As filed with the Securities and Exchange Commission on November 10, 2015

Registration No. 333-        

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



 

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933



 

MONSTER DIGITAL, INC.

(Exact name of Registrant as specified in its charter)



 

   
Delaware   3572   27-3948465
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

2655 Park Center Drive, Unit C
Simi Valley, California 93065
(805) 955-4190

(Address, including zip code and telephone number, of Registrant’s principal executive offices)



 

Jawahar Tandon
Chief Executive Officer
Monster Digital, Inc.
2655 Park Center Drive, Unit C
Simi Valley, California 93065
(805) 381-5544

(Name, address, including zip code and telephone number, including area code, of agent for service)



 

Copies to:

 
Thomas J. Poletti
Veronica N. Lah
Manatt, Phelps & Phillips LLP
695 Town Center Drive, 14 th Floor
Costa Mesa, California 92626
Phone: (714) 371-2500
Fax: (714) 371-2501
  Ralph V. DeMartino
Cavas S. Pavri
Schiff Hardin LLP
901 K Street NW Suite 700
Washington, D.C. 20001
Phone (202) 778-6400
Fax: (202) 778-6460


 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. x

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 
Large accelerated filer o   Accelerated filer o
Non-accelerated filer x (Do not check if a smaller reporting company)   Smaller reporting company o
 

 


 
 

TABLE OF CONTENTS

CALCULATION OF REGISTRATION FEE

       
Title of Each Class of Securities
to be Registered
  Amount to be registered (1) (2)   Proposed maximum aggregate offering price per share (2)   Proposed maximum aggregate offering price (2)   Amount of registration fee
Common Stock, $0.0001 par value per share                     $ 30,000,000     $  
Underwriters’ Warrants to Purchase Common Stock     (3)       N/A (4)       N/A (4)       N/A  
Common Stock Underlying Underwriters’ Warrants, $0.0001 par value per share     (5)           (6)                   (6)     $  
Total Registration Fee                              $  

(1) In accordance with Rule 416(a), the Registrant is also registering hereunder an indeterminate number of additional shares of Common Stock that shall be issuable pursuant to Rule 416 to prevent dilution resulting from stock splits, stock dividends or similar transactions.
(2) The registration fee for securities to be offered by the Registrant is based on an estimate of the Proposed Maximum Aggregate Offering Price of the securities, and such estimate is solely for the purpose of calculating the registration fee pursuant to Rule 457(o). Includes shares that the underwriters have the option to purchase from the Registrant to cover over-allotments, if any.
(3) Represents the maximum number of warrants, each of which will be exercisable at a percentage of the per share offering price, to purchase the Registrant’s common stock to be issued to the underwriters in connection with the public offering.
(4) In accordance with Rule 457(g) under the Securities Act, because the shares of the Registrant’s Common Stock underlying the underwriters’ warrants are registered hereby, no separate registration fee is required with respect to the warrants registered hereby.
(5) Represents the maximum number of shares of the Registrant’s common stock issuable upon exercise of the underwriters’ warrants.
(6) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(g) under the Securities Act, based on an estimated maximum exercise price of $     per share, or 120% of the maximum offering price.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission acting pursuant to said Section 8(a), may determine.


 
 

TABLE OF CONTENTS

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

PRELIMINARY PROSPECTUS              SUBJECT TO COMPLETION                 DATED NOVEMBER 10, 2015

 
        Shares
Common Stock
    
[GRAPHIC MISSING]
  
  
Monster Digital, Inc.

This is an initial public offering of shares of common stock of Monster Digital, Inc. We are selling      shares of our common stock in this offering.

Prior to this offering, there has been no public market for our common stock. It is currently estimated that the initial public offering price per share will be between $     and $     per share. We have applied to list our common stock on The Nasdaq Capital Market under the symbol “MSDI.”

We are an “emerging growth company” under applicable Securities and Exchange Commission rules and will be subject to reduced public company reporting requirements.

Investing in our common stock involves a high degree of risk. See “ Risk Factors ” beginning on page 10 to read about factors you should consider before buying shares of our common stock.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

   
  Per Share   Total
Initial public offering price   $          $       
Underwriting discounts and commissions (1)   $     $  
Proceeds to us, before expenses   $     $  
(1) We have agreed to pay a non-accountable expense allowance to the underwriters of 1.0% of the gross proceeds received in this offering and to reimburse the underwriters for other out-of-pocket expenses relating to this offering. See “Underwriting” beginning on page 76.

We have granted the underwriters a 45-day option to purchase up to      additional shares of common stock at the public offering price less the underwriting discount solely to cover over-allotments, if any. If the underwriters exercise this option in full, the total underwriting discounts and commissions will be $     and the additional proceeds to us, before expenses, from the over-allotment option exercise will be    .

The underwriters will also receive warrants to purchase a number of shares equal to 7% of the shares of our common stock sold in connection with this offering, or      shares, exercisable at a per share price equal to the offering price of this offering. The underwriters are offering the common stock as set forth under “Underwriting.” Delivery of the shares will be made on or about            , 2015.

  

Joint Book-Running Managers

 
Joseph Gunnar & Co.   Axiom Capital Management, Inc.

  

Prospectus dated            , 2015


 
 

TABLE OF CONTENTS

  

[GRAPHIC MISSING]

[GRAPHIC MISSING]

*To be introduced by end of calendar 2015.


 
 

TABLE OF CONTENTS

  

[GRAPHIC MISSING]


 
 

TABLE OF CONTENTS

  

[GRAPHIC MISSING]


 
 

TABLE OF CONTENTS

TABLE OF CONTENTS

 
  Page
Prospectus Summary     1  
The Offering     7  
Summary Financial Data     8  
Risk Factors     10  
Special Note Regarding Forward-Looking Statements     28  
Use of Proceeds     29  
Dividend Policy     29  
Capitalization     30  
Dilution     31  
Selected Financial Data     33  
Management’s Discussion and Analysis of Financial Condition and Results of Operations     35  
Business     51  
Management     62  
Executive Compensation     67  
Certain Relationships and Related Person Transactions     70  
Principal Stockholders     76  
Description of Capital Stock     78  
Shares Eligible for Future Sale     81  
Underwriting     83  
Legal Matters     86  
Experts     86  
Where You Can Find More Information     86  
Index to Financial Statements     F-1  

We have not authorized anyone to provide you with any information or to make any representation, other than those contained in this prospectus or any free writing prospectus we have prepared. We take no responsibility for, and provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only in circumstances and in jurisdictions where it is lawful to so do. The information contained in this prospectus is accurate only as of its date, regardless of the time of delivery of this prospectus or of any sale of our common stock.

Neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than the United States. You are required to inform yourself about, and to observe any restrictions relating to, this offering and the distribution of this prospectus.

i


 
 

TABLE OF CONTENTS

PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should read the entire prospectus carefully, including the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” consolidated financial statements and related notes included elsewhere in this prospectus. Unless the context suggests otherwise, references in this prospectus to “Monster Digital,” “we,” “us” and “our” refer to Monster Digital, Inc. and, where appropriate, its wholly-owned subsidiary SDJ Technologies, Inc., a Delaware corporation.

Unless we specifically state otherwise, all information in this prospectus gives effect to a one-for-         reverse stock split to be effected prior to the effective date of this offering and assumes (i) no exercise of the underwriters’ option to purchase up to an additional      shares of common stock; (ii) no exercise of warrants to be issued to the underwriters on the closing of this offering to purchase a number of shares equal to 7% of the shares sold in connection with this offering, or       shares exercisable at a price per share equal to the offering price of this offering (the “Underwriters Warrants”); and (iii) no exercise of 5,878,253 shares of common stock issuable upon exercise of outstanding options and warrants.

Our Business

General

Our primary business focus is the design, development and marketing of premium products under the “Monster Digital” brand for use in high-performance consumer electronics, mobile product and computing applications. Our license with Monster, Inc. allows us to manufacture and sell certain high-end products utilizing the “Monster Digital” brand name; Monster, Inc. is highly recognized by consumers for its high quality audio-video products. We work with our subcontract manufacturers and suppliers to offer new and enhanced products that use existing technology and adopt new technologies to satisfy existing and emerging consumer demands and preferences. On the marketing side, we partner with Monster, Inc. to support the sales and marketing of these products on a global basis.

We have invested significantly in building a broad distribution channel for the sale of products bearing the “Monster Digital” brand. As of June 30, 2015, our initial product entries of memory storage devices and peripherals are offered in over 15,000 locations globally. Our top four customers for our memory storage products for the six months ended June 30, 2015 were Walgreens (41%), Rite Aid (18%), InMotion (7%) and Fry’s (7%) and for the year ended December 31, 2014 were Sam’s Club (30%), Walgreens (22%), Rite Aid (15%) and Fry’s (7%). Our current focus is to leverage our distribution network through cooperating with Monster, Inc. to identify and market additional specialty and consumer electronics products.

Currently, our primary product offerings are as follows:

An action sports camera used in adventure sport, adventure photography and extreme-action videography which we intend to introduce before 2015 year end.
A line of ultra-small mobile external memory drive products for Apple iOS devices.
On-The-Go Cloud devices on an exclusive basis which create a wi-fi hot spot for multiple users while simultaneously allowing data to be viewed, played or transferred among the connected storage.
A broad selection of high-value memory storage products consisting of high-end, ruggedized Solid State Drives (“SSDs”), removable flash memory CompactFlash cards (“CF cards”), secured digital cards (“SD cards”) and USB flash drives.

Growth Strategy

Key elements of our growth and product offering strategy are to:

Continue to offer synergistic products addressing identifiable market trends . We plan to increase shelf space with our existing retailers and add other select specialty and consumer electronic products to our customer base. Specifically, we seek to offer products with high growth potential while combining performance, reliability and functionality at competitive prices that address identifiable market trends and satisfy existing and emerging consumer demands and preferences. Key elements of our product offering focus are:

1


 
 

TABLE OF CONTENTS

Social media . We believe the popularity and growth of social networking drives each of the markets our current and proposed products address. With respect to our action camera product entry, end-users will be able to share images and videos of their sports activities captured through action cameras on social media sites, which we believe will increase demand for these cameras. In the electronic data storage space, these internet-based applications drive the need for digital content, storage and distribution.
Growing unit sales . With respect to action cameras, Technavio projects the global action camera market to reach $5.72 billion by 2019 from $1.99 billion in 2014. In addition, according to Technovio, the global action camera market is expected to have a shipment of 21.54 million units by 2019 as compared to 7.63 million in 2014, growing at a compounded annual growth rate of 23.07% during the period 2015-2019. Unit sales within the electronic data storage industry have continued to grow. According to Global Industry Analysts, Inc., worldwide flash memory product sales of SD cards are estimated to reach $21.3 billion by 2018. According to IHS iSuppli, global SSD sales are projected to reach 189.6 million units by 2017.
Advances in technology . With advances in technology, more efficient and higher-end products are introduced into the market to cater to the various requirements of consumers. Technological advances drive consumer demand and higher average selling prices for these technologically superior products. We believe that as disposable income and purchasing power of consumers increases on a global basis, these consumers spend more on consumer electronics products generally and higher end products that offer advanced technological features specifically.

Accelerate our international growth.    We believe that international markets represent a significant growth opportunity for us. We plan to capitalize on the strength of the Monster Digital brand to increase our international presence through additional retailers and strategic distribution arrangements.

Continue to leverage our brand awareness.   Monster is a premium brand name highly recognizable by consumers. We intend to expand awareness of the Monster Digital brand through increased marketing efforts, trade show presence and selected advertising opportunities.

Competitive advantages

We believe we offer the following competitive advantages:

Relationship with Monster, Inc. .  Our license with Monster, Inc. offers us the ability to leverage Monster, Inc.’s substantial retail and distribution channels and to support our product sales through its global sales and marketing team. Further to this license, our company and Monster, Inc. consult and cooperate with each other in the design process of products sold under the Monster Digital brand name. Also, the license provides that our company and Monster, Inc. will cooperate to promote and effect the offer and marketing of products sold under the Monster Digital brand name through Monster, Inc.’s existing and future sales and distribution channels.

Strategic marketing relationships .  We believe our marketing relationships with key industry leaders distinguishes our company from others in our industry. Our Overdrive 3.0 SSD and Overdrive Thunderbolt SSD, each with a 1TB configuration, are currently offered by Apple online in Europe and the UK. Our Advanced 3.0 OTG USB flash drive is the first Apple certified external memory of iOS. Also, our products are offered and supported by Monster, Inc.’s large global and retail distribution network.

Experienced management team .  Our management consists of executives with years of technical and entrepreneurial experience. Our management has over 35 years of combined experience in memory products, power products and electronic manufacturing services.

Risks and Uncertainties

An investment in our company stock involves a high degree of risk. Our business prospects, financial condition or operating results could be materially adversely affected by a number of risks known or not currently known to us, including but not limited to those described in “Risk Factors” beginning on page 10 . There risks include, but not limited to the following:

2


 
 

TABLE OF CONTENTS

The report of our independent auditors has expressed that there is substantial doubt about our ability to continue as a going concern;
Our strategic partnership with Monster, Inc. poses significant challenges for us, including the fact that Monster, Inc. is not restricted from offering its own line of memory products;
Our ability to offer additional products under the “Monster Digital” brand is subject to the prior approval of Monster, Inc. which is not obligated to grant such approval;
We depend exclusively on third parties to manufacture and supply our memory storage products and plan on continuing to rely on such parties to manufacture the substantial amount of our primary memory storage products;
We are subject to the cyclical nature of the consumer electronics industry; and
Our markets are extremely complicated and subject to rapid technological change.

Related Party Transactions

From inception through the date of this prospectus, we have engaged in significant related party transactions with our executive officers and directors and with entities affiliated with such persons. There transactions include, but are not limited to:

related party loans from Jawahar Tandon, our Chief Executive Officer, and Devinder Tandon, the brother of Jawahar Tandon, a significant principal stockholder and a former director;
related party loans, operational and other support provided by Tandon Enterprises, a company owned in substantial part by Jawahar and Devinder Tandon; and
related party loans to Jawahar Tandon and to Vivek Tandon, our President and a director, who is the son of Jawahar Tandon.

The board of Monster Digital, which approved all of the related party transactions, consisted primarily of Jawahar, Devinder and Vivek Tandon. While the board believed the terms and conditions of such transactions were fair and in the best interests of our company, there can be no assurance that the transactions were on terms no less favorable than terms generally available to an unaffiliated third party under the same or similar circumstances.

We have adopted a policy to be effective on the effective date of this offering that our executive officers, directors, nominees for election as a director, beneficial owners of more than 5% of any class of our common stock and any members of the immediate family of any of the foregoing persons are not permitted to enter into a related person transaction with us without the prior consent of our audit committee. Any request for us to enter into a transaction with an executive officer, director, nominee for election as a director, beneficial owner of more than 5% of any class of our voting securities or any member of the immediate family of any of the foregoing persons, in which the amount involved exceeds $120,000 and such person would have a direct or indirect interest, must first be presented to our audit committee for review, consideration and approval. In approving or rejecting any such proposal, our audit committee is to consider the material facts of the transaction, including, but not limited to, whether the transaction is on terms no less favorable than terms generally available to an unaffiliated third party under the same or similar circumstances and the extent of the related person’s interest in the transaction. See “Certain Relationships and Related Person Transactions.”

3


 
 

TABLE OF CONTENTS

Monster License Agreement

We entered into a trademark license agreement with Monster, Inc. effective July 7, 2010 (the “Monster License Agreement”). The Monster License Agreement, as amended, gives us exclusive rights to utilize the tradenames “Monster Memory,” “Monster Digital” and the M (stylized) mark on (i) action sports cameras, (ii) cable memory, (iii) flash based cards, (iv) flash based SSD drive products, (v) DRAM modules, (vi) USB flash drives and (vii) internal power supplies for personal computers. The 25 year Agreement provides for the payment of royalties to Monster, Inc. on all sales of the referenced memory products, excluding sales to Monster, Inc., as follows:

Years 1 (2012) and 2:  Royalties on all sales excluding sales to Monster, Inc. at a rate of four (4) percent, with no minimum.
Years 3 through 5:  Minimum royalty payments of $50,000 per quarter up to a maximum of four (4) percent of all sales excluding sales to Monster, Inc.
Years 6 through 10:  Minimum royalty payments of $125,000 per quarter up to a maximum of four (4) percent of all sales excluding sales to Monster, Inc.
Years 11 through 15:  Minimum royalty payments of $187,500 per quarter up to a maximum of four (4) percent of all sales excluding sales to Monster, Inc.
Years 16 through 25:  Minimum royalty payments of $250,000 per quarter up to a maximum of four (4) percent of all sales excluding sales to Monster, Inc.

Effective July 1, 2014, the royalty rate on certain products was reduced to 2% for a 12 month period.

At any time during the term of the Monster License Agreement, a permanent license may be negotiated subject to the parties reaching a mutually acceptable agreement.

Under the Monster License Agreement, Monster, Inc. itself may use (but not sublicense) the Monster mark and its M (stylized) mark (but not the Monster Digital mark) in connection with memory and data storage products. Although Monster, Inc. must offer us the first right to supply such products on commercially reasonable terms under an arrangement similar to the Monster License Agreement, nothing limits the ability of Monster, Inc. to act as a competitor to us.

In August 2015, we executed an amendment to the Monster License Agreement with Monster Inc. whereby Monster granted us the additional right further to the Monster License Agreement to use the name “Monster Digital, Inc.” as our corporate name. Further to the amendment, in addition to royalties mentioned above, we issued Monster, Inc. 5,681,558 shares of our common stock and will pay it a cash fee of $500,000 payable over a 12 month period.

In addition, in August 2015, and in connection with the aforementioned amendment to the trademark license agreement, we entered into a two-year advisory board agreement with Noel Lee, the Chief Executive Officer and sole shareholder of Monster, Inc. Further to the advisory board agreement, we issued Mr. Lee a warrant to purchase up to 2,840,779 shares of our common stock at a per share exercise price of $1.00.

4


 
 

TABLE OF CONTENTS

Corporate Information

SDJ, our operating subsidiary, was incorporated in 2007 and became our wholly owned subsidiary in 2012. We were incorporated under the name WRASP 35, Inc., changed our name to AOTS 35, Inc. in September 2011, changed our name to Tandon Digital, Inc. in May 2012 and changed our name to Monster Digital, Inc. in August 2015. Our principal executive offices are located at 2655 Park Center Drive, Unit C, Simi Valley, California and our telephone number is (805) 381-5544. Our website address is www.monsterdigital.com . Information contained on or accessible through our website is not a part of this prospectus and should not be relied upon in determining whether to make an investment decision.

Monster Digital, Tandon Digital, Memory Cable, iX32 and other trade names, trademarks or service marks appearing in this prospectus are the property of, or exclusively licensed by, Monster Digital. Trade names, trademarks and service marks of other companies appearing in this prospectus, including but not limited to “Monster”, are the property of their respective holders.

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act, and therefore we may take advantage of certain exemptions from various public company reporting requirements, including not being required to have our internal control over financial reporting audited by our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and any golden parachute payments. We may take advantage of these exemptions until we are no longer an “emerging growth company”. We will remain an “emerging growth company” for up to five years. We will cease to be an “emerging growth company” upon the earliest of: (1) the last day of the fiscal year following the fifth anniversary of this offering, (2) the last day of the first fiscal year in which our annual gross revenues are $1 billion or more, (3) the date on which we have, during the previous rolling three-year period, issued more than $1 billion in non-convertible debt securities, and (4) the date on which we are deemed to be a “large accelerated filer” as defined in the Securities Exchange Act of 1934, as amended, or the Exchange Act. We are choosing to irrevocably opt out of the extended transition periods available under the JOBS Act for complying with new or revised accounting standards.

5


 
 

TABLE OF CONTENTS

Industry and Other Data

We have obtained some industry and market share data from third-party sources, including the independent industry publications set forth below, that we believe are reliable. In many cases, however, we have made statements in this prospectus regarding our industry and our position in the industry based on estimates made from our experience in the industry and our own investigation of market conditions. We believe these estimates to be accurate as of the date of this prospectus. However, this information may prove to be inaccurate because of the method by which we obtained some of the data for our estimates or because this information cannot always be verified with complete certainty due to the limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties. Although we are responsible for all of the disclosure contained in this prospectus and we believe the information from the industry publication and other third-party sources included in this prospectus is reliable, such information is inherently imprecise. As a result, you should be aware that the industry and market data included in this prospectus and estimates and beliefs based on that data, may not be reliable. The content of the below sources, except to the extent specifically set forth in this prospectus, do not constitute a portion of this prospectus and are not incorporated herein.

