agreement
upon the original Indemnification Representative, and the term “Indemnification
Representative” as used herein shall be deemed to include successor
Indemnification Representative.
(c)
The
Indemnification Representative shall have full power and authority to represent
the Indemnifying Stockholders, and their successors, with respect to all matters
arising under this Agreement and all actions taken by the Indemnification
Representative hereunder shall be binding upon the Indemnifying Stockholders,
and their successors, as if expressly confirmed and ratified in writing by
each
of them. Without limiting the generality of the foregoing, the Indemnification
Representative shall have full power and authority to interpret all of the
terms
and provisions of this Agreement, to compromise any claims asserted hereunder
and to authorize any release of the Escrow Shares to be made with respect
thereto, on behalf of the Indemnifying Stockholders and their successors.
(d)
The
Escrow Agent may rely on the Indemnification Representative as the exclusive
agent of the Indemnifying Stockholders under this Agreement and shall incur
no
liability to any party with respect to any action taken or suffered by it in
reliance thereon.
8.
Amounts
Payable by Indemnifying Stockholders
.
The
amounts payable by the Indemnifying Stockholders under this Agreement (i.e.,
the
fees of the Escrow Agent payable pursuant to Section 5 and the
indemnification obligations pursuant to Section 6(b)) shall be payable
solely as follows. The Escrow Agent shall notify the Indemnification
Representative of any such amount payable by the Indemnifying Stockholders
as
soon as it becomes aware that any such amount is payable, with a copy of such
notice to the Parent. On the sixth business day after the delivery of such
notice, the Escrow Agent shall sell such number of Escrow Shares (up to the
number of Escrow Shares then available in the Escrow Account), subject to
compliance with all applicable securities laws, as is necessary to raise such
amount, and shall be entitled to apply the proceeds of such sale in satisfaction
of such indemnification obligations of the Indemnifying Stockholders; provided
that if the Parent delivers to the Escrow Agent (with a copy to the
Indemnification Representative), within five business days after delivery of
such notice by the Indemnification Representative, a written notice contesting
the legitimacy or reasonableness of such amount, then the Escrow Agent shall
not
sell Escrow Shares to raise the disputed portion of such claimed amount except
in accordance with the terms of clauses (i) or (ii) of
Section 3(a).
9.
Termination
.
This
Agreement shall terminate upon the distribution by the Escrow Agent of all
of
the Escrow Shares in accordance with this Agreement; provided that the
provisions of Sections 6 and 7 shall survive such termination.
10.
Notices
.
All
notices, instructions and other communications given hereunder or in connection
herewith shall be in writing. Any such notice, instruction or communication
shall be sent either (i) by registered or certified mail, return receipt
requested, postage prepaid, or (ii) via a reputable nationwide overnight
courier service, in each case to the address set forth below. Any such notice,
instruction or communication shall be deemed to have been delivered two business
days after it is sent by registered or certified mail, return receipt requested,
postage prepaid, or one business day after it is sent via a reputable nationwide
overnight courier service.
If
to the
Parent:
Kreido
Biofuels, Inc.
1140
Avenida Acaso
Camarrillo,
CA 93012
Attn:
Joel A. Balbien, Chief Executive Officer
Facsimile:
(805) 384-0989
If
to the
Indemnification Representative:
Mr.
Joel
A. Balbien
Kreido
Biofuels, Inc.
1140
Avenida Acaso
Camarrillo,
CA 93012
Attn:
Joel A. Balbien, Chief Executive Officer
Facsimile:
(805) 384-0989
If
to the
Escrow Agent:
Gottbetter
& Partners, LLP
488
Madison Avenue, 12
th
Floor
New
York,
NY 10022
Attn:
Adam S. Gottbetter, Esq.
Facsimile:
(212)
400-6901
Any
party
may give any notice, instruction or communication in connection with this
Agreement using any other means (including personal delivery, telecopy or
ordinary mail), but no such notice, instruction or communication shall be deemed
to have been delivered unless and until it is actually received by the party
to
whom it was sent. Any party may change the address to which notices,
instructions or communications are to be delivered by giving the other parties
to this Agreement notice thereof in the manner set forth in this
Section 10.
11.
Successor
Escrow Agent
.
In the
event the Escrow Agent becomes unavailable or unwilling to continue in its
capacity herewith, the Escrow Agent may resign and be discharged from its duties
or obligations hereunder by delivering a resignation to the parties to this
Escrow Agreement, not less than 60 days prior to the date when such
resignation shall take effect. The Parent may appoint a successor Escrow Agent
without the consent of the Indemnification Representative so long as such
successor is a bank with assets of at least $500 million, and may appoint any
other successor Escrow Agent with the consent of the Indemnification
Representative, which shall not be unreasonably withheld. If, within such notice
period, the Parent provides to the Escrow Agent written instructions with
respect to the appointment of a successor Escrow Agent and directions for the
transfer of any Escrow Shares then held by the Escrow Agent to such successor,
the Escrow Agent shall act in accordance with such instructions and promptly
transfer such Escrow Shares to such designated successor. If no successor Escrow
Agent is named as provided in this Section 11 prior to the date on which the
resignation of the Escrow Agent is to properly take effect, the Escrow Agent
may
apply to a court of competent jurisdiction for appointment of a successor Escrow
Agent.
12.
General
.
(a)
Governing
Law; Assigns
.
This
Agreement shall be governed by and construed in accordance with the internal
laws of the State of New York without regard to conflict-of-law principles
and
shall be binding upon, and inure to the benefit of, the parties hereto and
their
respective successors and assigns.
(b)
Counterparts
.
This
Agreement may be executed 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.
(c)
Entire
Agreement
.
Except
for those provisions of the Merger Agreement referenced herein, this Agreement
constitutes the entire understanding and agreement of the parties with respect
to the subject matter of this Agreement and supersedes all prior agreements
or
understandings, written or oral, between the parties with respect to the subject
matter hereof.
(d)
Waivers
.
No
waiver by any party hereto of any condition or of any breach of any provision
of
this Escrow Agreement shall be effective unless in writing. No waiver by any
party of any such condition or breach, in any one instance, shall be deemed
to
be a further or continuing waiver of any such condition or breach or a waiver
of
any other condition or breach of any other provision contained
herein.
(e)
Amendment
.
This
Agreement may be amended only with the written consent of the Parent, the Escrow
Agent and the Indemnification Representative.
(f)
Consent
to Jurisdiction and Service
.
The
parties hereby absolutely and irrevocably consent and submit to the jurisdiction
of the courts in the State of New York and of any Federal court located in
said
State in connection with any actions or proceedings brought against any party
hereto by the Escrow Agent arising out of or relating to this Escrow Agreement.
In any such action or proceeding, the parties hereby absolutely and irrevocably
waive personal service of any summons, complaint, declaration or other process
and hereby absolutely and irrevocably agree that the service thereof may be
made
by certified or registered first-class mail directed to such party, at their
respective addresses in accordance with Section 10 hereof.
IN
WITNESS WHEREOF, the parties have duly executed this Agreement as of the day
and
year first above written.
|
|
|
|
KREIDO
BIOFUELS,
INC.
|
|
|
|
|
By:
|
/s/
Stephen B. Jackson
|
|
Name:
Stephen
B. Jackson
|
|
Title:
Chief
Executive Officer
|
|
|
|
|
/s/
Joel A.
Balbien
|
|
Joel
A. Balbien, Individually and as Indemnification
Representative
|
|
|
|
|
GOTTBETTER
&
PARTNERS, LLP
|
|
|
|
|
By:
|
/s/
Adam
S. Gottbetter
|
|
Name:
Adam
S. Gottbetter, Esq.
|
|
Title:
Partner
|
EXHIBIT
10.2
SUBSCRIPTION
AGREEMENT
THIS
SUBSCRIPTION AGREEMENT (the
“Agreement”
)
is made
as of this 12th day of January, 2007, by and among Kreido Biofuels, Inc. (f/k/a
Gemwood Productions, Inc.), a Nevada corporation (the
“Company”
),
Kreido
Laboratories, a California corporation (“
Kreido
”)
and
the investor identified on the signature page to this Agreement
(the
“Investor”
).
RECITALS:
WHEREAS,
the Company and Kreido contemplate that they will enter into an Agreement and
Plan of Merger and Reorganization, pursuant to which a wholly-owned subsidiary
of the Company, will merge with and into Kreido, with Kreido being the surviving
entity and a wholly-owned subsidiary of the Company (the “
Merger
”),
upon
the effective date of the Merger (the “
Merger
Effective
Date
”);
WHEREAS,
as a condition to the consummation of the Merger, and to provide the capital
required by Kreido for working capital purposes, the Company is offering, in
compliance with Rule 506 of Regulation D of the Securities Act of 1933, as
amended (the “
Securities
Act
”),
and
available prospectus exemptions in Canada to accredited investors in a private
placement transaction (the “
Offering
”),
18,518,519 units of its securities (the “
Units
”)
at a
purchase price of $1.35 per Unit, each Unit consisting of one share of the
Company’s common stock, par value $0.001 per share (“
Common
Stock
”)
and a
warrant (the “
Investor
Warrants
”)
to
purchase one share of Common Stock for five (5) years at the exercise price
of
$1.85 per share of Common Stock a form of Investor Warrant is attached hereto
as
Exhibit
A
;
WHEREAS,
the Investor desires to subscribe for, purchase and acquire from the Company
and
the Company desires to sell and issue to the Investor the number of Units,
set
forth on the signature page of this Agreement (the “
Investor’s
Units
”)
upon
the terms and conditions and subject to the provisions hereinafter set
forth;
WHEREAS,
in connection with the purchase of the Investor’s Units, the Company and the
Investor will execute a Registration Rights Agreement dated as of the same
date
as this Agreement pursuant to which the Company will provide certain
registration rights to the Investor (the “
Registration
Rights Agreement
”);
and
WHEREAS,
the Company, Kreido and McGuireWoods LLP (the “
Escrow
Agent
”)
have
entered into an Escrow Agreement (the “
Escrow
Agreement
”)
to
provide for the safekeeping of funds received and documents executed in
connection with the Offering.
NOW,
THEREFORE, for and in consideration of the mutual premises contained herein
and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
1.
Purchase
and Sale of the Units
.
Subject
to the terms and conditions of this Agreement and the satisfaction of the
Closing Conditions, the Investor subscribes for and agrees to purchase and
acquire from the Company and the Company agrees to sell and issue to the
Investor the Investor’s Units at the purchase price of $1.35 per Unit (the
“
Purchase
Price
”);
provided
,
that
the Company reserves the right, in its sole discretion and for any reason,
to
reject any Investor’s subscription in whole or in part, or to allot less than
the number of Units subscribed for.
2.
The
Closing
.
The
Offering will terminate upon the receipt of acceptable subscriptions totaling
$25,000,000;
provided
,
that
the initial closing of the Offering shall be concurrent with the close of the
Merger (the “
Closing
Date
”)
at the
offices of the Escrow Agent. On the Closing Date, the Escrow Agent shall deliver
the funds and Transaction Documents (as defined herein) held in escrow as of
the
Closing Date pursuant to the terms of the Escrow Agreement. As soon as
practicable after the Closing Date, the Company shall issue and deliver, or
shall cause the issuance and delivery of, a stock certificate, registered in
the
name of the Investor and representing the shares of Common Stock underlying
the
Investor’s Units and a warrant certificate registered in the name of the
Investor representing the Investor’s right to purchase the number of shares of
Common Stock underlying the Investor’s Warrants purchased in the
Offering.
3.
Closing
Conditions
.
a.
Conditions
to Obligations of Investors
.
The
respective obligations of the Investors hereunder in connection with the Closing
are subject to the satisfaction or waiver of the following conditions: (i)
the
accuracy in all material respects on the Closing Date of the representations
and
warranties of the Company contained herein; and (ii)
all
obligations, covenants and agreements of the Company required to be performed
at
or prior to the Closing Date shall have been performed.
b.
Conditions to Obligations of the Company
. The obligations of the
Company hereunder in connection with the Closing are subject to the satisfaction
or waiver of the following conditions: (i) the accuracy in all material
respects when made and on the Closing Date of the representations and warranties
of the Investors contained herein; (ii) all obligations, covenants and
agreements of the Investors required to be performed at or prior to the Closing
Date shall have been performed; and (iii) the delivery by the Investors of
the
items set forth in Section 4 of this Agreement.
4.
Subscription
Procedure
.
To
complete a subscription for the Units, the Investor must fully comply with
the
subscription procedure provided in this Section on or before 5:00 p.m. Eastern
time on the Closing Date.
a.
Transaction
Documents
.
Before
5:00 p.m. Eastern time on the Closing Date, the Investor shall review, complete
and execute this Agreement, the Investor Questionnaire attached hereto as
Appendix
A
and the
Registration Rights Agreement (collectively, the “
Transaction
Documents
”)
and
deliver the Transaction Documents to the Escrow Agent at the address provided
below. Executed agreements and questionnaires may be delivered to the Escrow
Agent by facsimile using the facsimile number provided below if the Investor
immediately thereafter confirms receipt of such transmission with the Escrow
Agent and delivers the original copies of the agreements and questionnaire
to
the Escrow Agent as soon as practicable thereafter.
Escrow
Agent - Mailing Address and Facsimile Number:
McGuireWoods
LLP
50
North
Laura Street, Suite 3300
Jacksonville,
FL 32202-3661
Facsimile
Number: (904) 798-3271
Attention:
Jonathan Sacks
Telephone
Number: (904) 798-2627
b.
Purchase
Price
.
Simultaneously with the delivery of the Transaction Documents to the Escrow
Agent as provided herein, and in any event on or prior to 5:00 p.m. Eastern
time
on the Closing Date, the Investor shall deliver to the Escrow Agent the full
Purchase Price for the Investor’s Units by wire transfer of immediately
available funds pursuant to wire transfer instructions provided
below:
Escrow
Agent - Wire Transfer Instructions:
BANK
OF
AMERICA - Jacksonville, FL
ABA:
026009593 (Domestic Wires)
Swift
Code: BOFAUS3N (International Wires)
Credit:
McGuireWoods LLP IOLTA Account
Account
Number: 2101206537
Reference:
Louis Zehil - Kreido Laboratories Escrow - 2049303-0001
McGuireWoods
Accounting Contact: Julia Aaron (804) 775-1224
Bank
Contact: Patrick Comia (888) 841-8159, Opt. 2, Ext. 2160
c.
Purchaser
Representative
.
If the
Investor has retained the services of a purchaser representative to assist
in
evaluating the merits and risks associated with investing in the Units, the
Investor must deliver along with the Transaction Documents, a purchaser
representative certificate in a form acceptable to the Company.
d.
Company
Discretion
.
The
Company may accept any subscription in whole or in part or reject any
subscription in its sole discretion for any reason and may terminate this
Offering at any time before accepting subscriptions. If the Investor’s
subscription is rejected or if the conditions to closing this Offering,
including the receipt and acceptance of subscriptions representing $25,000,000,
are not satisfied or if this Offering is otherwise terminated or withdrawn,
funds delivered by the Investor to the Escrow Agent will be returned to the
Investor without interest or deduction.
5.
Representations
and Warranties of the Company and Kreido
.
In
order to induce the Investor to enter into this Agreement, the Company and,
as
applicable, Kreido represent and warrant to the Investor the
following:
a.
Subsidiaries
.
The
Company has no direct or indirect subsidiaries (each a
“Subsidiary”
and
collectively the
“Subsidiaries”
)
other
than Kreido Acquisition Corp., and Gemwood Leasco, Inc. and those set forth
in
the Exchange Act Documents (as defined in Section 5(g)), or as are necessary
or
desirable to consummate the Merger and the transactions contemplated in the
Merger Agreement. Except as disclosed in the Exchange Act Documents, the Company
owns, directly or indirectly, all of the capital stock of each Subsidiary free
and clear of any and all liens, and all the issued and outstanding shares of
capital stock of each Subsidiary are validly issued and are fully paid,
non-assessable and free of preemptive and similar rights. Kreido has no direct
or indirect subsidiaries and all references to the term Subsidiary and
Subsidiaries used herein specifically refers to Kreido Acquisition Corp., and
Gemwood Leasco, Inc. and those set forth in the Exchange Act Documents, or
as
are necessary or desirable to consummate the Merger and the transactions
contemplated in the Merger Agreement.
b.
Organization
and Qualification
.
The
Company and Kreido, and as applicable any Subsidiary, are each an entity duly
incorporated or otherwise organized, validly existing and in good standing
under
the laws of the jurisdiction of its incorporation or organization (as
applicable), with the requisite power and authority to own and use its
properties and assets and to carry on its business as currently conducted.
Neither the Company and Kreido, nor any 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. Each of
the
Company and Kreido and the Subsidiaries 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 (i) a material adverse effect on the legality, validity
or enforceability of any Transaction Document or Investor Warrant, (ii) a
material adverse effect on the results of operations, assets, business,
prospects or condition (financial or otherwise) of the Company, Kreido and
the
Subsidiaries, taken as a whole, or (iii) a material adverse effect on the
Company’s or Kreido’s ability to perform in any material respect on a timely
basis its obligations under any Transaction Document or Investor Warrant (any
of
(i), (ii) or (iii), a “
Material
Adverse Effect
”)
and no
proceeding has been instituted in any such jurisdiction revoking, limiting
or
curtailing or seeking to revoke, limit or curtail such power and authority
or
qualification.
c.
Authorization;
Enforcement
.
The
Company and Kreido each has the requisite corporate power and authority to
enter
into and to consummate the transactions contemplated by each of the Transaction
Documents and the Investor Warrants and otherwise to carry out its obligations
hereunder and thereunder. The execution and delivery of each of the Transaction
Documents and Investor Warrants by the Company and Kreido and the consummation
of the transactions contemplated hereby and thereby have been duly authorized
by
all necessary action on the part of the Company and Kreido and no further action
is required by the Company and Kreido, and their respective boards of directors
or its stockholders in connection therewith. Each Transaction Document and
Investor Warrant has been (or upon delivery will have been) duly executed by
the
Company or Kreido, as applicable, and, when delivered in accordance with the
terms hereof and thereof, will constitute the valid and binding obligation
of
the Company or Kreido enforceable against the Company or Kreido in accordance
with its terms except (i) as limited by general equitable principles and
applicable bankruptcy, insolvency, reorganization, moratorium and other laws
of
general application affecting enforcement of creditors’ rights generally, (ii)
as limited by laws relating to the availability of specific performance,
injunctive relief or other equitable remedies and (iii) insofar as
indemnification and contribution provisions may be limited by applicable
law.
d.
No
Conflicts
.
The
execution, delivery and performance of the Transaction Documents by the Company,
the issuance and sale of the Units and the consummation by the Company or
Kreido, as applicable, of the other transactions contemplated hereby and thereby
do not and will not (i) conflict with or violate any provision of the Company’s
and Kreido’s or any Subsidiary’s certificate or articles of incorporation,
bylaws or other organizational or charter documents, or (ii) conflict with,
or
constitute a default (or an event that with notice or lapse of time or both
would become a default) under, result in the creation of any lien upon any
of
the properties or assets of the Company or Kreido or any Subsidiary, or give
to
others any rights of termination, amendment, acceleration or cancellation (with
or without notice, lapse of time or both) of, any agreement, credit facility,
debt or other instrument (evidencing a Company or Kreido or Subsidiary debt
or
otherwise) or other understanding to which the Company or Kreido or any
Subsidiary is a party or by which any property or asset of the Company or any
Subsidiary is bound or affected, or (iii) conflict with or result in a violation
of any law, rule, regulation, order, judgment, injunction, decree or other
restriction of any court or governmental authority to which the Company or
Kreido or a Subsidiary is subject (including federal and state securities laws
and regulations), or by which any property or asset of the Company or Kreido
or
a Subsidiary is bound or affected; except in the case of each of clauses (ii)
and (iii), such as could not have or reasonably be expected to result in a
Material Adverse Effect.
e.
Approvals
.
The
execution, delivery, and performance by the Company of this Agreement and the
offer and sale of the Units require no consent of, action by or in respect
of,
or filing with, any person, governmental body, agency, or official other than
those consents that have been obtained prior to the Closing and those filings
required to be made pursuant to the Securities Act and any State Acts which
the
Company undertakes to file within the applicable time period or provincial
filings required in connection with sales in Canada.
f.
Capitalization
.
Upon
issuance in accordance with the terms of this Agreement against payment of
the
Purchase Price therefor, the shares of Common Stock underlying the Investor’s
Units will be duly and validly issued, fully paid, and nonassessable and free
and clear of all liens imposed by or through the Company, and, assuming the
accuracy of the representations and warranties of the Investor and all other
purchasers of Units in the Offering, will be issued in accordance with a valid
exemption from the registration or qualification provisions of the Securities
Act, and any applicable state securities laws (the “
State
Acts
”),
or
will be issued in accordance with a valid prospectus exemption in Canada. 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”
)
,
and
the
rules and regulations thereunder,
n
o
person
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. 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. No further approval or authorization of any
stockholder, the Board of Directors of the Company or others is required for
the
issuance and sale of the Units. There are no stockholders agreements, voting
agreements or other similar 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.
g.
Exchange
Act Filing.
During
the 12 calendar months immediately preceding the date of this Agreement, all
reports and statements, including all amendments, required to be filed by the
Company with the Securities and Exchange Commission (the
“Commission”)
under
the Exchange Act, have been timely filed. Such filings, together with all
amendments and all documents incorporated by reference therein, are referred
to
as
“Exchange
Act Documents.”
Each
Exchange Act Document conformed in all material respects to the requirements
of
the Exchange Act and the rules and regulations thereunder, and no Exchange
Act
Document, at the time each such document was filed, included any untrue
statement of a material fact or omitted 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.
h.
Company
Financial Statements.
The
audited financial statements, together with the related notes of the Company
at
September 30, 2005, included in the Company’s SB-2 for the fiscal year ended
September 30, 2005 as filed with the Commission (the “
Company
Financial Statements
”),
fairly present in all material respects, on the basis stated therein and on
the
date thereof, the financial position of the Company at the respective dates
therein specified and its results of operations and cash flows for the periods
then ended. Such statements and related notes have been prepared in accordance
with generally accepted accounting principles in the United States applied
on a
consistent basis except as expressly noted therein.
i.
Material
Changes; Undisclosed Events, Liabilities or Developments
.
Since
the date of the latest audited financial statements included within the Exchange
Act Documents, except as specifically disclosed in a subsequent Exchange Act
Document filed prior to the date hereof, (i) there has been no event, occurrence
or development that has had or that could reasonably be expected to result
in a
Material Adverse Effect, (ii) the Company has not incurred any liabilities
(contingent or otherwise) other than (A) trade payables and accrued expenses
incurred in the ordinary course of business consistent with past practice and
(B) liabilities not required to be reflected in the Company’s financial
statements pursuant to GAAP or disclosed in filings made with the Commission,
(iii) the Company has not altered its method of accounting, (iv) the Company
has
not declared or made any dividend or distribution of cash or other property
to
its stockholders or purchased, redeemed or made any agreements to purchase
or
redeem any shares of its capital stock and (v) the Company has not issued any
equity securities to any officer, director or Affiliate. The Company does not
have pending before the Commission any request for confidential treatment of
information. Except for the issuance of the Securities contemplated by this
Agreement, no event, liability or development has occurred or exists with
respect to the Company or its Subsidiaries or their respective business,
properties, operations or financial condition, that would be required to be
disclosed by the Company under applicable securities laws at the time this
representation is made.
j.
No
Disputes or Litigation Against the Company or Kreido
.
There
is no action, suit, inquiry, notice of violation, proceeding or investigation
pending or, to the knowledge of the Company and Kreido, threatened against
or
affecting the Company and Kreido, any Subsidiary or any of their respective
properties before or by any court, arbitrator, governmental or administrative
agency or regulatory authority (federal, state, county, local or foreign)
(collectively, an “
Action
”)
which
(i) adversely affects or challenges the legality, validity or enforceability
of
any of the Transaction Documents or the Units or (ii) could, if there were
an
unfavorable decision, have or reasonably be expected to result in a Material
Adverse Effect. Neither the Company and Kreido, nor any Subsidiary, nor any
director or officer thereof, is or has been the subject of any Action involving
a claim of violation of or liability under federal or state securities laws
or a
claim of breach of fiduciary duty. There has not been, and to the knowledge
of
the Company and Kreido, there is not pending or contemplated, any investigation
by the Commission involving the Company and Kreido or any current or former
director or officer of the Company and Kreido. The Commission has not issued
any
stop order or other order suspending the effectiveness of any registration
statement filed by the Company or any Subsidiary under the Exchange Act or
the
Securities Act.
k.
Labor
Relations
.
No
material labor dispute exists or, to the knowledge of the Company and Kreido,
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 and Kreido’s or any Subsidiary’s employees is a member of a union that
relates to such employee’s relationship with the Company, and neither the
Company and Kreido or any Subsidiary is a party to a collective bargaining
agreement, and the Company (and its Subsidiaries) and Kreido believe that their
relationships with their employees are good. No executive officer, to the
knowledge of the Company or Kreido, 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) and Kreido to any liability with respect to any of the foregoing
matters. The Company (and its Subsidiaries) and Kreido are in compliance with
all U.S. 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.
l.
Compliance
.
Neither
the Company nor Kreido, nor any Subsidiary, (i) is in default under or in
violation of (and no event has occurred that has not been waived that, with
notice or lapse of time or both, would result in a default by the Company nor
Kreido, or any Subsidiary under), nor has the Company nor Kreido, or any
Subsidiary received notice of a claim that it is in default under or that it
is
in violation of, any indenture, loan or credit agreement, or any other agreement
or instrument to which it is a party or by which it or any of its properties
is
bound (whether or not such default or violation has been waived), (ii) is in
violation of any order of any Court, arbitrator, or governmental body, or (iii)
is or has been in violation of any statute, rule or regulation of any
governmental authority, including without limitation all foreign, federal,
state
and local laws relating to taxes, environmental protection, occupational health
and safety, product quality and safety and employment and labor matters, except
in each case as could not, individually or in the aggregate, have or reasonably
be expected to result in a Material Adverse Effect. The Company is in compliance
with the applicable requirements of the Sarbanes-Oxley Act of 2002, as amended,
and the rules and regulations thereunder, except where such noncompliance could
not have or reasonably be expected to result in a Material Adverse
Effect.
m.
Regulatory
Permits
.
The
Company (and its Subsidiaries) and Kreido possess all certificates,
authorizations and permits issued by the appropriate federal, state, local
or
foreign regulatory authorities necessary to conduct their respective businesses,
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 and Kreido, nor any Subsidiary, has received any notice
of
proceedings relating to the revocation or modification of any Material
Permit.
n.
Title
to Assets
.
The
Company and Kreido, and, as applicable, the Subsidiaries have good and
marketable title in fee simple to all real property owned by them that is
material to the business of the Company and Kreido and good and marketable
title
in all personal property owned by them that is material to the business of
the
Company and Kreido, in each case free and clear of all liens, except for liens
as do not materially affect the value of such property and do not materially
interfere with the use made and proposed to be made of such property by the
Company and Kreido and liens for the payment of federal, state or other taxes,
the payment of which is neither delinquent nor subject to penalties. Any real
property and facilities held under lease by the Company and Kreido are held
by
them under valid, subsisting and enforceable leases with which the Company
and
Kreido are in compliance.
o.
Patents
and Trademarks
.
The
Company and Kreido, or any of their respective Subsidiaries have, or have rights
to use, all patents, patent applications, trademarks, trademark applications,
service marks, trade names, copyrights, licenses, and other similar rights
that
are necessary or material for use in connection with their respective businesses
and which the failure to so have could, individually or in the aggregate, have
or reasonably be expected to result in a Material Adverse Effect (collectively,
the “
Intellectual
Property Rights
”).
Neither the Company nor Kreido, or any of their respective Subsidiaries, has
received a written notice that the Intellectual Property Rights used by the
Company or Kreido, or any of their respective Subsidiaries, violates or
infringes upon the rights of any person. Except as set forth in the Exchange
Act
Documents, to the knowledge of the Company, all such Intellectual Property
Rights are enforceable and there is no existing infringement by another person
of any of the Intellectual Property Rights, except where such infringement
could
not have or reasonably be expected to result in a Material Adverse
Effect.
p.
Insurance
.
The
Company and Kreido and, as applicable, the Subsidiaries, 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
Kreido and the Subsidiaries are engaged, including, but not limited to,
directors’ and officers’ liability coverage. Neither the Company and Kreido, nor
any 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.
Transactions
With Affiliates and Employees
.
Except
as set forth in the Exchange Act Documents, the Confidential Private Placement
Memorandum dated November 16, 2006, as revised on December 15, 2006 (the
“
Memorandum
”)
and
those transactions contemplated by the Transaction Documents, none of the
officers or directors of the Company or Kreido and, to the knowledge of the
Company or Kreido, none of the employees of the Company or Kreido is presently
a
party to any transaction with the Company or any Subsidiary of Kreido (other
than for services as employees, officers, and directors), 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 or Kreido, any entity in which
any
officer, director, or any such employee has a substantial interest or is an
officer, director, trustee, or partner.
r.
Internal
Accounting Controls
.
The
Company and the Subsidiaries maintain a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are executed
in
accordance with management’s general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles 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. 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 material
information relating to the Company and its Subsidiaries is made known to the
Company’s certifying officers by others within those entities, particularly
during the period in which the Company’s Form 10-KSB or 10-QSB, as the case may
be, are being prepared. The Company’s certifying officers have evaluated the
effectiveness of the Company’s controls and procedures as of the end of the
reporting period covered by the Company’s Form 10-KSB and each of the Company’s
Forms 10-QSB filed with the Commission (each such date, the
“Evaluation
Date”
)
and
presented in each such report their conclusions about the effectiveness of
the
Company’s disclosure controls and procedures based on their evaluations as of
the applicable Evaluation Date. Since the Evaluation Date of the Company’s most
recently filed Form 10-KSB or Form 10-QSB, there have been no significant
changes in the Company’s disclosure controls and procedures, the Company’s
internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) or 15d-15(f) or, to the Company’s knowledge, in other factors that
could significantly affect the Company’s internal controls over financial
reporting.
s.
Solvency
.
Based
on the financial condition of the Company as of the Closing Date (and assuming
that the Closing shall have occurred), (i) the Company’s fair saleable value of
its 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 for the current
fiscal year 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 debt when such amounts
are required to be paid. The Company does not intend to incur debts beyond
its
ability to pay such debts as they mature (taking into account the timing and
amounts of cash to be payable on or in respect of its debt).
t.
Certain
Fees
.
Other
than the cash commission payable on the closing, no brokerage or finder’s fees
or commissions are or will be payable by the Company to any broker, financial
advisor or consultant, finder, placement agent, investment banker, bank, or
other person with respect to the transactions contemplated by this Agreement.
The Investor shall have no obligation with respect to any claims (other than
such fees or commissions owed by an Investor pursuant to written agreements
executed by the Investor which fees or commissions shall be the sole
responsibility of such Investor) made by or on behalf of other persons for
fees
of a type contemplated in this Section that may be due in connection with the
transactions contemplated by this Agreement.
u.
Certain
Registration Matters
.
Assuming the accuracy of the Investor’s representations and warranties set forth
in this Agreement and the Transaction Documents and the representations and
warranties made by all other purchasers of Units in the Offering, no
registration under the Securities Act is required for the offer and sale of
the
Investor’s Units by the Company to the Investor hereunder.
v.
Listing
and Maintenance Requirements
.
The
Company is, and has no reason to believe that it will not in the foreseeable
future continue to be, in compliance with the listing and maintenance
requirements for continued listing of the Common Stock on the NASD Over the
Counter Bulletin Board.
w.
Investment
Company
.
Neither
the Company nor Kreido are an “investment company” or an “affiliate” of an
“investment company” within the meaning of the Investment Company Act of 1940,
as amended.
x.
No
Additional Agreements
.
The
Company and Kreido do not have any agreement or understanding with any other
purchasers of the Units in the Offering with respect to the transactions
contemplated by this Agreement on terms that differ substantially from those
set
forth in this Agreement.
y.
Disclosure
.
The
Investor confirms that in making its decision to enter into this Agreement,
the
Investor has relied on the information contained in the Confidential Private
Placement Memorandum dated November 16, 2006, as revised on December 15, 2006
and on the representations and warranties set forth in Section 5 of this
Agreement, and not on any other materials that have been furnished by or on
behalf of the Company and Kreido. The information contained in the Memorandum
and the representations and warranties of the Company and Kreido in this
Agreement are true and correct in all material respects and do 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 Company and Kreido confirm
that
neither they nor any person acting on their behalf has provided the Investor,
or
its agents or counsel, with any information that the Company or Kreido believes
would constitute material, non-public information following the announcement
of
the Closing and the transactions contemplated thereby. The Company understands
and confirms that the Investor will rely on the foregoing representations and
covenants in effecting transactions in securities of the Company.
z.
Registration
Rights
.
Other
than each of the Investors, no person has any right to cause the Company to
effect the registration under the Securities Act of any securities of the
Company.
aa.
No
Integrated Offering
.
Assuming
the accuracy of the Investors’ representations and warranties set forth in
Section 6, neither the Company, nor any of its affiliates, nor any person 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 of the Units to be integrated with prior offerings
by the Company for purposes of the Securities Act or any applicable shareholder
approval provisions of any trading market on which any of the securities of
the
Company are listed or designated.
bb.
No
General Solicitation
.
Neither
the Company nor any person acting on behalf of the Company has offered or sold
any of the Units by any form of general solicitation or general advertising.
The
Company has offered the Units for sale only to the Purchasers and certain other
“accredited investors” within the meaning of Rule 501 under the Securities
Act.
cc.
Acknowledgment
Regarding Investors’ Purchase of Securities
.
The
Company acknowledges and agrees that each of the Investors 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 Investor 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
Investor or any of their respective representatives or agents in connection
with
the Transaction Documents and the transactions contemplated thereby is merely
incidental to the Investors’ purchase of the Units. The Company further
represents to each Investor 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 Kreido and their representatives.
dd.
Acknowledgement
Regarding Investors’ Trading Activity
.
Anything in this Agreement or elsewhere herein to the contrary notwithstanding,
it is understood and acknowledged by the Company (i) that none of the Investors
have been asked to agree, nor has any Investor agreed, to desist from purchasing
or selling, long and/or short, securities of the Company, or “derivative”
securities based on securities issued by the Company or to hold the Units for
any specified term; (ii) that past or future open market or other transactions
by any Investor, including short sales, and specifically including, without
limitation, short sales or “derivative” transactions, before or after the
closing of this or future private placement transactions, may negatively impact
the market price of the Company’s publicly-traded securities; (iii) that any
Investor, and counter-parties in “derivative” transactions to which any such
Investor is a party, directly or indirectly, presently may have a “short”
position in the Common Stock, and (iv) that each Investor shall not be deemed
to
have any affiliation with or control over any arm’s length counter-party in any
“derivative” transaction.
The
Company further understands and acknowledges that (a) one or more
Investors
may
engage in hedging activities at various times during the period that the Units
are outstanding, including, without limitation, during the periods that the
value of the shares underlying the Warrants deliverable with respect to Units
are being determined and (b) such hedging activities (if any) could reduce
the
value of the existing stockholders' equity interests in the Company at and
after
the time that the hedging activities are being conducted. The Company
acknowledges that such aforementioned hedging activities do not constitute
a
breach of any of the Transaction Documents and Investor Warrants.
6.
Representations
and Warranties of the Investor
.
In
order to induce the Company to enter into this Agreement, the Investor
represents and warrants to the Company and Kreido the following:
a.
Authority
.
If a
corporation, partnership, limited partnership, limited liability company, or
other form of entity, the Investor is duly organized or formed, as the case
may
be, validly existing, and in good standing under the laws of its jurisdiction
of
organization or formation, as the case may be. The Investor has all requisite
individual or entity right, power, and authority to execute, deliver, and
perform this Agreement.
b.
Enforceability
.
The
execution, delivery, and performance of this Agreement by the Investor have
been
duly authorized by all requisite partnership, corporate or other entity action,
as the case may be. This Agreement has been duly executed and delivered by
the
Investor, and, upon its execution by the Company, shall constitute the legal,
valid, and binding obligation of the Investor, enforceable in accordance with
its terms, except to the extent that its enforceability is limited by
bankruptcy, insolvency, reorganization, moratorium, or other laws relating
to or
affecting the enforcement of creditors’ rights generally and by general
principles of equity.
c.
No
Violations
.
The
execution, delivery, and performance of this Agreement by the Investor do not
and will not, with or without the passage of time or the giving of notice,
result in the breach of, or constitute a default, cause the acceleration of
performance, or require any consent under, or result in the creation of any
lien, charge or encumbrance upon any property or assets of the Investor pursuant
to, any material instrument or agreement to which the Investor is a party or
by
which the Investor or its properties may be bound or affected, and, do not
or
will not violate or conflict with any provision of the articles of incorporation
or bylaws, partnership agreement, operating agreement, trust agreement, or
similar organizational or governing document of the Investor, as applicable.
d.
Knowledge
of Investment and its Risks
.
The
Investor has knowledge and experience in financial and business matters as
to be
capable of evaluating the merits and risks of Investor’s investment in the
Units. The Investor understands that an investment in the Company represents
a
high degree of risk and there is no assurance that the Company’s business or
operations will be successful. The Investor has considered carefully the risks
attendant to an investment in the Company, and that, as a consequence of such
risks, the Investor could lose Investor’s entire investment in the
Company.
e.
Investment
Intent
.
The
Investor hereby represents and warrants that (i) the Investor’s Units are being
acquired for investment for the Investor’s own account, and not as a nominee or
agent and not with a view to the resale or distribution of all or any part
of
the Investor’s Units, and the Investor has no present intention of selling,
granting any participation in, or otherwise distributing any of the Investor’s
Units within the meaning of the Securities Act, (ii) the Investor’s Units are
being acquired in the ordinary course of the Investor’s business, and (iii) the
Investor does not have any contracts, understandings, agreements, or
arrangements, directly or indirectly, with any person and/or entity to
distribute, sell, transfer, or grant participations to such person and/or entity
with respect to, any of the Investor’s Units. The Investor is not purchasing the
Investor’s Units as a result of any advertisement, article, notice or other
communication regarding the Investor’s Units published in any newspaper,
magazine or similar media or broadcast over television or radio or presented
at
any seminar or any other general solicitation or general
advertisement.
f.
Investor
Status
.
The
Investor is an “accredited investor” as that term is defined by Rule 501 of
Regulation D promulgated under the Securities Act and the information provided
by the Investor in the Investor Questionnaire, attached hereto as
Appendix
A
,
is
truthful, accurate, and complete. The Investor is not registered as a
broker-dealer under Section 15 of the Exchange Act or an affiliate of such
broker-dealer, except as otherwise provided in the Investor
Questionnaire.
g.
Disclosure
.
The
Investor has reviewed the information provided to the Investor by the Company
in
connection with the Investor’s decision to purchase the Investor’s Units,
including but not limited to, the Company’s publicly available filings with the
Commission and the information contained therein. The Company has provided
the
Investor with all the information that the Investor has requested in connection
with the decision to purchase the Investor’s Units. The Investor further
represents that the Investor has had an opportunity to ask questions and receive
answers from the Company regarding the business, properties, prospects, and
financial condition of the Company. All such questions have been answered to
the
full satisfaction of the Investor. Neither such inquiries nor any other
investigation conducted by or on behalf of the Investor or its representatives
or counsel shall modify, amend, or affect the Investor’s right to rely on the
truth, accuracy, and completeness of the disclosure materials and the Company’s
representations and warranties contained herein.
h.
No
Registration
.
The
Investor understands that Investor may be required to bear the economic risk
of
Investor’s investment in the Company for an indefinite period of time. The
Investor further understands that (i) neither the offering nor the sale of
the Investor’s Units has been registered under the Securities Act or any
applicable State Acts in reliance upon exemptions from the registration
requirements of such laws, (ii) the Investor’s Units must be held by the
Investor indefinitely unless the sale or transfer thereof is subsequently
registered under the Securities Act and any applicable State Acts, or an
exemption from such registration requirements is available, (iii) except as
set
forth in the Registration Rights Agreement, dated as of the date hereof, between
the Company and the Investor, the Company is under no obligation to register
any
of the shares of Common Stock underlying the Investor’s Units on the Investor’s
behalf or to assist the Investor in complying with any exemption from
registration, and (iv) the Company will rely upon the representations and
warranties made by the Investor in this Agreement and the Transaction Documents
in order to establish such exemptions from the registration requirements of
the
Securities Act and any applicable State Acts.
i.
Transfer
Restrictions
.
The
Investor will not transfer any of the Investor’s Units or the shares of Common
Stock underlying the Investor’s Units or the Investor Warrants unless such
transfer is registered or exempt from registration under the Securities Act
and
such State Acts, and, if requested by the Company in the case of an exempt
transaction, the Investor has furnished an opinion of counsel reasonably
satisfactory to the Company that such transfer is so exempt. The Investor
understands and agrees that (i) the certificates evidencing the shares of Common
Stock underlying the Investor’s Units and the Investor’s Warrants will bear
appropriate legends indicating such transfer restrictions placed upon the Units
and shares of Common Stock and Investor Warrants, (ii) the Company shall have
no
obligation to honor transfers of any of the Investor’s Units, Investor Warrants
or shares of Common Stock underlying the Investor’s Units or Investor Warrants
in violation of such transfer restrictions, and (iii) the Company shall be
entitled to instruct any transfer agent or agents for the securities of the
Company to refuse to honor such transfers.
j.
No
Solicitation
.
The
Investor (i) did not receive or review any advertisement, article, notice or
other communication published in a newspaper or magazine or similar media or
broadcast over television or radio, whether closed circuit, or generally
available, with respect to the Units or (ii) was not solicited by any person,
other than by representatives of the Company, with respect to a purchase of
the
Units.
k.
Principal
Address.
The
Investor’s principal residence, if an individual, or principal executive office,
if an entity, is set forth on the signature page of this Subscription
Agreement.
l.
Reliance
by the Company
.
The
Investor acknowledges and consents to the Company’s reliance on the Investor’s
representations and warranties made above for purposes of complying with all
applicable securities laws and any applicable exemptions from registration
requirements thereunder and otherwise.
7.
Transfer
Restrictions
.
a.
The
Common Stock and Common Stock issuable upon exercise of the Investor Warrants
(the “
Warrant
Shares
”)
(the
Common Stock, Investor Warrants and Warrant Shares are collectively referred
to
as the “
Securities
”)
may
only be disposed of in compliance with state and federal securities laws. In
connection with any transfer of Securities other than pursuant to an effective
registration statement or Rule 144, the Company may require the transferor
thereof to provide to the Company an opinion of counsel selected by the
transferor and reasonably acceptable to the Company, the form and substance
of
which opinion shall be reasonably satisfactory to the Company, to the effect
that such transfer does not require registration of such transferred Securities
under the Securities Act. As a condition of transfer, any such transferee shall
agree in writing to be bound by the terms of this Agreement and shall have
the
rights of an Investor under this Agreement and the Registration Rights
Agreement.
b.
The
Investors agree to the imprinting, so long as is required by this Section 7,
of
a legend on any of the Securities in the following form:
THIS
SECURITY HAS NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION
OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES
ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR
TO
SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY.
c.
Certificates
evidencing the Common Stock and Warrant Shares shall not contain any legend
(including the legend set forth in Section 7(b)), (i) while a registration
statement (including the Registration Statement) covering the resale of such
security is effective under the Securities Act, or (ii) following any sale
of
such Common Stock or Warrant Shares pursuant to Rule 144, or (iii) if such
Common Stock or Warrant Shares are eligible for sale under Rule 144(k), or
(iv)
if such legend is not required under applicable requirements of the Securities
Act (including judicial interpretations and pronouncements issued by the staff
of the Commission). The Company shall cause its counsel to issue a legal opinion
to the Company’s transfer agent promptly after the effective date of the
Registration Statement (the “
Effective
Date
”)
if
required by the Company’s transfer agent to effect the removal of the legend
hereunder. If all or any portion of an Investor Warrant is exercised at a time
when there is an effective registration statement to cover the resale of the
Warrant Shares, such shares shall be issued free of all legends. The Company
agrees that following the Effective Date or at such time as such legend is
no
longer required under this Section 7(c), it will, five Trading Days following
the delivery by an Investor to the Company or the Company’s transfer agent of a
certificate representing Common Stock or Warrant Shares, as the case may be,
issued with a restrictive legend (such fifth Trading Day, the “
Legend
Removal Date
”),
deliver or cause to be delivered to such Investor 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 any transfer agent
of the Company that enlarge the restrictions on transfer set forth in this
Section 7. Certificates for Securities and subject to legend removal hereunder
shall be transmitted by the transfer agent of the Company to the Investors
by
crediting the account of the Investor’s prime broker with the Depository Trust
Company System.
d.
In
addition to such Investor’s other available remedies, the Company shall pay to
an Investor, in cash, as partial liquidated damages and not as a penalty, for
each $1,000 of Common Stock or Warrant Shares (based on the VWAP of the Common
Stock on the date such Securities are submitted to the Company’s transfer agent)
delivered for removal of the restrictive legend and subject to Section 7(c),
$10
per Trading Day (increasing to $20 per Trading Day five (5) Trading Days after
such damages have begun to accrue) for each Trading Day after the Legend Removal
Date until such certificate is delivered without a legend. Nothing herein shall
limit such Investor’s right to pursue actual damages for the Company’s failure
to deliver certificates representing any Securities as required by the
Transaction Documents, and such Purchaser shall have the right to pursue all
remedies available to it at law or in equity including, without limitation,
a
decree of specific performance and/or injunctive relief. For purposes of this
Section 7(d) “
VWAP
”
means,
for any date, the price determined by the first of the following clauses that
applies: (i) if the Common Stock is then listed or quoted on a Trading Market,
the daily volume weighted average price of the Common Stock for such date (or
the nearest preceding date) on the Trading Market on which the Common Stock
is
then listed or quoted for trading as reported by Bloomberg L.P. (based on a
Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City
time); (ii) if the OTC Bulletin Board is not a Trading Market, the volume
weighted average price of the Common Stock for such date (or the nearest
preceding date) on the OTC Bulletin Board; (iii) if the Common Stock is not
then
quoted for trading on the OTC Bulletin Board 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
(iv) 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 Investor
and reasonably acceptable to the Company, the fees and expenses of which shall
be paid by the Company.
e.
Each
Investor, severally and not jointly with the other Investors, agrees that the
removal of the restrictive legend from certificates representing Securities
as
set forth in this Section 7 is predicated upon the Company’s reliance that the
Investor will sell any Securities pursuant to either the registration
requirements of the Securities Act, including any applicable prospectus delivery
requirements, or an exemption therefrom, and that if Securities are sold
pursuant to a Registration Statement, they will be sold in compliance with
the
plan of distribution set forth therein.
8.
Independent
Nature of Investor’s Obligations and Rights
.
The
obligations of the Investor under this Agreement and the Transaction Documents
are several and not joint with the obligations of any other purchaser of Units
in the Offering, and the Investor shall not be responsible in any way for the
performance of the obligations of any other purchaser of Units in the Offering
under any Transaction Document. The decision of the Investor to purchase the
Investor’s Units pursuant to the Transaction Documents has been made by the
Investor independently of any other purchaser of Units in the Offering. Nothing
contained herein or in any Transaction Document or Investor Warrant, and no
action taken by any purchaser of Units pursuant thereto, shall be deemed to
constitute such purchasers as a partnership, an association, a joint venture,
or
any other kind of entity, or create a presumption that the purchasers of Units
are in any way acting in concert or as a group with respect to such obligations
or the transactions contemplated by the Transaction Documents. The Investor
acknowledges that no other purchaser of Units has acted as agent for the
Investor in connection with making its investment hereunder and that no other
purchaser of Units will be acting as agent of the Investor in connection with
monitoring its investment in the Units or enforcing its rights under the
Transaction Documents and Investor Warrants. The Investor shall be entitled
to
independently protect and enforce its rights, including without limitation
the
rights arising out of this Agreement or out of the other Transaction Documents
or Investor Warrants, and it shall not be necessary for any other purchaser
of
Units to be joined as an additional party in any proceeding for such
purpose.
9.
Prospectus
Delivery Requirement
.
The
Investor hereby covenants with the Company not to make any sale of the
Investor’s Units without complying with the provisions hereof and of the
Registration Rights Agreement, and without effectively causing the prospectus
delivery requirement under the Securities Act to be satisfied (unless the
Investor is selling in a transaction not subject to the prospectus delivery
requirement).
10.
Shareholder
Approval
.
The
Company represents and warrants to the Investor that a vote of the stockholders
of the Company will not be required to approve the issuance of the Investor’s
Units.
11.
Indemnification
of Investor
.
In
addition to the indemnity provided in the Registration Rights Agreement, the
Company will indemnify and hold the Investor and its directors, officers,
shareholders, members, managers, partners, employees and agents (each, an
“
Investor
Party
”)
harmless from any and all losses, liabilities, obligations, claims,
contingencies, damages, costs and expenses, including all judgments, amounts
paid in settlements, court costs, and reasonable attorneys’ fees and costs of
investigation (collectively, “
Losses
”)
that
any such Investor Party may suffer or incur as a result of or relating to any
misrepresentation, breach, or inaccuracy of any representation, warranty,
covenant, or agreement made by the Company in any Transaction Document. In
addition to the indemnity contained herein, the Company will reimburse each
Investor Party for its reasonable legal and other expenses (including the cost
of any investigation, preparation, and travel in connection therewith) incurred
in connection therewith, as such expenses are incurred.
12.
Contribution
.
If the
indemnification under Section 11 is unavailable to an indemnified party or
insufficient to hold an indemnified party harmless for any Losses, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party, in such proportion as is appropriate to reflect the relative
fault of the indemnifying party and indemnified party in connection with the
actions, statements or omissions that resulted in such Losses as well as any
other relevant equitable considerations. The relative fault of such indemnifying
party and indemnified party shall be determined by reference to, among other
things, whether any action in question, including any untrue or alleged untrue
statement of a material fact or omission or alleged omission of a material
fact,
has been taken or made by, or relates to information supplied by, such
indemnifying party or indemnified party, and the parties’ relative intent,
knowledge, access to information and opportunity to correct or prevent such
action, statement or omission. The amount paid or payable by a party as a result
of any Losses shall be deemed to include, subject to the limitations set forth
in this Agreement, any reasonable attorneys’ or other fees or expenses incurred
by such party in connection with any Action to the extent such party would
have
been indemnified for such fees or expenses if the indemnification provided
for
in this Section was available to such party in accordance with its
terms.
13.
Integration
.
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 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 any
Trading Market such that it would require shareholder approval prior to the
closing of such other transaction unless shareholder approval is obtained before
the closing of such subsequent transaction.
14.
Participation
in Future Financing
.
a.
From
the
date hereof until the date that is the second anniversary of the Effective
Date,
upon any issuance by the Company or any of its Subsidiaries of Common Stock
or
Common Stock Equivalents for cash consideration (a “
Subsequent
Financing
”),
each
Investor shall have the right to participate in an amount up to the amount
of
the Subsequent Financing (the “
Participation
Maximum
”)
on the
same terms, conditions and price provided for in the Subsequent
Financing.
b.
At
least
15 Trading Days prior to the closing of the Subsequent Financing, the Company
shall deliver to each Investor a written notice of its intention to effect
a
Subsequent Financing (“
Pre-Notice
”),
which
Pre-Notice shall ask such Investor if it wants to review the details of such
financing (such additional notice, a “
Subsequent
Financing Notice
”).
Upon the request of an Investor, and only upon a request by such Investor,
for a
Subsequent Financing Notice, the Company shall as soon as practicable, but
no
later than 2 Trading Days after such request, deliver a Subsequent Financing
Notice to such Investor. The Subsequent Financing Notice shall describe in
reasonable detail the proposed terms of such Subsequent Financing, the amount
of
proceeds intended to be raised thereunder, the person or persons through or
with
whom such Subsequent Financing is proposed to be effected, and attached to
which
shall be a term sheet or similar document relating
thereto.
c.
Any
Investor desiring to participate in such Subsequent Financing must provide
written notice to the Company by not later than 5:30 p.m. Eastern time on the
fifth Trading Day after all of the Investors have received the Pre-Notice that
the Investor is willing to participate in the Subsequent Financing, the amount
of the Investor’s participation, and that the Investor has such funds ready,
willing, and available for investment on the terms set forth in the Subsequent
Financing Notice. If the Company receives no notice from an Investor as of
such
fifth Trading Day, such Investor shall be deemed to have notified the Company
that it does not elect to participate.
d.
If
by
5:30 p.m. Eastern time on the fifth Trading Day after all of the Investors
have
received the Pre-Notice, notifications by the Investors of their willingness
to
participate in the Subsequent Financing (or to cause their designees to
participate) is, in the aggregate, less than the total amount of the Subsequent
Financing, then the Company may effect the remaining portion of such Subsequent
Financing on the terms and with the persons set forth in the Subsequent
Financing Notice.
e.
If
by
5:30 p.m. Eastern time on the fifth Trading Day after all of the Investors
have
received the Pre-Notice, the Company receives responses to a Subsequent
Financing Notice from Investors seeking to purchase more than the aggregate
amount of the Participation Maximum, each such Investor shall have the right
to
purchase the greater of (a) their Pro Rata Portion (as defined below) of the
Participation Maximum and (b) the difference between the Participation Maximum
and the aggregate amount of participation by all other Investors.
“
Pro
Rata Portion
”
is
the
ratio of (x) the amount of Units subscribed for in this Agreement and purchased
on the Closing Date by an Investor participating under this Section 14 and
(y)
the sum of the aggregate amount of Units subscribed for and purchase under
this
Agreement on the Closing Date by all Purchasers participating under this Section
14.
f.
The
Company must provide the Investors with a second Subsequent Financing Notice,
and the Investors will again have the right of participation set forth above
in
this Section 14, if the Subsequent Financing subject to the initial Subsequent
Financing Notice is not consummated for any reason on the terms set forth in
such Subsequent Financing Notice within 60 Trading Days after the date of the
initial Subsequent Financing Notice.
g.
Notwithstanding
the foregoing, this Section 14 shall not apply in respect of
(i)
an
Exempt
Issuance
or (ii)
an underwritten public offering of Common Stock
.
“
Exempt
Issuance
”
means
the issuance of (a) shares of Common Stock or options to employees, officers
or
directors of the Company pursuant to any stock or option plan duly adopted
by a
majority of the non-employee members of the Board of Directors of the Company
or
a majority of the members of a committee of non-employee directors established
for such purpose, (b) securities upon the exercise or exchange of or conversion
of any Securities issued hereunder and/or other securities exercisable or
exchangeable for or convertible into shares of Common Stock issued and
outstanding on the date of this Agreement, provided that such securities have
not been amended since the date of this Agreement to increase the number of
such
securities or to decrease the exercise, exchange or conversion price of such
securities, and (c) securities issued pursuant to acquisitions or strategic
transactions approved by a majority of the disinterested directors of the
Company, provided that any such issuance shall only be to a Person which is,
itself or through its subsidiaries, an operating company in a business
synergistic with the business of the Company and in which the Company receives
benefits in addition to the investment of funds, but shall not include a
transaction in which the Company is issuing securities primarily for the purpose
of raising capital or to an entity whose primary business is investing in
securities.
15.
Non-Public
Information
.
Subsequent to the Closing, the Company covenants and agrees that neither it
nor
any other person acting on its behalf will provide Investor or its agents or
counsel with any information that the Company believes constitutes material
non-public information, unless prior thereto the Investor shall have executed
a
written agreement regarding the confidentiality and use of such information.
16.
Further
Assurances
.
The
parties hereto will, upon reasonable request, execute and deliver all such
further assignments, endorsements, and other documents as may be necessary
in
order to perfect the purchase by the Investor of the Investor’s Units. In
addition, the Company agrees that it will do all such acts necessary to ensure
that Canadian residents holding shares will be able to trade such securities
without resale restrictions under Canadian securities legislation within four
months from the Merger Effective Date, including, if necessary, all acts in
order for the Company to become a reporting issuer in a Canadian province or
territory, which may include the filing and receipting of a prospectus by
Canadian securities regulatory authorities.
17.
Entire
Agreement; No Oral Modification
.
This
Agreement and the other Transaction Documents and Investor Warrants contain
the
entire agreement among the parties hereto with respect to the subject matter
hereof and supersede all prior agreements and understandings with respect
thereto and this Agreement may not be amended or modified except in a writing
signed by both of the parties hereto.
18.
Amendments
and Waivers
.
The
provisions of this Agreement may be amended on or before the Closing Date,
and
particular provisions of this Agreement may be waived, with and only with an
agreement or consent in writing signed by the Company and the majority of
Investors, unless such provision is specific to an Investor. The Investors
acknowledge that by the operation of this Section 18, the majority of Investors
may have the right and power to diminish or eliminate all rights of the
Purchasers under this Agreement.
19.
Binding
Effect; Benefits
.
This
Agreement shall inure to the benefit of and be binding upon the parties hereto
and their respective heirs, successors and assigns; however, nothing in this
Agreement, expressed or implied, is intended to confer on any other person
other
than the parties hereto, or their respective heirs, successors, or assigns,
any
rights, remedies, obligations, or liabilities under or by reason of this
Agreement.
20.
Counterparts
.
This
Agreement may be executed in any number of counterparts, for each of which
shall
be deemed to be an original and all of which together shall be deemed to be
one
and the same instrument. In the event that any signature is delivered by
facsimile transmission, such signature shall create a valid and binding
obligation of the party executing (or on whose behalf such signature is
executed) with the same force and effect as if such facsimile signature page
were an original thereof.
21.
Governing
Law
.
This
Agreement shall be governed by, and construed and enforced in accordance with,
the laws of the United States of America and the State of New York, both
substantive and remedial, without regard to New York conflicts of law
principles.
Any
judicial proceeding brought against either of the parties to this agreement
or
any dispute arising out of this Agreement or any matter related hereto shall
be
brought in the courts of the State of New York, New York County, or in the
United States District Court for the Southern District of New York and, by
its
execution and delivery of this agreement, each party to this Agreement accepts
the jurisdiction of such courts.
22.
Prevailing
Parties
.
In any
action or proceeding brought to enforce any provision of this Agreement, or
where any provision hereof is validly asserted as a defense, the prevailing
party shall be entitled to receive and the nonprevailing party shall pay upon
demand reasonable attorneys’ fees in addition to any other remedy.
23.
Notices
.
All
communication hereunder shall be in writing and shall be mailed, delivered,
telegraphed or sent by facsimile or electronic mail, and such delivery shall
be
confirmed to the addresses as provided below:
if
to the
Investor:
to
the
address set forth on the signature page of this Agreement
if
to the
Company before the Closing Date:
Kreido
Biofuels, Inc.
88
West
44th Avenue
Vancouver,
British Columbia, V5Y 2V1 Canada
Attn:
Stephen B. Jackson, President
with
copy
to:
Gottbetter
& Partners, LLP
488
Madison Avenue, 12
th
Floor
New
York,
New York 10022
Attention:
Kenneth S. Goodwin, Esq.
Facsimile:
(212) 400-6901
if
to
Kreido or to the Company after the Closing Date, to:
Kreido
Laboratories
1140
Avenida Acaso
Camarillo,
California 93012
Attention:
Dr. Joel Balbien, Chief Executive Officer
Facsimile:
(805) 384-0989
with
a
copy to:
McGuireWoods
LLP
1345
Avenue of the Americas, 7
th
Floor
New
York,
New York 10105
Attention:
Louis W. Zehil
Facsimile:
(212) 548-2175
24.
Headings
.
The
section headings herein are included for convenience only and are not to be
deemed a part of this Agreement.
[SIGNATURE
PAGES FOLLOW]
IN
WITNESS WHEREOF, the parties hereto have executed this Subscription Agreement
as
of the date first written above.
|
|
|
|
KREIDO
BIOFUELS, INC.
|
|
|
|
|
By:
|
|
|
Name:
Stephen B. Jackson
|
|
Its:
President
|
[SIGNATURE
PAGES OF KREIDO AND INVESTOR FOLLOW]
IN
WITNESS WHEREOF, the parties hereto have executed this Subscription Agreement
as
of the date first written above.
|
|
|
|
KREIDO
LABORATORIES
|
|
|
|
|
By:
|
|
|
Name:
Dr. Joel Balbien
|
|
Its:
Chief
Executive Officer
|
[SIGNATURE
PAGE OF INVESTOR FOLLOWS]
IN
WITNESS WHEREOF, the parties hereto have executed this Subscription Agreement
as
of the date first written above.
INVESTOR
(individual)
|
INVESTOR
(entity)
|
|
|
______________________________________
|
____________________________________
|
Signature
|
Name
of Entity
|
|
|
______________________________________
|
____________________________________
|
Print
Name
|
Signature
|
|
|
Address
of Principal Residence:
|
|
_____________________________________
|
Print
Name: __________________________
|
_____________________________________
|
|
_____________________________________
|
Title:
________________________________
|
|
|
Social
Security Number:
|
Address
of Executive Offices:
|
_____________________________________
|
|
|
_____________________________________
|
Telephone
Number:
|
_____________________________________
|
_____________________________________
|
_____________________________________
|
|
|
Facsimile
Number:
|
IRS
Tax Identification Number:
|
_____________________________________
|
__________________________________
|
|
|
|
Telephone
Number:
|
|
__________________________________
|
|
|
|
Facsimile
Number:
|
|
____________________________________
|
_________________
|
X
|
$1.35
|
=
|
$___________________
|
Number
of Units
|
|
Price
per Unit
|
|
Purchase
Price
|
EXHIBIT
A
Form
of Warrant
(
See
Attached
)
APPENDIX
A
Investor
Questionnaire
(
See
Attached
)
EXHIBIT
10.3
REGISTRATION
RIGHTS AGREEMENT
This
Registration Rights Agreement (this “
Agreement
”)
is
made and entered into as of this 12th day of January, 2007 (the “
Effective
Date
”)
between Kreido Biofuels, Inc. (f/k/a Gemwood Productions, Inc.), a Nevada
corporation (the “
Company
”),
and
the parties set forth on the signature page and
Exhibit
A
hereto
(each a “
Purchaser
”
and
collectively the “
Purchasers
”).
RECITALS:
WHEREAS,
the Company and Kreido Laboratories (“
Kreido
”),
currently contemplate that they will enter into an Agreement and Plan of Merger
and Reorganization, pursuant to which a newly organized, wholly-owned subsidiary
of the Company will merge with and into Kreido, with Kreido being the surviving
entity and a wholly-owned subsidiary of the Company (the “
Merger
”)
(the
date such Merger becomes effective hereinafter referred to as the “
Merger
Effective
Date
”);
WHEREAS,
as a condition to the consummation of the Merger, and to provide the capital
required by Kreido for working capital purposes, the Company is offering in
compliance with Rule 506 of Regulation D of the Securities Act of 1933, as
amended (the “
Securities
Act
”)
and
available prospectus exemptions in Canada, to accredited investors in a private
placement transaction (the “
Offering
”),
18,518,519 units of its securities (the “
Units
”)
at the
purchase price of $1.35 per Unit (the “
Purchase
Price
”),
each
Unit consisting of one share of the Company’s common stock, par value $0.001 per
share (“
Common
Stock
”),
and a
warrant (the “
Investor
Warrants
”)
to
purchase one share of Common Stock for five years at the exercise price of
$1.85
per share of Common Stock;
WHEREAS,
the
Offering will terminate upon the receipt of acceptable subscriptions totaling
$25,000,000;
provided
,
that
the closing of the Offering shall be concurrent with the close of the
Merger
(the
“
Closing
Date
”);
and
WHEREAS,
the Purchasers, in connection with their intent to purchase Units in the
Offering, shall execute and deliver Subscription Agreements (the “
Subscription
Agreements
”)
and
Investor Questionnaires (the “
Investor
Questionnaires
”)
memorializing the Purchasers’ agreement to purchase and the Company’s agreement
to sell the number of Units set forth therein at the Purchase Price and this
Agreement, pursuant to which the Company will provide certain registration
rights related to the shares of Common Stock underlying the Units (including
the
shares of Common Stock issuable upon exercise of the Investor Warrants) on
the
terms set forth herein (the Subscription Agreements, Investor Questionnaires,
and Registration Rights Agreements are collectively referred to as the
“
Transaction
Documents
”).