Technavio — Global Action Camera Market 2015-2019
Global Industry Analysts, Inc. — Secure Digital (SD) Memory Cards: A Global Strategic Business Report (2012)
IHS iSuppli — “Enterprise Convertibles Lead Storage in 2014”
Great American Group — Technology Monitor (March 2015)

The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section titled “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

6


 
 

TABLE OF CONTENTS

THE OFFERING

Common stock offered    
         shares
Common stock to be outstanding after this offering    
         shares (1) (2)
Over-allotment option to purchase additional shares of common stock    
         shares
Use of proceeds    
    We estimate that our net proceeds from this offering will be approximately $     million, or approximately $     million if the underwriters’ option to purchase additional shares of our common stock is exercised in full, based on an assumed initial public offering price of      per share, which is the midpoint of the range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses.
    We intend to use the net proceeds from this offering to repay short-term debt and for working capital purposes, including the funding of inventory and expanding our net sales and marketing efforts. See “Use of Proceeds”.
Risk factors    
    See “Risk Factors” beginning on page 10 and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.
Proposed Nasdaq Capital Market symbol    
    “MSDI”

(1) Our executive officers, directors, holders of 5% or more of our capital stock and their respective affiliates will hold approximately    % of our outstanding voting stock upon consummation of this offering.
(2) The number of shares of common stock to be outstanding after this offering is based on 55,815,567 shares of our common stock outstanding as of October 29, 2015; such information excludes:
1,055,000 shares of common stock issuable upon the exercise of options granted under our 2012 Omnibus Incentive Plan, all of which have an exercise price of $2.00 per share; and
4,823,253 shares of common stock issuable upon the exercise of warrants which have an exercise price of between $0.00035 and $2.00 per share.
          shares of common stock issuable upon exercise of the underwriters warrants.

7


 
 

TABLE OF CONTENTS

SUMMARY FINANCIAL DATA OF MONSTER DIGITAL

The following tables summarize consolidated financial data of Monster Digital. You should read this summary financial data together with the sections titled “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as our consolidated financial statements and related notes included elsewhere in this prospectus.

We have derived the summary consolidated statement of operations data for the years ended December 31, 2013 and 2014 from the audited financial statements of Monster Digital included elsewhere in this prospectus. We have derived the summary consolidated statements of operations data for the six months ended June 30, 2014 and 2015 and the consolidated balance sheet data as of June 30, 2015 from the unaudited interim consolidated financial statements of Monster Digital included elsewhere in this prospectus. The unaudited interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and reflect, in the opinion of management of Monster Digital, all adjustments of a normal, recurring nature that are necessary for a fair presentation of the unaudited interim consolidated financial statements of Monster Digital. The historical results are not necessarily indicative of the results that should be expected in the future, and the interim results are not necessarily indicative of the results that should be expected for the full year or for any other period.

       
  Year ended
December 31,
  Six months ended June 30,
     2013   2014   2014   2015
     (in thousands except share and per share data)
Consolidated Statements of Operations Data:
                                   
Net sales   $ 3,444     $ 11,343     $ 3,270     $ 2,718  
Cost of goods sold     2,838       11,109       2,540       2,457  
Gross profit     606       234       730       261  
Operating expenses:
                                   
Research and development     709       542       190       246  
Selling and marketing     1,515       3,722       687       1,389  
General and administrative     1,747       2,646       949       1,375  
Loss from operations     (3,365 )       (6,676 )       (1,096 )       (2,749 )  
Other expenses:
                                   
Interest and finance expense     66       1,661       256       630  
Debt conversion expense              2,707             898  
Loss before income taxes     (3,431 )       (11,044 )       (1,352 )       (4,277 )  
Provision for income taxes     4       13       8        
Net loss   $ (3,435 )     $ (11,057 )     $ (1,360 )     $ (4,277 )  
Basic and diluted net loss per common
share
  $ (0.09 )     $ (0.27 )     $ (0.03 )     $ (0.10 )  
Weighted-average common shares outstanding used to compute basic and diluted net loss per common share     39,611       41,592       39,606       44,758  

8


 
 

TABLE OF CONTENTS

   
  As of June 30, 2015
     Actual   As
Adjusted (1) (2)
     (in thousands)
Consolidated Balance Sheet Data:
                 
Cash and cash equivalents   $ 106     $       
Working capital (deficit)     (4,000 )           
Total assets     4,706           
Notes payable     38           
Accumulated deficit     (21,411 )           
Total stockholders’ (deficit) equity     (3,966 )           

(1) The as adjusted column gives effect to the sale of      shares of our common stock in this offering at an assumed initial public offering price of      per share, which is the midpoint of the range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses.
(2) A $1.00 increase (decrease) in the assumed initial public offering price of      per share would increase (decrease) the amount of cash and cash equivalents, working capital, total assets and total stockholders’ equity by approximately $     million, assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions. Similarly, each increase (decrease) of 1,000,000 shares in the number of shares of our common stock offered would increase (decrease) the amount of cash and cash equivalents, working capital, total assets and total stockholders’ equity by approximately $     million, assuming that the assumed initial public offering price remains the same, after deducting estimated underwriting discounts and commissions and estimated offering expenses. The as adjusted information discussed above is illustrative only and will be adjusted based on the actual initial public offering price and the other terms of this offering determined at pricing.

9


 
 

TABLE OF CONTENTS

RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the following risks and all of the other information contained in this prospectus, including our combined and consolidated financial statements and related notes, before investing in our common stock. While we believe that the risks and uncertainties described below are the material risks currently facing us, additional risks that we do not yet know of or that we currently think are immaterial may also arise and materially affect our business. If any of the following risks materialize, our business, financial condition and results of operations could be materially and adversely affected. In that case, the trading price of our common stock could decline, and you may lose some or all of your investment.

Risks Related To Our Business

Our independent auditors have expressed substantial doubt about our ability to continue as a going concern.

We incurred net losses of $11.1 million, $3.4 million and $4.3 million for the years ended December 31, 2014 and 2013 and the six months ended June 30, 2015, respectively. As of June 30, 2015, we had an accumulated deficit of $21.4 million. In their report on our financial statements for the year ended December 31, 2014, our independent registered public accounting firm included an explanatory paragraph regarding the substantial doubt about our ability to continue as a going concern. Our financial statements contain additional note disclosures describing the circumstances regarding our ability to continue as a going concern. Failure to generate sufficient cash flows from operations raise additional capital or reduce discretionary spending will have a material adverse effect on our ability to achieve our intended business objectives. While management has a plan to fund ongoing operations, there is no assurance that its plan will be successfully implemented. As a result, you may lose the entire value of your investment in our company.

Our operating results, gross margins, cash flow and ability to sustain profitability may fluctuate significantly in the future and are difficult to predict.

Our operating results, gross margins, operating cash flow and ability to sustain profitability are based on a number of factors related to our industry and the markets for our memory storage products. We will have little or no control over many of these factors and any of these factors could cause our operating results, gross margins and ability to sustain profitability to fluctuate significantly. These factors include, among others:

competitive pricing pressures for the products we sell, including the timing and amount of any reductions in the average selling prices of our products and our ability to charge a premium for our higher performance products;
the growth of the markets for host devices that use data storage products;
our ability to control our operating expenses;
the timing and amount of expenses related to obsolescence and disposal of excess inventory and the difficulty of forecasting and managing our inventory levels;
the amount of price protection, volume incentive rebates, discounts, market development funds, cooperative advertising payments and other concessions and discounts that we may need to provide to some of our customers due to competitive pricing pressures;
changes in our product and revenue mix;
the extent to which our products, particularly our higher margin products, are accepted by the markets;
the timing of the collection of our accounts receivable;
the decision of our customers to return products or rotate their inventory;
the inability of suppliers to fully indemnify us should we be subjected to litigation;

10


 
 

TABLE OF CONTENTS

the difficulty of forecasting sell-through rates of our products and their impact on inventory levels at our resellers if sell-through data is not timely reported to us, which may result in additional orders being delayed or reduced and inventory being returned;
increases in costs charged by our product suppliers or the failure of our suppliers to decrease the prices they charge to us when industry prices decline;
competing data memory standards, which displace the standards used in our products and our customers’ products;
the announcement or introduction of products and technologies by competitors; and
potential product quality problems which could raise returns or rework costs.

In addition, we may be unable to accurately forecast our revenues and gross margins. We incur expenses based predominantly on operating plans and estimates of future revenues. Our expenses are to a large extent fixed in the short term and we may not be able to adjust them quickly to meet a shortfall in revenues during any particular quarter. We also plan inventory levels based on anticipated demand for our products and on anticipated product mix. As we anticipate increased demand for certain products we increase our level of inventory, which results in increased risk if we inaccurately estimate anticipated demand. Any significant shortfall in revenues in relation to our expenses and planned inventories would decrease our net income or increase our operating losses and harm our financial condition. If we are unsuccessful in increasing revenues from our higher margin products and controlling our operating expenses, we may not be able to achieve profitability.

Also, we have generated significant negative operating cash flows since our inception and expect to continue to do so for the foreseeable future. We are required to expend significant dollars on inventory and marketing efforts prior to the receipt of cash from the collection of our accounts receivable. We expect that our negative operating cash flows will continue for the foreseeable future as we increase our product offerings and expand our customer base. While we have a factoring arrangement in place that assists in part, we require substantial additional funds to bridge the gap between the expenditure and receipt of funds. If we are unable to raise additional capital, we will continue to be limited in our business and expansion efforts.

Because we have a limited operating history, we may not be able to successfully manage our business or achieve profitability.

We have a limited operating history upon which to base an evaluation of our prospects and the potential value of our common stock. We are confronted with the risks inherent in an early stage company, including difficulties and delays in connection with the acquisition and marketing of products, operational difficulties, and difficulty in estimating future development, regulatory, and administrative costs. If we cannot successfully manage our business, we may not be able to acquire and offer commercially viable products, generate future profits and may not be able to support our operations. It is possible that we will incur additional expenses and may incur losses in the further implementation of our business plan.

In addition, we have not had any previous experience in sourcing and selling action sports cameras. We are uncertain as to whether the action sports camera that we plan to introduce will achieve the level of market acceptance that we expect or at all. Also, we cannot assure you that there will not be unexpected delays or complications which will cause the introduction of our action sports camera to be delayed beyond the end of 2015. Given our lack of experience in the action sports camera market, we cannot assure you that we will be able to identify the needs and preferences of customers and to adjust inventory mixes or marketing efforts that correspond to such needs and preferences; and we also cannot assure you that our proposed action sports camera will become commercially successful. In such circumstances, our business, growth prospects, financial condition and results will be adversely affected.

Our strategic partnership with Monster, Inc. poses significant challenges for us, and if we are unable to manage this relationship, our business and operating results will be adversely affected.

We have entered into a multi-year license agreement with Monster, Inc. (the “Monster License Agreement”) under which we have the right to exclusively market certain products under the “Monster Digital” brand name. As of October 29, 2015, this list of permitted products consists of the following: action cameras,

11


 
 

TABLE OF CONTENTS

DRAM modules; USB flash drives; flash based SD, M2, MicroSD, CF, ProDuo, card products; SSD drive products; internal power supplies for PCs and hybrid drives. The management of this business will adversely affect our revenues and gross margins if we are, among other things, unable to:

properly manage the use of Monster Digital brand;
control the sales and marketing expenses associated with launching the brand in new channels;
plan for anticipated changes in demand; and
effectively leverage the Monster Digital brand to achieve premium pricing and grow market share.

We have a number of obligations that we must fulfill under our agreement with Monster, Inc. to keep it in effect. These obligations include compliance with Monster, Inc. guidelines and trademark usage, customer satisfaction and the requirement that we meet market share goals and target minimum royalty payments. As a result, Monster, Inc. may in the future have the right to terminate our license in its entirety. If we were to lose the rights to sell products under the “Monster Digital” brand, our financial results would be significantly negatively impacted.

While we will continue to seek to offer additional products bearing the “Monster Digital” brand, the consent of Monster, Inc. will be required in order to sell any additional products bearing the “Monster Digital” brand. While to date Monster, Inc. has granted its consent to all our additional products to be sold bearing the “Monster Digital” brand, there can be no assurance that it would similarly consent in the future. If we are unable to secure the consent of Monster, Inc. for the sale of future products bearing the “Monster Digital” brand our product offering will be limited which would substantially and adversely affect our future prospects.

Our strategic partnership with Monster, Inc. does not restrict Monster, Inc. from offering its own line of memory products.

Under the Monster License Agreement, Monster, Inc. itself may use (but not sublicense) the Monster mark and its M (stylized) mark (but not the Monster Digital mark) in connection with memory and data storage products. Although Monster, Inc. must offer us the first right to supply such products on commercially reasonable terms under an arrangement similar to the Monster License Agreement, nothing limits the ability of Monster, Inc. to act as a competitor to us. Monster, Inc. has substantially more resources to exploit these markets than we do and their entry into our markets would substantially and adversely affect our future prospects.

Our failure to successfully promote our brand and achieve strong brand recognition in our markets will limit and reduce the demand for our products.

We believe that brand recognition is critical to our success. We plan to increase our marketing expenditures to create and maintain prominent brand awareness. If we fail to promote our Monster Digital brand successfully, or if the expenses with doing so are disproportionate to any increased net sales we achieve, it would have a material adverse effect on our business and results of operations. Other companies, who may have significantly more resources to promote their own brands then we do, may not be aggressively promoting their brands. If they begin to more aggressively promote their brand or if our products exhibit poor performance or other defects, our brand may be adversely affected, which would inhibit our ability to attract or retain customers.

The net proceeds of this offering may not satisfy all of our working capital requirements, and we may need additional capital to fund our future operations and we may not be able to obtain the amount of capital required, particularly when the credit and capital markets are unstable. Future sales and issuances of our common stock or rights to purchase common stock, including pursuant to our equity incentive plans, could result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to fall.

Our projection of future capital needs is based on our operating plan, which in turn is based on assumptions that may prove to be incorrect. As a result, our financial resources may not be sufficient to satisfy our future capital requirements. Should these assumptions prove incorrect, there is no assurance that we can raise

12


 
 

TABLE OF CONTENTS

additional financing on a timely basis or on favorable terms. If funding is insufficient at any time in the future, we may not be able to fully commercialize our products, take advantage of business opportunities or respond to competitive pressures, any of which could harm our business.

We may be required to obtain additional financing, which could be dilutive to the investors in this Offering. We currently have minimal cash on hand and an accounts receivable factoring facility is limited to $4.0 million. Any of the following factors could result in insufficient capital to fund our operations for a period significantly shorter than twelve months:

if our capital requirements or cash flow vary materially from our current projections;
if we are unable to timely collect our accounts receivable;
the loss of a key customer or a material reduction by a key customer in the range of inventory level of our products;
if we are unable to sell-through inventory currently in our sales channels as anticipated;
if we are unable to timely bring new successful products to market; or
if other unforeseen circumstances occur.

We do not know whether additional financing will be available when needed, or, if available, whether the terms of any financing will be favorable to us. The current worldwide financing environment is challenging, which could make it more difficult for us to raise funds on reasonable terms, or at all. To the extent we raise additional capital by issuing equity securities, our stockholders may experience substantial dilution and the new equity securities may have rights, preferences or privileges senior to those of our common stock. If we cannot raise needed funds on acceptable terms, we may not be able to develop or enhance our products, take advantage of future strategic opportunities or respond to competitive pressures or unanticipated events, all of which would harm our business and results of operations. Furthermore, if we are unable to raise additional capital, or cannot raise capital on acceptable terms, we may not have sufficient capital to operate our business as planned and would have to modify our business plan or curtail some or all of our operations.

In addition, pursuant to our equity incentive plan, our compensation committee is authorized to grant equity-based incentive awards to our directors, executive officers and other employees and service providers, including officers, employees and service providers of our subsidiary. Future grants of, options and other equity awards and issuances of common stock under our equity incentive plans may have an adverse effect on the market price of our common stock.

If we are unable to develop or maintain the strategic relationships necessary to develop, sell and market products that are commercially viable and widely accepted, the growth and success of our business will be limited.

We may not be able to acquire and sell products that are commercially viable and widely accepted if we are unable to anticipate market trends and the price, performance and functionality requirements of data memory manufacturers, suppliers and customers. We must continue to collaborate closely with our customers, manufacturers, and other suppliers to ensure that critical development, marketing and distribution projects proceed in a coordinated manner. These collaborations are also important because our ability to anticipate trends and plan our future product offerings depends to a significant degree upon our continued access to strategic relationships we currently have with our manufacturers and suppliers. If any of our current relationships terminate or otherwise deteriorate, or if we are unable to enter into future relationships that provide us with comparable insight into market trends or access to new and enhanced products, offerings and technologies, we will be substantially hindered in our future business endeavors.

13


 
 

TABLE OF CONTENTS

We depend exclusively on third parties to manufacture and supply our products and we plan on continuing to rely on such parties to manufacture the substantial majority of our products. If we are unable to obtain sufficient quantities of existing and enhanced products at acceptable qualities and prices, and in a timely manner, we will not be able to meet customer demand for our products, which would limit the growth and success of our business.

We do not own or operate a manufacturing facility or have an internal research and development department. Instead, we have relied on and anticipate continuing to rely on third parties to produce and supply all of our products. We believe that by continuing to outsource these products, we continue to benefit from lower manufacturing and engineering costs. For this reason, for the foreseeable future we expect to continue to rely on third party manufacturers to produce and supply the substantial majority of our primary data memory products.

The products we market are subject to rapid technological change and evolving industry standards. The future revenue growth of our business depends in large part on the development, market acceptance and performance of any new products we introduce in the marketplace. We rely on third parties for the research and development of new and enhanced products that are necessary for the operation of our products. Our reliance on third party manufacturers involves a number of significant risks, including:

reduced control over delivery schedules, quality assurance, manufacturing yields and production costs; and
unavailability of, or delayed access to, next-generation or key products, processes or technologies.

These risks could result in product shortages or increase our costs of manufacturing, assembling or testing our products. If these subcontractors and suppliers are unable or unwilling to continue to provide services and deliver products of acceptable quality, at acceptable costs and in a timely manner, we would have to identify and qualify other subcontractors and suppliers. This could be time-consuming and difficult and result in unforeseen operational problems.

Although we depend on various third parties for the introduction and acceptance of new products, we do not have long-term relationships with any of them. There can be no assurance that we will maintain existing relationships or forge new relationships, that we will continue to have access to significant proprietary products, processes and technologies, or that we will continue to have access to new competitive products, processes and technologies that may be required to introduce new products. If we are not successful in maintaining and developing new relationships or obtaining rights to market products with competitive technologies, we will become less competitive and our operations will suffer.

A material change in customer relationships or in customer demand for products could have a significant impact on our business.

Our success is dependent on our ability to successfully offer trade terms that are acceptable to our customers and that are aligned with our pricing and profitability targets. Our business could suffer if we cannot maintain relationships with key customers based on our trade terms and conditions. In addition, our business would be negatively impacted if key customers were to significantly reduce or eliminate the range of inventory level of our products.

In our memory storage industry, products are typically characterized by average selling prices that historically decline over relatively short time periods. If we are unable to effectively manage our inventories, reduce our costs, introduce new products with higher average selling prices or increase our sales volumes, our revenues and gross margins will be negatively impacted.

Data memory products often experience price erosion over their life cycle due in large part to competitive pressures, customer demand and technological changes. In order to maintain gross profits for products that have a declining average selling price, we must continuously reduce costs or increase sales volume. We must also successfully manage our inventory to reduce our overall exposure to price erosion. In our industry, prices have often fallen faster than costs which has resulted in margin pressure. Our customers may exert pressure on us to make price concessions or to match pricing of our competitors. Any reduction in prices by us in response to pricing pressure will hurt our gross margins unless we can reduce our costs and manage our

14


 
 

TABLE OF CONTENTS

inventory levels to minimize the impact of such price declines. Though we experienced a reduction in average selling price for certain products during the six months ended June 30, 2015 as compared to the same period in 2014, overall gross margin on product was not negatively impacted as gross margin on new products compensated for such reductions. There can be no assurance that the introduction of new product will continue to protect gross margin.

As it relates to our SSD, CF and SD card and USB flash drive products, demand depends in large part on the demand for additional storage and storage upgrades in existing computer systems. The demand for computer systems has been volatile in the past and often has had an exaggerated effect on the demand for drives and flash memory in any given period. As a result, these markets have experienced periods of excess capacity, which can lead to liquidation of excess inventories and more intense price competition. If more intense price competition occurs, we may be forced to lower prices sooner and more than expected, which could result in lower average selling prices, revenue and gross margins. We expect that average selling prices and gross margins will also tend to decline when there is a shift in the mix of products and sales of lower priced products increase relative to those of higher priced products. In addition, rapid technological changes often reduce the volume and profitability of sales of existing products and increase the risk of inventory obsolescence.

If we are unable to reduce our costs to offset declines in average selling prices or increase the sales volume of our existing products, particularly higher capacity or premium products, or introduce new products with higher gross margins, our revenues and gross margins will be adversely affected. This may negatively impact our anticipated growth in product revenues as well as our gross margins, particularly if the decline in our average selling prices is not matched by price declines in our supply costs.

Our failure to accurately forecast market and customer demand for our products, or to quickly adjust to forecast changes, would adversely affect our business and financial results or operating efficiencies.

The data storage industry faces difficulties in accurately forecasting market and customer demand for its products. The variety and volume of products we offer is based in large part on these forecasts. Accurately forecasting demand has become increasingly difficult in light of the volatility in global economic conditions. In addition, because many of our products are designed to be largely substitutable, our demand forecasts may be impacted significantly by the strategic actions of our competitors. As forecasting demand becomes more difficult, the risk that our forecasts are not in line with demand increases. If our forecasts exceed actual market demand, then we could experience periods of product oversupply and price decreases, which would impact our financial performance. If market demand increases significantly beyond our forecasts, then we may not be able to satisfy customer product needs, which could result in a loss of market share if our competitors are able to meet customer demands.

If we do not effectively manage our inventory and product mix, we may incur costs associated with excess inventory or lose sales from not having enough inventory.

We operate in markets that are characterized by intense competition, supply shortages or oversupply, rapid technological change, evolving industry standards, declining average selling prices and rapid product obsolescence, all of which make it more challenging to effectively manage our inventory. If we are unable to properly monitor, control and manage our inventory and maintain an appropriate level and mix of products with our customers, we may incur increased and unexpected costs associated with this inventory. For example, if our customers are unable to sell their inventory in a timely manner, we may choose or be required to lower the price of our products or allow our customers to exchange the slow-moving products for newer products. Similarly, if we improperly forecast demand for our products, we could end up with excess inventory that we may be unable to sell in a timely manner, if at all. As a result, we could incur increased expenses associated with writing off excess or obsolete inventory. Alternatively, we could end up with too little inventory and we may not be able to satisfy demand, which could have a material adverse effect on our customer relationships. Our risks related to inventory management are exacerbated by our strategy of closely matching inventory levels with product demand, leaving limited margin for error.

15


 
 

TABLE OF CONTENTS

We are subject to the cyclical nature of the consumer electronics industry and any future downturn could adversely affect our business.

The consumer electronics industry is highly cyclical and characterized by constant and rapid technological change, rapid product obsolescence and price erosion, evolving standards, short product life cycles and wide fluctuations in product supply and demand. The flash memory markets have in the past experienced significant downturns often connected with, or in anticipation of, maturing product cycles and declines in general economic conditions. These downturns have been characterized by diminished product demand, production overcapacity, high inventory levels and accelerated erosion of average sales prices. It is impossible to predict whether demand for our products will diminish or costs for any of our products will increase. Also our customers’ demand for storage capacity may not continue to grow at current industry estimates. For example, there has been a recent rapid growth in devices that do not contain a hard drive such as tablet computers and smartphones; this could affect demand for our SSD products. Any future downturns could have a material adverse effect on our business and results of operations.

To remain competitive and stimulate customer demand, we must successfully manage product introductions and transitions.

We believe that we must continually source and introduce new products, enhance our existing products and effectively stimulate customer demand for new and upgraded products. Our success depends on our ability to identify and originate product trends as well as to anticipate and react to changing consumer demands in a timely manner. The success of new product introductions depends on a number of factors including market and customer acceptance, the effective forecasting and management of product demand, purchase commitments and inventory levels, the management of manufacturing and supply costs, and the risk that new products may have quality or other defects in the early stages of introduction. In addition, the introduction of new products or product enhancements may shorten the life cycle of our existing products, or replace sales of some of our current products, thereby offsetting the benefit of even a successful product introduction, and may cause customers to defer purchasing our existing products in anticipation of the new products and potentially lead to challenges in managing inventory of existing products. If we are unable to introduce new products or novel technologies in a timely manner or our new products or technologies are not accepted by consumers, our competitors may introduce more attractive products, which could hurt our competitive position. Our new products might not receive consumer acceptance if consumer preferences shift to other products, and our future success depends in part on our ability to anticipate and respond to these changes. Failure to anticipate and respond in a timely manner to changing consumer preferences could lead to, among other things, lower revenue and excess inventory levels. As we seek to enhance our products, we may incur additional costs to incorporate new or revised features. We might not be able to, or determine that it is not in our interests to, raise prices to compensate for these additional costs. If we do not successfully manage product transitions, our revenue and business may be harmed.

Our markets are extremely competitive and subject to rapid technological change. Many of our significant competitors have greater financial and other resources than we do, and one or more of these competitors could use their greater resources to gain market share at our expense.

Competition is based on a multitude of factors, including product design, brand strength, distribution presence and capability, channel knowledge and expertise, geographic availability, breadth of product line, product cost, media capacity, access speed and performance, durability, reliability, scalability and compatibility. Specifically, the performance, functionality, reliability and price of our products are critical elements of our ability to compete. We believe that we offer, and that our target consumers seek, products that combine higher levels of performance, functionality and reliability at prices competitive with other leading brand-name products. Also, market penetration, brand recognition and inventory management are also critical elements of our ability to compete. Most consumers purchase products similar to ours from off-the-shelf retailers such as a large computer, consumer electronics and office supply superstores. Market penetration in the industries in which we compete is typically based on the number of retailers who offer a company’s products and the amount of shelf-space allocated to those products.

Our existing competitors include many large domestic and international companies that have longer operating histories and have greater brand name recognition, substantially greater financial, technical, marketing and

16


 
 

TABLE OF CONTENTS

other resources, broader product lines and longer standing relationships with retailers, distributors, OEMs and end users. As a result, these competitors may be able to better absorb price declines, ensure more stable supply, adapt more quickly to new or emerging technologies or devote greater resources to the promotion and sale of their products than we may. Ultimately, this may lead to a decrease in our sales and market share and have a material adverse effect on our business, financial condition and results of operations.

We face competition from existing competitors and expect to face competition from future competitors that design and market similar or alternative data storage solutions that may be less costly or provide additional features. If a manufacturer of consumer electronic devices designs one of these alternative competing standards into its products, the digital media we manufacture, as currently configured, will not be compatible with that product and/or may cause our revenues to decline, which would result in a material adverse effect on our business.

We substantially rely on distributors and retailers to sell our data storage products and our inability to control the activities of such retailers could cause our operating results and gross margins to fluctuate significantly.

We sell substantially all of our data storage products through distributors and retailers. Sales to distributors and retailers subject us to many special risks, including the following:

continued downward pricing pressure may necessitate price protection of the inventories of our products that many of our customers carry;
distributors and retailers may emphasize our competitors’ products over our products or decline to carry our products;
loss of market share if the retailers that carry our products do not grow as quickly and sell as many digital media products as the retailers that carry the digital media products of our competitors;
loss of business or monetary penalties if we are unable to satisfy the product needs of these customers or fulfill their orders on a timely basis;
increased sales and marketing expenses if we are unable to accurately forecast our customer’s orders, including, among other items, increased freight and fulfillment costs if faster shipping methods are required to meet customer demand;
reduced ability to forecast sales; and
reduced gross margins, delays in collecting receivables and increased inventory levels due to the increasing tendency for some retailers to require products be supplied on a consignment basis.

Availability of reliable sell-through data varies throughout the retail channel, which will make it difficult for us to determine actual retail product revenues until after the end of each of our fiscal quarters. Unreliable sell-through data may result in either an overstatement or understatement of our reported revenues and results of operations. Our arrangements with our customers also provide them price protection against declines in our recommended selling prices. We do not have exclusive relationships with our retailers or distributors and therefore must rely on them to effectively sell our products over those of our competitors. Our reliance on the activities of distributors and retailers over which we have little or no control could cause our operating results and gross margin, to fluctuate significantly.

We obtain many products from a limited number of suppliers, and if these suppliers fail to meet our supply requirement or cease production of our products, we may lose sales and experience increased costs.

Our products inventory strategy is to maintain as little inventory as is necessary for the efficient operation of our business, which creates the risk that any shortage or delay in the supply of our products could harm our ability to meet demand. We obtain many of our products from a limited number of suppliers on a purchase order basis.

Furthermore, none of our suppliers have a contractual commitment to supply us with products. These products include our SSDs, flash memory cards and USB flash drives. If demand for a specific product increases, we may not be able to obtain an adequate supply of that product in a timely manner, since our suppliers may fill

17


 
 

TABLE OF CONTENTS

other orders before ours. It could be difficult, costly and time-consuming to obtain alternative sources for these products, or to change products, or to change designs to make use of alternative products. In addition, difficulties in transitioning from an existing supplier to a new supplier could create delays in product availability that would have a significant impact on our ability to fulfill orders for our products. This would adversely impact on our ability to meet demand and damage our brand and reputation in the market, which would have a material adverse effect on our business and results of operations.

Because we protect some of our retail customers and distributors against the effects of price decreases on their inventories of our products, we may incur price protection charges if we reduce our prices when there are large quantities of our products in our distribution channel.

We provide price protection to certain of our major resellers. In the past we have incurred price protection charges ranging from 2% to 5% of gross sales before giving effect to such changes for the fiscal periods presented in this prospectus. Price protection allows customers to receive a price adjustment on existing inventory when its published price is reduced. In an environment of slower demand and abundant supply of products, price declines and channel promotions expenses are more likely to occur and, should they occur, are more likely to have a significant impact on our operating results. Further, in this environment, high channel inventory may result in substantial price protection charges. These price protection charges have the effect of reducing gross sales and gross margins. We anticipate that we may continue to incur price protection charges due to competitive pricing pressures and, as a result, our revenues and gross margins may be adversely affected. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Year 2014 to Year 2013 — Results of Operations — Net Sales.”

A significant product defect or product recall could materially and adversely affect our brand image, causing a decline in our sales and profitability, and could reduce or deplete our financial resources.

A significant product defect could materially harm our brand image and could force us to conduct a product recall. This could damage our relationships with our customers and reduce end-user loyalty . A product recall would be particularly harmful to us because we have limited financial and administrative resources to effectively manage a product recall and it would detract management’s attention from implementing our core business strategies. As a result, a significant product defect or product recall could cause a decline in our sales and profitability, and could reduce or deplete our financial resources.

A substantial portion of our sales have been made to customers accounting for over 10% of sales. We expect that this may continue in the foreseeable future. If any of these customers fails to timely pay us amounts owed, we could suffer a significant decline in cash flow and liquidity.

For the six months ended June 30, 2015, the following customers accounted for over 10% of our net sales: Walgreens (41%) and Rite Aid (18%). For the year ended December 31, 2014 the following customers accounted for over 10% of our net sales: Sam’s Club (30%), Walgreens (22%) and Rite Aid (15%). We expect that we may continue to depend upon a limited number of major customers for a significant portion of our sales for the foreseeable future. We expect the composition of our major customer base to change over time, as our markets and strategies evolve, which could make our revenue less predictable from period-to-period.

Our agreements with our customers do not require them to purchase any specified number of products or dollar amount of purchases or to make any purchases whatsoever. Therefore, we cannot assure you that, in any future period, our sales generated from these customers, individually or in the aggregate, will equal or exceed historical levels. We also cannot assure you that, if sales to any of these customers cease or decline, we will be able to replace these sales with sales to either existing or new customers in a timely manner, or at all. A cessation or reduction of sales, or a decrease in the prices of products sold to one or more of these customers could cause a significant decline in our net sales and profitability.

Our financial performance depends significantly on worldwide economic conditions and the related impact on levels of consumer spending, which have deteriorated in many countries and regions, including the U.S., and may not recover in the foreseeable future.

Demand for our products is adversely affected by negative macroeconomic factors affecting consumer spending. The tightening of consumer credit, low level of consumer liquidity, and volatility in credit and

18


 
 

TABLE OF CONTENTS

equity markets have weakened consumer confidence and decreased consumer spending primarily in the U.S. and European retail markets. A continuation or further deterioration of depressed economic conditions could have an even greater adverse effect on our business. Adverse economic conditions affect demand for devices that incorporate our products, such as personal computers and other computing and networking products, mobile devices, and flash memory cards. Reduced demand for our products could result in continued market oversupply and significant decreases in our average selling prices. A continuation of current negative conditions in worldwide credit markets would limit our ability to obtain external financing to fund our operations and capital expenditures. Difficult economic conditions may also result in a higher rate of losses on our accounts receivables due to credit defaults. As a result, our business, results of operations or financial condition could be materially adversely affected.

Negative or uncertain global economic conditions could also cause many of our direct and indirect customers to delay or reduce their purchases of our products. Further, many of our customers in our distribution and retail channels rely on credit financing in order to purchase our products. If negative conditions in the global credit markets prevent our customers’ access to credit, product orders in these channels may decrease, which could result in lower revenue. Likewise, our suppliers may face challenges in obtaining credit, in selling their products or otherwise in operating their businesses. These actions could result in reductions in our revenue, increased price competition and increased operating costs, which could adversely affect our business, results of operations and financial condition.

We may become involved in litigation over intellectual property rights, which may adversely affect our ability to purchase and sell our products.

Our industry is characterized by vigorous protection and pursuit of intellectual property rights. We do not currently manufacture any products and currently purchase all our products from third parties for resale. All of our suppliers provide us with indemnification regarding such sales. Third parties may bring suits against us or we may be called upon to indemnify our customers for any intellectual property right infringements by us. If such products infringe the intellectual property rights of a third party or if we are found to owe license fees or royalties relating to these products, our margins and operating results would be severely negatively impacted. Litigation could result in significant expense to us and divert the efforts of our technical and management personnel. In the event of an adverse result in litigation, we could be required to pay substantial damages, cease the manufacture, use and sale of some products, and expend significant resources to develop non-infringing technology, discontinue the use of some processes or obtain licenses to use the infringed technology. Any of these results could have a material adverse effect on our business and results of operations.

Our indemnification obligations to our customers for product defects could require us to pay substantial damages.

A number of our product sales agreements provide that we will defend, indemnify and hold harmless our customers from damages and costs that arise from product warranty claims or claims for injury or damage resulting from defects in our products. Our insurance coverage may not be adequate to cover all or any part of the claims asserted against us. A successful claim brought against us that is in excess of, or excluded from, our insurance coverage could have a material adverse effect on our business and results of operations.

We rely heavily on our Chief Executive Officer and President. The loss of either of their services could adversely affect our ability to source products from our key subcontract manufacturers or suppliers and our ability to sell our products to our customers.

Our success depends, to a significant extent, upon the continued services of each of Jawahar Tandon and Vivek Tandon, who are our Chief Executive Officer and President, respectively. For example, the Tandons have developed key personal relationships with our customers, subcontract manufacturers and suppliers. We greatly rely on these relationships in the conduct of our operations and the execution of our business strategies. The loss of either Jawahar or Vivek Tandon could, therefore, result in the loss of our favorable relationships with one or more of our customers, subcontract manufacturers and suppliers. In addition we do not maintain “key person” life insurance covering either of the Tandons or any other executive officer. The loss of either Jawahar or Vivek Tandon could significantly delay or prevent the achievement of our business objectives. Consequently, the loss of either Jawahar or Vivek Tandon would adversely affect our business, financial condition and results of operations.

19


 
 

TABLE OF CONTENTS

To date, we have engaged in significant related party transactions.

We have adopted a policy to be effective on the effective date of this offering that our executive officers, directors, nominees for election as a director, beneficial owners of more than 5% of any class of our common stock and any members of the immediate family of any of the foregoing persons are not permitted to enter into a related person transaction with us without the proper consent of our audit committee. Further to such policy, any request for us to enter into a transaction with an executive officer, director, nominee for election as a director, beneficial owner of more than 5% of any class of our voting securities or any member of the immediate family of any of the foregoing persons in which the amount involved exceeds $120,000 and such person would have a direct or indirect interest, must first be presented to our audit committee for review consideration and approval. However to date, we have engaged in a substantial number of related party transactions prior to the adoption of such policy and all of which were approved by a board with no independent members. While the board believed the terms and conditions of such transactions was fair and in the best interests of our company, there can be no assurance that the transactions were on terms no less favorable than terms generally available to an unaffiliated third party under the same or similar circumstances. See “Certain Relationships and Related Party Transactions.”

We have limited human resources; we need to attract and retain highly skilled personnel; and we may be unable to manage our growth with our limited resources effectively.

The expansion of our business has placed a significant strain on our limited managerial, operational, and financial resources. We have been and will continue to be required to expand our operational and financial systems significantly and to expand, train and manage our work force in order to manage the expansion of our operations. Our future success will depend in large part on our ability to attract, train, and retain additional highly skilled executive level management with experience in the memory and data storage industry. Competition is intense for these types of personnel from more established organizations, many of which have significantly larger operations and greater financial, marketing, human, and other resources than we have. We may not be successful in attracting and retaining qualified personnel on a timely basis, on competitive terms or at all. To date we have had to limit the engagement of critical management and other key personnel due in part to limited financial resources. If we are not successful in attracting and retaining these personnel, our business, prospects, financial condition and operating results would be materially adversely affected. Further, our ability to manage our growth effectively will require us to continue to improve our operational, financial and management controls, reporting systems and procedures, to install new management information and control systems and to train, motivate and manage employees. If we are unable to manage growth effectively and new employees are unable to achieve adequate performance levels, our business, prospects, financial condition and operating results will be materially adversely affected.

Our international operations subject us to risks, which could adversely affect our operating results.

Our international operations are exposed to the following risks, several of which are out of our control:

political and economic instability, international terrorism and anti-American sentiment, particularly in emerging markets;
preference for locally-branded products, and laws and business practices favoring local competition;
unusual or burdensome foreign laws or regulations, and unexpected changes to those laws or regulations;
import and export license requirements, tariffs, taxes and other barriers;
costs of customizing products for foreign countries;
increased difficulty in managing inventory;
less effective protection of intellectual property; and
difficulties and costs of staffing and managing foreign operations.

Any or all of these factors could adversely affect our ability to execute any geographic expansion strategies or have a material adverse effect on our business and results of operations.

20


 
 

TABLE OF CONTENTS

Terrorist attacks, war, threats of war and government responses thereto may negatively impact our operations, revenues, costs and stock price.

Terrorist attacks, U.S. military responses to these attacks, war, threats of war and any corresponding decline in consumer confidence could have a negative impact on consumer demand. Any of these events may disrupt our operations or those of our customers and suppliers and may affect the availability of materials needed to manufacture our products or the means to transport those materials to manufacturing facilities and finished products to customers. Any of these events could also increase volatility in the U.S. and world financial markets, which could limit the capital resources available to us and our customers or suppliers, or adversely affect consumer confidence. Turmoil and unrest in regions from which we source our products could cause delays in the development or production of our products. This could harm our business and results of operation.

Our operations are vulnerable because we have limited redundancy and backup systems.

Our internal order, inventory and product data management system is an electronic system through which our customers place orders for our products and through which we manage product pricing, shipments, returns and other matters. This system’s continued and uninterrupted performance is critical to our day-to-day business operations. Despite our precautions, unanticipated interruptions in our computer and telecommunications systems could occur in the future. We have extremely limited ability and personnel to process purchase orders and manage product pricing and other matters in any manner other than through this electronic system. Any interruption or delay in the operation of this electronic system could cause a significant decline in our sales and profitability.

We may make acquisitions that are dilutive to existing shareholders. In addition, our limited experience in acquiring other businesses, product lines and technologies may make it difficult for us to overcome problems encountered in connection with any acquisitions we may undertake.