NOW,
THEREFORE
,
in
consideration of the mutual promises, representations, warranties, covenants,
and conditions set forth herein, the parties mutually agree as follows:
1.
Certain
Definitions
.
As used
in this Agreement, the following terms shall have the following respective
meanings:
“
Approved
Market
”
means
the NASD Over-The-Counter Bulletin Board, the Nasdaq National Market, the Nasdaq
Capital Market, the New York Stock Exchange, Inc. or the American Stock
Exchange, Inc.
“
Blackout
Period
”
means,
with respect to a registration, a period, in each case commencing on the day
immediately after the Company notifies the Purchasers that they are required,
because of the occurrence of an event of the kind described in Section 4(f)
hereof, to suspend offers and sales of Registrable Securities during which
the
Company, in the good faith judgment of its board of directors, determines
(because of the existence of, or in anticipation of, any acquisition, financing
activity, or other transaction involving the Company, or the unavailability
for
reasons beyond the Company’s control of any required financial statements,
disclosure of information which is in its best interest not to publicly
disclose, or any other event or condition of similar significance to the
Company) that the registration and distribution of the Registrable Securities
to
be covered by such Registration Statement, if any, would be seriously
detrimental to the Company and its stockholders and ending on the earlier of
(1)
the date upon which the material non-public information commencing the Blackout
Period is disclosed to the public or ceases to be material and (2) such time
as
the Company notifies the selling Holders that the Company will no longer delay
such filing of the Registration Statement, recommence taking steps to make
such
Registration Statement effective, or allow sales pursuant to such Registration
Statement to resume;
provided
,
that
(a) the Company shall limit its use of Blackout Periods, in the aggregate,
to 30
Trading Days in any 12-month period and (b) no Blackout Period may commence
sooner than 60 days after the end of a prior Blackout Period.
“
Business
Day
”
means
any day of the year, other than a Saturday, Sunday, or other day on which the
Commission is required or authorized to close.
“
Closing
Date
”
means
the date set forth in the Recitals of this Agreement.
“
Commission
”
means
the Securities and Exchange Commission or any other federal agency at the time
administering the Securities Act.
“
Common
Stock
”
means
the common stock, par value $0.001 per share, of the Company and any and all
shares of capital stock or other equity securities of: (i) the Company which
are
added to or exchanged or substituted for the Common Stock by reason of the
declaration of any stock dividend or stock split, the issuance of any
distribution or the reclassification, readjustment, recapitalization or other
such modification of the capital structure of the Company; and (ii) any other
corporation, now or hereafter organized under the laws of any state or other
governmental authority, with which the Company is merged, which results from
any
consolidation or reorganization to which the Company is a party, or to which
is
sold all or substantially all of the shares or assets of the Company, if
immediately after such merger, consolidation, reorganization or sale, the
Company or the stockholders of the Company own equity securities having in
the
aggregate more than 50% of the total voting power of such other
corporation.
“
Exchange
Act
”
means
the Securities Exchange Act of 1934, as amended, and the rules and regulations
of the Commission promulgated thereunder.
“
Family
Member
”
means
(a) with respect to any individual, such individual’s spouse, any descendants
(whether natural or adopted), any trust all of the beneficial interests of
which
are owned by any of such individuals or by any of such individuals together
with
any organization described in Section 501(c)(3) of the Internal Revenue Code
of
1986, as amended, the estate of any such individual, and any corporation,
association, partnership or limited liability company all of the equity
interests of which are owned by those above described individuals, trusts or
organizations and (b) with respect to any trust, the owners of the beneficial
interests of such trust.
“
Holder
”
means
each Purchaser or any of such Purchaser’s respective successors and Permitted
Assigns who acquire rights in accordance with this Agreement with respect to
the
Registrable Securities directly or indirectly from a Purchaser or from any
Permitted Assignee.
“
Investor
Warrants
”
mean
the
warrants issued in relation to the Purchasers’ purchase of Units in the private
placement offering.
“
Majority
Holders
”
means
at any time Holders representing a majority of the Registrable
Securities.
“
Permitted
Assignee
”
means
(a) with respect to a partnership, its partners or former partners in
accordance with their partnership interests, (b) with respect to a
corporation, its stockholders in accordance with their interest in the
corporation, (c) with respect to a limited liability company, its members
or former members in accordance with their interest in the limited liability
company, (d) with respect to an individual party, any Family Member of such
party, (e) an entity that is controlled by, controls, or is under common control
with a transferor, or (f) a party to this Agreement.
“
Piggyback
Registration
”
means,
in any registration of Common Stock as set forth in Section 3(b), the ability
of
holders of Common Stock to include Registrable Securities in such registration.
The
terms
“
register
,”
“
registered
,”
and
“
registration
”
refer
to a registration effected by preparing and filing a registration statement
in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
“
Registrable
Securities
”
means
the shares of Common Stock issued or issuable to each Purchaser in connection
with such Purchaser’s purchase of Units pursuant to the Subscription Agreements,
including the shares of Common Stock issuable on exercise of the Investor
Warrants issued to the Purchasers in connection with their purchase of Units
but
excluding (i) any Registrable Securities that have been publicly sold or may
be
sold immediately without registration under the Securities Act either pursuant
to Rule 144 of the Securities Act or otherwise; (ii) any Registrable Securities
sold by a person in a transaction pursuant to a registration statement filed
under the Securities Act, or (iii) any Registrable Securities that are at the
time subject to an effective registration statement under the Securities Act.
“
Registration
Default Date
”
means
the date that is 90 days after the Registration Filing Date;
provided
,
however
,
that if
the Registration Statement is subject to review by the Commission, then such
date shall be the date that is 120 days following the Registration Filing
Date.
“
Registration
Default Period
”
means
the period following the Registration Default Date during which any Registration
Event occurs and is continuing.
“
Registration
Event
”
means
the occurrence of any of the following events:
(a)
the
Company fails to file with the Commission the Registration Statement on or
before the Registration Filing Date (as defined in Section 3(a));
(b)
the
Registration Statement is not declared effective by the Commission on or before
the Registration Default Date;
(c)
after
the
SEC Effective Date, sales cannot be made pursuant to the Registration Statement
for any reason (including without limitation by reason of a stop order, or
the
Company’s failure to update the Registration Statement) except as excused
pursuant to Section 3(a); or
(d)
the
Common Stock generally or the Registrable Securities specifically are not listed
or included for quotation on an Approved Market, or trading of the Common Stock
is suspended or halted on the Approved Market, which at the time constitutes
the
principal market for the Common Stock, for more than two full, consecutive
Trading Days;
provided
,
however
, a Registration Event shall not be
deemed to occur if all or substantially all trading in equity securities
(including the Common Stock) is suspended or halted on the Approved Market
for
any length of time.
“
Registration
Filing Date
”
means
the date that is 60 days after the closing of the Merger.
“
Registration
Statement
”
means
the registration statement that the Company is required to file pursuant to
this
Agreement to register the Registrable Securities.
“
Rule
144
”
means
Rule 144 promulgated by the Commission under the Securities Act.
“
Securities
Act
”
means
the Securities Act of 1933, as amended, or any similar federal statute
promulgated in replacement thereof, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the
time.
“
SEC
Effective Date
”
means
the date the Registration Statement is declared effective by the
Commission.
“
Subscription
Agreement
”
means
the Subscription Agreement dated as of the date hereof between the Company
and
the Purchaser setting forth the terms and conditions of the Company’s offer of
Units and the Purchaser’s purchase of Units.
“
Trading
Day
”
means
any day on which the national securities exchange, the Nasdaq Stock Market,
the
NASD Over the Counter Bulletin Board or such other securities market or
quotation system, which at the time constitutes the principal securities market
for the Common Stock, is open for general trading of securities.
“
Units
”
mean
the units offered by the Company and purchased by the Purchaser pursuant to
the
Subscription Agreement which consist of one share of Common Stock and an
Investor Warrant representing the right of the Purchaser to purchase one share
of Common Stock at the exercise price of $1.85 per share.
2.
Term
.
This
Agreement shall continue in full force and effect for a period of two years
from
the Effective Date, unless terminated sooner hereunder.
3.
Registration
.
(a)
Registration
on Form SB-2
.
Not
later than the Registration Filing Date, the Company shall file with the
Commission a Registration Statement on Form SB-2, or other applicable form,
relating to the resale by the Holders of all of the Registrable Securities,
and
the Company shall use its best efforts to cause such Registration Statement
to
be declared effective prior to the Registration Default Date;
provided
,
that
the Company shall not be obligated to effect any such registration,
qualification, or compliance pursuant to this Section, or keep such registration
effective pursuant to the terms hereunder in any particular jurisdiction in
which the Company would be required to qualify to do business as a foreign
corporation or as a dealer in securities under the securities or blue sky laws
of such jurisdiction or to execute a general consent to service of process
in
effecting such registration, qualification or compliance, in each case where
it
has not already done so. Notwithstanding the foregoing, the Company shall
register or qualify such registration under the applicable securities or blue
sky laws in the states of Georgia, Maryland, Michigan, Massachusetts, New
Jersey, New York and Oregon.
(b)
Piggyback
Registration
.
If the
Company shall determine to register for sale for cash any of its Common Stock,
for its own account or for the account of others (other than the Holders),
other
than (i) a registration relating solely to employee benefit plans or securities
issued or issuable to employees, consultants (to the extent the securities
owned
or to be owned by such consultants could be registered on Form S-8) or any
of
their Family Members (including a registration on Form S-8) or (ii) a
registration relating solely to a Commission Rule 145 transaction, a
registration on Form S-4 in connection with a merger, acquisition, divestiture,
reorganization, or similar event, the Company shall promptly give to the Holders
written notice thereof (and in no event shall such notice be given less than
20
calendar days prior to the filing of such registration statement), and shall,
subject to Section 3(c), include as a Piggyback Registration all of the
Registrable Securities specified in a written request delivered by the Holder
within 10 calendar days after receipt of such written notice from the Company.
However, the Company may, without the consent of the Holders, withdraw such
registration statement prior to its becoming effective if the Company or such
other stockholders have elected to abandon the proposal to register the
securities proposed to be registered thereby.
(c)
Underwriting
.
If a
Piggyback Registration is for a registered public offering involving an
underwriting, the Company shall so advise the Holders. In such event, the right
of any Holder to Piggyback Registration shall be conditioned upon such Holder’s
participation in such underwriting and the inclusion of such Holder’s
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to include the Registrable Securities they hold through such
underwriting shall (together with the Company and any other stockholders of
the
Company selling their securities through such underwriting) enter into an
underwriting agreement in customary form with the underwriter selected for
such
underwriting by the Company or the selling stockholders, as applicable.
Notwithstanding any other provision of this Section, if the underwriter or
the
Company determines that marketing factors require a limitation of the number
of
shares of Common Stock or the amount of other securities to be underwritten,
the
underwriter may exclude some or all Registrable Securities from such
registration and underwriting. The Company shall so advise all Holders (except
those Holders who failed to timely elect to include their Registrable Securities
through such underwriting or have indicated to the Company their decision not
to
do so), and indicate to each such Holder the number of shares of Registrable
Securities that may be included in the registration and underwriting, if any.
The number of shares of Registrable Securities to be included in such
registration and underwriting shall be allocated among such Holders as follows:
(i)
If
a
Piggyback Registration is initiated by the Company, the number of shares
that
may be included in the registration and underwriting shall be allocated first
to
the Company and then, subject to obligations and commitments existing as
of the
date hereof, to all selling stockholders, including the Holders, who have
requested to sell in the registration on a pro rata basis according to the
number of shares requested to be included; and
(ii)
If
a
Piggyback Registration is initiated by the exercise of demand registration
rights by a stockholder or stockholders of the Company (other than the Holders),
then the number of shares that may be included in the registration and
underwriting shall be allocated first to such selling stockholders who exercised
such demand and then, subject to obligations and commitments existing as of
the
date hereof, to all other selling stockholders, including the Holders, who
have
requested to sell in the registration, on a pro rata basis according to the
number of shares requested to be included.
No
Registrable Securities excluded from the underwriting by reason of the
underwriter’s marketing limitation shall be included in such registration. If
any Holder disapproves of the terms of any such underwriting, such Holder may
elect to withdraw their Registrable Securities therefrom by delivery of written
notice to the Company and the underwriter. The Registrable Securities so
withdrawn from such underwriting shall also be withdrawn from such registration;
provided
,
however
, that, if by the withdrawal of such Registrable
Securities a greater number of Registrable Securities held by other Holders
may
be included in such registration (up to the maximum of any limitation imposed
by
the underwriters), then the Company shall offer to all Holders who have included
Registrable Securities in the registration the right to include additional
Registrable Securities pursuant to the terms and limitations set forth herein
in
the same proportion used above in determining the underwriter limitation.
(d)
Other
Registrations
.
Before
the SEC Effective Date, the Company will not, without the prior written consent
of the Majority Holders, file or request the acceleration of any other
registration statement filed with the Commission, and during any time subsequent
to the SEC Effective Date when the Registration Statement for any reason is
not
available for use by any Holder for the resale of any Registrable Securities,
the Company shall not, without the prior written consent of the Majority
Holders, file any other registration statement or any amendment thereto with
the
Commission under the Securities Act or request the acceleration of the
effectiveness of any other registration statement previously filed with the
Commission, other than (i) any registration statement on Form S-8 or Form S-4
and (ii) any registration statement or amendment which the Company is required
to file or as to which the Company is required to request acceleration pursuant
to any obligation in effect on the date of execution and delivery of this
Agreement.
(e)
Occurrence
of Registration Event
.
If a
Registration Event occurs, then the Company will make payments to each Purchaser
(a “
Qualified
Purchaser
”),
as
partial liquidated damages for the minimum amount of damages to the Qualified
Purchaser by reason thereof, and not as a penalty, payable in shares of Common
Stock as provided below in this Section 3(e), as follows:
(i)
in
the
case of clause (a) of the definition of Registration Event, (A) if the Company
fails to file the Registration Statement with the Commission by the Registration
Filing Date, 5% of the Registrable Securities then held by a Qualified
Purchaser, (B) if the Company fails to file the Registration Statement with the
Commission within 30 days after the Registration Filing Date (90 days after
the
closing of the Merger), an additional 5% of the Registrable Securities then
held
by a Qualified Purchaser, and (C) if the Company fails to file the Registration
Statement with the Commission within 60 days after the Registration Filing
Date
(120 days after the closing of the Merger), an additional 5% of the Registrable
Securities then held by a Qualified Purchaser;
(ii)
in
the
case of clause (b) of the definition of Registration Event, (A) if the
Registration Statement is not declared effective by the Registration Default
Date, 5% of the Registrable Securities then held by a Qualified Purchaser,
(B)
if the Registration Statement is not declared effective 120 days after the
Registration Filing Date, an additional 5% of the Registrable Securities then
held by a Qualified Purchaser;
provided
,
however
,
that if
the Registration Statement is subject to review by the Commission, such date
shall be 150 days after the Registration Filing Date, and (C) if the
Registration Statement is not declared effective 150 days after the Registration
Filing Date, an additional 5% of the Registrable Securities then held by a
Qualified Purchaser;
provided
,
however
,
that if
the Registration Statement is subject to review by the Commission, such date
shall be 180 days after the Registration Filing Date; or
(iii)
in
the
case of clause (c) or clause (d) of the definition of Registration Event then
the Company will make payments to each Qualified Purchaser, as partial
liquidated damages for the minimum amount of damages to the Qualified Purchaser
by reason thereof, and not as a penalty, at a rate equal to 1.25% of the
Registrable Securities then held by a Qualified Purchaser monthly, for each
calendar month of the Registration Default Period (pro rated for any period
less
than 30 days).
Notwithstanding
the foregoing, the maximum amount of liquidated damages that may be paid to
any
Qualified Purchaser under Section 3(e)(i) and (ii) combined shall be equal
to
thirty percent (30%) of the Registrable Securities held by such Qualified
Purchaser and fifteen percent (15%) under Section 3(e)(iii). Each such payment
shall be due and payable within five days after the occurrence of any such
event
in Section 3(e)(i)(A) - (C) and Section 3(e)(ii)(A) - (C). Each such payment
under Section 3(e)(iii) shall be due and payable within five days after the
end
of each calendar month of the Registration Default Period until the termination
of the Registration Default Period and within five days after such termination.
Except as provided in Section 13(b), such payments shall constitute the
Qualified Purchaser’s exclusive remedy for such events. The Registration Default
Period shall terminate upon (i) the filing of the Registration Statement in
the
case of clause (a) of the definition of Registration Event, (ii) the SEC
Effective Date in the case of clause (b) of the definition of Registration
Event, (iii) the ability of the Qualified Purchaser to effect sales pursuant
to
the Registration Statement in the case of clause (c) of the definition of
Registration Event, (iv) the listing or inclusion and/or trading of the Common
Stock on an Approved Market, as the case may be, in the case of clause (d)
of
the definition of Registration Event, and (v) in the case of the events
described in clauses (b) and (c) of the definition of Registration Event, the
earlier termination of the Registration Default Period. The amounts payable
as
partial liquidated damages pursuant to Section 3(f)(i), (ii) or (iii) shall
be
payable in shares of Common Stock, which shares shall be Registrable Securities
for all purposes of this Agreement.
4.
Registration
Procedures
.
The
Company will keep each Holder reasonably advised as to the filing and
effectiveness of the Registration Statement. At its expense with respect to
the
Registration Statement, the Company will:
(a)
not
less
than five (5) Trading Days prior to the filing of the Registration Statement
and
not less than one (1) Trading Day prior to the filing of any amendment or
supplement thereto (including any document that would be incorporated or deemed
to be incorporated therein by reference), the Company shall (i) furnish to
each
Holder copies of all such documents proposed to be filed, which documents (other
than those incorporated or deemed to be incorporated by reference) will be
subject to the review of such Holders and (ii) cause its officers and directors,
counsel and independent certified public accountants to respond to such
inquiries as shall be necessary, in the reasonable opinion of respective counsel
to each Holder to conduct a reasonable investigation within the meaning of
the
Securities Act. The Company shall not file the Registration Statement or any
amendments or supplements thereto to which the Holders of a majority of the
Registrable Securities shall reasonably object in good faith, provided that,
the
Company is notified of such objection in writing no later than five (5) Trading
Days after the Holders have been so furnished copies of a Registration Statement
or one (1) Trading Day after the Holders have been so furnished copies of any
amendment or supplement thereto;
(b)
prepare
and file with the Commission with respect to the Registrable Securities, a
Registration Statement on Form SB-2, or any other form for which the Company
then qualifies or which counsel for the Company shall deem appropriate and
which
form shall be available for the sale of the Registrable Securities in accordance
with the intended methods of distribution thereof, and use its commercially
reasonable efforts to cause such Registration Statement to become effective
and
shall use its commercially reasonable efforts to keep such Registration
Statement continuously effective under the Securities Act until all Registrable
Securities covered by such Registration Statement have been sold, or may be
sold
without volume restrictions pursuant to Rule 144(k), as determined by counsel
to
the Company pursuant to a written opinion letter to such effect, addressed
and
acceptable to the Company’s transfer agent and the affected Holder
(the
“
Effectiveness
Period
”);
(c)
if
the
Registration Statement is subject to review by the Commission, promptly respond
to all comments and diligently pursue resolution of any comments to the
satisfaction of the Commission;
(d)
prepare
and file with the Commission such amendments and supplements to such
Registration Statement as may be necessary to keep such Registration Statement
effective during the Effectiveness Period;
(e)
furnish,
without charge, to each Holder of Registrable Securities covered by such
Registration Statement (i) a reasonable number of copies of such Registration
Statement (including any exhibits thereto other than exhibits incorporated
by
reference), each amendment and supplement thereto as such Holder may reasonably
request, (ii) such number of copies of the prospectus included in such
Registration Statement (including each preliminary prospectus and any other
prospectus filed under Rule 424 under the Securities Act) as such Holders may
reasonably request, in conformity with the requirements of the Securities Act,
and (iii) such other documents as such Holder may require to consummate the
disposition of the Registrable Securities owned by such Holder, but only during
the Effectiveness Period;
(f)
use
its
commercially reasonable best efforts to register or qualify such registration
under such other applicable securities or blue sky laws of such jurisdictions
as
any Holder of Registrable Securities covered by such Registration Statement
reasonably requests and as may be necessary for the marketability of the
Registrable Securities (such request to be made by the time the applicable
Registration Statement is deemed effective by the Commission) and do any and
all
other acts and things necessary to enable such Holder to consummate the
disposition in such jurisdictions of the Registrable Securities owned by such
Holder;
provided
,
that
the Company shall not be required to (i) qualify generally to do business in
any
jurisdiction where it would not otherwise be required to qualify but for this
paragraph, (ii) subject itself to taxation in any such jurisdiction, or (iii)
consent to general service of process in any such jurisdiction. Notwithstanding
the foregoing, the Company shall register or qualify such registration under
the
applicable securities or blue sky laws in the states of Georgia, Maryland,
Michigan, Massachusetts, New Jersey, New York and Oregon.
(g)
as
promptly as practicable after becoming aware of such event, notify each Holder
of Registrable Securities, the disposition of which requires delivery of a
prospectus relating thereto under the Securities Act, of the happening of any
event, which comes to the Company’s attention, that will after the occurrence of
such event cause the prospectus included in such Registration Statement, if
not
amended or supplemented, to contain an untrue statement of a material fact
or an
omission to state a material fact required to be stated therein or necessary
to
make the statements therein not misleading and the Company shall promptly
thereafter prepare and furnish to such Holder a supplement or amendment to
such
prospectus (or prepare and file appropriate reports under the Exchange Act)
so
that, as thereafter delivered to the purchasers of such Registrable Securities,
such prospectus shall not contain an 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 not misleading, unless suspension of the use of such
prospectus otherwise is authorized herein or in the event of a Blackout Period,
in which case no supplement or amendment need be furnished (or Exchange Act
filing made) until the termination of such suspension or Blackout Period;
(h)
comply,
and continue to comply during the Effectiveness Period, in all material respects
with the Securities Act and the Exchange Act and with all applicable rules
and
regulations of the Commission with respect to the disposition of all securities
covered by such Registration Statement;
(i)
as
promptly as practicable after becoming aware of such event, notify each Holder
of Registrable Securities being offered or sold pursuant to the Registration
Statement of the issuance by the Commission of any stop order or other
suspension of effectiveness of the Registration Statement;
(j)
use
its
best efforts to cause all the Registrable Securities covered by the Registration
Statement to be quoted on the NASD OTC Bulletin Board or such other principal
securities market on which securities of the same class or series issued by
the
Company are then listed or traded;
(k)
provide
a
transfer agent and registrar, which may be a single entity, for the shares
of
Common Stock at all times;
(l)
cooperate
with the Holders of Registrable Securities being offered pursuant to the
Registration Statement to issue and deliver, or cause its transfer agent to
issue and deliver, certificates representing Registrable Securities to be
offered pursuant to the Registration Statement within a reasonable time after
the delivery of certificates representing the Registrable Securities to the
transfer agent or the Company, as applicable, and enable such certificates
to be
in such denominations or amounts as the Holders may reasonably request and
registered in such names as the Holders may request;
(m)
during
the Effectiveness Period, refrain from bidding for or purchasing any Common
Stock or any right to purchase Common Stock or attempting to induce any person
to purchase any such security or right if such bid, purchase or attempt would
in
any way limit the right of the Holders to sell Registrable Securities by reason
of the limitations set forth in Regulation M under the Exchange Act;
and
(n)
take
all
other reasonable actions necessary to expedite and facilitate the disposition
by
the Holders of the Registrable Securities pursuant to the Registration
Statement.
5.
Suspension
of Offers and Sales
.
Each
Holder agrees that, upon receipt of any notice from the Company of the happening
of any event of the kind described in Section 4(f) hereof or of the commencement
of a Blackout Period, such Holder shall discontinue the disposition of
Registrable Securities included in the Registration Statement until such
Holder’s receipt of the copies of the supplemented or amended prospectus
contemplated by Section 4(f) hereof or notice of the end of the Blackout Period,
and, if so directed by the Company, such Holder shall deliver to the Company
(at
the Company’s expense) all copies (including, without limitation, any and all
drafts), other than permanent file copies, then in such Holder’s possession, of
the prospectus covering such Registrable Securities current at the time of
receipt of such notice.
6.
Registration
Expenses
.
The
Company shall pay all expenses in connection with any registration obligation
provided herein, including, without limitation, all registration, filing, stock
exchange fees, printing expenses, all fees and expenses of complying with
securities or blue sky laws, and the fees and disbursements of counsel for
the
Company and of its independent accountants;
provided
that
, in any
underwritten registration, each party shall pay for its own underwriting
discounts and commissions and transfer taxes. Except as provided in this Section
and Section 9, the Company shall not be responsible for the expenses of any
attorney or other advisor employed by a Holder.
7.
Assignment
of Rights
.
No
Holder may assign its rights under this Agreement to any party without the
prior
written consent of the Company;
provided
,
however
, that a Holder
may assign its rights under this Agreement without such consent to a Permitted
Assignee as long as (a) such transfer or assignment is effected in accordance
with applicable securities laws; (b) such transferee or assignee agrees in
writing to become subject to the terms of this Agreement; and (c) the Company
is
given written notice by such Holder of such transfer or assignment, stating
the
name and address of the transferee or assignee and identifying the Registrable
Securities with respect to which such rights are being transferred or
assigned.
8.
Information
by Holder
.
Holders
included in any registration shall furnish to the Company such information
as
the Company may reasonably request in writing regarding such Holders and the
distribution proposed by such Holders.
9.
Indemnification
.
(a)
In
the
event of the offer and sale of Registrable Securities under the Securities
Act,
the Company shall, and hereby does, indemnify and hold harmless, to the fullest
extent permitted by law, each Holder, its directors, officers, partners, each
other person who participates as an underwriter in the offering or sale of
such
securities, and each other person, if any, who controls or is under common
control with such Holder or any such underwriter within the meaning of Section
15 of the Securities Act, against any losses, claims, damages or liabilities,
joint or several, and expenses to which the Holder or any such director,
officer, partner or underwriter or controlling person may become subject under
the Securities Act or otherwise, insofar as such losses, claims, damages,
liabilities or expenses (or actions or proceedings, whether commenced or
threatened, in respect thereof) arise out of or are based upon any untrue
statement of any material fact contained in any Registration Statement prepared
and filed by the Company under which shares of Registrable Securities were
registered under the Securities Act, any preliminary prospectus, final
prospectus or summary prospectus contained therein, or any amendment or
supplement thereto, or any omission to state therein a material fact required
to
be stated therein or necessary to make the statements therein in light of the
circumstances in which they were made not misleading, and the Company shall
reimburse the Holder, and each such director, officer, partner, underwriter
and
controlling person for any legal or any other expenses reasonably incurred
by
them in connection with investigating, defending or settling any such loss,
claim, damage, liability, action or proceeding;
provided
that
the
Company shall not be liable in any such case (i) to the extent that any such
loss, claim, damage, liability (or action or proceeding in respect thereof)
or
expense arises out of or is based upon an untrue statement in or omission from
such Registration Statement, any such preliminary prospectus, final prospectus,
summary prospectus, amendment or supplement in reliance upon and in conformity
with written information furnished to the Company through an instrument duly
executed by or on behalf of such Holder specifically stating that it is for
use
in the preparation thereof or (ii) if the person asserting any such loss, claim,
damage, liability (or action or proceeding in respect thereof) who purchased
the
Registrable Securities that are the subject thereof did not receive a copy
of an
amended preliminary prospectus or the final prospectus (or the final prospectus
as amended or supplemented) at or prior to the written confirmation of the
sale
of such Registrable Securities to such person because of the failure of such
Holder or underwriter to so provide such amended preliminary or final prospectus
and the untrue statement or omission of a material fact made in such preliminary
prospectus was corrected in the amended preliminary or final prospectus (or
the
final prospectus as amended or supplemented). Such indemnity shall remain in
full force and effect regardless of any investigation made by or on behalf
of
the Holders, or any such director, officer, partner, underwriter or controlling
person and shall survive the transfer of such shares by the Holder.
(b)
As
a
condition to including Registrable Securities in any registration statement
filed pursuant to this Agreement, each Holder agrees to be bound by the terms
of
this Section 9 and to indemnify and hold harmless, to the fullest extent
permitted by law, the Company, its directors and officers, and each other
person, if any, who controls the Company within the meaning of Section 15 of
the
Securities Act, against any losses, claims, damages or liabilities, joint or
several, to which the Company or any such director or officer or controlling
person may become subject under the Securities Act or otherwise, insofar as
such
losses, claims, damages or liabilities (or actions or proceedings, whether
commenced or threatened, in respect thereof) that arises out of or is based
upon
an untrue statement in or omission from such Registration Statement, any such
preliminary prospectus, final prospectus, summary prospectus, amendment or
supplement in reliance upon and in conformity with written information furnished
by the Holder through an instrument duly executed by or on behalf of the Holder
specifically stating that it is for use in the preparation thereof, and such
Holder shall reimburse the Company, and each such director, officer, and
controlling person for any legal or other expenses reasonably incurred by them
in connection with investigating, defending, or settling any such loss, claim,
damage, liability, action, or proceeding;
provided
,
however
, that
such indemnity agreement found in this Section 9 shall in no event exceed the
net proceeds from the Offering received by such Holder. Such indemnity shall
remain in full force and effect, regardless of any investigation made by or
on
behalf of the Company or any such director, officer or controlling person and
shall survive the transfer by any Holder of such shares.
(c)
Promptly
after receipt by an indemnified party of notice of the commencement of any
action or proceeding involving a claim referred to in this Section (including
any governmental action), such indemnified party shall, if a claim in respect
thereof is to be made against an indemnifying party, give written notice to
the
indemnifying party of the commencement of such action;
provided
that
the failure of any indemnified party to give
notice as provided herein shall not relieve the indemnifying party of its
obligations under this Section, except to the extent that the indemnifying
party
is actually prejudiced by such failure to give notice. In case any such action
is brought against an indemnified party, unless in the reasonable judgment
of
counsel to such indemnified party a conflict of interest between such
indemnified and indemnifying parties may exist or the indemnified party may
have
defenses not available to the indemnifying party in respect of such claim,
the
indemnifying party shall be entitled to participate in and to assume the defense
thereof, with counsel reasonably satisfactory to such indemnified party and,
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party shall not
be
liable to such indemnified party for any legal or other expenses subsequently
incurred by the latter in connection with the defense thereof, unless in such
indemnified party’s reasonable judgment a conflict of interest between such
indemnified and indemnifying parties arises in respect of such claim after
the
assumption of the defenses thereof or the indemnifying party fails to defend
such claim in a diligent manner, other than reasonable costs of investigation.
Neither an indemnified nor an indemnifying party shall be liable for any
settlement of any action or proceeding effected without its consent. No
indemnifying party shall, without the consent of the indemnified party, consent
to entry of any judgment or enter into any settlement, which does not include
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. Notwithstanding anything to the contrary set forth herein, and
without limiting any of the rights set forth above, in any event any party
shall
have the right to retain, at its own expense, counsel with respect to the
defense of a claim.
(d)
If
an
indemnifying party does or is not permitted to assume the defense of an action
pursuant to Sections 9(c) or in the case of the expense reimbursement obligation
set forth in Sections 9(a) and (b), the indemnification required by Sections
9(a) and (b) hereof shall be made by periodic payments of the amount thereof
during the course of the investigation or defense, as and when bills received
or
expenses, losses, damages, or liabilities are incurred.