We intend to evaluate and explore strategic opportunities as they arise, including business combinations, strategic partnerships, and the purchase, licensing or sale of assets. In connection with any such future transaction, we could issue dilutive equity securities, incur substantial debt, reduce our cash reserves or assume contingent liabilities.

Our experience in acquiring other businesses, product lines and technologies is limited. Our inability to overcome problems encountered in connection with any acquisitions could divert the attention of management, utilize scarce corporate resources and otherwise harm our business. Any potential future acquisitions also involve numerous risks, including:

problems assimilating the purchased operations, technologies or products;
costs associated with the acquisition;
adverse effects on existing business relationships with suppliers and customers;
risks associated with entering markets in which we have no or limited prior experience;
potential loss of key employees of purchased organizations; and
potential litigation arising from the acquired company’s operations before the acquisition.

Furthermore, acquisitions may require material charges and could result in adverse tax consequences, substantial depreciation, deferred compensation charges, in-process research and development charges, the amortization of amounts related to deferred compensation and identifiable purchased intangible assets or impairment of goodwill, any of which could negatively affect our results of operations.

Sudden disruptions to the availability of freight lanes could have an impact on our operations.

We generally ship our products to our customers, and receive shipments from our suppliers, via air or ocean freight. The sudden unavailability or disruption of cargo operations or freight lanes, such as due to labor difficulties or disputes, severe weather patterns or other natural disasters, or political instability, terrorism or civil unrest, could impact our operating results by impairing our ability to timely and efficiently deliver our products.

21


 
 

TABLE OF CONTENTS

If currency exchange rates fluctuate substantially in the future, our financial results, which are reported in U.S. dollars, could be adversely affected.

As we continue to expand our international operations, we become more exposed to the effects of fluctuations in currency exchange rates. Our sales contracts are denominated in U.S. dollars, and therefore substantially all of our revenues are not subject to foreign currency risk. However, a strengthening of the U.S. dollar could increase the real cost of our products to our customers outside of the United States, adversely affecting our business operations and financial results. To date, we have not engaged in any hedging strategies, and any such strategies, such as forward contracts, options and foreign exchange swaps related to transaction exposures that we may implement to mitigate this risk may not eliminate our exposure to foreign exchange fluctuations.

Certain transactions effected in the second and third quarters of 2015 will have a substantial adverse effect on our financial position and operating results for the year ending December 31, 2015.

In the second, third and fourth quarters of 2015 we issued over 7.9 million shares of our common stock in non-cash transactions; 5,681,558 shares to Monster, Inc. further to an amended license agreement with Monster, Inc. and 2,250,000 shares to David Clarke further to a consulting contract and his agreement to serve as Executive Chairman of the Board. In addition, we issued Noel Lee a warrant to purchase up to 2,840,779 shares of our common stock at a per share exercise price of $1.00 further to an advisory board agreement. As a result, we expect to incur significant stock-based compensation expense for the year ending December 31, 2015. While these charges are non-cash in nature, they will have the effect of increasing our anticipated net loss for 2015 which may have an adverse effect on the trading price of our common stock.

Risks Related to This Offering and Ownership of Our Common Stock

We do not know whether an active, liquid and orderly trading market will develop for our common stock or what the market price of our common stock will be and as a result it may be difficult for you to sell your shares of our common stock.

Prior to this offering there has been no market for shares of our common stock. An active trading market for our shares may never develop or be sustained following this offering. The initial public offering price for our common stock will be determined through negotiations with the underwriters, and the negotiated price may not be indicative of the market price of our common stock after this offering. The market value of our common stock may decrease from the initial public offering price. As a result of these and other factors, you may be unable to resell your shares of our common stock at or above the initial public offering price. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value of your shares. Further, an inactive market may also impair our ability to raise capital by selling shares of our common stock and may impair our ability to enter into collaborations or acquire companies or products by using our shares of common stock as consideration. The market price of our stock may be volatile, and you could lose all or part of your investment.

The trading price of our common stock following this offering is likely to be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. In addition to the factors discussed in this “Risk Factors” section and elsewhere in this prospectus, these factors include:

the success of competitive products or technologies;
actual or anticipated changes in our growth rate relative to our competitors;
announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures, collaborations or capital commitments;
regulatory or legal developments in the United States and other countries;
the recruitment or departure of key personnel;
the level of expenses;
actual or anticipated changes in estimates as to financial results, development timelines or recommendations by securities analysts;

22


 
 

TABLE OF CONTENTS

variations in our financial results or those of companies that are perceived to be similar to us;
fluctuations in the valuation of companies perceived by investors to be comparable to us;
inconsistent trading volume levels of our shares;
announcement or expectation of additional financing efforts;
sales of our common stock by us, our insiders or our other stockholders;
market conditions in the technology sectors; and
general economic, industry and market conditions.

In addition, the stock market in general, and technology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance. The realization of any of these risks or any of a broad range of other risks, including those described in these “Risk Factors,” could have a dramatic and material adverse impact on the market price of our common stock.

We may be subject to securities litigation, which is expensive and could divert management attention.

The market price of our common stock may be volatile, and in the past companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.

Our principal stockholders and management own a significant percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.

Prior to this offering, our executive officers, directors, holders of 5% or more of our capital stock and their respective affiliates together beneficially owned over   % of our voting stock and, upon consummation of this offering, that same group will together hold approximately     % of our outstanding voting stock. These stockholders may be able to substantially determine the outcome of all matters requiring stockholder approval. For example, these stockholders may be able to substantially control elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may feel are in your best interest as one of our stockholders. The interests of this group of stockholders may not always coincide with your interests or the interests of other stockholders and they may act in a manner that advances their best interests and not necessarily those of other stockholders, including seeking a premium value for their common stock, and might affect the prevailing market price for our common stock.

If you purchase our common stock in this offering, you will incur immediate and substantial dilution in the book value of your shares.

The initial public offering price is substantially higher than the net tangible book value per share of our common stock. Investors purchasing common stock in this offering will pay a price per share that substantially exceeds the book value of our tangible assets after subtracting our liabilities. As a result, investors purchasing common stock in this offering will incur immediate dilution of $     per share, based on an assumed initial public offering price of $     per share, which is the midpoint of the range set forth on the cover page of this prospectus. Further, investors purchasing common stock in this offering will contribute approximately     % of the total amount invested by stockholders since our inception, but will own, as a result of such investment, only approximately     % of the shares of common stock outstanding immediately following this offering.

As a result of the dilution to investors purchasing shares in this offering, investors may receive significantly less than the purchase price paid in this offering, if anything, in the event of our liquidation. Further, because we may need to raise additional capital to fund our anticipated level of operations, we may in the future sell substantial amounts of common stock or securities convertible into or exchangeable for common stock. These

23


 
 

TABLE OF CONTENTS

future issuances of equity or equity-linked securities, together with the exercise of outstanding options and any additional shares issued in connection with acquisitions, if any, may result in further dilution to investors.

We are an “emerging growth company” and we intend to take advantage of reduced disclosure and governance requirements applicable to emerging growth companies, which could result in our common stock being less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. We may take advantage of these reporting exemptions until we are no longer an emerging growth company, which in certain circumstances could be for up to five years. We will cease to be an “emerging growth company” upon the earliest of: (1) the last day of the fiscal year following the fifth anniversary of this offering, (2) the last day of the first fiscal year in which our annual gross revenues are $1 billion or more, (3) the date on which we have, during the previous rolling three-year period, issued more than $1 billion in non-convertible debt securities, and (4) the date on which we are deemed to be a “large accelerated filer” as defined in the Exchange Act.

Our status as an “emerging growth company” under the JOBS Act may make it more difficult to raise capital as and when we need it.

Because of the exemptions from various reporting requirements provided to us as an “emerging growth company” we may be less attractive to investors and it may be difficult for us to raise additional capital as and when we need it. Investors may be unable to compare our business with other companies in our industry if they believe that our financial accounting is not as transparent as other companies in our industry. If we are unable to raise additional capital as and when we need it, our financial condition and results of operations may be materially and adversely affected.

We will incur increased costs as a result of being a public company and our management expects to devote substantial time to public company compliance programs.

As a public company, we will incur significant legal, insurance, accounting and other expenses that we did not incur as a private company. In addition, our administrative staff will be required to perform additional tasks. For example, in anticipation of becoming a public company, we will need to adopt additional internal controls and disclosure controls and procedures and bear all of the internal and external costs of preparing and distributing periodic public reports in compliance with our obligations under the securities laws. We intend to invest resources in connection with such adoption, and this investment may result in increased general and administrative expenses and may divert management’s time and attention from the marketing and sale of our products. In connection with this offering, we are securing directors’ and officers’ insurance coverage at a level that we believe is customary for similarly situated companies and adequate to provide us with insurance coverage for foreseeable risks, which will increase our insurance cost. In the future, it may be more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.

In addition, in order to comply with the requirements of being a public company, we may need to undertake various actions, including implementing new internal controls and procedures and hiring new accounting or internal audit staff. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed

24


 
 

TABLE OF CONTENTS

by us in the reports that we file with the Securities and Exchange Commission, or SEC, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers. Any failure to develop or maintain effective controls could adversely affect the results of periodic management evaluations. In the event that we are not able to demonstrate compliance with the Sarbanes-Oxley Act, that our internal control over financial reporting is perceived as inadequate, or that we are unable to produce timely or accurate financial statements, investors may lose confidence in our operating results and the price of our common stock could decline. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on The Nasdaq Capital Select Market, or Nasdaq.

We are not currently required to comply with the SEC’s rules that implement Section 404 of the Sarbanes-Oxley Act, and are therefore not yet required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Upon becoming a public company, we will be required to comply with certain of these rules, which will require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our internal control over financial reporting commencing with our second annual report. This assessment will need to include the disclosure of any material weaknesses in our internal control over financial reporting identified by our management or our independent registered public accounting firm. To achieve compliance with Section 404 within the prescribed period, we will be engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants and adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. Despite our efforts, there is a risk that we will not be able to conclude, within the prescribed timeframe or at all, that our internal control over financial reporting is effective as required by Section 404. If we identify one or more material weaknesses, it could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.

Our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting until the later of our second annual report or the first annual report required to be filed with the SEC following the date we are no longer an “emerging growth company” as defined in the JOBS Act. We cannot assure you that there will not be material weaknesses or significant deficiencies in our internal controls in the future.

We have identified a material weakness in our internal control over financial reporting and may identify additional material weaknesses in the future that may cause us to fail to meet our reporting obligations or result in material misstatements of our financial statements. If we fail to remediate any material weaknesses or if we fail to establish and maintain effective control over financial reporting, our ability to accurately and timely report our financial results could be adversely affected.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with US generally accepted accounting principles. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis.

Prior to the completion of this offering, we have been a private company with limited accounting personnel and other resources to address our internal control over financial reporting. During the course of preparing for this offering, we determined that we had a material weakness in our internal control over financial reporting as of December 31, 2013 and 2014 and June 30, 2015 relating to the design and operation of our closing and financial reporting processes.

25


 
 

TABLE OF CONTENTS

For a discussion of our remediation plan and the actions that we have executed during 2014 and 2015, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Internal Control over Financial Reporting.” The actions we have taken are subject to continued review, supported by confirmation and testing by management. While we have implemented a plan to remediate this weakness, we cannot assure you that we will be able to remediate this weakness, which could impair our ability to accurately and timely report our financial position, results of operations or cash flows. If we are unable to successfully remediate this material weakness, and if we are unable to produce accurate and timely financial statements, our stock price may be adversely affected and we may be unable to maintain compliance with applicable Nasdaq listing requirements.

Our failure to remediate the material weakness identified above or the identification of additional material weaknesses in the future, could adversely affect our ability to report financial information, including our filing of quarterly or annual reports with the SEC on a timely and accurate basis. Moreover, our failure to remediate the material weakness identified above or the identification of additional material weaknesses could prohibit us from producing timely and accurate financial statements, which may adversely affect our stock price and we may be unable to maintain compliance with Nasdaq listing requirements.

Because we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, capital appreciation, if any, will be your sole source of potential gain.

We have never declared or paid cash dividends on our capital stock. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business. In addition, the terms of any future debt agreements may preclude us from paying dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.

Sales of a substantial number of shares of our common stock in the public market could cause our stock price to fall.

Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. After this offering, we will have outstanding      shares of common stock based on the number of shares outstanding as of June 30, 2015. This includes the shares that we are selling in this offering, which may be resold in the public market immediately without restriction, unless purchased by our affiliates. Stockholders holding an aggregate of      shares of our common stock have entered into lock-up agreements pursuant to which they agreed not to sell any of our shares for a period of six months from the effective date of this offering. As representative of the underwriters, Joseph Gunnar & Co. LLC may, in its sole discretion, allow early releases under the referenced lock-up restrictions provided however any such early release shall be made pro rata with respect to all such holders’ shares.

We have agreed to register all 5,681,558 shares of common stock held by Monster, Inc. upon demand. All of the shares involved in an effective registration statement may be freely sold and transferred, subject to any applicable lock-up agreement. We also intend to register all shares of common stock that we may issue under our equity compensation plan. Once we register these shares, they can be freely sold in the public market upon issuance, subject to volume limitations applicable to affiliates and the lock-up agreements described in the “Underwriting” section of this prospectus.

We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.

Our management will have broad discretion in the application of the net proceeds from this offering and could spend the proceeds in ways that do not improve our results of operations or enhance the value of our common stock. The failure by our management to apply these funds effectively could result in financial losses that could have a material adverse effect on our business and cause the market price of our common stock to decline. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value. If we do not invest the net proceeds from this offering in ways that enhance stockholder value, we may fail to achieve expected financial results, which could cause the price of our common stock to decline.

26


 
 

TABLE OF CONTENTS

Some provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our stockholders and may prevent attempts by our stockholders to replace or remove our current management.

Provisions in our Certificate of Incorporation and Bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us or increase the cost of acquiring us, even if doing so would benefit our stockholders, or remove our current management. These include provisions that:

permit our board of directors to issue up to 10,000,000 shares of preferred stock, with any rights, preferences and privileges as they may designate;
provide that all vacancies on our board of directors, including as a result of newly created directorships, may, except as otherwise required by law, be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum;
require that any action to be taken by our stockholders must be effected at a duly called annual or special meeting of stockholders and not be taken by written consent;
provide that stockholders seeking to present proposals before a meeting of stockholders or to nominate candidates for election as directors at a meeting of stockholders must provide advance notice in writing, and also satisfy requirements as to the form and content of a stockholder’s notice;
not provide for cumulative voting rights, thereby allowing the holders of a majority of the shares of common stock entitled to vote in any election of directors to elect all of the directors standing for election; and
provide that special meetings of our stockholders may be called only by the board of directors or by such person or persons requested by a majority of the board of directors to call such meetings.

These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, who are responsible for appointing the members of our management. Because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which may discourage, delay or prevent someone from acquiring us or merging with us whether or not it is desired by or beneficial to our stockholders. Under Delaware law, a corporation may not, in general, engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other things, the board of directors has approved the transaction. Any provision of our Certificate of Incorporation or Bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. Securities and industry analysts do not currently, and may never, publish research on our company. If no securities or industry analysts commence coverage of our company, the trading price for our stock would likely be negatively impacted. In the event securities or industry analysts initiate coverage, if one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.

27


 
 

TABLE OF CONTENTS

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus, including the sections titled “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” contains forward-looking statements. In some cases you can identify these statements by forward-looking words such as “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan,” “expect” or the negative or plural of these words or similar expressions. These forward-looking statements include, but are not limited to, statements concerning the following:

our ability to continue as a going concern;
our ability to successfully manage our business or achieve profitability;
our operating results, including our margins and negative cash flow;
our strategic relationship with Monster, Inc.;
our ability to successfully promote our brand and achieve strong brand recognition;
our ability to develop or maintain necessary strategic relationships;
our reliance on third party manufacturers;
customer relationships or customer demand for our products;
our ability to effectively manage our inventories, reduce our costs, introduce new products with higher average selling prices or increase our sales volume;
our ability to accurately forecast market and customer demand or to quickly adjust to forecast changes;
the cyclical nature of the consumer electronics industry;
the competitive nature of our markets and our ability to compete;
our reliance on distributors and retailers;
our reliance on a limited number of suppliers;
our exposure to price protection charges;
our use of proceeds from this offering;
our financial performance; and
developments and projections relating to our competitors and our industry.

These statements are only current predictions and are subject to known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from those anticipated by the forward-looking statements. We discuss many of these risks in this prospectus in greater detail under the heading “Risk Factors” and elsewhere in this prospectus. You should not rely upon forward-looking statements as predictions of future events. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risks and uncertainties.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by law, after the date of this prospectus, we are under no duty to update or revise any of the forward-looking statements, whether as a result of new information, future events or otherwise.

28


 
 

TABLE OF CONTENTS

USE OF PROCEEDS

We estimate that we will receive net proceeds from the sale of common stock of approximately $     million, based upon an assumed initial public offering price of $     per share, which is the midpoint of the range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses. If the underwriters’ option to purchase additional shares of common stock is exercised in full, we estimate that we will receive net proceeds of approximately $     million, after deducting estimated underwriting discounts and commissions and estimated offering expenses.

Each $1.00 increase (decrease) in the assumed initial public offering price of $     per share would increase (decrease) the net proceeds to us from this offering by approximately $     million, assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions. Similarly, each increase (decrease) of 1,000,000 shares in the number of shares of common stock offered would increase (decrease) the net proceeds to us from this offering by approximately $     million, assuming that the assumed initial public offering price remains the same, and after deducting estimated underwriting discounts and commissions.

We currently estimate that we will use the net proceeds from this offering for working capital to repay $1.96 million of promissory notes and $240,000 of interest due on such notes. The notes are due and payable on the earlier of October 2016 or the closing date of our initial public offering, and consist of $1.6 million loaned to our company and a 22.5% loan organization fee payable on maturity. Amounts actually loaned bear interest at a fixed amount of 15% of principal loaned, regardless of the time that the loan is outstanding. All principal, interest and fees are payable on the due date. The balance will be used for working capital, which will primarily consist of the funding of inventory and the hiring of additional marketing and sales personnel and for other general corporate purposes, which includes the cost of operating as a public company and the cost of potentially acquiring or licensing other products, businesses or technologies, although we have no present commitments for any such acquisitions or licenses.

This expected use of our net proceeds from this offering represents our intentions based upon our current plans and business conditions, which could change in the future as our plans and business conditions evolve. The amounts and timing of our actual expenditures may vary significantly depending on numerous factors, including any unforeseen cash needs. As a result, our management will retain broad discretion over the allocation of the net proceeds of this offering.

Pending our use of our net proceeds from this offering, we intend to invest the net proceeds in a variety of capital preservation investments, including short-term, investment-grade, interest-bearing instruments and US government securities.

DIVIDEND POLICY

We do not anticipate declaring or paying any cash dividends on our capital stock. Any future determination as to the declaration and payment of dividends, if any, will be at the discretion of our board of directors and will depend on then existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant.

29


 
 

TABLE OF CONTENTS

CAPITALIZATION

The following table sets forth our cash and cash equivalents, and our capitalization as of June 30, 2015:

on an actual basis;
on an as adjusted basis to reflect, the sale of      shares of common stock in this offering at an assumed initial public offering price of $     per share, which is the midpoint of the range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses.

You should read the information in this table together with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes, of Monster Digital included elsewhere in this prospectus. The data presented in the following table is for illustrative purposes only, does not purport to reflect what our actual financial position would have been in this offering (and the use of proceeds contemplated hereby) actually taken place on such date and is not necessarily indicative of our financial position as of the specified date or in the future.

   
  As of June 30, 2015
(in thousands, except
share and per share data)
     Actual   As Adjusted (1)
Cash and cash equivalents   $ 106     $  
Notes payable   $ 38     $  
Preferred stock 10,000,000 shares authorized, no shares issued and outstanding                  
Stockholders’ equity:
                 
Common stock, $0.0001 par value, 100,000,000 shares authorized;            shares issued and outstanding, actual; 47,664,715 shares issued and outstanding, as adjusted;      shares issued and outstanding, as further adjusted     5           
Additional paid-in capital     17,440           
Accumulated deficit     (21,411 )           
Total stockholders’ equity (deficit)     (3,966 )           
Total capitalization   $ (3,928 )     $  

(1) Each $1.00 increase (decrease) in the assumed initial public offering price of $     per share would increase (decrease) each of cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $     million, assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses. Similarly, each increase (decrease) of 1,000,000 shares in the number of shares of our common stock offered would increase (decrease) cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $     million, assuming the assumed initial public offering price remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing.