(e)
If
the
indemnification provided for in this Section is held by a court of competent
jurisdiction to be unavailable to an indemnified party with respect to any
loss,
liability, claim, damage or expense referred to herein, the indemnifying party,
in lieu of indemnifying such indemnified party hereunder, shall (i) contribute
to the amount paid or payable by such indemnified party as a result of such
loss, liability, claim, damage or expense as is appropriate to reflect the
proportionate relative fault of the indemnifying party on the one hand and
the
indemnified party on the other (determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or omission
relates to information supplied by the indemnifying party or the indemnified
party and the parties’ relative intent, knowledge, access to information and
opportunity to correct or prevent such untrue statement or omission), or (ii)
if
the allocation provided by clause (i) above is not permitted by applicable
law
or provides a lesser sum to the indemnified party than the amount hereinafter
calculated, not only the proportionate relative fault of the indemnifying party
and the indemnified party, but also the relative benefits received by the
indemnifying party on the one hand and the indemnified party on the other,
as
well as any other relevant equitable considerations. No indemnified party guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any indemnifying party
who was not guilty of such fraudulent misrepresentation.
(f)
Other
Indemnification
.
Indemnification similar to that specified in this Section (with appropriate
modifications) shall be given by the Company and each Holder of Registrable
Securities with respect to any required registration or other qualification
of
securities under any federal or state law or regulation or governmental
authority other than the Securities Act.
10.
Rule
144
.
Until
all
Registrable Securities are eligible for sale under Rule 144(k),
the
Company will use its commercially reasonable best efforts to timely file all
reports required to be filed by the Company after the date hereof under the
Securities Act and the Exchange Act and the rules and regulations adopted by
the
Commission thereunder, and if the Company is not required to file reports
pursuant to such sections, 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 shares of Common Stock under Rule
144.
11.
Reservation
of Shares
.
Upon
the occurrence of a Registration Event, t
he
Company
shall reserve and keep available out of its authorized but unissued shares
of
Common
Stock
for
issuance if required pursuant to Section 3(f).
12.
Independent
Nature of Each Purchaser’s Obligations and Rights
.
The
obligations of each Purchaser under this Agreement are several and not joint
with the obligations of any other Purchaser, and each Purchaser shall not be
responsible in any way for the performance of the obligations of any other
Purchaser under this Agreement. Nothing contained herein and no action taken
by
any Purchaser pursuant hereto, shall be deemed to constitute such Purchasers
as
a partnership, an association, a joint venture, or any other kind of entity,
or
create a presumption that the Purchasers are in any way acting in concert or
as
a group with respect to such obligations or the transactions contemplated by
this Agreement. Each Purchaser shall be entitled to independently protect and
enforce its rights, including without limitation the rights arising out of
this
Agreement, and it shall not be necessary for any other Purchaser to be joined
as
an additional party in any proceeding for such purpose.
13.
Miscellaneous
.
(a)
Governing
Law
.
This
Agreement shall be governed by and construed in accordance with the laws of
the
State of New York and the United States of America, both substantive and
remedial, without regard to New York conflicts of law principles.
Any
judicial proceeding brought against either of the parties to this Agreement
or
any dispute arising out of this Agreement or any matter related hereto shall
be
brought in the courts of the State of New York, New York County, or in the
United States District Court for the Southern District of New York and, by
its
execution and delivery of this Agreement, each party to this Agreement accepts
the jurisdiction of such courts. The foregoing consent to jurisdiction shall
not
be deemed to confer rights on any person other than the parties to this
Agreement.
(b)
Remedies
.
In the
event of a breach by the Company or by a Holder of any of their respective
obligations under this Agreement, each Holder or the Company, as the case may
be, in addition to being entitled to exercise all rights granted by law and
under this Agreement, including recovery of damages, shall be entitled to
specific performance of its rights under this Agreement. The Company and each
Holder agree that monetary damages would not provide adequate compensation
for
any losses incurred by reason of a breach by it of any of the provisions of
this
Agreement and hereby further agrees that, in the event of any action for
specific performance in respect of such breach, it shall not assert or shall
waive the defense that a remedy at law would be adequate.
(c)
Successors
and Assigns
.
Except
as otherwise provided herein, the provisions hereof shall inure to the benefit
of, and be binding upon, the successors, Permitted Assigns, executors and
administrators of the parties hereto. In the event the Company merges with,
or
is otherwise acquired by, a direct or indirect subsidiary of a publicly traded
company, the Company shall condition the merger or acquisition on the assumption
by such parent company of the Company’s obligations under this
Agreement.
(d)
No
Inconsistent Agreements
.
Neither
the Company nor any of its Subsidiaries has entered, as of the date hereof,
nor
shall the Company or any of its Subsidiaries, on or after the date of this
Agreement, enter into any agreement with respect to its securities, that would
have the effect of impairing the rights granted to the Holders in this Agreement
or otherwise conflicts with the provisions hereof.
(e)
Entire
Agreement
.
This
Agreement constitutes the full and entire understanding and agreement between
the parties with regard to the subjects hereof.
(f)
Notices,
etc
.
All
notices or other communications which are required or permitted under this
Agreement shall be in writing and sufficient if delivered by hand, by facsimile
transmission, by registered or certified mail, postage pre-paid, by electronic
mail, or by courier or overnight carrier, to the persons at the addresses set
forth below (or at such other address as may be provided hereunder), and shall
be deemed to have been delivered as of the date so delivered:
If
to the
Company before the Closing Date to:
Kreido
Biofuels, Inc.
88
West
44th Avenue
Vancouver,
British Columbia, V5Y 2V1 Canada
Attn:
Stephen B. Jackson, President
If
to the
Company after the Closing Date to:
Kreido
Biofuels, Inc.
1140
Avenida Acaso
Camarillo,
California 93012
Attention:
Dr. Joel Balbien, Chief Executive Officer
Facsimile:
(805) 384-0989
If
to the
Purchasers:
To
each
Purchaser at the address
set
forth
on Exhibit A or at such other address as any party shall have furnished to
the
other parties in writing.
(g)
Delays
or Omissions
.
No
delay or omission to exercise any right, power or remedy accruing to any Holder,
upon any breach or default of the Company under this Agreement, shall impair
any
such right, power or remedy of such Holder nor shall it be construed to be
a
waiver of any such breach or default, or an acquiescence therein, or of any
similar breach or default thereunder occurring; nor shall any waiver of any
single breach or default be deemed a waiver of any other breach or default
theretofore or thereafter occurring. Any waiver, permit, consent or approval
of
any kind or character on the part of any Holder of any breach or default under
this Agreement, or any waiver on the part of any Holder of any provisions or
conditions of this Agreement, must be in writing and shall be effective only
to
the extent specifically set forth in such writing. All remedies, either under
this Agreement, or by law or otherwise afforded to any holder, shall be
cumulative and not alternative.
(h)
Counterparts
.
This
Agreement may be executed in any number of counterparts, each of which shall
be
enforceable against the parties actually executing such counterparts, and all
of
which together shall constitute one instrument. In the event that any signature
is delivered by facsimile transmission, such signature shall create a valid
and
binding obligation of the party executing (or on whose behalf such signature
is
executed) with the same force and effect as if such facsimile signature page
were an original thereof.
(i)
Severability
.
In the
case any provision of this Agreement shall be invalid, illegal or unenforceable,
the validity, legality and enforceability of the remaining provisions shall
not
in any way be affected or impaired thereby.
(j)
Amendments
.
The
provisions of this Agreement may be amended at any time and from time to time,
and particular provisions of this Agreement may be waived, with and only with
an
agreement or consent in writing signed by the Company and the Majority Holders.
The Purchasers acknowledge that by the operation of this Section, the Majority
Holders may have the right and power to diminish or eliminate all rights of
the
Purchasers under this Agreement.
(k)
Limitation
on Subsequent Registration Rights
.
After
the date of this Agreement, the Company shall not, without the prior written
consent of the Majority Holders, enter into any agreement with any holder or
prospective holder of any securities of the Company that would
grant
such holder registration rights senior to those granted to the Holders
hereunder.
[SIGNATURE
PAGES FOLLOW]
This
Registration Rights Agreement is hereby executed as of the date first above
written.
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COMPANY:
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K
REIDO
B
IOFUELS,
I
NC.
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By:
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Name:
Dr. Joel Balbien
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Its:
President
and Chief Executive Officer
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[SIGNATURE
PAGE OF PURCHASER FOLLOWS]
This
Registration Rights Agreement is hereby executed as of the date first above
written.
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PURCHASER
(Individual)
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(Print
Name)
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PURCHASER
(Entity)
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By:
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Name:
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Its:
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Exhibit
A
Purchasers
Purchaser
Name
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Purchaser
Address
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Number
of Units
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EXHIBIT
10.4
SPLIT-OFF
AGREEMENT
SPLIT-OFF
AGREEMENT
,
dated
as of this 12th day of January, 2007 (this “Agreement”), by and among Kreido
Biofuels, Inc. (f/k/a Gemwood Productions, Inc.), a Nevada corporation
(“Seller”),
Victor
Manuel Savceda
(“Buyer”), Gemwood Leaseco, Inc., a Nevada corporation (“Leaseco”), and Kreido
Laboratories, a California corporation (“Kreido”).
RECITALS:
WHEREAS
,
Seller
is
the owner of all of the issued and outstanding capital stock of Leaseco.
Leaseco
is a newly-formed wholly-owned subsidiary of Seller which was organized to
acquire, and has so acquired, the business assets and liabilities previously
held by Seller. Seller has no other businesses or operations;
WHEREAS
,
prior
to the execution of this Agreement, Seller, Kreido, and a newly-formed
wholly-owned California subsidiary of Seller, Kreido Acquisition Corp.
(“Acquisition Corp.”), have entered into an Agreement and Plan of Merger and
Reorganization (the “Merger Agreement”) pursuant to which Acquisition Corp.
merged with and into Kreido with Kreido being the surviving entity (the
“Merger”), and the equity holders of Kreido received shares of common stock in
Seller in exchange for their equity interests in Kreido;
WHEREAS
,
the
execution and delivery of this Agreement was required by Kreido as a condition
subsequent to its execution of the Merger Agreement. The consummation of
the
purchase and sale transaction contemplated by this Agreement was also a
condition subsequent to the completion of the Merger pursuant to the Merger
Agreement. Seller has represented to Kreido in the Merger Agreement that
the
purchase and sale transaction contemplated by this Agreement would be
consummated as soon as practicable following the consummation of the Merger,
and
Kreido relied on such representation in entering into the Merger
Agreement;
WHEREAS
,
Buyer
desires to purchase the Shares (as defined in
Section
1.1
)
from
Seller, and to assume, as between Seller and Buyer, all responsibilities
for any
debts, obligations and liabilities of Leaseco, on the terms and subject to
the
conditions specified in this Agreement; and
WHEREAS
,
Seller
desires to sell and transfer the Shares to the Buyer, on the terms and subject
to the conditions specified in this Agreement.
NOW,
THEREFORE
,
in
consideration of the premises and the covenants, promises, and agreements
herein
set forth and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, intending
legally to be bound, agree as follows.
I.
PURCHASE
AND SALE OF STOCK
.
1.1
Purchased
Shares
.
Subject
to the terms and conditions provided below, Seller shall sell and transfer
to
Buyer and Buyer shall purchase from Seller, on the Closing Date (as defined
in
Section
1.3
),
all
the issued and outstanding shares of capital stock of Leaseco (the
“Shares”).
1.2
Purchase
Price
.
The
purchase price for the Shares shall be the transfer and delivery by Buyer
to
Seller of 19,444,444 shares of common stock of Seller that Buyer owns (the
“Purchase Price Shares”), deliverable as provided in
Section
2.2
.
1.3
Closing
.
The
closing of the transactions contemplated in this Agreement (the “Closing”) shall
take place as soon as practicable following the execution of this Agreement.
The
date on which the Closing occurs shall be referred to herein as the Closing
Date
(the “Closing Date”).
II.
CLOSING
.
2.1
Transfer
of Shares
.
At the
Closing, Seller shall deliver to Buyer certificates representing the Shares,
duly endorsed to Buyer or as directed by Buyer, which delivery shall vest
Buyer
with good and marketable title to all of the issued and outstanding shares
of
capital stock of Leaseco, free and clear of all liens and
encumbrances.
2.2
Payment
of Purchase Price
.
At the
Closing, Buyer shall deliver to Seller a certificate or certificates
representing the Purchase Price Shares duly endorsed to Seller, which delivery
shall vest Seller with good and marketable title to the Purchase Price Shares,
free and clear of all liens and encumbrances.
2.3
Transfer
of Records
.
On or
before the Closing, Seller shall arrange for transfer to Leaseco all existing
corporate books and records in Seller’s possession relating to Leaseco and its
business, including but not limited to all agreements, litigation files,
real
estate files, personnel files and filings with governmental agencies;
provided
,
however
,
when
any such documents relate to both Seller and Leaseco, only copies of such
documents need be furnished. On or before the Closing, Buyer and Leaseco
shall
transfer to Seller all existing corporate books and records in the possession
of
Buyer or Leaseco relating to Seller, including but not limited to all corporate
minute books, stock ledgers, certificates and corporate seals of Seller and
all
agreements, litigation files, real property files, personnel files and filings
with governmental agencies;
provided
,
however
,
when
any such documents relate to both Seller and Leaseco or its business, only
copies of such documents need be furnished.
III.
BUYER’S
REPRESENTATIONS AND WARRANTIES
.
Buyer
represents and warrants to Seller and Kreido that:
3.1
Capacity
and Enforceability
.
Buyer
has the legal capacity to execute and deliver this Agreement and the documents
to be executed and delivered by Buyer at the Closing pursuant to the
transactions contemplated hereby. This Agreement and all such documents
constitute valid and binding agreements of Buyer, enforceable in accordance
with
their terms.
3.2
Compliance
.
Neither
the execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby by Buyer will result in the breach of any
term
or provision of, or constitute a default under, or violate any agreement,
indenture, instrument, order, law or regulation to which Buyer is a party
or by
which Buyer is bound.
3.3
Purchase
for Investment
.
Buyer
is financially able to bear the economic risks of acquiring an interest in
Leaseco and the other transactions contemplated hereby, and has no need for
liquidity in this investment. Buyer has such knowledge and experience in
financial and business matters in general and with respect to businesses
of a
nature similar to the business of Leaseco so as to be capable of evaluating
the
merits and risks of, and making an informed business decision with regard
to,
the acquisition of the Shares. Buyer is acquiring the Shares solely for his
own
account and not with a view to or for resale in connection with any distribution
or public offering thereof, within the meaning of any applicable securities
laws
and regulations, unless such distribution or offering is registered under
the
Securities Act of 1933, as amended (the “Securities Act”), or an exemption from
such registration is available. Buyer has (i) received all the information
he has deemed necessary to make an informed investment decision with respect
to
the acquisition of the Shares; (ii) had an opportunity to make such
investigation as he has desired pertaining to Leaseco and the acquisition
of an
interest therein and to verify the information which is, and has been, made
available to him; and (iii) had the opportunity to ask questions of Seller
concerning Leaseco. Buyer acknowledges that Buyer is an officer and director
of
Seller and Leaseco and, as such, has actual knowledge of the business,
operations and financial affairs of Leaseco. Buyer has received no public
solicitation or advertisement with respect to the offer or sale of the Shares.
Buyer realizes that the Shares are “restricted securities” as that term is
defined in Rule 144 promulgated by the Securities and Exchange Commission
under
the Securities Act, the resale of the Shares is restricted by federal and
state
securities laws and, accordingly, the Shares must be held indefinitely unless
their resale is subsequently registered under the Securities Act or an exemption
from such registration is available for their resale. Buyer understands that
any
resale of the Shares by him must be registered under the Securities Act (and
any
applicable state securities law) or be effected in circumstances that, in
the
opinion of counsel for Leaseco at the time, create an exemption or otherwise
do
not require registration under the Securities Act (or applicable state
securities laws). Buyer acknowledges and consents that certificates now or
hereafter issued for the Shares will bear a legend substantially as
follows:
THE
SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR QUALIFIED UNDER
ANY APPLICABLE STATE SECURITIES LAWS (THE “STATE ACTS”), HAVE BEEN ACQUIRED FOR
INVESTMENT AND MAY NOT BE SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED
EXCEPT PURSUANT TO A REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND
QUALIFICATION UNDER THE STATE ACTS OR EXEMPTIONS FROM SUCH REGISTRATION OR
QUALIFICATION REQUIREMENTS (INCLUDING, IN THE CASE OF THE SECURITIES ACT,
THE
EXEMPTIONS AFFORDED BY SECTION 4(1) OF THE SECURITIES ACT AND RULE 144
THEREUNDER). AS A PRECONDITION TO ANY SUCH TRANSFER, THE ISSUER OF THESE
SECURITIES SHALL BE FURNISHED WITH AN OPINION OF COUNSEL OPINING AS TO THE
AVAILABILITY OF EXEMPTIONS FROM SUCH REGISTRATION AND QUALIFICATION AND/OR
SUCH
OTHER EVIDENCE AS MAY BE SATISFACTORY THERETO THAT ANY SUCH TRANSFER WILL
NOT
VIOLATE THE SECURITIES LAWS.
Buyer
understands that the Shares are being sold to him pursuant to the exemption
from
registration contained in Section 4(1) of the Securities Act and that the
Seller
is relying upon the representations made herein as one of the bases for claiming
the Section 4(1) exemption.
3.4
Liabilities
.
Following the Closing, Seller will have no liability for any debts, liabilities
or obligations of Leaseco or its business or activities, and there are no
outstanding guaranties, performance or payment bonds, letters of credit or
other
contingent contractual obligations that have been undertaken by Seller directly
or indirectly in relation to Leaseco or its business and that may survive
the
Closing.
3.5
Title
to Purchase Price Shares
.
Buyer
is the sole record and beneficial owner of the Purchase Price Shares. At
Closing, Buyer will have good and marketable title to the Purchase Price
Shares,
which Purchase Price Shares are, and at the Closing will be, free and clear
of
all options, warrants, pledges, claims, liens, and encumbrances and any
restrictions or limitations prohibiting or restricting transfer to Seller,
except for restrictions on transfer as contemplated by applicable securities
laws.
IV.
SELLER’S
AND LEASECO’S REPRESENTATIONS AND WARRANTIES
.
Seller
and Leaseco, jointly and severally, represent and warrant to Buyer
that:
4.1
Organization
and Good Standing
.
Seller
is a corporation duly incorporated, validly existing, and in good standing
under
the laws of the State of Nevada. Leaseco is a corporation duly incorporated,
validly existing and in good standing under the laws of the State of
Nevada.
4.2
Authority
and Enforceability
.
The
execution and delivery of this Agreement and the documents to be executed
and
delivered at the Closing pursuant to the transactions contemplated hereby,
and
performance in accordance with the terms hereof and thereof, have been duly
authorized by Seller and all such documents constitute the valid and binding
agreements of Seller enforceable in accordance with their terms.
4.3
Title
to Shares
.
Seller
is the sole record and beneficial owner of the Shares. At Closing, Seller
will
have good and marketable title to the Shares, which Shares are, and at the
Closing will be, free and clear of all options, warrants, pledges, claims,
liens
and encumbrances, and any restrictions or limitations prohibiting or restricting
transfer to Buyer, except for restrictions on transfer as contemplated by
Section
3.3
above.
The Shares constitute all of the issued and outstanding shares of capital
stock
of Leaseco.
4.4
WARN
Act
.
Leaseco
does not have a sufficient number of employees to make it subject to the
Worker
Adjustment and Retraining Notification Act (“WARN Act”).
4.5
Representations
in Merger Agreement
.
Leaseco
represents and warrants that all of the representations and warranties by
Seller, insofar as they relate to Leaseco, contained in the Merger Agreement
are
true and correct.
V.
OBLIGATIONS
OF BUYER PENDING CLOSING
.
Buyer
covenants and agrees that between the date hereof and the Closing:
5.1
Not
Impair Performance
.
Buyer
shall not take any intentional action that would cause the conditions upon
the
obligations of the parties hereto to effect the transactions contemplated
hereby
not to be fulfilled, including, without limitation, taking or causing to
be
taken any action that would cause the representations and warranties made
by any
party herein not to be true, correct and accurate as of the Closing, or in
any
way impairing the ability of Seller to satisfy its obligations as provided
in
Article
VI
.
5.2
Assist
Performance
.
Buyer
shall exercise its reasonable best efforts to cause to be fulfilled those
conditions precedent to Seller’s obligations to consummate the transactions
contemplated hereby which are dependent upon actions of Buyer and to make
and/or
obtain any necessary filings and consents in order to consummate the sale
transaction contemplated by this Agreement.
VI.
OBLIGATIONS
OF SELLER PENDING CLOSING
.
Seller
covenants and agrees that between the date hereof and the Closing:
6.1
Business as Usual
.
Leaseco
shall operate and Seller shall cause Leaseco to operate in accordance with
past
practices and shall use best efforts to preserve its goodwill and the goodwill
of its employees, customers and others having business dealings with Leaseco.
Without limiting the generality of the foregoing, from the date of this
Agreement until the Closing Date, Leaseco shall (a) make all normal and
customary repairs to its equipment, assets and facilities, (b) keep in
force all insurance, (c) preserve in full force and effect all material
franchises, licenses, contracts and real property interests and comply in
all
material respects with all laws and regulations, (d) collect all accounts
receivable and pay all trade creditors in the ordinary course of business
at
intervals historically experienced, and (e) preserve and maintain Leaseco’s
assets in their current operating condition and repair, ordinary wear and
tear
excepted. Leaseco shall not (i) amend, terminate or surrender any material
franchise, license, contract or real property interest, or (ii) sell or
dispose of any of its assets except in the ordinary course of business. Neither
Leaseco nor Buyer shall take or omit to take any action that results in Seller
incurring any liability or obligation prior to or in connection with the
Closing.
6.2
Not
Impair Performance
.
Seller
shall not take any intentional action that would cause the conditions upon
the
obligations of the parties hereto to effect the transactions contemplated
hereby
not to be fulfilled, including, without limitation, taking or causing to
be
taken any action which would cause the representations and warranties made
by
any party herein not to be materially true, correct and accurate as of the
Closing, or in any way impairing the ability of Buyer to satisfy his obligations
as provided in
Article
V
.
6.3
Assist
Performance
.
Seller
shall exercise its reasonable best efforts to cause to be fulfilled those
conditions precedent to Buyer’s obligations to consummate the transactions
contemplated hereby which are dependent upon the actions of Seller and to
work
with Buyer to make and/or obtain any necessary filings and consents. Seller
shall cause Leaseco to comply with its obligations under this
Agreement.
VII.
SELLER’S
AND LEASECO’S CONDITIONS PRECEDENT TO CLOSING
.
The
obligations of Seller and Leaseco to close the transactions contemplated
by this
Agreement are subject to the satisfaction at or prior to the Closing of each
of
the following conditions precedent (any or all of which may be waived by
Seller
and Kreido in writing):
7.1
Representations
and Warranties; Performance
.
All
representations and warranties of Buyer contained in this Agreement shall
have
been true and correct, in all material respects, when made and shall be true
and
correct, in all material respects, at and as of the Closing, with the same
effect as though such representations and warranties were made at and as
of the
Closing. Buyer shall have performed and complied with all covenants and
agreements and satisfied all conditions, in all material respects, required
by
this Agreement to be performed or complied with or satisfied by Buyer at
or
prior to the Closing.
7.2
Additional
Documents
.
Buyer
shall deliver or cause to be delivered such additional documents as may be
necessary in connection with the consummation of the transactions contemplated
by this Agreement and the performance of their obligations
hereunder.
7.3
Release
by Leaseco
.
At the
Closing, Leaseco shall execute and deliver to Seller and Kreido a general
release which in substance and effect releases Seller and Kreido from any
and
all liabilities and obligations that Seller and Kreido may owe to Leaseco
in any
capacity and from any and all claims that Leaseco may have against Seller,
Kreido, or their respective managers, members, officers, directors,
stockholders, employees and agents (other than those arising pursuant to
this
Agreement or any document delivered in connection with this
Agreement).
VIII.
BUYER’S
CONDITIONS PRECEDENT TO CLOSING
.
The
obligation of Buyer to close the transactions contemplated by this Agreement
is
subject to the satisfaction at or prior to the Closing of the following
condition precedent (which may be waived by Buyer in writing):
8.1
Representations
and Warranties; Performance
.
All
representations and warranties of Seller and Leaseco contained in this Agreement
shall have been true and correct, in all material respects, when made and
shall
be true and correct, in all material respects, at and as of the Closing with
the
same effect as though such representations and warranties were made at and
as of
the Closing. Seller and Leaseco shall have performed and complied with all
covenants and agreements and satisfied all conditions, in all material respects,
required by this Agreement to be performed or complied with or satisfied
by them
at or prior to the Closing.
IX.
OTHER
AGREEMENTS
.
9.1
Expenses
.
Each
party hereto shall bear its expenses separately incurred in connection with
this
Agreement and with the performance of its obligations hereunder.
9.2
Confidentiality
.
The
parties hereto shall not make any public announcements concerning this
transaction other than in accordance with mutual agreement reached prior
to any
such announcement(s) and other than as may be required by applicable law
or
judicial process. If for any reason the transactions contemplated hereby
are not
consummated, then Buyer shall return any information received by Buyer from
Seller or Leaseco, and Buyer shall cause all confidential information obtained
by Buyer concerning Leaseco and its business to be treated as such.
9.3
Brokers’
Fees
.
No
party to this Agreement has employed the services of a broker and each agrees
to
indemnify the other against all claims of any third parties for fees and
commissions of any brokers claiming a fee or commission related to the
transactions contemplated hereby.
9.4
Access
to Information Post-Closing; Cooperation
.
(a)
Following
the Closing, Buyer and Leaseco shall afford to Seller and its authorized
accountants, counsel, and other designated representatives reasonable access
(and including using reasonable efforts to give access to persons or firms
possessing information) and duplicating rights during normal business hours
to
allow records, books, contracts, instruments, computer data and other data
and
information (collectively, “Information”) within the possession or control of
Buyer or Leaseco insofar as such access is reasonably required by Seller.
Information may be requested under this
Section
9.4(a)
for,
without limitation, audit, accounting, claims, litigation and tax purposes,
as
well as for purposes of fulfilling disclosure and reporting obligations and
performing this Agreement and the transactions contemplated hereby. No files,
books or records of Leaseco existing at the Closing Date shall be destroyed
by
Buyer or Leaseco after Closing but prior to the expiration of any period
during
which such files, books or records are required to be maintained and preserved
by applicable law without giving the Seller at least 30 days’ prior written
notice, during which time Seller shall have the right to examine and to remove
any such files, books and records prior to their destruction.
(b)
Following
the Closing, Seller shall afford to Leaseco and its authorized accountants,
counsel and other designated representatives reasonable access (including
using
reasonable efforts to give access to persons or firms possessing information)
and duplicating rights during normal business hours to Information within
Seller’s possession or control relating to the business of Leaseco. Information
may be requested under this
Section
9.4(b)
for,
without limitation, audit, accounting, claims, litigation and tax purposes
as
well as for purposes of fulfilling disclosure and reporting obligations and
for
performing this Agreement and the transactions contemplated hereby. No files,
books or records of Leaseco existing at the Closing Date shall be destroyed
by
Seller after Closing but prior to the expiration of any period during which
such
files, books or records are required to be maintained and preserved by
applicable law without giving the Buyer at least 30 days’ prior written notice,
during which time Buyer shall have the right to examine and to remove any
such
files, books and records prior to their destruction.
(c)
At
all
times following the Closing, Seller, Buyer and Leaseco shall use reasonable
efforts to make available to the other party on written request, the current
and
former officers, directors, employees and agents of Seller or Leaseco for
any of
the purposes set forth in
Section
9.4(a) or (b)
above or
as witnesses to the extent that such persons may reasonably be required in
connection with any legal, administrative or other proceedings in which Seller
or Leaseco may from time to be involved.
(d)
The
party
to whom any Information or witnesses are provided under this
Section
9.4
shall
reimburse the provider thereof for all out-of-pocket expenses actually and
reasonably incurred in providing such Information or witnesses.
(e)
Seller,
Buyer, Leaseco and their respective employees and agents shall each hold
in
strict confidence all Information concerning the other party in their possession
or furnished by the other or the other’s representative pursuant to this
Agreement with the same degree of care as such party utilizes as to such
party’s
own confidential information (except to the extent that such Information
is
(i) in the public domain through no fault of such party or (ii) later
lawfully acquired from any other source by such party), and each party shall
not
release or disclose such Information to any other person, except such party’s
auditors, attorneys, financial advisors, bankers, other consultants and advisors
or persons with whom such party has a valid obligation to disclose such
Information, unless compelled to disclose such Information by judicial or
administrative process or, as advised by its counsel, by other requirements
of
law.
(f)
Seller,
Buyer and Leaseco shall each use their best efforts to forward promptly to
the
other party all notices, claims, correspondence and other materials which
are
received and determined to pertain to the other party.
9.5
Guarantees,
Surety Bonds and Letter of Credit Obligations
.
In the
event that Seller is obligated for any debts, obligations or liabilities
of
Leaseco by virtue of any outstanding guarantee, performance or surety bond
or
letter of credit provided or arranged by Seller on or prior to the Closing
Date,
Buyer and Leaseco shall use best efforts to cause to be issued replacements
of
such bonds, letters of credit and guarantees and to obtain any amendments,
novations, releases and approvals necessary to release and discharge fully
Seller from any liability thereunder following the Closing. Buyer and Leaseco,
jointly and severally, shall be responsible for, and shall indemnify, hold
harmless and defend Seller from and against, any costs or losses incurred
by
Seller arising from such bonds, letters of credits and guarantees and any
liabilities arising therefrom and shall reimburse Seller for any payments
that
Seller may be required to pay pursuant to enforcement of its obligations
relating to such bonds, letters of credit and guarantees.
9.6
Filings
and Consents
.
Buyer,
at its risk, shall determine what, if any, filings and consents must be made
and/or obtained prior to Closing to consummate the purchase and sale of the
Shares. Buyer shall indemnify the Seller Indemnified Parties (as defined
in
Section
11.1
below)
against any Losses (as defined in
Section
11.1
below)
incurred by any Seller Indemnified Parties by virtue of the failure to make
and/or obtain any such filings or consents. Recognizing that the failure
to make
and/or obtain any filings or consents may cause Seller to incur Losses or
otherwise adversely affect Seller, Buyer and Leaseco confirm that the provisions
of this
Section
9.6
will not
limit Seller’s right to treat such failure as the failure of a condition
precedent to Seller’s obligation to close pursuant to
Article
VII
above.
9.7
Insurance
.
Buyer
acknowledges that on the Closing Date, effective as of the Closing, all
insurance coverage and bonds provided by Seller for Leaseco, and all
certificates of insurance evidencing that Leaseco maintains any required
insurance by virtue of insurance provided by Seller, will terminate with
respect
to any insured damages resulting from matters occurring subsequent to Closing.
9.8
Agreements
Regarding Taxes
.
(a)
Tax
Sharing Agreements
.
Any tax
sharing agreement between Seller and Leaseco is terminated as of the Closing
Date and will have no further effect for any taxable year (whether the current
year, a future year, or a past year).
(b)
Returns
for Periods Through the Closing Date
.
Seller
will include the income and loss of Leaseco (including any deferred income
triggered into income by Reg. §1.1502-13 and any excess loss accounts taken into
income under Reg. §1.1502-19) on Seller’s consolidated federal income tax
returns for all periods through the Closing Date and pay any federal income
taxes attributable to such income. Seller and Leaseco agree to allocate income,
gain, loss, deductions and credits between the period up to Closing (the
“Pre-Closing Period”) and the period after Closing (the “Post-Closing Period”)
based on a closing of the books of Leaseco and both Seller and Leaseco agree
not
to make an election under Reg. §1.1502-76(b)(2)(ii) to ratably allocate the
year’s items of income, gain, loss, deduction and credit. Seller, Leaseco and
Buyer agree to report all transactions not in the ordinary course of business
occurring on the Closing Date after Buyer’s purchase of the Shares on Leaseco’s
tax returns to the extent permitted by Reg. §1.1502-76(b)(1)(ii)(B). Buyer
agrees to indemnify Seller for any additional tax owed by Seller (including
tax
owned by Seller due to this indemnification payment) resulting from any
transaction engaged in by Leaseco during the Pre-Closing Period or on the
Closing Date after Buyer’s purchase of the Shares. Leaseco will furnish tax
information to Seller for inclusion in Seller’s consolidated federal income tax
return for the period which includes the Closing Date in accordance with
Leaseco’s past custom and practice.
(c)
Audits
.
Seller
will allow Leaseco and its counsel to participate at Leaseco’s expense in any
audits of Seller’s consolidated federal income tax returns to the extent that
such audit raises issues that relate to and increase the tax liability of
Leaseco. Seller shall have the absolute right, in its sole discretion, to
engage
professionals and direct the representation of Seller in connection with
any
such audit and the resolution thereof, without receiving the consent of Buyer
or
Leaseco or any other party acting on behalf of Buyer or Leaseco, provided
that
Seller will not settle any such audit in a manner which would materially
adversely affect Leaseco after the Closing Date unless such settlement would
be
reasonable in the case of a person that owned Leaseco both before and after
the
Closing Date. In the event that after Closing any tax authority informs the
Buyer or Leaseco of any notice of proposed audit, claim, assessment, or other
dispute concerning an amount of taxes which pertain to the Seller, or to
Leaseco
during the period prior to Closing, Buyer or Leaseco must promptly notify
the
Seller of the same within 15 calendar days of the date of the notice from
the
tax authority. In the event Buyer or Leaseco does not notify the Seller within
such 15 day period, Buyer and Leaseco, jointly and severally, will indemnify
the
Seller for any incremental interest, penalty or other assessments resulting
from
the delay in giving notice. To the extent of any conflict or inconsistency,
the
provisions of this
Section 9.8
shall control over the provisions of
Section 11.2
below.
(d)
Cooperation
on Tax Matters
.
Buyer,
Seller and Leaseco shall cooperate fully, as and to the extent reasonably
requested by the other party, in connection with the filing of tax returns
pursuant to this Section and any audit, litigation or other proceeding with
respect to taxes. Such cooperation shall include the retention and (upon
the
other party’s request) the provision of records and information which are
reasonably relevant to any such audit, litigation or other proceeding and
making
employees available on a mutually convenient basis to provide additional
information and explanation of any material provided hereunder. Leaseco shall
(i) retain all books and records with respect to tax matters pertinent to
Leaseco relating to any taxable period beginning before the Closing Date
until
the expiration of the statute of limitations (and, to the extent notified
by
Seller, any extensions thereof) of the respective taxable periods, and to
abide
by all record retention agreements entered into with any taxing authority,
and
(ii) give Seller reasonable written notice prior to transferring,
destroying or discarding any such books and records and, if the Seller so
requests, Buyer agrees to cause Leaseco to allow Seller to take possession
of
such books and records.
9.9
ERISA
.
Effective as of the Closing Date, Leaseco shall terminate its participation
in,
and withdraw from, all employee benefit plans sponsored by Seller, and Seller
and Buyer shall cooperate fully in such termination and withdrawal. Without
limitation, Leaseco shall be solely responsible for (i) all liabilities
under those employee benefit plans notwithstanding any status as an employee
benefit plan sponsored by Seller, and (ii) all liabilities for the payment
of vacation pay, severance benefits, and similar obligations, including,
without
limitation, amounts which are accrued but unpaid as of the Closing Date with
respect thereto. Buyer and Leaseco acknowledge that Leaseco is solely
responsible for providing continuing health coverage, as required under the
Consolidated Omnibus Reconciliation Act of 1985, as amended (“COBRA”), to each
person, if any, participating in an employee benefit plan subject to COBRA
with
respect to such employee benefit plan as of the Closing Date, including,
without
limitation, any person whose employment with Leaseco is terminated after
the
Closing Date.
X.
TERMINATION
.
This
Agreement may be terminated at, or at any time prior to, the Closing by mutual
written consent of Seller, Buyer and Kreido.
If
this
Agreement is terminated as provided herein, it shall become wholly void and
of
no further force and effect and there shall be no further liability or
obligation on the part of any party except to pay such expenses as are required
of such party.
XI.
INDEMNIFICATION
.
11.1
Indemnification
by Buyer
.
Buyer
covenants and agrees to indemnify, defend, protect and hold harmless Seller,
and
its officers, directors, employees, stockholders, agents, representatives
and
affiliates (collectively, together with Seller, the “Seller Indemnified
Parties”) at all times from and after the date of this Agreement from and
against all losses, liabilities, damages, claims, actions, suits, proceedings,
demands, assessments, adjustments, costs and expenses (including specifically,
but without limitation, reasonable attorneys’ fees and expenses of
investigation), whether or not involving a third party claim and regardless
of
any negligence of any Seller Indemnified Party (collectively, “Losses”),
incurred by any Seller Indemnified Party as a result of or arising from
(i) any breach of the representations and warranties of Buyer set forth
herein or in certificates delivered in connection herewith, (ii) any breach
or nonfulfillment of any covenant or agreement (including any other agreement
of
Buyer to indemnify Seller set forth in this Agreement) on the part of Buyer
under this Agreement, (iii) any debt, liability or obligation of Leaseco,
(iv) the conduct and operations of the business of Leaseco whether before
or after Closing, (v) claims asserted against Leaseco whether before or
after Closing, or (vi) any federal or state income tax payable by Seller
and attributable to the transaction contemplated by this Agreement.
11.2
Third
Party Claims
.
(a)
Defense
.
If any
claim or liability (a “Third-Party Claim”) should be asserted against any of the
Seller Indemnified Parties (the “Indemnitee”) by a third party after the Closing
for which Buyer has an indemnification obligation under the terms of
Section
11.1
,
then
the Indemnitee shall notify Buyer and Leaseco (the “Indemnitor”) within 20 days
after the Third-Party Claim is asserted by a third party (said notification
being referred to as a “Claim Notice”) and give the Indemnitor a reasonable
opportunity to take part in any examination of the books and records of the
Indemnitee relating to such Third-Party Claim and to assume the defense of
such
Third-Party Claim and in connection therewith and to conduct any proceedings
or
negotiations relating thereto and necessary or appropriate to defend the
Indemnitee and/or settle the Claim. The expenses (including reasonable
attorneys’ fees) of all negotiations, proceedings, contests, lawsuits or
settlements with respect to any Third-Party Claim shall be borne by the
Indemnitor. If the Indemnitor agrees to assume the defense of any Third-Party
Claim in writing within 20 days after the Claim Notice of such Third-Party
Claim
has been delivered, through counsel reasonably satisfactory to Indemnitee,
then
the Indemnitor shall be entitled to control the conduct of such defense,
and any
decision to settle such Third-Party Claim, and shall be responsible for any
expenses of the Indemnitee in connection with the defense of such Third-Party
Claim so long as the Indemnitor continues such defense until the final
resolution of such Third-Party Claim. The Indemnitor shall be responsible
for
paying all settlements made or judgments entered with respect to any Third-Party
Claim the defense of which has been assumed by the Indemnitor. Except as
provided on subsection (b) below, both the Indemnitor and the Indemnitee
must
approve any settlement of a Third-Party Claim. A failure by the Indemnitee
to
timely give the Claim Notice shall not excuse Indemnitor from any
indemnification liability except only to the extent that the Indemnitor is
materially and adversely prejudiced by such failure.
(b)
Failure
to Defend
.
If the
Indemnitor shall not agree to assume the defense of any Third-Party Claim
in
writing within 20 days after the Claim Notice of such Third-Party Claim has
been
delivered, or shall fail to continue such defense until the final resolution
of
such Third-Party Claim, then the Indemnitee may defend against such Third-Party
Claim in such manner as it may deem appropriate and the Indemnitee may settle
such Third-Party Claim on such terms as it may deem appropriate. The Indemnitor
shall promptly reimburse the Indemnitee for the amount of all settlement
payments and expenses, legal and otherwise, incurred by the Indemnitee in
connection with the defense or settlement of such Third-Party Claim. If no
settlement of such Third-Party Claim is made, then the Indemnitor shall satisfy
any judgment rendered with respect to such Third-Party Claim before the
Indemnitee is required to do so, and pay all expenses, legal or otherwise,
incurred by the Indemnitee in the defense against such Third-Party
Claim.
11.3
Non-Third-Party
Claims
.
Upon
discovery of any claim for which Buyer has an indemnification obligation
under
the terms of this
Section
11.3
which
does not involve a claim by a third party against the Indemnitee, the Indemnitee
shall give prompt notice to Buyer of such claim and, in any case, shall give
Buyer such notice within 30 days of such discovery. A failure by Indemnitee
to
timely give the foregoing notice to Buyer shall not excuse Buyer from any
indemnification liability except to the extent that Buyer is materially and
adversely prejudiced by such failure.
11.4
Survival
.
Except
as otherwise provided in this
Section
11.4
,
all
representations and warranties made by Buyer, Leaseco and Seller in connection
with this Agreement shall survive the Closing. Anything in this Agreement
to the
contrary notwithstanding, the liability of all Indemnitors under this
Article
XI
shall
terminate on the third (3
rd
)
anniversary of the Closing Date, except with respect to (a) liability for
any item as to which, prior to the third (3
rd
)
anniversary of the Closing Date, any Indemnitee shall have asserted a Claim
in
writing, which Claim shall identify its basis with reasonable specificity,
in
which case the liability for such Claim shall continue until it shall have
been
finally settled, decided or adjudicated, (b) liability of any party for
Losses for which such party has an indemnification obligation, incurred as
a
result of such party’s breach of any covenant or agreement to be performed by
such party after the Closing, (c) liability of Buyer for Losses incurred by
a Seller Indemnified Party due to breaches of their representations and
warranties in
Article
III
of this
Agreement, and (d) liability of Buyer for Losses arising out of Third-Party
Claims for which Buyer has an indemnification obligation, which liability
shall
survive until the statute of limitation applicable to any third party’s right to
assert a Third-Party Claim bars assertion of such claim.
XII.
MISCELLANEOUS
.
12.1
Notices
.
All
notices and communications required or permitted hereunder shall be in writing
and deemed given when received by means of the United States mail, addressed
to
the party to be notified, postage prepaid and registered or certified with
return receipt requested, or personal delivery, or overnight courier, as
follows:
(a)
If
to
Seller, addressed to:
Kreido
Biofuels, Inc.
1140
Avenida Acaso
Camarrillo,
CA 93012
Attn:
Joel A. Balbien, Chief Executive Officer
Facsimile:
(805) 384-0989
With
a
copy to (which shall not constitute notice hereunder):
McGuireWoods
LLP
1345
Avenue of the Americas
New
York,
NY 10105
Attn:
Louis W. Zehil, Esq.
Facsimile:
(212) 548-2175
Additional
copy to (which shall not constitute notice hereunder):
DLA
Piper
LLP
203
North
LaSalle Street, Suite 1900
Chicago,
Illinois 60601
Attn:
John H. Heuberger, Esq.
Facsimile:
(312) 236-7516
(b)
If
to
Buyer or Leaseco, addressed to:
Victor
Manuel Savceda
C
Alta
Mar 157 Fracc Baja Del Mar
Playas
de
Rosarito BC 22710 Mexico
With
a
copy to (which shall not constitute notice hereunder):
Gottbetter
& Partners, LLP
488
Madison Avenue, 12
th
Floor
New
York,
New York 10022
Attn:
Adam S. Gottbetter, Esq.
Facsimile:
(212) 400-6901
(c)
If
to
Kreido, addressed to:
Kreido
Laboratories
1140
Avenida Acaso
Camarrillo,
CA 93012
Attn:
Joel A. Balbien, Chief Executive Officer
Facsimile:
(805) 384-0989
With
a
copy to (which shall not constitute notice hereunder):
McGuireWoods
LLP
1345
Avenue of the Americas
New
York,
NY 10105
Attn:
Louis W. Zehil, Esq.
Facsimile:
(212) 548-2175
Additional
copy to (which shall not constitute notice hereunder):
DLA
Piper
LLP
203
North
LaSalle Street, Suite 1900
Chicago,
Illinois 60601
Attn:
John H. Heuberger, Esq.
(312)
236-7516
or
to
such other address as any party hereto shall specify pursuant to this
Section
12.1
from
time to time.
12.2
Exercise
of Rights and Remedies
.
Except
as otherwise provided herein, no delay of or omission in the exercise of
any
right, power or remedy accruing to any party as a result of any breach or
default by any other party under this Agreement shall impair any such right,
power or remedy, nor shall it be construed as a waiver of or acquiescence
in any
such breach or default, or of any similar breach or default occurring later;
nor
shall any waiver of any single breach or default be deemed a waiver of any
other
breach or default occurring before or after that waiver.
12.3
Time
.
Time is
of the essence with respect to this Agreement.
12.4
Reformation
and Severability
.
In case
any provision of this Agreement shall be invalid, illegal or unenforceable,
it
shall, to the extent possible, be modified in such manner as to be valid,
legal
and enforceable but so as to most nearly retain the intent of the parties,
and
if such modification is not possible, such provision shall be severed from
this
Agreement, and in either case the validity, legality and enforceability of
the
remaining provisions of this Agreement shall not in any way be affected or
impaired thereby.
12.5
Further
Acts
.
Seller,
Buyer and Leaseco shall execute any and all documents and perform such other
acts which may be reasonably necessary to effectuate the purposes of this
Agreement.
12.6
Entire
Agreement; Amendments
.
This
Agreement contains the entire understanding of the parties relating to the
subject matter contained herein. This Agreement cannot be amended or changed
except through a written instrument signed by all of the parties hereto,
including Kreido. No provisions of this Agreement or any rights hereunder
may be
waived by any party without the prior written consent of Kreido.
12.7
Assignment
.
No
party may assign his or its rights or obligations hereunder, in whole or
in
part, without the prior written consent of the other parties.
12.8
Governing
Law
.
This
Agreement shall be governed by and construed in accordance with the laws
of the
State of New York, without giving effect to principles of conflicts or choice
of
laws thereof.
12.9
Counterparts
.
This
Agreement may be executed in one or more counterparts, with the same effect
as
if all parties had signed the same document. Each such counterpart shall
be an
original, but all such counterparts taken together shall constitute a single
agreement. In the event that any signature is delivered by facsimile
transmission, such signature shall create a valid and binding obligation
of the
party executing (or on whose behalf such signature is executed) the same
with
the same force and effect as if such facsimile signature page was an original
thereof.
12.10
Section
Headings and Gender
.
The
Section headings used herein are inserted for reference purposes only and
shall
not in any way affect the meaning or interpretation of this Agreement. All
personal pronouns used in this Agreement shall include the other genders,
whether used in the masculine, feminine or neuter, and the singular shall
include the plural, and
vice
versa
,
whenever and as often as may be appropriate.
12.11
Specific
Performance; Remedies
.
Each of
Seller, Buyer and Leaseco acknowledges and agrees that Kreido would be damaged
irreparably if any provision of this Agreement is not performed in accordance
with its specific terms or is otherwise breached. Accordingly, each of Seller,
Buyer and Leaseco agrees that Kreido will be entitled to seek an injunction
or
injunctions to prevent breaches of the provisions of this Agreement and to
enforce specifically this Agreement and its terms and provisions in any action
instituted in any court of the United States or any state thereof having
jurisdiction over the parties and the matter, subject to
Section
12.8
,
in
addition to any other remedy to which they may be entitled, at law or in
equity.
Except as expressly provided herein, the rights, obligations and remedies
created by this Agreement are cumulative and in addition to any other rights,
obligations or remedies otherwise available at law or in equity, and nothing
herein will be considered an election of remedies
.
12.12
Submission
to Jurisdiction; Process Agent; No Jury Trial
.
(a)
Each
party to the Agreement hereby submits to the jurisdiction of any state or
federal court sitting in the State of New York, in any action arising out
of or
relating to this Agreement and agrees that all claims in respect of the action
may be heard and determined in any such court. Each party to the Agreement
also
agrees not to bring any action arising out of or relating to this Agreement
in
any other court. Each party to the Agreement agrees that a final judgment
in any
action so brought will be conclusive and may be enforced by action on the
judgment or in any other manner provided at law or in equity. Each party
to the
Agreement waives any defense of inconvenient forum to the maintenance of
any
action so brought and waives any bond, surety, or other security that might
be
required of any other Party with respect thereto.
(b)
EACH
PARTY TO THE AGREEMENT HEREBY AGREES TO WAIVE HIS OR HER RIGHTS TO JURY TRIAL
OF
ANY DISPUTE BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OTHER AGREEMENTS
RELATING TO THE SUBJECT MATTER OF THIS AGREEMENT OR ANY DEALINGS AMONG THEM
RELATING TO THE TRANSACTIONS CONTEMPLATED HEREBY. The scope of this waiver
is
intended to be all encompassing of any and all actions that may be filed
in any
court and that relate to the subject matter of the transactions, including,
contract claims, tort claims, breach of duty claims, and all other common
law
and statutory claims. Each party to the Agreement hereby acknowledges that
this
waiver is a material inducement to enter into a business relationship and
that
they will continue to rely on the waiver in their related future dealings.
Each
party to the Agreement further represents and warrants that it has reviewed
this
waiver with its legal counsel, and that each knowingly and voluntarily waives
its jury trial rights following consultation with legal counsel. NOTWITHSTANDING
ANYTHING TO THE CONTRARY HEREIN, THIS WAIVER IS IRREVOCABLE, MEANING THAT
IT MAY
NOT BE MODIFIED ORALLY OR IN WRITING, AND THE WAIVER WILL APPLY TO ANY
AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT OR TO
ANY
OTHER DOCUMENTS OR AGREEMENTS RELATING HERETO. In the event of commencement
of
any action, this Agreement may be filed as a written consent to trial by
a
court.
12.13
Construction
.
The
parties hereto have participated jointly in the negotiation and drafting
of this
Agreement. If an ambiguity or question of intent or interpretation arises,
this
Agreement will be construed as if drafted jointly by the parties hereto and
no
presumption or burden of proof will arise favoring or disfavoring any party
because of the authorship of any provision of this Agreement. Any reference
to
any federal, state, local, or foreign law will be deemed also to refer to
law as
amended and all rules and regulations promulgated thereunder, unless the
context
requires otherwise. The words “include,” “includes,” and “including” will be
deemed to be followed by “without limitation.” The words “this Agreement,”
“herein,” “hereof,” “hereby,” “hereunder,” and words of similar import refer to
this Agreement as a whole and not to any particular subdivision unless expressly
so limited. The parties hereto intend that each representation, warranty,
and
covenant contained herein will have independent significance. If any party
hereto has breached any representation, warranty, or covenant contained herein
in any respect, the fact that there exists another representation, warranty
or
covenant relating to the same subject matter (regardless of the relative
levels
of specificity) which that party has not breached will not detract from or
mitigate the fact that such party is in breach of the first representation,
warranty, or covenant.
[Signature
page follows this page]
IN
WITNESS WHEREOF
,
the
parties hereto have hereunto set their hands as of the day and year first
above
written.
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KREIDO
BIOFUELS, INC.
|
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|
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By:
|
/s/ Stephen B. Jackson
|
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Name:
Stephen
B. Jackson
|
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Title:
President
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GEMWOOD LEASECO,
INC.
|
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By:
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/s/ Stephen B. Jackson
|
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Name:
Stephen
B. Jackson
|
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Title
President
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BUYER
|
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By:
|
/s/
Victor Manuel Savceda
|
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Victor
Manuel Savceda
|
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KREIDO
LABORATORIES
|
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By:
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/s/ Joel A. Balbien
|
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Name:
Joel
A. Balbien
|
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Title:
Chief
Executive Officer
|
EXHIBIT
10.5
EMPLOYMENT
AGREEMENT
THIS
EMPLOYMENT AGREEMENT (this “
Agreement
”)
is
made, entered into and effective as of November 1, 2006 (the “
Effective
Date
”),
between
KREIDO
LABORATORIES
(the
“
Company
”),
and
JOEL
BALBIEN, Ph.D.
,
an
individual (the “
Executive
”).
WHEREAS,
the Company and the Executive wish to memorialize the terms and conditions
of
the Executive’s employment by the Company in the positions of President and
Chief Executive Officer;
NOW,
THEREFORE, in consideration of the covenants and promises contained herein,
the
Company and the Executive agree as follows:
1.
Employment
Period
.
The
Company offers to employ the Executive, and the Executive agrees to be employed
by Company, on an "at will" basis, in accordance with the terms and subject
to
the conditions of this Agreement, commencing on the Effective Date and
terminating on the first (1
st
)
anniversary of the Effective Date (the “
Scheduled
Termination Date
”),
unless terminated in accordance with the provisions of
Section
12
below,
in which case the provisions of
Section
12
shall
control;
provided
,
however
,
that
unless either party provides the other party with written notice of his or
its
intention not to renew this Agreement at least 90 days prior to the expiration
of the initial term or any renewal term of this Agreement (as the case may
be),
this Agreement shall automatically renew for additional one-year periods
commencing on the day after such expiration date. The Executive affirms that
no
obligation exists between the Executive and any other entity which would prevent
or impede the Executive’s immediate and full performance of every obligation of
this Agreement. The Company may terminate this Agreement, anything to the
contrary notwithstanding, without any further compensation due to the Executive
in the event that the Company does not close a financing of at least
TWENTY-FIVE
MILLION DOLLARS ($25,000,000)
prior to
January 15, 2007.
2.
Position
and Duties
.
During
the term of the Executive’s employment hereunder, the Executive shall continue
to serve in, and assume duties and responsibilities consistent with, the
positions of President and Chief Executive Officer, unless and until otherwise
instructed by the Company. The Executive agrees to devote to the Company
substantially all of his working time, skill, energy and best business efforts
during the term of his employment with the Company, and the Executive shall
not
engage in business activities outside the scope of his employment with the
Company if such activities would detract from or interfere with his ability
to
fulfill his responsibilities and duties under this Agreement or require
substantial amounts of his time or of his services, or which would constitute
a
conflict of interest by the Executive.
3.
No
Conflicts
.
The
Executive covenants and agrees that for so long as he is employed by the
Company, he shall inform the Company of each and every future business
opportunity presented to the Executive that arises within the scope of the
Business of the Company (as defined below) and would be feasible for the
Company, and that he will not, directly or indirectly, exploit any such
opportunity for his own account.
4.
Hours
of Work
.
The
Executive’s normal days and hours of work shall coincide with the Company’s
regular business hours. The nature of the Executive’s employment with the
Company requires flexibility in the days and hours that the Executive must
work,
and may necessitate that the Executive work on other or additional days and
hours.
5.
Location
.
The
locus
of the Executive’s employment with the Company shall be primarily at the
Company’s office located in Camarillo, California.
6.
Compensation
.
(a)
Base
Salary
.
During
the term of this Agreement, the Company shall pay, and the Executive agrees
to
accept, in consideration for the Executive’s services hereunder, an annual
salary of
TWO
HUNDRED
THOUSAND
DOLLARS ($200,000)
,
less
all applicable taxes and other appropriate deductions, payable in accordance
with the Company's policy for salaried employees.
The
Compensation Committee (as defined below
)
of the
Board shall also review the Executive’s base salary annually and shall make a
recommendation to the Board as to whether such base salary should be adjusted
upward, which decision shall be within the Board’s sole discretion.
(b)
Annual
Bonus
.
The
Executive shall be entitled to an initial bonus of up to
ONE
HUNDRED AND
FIFTY
THOUSAND DOLLARS ($150,000)
for the
period from the Effective Date through December 31, 2007, the actual amount
of
the bonus shall be determined according to achievement of performance-related
financial and operating targets established quarterly for the Company and the
Executive by the Compensation Committee.
The
Compensation Committee will establish four (4) quarterly performance plans
for
the Employee. Each plan will contain financial and operating objectives (the
"
Quarterly
Performance Targets
"),
the
achievement of which will determine the amount of bonus paid during that
quarter. The initial performance objective shall be the completion of an equity
financing of the Company or its parent Company, which is expected to close
concurrently with the proposed merger transaction (the “
Merger
”)
referred to in
Section 17
, for which a bonus of THIRTY SEVEN THOUSAND
FIVE HUNDRED DOLLARS ($37,500) will be paid upon the closing date of the equity
financing and the Merger. The remaining three (3) Quarterly Performance Targets
will be set by the Compensation Committee of the board of directors of the
Company or its parent Company (the “Compensation Committee”) not later than
January 12, 2007. The remaining payments, if the Executive meets Quarterly
Performance Targets, are scheduled for April 1, 2007, July 1, 2007 and November
1, 2007.
Quarterly
Performance related financial and operational targets
for
Q4:2007 - Q3:2008 shall be adopted by the Compensation Committee promptly after
the end of Q3:2007, but in no event later than October 12, 2007).
7.
Expenses
.
During
the term of this Agreement, the Executive shall be entitled to payment or
reimbursement of any reasonable expenses paid or incurred by him in connection
with and related to the performance of his duties and responsibilities hereunder
for the Company. All requests by the Executive for payment
or
reimbursement of such expenses shall be supported by appropriate invoices,
vouchers, receipts or such other supporting documentation in such form and
containing such information as the Company may from time to time require,
evidencing that the Executive, in fact, incurred or paid said expenses.
8.
Vacation
.
During
the term of this Agreement, the Executive shall be entitled to accrue, on a
pro
rata
basis,
twenty (20) vacation days, per year. The Executive shall be entitled to carry
over any accrued, unused vacation days from year to year as provided by current
Company policy.
9.
Lock-Up
Agreement
.
The
Executive shall enter into a Lock-Up Agreement with the Company in the form
attached hereto as
Exhibit
B
.
During
any period that the Executive is precluded by the Lock-Up Agreement from
exercising the Option granted to the Executive under
Section 10
, then the
exercise period in
Section 10(d)
will be extended by the amount of time
during which the Executive could not exercise the Option.
10.
Stock
Options
.
The
Company hereby agrees to use commercially reasonable efforts to cause Kreido
Biofuels, Inc., a Nevada corporation (the “
PubCo
”) to grant the Executive
a
non-qualified stock option under the PubCo's equity incentive plan on the terms
and conditions hereinafter stated. When so granted, the following terms and
conditions will be incorporated into a separate stock option agreement (the
“
PubCo Stock Option Agreement
”), dated the date of the grant, between the
Executive and the PubCo. In the event of any inconsistency between the PubCo
Stock Option Agreement and this Agreement, the terms of the PubCo Stock Option
Agreement shall prevail.
(a)
Grant
of Option
.
On the
effective date of the Merger, the Company will grant
the
Executive an option to purchase an aggregate of
ONE
MILLION TWO HUNDRED AND FIVE THOUSAND THREE HUNDRED AND EIGHTY FOUR
(1,205,384)
shares
of
the
Company’s common voting stock (the “
Option
”)
under
the PubCo’s 2006 Stock Option Plan (the “
Stock
Option Plan
”).
In
subsequent years the Executive shall be eligible for such grants of options
and
other permissible awards (collectively with such options, the “
Awards
”)
under
the Stock Option Plan as the Compensation Committee of the board of directors
of
PubCo shall determine.
(b)
Option
Price; Term
.
The
per
share
exercise price of the Option shall be
ONE
AND 35/100THS DOLLARS ($1.35)
,
which
represents the anticipated fair market value per share of Company common voting
stock on the closing date of the Merger. The term of the Option shall be ten
(10) years from the date of grant.
(c)
Vesting
and Exercise
.
The
Option shall be vested and exercisable in eight (8) quarterly installments
of
ONE
HUNDRED
FIFTY THOUSAND SIX HUNDRED AND SEVENTY THREE (150,673)
shares
each.
(d)
Termination
of Service; Accelerated Vesting
.
(i)
If
the
Executive’s employment is terminated for Cause, as such term is defined below,
all Awards, whether or not vested, shall immediately expire effective the date
of termination of employment.
(ii)
If
the
Executive’s employment is terminated voluntarily by the Executive without Good
Reason, as such term is defined below, all unvested Awards shall immediately
expire effective the date of termination of employment. Vested Awards, to the
extent unexercised, shall expire on the later of ninety (90) days after the
termination of employment and the expiration of the contractual lock-up
agreement.
(iii)
If
the
Executive’s employment terminates on account of death or Disability, as defined
below, all unvested Awards shall immediately expire effective the date of
termination of employment. Vested Awards, to the extent unexercised, shall
expire one (1) year after the termination of employment.
(iv)
If
the
Executive’s employment is terminated (A) in connection with a Change of Control,
as defined below, (B) by the Company without Cause or (C) by the Executive
for
Good Reason, one-half (1/2) of all unvested Awards shall immediately vest up
to
a maximum of six (6) months, and become exercisable effective the date of
termination of employment, and, to the extent unexercised, shall expire one
(1)
year from the date of termination of employment.
(e)
Payment
.
The full
consideration for any shares purchased by the Executive upon exercise of the
Option shall be paid in cash.
11.
Other
Benefits
.
(a)
During
the term of this Agreement, the Executive shall be eligible to participate
in
incentive, savings, retirement (401(k)), and welfare benefit plans, including,
without limitation, health, medical, dental, vision, life (including accidental
death and dismemberment) and disability insurance plans (collectively,
“
Benefit
Plans
”),
in
substantially the same manner, including but not limited to responsibility
for
the cost thereof, and at substantially the same levels, as the Company makes
such opportunities available to all of the Company’s managerial or salaried
executive employees.
(b)
The
Executive’s spouse and dependent minor children will be covered under the
Benefit Plans providing health, medical, dental, and vision benefits, in
substantially the same manner, including but not limited to responsibility
for
the cost thereof, and at substantially the same levels, as the Company makes
such opportunities available to the spouses and dependent minor children to
all
of the Company’s managerial or salaried executive employees.
(c)
The
Company shall purchase and maintain traditional directors and officers liability
insurance coverage in the amount of at least
ONE
MILLION DOLLARS ($1,000,000)
covering
the Company’s officers and directors, including the Executive, as soon as
practicable after the Effective Date, but in no event later than 30 days
following the Effective Date, provided such coverage is available on
commercially reasonable terms.
(d)
Until
such time as the Executive becomes covered by Company medical coverage, the
Company shall pay the cost of COBRA coverage provided by the Executive’s prior
employer, to the same extent as such coverage was paid for by such prior
employer.
12.
Termination
of Employment
.
(a)
Death
.
In the
event that during the term of this Agreement the Executive dies, this Agreement
and the Executive’s employment with the Company shall automatically terminate
and the Company shall have no further obligations or liability to the Executive
or his heirs, administrators or executors with respect to compensation and
benefits accruing thereafter, except for the obligation to pay the Executor’s
heirs, administrators or executors any earned but unpaid base salary, unpaid
pro
rata
annual
bonus and unused vacation days accrued through the date of death;
provided
,
that
nothing contained in this paragraph shall be deemed to excuse any breach by
the
Company of any provision of this Agreement. The Company shall deduct, from
all
payments made hereunder, all applicable taxes, including income tax, FICA and
FUTA, and other appropriate deductions.
(b)
“
Disability
.”
In the
event of the Executive's disability for a period of 120 consecutive days during
any 365-day period, the Company shall thereafter have the right, upon written
notice to the Executive, to terminate this Agreement, in which case the date
of
termination shall be the date of such written notice to the Executive. As used
herein, "disability" shall mean a physical and/or mental disability of the
Executive that prevents the Executive from substantially performing the
essential functions of his position even with reasonable accommodation. In
the
event of termination under this Section, all the Executive's compensation and
benefits shall cease as of the date of his termination, and the Executive will
not be entitled to receive any Severance.
(c)
“
Cause.