30


 
 

TABLE OF CONTENTS

DILUTION

If you invest in our common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the as further adjusted net tangible book value per share of our common stock immediately after this offering.

Our historical net tangible deficit as of June 30, 2015 was approximately $4.1 million, or $0.09 per share of common stock. Our historical net tangible deficit is the amount of our total tangible assets less our liabilities. Historical net tangible deficit per share is our historical net tangible deficit divided by 47,664,715 (the number of shares of common stock outstanding as of June 30, 2015). The as adjusted net tangible book value of our common stock as of June 30, 2015, was $     million, or $     per share. As adjusted net tangible book value per share represents our total tangible assets less our total liabilities, divided by the number of outstanding shares of common stock outstanding as of June 30, 2015.

After giving effect our receipt of the net proceeds from our sale of      shares of common stock at an assumed initial public offering price of $     per share, which is the midpoint of the range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses, our as further adjusted net tangible book value as of June 30, 2015 would have been approximately $     million, or $     per share. This represents an immediate increase in as further adjusted net tangible book value of $     per share to our existing stockholders and an immediate dilution of $     per share to investors purchasing common stock in this offering.

The following table illustrates this dilution on a per share basis to new investors:

   
Assumed initial public offering price per share         $  
Historical net tangible deficit per share as of June 30, 2015   $ 0.09           
Increase in historical net tangible book value per share attributable to new investors purchasing shares in this offering                  
Adjusted net tangible book value per share after giving effect to this offering                 
Dilution in as adjusted net tangible book value per share to new investors in this offering         $       

Each $1.00 increase (decrease) in the assumed initial public offering price of $     per share would increase (decrease) the pro forma as adjusted dilution to new investors to $     per share, assuming that the number of shares offered, as set forth on the cover page of this prospectus, remains the same, after deducting estimated underwriting discounts and commissions and estimated offering expenses. Similarly, each increase of 1,000,000 shares in the number of shares of common stock offered would increase the as further adjusted net tangible book value, as adjusted to give effect to this offering, to approximately $     per share and decrease the dilution to new investors to $     per share, assuming the assumed initial public offering price remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses. Each decrease of 1,000,000 shares in the number of shares of common stock offered would decrease the as further adjusted net tangible book value, as adjusted to give effect to this offering, to approximately $     per share and increase the dilution to new investors to $     per share, assuming the assumed initial public offering price remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses. If the underwriters exercise their option to purchase additional shares of common stock in full, the as further adjusted net tangible book value per share, as adjusted to give effect to this offering, would be $     per share, and the dilution in as further adjusted net tangible book value per share to investors in this offering would be $     per share.

31


 
 

TABLE OF CONTENTS

The table below summarizes as of October 29, 2015, the number of shares of our common stock, the total consideration and the average price per share (i) paid to us by our existing stockholders and (ii) to be paid by new investors purchasing our common stock in this offering at an assumed initial public offering price of $     per share, which is the midpoint of the range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses.

         
  Shares Purchased   Total Consideration   Average Price Per Share
     Number   Percent   Amount   Percent
Existing stockholders     55,815,567         $              $       
New investors                    %                       %     $  
Totals              100.0 %     $            100.0 %        

If the underwriters exercise their option to purchase additional shares of our common stock in full, our existing stockholders would own     % and our new investors would own     % of the total number of shares of our common stock outstanding upon completion of this offering. In this event, the total consideration paid by our existing stockholders would be approximately $     million, or     %, and the total consideration paid by our new investors would be $     million, or     %.

32


 
 

TABLE OF CONTENTS

SELECTED FINANCIAL DATA

The following selected consolidated financial data of Monster Digital should be read in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as the audited consolidated financial statements and related notes of Monster Digital included elsewhere in this prospectus. We have derived the summary consolidated statement of operations data of Monster Digital for the years ended December 31, 2014 and 2013 and the consolidated balance sheet data as of December 31, 2014 from the audited consolidated financial statements included elsewhere in this prospectus. We have derived the summary consolidated statements of operations data for the six months ended June 30, 2015 and 2014 and the consolidated balance sheet data of as of June 30, 2015 of Monster Digital from the unaudited interim consolidated financial statements included elsewhere in this prospectus. The unaudited interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and reflect, in the opinion of management, all adjustments of a normal, recurring nature that are necessary for a fair presentation of the unaudited interim consolidated financial statements. The historical results of Monster Digital are not necessarily indicative of the results to be expected in the future, and the interim results are not necessarily indicative of the results of Monster Digital that should be expected for the full year or for any other period.

       
  Year ended
December 31,
  Six months ended
June 30,
     2013   2014   2014   2015
     (in thousands, except per share data)
Consolidated Statements of Operations Data:
                                   
Net sales   $ 3,444     $ 11,343     $ 3,270     $ 2,718  
Cost of goods sold     2,838       11,109       2,540       2,457  
Gross profit     606       234       730       261  
Operating Expenses:
                                   
Research and development     709       542       190       246  
Selling and marketing     1,515       3,722       687       1,389  
General and administrative     1,747       2,646       949       1,375  
Loss from operations     (3,365 )       (6,676 )       (1,096 )       (2,749 )  
Other expenses:
                                   
Interest and finance expense     66       1,661       256       630  
Debt conversion expense              2,707             898  
Loss before income taxes     (3,431 )       (11,044 )       (1,352 )       (4,277 )  
Provision for income taxes     4       13       8        
Net loss   $ (3,435 )     $ (11,057 )     $ (1,360 )     $ (4,277 )  
Basic and diluted net loss per common share   $ (0.09 )     $ (0.27 )     $ (0.03 )     $ (0.10 )  
Weighted-average common shares outstanding used to compute basic and diluted net loss per common share     39,611       41,592       39,606       44,758  

33


 
 

TABLE OF CONTENTS

   
  As of
December 31, 2014
  As of
June 30,
2015
     (in thousands)
Consolidated Balance Sheet Data:
                 
Cash and cash equivalents   $ 97     $ 106  
Notes payable     35       38  
Working capital (deficit)     (5,030 )       (4,000 )  
Total assets     6,411       4,706  
Accumulated deficit     (17,134 )       (21,411 )  
Total stockholders’ equity (deficit)     (4,988 )       (3,966 )  

34


 
 

TABLE OF CONTENTS

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with the section of this prospectus titled “Selected Financial Data” and our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion and other parts of this prospectus contain forward-looking statements that involve risk and uncertainties, such as statements of our plans, objectives, expectations and intentions. As a result of many factors, including those factors set forth in the “Risk Factors” section of this prospectus, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

General

Our primary business focus is the design, development and marketing of premium products under the “Monster Digital” brand for use in high-performance computing and consumer and mobile product applications. We have invested significantly in building a broad distribution channel for the sale of products bearing the “Monster Digital” brand. As of June 30, 2015, our initial product entries of memory storage devices and peripherals are offered in over 15,000 locations globally. Our top four customers for our memory storage products for the six months ended June 30, 2015 were Walgreens (41%), Rite Aid (18%), InMotion (7%) and Fry’s (7%) and for the year ended December 31, 2014 were Sam’s Club (30%), Walgreens (22%), Rite Aid (15%) and Fry’s (7%). Our current focus is to leverage our distribution network through cooperating with Monster, Inc. to identify and market additional specialty and consumer electronics products.

Currently, our primary product offerings are as follows:

An action sports camera used in adventure sport, adventure photography and extreme-action videography which we intend to introduce before 2015 year end.
A line of ultra-small mobile external memory drive products for Apple iOS devices.
On-The-Go Cloud devices on an exclusive basis which create a wi-fi hot spot for multiple users while simultaneously allowing data to be viewed, played or transferred among the connected storage.
A broad selection of high-value memory storage products consisting of high-end, ruggedized Solid State Drives (“SSDs”), removable flash memory CompactFlash cards (“CF cards”), secured digital cards (“SD cards”) and USB flash drives.

Our license with Monster, Inc. allows us to manufacture and sell certain high-end products, utilizing the Monster premium brand name which is highly recognized by consumers for its high quality audio-video products. We work with our world-class subcontract manufacturers and suppliers to offer new and enhanced products that use existing technology and adopt new technologies to satisfy existing and emerging consumer demands and preferences. On the marketing side, we partner with Monster, Inc. to support the sales and marketing of these products on a global basis.

Historically, memory has been the most significant part of our business. It is a commodity that tends to be subject to price erosion. The average selling price (“ASP”) for our products reflects this tendency. The top ten products sold in the first six months of 2014 had a weighted average ASP of $15.24. These same ten products were sold in the first six months of 2015 with an ASP of $9.18. Using the Monster branding to quickly introduce new technologies to the market is designed to bring about the introduction of products that are not subject to the same level of downward pressure on pricing as is common with memory products.

Prior to 2012, our primary business focus was on selling and distributing non-branded memory module products used in computing and mobile devices. Our customers consisted principally of original equipment manufacturers (OEMs) and distributors. In 2012, through a long-term license agreement, we acquired the right to use the brand “Monster Digital”, after which our primary business focus became the design, development and marketing of premium memory storage products for use in high-performance computing and demanding consumer and mobile product applications. With a well-recognized brand to bring to the market, we have expanded our product offerings and have shifted away from OEM customers in favor of local, regional and national retailers and distributors. Our customer base has grown to over 60 customers. We have funded our

35


 
 

TABLE OF CONTENTS

operations to date primarily from cash flow from an accounts receivable factoring facility, purchase order financing facilities, loans from related parties and capital from the issuance of common stock and convertible notes.

We have experienced significant growth in the sale of our memory storage products, with revenue increasing from $3.4 million for the year ended December 31, 2013 to $11.3 million for the year ended December 31, 2014, representing year-over-year revenue growth of 229.4%.

Since our founding, we have invested heavily in growing our business. Our headcount increased from approximately 12 employees as of December 31, 2013 to over 20 employees as of June 30, 2015. We intend to continue to invest and expand our sales and marketing functions, including expanding our global network of retailers and distributors and carrying our associated marketing activities in key geographies. By investing in sales and technical training, demand generation and partner programs, we believe we can enable many of our partners to independently identify, qualify, sell and upgrade customers, with limited involvement from us. However, if we fail to effectively identify, train and manage our retail and distribution partners and to monitor their sales activity, as well as the customer support and services being provided to our customers in their local markets, our business, operating results, financial condition and cash flows could be harmed.

In addition, we intend to expand and continue to invest in our international operations, which we believe will be an important factor in our continued growth. Our revenue generated from customers outside of the United States was minimal for the year ended December 31, 2014 and for the six months ended June 30, 2015, as our international operations are relatively new and we have limited experience operating in foreign jurisdictions. Our inexperience in operating our business outside of the United States increases the risk that our international expansion efforts may not be successful.

As a result of our strategy to increase our investments in sales, marketing, support and international expansion, we expect to continue to incur operating losses and negative cash flows from operations at least in the near future and may require additional capital resources to execute strategic initiatives to grow our business.

Factors Affecting Our Performance

Ability to Fund Operations.

To date, we have incurred significant operating losses and substantial negative cash flow from operations. This is due in large part on our need to expend significant dollars on inventory and marketing efforts prior to the receipt of cash from the collection of our accounts receivable. We intend to continue to invest in sales and marketing efforts to grow our sales platform and improve operating results. In order to effectuate this growth, we must have significant cash resources available. Our business and results of operations will continue to depend on our ability to access adequate financial assets to fund our projected growth.

Investment in growth.   We have invested, and intend to continue to invest, in expanding our operations, increasing our headcount, developing our products to support our growth and expanding our infrastructure. We expect our total operating expenses to increase significantly in the foreseeable future to meet our growth objectives. We plan to continue to invest in our sales and support operations with a particular focus in the near term of adding additional sales personnel to further broaden our support and coverage of our existing customer base, in addition to developing new customer relationships. Any investments we make in our sales and marketing organization will occur in advance of experiencing any benefits from such investments, and the return on these investments may be lower than we expect. In addition, as we invest in expanding our operations internationally, our business and results will become further subject to the risks and challenges of international operations, including higher operating expenses and the impact of legal and regulatory developments outside the United States.

Adding New Customers and Expanding Sales to Our Existing Customer Base.   We intend to target new customers by continuing to invest in our field sales force and extending our relationships with existing distributors and retailers. We also intend to continue to target large customers organizations who have yet to offer our products. A typical initial order involves educating prospective customers about the technical merits and capabilities and potential cost savings of our products as compared to our competitors’ products. We believe that customer references have been, and will continue to be, an important factor in winning new

36


 
 

TABLE OF CONTENTS

business. We expect that a substantial portion of our future sales will be sales to existing customers, including expansion of their product offerings as we offer new products through the existing sales channel. Our business and results of operations will depend on our ability to continue to add new customers and sell additional products to our growing base of customers.

Promoting our Brand and Offering Additional Products.   Our future performance will depend on our continued ability to achieve brand recognition for our Monster Digital line of products. We plan to increase our marketing expenditures to continue to create and maintain prominent brand awareness. Also, our future performance will depend on our ability to continue to offer high quality, high performance and high functionality products through our network of retailers and distributors. We intend to continue to devote efforts to introduce new products including new versions of our existing product lines. We expect that our results of operations will be impacted by the timing, size and level of success of these brand awareness and product offering efforts.

Ability to Maintain Higher Average Selling Prices.   Our gross margins have been and will continue to be affected by a variety of factors, including the timing of changes in pricing, shipment volumes, new product introductions, changes in product mixes, changes in our purchase price of components and assembly and test service costs and inventory write downs, if any. We have experienced and expect to continue to experience price erosion over the life cycle of our products. This is due in large part to competitive pressures, customer demand and technological changes. Our goal is to strive to maintain gross profits for products that have a declining average selling price by continuing to focus on increased sales volume and looking to reduce operating costs. We also focus on managing our inventory to reduce our overall exposure to price erosion. In addition, we seek to introduce new products with higher gross margins to offset the effect of price erosion on other lines of products. Our business and results of operations will depend on our ability to reduce our exposure to declines in average selling prices.

Net sales

The principal factors that have affected or could affect our net sales from period to period are:

The condition of the economy in general and of the memory storage products industry in particular,
Our customers’ adjustments in their order levels,
Changes in our pricing policies or the pricing policies of our competitors or suppliers,
The addition or termination of key supplier relationships,
The rate of introduction and acceptance by our customers of new products,
Our ability to compete effectively with our current and future competitors,
Our ability to enter into and renew key corporate and strategic relationships with our customers, vendors and strategic alliances,
Changes in foreign currency exchange rates,
A major disruption of our information technology infrastructure,
Unforeseen catastrophic events, such as armed conflict, terrorism, fires, typhoons and earthquakes, and
Any other disruptions, such as labor shortages, unplanned maintenance or other manufacturing problems.

Cost of goods sold

Cost of goods sold primarily includes the cost of products that we purchase from third party manufacturers and sell to our customers. Additional packaging and assembly (labor) costs for certain product orders is also a component of costs of goods sold. Cost of goods sold is also affected by inventory obsolescence if our inventory management is not effective or efficient. We mitigate the risk of inventory obsolescence by stocking relatively small amounts of inventory at any given time, and relying instead on a strategy of manufacturing or acquiring products based on orders placed by our customers.

37


 
 

TABLE OF CONTENTS

General and administrative expenses

General and administrative expenses relate primarily to compensation and associated expenses for personnel in general management, information technology, human resources, procurement, planning and finance, as well as outside legal, investor relations, accounting, consulting and other operating expenses.

Selling and marketing expenses

Selling and marketing expenses relate primarily to salary and other compensation and associated expenses for internal sales and customer relations personnel, advertising, outbound shipping and freight costs, tradeshows, royalties under a brand license, and selling commissions.

Research and development expenses

Research and development expenses consist of compensation and associated costs of employees engaged in research and development projects, as well as materials and equipment used for these projects, and third party compensation for research and development services. We do not engage in any long-term research and development contracts, and all research and development costs are expensed as incurred.

Other expenses

Interest and finance expense includes interest paid or payable to a finance company for outstanding borrowings, bank fees, purchase order finance fees, interest accrued on convertible debt, amortization of a debt discount that arose as a result of the issuance of warrants with convertible debt, and amortization of debt issuance costs. Debt conversion expense is a non-cash charge for the effect of an induced conversion of debt to equity.

Six Months ended June 30, 2015 Compared to Six Months ended June 30, 2014

Results of Operations

   
  Six months ended June 30,
     2015   2014
     (in thousands)
Net sales   $ 2,718     $ 3,270  

Net sales for the six months ended June 30, 2015 decreased approximately 17% to $2.7 million from $3.3 million for the six months ended June 30, 2014. The most significant factor contributing to the reduction in net sales was a $943,000 reserve, or 21% of gross sales before allowances, which was charged against sales during the six months ended June 30, 2015. This reserve was established in connection with sales to a relatively new customer, a large retail entity. When product is first being introduced to such a customer, there is uncertainty regarding returns. We recorded the return reserve based upon past historical experience with this customer.

   
  Six months ended June 30,
     2015   2014
     (in thousands)
Cost of goods sold   $ 2,457     $ 2,540  
Gross profit   $ 261     $ 730  
Gross profit margin     9.6 %       22.3 %  

Cost of goods sold decreased approximately $83,000, for the six months ended June 30, 2015 to $2.4 million, compared to $2.5 million for the six months ended June 30, 2014. As a percent of net sales, cost of goods sold increased to 90.4% in the six months ended June 30, 2015 from 77.7% for the six months ended June 30, 2014. The decrease in gross profit as a percentage of net sales is caused by a combination of factors, including product mix, customer mix, and specific pricing decisions. These factors can effect a significant change in gross profit as a percentage of net sales from one period to the next, particularly when sales are relatively low, which is typical of the first quarter of our operating year. Gross profit in the six months ended June 30, 2015 decreased to $261,000 from $730,000 in the six months ended June 30, 2014. Gross profit as a percentage of net sales was 9.6% in the six months ended June 30, 2015, compared to 22.3% in the six months ended June 30, 2014.

38


 
 

TABLE OF CONTENTS

   
  Six months ended June 30,
     2015   2014
     (in thousands)
Selling and marketing (“S & M”)   $ 1,389     $ 687  
General and Administrative (G&A)   $ 1,375     $ 949  

S & M for the six months ended June 30, 2015 increased approximately 102%, to $1.4 million, compared to $687,000 for the six months ended June 30, 2014. The increase is consistent with our new focus on retail channels in order to increase sales. Selling costs include certain variable amounts based on sales such as selling commissions, outbound shipping and royalties. Those costs incurred for the six months ended June 30, 2015 were $415,000 compared to $350,000 in the six months ended June 30, 2014. In the six months ended June 30, 2015, we incurred additional personnel costs in our sales and marketing functions compared to the six months ended June 30, 2014 as anticipated a ramp up in sales. Such internal workforce provides customer support, among other functions. The increase in such costs were approximately $0.2 million in the six months ended June 30, 2015.

General and administrative expenses for the six months ended June 30, 2015 increased by approximately 45% to $1.4 million compared to $949,000 in the six months ended June 30, 2014. The increase is attributable to the growth in our sales during 2014, which required us to broaden our infrastructure to support the business growth. Consequently, for the six months ended June 30, 2015 we employed more personnel in our purchasing, finance and administrative functions as compared to the same period in 2014. We will continue to assess our infrastructure requirements as sales continue to increase. We expect that our general and administrative spending will increase at a modest rate as revenues increase, but as a percentage of sales will decline as sales increase.

   
  Six months ended June 30,
     2015   2014
     (in thousands)
Research and development (“R&D”)   $ 246     $ 190  

R & D for the six months ended June 30, 2015 increased approximately 29% to $246,000, compared to $190,000 for the six months ended June 30, 2014. Our R&D function is managed by one employee, and we use the services of third party software engineers to complement our needs on a product-by-product basis if and when needed. With respect to our products, the basic functional technology we use changes very little over time, therefore, our R&D spending is primarily related to enhancing existing functionality, introducing new functions within existing products, and designing and engineering new products largely with existing proven technology. We do not expect that R&D costs as a percentage of sales will be significant for the foreseeable future.