”
(i)
At
any
time during the term of this Agreement, the Company may terminate this Agreement
and the Executive’s employment hereunder for “Cause.” For purposes of this
Agreement, “
Cause
”
shall
be defined as the occurrence of: (A) gross neglect, malfeasance or gross
insubordination in performing the Executive’s duties under this Agreement; (B)
the Executive’s conviction for a felony, excluding convictions associated with
traffic violations; (C) an egregious act of dishonesty (including without
limitation theft or embezzlement) or a malicious action by the Executive toward
the Company’s customers or employees; or (D) a willful and material violation of
any provision of
Section
13
or
Section
14
hereof.
(ii)
Upon
termination of this Agreement for Cause, the Company shall have no further
obligations or liability to the Executive or his heirs, administrators or
executors with respect to compensation and benefits thereafter, except for
the
obligation to pay the Executive any earned but unpaid base salary, any earned
but unpaid portion of Executive's annual bonus and unused vacation days accrued
through the Executive’s last day of employment with the Company. The Company
shall deduct, from all payments made hereunder, all applicable taxes, including
income tax, FICA and FUTA, and other appropriate deductions. However, 12 (c)(ii)
not withstanding, with respect to "Cause" as defined in 12 (c)(i)(D) of the
Employment Agreement, the Company must provide notification in writing of the
breach and the Employee shall have the right to cure the breach to the
satisfaction of the Company within 30 days of the written notice.
(d)
Change
of Control
.
For
purposes of this Agreement, “
Change
of Control
”
means
the occurrence of, or the Company’s Board votes to approve: (A) any
consolidation or merger of the Company pursuant to which the stockholders of
the
Company immediately before the transaction do not retain immediately after
the
transaction, in substantially the same proportions as their ownership of shares
of the Company
’
s
voting
stock immediately before the transaction, direct or indirect beneficial
ownership of more than 50% of the total combined voting power of the outstanding
voting securities of the surviving business entity; (B) any sale, lease,
exchange or other transfer (in one transaction or a series of related
transactions) of all, or substantially all, of the assets of the Company other
than any sale, lease, exchange or other transfer to any company where the
Company owns, directly or indirectly, 100% of the outstanding voting securities
of such company after any such transfer; (C) the direct or indirect sale or
exchange in a single or series of related transactions by the stockholders
of
the Company of more than 50% of the voting stock of the Company.
(e)
“
Good
Reason
.”
(i)
At
any
time during the term of this Agreement, subject to the conditions set forth
in
Section
12(e)(ii)
below,
the Executive may terminate this Agreement and the Executive’s employment with
the Company for “Good Reason.” For purposes of this Agreement, “
Good
Reason
”
shall
mean the occurrence of any of the following events: (A) the assignment, without
the Executive’s consent, to the Executive of duties that are significantly
different from, and that result in a substantial diminution of, the duties
that
he assumed on the Effective Date; (B) the assignment, without the Executive’s
consent, to the Executive of a title that is different from and subordinate
to
the title specified in
Section
2
above,
provided
,
however
,
that
the retention of another executive as President and Chief Executive Officer
shall not, in and of itself, entitle the Executive to claim a termination for
Good reason hereunder; (C) any termination of the Executive’s employment by the
Company, other than a termination for Cause, within 12 months after a Change
of
Control; (D) the assignment, without the Executive’s consent, to the Executive
of duties that are significantly different from, and that result in a
substantial diminution of, the duties that he assumed on the Effective Date
within 12 months after a Change of Control; or (E) material breach by the
Company of this Agreement.
(ii)
The
Executive shall not be entitled to terminate his employment with the Company
and
this Agreement for Good Reason unless and until he shall have delivered written
notice to the Company of his intention to terminate this Agreement and his
employment with the Company for Good Reason, which notice specifies in
reasonable detail the circumstances claimed to provide the basis for such
termination for Good Reason, and the Company shall not have eliminated the
circumstances constituting Good Reason within 30 days of its receipt from the
Executive of such written notice.
(iii)
In
the
event that the Executive terminates this Agreement and his employment with
the
Company for Good Reason, the Company shall pay or provide to the Executive
(or,
following his death, to the Executive’s heirs, administrators or executors): (A)
any earned but unpaid base salary, any earned but unpaid portion of Executive's
bonus, and previously granted and unused vacation days accrued through the
Executive’s last day of employment with the Company; (B) as severance pay, the
Executive’s full base salary for a period of six (6) months; and (C) continued
coverage, at the Company’s expense, under all Benefits Plans in which the
Executive was a participant immediately prior to his last date of employment
with the Company, or, in the event that any such Benefit Plans do not permit
coverage of the Executive following his last date of employment with the
Company, under benefit plans that provide no less coverage than such Benefit
Plans, through the Scheduled Termination Date. Except for severance which will
be payable monthly, all payments due hereunder shall be made within 45 days
after the date of termination of the Executive’s employment. The Company shall
deduct, from all payments made hereunder, all applicable taxes, including income
tax, FICA and FUTA, and other appropriate deductions.
(iv)
The
Executive shall have no duty to mitigate his damages, except that continued
benefits required to be provided under
Section
11(e)(iii)(D)
shall be
canceled or reduced to the extent of any comparable benefit coverage offered
to
the Executive during the period prior to the Scheduled Termination Date by
a
subsequent employer or other person or entity for which the Executive performs
services, including but not limited to consulting services.
(f)
Without
“Cause
.”
(i)
By
the Executive
.
At any
time during the term of this Agreement, the Executive shall be entitled to
terminate this Agreement and the Executive’s employment with the Company other
than for Good Reason by providing prior written notice of at least 90 days
to
the Company. Upon termination by the Executive of this Agreement and the
Executive’s employment with the Company without Cause, the Company shall have no
further obligations or liability to the Executive or his heirs, administrators
or executors with respect to compensation and benefits thereafter, except for
the obligation to pay the Executive any earned but unpaid base salary, and
unused vacation days accrued through the Executive’s last day of employment with
the Company. The Company shall deduct, from all payments made hereunder, all
applicable taxes, including income tax, FICA and FUTA, and other appropriate
deductions.
(ii)
By
The Company
.
At any
time during the term of this Agreement, the Company shall be entitled to
terminate this Agreement and the Executive’s employment with the Company without
Cause by providing prior written notice of at least 90 days to the Executive.
Upon termination by the Company of this Agreement and the Executive’s employment
with the Company without Cause, the Company shall pay or provide to the
Executive (or, following his death, to the Executive’s heirs, administrators or
executors): (A) any earned but unpaid base salary, unpaid
pro
rata
bonus
previously granted and unused vacation days accrued through the Executive’s last
day of employment with the Company; (B) as severance pay, the Executive’s full
base salary for a period of six (6) months; and (C) continued coverage, at
the
Company’s expense, under all Benefits Plans in which the Executive was a
participant immediately prior to his last date of employment with the Company,
or, in the event that any such Benefit Plans do not permit coverage of the
Executive following his last date of employment with the Company, under benefit
plans that provide no less coverage than such Benefit Plans, through the
Scheduled Termination Date. Except for severance which will be payable monthly,
all payments due hereunder shall be made within 45 days after the date of
termination of the Executive’s employment. The Company shall deduct, from all
payments made hereunder, all applicable taxes, including income tax, FICA and
FUTA, and other appropriate deductions.
13.
Confidential
Information
.
(a)
The
Executive expressly acknowledges that, in the performance of his duties and
responsibilities with the Company, he has been exposed since prior to the
Effective Date, and will be exposed, to the trade secrets, business and/or
financial secrets and confidential and proprietary information of the Company,
its affiliates and/or its clients, business partners or customers (“
Confidential
Information
”).
The
term “Confidential Information” includes information or material that has actual
or potential commercial value to the Company, its affiliates and/or its clients,
business partners or customers and is not generally known to and is not readily
ascertainable by proper means to persons outside the Company, its affiliates
and/or its clients or customers.
(b)
Except
as
authorized in writing by the Board, during the performance of the Executive’s
duties and responsibilities for the Company and until such time as any such
Confidential Information becomes generally known to and readily ascertainable
by
proper means to persons outside the Company, its affiliates and/or its clients,
business partners or customers, the Executive agrees to keep strictly
confidential and not use for his personal benefit or the benefit to any other
person or entity (other than the Company) the Confidential Information.
“Confidential Information” includes the following, whether or not expressed in a
document or medium, regardless of the form in which it is communicated, and
whether or not marked “trade secret” or “confidential” or any similar legend:
(i) lists of and/or information concerning customers, prospective customers,
suppliers, employees, consultants, co-venturers and/or joint venture candidates
of the Company, its affiliates or its clients or customers; (ii) information
submitted by customers, prospective customers, suppliers, employees, consultants
and/or co-venturers of the Company, its affiliates and/or its clients or
customers; (iii) non-public information proprietary to the Company, its
affiliates and/or its clients or customers, including, without limitation,
cost
information, profits, sales information, prices, accounting, unpublished
financial information, business plans or proposals, expansion plans (for current
and proposed facilities), markets and marketing methods, advertising and
marketing strategies, administrative procedures and manuals, the terms and
conditions of the Company’s contracts and trademarks and patents under
consideration, distribution channels, franchises, investors, sponsors and
advertisers; (iv) proprietary technical information concerning products and
services of the Company, its affiliates and/or its clients, business partners
or
customers, including, without limitation, product data and specifications,
diagrams, flow charts, know how, processes, designs, formulae, inventions and
product development; (v) lists of and/or information concerning applicants,
candidates or other prospects for employment, independent contractor or
consultant positions at or with any actual or prospective customer or client
of
Company and/or its affiliates, any and all confidential processes, inventions
or
methods of conducting business of the Company, its affiliates and/or its
clients, business partners or customers; (vi) acquisition or merger targets;
(vii) business plans or strategies, data, records, financial information or
other trade secrets concerning the actual or contemplated business, strategic
alliances, policies or operations of the Company or its affiliates; or (viii)
any and all versions of proprietary computer software (including source and
object code), hardware, firmware, code, discs, tapes, data listings and
documentation of the Company; or (ix) any other confidential information
disclosed to the Executive by, or which the Executive obligated under a duty
of
confidence from, the Company, its affiliates, and/or its clients, business
partners or customers.
(c)
The
Executive affirms that he does not possess and will not rely upon the protected
trade secrets or confidential or proprietary information of his prior
employer(s) in providing services to the Company.
(d)
In
the
event that the Executive’s employment with the Company terminates for any
reason, the Executive shall deliver forthwith to the Company or destroy any
and
all originals and copies of Confidential Information.
14.
Non-Competition
And Non-Solicitation
.
(a)
The
Executive agrees and acknowledges that the Confidential Information that the
Executive has already received and will receive is valuable to the Company
and
that its protection and maintenance constitutes a legitimate business interest
of the Company, to be protected by the non-competition restrictions set forth
herein. The Executive agrees and acknowledges that the non-competition
restrictions set forth herein are reasonable and necessary and do not impose
undue hardship or burdens on the Executive. The Executive also acknowledges
that
the products and services developed or provided by the Company, its affiliates
and/or its clients or customers are or are intended to be sold, provided,
licensed and/or distributed to customers and clients in and throughout the
United States and Europe (the “
Geographic
Boundary
”)
(to
the extent the Company comes to own or operate any material asset in other
areas
during the term of the Executive’s employment, the definition of Geographic
Boundary shall be automatically expanded to cover such other areas), and that
the Geographic Boundary, scope of prohibited competition, and time duration
set
forth in the non-competition restrictions set forth below are reasonable and
necessary to maintain the value of the Confidential Information of, and to
protect the goodwill and other legitimate business interests of, the Company,
its affiliates and/or its clients or customers.
(b)
The
Executive hereby agrees and covenants that he shall not, without the prior
written consent of the Company, directly or indirectly, in any capacity
whatsoever, including, without limitation, as an employee, employer, consultant,
principal, partner, shareholder, officer, director or any other individual
or
representative capacity (other than a holder of less than one percent (1%)
of
the outstanding voting shares of any publicly held company), or whether on
the
Executive’s own behalf or on behalf of any other person or entity or otherwise
howsoever, (i) during the Executive’s employment with the Company and (ii) the
period during which the Executive continues to receive his base salary pursuant
to
Section
12(e)
or
Section
12(f)(ii)
of this
Agreement following the termination of this Agreement and of the Executive’s
employment, in the Geographic Boundary:
(i)
Engage,
own, manage, operate, control, be employed by, consult for, participate in,
or
be connected in any manner with the ownership, management, operation or control
of any business in competition with the Business of the Company. The
“
Business
of the Company
”
is
defined as the development and production of biodiesel and other alternatives
to
petroleum-based fuels within the Geographic Boundary.
(ii)
Recruit,
solicit or hire, or attempt to recruit, solicit or hire, any employee, or
independent contractor of the Company to leave the employment (or independent
contractor relationship) thereof, whether or not any such employee or
independent contractor is party to an employment agreement.
(iii)
Attempt
in any manner to solicit or accept from any customer of the Company, with whom
the Executive had significant contact during the term of the Agreement, business
of the kind or competitive with the business done by the Company with such
customer or to persuade or attempt to persuade any such customer to cease to
do
business or to reduce the amount of business which such customer has customarily
done or is reasonably expected to do with the Company, or if any such customer
elects to move its business to a person other than the Company, provide any
services (of the kind or competitive with the Business of the Company) for
such
customer, or have any discussions regarding any such service with such customer,
on behalf of such other person.
(iv)
Interfere
with any relationship, contractual or otherwise, between the Company and any
other party, including, without limitation, any supplier, co-venturer or joint
venturer of the Company to discontinue or reduce its business with the Company
or otherwise interfere in any way with the Business of the Company.
15.
Dispute
Resolution
.
The
Executive and the Company agree that any dispute or claim, whether based on
contract, tort, discrimination, retaliation, or otherwise, relating to, arising
from, or connected in any manner with this Agreement or with the Executive’s
employment with Company shall be resolved exclusively through final and binding
arbitration under the auspices of the American Arbitration Association
(“
AAA
”).
The
arbitration shall be held in Los Angeles, California. The Company will be
responsible for the cost of the arbitration and the arbitrator. The arbitration
shall proceed in accordance with the National Rules for the Resolution of
Employment Disputes of the AAA in effect at the time the claim or dispute arose,
unless other rules are agreed upon by the parties. The arbitration shall be
conducted by one arbitrator who is a member of the AAA, unless the parties
mutually agree otherwise. The arbitrator shall have jurisdiction to determine
any claim, including the arbitrability of any claim, submitted to them. The
arbitrator may grant any relief authorized by law for any properly established
claim. The interpretation and enforceability of this paragraph of this Agreement
shall be governed and construed in accordance with the United States Federal
Arbitration Act, 9. U.S.C. § 1,
et
seq
.
More
specifically, the parties agree to submit to binding arbitration any claims
for
unpaid wages or benefits, or for alleged discrimination, harassment, or
retaliation, arising under Title VII of the Civil Rights Act of 1964, the Equal
Pay Act, the National Labor Relations Act, the Age Discrimination in Employment
Act, the Americans With Disabilities Act, the Employee Retirement Income
Security Act, the Civil Rights Act of 1991, the Family and Medical Leave Act,
the Fair Labor Standards Act, Sections 1981 through 1988 of Title 42 of the
United States Code, COBRA, the New York State Human Rights Law, the New York
City Human Rights Law, and any other federal, state, or local law, regulation,
or ordinance, and any common law claims, claims for breach of contract, or
claims for declaratory relief. The Executive acknowledges that the purpose
and
effect of this paragraph is solely to elect private arbitration in lieu of
any
judicial proceeding he might otherwise have available to him in the event of
an
employment-related dispute between him and the Company. Therefore, the Executive
hereby waives his right to have any such employment-related dispute heard by
a
court or jury, as the case may be, and agrees that his exclusive procedure
to
redress any employment-related claims will be arbitration.
16.
Notice
.
For
purposes of this Agreement, notices and all other communications provided for
in
this Agreement or contemplated hereby shall be in writing and shall be deemed
to
have been duly given when personally delivered, delivered by a nationally
recognized overnight delivery service or when mailed United States Certified
or
registered mail, return receipt requested, postage prepaid, and addressed as
follows:
If
to the Company:
Kreido
Laboratories
1140
Avenida Acaso
Camarillo,
California 93012
Attn:
Chairman of the Board
Facsimile:
(805) 384-0989
If
to the Executive:
Joel
Balbien, Ph.D.
4041
Balcony Drive
Calabasas,
California 91302
Any
party
may change the address to which communications hereunder are to be delivered
by
giving the other party notice in the manner herein set forth.
17.
Assignment
and Assumption
.
This
Agreement may be assigned to and assumed by the PubCo in connection with a
proposed merger transaction involving the Company and a subsidiary of the Pubco.
From and after such assignment and assumption, all references to the Company
shall be references to the PubCo, and this Agreement shall have been effectively
novated to become an agreement between the Executive and the PubCo.
18.
Miscellaneous
.
(a)
All
issues and disputes concerning, relating to or arising out of this Agreement
and
from the Executive’s employment by the Company, including, without limitation,
the construction and interpretation of this Agreement, shall be governed by
and
construed in accordance with the internal laws of the State of California,
without giving effect to that State’s principles of conflicts of
law.
(b)
The
Executive and the Company agree that any provision of this Agreement deemed
unenforceable or invalid may be reformed to permit enforcement of the
objectionable provision to the fullest permissible extent. Any provision of
this
Agreement deemed unenforceable after modification shall be deemed stricken
from
this Agreement, with the remainder of the Agreement being given its full force
and effect.
(c)
The
Company shall be entitled to equitable relief, including injunctive relief
and
specific performance as against the Executive, for the Executive’s threatened or
actual breach of
Section
13
or
Section
14
of this
Agreement, as money damages for a breach thereof would be incapable of precise
estimation, uncertain, and an insufficient remedy for an actual or threatened
breach of
Section
13
or
Section
14
of this
Agreement. The Executive and the Company agree that any pursuit of equitable
relief in respect of
Section
13
or
Section
14
of this
Agreement shall have no effect whatsoever regarding the continued viability
and
enforceability of
Section
15
of this
Agreement.
(d)
Any
waiver or inaction by the Company for any breach of this Agreement shall not
be
deemed a waiver of any subsequent breach of this Agreement.
(e)
The
Executive and the Company independently have made all inquiries regarding the
qualifications and business affairs of the other which either party deems
necessary. The Executive affirms that he fully understands this Agreement’s
meaning and legally binding effect. Each party has participated fully and
equally in the negotiation and drafting of this Agreement. Each party assumes
the risk of any misrepresentation or mistaken understanding or belief relied
upon by him or it in entering into this Agreement.
(f)
The
Executive’s obligations under this Agreement are personal in nature and may not
be assigned by the Executive to any other person or entity.
(g)
This
instrument constitutes the entire Agreement between the parties regarding its
subject matter. When signed by all parties, this Agreement supersedes and
nullifies all prior or contemporaneous conversations, negotiations, or
agreements, oral and written, regarding the subject matter of this Agreement.
In
any future construction of this Agreement, this Agreement should be given its
plain meaning. This Agreement may be amended only by a writing signed by the
Company and the Executive.
(h)
This
Agreement may be executed in counterparts, a counterpart transmitted via
facsimile, and all executed counterparts, when taken together, shall constitute
sufficient proof of the parties’ entry into this Agreement. The parties agree to
execute any further or future documents which may be necessary to allow the
full
performance of this Agreement. This Agreement contains headings for ease of
reference. The headings have no independent meaning.
(i)
THE
EXECUTIVE STATES THAT HE HAS FREELY AND VOLUNTARILY ENTERED INTO THIS AGREEMENT
AND THAT HE HAS READ AND UNDERSTOOD EACH AND EVERY PROVISION THEREOF. THIS
AGREEMENT IS EFFECTIVE UPON THE EXECUTION OF THIS AGREEMENT BY BOTH
PARTIES.
IN
WITNESS WHEREOF, the Company and the Executive have executed this Employment
Agreement as of the day and year first above written.
EXECUTIVE
:
|
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COMPANY
:
|
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|
|
|
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KREIDO
LABORATORIES
|
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|
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/s/ Joel Balbien
|
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By:
/s/
Philip Lichtenberger
|
JOEL
BALBIEN, Ph.D.
|
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Name:
Philip Lichtenberger
|
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Title:
Executive Vice President
|
EXHIBIT
10.6
INDEMNITY
AGREEMENT
This
INDEMNITY AGREEMENT (the “Agreement”) is dated as of January 12, 2007 and is
made by and between Kreido Biofuels, Inc. (f/k/a Gemwood Productions, Inc.),
a
Nevada corporation (the “Company”), and [ ], an officer or director of the
Company (the “Indemnitee”).
RECITALS
A.
The
Company is aware that competent and experienced persons are increasingly
reluctant to serve as directors or officers of corporations unless they are
protected by comprehensive liability insurance and/or indemnification, due
to
increased exposure to litigation costs and risks resulting from their service
to
such corporations, and due to the fact that the exposure frequently bears no
reasonable relationship to the compensation of such directors and
officers;
B.
Based
on
their experience as business managers, the Board of Directors of the Company
(the “Board”) has concluded that, to retain and attract talented and experienced
individuals to serve as officers and directors of the Company, and to encourage
such individuals to take the business risks necessary for the success of the
Company, it is necessary for the Company contractually to indemnify officers
and
directors and to assume for itself maximum liability for expenses and damages
in
connection with claims against such officers and directors in connection with
their service to the Company;
C.
The
Nevada Revised Statutes under which the Company is organized (the “Law”),
empowers the Company to indemnify by agreement its officers, directors,
employees and agents, and persons who serve, at the request of the Company,
as
directors, officers, employees or agents of other corporations or enterprises,
and expressly provides that the indemnification provided by the Law is not
exclusive; and
D.
The
Company desires and has requested the Indemnitee to serve or continue to serve
as a director or officer of the Company. As an inducement to serve and in
consideration for such service, the Company has agreed to indemnify the
Indemnitee for claims for damages arising out of or related to the performance
of such services to the Company in accordance with the terms and conditions
set
forth in this Agreement.
NOW,
THEREFORE, the parties hereto, intending to be legally bound, hereby agree
as
follows:
1.
Definitions
.
1.1
Agent
.
For the
purposes of this Agreement, “agent” of the Company means any person who is or at
any time was a director or officer of the Company or a subsidiary of the
Company; or is or at any time was serving at the request of, for the convenience
of, or to represent the interest of the Company or a subsidiary of the Company
as a director or officer of another foreign or domestic corporation,
partnership, joint venture, trust or other enterprise or an affiliate of the
Company; or was a director or officer of another enterprise or affiliate of
the
Company at the request of, for the convenience of, or to represent the interests
of such predecessor corporation. The term “enterprise” includes any employee
benefit plan of the Company, its subsidiaries, affiliates and predecessor
corporations.
1.2
Expenses
.
For
purposes of this Agreement, “expenses” includes all direct and indirect costs of
any type or nature whatsoever (including, without limitation, all attorneys’
fees and related disbursements and other out-of-pocket costs) actually and
reasonably incurred by the Indemnitee in connection with the investigation,
defense or appeal of a proceeding or establishing or enforcing a right to
indemnification or advancement of expenses under this Agreement, Section 78.7502
of the Law or otherwise.
1.3
Proceeding
.
For the
purposes of this Agreement, “proceeding” means any threatened, pending or
completed action, suit, inquiry or other proceeding, whether civil, criminal,
administrative, investigative or any other type whatsoever.
1.4
Subsidiary
.
For
purposes of this Agreement, “subsidiary” means any corporation of which more
than fifty percent (50%) of the outstanding voting securities is owned directly
or indirectly by the Company, by the Company and one or more of its subsidiaries
or by one or more of the Company’s subsidiaries.
2.
Agreement
to Serve
.
The
Indemnitee agrees to serve and/or continue to serve as an agent of the Company,
at the will of the Company (or under separate agreement, if such agreement
exists), in the capacity the Indemnitee currently serves as an agent of the
Company, faithfully and to the best of his ability, so long as he is duly
appointed or elected and qualified in accordance with the applicable provisions
of the charter documents of the Company or any subsidiary of the Company;
provided
,
however
, that the Indemnitee may at any time and for any
reason resign from such position (subject to any contractual obligation that
the
Indemnitee may have assumed apart from this Agreement), and the Company or
any
subsidiary shall have no obligation under this Agreement to continue the
Indemnitee in any such position. For the avoidance of doubt, the Company and
Indemnitee each acknowledge and agree that the resignation or other termination
of Indemnitee as an agent of the Company under this paragraph 2 shall not impair
any right that Indemnitee may otherwise have to be indemnified under the terms
of this Agreement.
3.
Directors’
and Officers’ Insurance
.
The
Company shall, to the extent that the Board determines it to be economically
reasonable, maintain a policy of directors’ and officers’ liability insurance
(“D&O Insurance”), on such terms and conditions as may be approved by the
Board.
4.
Mandatory
Indemnification
.
Subject
to Section 9 below, the Company shall indemnify and hold the Indemnitee harmless
to the fullest extent permitted by the Law. Without limiting the generality
of
the foregoing, the Company shall indemnify and hold harmless the
Indemnitee:
4.1
Third
Party Actions
.
If the
Indemnitee is a person who was or is a party or is threatened to be made a
party
to any proceeding (other than an action by or in the right of the Company)
by
reason of the fact that he is or at any time was an agent of the Company, or
by
reason of anything done or not done by him in any such capacity, against any
and
all expenses and liabilities of any type whatsoever (including, but not limited
to, judgments, fines, ERISA excise taxes or penalties and amounts paid in
settlement) actually and reasonably incurred by him in connection with the
investigation, defense, settlement or appeal of such proceeding if he acted
in
good faith and in a manner he reasonably believed to be in, or not opposed
to,
the best interests of the Company and, with respect to any criminal action
or
proceeding, had no reasonable cause to believe his conduct was unlawful;
4.2
Derivative
Actions
.
If the
Indemnitee is a person who was or is a party or is threatened to be made a
party
to any proceeding by or in the right of the Company to procure a judgment in
its
favor by reason of the fact that he is or at any time was an agent of the
Company, or by reason of anything done or not done by him in any such capacity,
against any amounts paid in settlement of any such proceeding and all expenses
actually and reasonably incurred by him in connection with the investigation,
defense, settlement or appeal of such proceeding if he acted in good faith
and
in a manner he reasonably believed to be in, or not opposed to, the best
interests of the Company; except that no indemnification under this subsection
shall be made in respect of any claim, issue or matter as to which such person
shall have been finally adjudged, in a judgment not subject to appeal, to be
liable to the Company by a court of competent jurisdiction due to willful
misconduct of a culpable nature in the performance of his duty to the Company,
unless and only to the extent that the court in which such proceeding was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such amounts which the court
shall deem proper; and
4.3
Exception
for Amounts Covered by Insurance
.
Notwithstanding the foregoing, the Company shall not be obligated to indemnify
the Indemnitee for expenses or liabilities of any type whatsoever (including,
but not limited to, judgments, fines, ERISA excise taxes or penalties and
amounts paid in settlement) to the extent such have been paid directly to the
Indemnitee by D&O Insurance.
5.
Partial
Indemnification and Contribution
.
5.1
Partial
Indemnification
.
If the
Indemnitee is entitled under any provision of this Agreement to indemnification
by the Company for some or a portion of any expenses or liabilities of any
type
whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes
or penalties and amounts paid in settlement) incurred by him in the
investigation, defense, settlement or appeal of a proceeding but is not
entitled, however, to indemnification for all of the total amount thereof,
then
the Company shall nevertheless indemnify the Indemnitee for such total amount
except as to the portion thereof to which the Indemnitee is not entitled to
indemnification.
5.2
Contribution
.
If the
Indemnitee is not entitled to the indemnification provided in Section 4 for
any
reason other than the statutory limitations set forth in the Law, then in
respect of any threatened, pending or completed proceeding in which the Company
is jointly liable with the Indemnitee (or would be if joined in such
proceeding), the Company shall contribute to the amount of expenses (including
attorneys’ fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred and paid or payable by the Indemnitee in such proportion
as
is appropriate to reflect (i) the relative benefits received by the Company
on
the one hand and the Indemnitee on the other hand from the transaction from
which such proceeding arose and (ii) the relative fault of the Company on the
one hand and of the Indemnitee on the other hand in connection with the events
which resulted in such expenses, judgments, fines or settlement amounts, as
well
as any other relevant equitable considerations. The relative fault of the
Company on the one hand and of the Indemnitee on the other hand shall be
determined by reference to, among other things, the parties’ relative intent,
knowledge, access to information and opportunity to correct or prevent the
circumstances resulting in such expenses, judgments, fines or settlement
amounts. The Company agrees that it would not be just and equitable if
contribution pursuant to this Section 5 were determined by pro rata allocation
or any other method of allocation, which does not take account of the foregoing
equitable considerations.
6.
Mandatory
Advancement of Expenses
.
6.1
Advancement
.
Subject
to Section 9 below, the Company shall advance all expenses incurred by the
Indemnitee in connection with the investigation, participation, defense,
settlement or appeal of any proceeding to which the Indemnitee is a party or
is
threatened to be made a party by reason of the fact that the Indemnitee is
or at
any time was an agent of the Company or by reason of anything done or not done
by him in any such capacity. The Indemnitee hereby undertakes to promptly repay
such amounts advanced only if, and to the extent that, it shall ultimately
be
determined that the Indemnitee is not entitled to be indemnified by the Company
under the provisions of this Agreement, the Certificate of Incorporation or
Bylaws of the Company, the Law or otherwise. The advances to be made hereunder
shall be paid by the Company to the Indemnitee within thirty (30) days following
delivery of a written request therefor by the Indemnitee to the
Company.
6.2
Exception
.
Notwithstanding the foregoing provisions of this Section 6, the Company shall
not be obligated to advance any expenses to the Indemnitee arising from a
lawsuit filed directly by the Company against the Indemnitee if an absolute
majority of the members of the Board reasonably determines in good faith, within
thirty (30) days of the Indemnitee’s request to be advanced expenses, that the
facts known to them at the time such determination is made demonstrate clearly
and convincingly that the Indemnitee acted in bad faith. If such a determination
is made, the Indemnitee may have such decision reviewed by another forum, in
the
manner set forth in Sections 8.3, 8.4 and 8.5 hereof, with all references
therein to “indemnification” being deemed to refer to “advancement of expenses,”
and the burden of proof shall be on the Company to demonstrate clearly and
convincingly that, based on the facts known at the time, the Indemnitee acted
in
bad faith. The Company may not avail itself of this Section 6.2 as to a given
lawsuit if, at any time after the occurrence of the activities or omissions
that
are the primary focus of the lawsuit, the Company has undergone a change in
control. For this purpose, a change in control shall mean a given person or
group of affiliated persons or groups increasing their beneficial ownership
interest in the Company by at least twenty (20) percentage points without
advance Board approval.
7.
Notice
and Other Indemnification Procedures
.
7.1
Promptly
after receipt by the Indemnitee of notice of the commencement of or the threat
of commencement of any proceeding, the Indemnitee shall, if the Indemnitee
believes that indemnification with respect thereto may be sought from the
Company under this Agreement, notify the Company of the commencement or threat
of commencement thereof.
7.2
If,
at
the time of the receipt of a notice of the commencement of a proceeding pursuant
to Section 7.1 hereof, the Company has D&O Insurance in effect, the Company
shall give prompt notice of the commencement of such proceeding to the insurers
in accordance with the procedures set forth in the respective policies. The
Company shall thereafter take all necessary or desirable action to cause such
insurers to pay, on behalf of the Indemnitee, all amounts payable as a result
of
such proceeding in accordance with the terms of such D&O Insurance
policies.