   
  Six months ended June 30,
     2015   2014
     (in thousands)
Interest and finance expense   $ 630     $ 256  
Debt conversion expense   $ 898     $  

For the six months ended June 30, 2014 we had interest bearing debt and incurred approximately $122,000 in borrowing costs. Another $116,000 pertained to the amortization of debt issuance costs incurred to secure our credit facility in 2013. For the six months ended June 30, 2015, interest and finance expense consisted primarily of the amortization of deferred debt issuance costs and interest incurred under the credit facility. Debt conversion expense of $898,000 was a non-cash expense incurred as an inducement for the exchange of our convertible notes and warrants further to our exchange offer, with a corresponding credit to paid in capital.

39


 
 

TABLE OF CONTENTS

   
  Six months ended June 30,
     2015   2014
     (in thousands)
Income tax provision   $     $ 8  

Income tax expense for the six months ended June 30, 2015 and 2014 consists of state income taxes due or paid in the states in which we operate. We have not recognized a deferred tax benefit for the operating losses generated during the periods due to the uncertainty that we will generate taxable income in the future that will allow us to utilize the benefit.

Financial Condition

Liquidity and Capital Resources

Our primary sources of liquidity throughout the six months ended June 30, 2015 and 2014 have been cash raised in private placements of common stock and notes payable, an accounts receivable factoring credit facility, and a purchase order finance facility. In addition, from time to time, we have obtained short-term, non-interest bearing loans from a related party to complement our working capital needs.

In June 2015, we secured an accounts receivable financing facility with Bay View Funding. The new contract provides for maximum funding of $4.0 million and a factoring fee of 1.35% for the first 30 days and .45% for each 10-day period thereafter that the financed receivable remains outstanding. As of June 30, 2015, the balance owed on this facility was $1.5 million.

As of June 30, 2015, we have one purchase order (“PO”) finance facility in place. When we receive a firm purchase order from our customer, we will prepare a purchase order to our offshore supplier. We then submit all documentation to our PO financer who in turn will establish a standby letter of credit on our behalf for the benefit of our offshore supplier. Once the standby letter of credit is in place, our supplier will initiate production of our order. Upon completion of our PO, our PO financer will remit payment to our offshore supplier, at which time we ship the product to our customer and present our invoice to them. At the same time, we may submit the invoice to our credit provider, as described in the previous paragraph, and the credit provider will remit to the PO financer the amount owed for the purchase transaction.

In October 2015, we issued $1.96 million of promissory notes. The notes are due and payable on the earlier of October 2016 or the closing date of our initial public offering and consist of $1.6 million loaned to the company and a 22.5% loan originated fee payable on maturity. Amounts actually lent bear interest at a fixed amount of 15% of principal loaned, regardless of the time that the loan is outstanding. All principal, interest and fees are payable on the due date.

Discussion of Cash Flows

     
  Six months ended June 30,
     2015   2014   Change
     (in thousands)
Net cash provided by (used in) operating activities   $ (160 )     $ (2,689 )     $ 2,529  
Net cash used in investing activities                  
Net cash provided by (used in) financing activities     169       2,727       (2,558 )  
Net increase (decrease) in cash   $ 9     $ 38     $ (29 )  

Operating Activities

Net cash used in operating activities in the six months ended June 30, 2015 was approximately $160,000, due to the collection of accounts receivable of $3.0 million and increased use of vendor credit of $1.5 million, offset by the net loss of $4.3 million and a $1.2 million increase in inventory during the period. The net loss also included non-cash charges totaling approximately $463,000 for the amortization of debt issuance costs and a debt to equity conversion expense of $898,000. The decrease in accounts receivable is reflective of 31 days of sales outstanding for the six months ended June 30, 2015 as compared to 80 days sales outstanding for the six months ended June 30, 2014. The increase in inventory is primarily related to returns and the inventory turnover ratio was .77 for the six months ended June 30, 2015 as compared to 2.49 for the six months ended June 30, 2014.

40


 
 

TABLE OF CONTENTS

Investing Activities

Our current operating structure does not depend upon a significant investment in capital equipment or operating facilities. Substantially all of our manufacturing is conducted offshore by third party manufacturers. Our office and warehouse facilities are leased under a three-year operating lease. For the six months ended June 30, 2015 and 2014, we used no cash in investing activities.

Financing Activities

Net cash provided by financing activities in the six months ended June 30, 2015 was approximately $169,000. There was net repayment of approximately $3.5 million of our accounts receivable credit facility as a result of the collection of accounts receivable, as indicated above. In 2015, we continued to receive funding through the issuance of convertible debt under the private placement offering that began in 2014. In 2015, an additional net total of $1.6 million was raised under this offering, and the offering has been closed. In March 2015, we initiated a common stock purchase rights offering for the issuance of up to $4.8 million of equity. Through June 30, 2015, a net total of $2.6 million has been raised under this offering.

Debt Instruments

As of June 30, 2015, debt instruments consist of two convertible notes payable with a total principal amount of $38,000, due in May and June 2015. All other notes and related warrants issued in connection with the private placement of convertible debt in 2014 and 2015 have converted to equity as of June 30, 2015 pursuant to an exchange offer.

Year 2014 Compared to Year 2013

Results of Operations

Summary of the Year Ended December 31, 2014

Net sales for 2014 increased to $11.3 million compared to $3.4 million in 2013;
Gross profit for 2014 was $.2 million, or 2.1% of net sales, from $0.6 million, or 17.6% of net sales, in 2013;
Operating expenses, as a percentage of net sales, decreased to 60.9% for 2014 compared to 115.3% for 2013;
Net loss attributable to common stockholders for 2014 was $11.1 million, or $0.27 per diluted share, from $3.4 million, or $0.09 per diluted share, in 2013; and
Cash used in operations for 2014 was $7.5 million, an increase from $3.9 million used in 2013.

The following table sets forth, for the periods indicated, the percentage that certain items in the statement of operations bear to net sales and the percentage dollar increase (decrease) of such items from year to year.

   
  Percent of net sales
year ended December 31,
     2014   2013
Net sales     100 %       100 %  
Cost of goods sold     (97.9 )       (82.4 )  
Gross profit     2.1       17.6  
Operating expenses     (60.9 )       (115.3 )  
Income (loss) from operations     (58.8 )       (97.7 )  
Interest and finance expense     14.7       1.9  
Debt conversion expenses     23.9       0.0  
Income (loss) before income taxes     (97.4 )       (99.6 )  
Income tax provision     (.1 )       (.1 )  
Net income (loss)     (97.5 )       (99.7 )  

The following discussion explains in greater detail our consolidated operating results and financial condition. This discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this prospectus.

41


 
 

TABLE OF CONTENTS

   
  Year ended December 31,
     2014   2013
     (in thousands)
Net sales   $ 11,343     $ 3,444  

Net sales in 2014 increased approximately 229% to $11.3 million from $3.4 million in 2013. The increase in net sales is attributable in part to an increase in the number of product units sold (from 244,000 to 826,000). The net working capital that we raised through the issuance of convertible notes beginning in the second quarter of 2014 and through the end of 2014, and the working capital provided through a new credit facility in November 2013 allowed us to expand our product offerings.

   
  Year ended December 31,
     2014   2013
     (in thousands)
Cost of goods sold   $ 11,109     $ 2,838  
Gross profit   $ 234     $ 606  
Gross profit margin     2.1 %       17.6 %  

Cost of goods sold increased approximately 291% in 2014 to $11.1 million, compared to $2.8 million in 2013. As a percent of net sales, cost of goods sold increased from 82.4% in 2013 to 97.9% in 2014. The increase in the percentage costs of goods sold (and therefore a decrease in the gross profit margin), was due primarily to our customer base in 2014 as compared to 2013. In 2014, we began selling to several large national retailers in the third and fourth quarters of 2014. In order to establish these new relationships, we offered abnormally large discounts in the form of market development credits (MDF credits) and other liberal allowances during the year. These allowances, along with price protection and return allowance, which effectively reduced the selling prices to these customers, totaled $3.4 million, or 21% of gross sales before these allowances, during 2014. The comparable amounts allowed in 2013 to all of our customers was approximately $0.5 million or 13% of gross sales. While we generally offer MDF credits to certain of our customers through written contracts (which generally range from 3% to 5% of invoice price), our larger national retail customers may receive additional allowances as requested, negotiated and agreed to from time to time. As our relationships with these larger retail customers mature, we expect that the amount of allowance as a percentage of sales will decrease significantly.

   
  Year ended December 31,
     2014   2013
     (in thousands)
Selling and marketing (“S & M”)   $ 3,722     $ 1,515  
General and administrative (“G&A”)     2,646       1,747  

S & M in 2014 increased approximately 146%, to $3.7 million, compared to $1.5 million for 2013. The increase is consistent with our new focus on retail channels. Selling costs include certain variable amounts based on sales such as selling commissions, outbound shipping costs and royalties. Those costs incurred in 2014 were $1.3 million compared to $0.3 million in 2013. In 2014, we incurred abnormally high selling and marketing costs to establish initial customer relationships with a large national retailer. These one-time customer relationship costs incurred in 2014 are estimated to be $0.6 million. Also in 2014, we incurred additional personnel costs in our sales and marketing functions compared to 2013 as we ramped up sales. Such internal workforce provides customer support, among other functions. The increase in such costs were approximately $0.3 million in 2014.

General and administrative expenses in 2014 increased by approximately 51% to $2.7 million in 2014 compared to $1.7 million in 2013. The increase is attributable to the growth in our sales, which required us to broaden our infrastructure to support the business growth. Additionally, provisions for doubtful accounts increased by $0.3 million due to the increase in sales and number of customers.

42


 
 

TABLE OF CONTENTS

   
  Year ended December 31,
     2014   2013
     (in thousands)
Research and development (“R&D”)   $ 542     $ 709  

R&D for 2014 decreased approximately 24% to $.5 million, compared to $.7 million for 2013, primarily due to the completion of certain development projects in 2013.

   
  Year ended December 31,
     2014   2013
     (in thousands)
Interest and finance expense   $ 1,661     $ 66  
Debt conversion expense     2,707        

In 2013 we had interest bearing debt for only a portion of the year, and the $66,000 incurred relates primarily to charges on outstanding borrowings of approximately $26,000 and approximately $40,000 in the amortization of debt issuance costs incurred to secure credit facilities in 2013. In 2014 we had a financing facility in place for the full year and incurred charges related to outstanding borrowings and transaction fees. Also in 2014, we entered into two purchase order financing contracts which allowed us to initiate purchase orders from offshore vendors. We expensed approximately $382,000 in fees related to these financing contracts in 2014. Also in 2014, we raised approximately $3.7 million of convertible debt with detachable warrants. The estimated fair value of the warrants was classified in equity, which effectively created a discount to the debt raised in the offering. The debt discount and the debt issuance costs incurred in 2014 were amortized using the effective interest method over the one-year term of the notes, which resulted in a charge to earnings of approximately $1.1 million. In addition, interest accrued on the convertible notes at the stated rate of 6% amounted to approximately $.1 million in 2014, with no corresponding amount incurred in 2013. In December 2014, approximately $3.4 million of our convertible notes were converted to common stock pursuant to an exchange offer (induced conversion). As a result, all but $35,000 of debt was converted to equity as of December 31, 2014. In connection with the conversion, we recognized a non-cash charge to earnings of $2,707,000, with a corresponding credit to paid-in capital.

   
  Year ended December 31,
     2014   2013
     (in thousands)
Income tax provision   $ 13     $ 4  

Income tax expense in 2013 and 2014 consists of minimum state income taxes due in the states in which we operate. We have not recognized a deferred tax benefit for the operating losses generated in 2014 or prior due to the uncertainty that we will generate taxable income in the future that will allow us to utilize the benefit.

Financial Condition

Liquidity and Capital Resources

Our primary sources of liquidity throughout 2014 and 2013 have been cash raised in private placements of common stock and convertible notes payable, an accounts receivable factoring credit facility, and purchase order finance facilities. In addition, from time to time, we have obtained very short-term, non-interest bearing loans from a related party to complement our working capital needs.

As of December 31, 2014, we had a credit facility which allowed us to factor certain of our accounts receivable. The maximum amount of credit available under this facility was $8.0 million. The maximum amount that we used under this facility in 2014 was approximately $5.5 million. Under this facility, we may present to the credit provider our customers’ invoices for financing. Upon acceptance of the invoice by the credit provider, we assign all rights to the collection to the credit provider, and the credit provider in turn advances us a percentage of the face amount of the invoice (e.g: 80%). The advance is used to repay the purchase order financer (see below), with any excess being remitted to us. We instruct all of our customers to make payment to the credit provider. Any payments received by the credit provider that have not been financed are remitted to us in full by the credit provider. Any payments received that have been financed are retained by the credit provider, and the amount received, less the amount financed, transaction fees, interest, and other finance charges by the credit provider are

43


 
 

TABLE OF CONTENTS

remitted to us. As of December 31, 2014, approximately $5.0 million was outstanding. In March 2015, Marquette Commercial Finance notified us of its intent to terminate the factoring contract described above and that it will continue to finance sales transactions with specific customers until such time that we are able to establish a credit facility with a different finance company.

In June 2015, we secured an accounts receivable financing facility with Bay View Funding. The new contract provides for maximum funding of $4.0 million and a factoring fee of 1.35% for the first 30 days and .45% for each 10-day period thereafter that the financed receivable remains outstanding. Upon the execution of this contract, the balance owed to Marquette Commercial Finance was repaid and that contract was terminated.

As of December 31, 2014, we had one purchase order finance facility in place. When we receive a firm purchase order from our customer, we will prepare a purchase order to our offshore supplier. We then submit all documentation to our P.O. financer who in turn will establish a standby letter of credit on our behalf for the benefit of our offshore supplier. Once the standby letter of credit is in place, our supplier will initiate production of our order. Upon completion of our purchase order, our purchase order financer will remit payment to our offshore supplier, at which time we ship the product to our customer and present our invoice to them. At the same time, we may submit the invoice to our credit provider, as described in the previous paragraph, and the credit provider will remit to the P.O financer the amount owed for the purchase transaction.

In 2014 and 2013, the net amount of cash we received from our credit facilities, the private placement of common stock and issuance of convertible debt totaled $7.3 million and $3.7 million, respectively. We currently rely on third-party suppliers to manufacture our products to our specifications. As such, historically our capital expenditures on plant and equipment have been nominal and are expected to continue as such for the foreseeable future.

Discussion of Cash Flows

     
  Year ended December 31,
     2014   2013   Change
     (in thousands)
Net cash used in operating activities   $ (7,452 )     $ (3,872 )     $ (3,580 )  
Net cash used by investing activities                  
Net cash provided by financing activities     7,548       3,811       3,737  
Net increase (decrease) in cash   $ 96     $ (61 )     $ 157  

Operating Activities

Net cash used in operating activities in 2014 was approximately $7.5 million, due primarily to a net loss of $11.1 million, partially offset by non-cash finance and other charges of approximately $3.9 million pertaining to convertible debt issued in 2014. We used approximately $3.1 million of cash with the increase in customer accounts receivable, while we were leveraged our trade payables by $2.9 million.. In addition, accrued expenses increased by approximately $1.3 million.

Net cash used in operating activities increased by approximately $3.6 million from 2013 to 2014. This increase resulted primarily from an increase in our receivables which was partially offset by an increase in our accounts payable and accrued expenses.

Investing Activities

Our current operating structure does not depend upon a significant investment in capital equipment or operating facilities. Substantially all of our manufacturing is conducted offshore by a third party manufacturer. Our office and warehouse facilities are leased under a three-year operating lease. For 2013 and 2014, we used no cash in investing activities.

Financing Activities

Net cash provided by financing activities in 2014 was approximately $7.6 million, due primarily to net proceeds from the issuance of convertible debt of $2.8 million, net of issuance costs of $.6 million, and net borrowings under an accounts receivable factoring credit facility of approximately $4.5 million. In 2015, we

44


 
 

TABLE OF CONTENTS

continued to receive funding through the issuance of convertible debt under the private placement offering that began in 2014. In 2015, an addition net total of approximately $1.4 million has been raised under this offering, and the offering has been closed. In March 2015, we initiated a common stock purchase rights offering for the issuance of up to $4.8 million of equity. Through August 7, 2015, a net total of $3.2 million has been raised under this offering.

Net cash provided by financing activities for 2013 was approximately $3.8 million, due primarily to a raise of $3.0 million, net of issuance costs of $.9 million, in a private placement of common stock. In addition, we realized an increase in cash of approximately $.7 million under the accounts receivable financing facility that was established in 2013.

Debt Instruments

As of December 31, 2014, debt instruments consist of two convertible notes payable with a total principal amount of $38,000, due in 2015. All other notes and related warrants issued in connection with the private placement of convertible debt in 2014 have converted to equity as of December 31, 2014, pursuant to an exchange offer submitted to all note holders of record as of December 31, 2014.

Operating and Capital Expenditure Requirements

We have not achieved profitability since our inception and we expect to continue to incur net losses for the foreseeable future. We expect our cash expenditures to increase in the near term as we fund our future growth. Following this offering, we will be a publicly traded company and will incur significant legal, accounting and other expenses that we were not required to incur as a private company. In addition, the Sarbanes-Oxley Act, as well as rules adopted by the Securities and Exchange Commission, or SEC, and the NASDAQ Stock Market, requires public companies to implement specified corporate governance practices that are currently inapplicable to us as a private company. We expect these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly.

Based on our business and development plans and our timing expectations related to the progress of our products, we expect that the net proceeds from this offering, together with our existing cash and cash equivalents as of June 30, 2015, will enable us to fund our operating expenses and capital expenditure requirements through the end of 2016. Our future capital requirements will depend on many factors, including: the costs and timing of future product and marketing activities, including product manufacturing, marketing, sales and distribution for any of our products; the expenses needed to attract and retain skilled personnel; and the timing and success of this offering. Until such time, if ever, as we can generate more substantial product revenues, we expect to finance our cash needs through a combination of equity or debt financings.

We will need to raise substantial additional financing in the future to fund our operations. In order to meet these additional cash requirements, we may seek to sell additional equity or convertible securities that may result in dilution to our stockholders. If we raise additional funds through the issuance of convertible securities, these securities could have rights senior to those of our common stock and could contain covenants that restrict our operations. There can be no assurance that we will be able to obtain additional equity or debt financing on terms acceptable to us, if at all. If we raise additional funds through collaboration and licensing agreements with third parties, it may be necessary to relinquish valuable rights to our product candidates, technologies or future revenue streams or to grant licenses on terms that may not be favorable to us. Please see “Risk Factors” for additional risks associated with our substantial capital requirements.

45


 
 

TABLE OF CONTENTS

Contractual Obligations and Commitments

The following is a summary of our long-term contractual cash obligations as of December 31, 2014 (in thousands):

         
Contractual Obligations   Total   less than
One year
  1 – 3
Years
  3 – 5
years
  More than
5 years
Inventory-related commitments (1)   $ 95     $ 95     $     $     $  
Royalty obligations (2)     2,400       200       700       1,500        
Long-term debt obligations (3)     35       35                    
Operating lease obligations (4)     378       126       252              
Total contractual obligations   $ 2,908     $ 456     $ 952     $ 1,500     $  

(1) Represents outstanding purchase orders for inventory that we have placed with our suppliers as of December 31, 2014.
(2) This table does not include any other royalty payments that may become payable to Monster, Inc. under our license agreement above and beyond the minimum amounts owed and more than five years because the timing and likelihood of such payments are not known.
(3) Amount represents principal and interest cash payments over the life of the debt obligations, including anticipated interest payments that are not recorded on our balance sheet.
(4) Operating lease obligations reflect our obligations pursuant to the terms of a lease agreement entered into in October 2014 for our office space located in Simi Valley, California.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, as defined by applicable SEC rules and regulations.

46


 
 

TABLE OF CONTENTS

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in conformity with U.S. GAAP requires that management 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 the reported amounts of net sales and expenses during the reporting period. On an on-going basis, we evaluate our estimates, which are based upon historical experiences, market trends and financial forecasts and projections, and upon various other assumptions that management believes to be reasonable under the circumstances at that certain point in time. Actual results may differ, significantly at times, from these estimates under different assumptions or conditions.

We believe the following critical accounting policies and estimates affect the significant estimates and judgments we use in the preparation of our consolidated financial statements, and may involve a higher degree of judgment and complexity than others.

Revenue recognition

Net sales (revenue) are recognized when there is persuasive evidence that an arrangement exists, when delivery has occurred, when the price to the buyer is fixed or determinable and when collectability of the receivable is reasonably assured. These elements are met when title to the products is passed to the buyers, which is generally when product is delivered to the customer and the customer has accepted delivery.

Certain customers have limited rights of return and/or are entitled to price adjustments on products held in their inventory. We reduce net sales in the period of sale for estimates of product returns, price adjustments and other allowances. Our reserve estimates are based upon historical data as well as projections of sales, customer inventories, price adjustments, average selling prices and market conditions. Price protection is calculated on a product by product basis. The objective of price protection is to mitigate returns by providing retailers with credits to ensure maximum consumer sales. Price protection is granted to retailers after they have presented the company an affidavit of existing inventory. Actual returns and adjustments could be significantly different from our estimates and provisions, resulting in an adjustment to net sales.

Inventories

Inventory is stated at the lower of cost or market, with cost being determined on the weighted average cost method of accounting. We purchase finished goods and materials to assemble kits in quantities that we anticipate will be fully used in the near term. Changes in operating strategy, customer demand, and fluctuations in market values can limit our ability to effectively utilize all products purchased and can result in finished goods with above-market carrying costs which may cause losses on sales to customers. Our policy is to closely monitor inventory levels, obsolescence and lower market values compared to costs and, when necessary, reduce the carrying amount of inventory to market value. As of December 31, 2013 and 2014, inventory on hand was comprised primarily of finished goods ready for sale and packaging materials.

Share-based compensation/Warrants valuation

We use the Black-Scholes model to determine the fair value of stock options and stock purchase warrants on the date of grant. The amount of compensation or other expense recognized using the Black-Scholes model requires us to exercise judgment and make assumptions relating to the factors that determine the fair value of our share-based grants. The fair value calculated by this model is a function of several factors, including the grant price, the expected future volatility, the expected term of the option or warrant and the risk-free interest rate correlating to the term of the option or warrant. The expected term is derived using the simplified method provided in Securities and Exchange Commission release Staff Accounting Bulletin No. 110 which averages an awards weighted average vesting period and contractual term for “plain vanilla” share options. The expected volatility is estimated by analyzing the historic volatility of similar public companies. The risk-free rate of return reflects the weighted average interest rate offered for US treasury rates over the expected life of options or warrants. The expected term and expected future volatility requires our judgment. In addition, we are required to estimate the expected forfeiture rate and only recognize a cost or expense for those stock options or warrants expected to vest.

47


 
 

TABLE OF CONTENTS

Fair value measurements

Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on the assumptions that market participants would use in pricing an asset or liability. Fair value is based on a hierarchy of valuation techniques, which is determined on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. These two types of inputs create a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1: Quoted prices for identical instruments in active markets.
Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3: Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

All stock options and stock purchase warrants are valued under methods of fair value under the Level 3 tier, as described above.

Factors included in the valuation of common stock underlying stock options and warrants include the present value of future cash flows, capital structure, valuation of comparable companies, existing licensing agreements and the growth prospects for our product line. These factors were incorporated into an income approach and a market approach in order to derive an overall valuation of the Company’s common stock of $0.37. Such a valuation is dependent upon estimates that are highly complex and subjective and will not be necessary once the shares underlying stock options and warrants begin trading.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

See Note 1 of Notes to Consolidated Financial Statements beginning on page F- 8 contained elsewhere in this prospectus.

Quantitative and Qualitative Disclosures About Market Risk.

Foreign Currency Risk

We face potential exposure to adverse movements in foreign currency exchange rates, primarily in Asia, due to the fact that we source substantially all of our products in Taiwan, Hong Kong, and China. Although we currently transact all purchases in U.S. dollars and therefore do not engage in any currency hedging activities, an adverse change in the currency exchange rate in those countries could adversely affect the price at which our suppliers would be willing to sell to us. Our foreign currency risk may change over time as the level of activity in foreign markets grows and could have a material adverse impact upon our financial results.

Interest Rate Risk

We have a credit facility with a U.S. based financing company. Borrowings under the facility are subject to a variable rate of interest, and subject to a minimum of interest rate 6.75%. Throughout 2014, the minimum interest rate of 6.75% was in effect. A rise in interest rates could have an adverse impact upon our cost of working capital and our interest expense. As a matter of policy, we do not enter into derivative transactions for hedging variable rate interest or for speculative purposes. As of June 30, 2015, our outstanding principal debt included $1.5 million outstanding under our accounts receivable financing facility. Based on our average borrowing under the facility in 2014, an increase in the variable interest rate by 1.0% would have caused an increase of our interest expense by approximately $9,000. A decrease in the variable rate would have no impact on interest expense because of the minimum interest rate provision.

Inflation Risk

Inflation did not have a material effect on net sales or net loss in 2014. A significant increase in inflation could have a significant detrimental impact on our future performance since our products are ultimately

48


 
 

TABLE OF CONTENTS

purchased by individual consumers whose discretionary spending is influenced by the effects of inflation. We are unable to quantify the potential effects that various rates of inflation could have on our operating performance.

Credit Risk

The success of our business depends, among other factors, on the strength of the North American and global economies and the stability of the financial markets, which in turn affects end users’ demand for our products and therefore our customers’ demand for our products. We provide credit to customers in the ordinary course of business and perform initial and ongoing credit evaluations, while at times providing extended terms. We believe that our exposure to concentrations of credit risk with respect to trade receivables is largely mitigated by dispersion of our customers over various geographic areas. We believe our allowance for doubtful accounts is sufficient to cover customer credit risks.

INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Internal control over financial reporting includes: maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; providing reasonable assurance that receipts and expenditures of our assets are made in accordance with management’s authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Furthermore, our controls and procedures can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls or procedures, and misstatements due to error or fraud may occur and not be detected on a timely basis.

Our management has determined that we had a material weakness in our internal control over financial reporting as of December 31, 2013 and 2014 and June 30, 2015 relating to the design and operation of our closing and financial reporting processes. We have concluded that this material weakness in our internal control over financial reporting is due to the fact that we do not yet have the appropriate resources with the appropriate level of experience and technical expertise to oversee our closing and financial reporting processes.

In order to remediate this material weakness, we have taken the following actions:

we have hired a full-time chief financial officer;
we have hired and are continuing to actively seek additional accounting and finance staff members to augment our current staff and to improve the effectiveness of our closing and financial reporting processes; and
we are formalizing our accounting policies and internal controls documentation and strengthening supervisory reviews by our management.

In connection with the initiatives we implemented to remediate the material weakness, we expect to incur additional compensation expense as we hire additional financial accounting staff and improve our accounting and financial reporting systems. The initiatives we have implemented are subject to continued management review supported by confirmation and testing, as well as audit committee oversight. We expect to complete the measures above within approximately 90 to 120 days after upon the completion of this offering and will continue to implement measures to remedy our internal control deficiencies in order to meet the reporting requirement of Section 404 of the Sarbanes-Oxley Act of 2002. However, we cannot be certain that the measures we have taken or might take in the future will ensure that we will maintain adequate controls over our financial processes and reporting in the future.

49


 
 

TABLE OF CONTENTS

Notwithstanding the material weakness that existed as of December 31, 2013 and 2014 and June 30, 2015, our management has concluded that the consolidated financial statements included elsewhere in this prospectus present fairly, in all material respects, our financial position, results of operation and cash flows in conformity with GAAP.

If we fail to fully remediate this material weakness or fail to maintain effective internal controls in the future, it could result in a material misstatement of our financial statements that would not be prevented or detected on a timely basis, which could cause investors to lose confidence in our financial information or cause our stock price to decline. Our independent registered public accounting firm has not assessed the effectiveness of our internal control over financial reporting and, under the JOBS Act, will not be required to provide an attestation report on the effectiveness of our internal control over financial reporting so long as we qualify as an “emerging growth company,” which may increase the risk that weaknesses or deficiencies in our internal control over financial reporting go undetected.

EMERGING GROWTH COMPANY STATUS

We are an “emerging growth company” as defined in the JOBS Act, and therefore we may take advantage of certain exemptions from various public company reporting requirements. As an “emerging growth company:”

we will present no more than two years of audited financial statements and no more than two years of related management’s discussion and analysis of financial condition and results of operations;
we will avail ourselves of the exemption from the requirement to obtain an attestation and report from our auditors on the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act;
we will provide less extensive disclosure about our executive compensation arrangements; and
we will not require stockholder non-binding advisory votes on executive compensation or golden parachute arrangements.

However, we are choosing to irrevocably opt out of the extended transition periods available under the JOBS Act for complying with new or revised accounting standards. We will remain an “emerging growth company” for up to five years, although we will cease to be an “emerging growth company” upon the earliest of: (1) the last day of the fiscal year following the fifth anniversary of this offering, (2) the last day of the first fiscal year in which our annual gross revenues are $1 billion or more, (3) the date on which we have, during the previous rolling three-year period, issued more than $1 billion in non-convertible debt securities, and (4) the date on which we are deemed to be a “large accelerated filer” as defined in the Exchange Act.

50


 
 

TABLE OF CONTENTS

BUSINESS

Our primary business focus is the design, development and marketing of premium products under the “Monster Digital” brand for use in high-performance consumer electronics, mobile product and computing applications. Our license with Monster, Inc. allows us to manufacture and sell certain high-end products utilizing the “Monster Digital” brand name; Monster, Inc. is highly recognized by consumers for its high quality audio-video products. We work with our subcontract manufacturers and suppliers to offer new and enhanced products that use existing technology and adopt new technologies to satisfy existing and emerging consumer demands and preferences. On the marketing side, we partner with Monster, Inc. to support the sales and marketing of these products on a global basis.

We have invested significantly in building a broad distribution channel for the sale of products bearing the “Monster Digital” brand. As of June 30, 2015, our initial product entries of memory storage devices and peripherals are offered in over 15,000 locations globally. Our top four customers for our memory storage products for the six months ended June 30, 2015 were Walgreens (41%), Rite Aid (18%), InMotion (7%) and Fry’s (7%) and for the year ended December 31, 2014 were Sam’s Club (30%), Walgreens (22%), Rite Aid (15%) and Fry’s (7%). Our current focus is to leverage our distribution network through cooperating with Monster, Inc. to identify and market additional specialty and consumer electronics products.

Currently, our primary product offerings are as follows:

An action sports camera used in adventure sport, adventure photography and extreme-action videography which we intend to introduce before 2015 year end.
A line of ultra-small mobile external memory drive products for Apple iOS devices.
On-The-Go Cloud devices on an exclusive basis which create a wi-fi hot spot for multiple users while simultaneously allowing data to be viewed, played or transferred among the connected storage.
A broad selection of high-value memory storage products consisting of high-end, ruggedized Solid State Drives (“SSDs”), removable flash memory CompactFlash cards (“CF cards”), secured digital cards (“SD cards”) and USB flash drives.

Products

Action Sports Camera

Market

Action cameras are used to capture extreme action sports or activities. Action cameras are more convenient than traditional analog cameras for capturing action and sports. Regular cameras are typically incapable of capturing high-speed actions and are not designed for rugged conditions, including extreme weather. In contrast, action cameras are compact, lightweight, designed for rugged conditions, and can be worn on the person, or are mountable on vehicles. These cameras can capture high-speed and high-quality images. Professional applications include the use of action cameras by professionals for sports, training, government agencies, and movies; casual applications are primarily personal use, which includes adventure tourism, photography, and shooting short films.

According to Technovio, the global action camera market is experiencing a period of substantial growth, with revenues increasing 41.82% in 2014. In terms of volume, Technovio states that the action camera market shipped 7.63 million units in 2014 and is expected to increase to 21.54 million units by 2019, growing at a compounded annual growth rate of 23.07%. The report states that the global action camera market was valued at $1.99 billion in 2014 and is expected to reach $5.72 billion by 2019, growing at a compounded annual growth rate of 23.51%.

We believe the following factors continue to drive the growth of action camera sales:

The fascination of capturing adventure activities on camera primarily driven by demands from enthusiasts of extreme sports. The advanced features of action cameras enable them to capture high-speed movement both as stills and as video.

51


 
 

TABLE OF CONTENTS

The popularity of social networking sites, increased penetration of social media and the growing popularity of adventure sports. End-users share images and videos of their sports activities captured through action cameras on these sites, which has boosted the demand for action cameras as they provide superior quality images and videos. Growth in adventure tourism such as skydiving, snowboarding, extreme skiing and mountain biking is another factor driving market growth.
The market has witnessed an increase in demand from professional athletes, where action cameras assist in monitoring and improving performance and from sponsorship of extreme sports events by leading market vendors for the purpose of branding. Athletes and sponsors use user-generated content to market their brand through social media platforms.

According to Technovio, the global action camera market is currently witnessing an increase in demand from developed countries: the US and the UK are major contributors to the market. High per capita income, rapid increase in adventure sports tourism, and growing interest in social networking are some of the factors boosting the sale of action cameras in these countries. The action camera market in the Americas shipped 3.71 million units in 2014, which is expected to increase to 9.13 million units by 2019, with a compounded annual growth rate of 19.73% percent. The high spending power of consumers in North America has led to the region being the early adopter of action cameras. Moreover, according to Technovio, more than 50% of Americans are involved with adventure activities. Finally, vendors in these countries are sponsoring extreme sports events to promote their brands.

The “Villain”

We intend to introduce our “Villain” action sport camera by the end of calendar 2015. The Villain is an action camera with easy handling and sharing options that ensure high-quality images, long battery life and expandable memory storage. The camera comes in a small, easy-to-use form factor housing with dimensions of 2 5/16” W by 1¾” H, weighing 2.5 pounds with the battery installed and featuring a 2” LCD display and a 32GB Sport Series SDXC Card. The Villian is a fixed-lens camera with a 5 mega pixel sensor, a 140 degree viewing angle, and provides video recording at 1080 pixels at 30 frames per second and 12 mega pixel photos. The Villain can be used in time lapse mode and is wi-fi enabled. The camera is contained in a removable polycarbonate floating water proof housing with a glass lens that is rated shockproof and waterproof to 100 feet. The Villain features a quick-release buckle and threads at the bottom to attach to all the Villain mounts.

We believe that to succeed in the competitive action camera marketplace, it is imperative that we to distinguish our product offerings through clear and unique value propositions. For this reason, we have positioned the Villain as a “ready-to-go” camera. We believe our approach is unique to this category as we intend to provide a completely “all included” solution for the consumer. The strategy is to provide the end user with everything necessary to start enjoying the product straight out of the box. In addition, we intend to price the Villain on an “all included basis” at $149, which we believe makes the Villain extremely price competitive with other entries in the action camera market.

52


 
 

TABLE OF CONTENTS

[GRAPHIC MISSING]

*To be introduced by end of calendar 2015.

The “all included” package contains numerous universal mounts designed to enable users to capture content when engaged in a wide variety of activities. These include helmet, handlebar grip and tripod mounts. Also included are helmet straps, a tripod and a removable replaceable battery. We also intend to sell cables that connect the Villain to television monitors, as well as other accessories to further expand the features, versatility and convenience of our camera.

Data Storage Devices

Market

Data storage devices are used in computers and portable electronic products that require additional data storage capacity to function at optimal levels. Unit sales within the electronic data storage industry have continued to grow. According to Global Industry Analysts, Inc. worldwide flash memory product sales of SD cards are estimated to reach $21.3 billion by 2018. According to IHS iSuppli, global SSD sales are projected to reach 189.6 million units by 2017.

We believe the following factors continue to drive the unit growth of flash memory data storage device sales:

consumer use of data storage devices for the playing, retention and creation of digital content in devices such as personal and laptop computers, mobile handsets and related devices, digital cameras and camcorders and MP3 and MP4 players;
ease of use of external storage devices such as flash memory cards and USB flash drives allowing the easy storage and portability of digital data such as photographs, video and music; and
growth of Internet-based applications such as social networking which drives the need for digital content, storage and distribution.

According to Great American Group, storage purchases have been moving from traditional, mechanical storage formats to flash-based technologies in recent years, and flash-based SSD formats are expected to completely replace magnetic hard drives in the next five years, as SSD technology can access memory significantly faster than traditional magnetic drives. We believe that the demand for SSDs will also grow due to growing requirements for increasing performance, small size, and low power consumption, as well as increasing demand for such devices in emerging countries.

53


 
 

TABLE OF CONTENTS

Our primary end markets for our memory storage products are as follows:

Consumer .  We provide flash memory storage products to multiple consumer markets, including imaging, gaming, audio/video and mobile applications. Flash storage cards are used as the film for all major brands of digital cameras. In addition, many portable game devices include advanced features that require high capacity memory storage. Also, multimedia features and download applications in mobile phones drive demand for additional flash memory storage.

Computing .  We provide data storage solutions for the computing market. CF and SD card and USB flash drive flash memory allows consumers to store pictures and music on cards and then quickly and easily transfer these files to and between laptops, notebooks, desktops, and other devices. In addition, we sell SSDs for the computing market. We plan to continue to develop new releases of our SSDs for the notebook and desktop computer markets as we believe that SSDs are increasingly likely to replace HDDs in a variety of computing solutions.

We believe our focus allows us to:

distinguish us from other providers of electronic data storage products;
provide value to our customers; and
easily and cost-effectively diversify and market our product portfolio.

[GRAPHIC MISSING]

Monster Apple iPhone/iPad External Memory Drive

We offer a family of ultra-small mobile external memory drive products for Apple iOS devices (iPhone/iPad/iPod) under the iX32 and Memory Cable trade names.

We offer an iX32 flash drive which contains a memory module (16GB up to 128GB) with a Lightning connector and a USB connector. Lightning is a proprietary computer bus and power connector created by Apple Inc. and is used to connect Apple mobile devices like iPhones, iPads and iPods to host computers, external monitors, cameras, USB battery chargers and other peripherals. Through the USB port, the user can plug his/her Apple device to any computer to store data/media and take it for future use. Through the Lightning connector, the user can download data from selected Apple iOS devices onto the drive and then transfer the data to another iOS device or to a device with a USB port ( such as a TV or a computer). As a result, the user creates“freed” up space on his/her Apple device by directly copying content off the device instead of having to move the content by sending it to iCloud or other remote cloud storage destinations. It is

54


 
 

TABLE OF CONTENTS

also helpful if a user wants to consume large megabyte data, such as a movie, and does not want to store that content on his/her iOS device which would further diminish the available memory. In such an instance the“movie” can be loaded onto the drive and then watched from the drive when it is plugged into the iOS device.

The device also allows backup of photos, contacts, documents and videos, access to Dropbox, internal App storage and is security protected with optional password/fingerprint protection. In the case of the Memory Cable, it also serves as a charging cable if needed for the iOS device.

On-The-Go Cloud

Our On-The-Go Cloud device, which we market on an exclusive basis, is an innovative multi-function wireless media access hub. This device allows a user to create a wi-fi hot spot for multiple users, share photos and videos with friends and stream movies while on the road or in the air to any wi-fi enabled device. This lightweight, smartphone-sized device is equipped with dedicated ports for SD and microSD cards up to 64GB, as well as standard-size USB flash drives or external hard drives up to 2TB. A Micro USB cable is used for connectivity and charging the onboard battery which can last five hours on a single charge while streaming videos. When a PC or Mac is connected via the micro USB cable, it acts as a reader and hub, simultaneously giving access to memory cards and/or a storage device plugged into the USB port. Not only can data be viewed or played, it can be transferred among the connected storage. For example, an HD movie file from an SD card can be copied to an external hard drive.

The same functionality above can also be done wirelessly. The device has 2.4GHz (b/g/n) encrypted Wi-Fi capability, which gives cable-free connectivity to PCs, Macs, tablets and smartphones. Files can be accessed via any web browser and by wireless enumeration, in which it operates as a network drive. With a streaming capacity of up to five devices at 720p (three devices at 1080p) and unlimited direct access, it’s ideal for sharing media. The device also has an Ethernet port allowing it to act as a wi-fi hotspot. The device comes with a travel bag and micro USB cable and is priced under $100.

SSDs

SSDs are data storage devices that utilize solid-state memory to store persistent data. SSDs contain no moving parts and use microchips that retain data in non-volatile memory chips, meaning they retain their memory when the power is turned off. SSDs have the same interface as hard disk drives (“HDDs”) and easily replace them in most applications. SSDs are used in consumer electronic products which are primarily designed for small form factor, battery powered consumer hand held devices, such as laptop computers and tablets.

Our drives are used for laptop, notebook, desktop and enterprise server applications. These drives feature enhanced reliability, higher performance and reduced power consumption compared to typical HHDs and are more than twice as fast as many other SSD drives.