7.3
In
the
event the Company shall be obligated to advance the expenses for any proceeding
against the Indemnitee, the Company, if appropriate, shall be entitled to assume
the defense of such proceeding, with counsel approved by the Indemnitee (which
approval shall not be unreasonably withheld), upon the delivery to the
Indemnitee of written notice of its election to do so. After delivery of such
notice, approval of such counsel by the Indemnitee and the retention of such
counsel by the Company, the Company will not be liable to the Indemnitee under
this Agreement for any fees of counsel subsequently incurred by the Indemnitee
with respect to the same proceeding, provided that: (a) the Indemnitee shall
have the right to employ his own counsel in any such proceeding at the
Indemnitee’s expense; (b) the Indemnitee shall have the right to employ his own
counsel in connection with any such proceeding, at the expense of the Company,
if such counsel serves in a review, observer, advice and counseling capacity
and
does not otherwise materially control or participate in the defense of such
proceeding; and (c) if (i) the employment of counsel by the Indemnitee has
been
previously authorized by the Company, (ii) the Indemnitee shall have reasonably
concluded that there may be a conflict of interest between the Company and
the
Indemnitee in the conduct of any such defense or (iii) the Company shall not,
in
fact, have employed counsel to assume the defense of such proceeding, then
the
fees and expenses of the Indemnitee’s counsel shall be at the expense of the
Company.
8.
Determination
of Right to Indemnification
.
8.1
To
the
extent the Indemnitee has been successful on the merits or otherwise in defense
of any proceeding referred to in Section 4.1 or 4.2 of this Agreement or in
the
defense of any claim, issue or matter described therein, the Company shall
indemnify the Indemnitee against expenses actually and reasonably incurred
by
him in connection with the investigation, defense or appeal of such proceeding,
or such claim, issue or matter, as the case may be.
8.2
In
the
event that Section 8.1 is inapplicable, or does not apply to the entire
proceeding, the Company shall nonetheless indemnify the Indemnitee unless the
Company shall prove by clear and convincing evidence to a forum listed in
Section 8.3 below that the Indemnitee has not met the applicable standard of
conduct required to entitle the Indemnitee to such indemnification.
8.3
The
Indemnitee shall be entitled to select the forum in which the validity of the
Company’s claim under Section 8.2 hereof that the Indemnitee is not entitled to
indemnification will be heard from among the following:
(a)
a
quorum
of the Board consisting of directors who are not parties to the proceeding
for
which indemnification is being sought;
(b)
the
stockholders of the Company,
provided,
however
, that the
Indemnitee can select a forum consisting of the stockholders of the Company
only
with the approval of the Company;
(c)
legal
counsel mutually agreed upon by the Indemnitee and the Board, which counsel
shall make such determination in a written opinion;
(d)
a
panel
of three arbitrators, one of whom is selected by the Company, another of whom
is
selected by the Indemnitee and the last of whom is selected by the first two
arbitrators so selected; or
(e) the
courts of the State of New York or other court having jurisdiction of subject
matter and the parties.
8.4
As
soon
as practicable, and in no event later than thirty (30) days after the forum
has
been selected pursuant to Section 8.3 above, the Company shall, at its own
expense, submit to the selected forum its claim that the Indemnitee is not
entitled to indemnification, and the Company shall act in the utmost good faith
to assure the Indemnitee a complete opportunity to defend against such
claim.
8.5 If
the forum selected in accordance with Section 8.3 hereof is not a court, then
after the final decision of such forum is rendered, the Company or the
Indemnitee shall have the right to apply to the courts of the State of New
York,
the court in which the proceeding giving rise to the Indemnitee’s claim for
indemnification is or was pending or any other court having jurisdiction of
subject matter and the parties, for the purpose of appealing the decision of
such forum, provided that such right is executed within sixty (60) days after
the final decision of such forum is rendered. If the forum selected in
accordance with Section 8.3 hereof is a court, then the rights of the Company
or
the Indemnitee to appeal any decision of such court shall be governed by the
applicable laws and rules governing appeals of the decision of such
court.
8.6
Notwithstanding
any other provision in this Agreement to the contrary, the Company shall
indemnify the Indemnitee against all expenses incurred by the Indemnitee in
connection with any hearing or proceeding under this Section 8 involving the
Indemnitee and against all expenses incurred by the Indemnitee in connection
with any other proceeding between the Company and the Indemnitee involving
the
interpretation or enforcement of the rights of the Indemnitee under this
Agreement unless a court of competent jurisdiction finds that each of the
material claims and/or defenses of the Indemnitee in any such proceeding was
frivolous or not made in good faith.
9.
Exceptions
.
Any
other provision herein to the contrary notwithstanding, the Company shall not
be
obligated pursuant to the terms of this Agreement:
9.1
Claims
Initiated by Indemnitee
.
To
indemnify or advance expenses to the Indemnitee with respect to proceedings
or
claims initiated or brought voluntarily by the Indemnitee and not by way of
defense, except with respect to proceedings specifically authorized by the
Board
or brought to establish or enforce a right to indemnification and/or advancement
of expenses arising under this Agreement, the charter documents of the Company
or any subsidiary or any statute or law or otherwise, but such indemnification
or advancement of expenses may be provided by the Company in specific cases
if
the Board finds it to be appropriate; or
9.2
Unauthorized
Settlements
.
To
indemnify the Indemnitee hereunder for any amounts paid in settlement of a
proceeding unless the Company consents in advance in writing to such settlement,
which consent shall not be unreasonably withheld; or
9.3
Securities
Law Actions
.
To
indemnify the Indemnitee on account of any suit in which judgment is rendered
against the Indemnitee for an accounting of profits made from the purchase
or
sale by the Indemnitee of securities of the Company pursuant to the provisions
of Section l6(b) of the Securities Exchange Act of 1934 and amendments thereto
or similar provisions of any federal, state or local statutory law;
or
9.4
Unlawful
Indemnification
.
To
indemnify the Indemnitee if a final decision by a court having jurisdiction
in
the matter, in a judgment not subject to appeal, shall determine that such
indemnification is not lawful. In this respect, the Company and the Indemnitee
have been advised that the Securities and Exchange Commission takes the position
that indemnification for liabilities arising under the federal securities laws
is against public policy and is, therefore, unenforceable and that claims for
indemnification should be submitted to appropriate courts for
adjudication.
10.
Non-Exclusivity
.
The
provisions for indemnification and advancement of expenses set forth in this
Agreement shall not be deemed exclusive of any other rights which the Indemnitee
may have under any provision of law, the Company’s Certificate of Incorporation
or Bylaws, the vote of the Company’s stockholders or disinterested directors,
other agreements or otherwise, both as to action in the Indemnitee’s official
capacity and to action in another capacity while occupying his position as
an
agent of the Company, and the Indemnitee’s rights hereunder shall continue after
the Indemnitee has ceased acting as an agent of the Company and shall inure
to
the benefit of the heirs, executors and administrators of the
Indemnitee.
11.
General
Provisions
.
11.1
Interpretation
of Agreement
.
It is
understood that the parties hereto intend this Agreement to be interpreted
and
enforced so as to provide indemnification and advancement of expenses to the
Indemnitee to the fullest extent now or hereafter permitted by law, except
as
expressly limited herein.
11.2
Severability
.
If any
provision or provisions of this Agreement shall be held to be invalid, illegal
or unenforceable for any reason whatsoever, then:
(a)
the
validity, legality and enforceability of the remaining provisions of this
Agreement (including, without limitation, all portions of any paragraphs of
this
Agreement containing any such provision held to be invalid, illegal or
unenforceable that are not themselves invalid, illegal or unenforceable) shall
not in any way be affected or impaired thereby; and
(b)
to
the
fullest extent possible, the provisions of this Agreement (including, without
limitation, all portions of any paragraphs of this Agreement containing any
such
provision held to be invalid, illegal or unenforceable, that are not themselves
invalid, illegal or unenforceable) shall be construed so as to give effect
to
the intent manifested by the provision held invalid, illegal or unenforceable
and to give effect to Section 11.1 hereof.
11.3
Modification
and Waiver
.
No
supplement, modification or amendment of this Agreement shall be binding unless
executed in writing by both of the parties hereto. No waiver of any of the
provisions of this Agreement shall be deemed or shall constitute a waiver of
any
other provision hereof (whether or not similar), nor shall such waiver
constitute a continuing waiver.
11.4
Subrogation
.
In the
event of full payment under this Agreement, the Company shall be subrogated
to
the extent of such payment to all of the rights of recovery of the Indemnitee,
who shall execute all documents required and shall do all acts that may be
necessary or desirable to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
11.5
Counterparts
.
This
Agreement may be executed in one or more counterparts, which shall together
constitute one agreement.
11.6
Successors
and Assigns
.
The
terms of this Agreement shall bind, and shall inure to the benefit of, the
successors and assigns of the parties hereto.
11.7
Notice
.
All
notices, requests, demands and other communications under this Agreement shall
be in writing and shall be deemed duly given: (a) if delivered by hand and
signed for by the party addressee; or (b) if mailed by certified or registered
mail, with postage prepaid, on the third business day after the mailing date.
Addresses for notices to either party are as shown on the signature page of
this
Agreement or as subsequently modified by written notice.
11.8
Governing
Law
. This Agreement shall be governed exclusively by and construed according
to the laws of the State of New York, without regard to any choice or conflict
of laws principles, as applied to contracts between New York residents entered
into and to be performed entirely within New York.
11.9
Consent
to Jurisdiction
. The Company and the Indemnitee each hereby irrevocably
consent to the jurisdiction of the courts of the State of New York for all
purposes in connection with any action or proceeding, which arises out of or
relates to this Agreement.
11.10
Attorneys’
Fees
.
In the
event Indemnitee is required to bring any action to enforce rights under this
Agreement (including, without limitation, the payment or reimbursement of
expenses of any proceeding described in Section 4), the Indemnitee shall be
entitled to all reasonable fees and expenses in bringing and pursuing such
action, unless a court of competent jurisdiction finds each of the material
claims of the Indemnitee in any such action was frivolous and not made in good
faith.
[SIGNATURE
PAGE FOLLOWS]
IN
WITNESS WHEREOF, the parties hereto have entered into this Agreement effective
as of the date first written above.
KREIDO
BIOFUELS,
INC.
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INDEMNITEE
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f/k/a Gemwood Productions, Inc.
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By:
Title:
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Address:
_________________________________
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_________________________________
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EXHIBIT
10.7
2006
EQUITY INCENTIVE PLAN
1.
Purpose
.
The
purpose of this Equity Incentive Plan (the “
Plan
”)
is to
advance the interests of
Kreido
Biofuels, Inc.
(the
“
Company
”)
and
its Affiliates (as defined below) by inducing eligible individuals of
outstanding ability and potential to join and remain with, or to provide
consulting or advisory services to, the Company or its Affiliates, by
encouraging and enabling eligible employees, Outside Directors (as defined
below), consultants, and advisors to acquire proprietary interests in the
Company, and by providing participating eligible employees, Outside Directors,
consultants, and advisors with an additional incentive to promote the success
of
the Company. These purposes are accomplished by providing for the granting
of
Incentive Stock Options, Nonqualified Stock Options, Reload Options, Stock
Appreciation Rights, and Restricted Stock (all as defined below) to eligible
employees, Outside Directors, consultants, and advisors.
2.
Definitions
.
As used
in the Plan, the following terms have the meanings indicated:
(a)
“
Affiliate
”
means
a
“parent corporation” or a “subsidiary corporation” (as set forth in Code
Sections 424(e) and 424(f), respectively) of the Company.
(b)
“
Applicable
Withholding Taxes
”
means
the aggregate minimum amount of federal, state, local, and foreign income,
payroll, and other taxes that the Employer is required to withhold in connection
with the grant, vesting, or exercise of any Award.
(c)
“
Award
”
means
an Incentive Stock Option, a Nonqualified Stock Option, a Reload Option, a
Stock
Appreciation Right, or Restricted Stock.
(d)
“
Beneficiary
”
means
the person or entity designated by the Participant, in a form approved by the
Company, to exercise the Participant’s rights with respect to an Award after the
Participant’s death. If the Participant does not validly designate a
Beneficiary, or if the designated person no longer exists, then the
Participant’s Beneficiary shall be his or her estate.
(e)
“
Board
”
means
the Board of Directors of the Company.
(f)
“
Cause
”
shall
have the same meaning given to such term (or other term of similar meaning)
in
an Employment Agreement for purposes of termination of employment under such
agreement, and in the absence of any such agreement or if such agreement does
not include a definition of “Cause” (or other term of similar meaning), the term
“Cause” shall mean (i) any material breach by the Participant of any agreement
to which the Participant and the Company or an Affiliate are parties, (ii)
any
continuing act or omission to act by the Participant which may have a material
and adverse effect on the Company’s business or on the Participant’s ability to
perform services for the Company or an Affiliate, including, without limitation,
the commission of any crime (other than minor traffic violations), or (iii)
any
material misconduct or material neglect of duties by the Participant in
connection with the business or affairs of the Company or an
Affiliate.
(g)
“
Change
in Control
”
means,
unless such term or an equivalent term is otherwise defined with respect to
an
Award by the Participant’s Award agreement, any Employment Agreement or in a
written contract of service, the occurrence of any of the
following:
(i)
any
“person” (as such term is used in Sections 13(d) and 14(d) of the Exchange
Act) becomes the “beneficial owner” (as defined in Rule 13d-3 promulgated
under the Exchange Act), directly or indirectly, of securities of the Company
representing more than fifty percent (50%) of the total combined voting power
of
the Company’s then-outstanding securities entitled to vote generally in the
election of Directors;
provided
,
however
, that the following
acquisitions shall not constitute a Change in Control: (1) an acquisition
by any such person who on the Effective Date is the beneficial owner of more
than fifty percent (50%) of such voting power, (2) any acquisition directly
from the Company, including, without limitation, a public offering of
securities, (3) any acquisition by the Company, (4) any acquisition by
a trustee or other fiduciary under an employee benefit plan of a participating
company or (5) any acquisition by an entity owned directly or indirectly by
the stockholders of the Company in substantially the same proportions as their
ownership of the voting securities of the Company; or
(ii)
an
Ownership Change Event or series of related Ownership Change Events
(collectively, a “
Transaction
”)
in
which the stockholders of the Company immediately before the Transaction do
not
retain immediately after the Transaction direct or indirect beneficial ownership
of more than fifty percent (50%) of the total combined voting power of the
outstanding securities entitled to vote generally in the election of directors
or, in the case of an Ownership Change Event described in Section 2(x)(iii),
the
entity to which the assets of the Company were transferred (the “
Transferee
”),
as
the case may be; or
(iii)
a
liquidation or dissolution of the Company;
provided
,
however
, that a Change in Control shall be deemed not to include a
transaction described in subsections (i) or (ii) of this paragraph (g) in which
a majority of the members of the board of directors of the continuing, surviving
or successor entity, or parent thereof, immediately after such transaction
is
comprised of incumbent directors. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting securities of one or more corporations
or
other business entities which own the Company or the Transferee, as the case
may
be, either directly or through one or more subsidiary corporations or other
business entities. The Committee shall have the right to determine whether
multiple sales or exchanges of the voting securities of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
(h)
“
Code
”
means
the Internal Revenue Code of 1986, as amended from time to time, and any rulings
or regulations promulgated thereunder.
(i)
“
Committee
”
means
the Board, the Compensation Committee of the Board, or such other committee
of
the Board as the Board appoints to administer the Plan;
provided
,
however
, that should Section 162(m) of the Code and Section 16 of
the
Securities Exchange Act of 1934 apply to Awards under the Plan, if any member
of
the Committee does not qualify as both an “outside director” for purposes of
Code Section 162(m) and a “non-employee director” for purposes of Rule 16b-3,
the remaining members of the Committee (but not less than two members) shall
be
constituted as a subcommittee of the Committee to act as the Committee for
purposes of the Plan.
(j)
“
Commission
”
means
the U.S. Securities and Exchange Commission.
(k)
“
Company
”
means
Kreido Biofuels, Inc., a Nevada corporation, and its subsidiaries.
(l)
“
Company
Stock
”
means
the common stock, par value $0.001 per share, of the Company. In the event
of a
change in the capital structure of the Company affecting the common stock (as
provided in Section 14), the shares resulting from such a change in the common
stock shall be deemed to be Company Stock within the meaning of the
Plan.
(m)
“
Date
of Grant
”
means
the date on which the Committee grants an Award, or such future date as may
be
determined by the Committee.
(n)
“
Disability
”
means
a
disability within the meaning of Code Section 22(e)(3).
(o)
“
Employer
”
means
the Company and each Affiliate that employs one or more Participants.
(p)
“
Employment
Agreement
”
means
any written employment or other similar agreement between the Participant and
the Company or an Affiliate.
(q)
“
Exchange
Act
”
means
the Securities Exchange Act of 1934, as amended.
(r)
“
Fair
Market Value
”
means
on any given date the fair market value of Company Stock as of such date, as
determined by the Committee. If the Company Stock is listed on a national
securities exchange or traded on the over-the-counter market, Fair Market Value
means the closing selling price or, if not available, the closing bid price
or,
if not available, the high bid price of the Company Stock quoted on such
exchange, or on the over-the-counter market as reported by the NASDAQ Stock
Market (“
NASDAQ
”),
or if
the Company Stock is not listed on NASDAQ, then by the National Quotation
Bureau, Incorporated, on the day immediately preceding the day on which the
Award is granted or exercised, as the case may be, or, if there is no selling
or
bid price on that day, the closing selling price, closing bid price, or high
bid
price on the most recent day which precedes that day and for which such prices
are available.
(s)
“
Incentive
Stock Option
”
means
an Option that qualifies for favorable income tax treatment under Code Section
422.
(t)
“
Mature
Shares
”
means
shares of Company Stock for which the stockholder has good title, free and
clear
of all liens and encumbrances.
(u)
“
Nonqualified
Stock Option
”
means
an Option that is not an Incentive Stock Option.
(v)
“
Option
”
means
a
right to purchase Company Stock granted under the Plan, at a price determined
in
accordance with the Plan.
(w)
“
Outside
Director
”
means
a
member of the Board who is not an employee of, or a consultant or advisor to,
the Company or an Affiliate as of the Date of Grant.
(x)
“
Ownership
Change Event
”
means
the occurrence of any of the following with respect to the Company: (i) the
direct or indirect sale or exchange in a single or series of related
transactions by the stockholders of the Company of more than fifty percent
(50%)
of the voting stock of the Company; (ii) a merger or consolidation in which
the Company is a party; or (iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company (other than a sale, exchange
or
transfer to one or more subsidiaries of the Company).
(y)
“
Participant
”
means
any employee, Outside Director, consultant, or advisor (including independent
contractors, professional advisors, and service providers) of the Company or
an
Affiliate who receives an Award under the Plan.
(z)
“
Restricted
Stock
”
means
Company Stock awarded under Section 9 of the Plan.
(aa)
“
Reload
Option
”
means
a
reload option grant made in accordance with Section 7 of the Plan.
(bb)
“
Rule
16b-3
”
means
Rule 16b-3 of the Commission promulgated under the Exchange Act. A reference
in
the Plan to Rule 16b-3 shall include a reference to any corresponding rule
(or
number redesignation) of any amendments to Rule 16b-3 enacted after the
effective date of the Plan’s adoption.
(cc)
“
Securities
Act
”
means
the Securities Act of 1933, as amended.
(dd)
“
Stock
Appreciation Right
”
means
a
right to receive amounts awarded under Section 8.
3.
Stock
.
Subject
to Section 14 of the Plan, there shall be reserved for issuance under the Plan
an aggregate of 3,850,000 shares of Company Stock, which may be authorized
but
unissued shares, or shares held in the Company’s treasury, or shares purchased
from stockholders expressly for use under the Plan. In addition, shares
allocable to Awards granted under the Plan that expire, are forfeited, are
cancelled without the delivery of the shares, or otherwise terminate
unexercised, may again be available for Awards under the Plan. For purposes
of
determining the number of shares that are available for Awards under the Plan,
the number shall also include the number of shares surrendered by a Participant
actually or by attestation or retained by the Company in payment of Applicable
Withholding Taxes, and any Mature Shares surrendered by a Participant upon
exercise of an Option or in payment of Applicable Withholding Taxes. Shares
issued under the Plan through the settlement, assumption, or substitution of
outstanding awards or obligations to grant future awards as a condition of
an
Employer acquiring another entity shall not reduce the maximum number of shares
available for delivery under the Plan.
4.
Eligibility
.
Subject
to the terms of the Plan, the Committee shall have the power and complete
discretion, as provided in Section 13, to select eligible employees, Outside
Directors, consultants, and advisors to receive an Award under the Plan;
provided
,
however
, that any Award shall be subject to the
following terms and conditions:
(a)
Only
those individuals who are employees (including officers) of the Company or
an
Affiliate at the Date of Grant shall be eligible to receive an Incentive Stock
Option under the Plan.
(b)
All
employees (including officers) and Outside Directors of, or consultants and
advisors to, either the Company or an Affiliate at the Date of Grant shall
be
eligible to receive Nonqualified Stock Options,
Stock
Appreciation Rights
,
and
Restricted Stock; provided, however, that Nonqualified Stock Options, Stock
Appreciation Rights, and Restricted Stock may not be granted to any such
consultants and advisors unless (i) bona fide services have been or are to
be
rendered by such consultant or advisor and (ii) such services are not in
connection with the offer or sale of securities in a capital raising
transaction.
(c)
Anything
herein to the contrary notwithstanding, any recipient of an Award under the
Plan
must be includable in the definition of “employee” provided in the general
instructions to Form S-8 Registration Statement under the Securities
Act.
(d)
The
grant
of an Award shall not obligate an Employer to pay any employee, Outside
Director, consultant, or advisor any particular amount of remuneration, to
continue the employment of the employee or engagement of the Outside Director,
consultant, or advisor after the grant, or to make further grants to the
employee, Outside Director, consultant, or advisor at any time
thereafter.
5.
Stock
Options.
(a)
The
Committee may make grants of Options to Participants. Except as otherwise
provided herein, the Committee shall determine the number of shares for which
Options are granted, the Option exercise price per share, whether the Options
are Incentive Stock Options or Nonqualified Stock Options, and any other terms
and conditions to which the Options are subject.
(b)
Unless
determined otherwise by the Committee on the Date of Grant, the exercise price
of shares of Company Stock covered by an Option shall be not less than 100
percent of the Fair Market Value of Company Stock on the Date of Grant. Except
as provided in Section 14, (i) the exercise price of an Option may not be
decreased after the Date of Grant and (ii) a Participant may not surrender
an
Option in consideration for the grant of a new Option with a lower exercise
price or another Award.
(c)
All
Options granted hereunder shall be subject to the following terms and
conditions:
(i)
All
Options shall be evidenced by a written stock option agreement (the
“
Stock
Option Agreement
”)
setting forth all the relevant terms of the Award.
(ii)
No
Option
shall be exercisable more than 10 years after the Date of Grant.
(iii)
The
aggregate Fair Market Value, determined at the Date of Grant, of shares for
which Incentive Stock Options become exercisable by a Participant during any
calendar year shall not exceed $100,000 and any amount in excess of $100,000
shall be treated as Nonqualified Stock Option. The maximum aggregate number
of shares for which Incentive Stock Options may be issued under the Plan to
any
Participant in any calendar year shall be 200,000.
(iv)
If
an
Incentive Stock Option is granted to an employee who owns, at the Date of Grant,
more than 10 percent of the total combined voting power of all classes of stock
of the Company or an Affiliate, then (A) the option price of the shares subject
to the Incentive Stock Option shall be at least 110% of the Fair Market Value
of
the Company Stock at the Date of Grant and (B) such Incentive Stock Option
shall
not be exercisable after the expiration of 5 years from the Date of
Grant.
(v)
Subject
to earlier termination of the Option as otherwise provided herein and unless
otherwise provided in any Employment Agreement or as provided by the Committee
in the grant of an Option and set forth in or incorporated into the Stock Option
Agreement: (A)
if
the
employment of an employee by, or the services of an Outside Director for, or
consultant or advisor to, the Company or an Affiliate should be terminated
for
Cause or terminated voluntarily by the grantee, then any outstanding Option
shall terminate immediately, (B) if such employment or services terminates
for
any other reason, any such Option exercisable as of the date of termination
may
be exercised at any time within three months of termination. For purposes of
this subsection, (y) the retirement of an individual either pursuant to a
pension or retirement plan maintained by the Company or an Affiliate or at
the
applicable normal retirement date prescribed from time to time by the Company
shall be deemed to be termination of the individual’s employment other than
voluntarily or for Cause, and (z) an individual who leaves the employ or
services of the Company or an Affiliate to become an employee or Outside
Director of, or a consultant or advisor to, an entity that has assumed the
Option as a result of a corporate reorganization or the like shall not be
considered to have terminated employment or services.
(vi)
Subject
to earlier termination of the Option as otherwise provided herein and unless
otherwise provided in any Employment Agreement or as provided by the Committee
in the grant of an Option and set forth in or incorporated into the Stock Option
Agreement, i
f
the
holder of an Option under the Plan ceases employment or services because of
Disability while employed by, or while serving as an Outside Director for or
a
consultant or advisor to, the Company or an Affiliate, then such Option may,
subject to the provisions of subsection (viii) below, be exercised at any time
within one year after the termination of employment or services due to the
Disability.
(vii)
Subject
to earlier termination of the Option as otherwise provided herein and unless
otherwise provided in any Employment Agreement or as provided by the Committee
in the grant of an Option and set forth in or incorporated into the Stock Option
Agreement, i
f
the
holder of an Option under the Plan dies (A) while employed by, or while serving
as an Outside Director for or a consultant or advisor to, the Company or an
Affiliate, or (B) within three months after the termination of employment or
services other than voluntarily by the grantee or for Cause, then such Option
may, subject to the provisions of subsection (viii) below, be exercised by
the
Participant’s Beneficiary at any time within one year after the Participant’s
death.
(viii)
An
Option
may not be exercised after termination of employment, termination of
directorship, termination of consulting or advisory services, Disability or
death except to the extent that the holder was entitled to exercise the Option
at the time of such termination or as otherwise provided in a currently
effective written Employment Agreement, consulting agreement or other related
agreement executed between the Company and the employee, Outside Director or
consultant or advisor, and in any event may not be exercised after the
expiration of the Option in accordance with the terms of the grant.
(ix)
The
employment relationship of an employee of the Company or an Affiliate shall
be
treated as continuing intact while the employee is on military or sick leave
or
other bona fide leave of absence if such leave does not exceed 90 days or,
if
longer, so long as the employee’s right to reemployment is guaranteed either by
statute or by contract.
(d)
The
holder of any Option granted under the Plan shall have none of the rights of
a
stockholder with respect to the shares covered by the Option until such stock
shall be transferred to the holder upon the exercise of the Option.
6.
Grants
to Outside Directors
.
Awards,
other than Incentive Stock Options, may be made to Outside Directors. The
Committee shall have the power and complete discretion to select Outside
Directors to receive Awards. The Committee shall have the complete discretion,
under provisions consistent with Section 13, to determine the terms and
conditions, the nature of the Award and the number of shares to be allocated
as
part of each Award for each Outside Director. The grant of an Award shall not
obligate the Company to make further grants to the Outside Director at any
time
thereafter or to retain any person as a director for any period of
time.
7.
Reload
Options
.
The
Committee may grant Options with a reload feature. A reload feature shall only
apply when the exercise price is paid by delivery of Company Stock in accordance
with Section 10. The Stock Option Agreement for the Option containing the reload
feature shall provide that the holder of the Option shall receive,
contemporaneously with the payment of the exercise price in shares of Company
Stock, a Reload Option to purchase that number of shares of Company Stock equal
to the sum of (i) the number of shares used to exercise the Option, and (ii)
with respect to Nonqualified Stock Options, the number of shares used to satisfy
Applicable Withholding Taxes. The terms of the Plan applicable to the Option
shall be equally applicable to the Reload Option with the following exceptions:
the price per share of Company Stock deliverable upon the exercise of the Reload
Option (i) in the case of a Reload Option that is an Incentive Stock Option
being granted to a Participant who owns more than 10 percent of the total
combined voting power of all classes of stock of the Company or an Affiliate,
shall be 110% of the Fair Market Value of a share of Company Stock on the Date
of Grant of the Reload Option, and (ii) in the case of a Reload Option which
is
an Incentive Stock Option being granted to any other Participant, or which
is a
Nonqualified Stock Option, shall be the Fair Market Value of a share of Company
Stock on the Date of Grant of the Reload Option, unless the Committee shall
determine otherwise on the Date of Grant, but in no event shall such price
be
less than the exercise price of the Option which gave rise to the Reload Option.
The term of the Reload Option shall be the same as the Option which gave rise
to
the Reload Option. If the exercise price of an Option containing a reload
feature is paid in cash and not in shares of Company Stock, the reload feature
shall have no application with respect to such exercise.
8.
Stock
Appreciation Rights
.
Concurrently with the award of any Option to purchase one or more shares of
Company Stock, the Committee may, in its sole discretion, award to the optionee
with respect to each share of Company Stock covered by an Option a related
Stock
Appreciation Right, which permits the optionee to be paid the appreciation
on
the related Option in lieu of exercising the Option. The Committee shall
establish as to each award of Stock Appreciation Rights the terms and conditions
to which the Stock Appreciation Rights are subject;
provided
,
however
, that the following terms and conditions shall apply to all
Stock
Appreciation Rights:
(a)
A
Stock
Appreciation Right granted with respect to an Incentive Stock Option must
be
granted together with the related Option. A Stock Appreciation Right granted
with respect to a Nonqualified Stock Option may be granted together with
the
grant of the related Option.
(b)
A
Stock
Appreciation Right shall entitle the Participant, upon exercise of the Stock
Appreciation Right, to receive in exchange an amount equal to the excess of
(i)
the Fair Market Value on the date of exercise of Company Stock covered by the
surrendered Stock Appreciation Right, over (ii) the Fair Market Value of Company
Stock on the Date of Grant of the Stock Appreciation Right. The Committee may
limit the amount that the Participant will be entitled to receive upon exercise
of a Stock Appreciation Right.
(c)
A
Stock
Appreciation Right may be exercised only if and to the extent the underlying
Option is exercisable, and a Stock Appreciation Right may not be exercisable
in
any event more than 10 years after the Date of Grant.
(d)
A
Stock
Appreciation Right may only be exercised at a time when the Fair Market Value
of
Company Stock covered by the Stock Appreciation Right exceeds the Fair Market
Value of Company Stock on the Date of Grant of the Stock Appreciation Right.
The
Stock Appreciation Right may provide for payment in Company Stock or cash,
or a
fixed combination of Company Stock and cash, or the Committee may reserve the
right to determine the manner of payment at the time the Stock Appreciation
Right is exercised.
(e)
To
the
extent a Stock Appreciation Right is exercised, the underlying Option shall
be
cancelled, and the shares of Company Stock represented by the Option shall
no
longer be available for Awards under the Plan.
9.
Restricted
Stock Awards
.
(a)
The
Committee may make grants of Restricted Stock to a Participant. The Committee
shall establish as to each award of Restricted Stock the terms and conditions
to
which the Restricted Stock is subject, including the period of time before
which
all restrictions shall lapse and the Participant shall have full ownership
of
the Company Stock. The Committee in its discretion may award Restricted Stock
without cash consideration. All Restricted Stock Awards shall be evidenced
by a
Restricted Stock Agreement setting forth all the relevant terms of the
Award.
(b)
Restricted
Stock may not be sold, assigned, transferred, pledged, hypothecated, or
otherwise encumbered or disposed of until the restrictions have lapsed or been
removed. Certificates representing Restricted Stock shall be held by the Company
until the restrictions lapse, and the Participant shall provide the Company
with
appropriate stock powers endorsed in blank.
10.
Method
of Exercise of Options
.
(a)
Options
may be exercised by the Participant (or his or her legal guardian or personal
representative) by giving written notice of the exercise to the Company at
its
principal office (attention of the Corporate Secretary) pursuant to procedures
established by the Company. The notice shall state the number of shares the
Participant has elected to purchase under the Option. Such notice shall be
accompanied, or followed within 10 days of delivery thereof, by payment of
the
full exercise price of such shares. The exercise price may be paid in cash
by
means of a check payable to the order of the Company or, if the terms of an
Option permit, (i) by delivery or attestation of Mature Shares (valued at their
Fair Market Value) in satisfaction of all or any part of the exercise price,
(ii) by delivery of a properly executed exercise notice with irrevocable
instructions to a broker to deliver to the Company the amount necessary to
pay
the exercise price from the sale or proceeds of a loan from the broker with
respect to the sale of Company Stock or a broker loan secured by the Company
Stock,
(iii) by such other consideration as may be approved by the Committee from
time to time to the extent permitted by applicable law, or (iv) by any
combination of (i) through (iii) hereof.
(b)
Unless
prior to the exercise of the Option the shares issuable upon such exercise
have
been registered with the Commission pursuant to the Securities Act, the notice
of exercise shall be accompanied by a representation or agreement of the
individual or entity exercising the Option to the Company to the effect that
such shares are being acquired for investment purposes and not with a view
to
the distribution thereof, and such other documentation as may be required by
the
Company, unless in the opinion of counsel to the Company such representation,
agreement or documentation is not necessary to comply with any such
act.
(c)
The
Company shall not be obligated to deliver any Company Stock until the shares
have been listed on each securities exchange or market on which the Company
Stock may then be listed or until there has been qualification under or
compliance with such federal or state laws, rules or regulations as the Company
may deem applicable. The Company shall use reasonable efforts to obtain such
listing, qualification and compliance.
11.
Tax
Withholding
.
Each
Participant shall agree as a condition of receiving an Award payable in the
form
of Company Stock to pay to the Employer, or make arrangements satisfactory
to
the Employer regarding the payment to the Employer of, Applicable Withholding
Taxes. Under procedures established by the Committee or its delegate, a
Participant may elect to satisfy Applicable Withholding Taxes by (i) making
a
cash payment or authorizing additional withholding from cash compensation,
(ii)
delivering Mature Shares (valued at their Fair Market Value), or (iii) if the
applicable Stock Option Agreement or Restricted Stock Agreement permits, having
the Company retain that number of shares of Company Stock (valued at their
Fair
Market Value) that would satisfy all or a specified portion of the Applicable
Withholding Taxes.
12.
Transferability
of Awards
.
Awards
shall not be transferable except by will or by the laws of descent and
distribution.
13.
Administration
of the Plan
.
(a)
The
Committee shall administer the Plan. Subject to the terms and conditions set
forth in the Plan, the Committee shall have general authority to impose any
term, limitation, or condition upon an Award that the Committee deems
appropriate to achieve the objectives of the Award and of the Plan. The
Committee may adopt rules and regulations for carrying out the Plan with respect
to Participants and Beneficiaries. The interpretation and construction of any
provision of the Plan by the Committee shall be final and conclusive as to
any
Participant or Beneficiary.
(b)
The
Committee shall have the power to amend the terms and conditions of previously
granted Awards so long as the terms as amended are consistent with the terms
of
the Plan and provided that the consent of the Participant is obtained with
respect to any amendment that would be detrimental to him or her, except that
such consent will not be required if such amendment is for the purpose of
complying with Rule 16b-3 or any requirement of the Code or of other securities
laws applicable to the Award.
(c)
The
Committee shall have the power and complete discretion (i) to delegate to any
individual, or to any group of individuals employed by the Company or any
Affiliate, the authority to grant Awards under the Plan and (ii) to determine
the terms and limitations of any delegation of authority;
provided
,
however
, that the Committee may not delegate power and discretion
to the
extent such action would cause noncompliance with, or the imposition of
penalties, excise taxes, or other sanctions under, applicable corporate law,
Rule 16b-3, Code Section 162(m) or 409A, or any other applicable securities
or
tax law.
(d)
The
Committee shall have the power to include one or more provisions in the terms
of
Award grants to provide for the cancellation of an outstanding Award in the
event the Participant violates any agreement or other obligation dealing with
non-competition, non-solicitation or protection of the Company’s confidential
information
.
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14.
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Change
in Capital Structure; Change of Control
.
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(a)
Change
in Capital Structure.
In
the
event of a stock dividend, stock split, or combination of shares, share
exchange, share distribution, recapitalization or merger in which the Company
is
the surviving corporation, a spin-off or split-off of a subsidiary or Affiliate,
or other change in the Company’s capital stock (including, but not limited to,
the creation or issuance to stockholders generally of rights, options, or
warrants for the purchase of common stock or preferred stock of the Company),
the aggregate number and kind of shares of stock or securities of the Company
to
be subject to the Plan and to Awards then outstanding or to be granted, the
maximum number of shares or securities which may be delivered under the Plan
under Sections 3, 5(b), or 8, the per share exercise price of Options, the
terms
of Awards, and other relevant provisions shall be proportionately and
appropriately adjusted by the Committee in its discretion, and the determination
of the Committee shall be binding on all persons. If the adjustment would
produce fractional shares with respect to any unexercised Option, the Committee
may adjust appropriately and in a nondiscriminatory manner the number of shares
covered by the Option so as to eliminate the fractional shares.
(b)
Effect
of Change in Control on Options and Stock Appreciation Rights.
Subject
to the terms of any Employment Agreement, the Committee may provide in an Award
agreement for, or in the event of a Change in Control may take such actions
as
it deems appropriate to provide for, any one or more of the
following:
(i)
Accelerated
Vesting.
The
Committee may provide for the acceleration of the exercisability and vesting
in
connection with a Change in Control of any or all outstanding Options and Stock
Appreciation Rights and shares acquired upon the exercise thereof upon such
conditions, including termination of the Participant’s service prior to, upon,
or following such Change in Control, and to such extent as the Committee shall
determine.
(ii)
Assumption
or Substitution.
In the
event of a Change in Control, the surviving, continuing, successor, or
purchasing entity or parent thereof, as the case may be (the “
Acquiror
”),
may,
without the consent of any Participant, either assume or continue the Company’s
rights and obligations under any or all outstanding Options and Stock
Appreciation Rights or substitute for any or all outstanding Options and Stock
Appreciation Rights substantially equivalent options and stock appreciation
rights (as the case may be) for the Acquiror’s stock. Any Options or Stock
Appreciation Rights which are neither assumed or continued by the Acquiror
in
connection with the Change in Control nor exercised as of the time of
consummation of the Change in Control shall terminate and cease to be
outstanding effective as of the time of consummation of the Change in
Control.
(iii)
Cash-Out.
The
Committee may, in its sole discretion and without the consent of any
Participant, determine that, upon the occurrence of a Change in Control, each
or
any Option or Stock Appreciation Right outstanding immediately prior to the
Change in Control shall be canceled in exchange for a payment with respect
to
each vested share (and each unvested share, if so determined by the Committee)
of Company Stock subject to such canceled Option or Stock Appreciation Right
in
(A) cash, (B) stock of the Company or of a corporation or other
business entity a party to the Change in Control, or (C) other property
which, in any such case, shall be in an amount having a Fair Market Value equal
to the excess of the Fair Market Value of the consideration to be paid per
share
of Company Stock in the Change in Control over the exercise price per share
under such Option or Stock Appreciation Right (the “
Spread
”).
In
the event such determination is made by the Committee, the Spread (reduced
by
applicable withholding taxes, if any) shall be paid to Participants in respect
of the vested portion (and unvested portion, if so determined by the Committee)
of their canceled Options and Stock Appreciation Rights as soon as practicable
following the date of the Change in Control.
(iv)
Effect
of Change in Control on Restricted Stock Awards
.
The
Committee may provide for the acceleration of the vesting of the shares subject
to the Restricted Stock Award upon such conditions, including termination of
the
Participant’s services to the Company prior to, upon, or following such Change
in Control, and to such extent as the Committee shall determine
.
15.
Effective
Date
.
The
effective date of the Plan is November 2, 2006. The Plan shall be submitted
to
the stockholders of the Company for approval. Until (i) the Plan has been
approved by the Company’s stockholders, and (ii) the requirements of any
applicable federal or state securities laws have been met, no Restricted Stock
shall be awarded, and no Option shall be granted or exercisable, that is not
contingent on these events.
16.
Termination,
Modification
.
If not
sooner terminated by the Board, this Plan shall terminate at the close of
business on November 2, 2016. No Awards shall be made under the Plan after
its
termination. The Board may amend or terminate the Plan as it shall deem
advisable;
provided
,
however
, that no change shall be made that
increases the total number of shares of Company Stock reserved for issuance
pursuant to Awards granted under the Plan (except pursuant to Section 14),
or
reduces the minimum exercise price for Options, or exchanges an Option for
another Award, unless such change is authorized by the stockholders of the
Company within one year of the date of such change. Except as otherwise
specifically provided herein, a termination or amendment of the Plan shall
not,
without the consent of the Participant, adversely affect a Participant’s rights
under an Award previously granted to him or her.
17.
American
Jobs Creation Act of 2004
.
(a)
It
is
intended that the Plan comply in all applicable respects with Code Sections
409A(a)(2) through (4), as it may be amended from time to time, and any rulings,
regulations, or other guidelines promulgated under either or both statutes
(such
statutes, rulings, regulations and other guidelines to be referred to
collectively herein as “Section 409A”). This Plan, and any amendments thereto,
shall therefore be interpreted and implemented at all times so as to (i) ensure
compliance with Section 409A and (ii) avoid any penalty or early taxation of
any
payment or benefit under the Plan.
(b)
Anything
herein to the contrary notwithstanding, the Board shall approve and implement
such amendments as it deems necessary or desirable to ensure compliance with
Section 409A and to avoid any penalty or early taxation of any payment or
benefit under this Plan;
provided
,
however
, that no change shall
be made that increases the total number of shares of Company Stock reserved
for
issuance pursuant to Awards granted under the Plan (except pursuant to Section
14), or reduces the minimum exercise price for Options, or exchanges an Option
for another Award, unless such change is authorized by the stockholders of
the
Company. No such amendment shall require the consent of any
Participant.
18.
Interpretation
and Venue
.
Except
to the extent preempted by applicable federal law, the terms of this Plan shall
be governed by the laws of the State of New York without regard to its conflict
of laws rules.
EXHIBIT
10.8
KREIDO
BIOFUELS, INC.
88
West 44th Avenue
Vancouver,
British Columbia, Canada
V5Y
2V1
Non-Qualified
Stock Option Agreement
January
12, 2007
Dr.
Joel
Balbien
c/o
Kreido Laboratories
1140
Avenido Acaso
Camarillo,
CA 93012
Dear
Dr.
Balbien:
I
am
pleased to inform you that, subject to the conditions precedent to the
effectiveness of this Agreement that is set forth in Section 13 of this
Agreement, Kreido Biofuels, Inc. (the “Company”) has granted you a non-qualified
stock option to purchase shares of the Company’s Common Stock, par value $0.001
per share (the “Common Stock”), on the terms and conditions set forth
below.
The
grant
of this stock option is made pursuant to the Kreido Biofuels, Inc. 2006 Stock
Option Plan (the “Plan”). The terms of the Plan are incorporated into this
letter and in the case of any conflict between the Plan and this letter, the
terms of the Plan shall control. This Agreement also references the Employment
Agreement (the “Employment Agreement”), dated as of November 1, 2006, between
you and Kreido Laboratories, a California corporation, which Employment
Agreement the Company will assume at the effective time of the merger (the
“Merger”) that occurs under the Agreement and Plan of Merger, referred to in
Section 13 of this Agreement.
Now,
therefore, in consideration of the foregoing and the mutual covenants
hereinafter set forth:
1.
Stock
Option
.
The
Company hereby grants you an incentive stock option (the “Stock Option”) to
purchase from the Company One Million Two Hundred Five Thousand Three Hundred
Eighty-Four (1,205,384) shares of Common Stock at a price of $1.35 per share.
The date of grant (the “Date of Grant”) of the Stock Option is the date set
forth above. Unless earlier exercised or terminated in accordance with the
terms
hereunder and in the Plan, this Stock Option will expire on the date that is
the
tenth (10
th
)
anniversary of the Date of Grant.
2.
Entitlement
to Exercise the Stock Option
.
The
grant of the Stock Option is subject to the following terms and
conditions:
(a)
The
Stock
Option shall be vested exercisable in eight (8) quarterly installments of One
Hundred Fifty Thousand Six Hundred Seventy-Three (150,673) shares each with
installments vesting on the date of each March, June, September and December
of
2007 and 2008 that corresponds to the date that is the effective date of the
Merger.
(b)
If
you
die when any portion of the Stock Option is exercisable, then the person to
whom
your rights under the Stock Option shall have passed by will or by the laws
of
descent and distribution may exercise any of the exercisable portion of the
Stock Option within one (1) year after your death;
provided,
that no
Stock Option may be exercised in any event more than ten (10) years after the
Date of Grant
.
3.
Method
of Exercise & Payment
.
You may
exercise the vested portion of the Stock Option in whole or in part, by giving
written notice to the Company. The written notice shall clearly state your
intent to elect to exercise the Stock Option and the number of shares of Common
Stock with respect to which the Stock Option is being exercised. Further, the
written notice shall be signed by you (or, in the case of your death, the person
exercising the Stock Option) and shall be delivered to the Corporate Secretary
of the Company at the Company’s principal executive office. Except as otherwise
provided in the Plan, payment of the exercise price for the number of shares
of
Stock being purchased pursuant to any Option shall be made (i) by cash or
check payable to the order of the Company; (ii)
by
delivery or attestation of shares of Common Stock (valued at their Fair Market
Value) in satisfaction of all or any part of the exercise price; (iii) by
delivery of a properly executed exercise notice with irrevocable instructions
to
a broker to deliver to the Company the amount necessary to pay the exercise
price from the sale or proceeds of a loan from the broker with respect to the
sale of Company Stock or a broker loan secured by the Company Stock;
(iv) by such other consideration as may be approved by the Committee from
time to time to the extent permitted by applicable law; or (v) by any
combination of (i) through (iv) hereof.
4.
Tax
Withholding
.
As a
condition of exercise, you agree that at the time of exercise that you will
pay
to the Company any applicable withholding taxes, if any, that the Company is
required to withhold in connection with the exercise of the Stock Option. To
satisfy the applicable withholding taxes, you may elect to (a) make cash
payment or authorize additional withholding from your cash compensation;
(b) deliver freely tradable shares of Common Stock (which will be valued at
their Fair Market Value as of the date of delivery); or (c) request that
the Company retain that number of shares of Common Stock that would satisfy
all
or a portion of the applicable withholding taxes.
5.
Transferability
of Stock Option
.
Other
than upon your death by will or by the laws of descent and distribution, the
Stock Option is not transferable by you and may be exercised during your
lifetime only by you.
6.
Termination
of Stock Option
.
(a)
If
your
employment with the Company is terminated for Cause, as such term is defined
in
the Employment Agreement, the Stock Option, whether or not vested, shall
immediately expire effective the date of termination of employment.
(b)
If
you
terminate your employment with the Company voluntarily without Good Reason,
as
such term is defined in the Employment Agreement, all unvested installments
of
the Stock Option shall immediately expire effective the date of termination
of
employment. The Stock Option, to the extent unexercised, shall expire on the
later of (a) ninety (90) days after the termination of employment, and (b)
the
expiration of the contractual lock-up agreement.
(c)
If
your
employment with the Company terminates on account of death or Disability, as
defined below, all unvested installments of the Stock Option shall immediately
expire effective the date of termination of employment. Vested installments
of
the Stock Option, to the extent unexercised, shall expire one (1) year after
the
termination of employment.
(d)
If
you
terminate your employment with the Company (A) in connection with a Change
of
Control, as defined in the Employment Agreement, (B) if the Company terminates
your employment without Cause or (C) if you terminate your employment with
the
Company for Good Reason, one-half (1/2) of all unvested installments of the
Stock Option shall immediately vest up to a maximum of two (2) quarters and
become exercisable effective the date of your termination of employment, and,
to
the extent unexercised, shall expire one (1) year after any such
event.
7.
Adjustments
.
If the
number of outstanding shares of Common Stock is increased or decreased as a
result of one or more stock splits, reverse stock splits, stock dividends,
recapitalizations, mergers, share exchange acquisitions, combinations or
reclassifications, the number of shares with respect to which you have an
unexercised Stock Option and the Stock Option price shall be appropriately
adjusted as provided in the Plan.
8.
Delivery
of Certificate
.
The
Company may delay delivery of the certificate for shares of Common Stock
purchased pursuant to the exercise of a Stock Option until (i) it receives
any required representation by you or completion of any registration or other
qualification of such shares under any state or federal law regulation that
the
Company’s counsel shall determine as necessary or advisable, or (ii) it
receives advice of counsel that all applicable legal requirements have been
complied with. As a condition of exercising the Stock Option, you may be
required to execute a customary written indication of your investment intent
and
such other agreements the Company deems necessary or appropriate to comply
with
applicable securities laws.
9.
No
Guaranteed Right of Employment
.
If you
are employed by the Company, nothing contained herein shall confer upon you
any
right to be continued in the employment of the Company or interfere in any
way
with the right of the Company to terminate your employment at any time for
any
cause.
10.
Notice
of Certain Dispositions
.
You
agree to notify the Company in writing immediately after you make a disposition
of any shares acquired upon exercise of this Stock Option if you are required
to
report information related to your ownership of Common Stock pursuant to any
applicable securities laws, or if such disposition occurs before the later
of
(a) the date that is two years after the Date of Grant, or (b) the date that
is
one year after the date that you acquired such shares upon exercise of this
Stock Option.
11.
Notices
.
Notices
hereunder shall be mailed or delivered to the Company at its principal place
of
business, and shall be delivered to you in person or mailed or delivered to
you
at the address set forth below, or in either case at such other address as
one
party may subsequently furnish to the other party in writing.
12.
Choice
of Law
.
This
Agreement shall be governed by New York law, without giving effect to the
conflicts or choice of laws principles thereof.
13.
Condition
Precedent
.
This
Agreement shall not be or become effective until the merger referred to in
the
Agreement and Plan of Merger, dated as of January 12, 2007, between the Company
and Kreido Laboratories, shall have been consummated.
[Signature
page follows]
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Kreido
Biofuels, Inc.
|
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By:
|
/s/
Philip Lichtenberger
|
|
Name: Philip Lichtenberger
|
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Title:
Executive
Vice President
|
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ACKNOWLEDGEMENT
BY OPTIONEE
The
foregoing Stock Option is hereby accepted and the terms and conditions thereof
hereby agreed to by the undersigned as of the Date of Grant specified
above.
|
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/s/
Joel Balbien
|
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Optionee's
Signature
|
|
|
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Joel Balbien, Ph.D.
|
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Printed
Name
|
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Optionee's Address:
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EXHIBIT
10.9
KREIDO
BIOFUELS, INC.
Form
of Incentive Stock Option Agreement
[Date]
Dear
________________________:
I
am
pleased to inform you that Kreido Biofuels, Inc. (the “Company”) has granted you
an incentive stock option to purchase shares of the Company’s Common Stock, par
value $0.001 per share (the “Common Stock”), on the terms and conditions set
forth below.
The
grant
of this stock option is made pursuant to the Kreido Biofuels, Inc. Equity
Incentive Plan (the “Plan”). This stock option is intended to qualify as an
“incentive stock option” under Section 422 of the Internal Revenue Code of 1986,
as amended. The terms of the Plan are incorporated into this letter and in
the
case of any conflict between the Plan and this letter, the terms of the Plan
shall control.
Now,
therefore, in consideration of the foregoing and the mutual covenants
hereinafter set forth:
1.
Stock
Option
.
The
Company hereby grants you an incentive stock option (the “Stock Option”) to
purchase from the Company [______] shares of Common Stock at a price of [$_____]
per share. The Date of Grant is [________________]. Unless earlier exercised
or
terminated in accordance with the terms hereunder and in the Plan, this Stock
Option will expire on the date that is the tenth (10
th
)
anniversary of the Date of Grant.
2.
Entitlement
to Exercise the Stock Option
.
The
grant of the Stock Option is subject to the following terms and
conditions:
(a)
The
Stock
Option shall be exercisable in accordance with the following schedule:
[
]
The
Stock
Option shall cease to vest as of the date of the termination, for any reason,
of
your
employment or other relationship underlying the issuance of this Stock Option.
(b)
If
you
die when any portion of the Stock Option is exercisable, then the person to
whom
your rights under the Stock Option shall have passed by will or by the laws
of
descent and distribution may exercise any of the exercisable portion of the
Stock Option within one (1) year after your death,
provided
that no Stock Option may be exercised in any event more than ten (10) years
after the Date of Grant
.
4.
Method
of Exercise & Payment
.
You may
exercise the vested portion of the Stock Option in whole or in part, by giving
written notice to the Company. The written notice shall clearly state your
intent to elect to exercise the Stock Option and the number of shares of Common
Stock with respect to which the Stock Option is being exercised. Further, the
written notice shall be signed by you (or, in the case of your death, the person
exercising the Stock Option) and shall be delivered to the Corporate Secretary
of the Company at the Company’s principal executive office. Except as otherwise
provided in the Plan, payment of the exercise price for the number of shares
of
Stock being purchased pursuant to any Option shall be made (i) by cash or
check payable to the order of the Company; (ii)
by
delivery or attestation of shares of Common Stock (valued at their Fair Market
Value) in satisfaction of all or any part of the exercise price; (iii) by
delivery of a properly executed exercise notice with irrevocable instructions
to
a broker to deliver to the Company the amount necessary to pay the exercise
price from the sale or proceeds of a loan from the broker with respect to the
sale of Company Stock or a broker loan secured by the Company Stock;
(iv) by such other consideration as may be approved by the Committee from
time to time to the extent permitted by applicable law; or (v) by any
combination of (i) through (iv) hereof.
5.
Tax
Withholding
.
As a
condition of exercise, you agree that at the time of exercise that you will
pay
to the Company any applicable withholding taxes, if any, that the Company is
required to withhold in connection with the exercise of the Stock Option. To
satisfy the applicable withholding taxes, you may elect to (a) make cash
payment or authorize additional withholding from your cash compensation;
(b) deliver freely tradable shares of Common Stock (which will be valued at
their Fair Market Value as of the date of delivery); or (c) request that
the Company retain that number of shares of Common Stock that would satisfy
all
or a portion of the applicable withholding taxes.
6.
Transferability
of Stock Option
.
Other
than upon your death by will or by the laws of descent and distribution, the
Stock Option is not transferable by you and may be exercised during your
lifetime only by you.
7.
Termination
of Stock Option
.
In the
event that your employment or other relationship underlying the issuance of
this
Stock Option is terminated for Cause (as defined in the Plan) or terminated
voluntarily by you, your vested and non-vested Stock Option rights shall be
forfeited and terminated immediately and may not thereafter be exercised to
any
extent.
In
the
event that your employment or other relationship underlying the issuance of
this
Stock Option is terminated for any reason other than Cause, your death, or
voluntarily by you, you shall have the right to exercise the portion of the
Stock Option that has vested as of the date of such termination at any time
during the three (3) month period following the date of such termination, and
not thereafter, provided that no Stock Option may be exercised in any event
more
than ten (10) years after the Date of Grant.
8.
Adjustments
.
If the
number of outstanding shares of Common Stock is increased or decreased as a
result of one or more stock splits, reverse stock splits, stock dividends,
recapitalizations, mergers, share exchange acquisitions, combinations or
reclassifications, the number of shares with respect to which you have an
unexercised Stock Option and the Stock Option price shall be appropriately
adjusted as provided in the Plan.
9.
Delivery
of Certificate
.
The
Company may delay delivery of the certificate for shares of Common Stock
purchased pursuant to the exercise of a Stock Option until (i) it receives
any required representation by you or completion of any registration or other
qualification of such shares under any state or federal law regulation that
the
Company’s counsel shall determine as necessary or advisable, or (ii) it
receives advice of counsel that all applicable legal requirements have been
complied with. As a condition of exercising the Stock Option, you may be
required to execute a customary written indication of your investment intent
and
such other agreements the Company deems necessary or appropriate to comply
with
applicable securities laws.
10.
No
Guaranteed Right of Employment
.
If you
are employed by the Company, nothing contained herein shall confer upon you
any
right to be continued in the employment of the Company or interfere in any
way
with the right of the Company to terminate your employment at any time for
any
cause.
11.
Notice
of Certain Dispositions
.
You
agree to notify the Company in writing immediately after you make a disposition
of any shares acquired upon exercise of this Stock Option if you are required
to
report information related to your ownership of Common Stock pursuant to any
applicable securities laws, or if such disposition occurs before the later
of
(a) the date that is two (2) years after the Date of Grant, or (b) the date
that is one (1) year after the date that you acquired such shares upon
exercise of this Stock Option.
12.
Notices
.
Notices
hereunder shall be mailed or delivered to the Company at its principal place
of
business, and shall be delivered to you in person or mailed or delivered to
you
at the address set forth below, or in either case at such other address as
one
party may subsequently furnish to the other party in writing.
13.
Choice
of Law
.
This
Agreement shall be governed by New York law, without giving effect to the
conflicts or choice of laws principles thereof.
[Signature
page follows]
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Kreido
Biofuels, Inc.
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By:
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Name:
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Title:
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ACKNOWLEDGEMENT
BY OPTIONEE
The
foregoing Stock Option is hereby accepted and the terms and conditions thereof
hereby agreed to by the undersigned as of the Date of Grant specified
above.
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Optionee's
Signature
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Printed
Name
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Optionee's
Address:
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EXHIBIT
10.10
KREIDO
BIOFUELS, INC.
Form
of Non-Qualified Stock Option Agreement
[Date]
Dear
________________________:
I
am
pleased to inform you that Kreido Biofuels, Inc. (the “Company”) has granted you
a non-qualified stock option to purchase shares of the Company’s Common Stock,
par value $0.001 per share (the “Common Stock”), on the terms and conditions set
forth below.
The
grant
of this stock option is made pursuant to the Kreido Biofuels, Inc. Equity
Incentive Plan (the “Plan”). The terms of the Plan are incorporated into this
letter and in the case of any conflict between the Plan and this letter, the
terms of the Plan shall control.
Now,
therefore, in consideration of the foregoing and the mutual covenants
hereinafter set forth:
1.
Stock
Option
.
The
Company hereby grants you a non-qualified stock option (the “Stock Option”) to
purchase from the Company [______] shares of Common Stock at a price of [$_____]
per share. The Date of Grant is [________________]. Unless earlier exercised
or
terminated in accordance with the terms hereunder and in the Plan, this Stock
Option will expire on the date that is the tenth (10
th
)
anniversary of the Date of Grant.
2.
Entitlement
to Exercise the Stock Option
.
The
grant of the Stock Option is subject to the following terms and
conditions:
(a)
The
Stock
Option shall be exercisable in accordance with the following schedule:
[
]
The
Stock
Option shall cease to vest as of the date of the termination, for any reason,
of
your
employment or other relationship underlying the issuance of this Stock Option.
(b)
If
you
die when any portion of the Stock Option is exercisable, then the person to
whom
your rights under the Stock Option shall have passed by will or by the laws
of
descent and distribution may exercise any of the exercisable portion of the
Stock Option within one (1) year after your death,
provided
that no Stock Option may be exercised in any event more than ten (10) years
after the Date of Grant
.
4.
Method
of Exercise & Payment
.
You may
exercise the vested portion of the Stock Option in whole or in part, by giving
written notice to the Company. The written notice shall clearly state your
intent to elect to exercise the Stock Option and the number of shares of Common
Stock with respect to which the Stock Option is being exercised. Further, the
written notice shall be signed by you (or, in the case of your death, the person
exercising the Stock Option) and shall be delivered to the Corporate Secretary
of the Company at the Company’s principal executive office. Except as otherwise
provided in the Plan, payment of the exercise price for the number of shares
of
Stock being purchased pursuant to any Option shall be made (i) by cash or
check payable to the order of the Company; (ii)
by
delivery or attestation of shares of Common Stock (valued at their Fair Market
Value) in satisfaction of all or any part of the exercise price; (iii) by
delivery of a properly executed exercise notice with irrevocable instructions
to
a broker to deliver to the Company the amount necessary to pay the exercise
price from the sale or proceeds of a loan from the broker with respect to the
sale of Company Stock or a broker loan secured by the Company Stock;
(iv) by such other consideration as may be approved by the Committee from
time to time to the extent permitted by applicable law; or (v) by any
combination of (i) through (iv) hereof.
5.
Tax
Withholding
.
As a
condition of exercise, you agree that at the time of exercise that you will
pay
to the Company any applicable withholding taxes, if any, that the Company is
required to withhold in connection with the exercise of the Stock Option. To
satisfy the applicable withholding taxes, you may elect to (a) make cash
payment or authorize additional withholding from your cash compensation;
(b) deliver freely tradable shares of Common Stock (which will be valued at
their Fair Market Value as of the date of delivery); or (c) request that
the Company retain that number of shares of Common Stock that would satisfy
all
or a portion of the applicable withholding taxes.
6.
Transferability
of Stock Option
.
Other
than upon your death by will or by the laws of descent and distribution, the
Stock Option is not transferable by you and may be exercised during your
lifetime only by you.
7.
Termination
of Stock Option
.
In the
event that your employment or other relationship underlying the issuance of
this
Stock Option is terminated for Cause (as defined in the Plan) or terminated
voluntarily by you, your vested and non-vested Stock Option rights shall be
forfeited and terminated immediately and may not thereafter be exercised to
any
extent.
In
the
event that your employment or other relationship underlying the issuance of
this
Stock Option is terminated for any reason other than Cause, your death, or
voluntarily by you, you shall have the right to exercise the portion of the
Stock Option that has vested as of the date of such termination at any time
during the three (3) month period following the date of such termination, and
not thereafter, provided that no Stock Option may be exercised in any event
more
than ten (10) years after the Date of Grant.
8.
Adjustments
.
If the
number of outstanding shares of Common Stock is increased or decreased as a
result of one or more stock splits, reverse stock splits, stock dividends,
recapitalizations, mergers, share exchange acquisitions, combinations or
reclassifications, the number of shares with respect to which you have an
unexercised Stock Option and the Stock Option price shall be appropriately
adjusted as provided in the Plan.
9.
Delivery
of Certificate
.
The
Company may delay delivery of the certificate for shares of Common Stock
purchased pursuant to the exercise of a Stock Option until (i) it receives
any required representation by you or completion of any registration or other
qualification of such shares under any state or federal law regulation that
the
Company’s counsel shall determine as necessary or advisable, or (ii) it
receives advice of counsel that all applicable legal requirements have been
complied with. As a condition of exercising the Stock Option, you may be
required to execute a customary written indication of your investment intent
and
such other agreements the Company deems necessary or appropriate to comply
with
applicable securities laws.
10.
No
Guaranteed Right of Employment
.
If you
are employed by the Company, nothing contained herein shall confer upon you
any
right to be continued in the employment of the Company or interfere in any
way
with the right of the Company to terminate your employment at any time for
any
cause.
11.
Notice
of Certain Dispositions
.
You
agree to notify the Company in writing immediately after you make a disposition
of any shares acquired upon exercise of this Stock Option if you are required
to
report information related to your ownership of Common Stock pursuant to any
applicable securities laws, or if such disposition occurs before the later
of
(a) the date that is two (2) years after the Date of Grant, or (b) the date
that is one (1) year after the date that you acquired such shares upon
exercise of this Stock Option.
12.
Notices
.
Notices
hereunder shall be mailed or delivered to the Company at its principal place
of
business, and shall be delivered to you in person or mailed or delivered to
you
at the address set forth below, or in either case at such other address as
one
party may subsequently furnish to the other party in writing.
13.
Choice
of Law
.
This
Agreement shall be governed by New York law, without giving effect to the
conflicts or choice of laws principles thereof.
[Signature
page follows]
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Kreido Biofuels, Inc.
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By:
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Name:
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Title:
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ACKNOWLEDGEMENT
BY OPTIONEE
The
foregoing Stock Option is hereby accepted and the terms and conditions thereof
hereby agreed to by the undersigned as of the Date of Grant specified
above.
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Optionee's
Signature
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Printed
Name
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Optionee's Address:
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EXHIBIT
21.1
SUBSIDIARIES
OF KREIDO BIOFUELS, INC.
The
table
below sets forth all subsidiaries of Kreido Biofuels, Inc. and the state or
other jurisdiction of incorporation or organization of each.
Subsidiary
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State
of Incorporation
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Kreido
Laboratories
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California
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