Overdrive 3.0 SSD and Overdrive 3.0 Mini .  Our Overdrive 3.0 Series of SSDs is designed for consumer applications that require high-performance and endurance with easy plug and play compatibility. The drives are USB powered making them energy efficient with no external power switch required. Our Overdrive 3.0 and Overdrive 3.0 Minis are USB 2.0 compatible as well. Its robust construction is designed to survive impact up to 500g and resistant to magnetic interference and extreme temperatures. The drives have a laser extended stainless steel enclosure with a small form factor that travels easily.

This family of SSDs is available in densities of 128GB, 256GB and 512GB, and 1 Terra Byte (“TB”) with 250/150 Megabytes (“MB”) sequential read/write speeds. Prices for our Overdrive 3.0 SSDs range from $99 to $700.

Overdrive Thunderbolt SSD.

Our Overdrive Thunderbolt SSD series incorporates Intel’s Thunderbolt technology that simultaneously supports high resolution displays and high performance data devices through a single compact port. With read/write speeds of 500/450 MB/s, our Overdrive Thunderbolt is substantially faster than many other commercially offered Thunderbolt connected drives. Our drive features an integrated 250mm Thunderbolt Cable with a press-to-release catch. With the same robust construction durability and stainless steel enclosure as our Overdrive 3.0 series, this family of drives offers high performance in demanding data applications.

55


 
 

TABLE OF CONTENTS

This family of SSDs is available in densities of 240GB, 480GB and 1TB and prices range from $99 to $799.

Overdrive Advanced SSD .  This device is an entry level SSD for less demanding data applications. The external SSD has a density of 128GB and a speed of 140 MB/s, making it substantially faster than many other commercially available USB 3.0 drives. The SSD includes a USB 3.0 cable and has a price point of $100.

Monster “Superfast” SSD .  Our Monster “Superfast” SSD allows a user the ability to upgrade an PC from the internal traditional rotating HDD to our MD-550 2.5” SSD. The upgrade increases the speed, battery life and reliability of the PC. The MD-550 SSD has no rotating parts thus offering substantially more reliability and durability than standard rotating HDDs.

Our Monster “Superfast” SSD comes in 240GB, 480GB and 1TB configurations and range in price from $150 to $450.

CompactFlash Cards

CF cards are flash memory mass storage devices used mainly in portable electronic devices. Flash memory products are electronically re-writable, non-volatile semiconductor memory devices that retain content when power is turned off. CF cards make data easy to add to a wide variety of computer devices, including digital cameras and music players, desktop computers, personal digital assistants, digital audio recorders and photo printers.

Our line of CF cards consists of the following:

800x CF. These cards are designed for discerning photo and video users. Built with a robust structure, our CF Cards feature 120 MB/s read read/write speeds and superior memory card performance. The cards are offered in 320GB and 64GB configurations, are waterproof and impact resistant to 1500g. These cards are ideal for fast action photography and video capture.

Our CF cards are offered at prices of $140 and $280.

Secure Digital Cards

SD cards are removable flash memory products. SD cards are used in many consumer electronic devices and have become a widespread means of storing several gigabytes (“GB”) of data in a smaller site. Devices where the user may remove and replace cards often, such as laptop or notebook computers, digital cameras, camcorders and video game consoles tend to use full-sized cards. Devices where small size is paramount, such as action sports cameras and mobile phones, tend to use microSD cards.

We offer a variety of SD cards with a range of speeds, capacities and value-added features in all major media formats.

Sport Series SDXC .  Our line of Secure Digital eXtreme Capacity, or SDXC, cards is tailored for those users seeking the highest standards in memory card technology. These products have the highest speed rating in our SD product line and are targeted at users of action sports cameras, professional photographers and high-end gamers. Speed, capacity and protection are maximized for consumers’ important data; our SDXC cards have 90/45 MBs read/write speeds and are waterproof, magnetic, impact and temperature resistant. Storage densities include 64GB and 128GB offered at $120 and $200 respectively.

Legacy Series SDHC Card .  Our line of Secure Digital High Capacity, or SDHC, cards are specially designed for personal electronics applications. Our SDHC cards include 8GB, 16GB and 32GB storage densities; they also support the UHS104 (ultra-high speed) SD interface and are compliant with the industry standard SD Memory Card Standard Version 3.0 (SD 3.0) which supports SD interface speeds up to 104MB per second. Prices range from $19 to $40.

USB Flash Drives

USB flash drives are small portable data storage devices that include flash memory. The integrated universal serial bus (“USB”) interface plug into a computer’s USB port and function as portable hard drives. USB flash drives have less storage capacity than an external hard drive, but they are smaller and more durable because

56


 
 

TABLE OF CONTENTS

they do not contain any internal moving parts. They are often used for storage, back-up and transfer of computer files, thus facilitating data transfers between different devices.

We offer a wide selection of customized USB flash drives in different memory capacities and with a wide variety of features.

COPPA 3.0 and 2.0 .  Our Coppa 3.0 and 2.0 USB flash drives are lightweight, compact and have high quality memory. The COPPA 3.0 USB has speed up to 160/45 MB/s read/write and the COPPA 3.0 USB has 32/28 MB/s read/write, each allowing users to quickly and easily transfer large documents, HD movies, high resolution photographs and other large memory use data. The COPPA 3.0 is backwards compatible with the USB 2.0 allowing use with devices that are not 3.0 enabled.

The drives come with an integrated twist cover, a lanyard key chain loop and are offered in configurations of 8GB, 16GB, 32GB and 64GB at prices ranging from $9 to $100.

Advanced 3.0 OTG .  Our advanced 3.0 OTG USB flash drives allow users the ability to easily backup and transfer files from a place without a computer, cable or wifi. Files can be transferred directly without sending information through the drive or on an unsecured wireless network. The drive has similar features to our COPPA 3.0 USB drives and can be used with our proprietary On-The-Go Cloud Storage device. The Advanced 3.0 OTG is offered in 16GB, 32GB and 64GB configurations at prices ranging from $24 to $75.

Legacy 2.0 UFD .  We also offer an entry level series of drives for businesses, schools, and home applications at speeds of up to 14 MB/S. These drives are offered in configurations of 2GB, 4GB, 8Gb, 16GB and 32GB at prices ranging from $7 to $30.

Manufacturing and Research and Development

We do not directly manufacture any of the products we sell. Instead, we subcontract for the manufacture and source products from suppliers. We believe that by continuing to outsource these products, we would continue to benefit from lower manufacturing and engineering costs. For this reason, for the foreseeable future we expect to continue to rely on third party manufacturers to produce and supply the substantial majority of our primary data memory products.

We seek to differentiate our products through product features offered, product positioning, packaging, merchandising and branding. By continuing to subcontract manufacture and source our products from third parties, we believe that we are able to sell products incorporating new technology without having to make the substantial investment in, or having to incur the fixed costs associated with, product development and manufacturing.

Our in-house testing and production staff in Simi Valley, California regularly inspects and tests product samples, assembles pilot production runs and repackages bulk quantities received from our subcontract manufacturers and suppliers. We also develop user manuals, product packaging and marketing materials, as well as installation guides, software and hardware designed to permit user friendly product installation. Our staff periodically tours our subcontract manufacturers’ and suppliers’ facilities and monitors and tests to minimize defective products.

The majority of our products are shipped directly by our subcontractor manufacturers and suppliers to our facility in Simi Valley, California. These products are then packaged and shipped by us directly to our customers.

We have not made material expenditures on research and development activities relating to the development of new products. However, we realize that to compete in this industry, we must continue to offer technologically advanced products. New products are developed and offered by our subcontractors, manufacturers and suppliers and then offered by us. We believe our relationship with our contract manufacturers and suppliers allows us to enhance and expand our product offerings with existing and new technologies that such third parties develop internally and avoid the costs associated with an in-house research and development team. Our efforts are directed at the evaluation of new products and enhancements to existing products. We monitor market and industry trends to understand and identify new technologies and plan for new product offerings.

57


 
 

TABLE OF CONTENTS

Sales and Marketing

Sales

We sell our products primarily through distributors and independent sales representatives and distributors.

Distributors .  We use distributors to sell our products to non-direct customers such as small computer manufacturers, dealers, systems integrators, online retailers and other resellers. Distributors generally enter into non-exclusive agreements with us for the purchase and redistribution of our products in specific territories.

Retailers .  We sell our branded devices directly to a select group of major retailers such as computer superstores, warehouse clubs, online retailers, and computer electronics stores, and authorize sales through distributors to smaller retailers. The retail channel complements our other sales channels while helping to build brand awareness for our products. We also offer our branded products through our website.

We protect some of our customers against the effects of price decreases on their inventories. Accordingly, if we reduce our prices, we pay certain distributors and retailers the difference between the price paid for the product still in their inventory and the reduced price. Additionally, some of our retail customers and distributors have the right to return limited amounts of products still in their inventory for credit.

Marketing

We believe our marketing relationships with key industry leaders distinguishes our company from others in our industry. Our Overdrive 3.0 SSD and Overdrive Thunderbolt SSD, each with a 1TB configuration, are currently offered in all Apple stores throughout Europe. Our Advanced 3.0 OTG USB flash drive is the first Apple certified external memory of iOS.

Also, our products are offered and supported by Monster, Inc.’s large global and retail distribution network.

Further to the license with Monster, Inc., our company and Monster, Inc. consult and cooperate with each other in the design process of products sold under the Monster Digital brand name. Also, the license provides that our company and Monster, Inc. will cooperate to promote and effect the offer and marketing of products sold under the Monster Digital brand name through Monster, Inc.’s existing and future sales and distribution channels.

To date, Monster, Inc. sales team has introduced our Monster Digital memory products to many of their key distributors and retail chains and has indicated that it intends to continue to do so in the future. Monster, Inc. has existing relationships with virtually all major retail chains and strategic distributors across North America, Latin America and Europe. We believe that a significant percentage of our domestic revenues has been derived from Monster, Inc.’s introductions to buyers and retailers.

In addition, Monster, Inc. has a global network of independent sales representatives established which affords us the ability to access additional sales coverage and to take advantage of established local market relationships. To ensure the quality of its sales forces, our products are incorporated into Monster, Inc.’s internal sales metrics that measure sales performance for all sales people, independent sales representatives and customers.

We participate in co-sponsored events with our customers and industry trade shows such as Consumer Electronics Show. We participate in these events and trade shows in order to develop new relationships with potential customers and maintain relationships with our existing customers. We also intend to fund cooperative advertising campaigns with our customers, develop custom product promotions and cooperate with our retailers to use point-of-sale and mail-in rebate promotions to increase sales of our products. We also intend to utilize sales circulars to obtain regional and national exposure for our products and our brands. We believe that these marketing efforts will help generate additional shelf-space for our products with our major retailers, promote retail traffic and sales of our products, and enhance our goodwill with these retailers.

Monster License Agreement

We entered into a trademark license agreement with Monster, Inc. effective July 7, 2010. The agreement gives us exclusive rights to utilize the tradenames “Monster Memory”, “Monster Digital, Inc.” and the M (stylized) mark on (i) action sports cameras, (ii) cable memory, (iii) flash based cards, (iv) flash based SSD drive

58


 
 

TABLE OF CONTENTS

products, (v) DRAM modules, (vi) USB flash drives and (vii) internal power supplies for personal computers. The 25 year agreement provides for the payment of royalties to Monster, Inc. on all sales of the referenced memory products, excluding sales to Monster, Inc., as follows:

Years 1 (2012) and 2: Royalties on all sales excluding sales to Monster, Inc. at a rate of four (4) percent, with no minimum.

Years 3 through 5: Minimum royalty payments of $50,000 per quarter up to a maximum of four (4) percent of all sales excluding sales to Monster, Inc.

Years 6 through 10: Minimum royalty payments of $125,000 per quarter up to a maximum of four(4) percent of all sales excluding sales to Monster, Inc.

Years 11 through 15: Minimum royalty payments of $187,500 per quarter up to a maximum offour (4) percent of all sales excluding sales to Monster, Inc.

Years 16 through 25: Minimum royalty payments of $250,000 per quarter up to a maximum offour (4) percent of all sales excluding sales to Monster, Inc.

At any time during the term of the agreement, a permanent license may be negotiated subject to the parties reaching a mutually acceptable agreement.

Effective July 1, 2014, the royalty rate on certain products was reduced to 2% for a period of 12 months.

Monster, Inc. may purchase licensed products from us at a price no greater than 20% above our standard costs. Monster, Inc. has agreed not to sell products sourced from us in a way that undermines our position in the marketplace. We have agreed that all design, packaging and marketing materials for any licensed products would be in accordance with and conform to design standards prescribed by Monster, Inc. Monster, Inc. and our company have agreed to cooperate to promote and affect the offer and marketing of the licensed products through Monster Inc.’s existing and future sales and distribution channels.

Monster, Inc. may use and grant others the right to use any trademarks, logos, domain names and/or trademarks for use in connection any products except (i) the granting to others of the use of the Monster mark in connection with the manufacture, design, distribution, sales or other similar exploitation of any licensed Monster mark (but not the Monster Digital mark or the M (stylized) mark) if the primary purpose of such license is the settlement of a claim of infringement of the Monster mark with that of the subject licensee and not the commercial exploitations of the Monster Mark and (ii) Monster, Inc. itself may use (but not sublicense) the Monster mark and the M (stylized) mark (but not the Monster Digital mark) in connection with any licensed products or other data memory products subject to the condition that Monster, Inc. provides us with at least thirty (30) days prior written notice of its intention to so enter the market and offers us the first right to supply such products pursuant to a commercially reasonable arrangement similar to the Monster License Agreement.

In August 2015, we executed an amendment to the license agreement with Monster whereby Monster granted us the additional right further to the aforementioned License Agreement to use the name “Monster Digital, Inc.” as our corporate name. Further to the amendment, in addition to the royalties mentioned above, we issued Monster, Inc. 5,681,558 shares of our common stock and will pay Monster a cash fee of $500,000 payable over a 12 month period.

In addition, in August 2015, and in connection with the aforementioned amendment to the trademark license agreement, we entered into a two-year advisory board agreement with Noel Lee, the Chief Executive Officer and sole shareholder of Monster, Inc. Further to the advisory board agreement, we issued Mr. Lee a warrant to purchase up to 2,840,779 shares of our common stock at a per share exercise price of $1.00.

Warranties

Because the design and manufacturing process for our products is highly complex, it is possible that our products may contain defects or are otherwise not compatible with end uses. In accordance with industry practice, we generally provide a limited warranty that our products are in compliance with our specifications existing at the time of delivery. Under our general terms and conditions of sale, liability for certain failures of products during a stated warranty period is usually limited to repair or replacement of defective items or

59


 
 

TABLE OF CONTENTS

return of, or a credit with respect to, amounts paid for such items. Under certain circumstances, we may provide more extensive limited warranty coverage than that provided under our general terms and conditions.

Backlog

Because of volatile conditions in our markets, customers are reluctant to enter into long-term, fixed-price contracts. Accordingly, new order volumes for our products do and are expected to continue to fluctuate significantly. We typically accept orders with acknowledgment that the terms may be adjusted to reflect market conditions at the date of shipment. For these reasons, we do not believe that our order backlog as of any particular date is a reliable indicator of actual sales for any succeeding period.

Competition

Our industry is characterized by intense competition, supply shortages or oversupply, rapid technological change, evolving industry standards, declining average selling prices and rapid product obsolescence.

Competition is based on multitude of factors, including product design, brand strength, distribution presence and capability, channel knowledge and expertise, geographic availability, breadth of product line, product cost, media capacity, access speed and performance, durability, reliability, scalability and compatibility. Specifically, the performance, functionality, reliability and price of our products are critical elements of our ability to compete. We believe that we offer, and that our target consumers seek products that combine higher levels of performance, functionality and reliability at prices competitive with other leading brand-name products. Also, market penetration, brand recognition and inventory management are also critical elements of our ability to compete. Most consumers purchase products similar to ours from off-the-shelf retailers such as large consumer electronics and office supply superstores. Market penetration in the industries in which we compete is typically based on the number of retailers who offer a company’s products and the amount of shelf-space allocated to those products.

Our existing competitors include many large domestic and international companies that have longer operating histories and have greater brand name recognition, substantially greater financial, technical, marketing and other resources, broader product lines and longer standing relationships with retailers, distributors, OEMs and end users. As a result, these competitors may be able to better absorb price declines, ensure more stable supply, adapt more quickly to new or emerging technologies or devote greater resources to the promotion and sale of their products than we may. Ultimately, this may lead to a decrease in our sales and market share and have a material adverse effect on our business, financial condition and results of operations.

We expect to face competition from existing or future competitors that design and market similar or alternative data storage solutions that may be less costly or provide additional features. If a manufacturer of consumer electronic devices designs one of these alternative competing standards into its products, the digital media we sell, as currently configured, will not be compatible with that product and our revenues may decline, which would result in a material adverse effect on or business.

Our competition includes:

Action Sports Cameras .  The market for action sports cameras is highly competitive. Further, we expect competition to intensify in the future as existing competitors introduce new and more competitive offerings alongside their existing products, and as new market entrants introduce new products into this market. We expect to compete against established, well-known action camera and traditional camera manufacturers such as GoPro, Inc., Canon Inc., Nikon Corporation, Olympus Corporation, Polaroid Holding Corporation and Vivitar Corporation, large, diversified electronics companies such as JVC Kenwood Corporation, Panasonic Corporation, Samsung Electronics Co., Sony Corporation and Toshiba Corporation, and specialty companies such as Garmin Ltd. Most of these competitors have substantial market share, diversified product lines, well-established supply and distribution systems, strong worldwide brand recognition and greater financial, marketing, research and development and other resources than we do. In addition, many of these existing and potential competitors enjoy substantial competitive advantages, such as:

longer operating histories;
the capacity to leverage their sales efforts and marketing expenditures across a broader portfolio of products;

60


 
 

TABLE OF CONTENTS

broader distribution and established relationships with channel partners;
access to larger established customer bases;
greater resources to make acquisitions;
larger intellectual property portfolios; and
the ability to bundle competitive offerings with other products and services.

Moreover, smartphones and tablets with photo and video functionality have significantly displaced the market for traditional camera sales. It is possible that, in the future, the manufacturers of these devices, such as Apple Inc. and Samsung, may design them for use in a range of conditions, including challenging physical environments, or develop products similar to our action sport camera. In addition to competition or potential competition from large, established companies, new companies may emerge and offer competitive products.

Solid-state drive and hard disk drive manufacturers .  Our SSDs face competition from other manufacturers, including Intel, Micron and Samsung, Toshiba, and others. Our SSDs also face competition from hard disks drives, which are offered by companies including, among others, Seagate, Samsung and Western Digital Corporation.

CF and SD card and USB flash drive manufacturers and resellers .  We compete with semiconductor companies that manufacture and sell flash memory chips, flash memory cards and USB flash drives. These include Hynix, Infineon, Micron, Samsung, SanDisk, and Toshiba. We also face significant competition from manufacturers or card assemblers and resellers that either resell flash cards and USB flash drives purchased from others or assemble cards and USB flash drives from controllers and flash memory chips purchased from companies such as Renesas, Samsung or Toshiba, into flash cards and USB flash drives. These companies include Crucial, Dane-Elec, Delkin Devices, Feiya, Fuji, Hagiwara, Hama, Hewlett Packard, Data I/O, Infineon, Kingston, Kodak, M-Systems, Matsushita, Memorex, Memory Plus, Micron, PNY, PQI, Pretec, Ritek, Samsung, SanDisk, Silicon Storage Technology, SimpleTech, SMART Modular Technologies, Sony, TDK, Transcend and Viking InterWorks.

Employees

As of June 30, 2015 we had 24 full-time employees. In addition to our full-time employees, we employ temporary and part-time employees. Our employees are not represented by any collective bargaining agreements. We have never experienced a work stoppage at any of our facilities. We consider our relationship with our employees to be good.

Facilities

We lease approximately 11,500 square feet for our executive offices in Simi Valley, CA pursuant to a three year lease at a monthly rental rate of $10,500. We believe these facilities are sufficient for our currently foreseeable needs.

Litigation

We are not party to any material pending or threatened litigation.

61


 
 

TABLE OF CONTENTS

MANAGEMENT
 
Executive Officers and Directors

Our executive officers, directors and director nominees, their respective positions and their respective ages as of October 29, 2015 are as follows:

   
Name   Age   Position(s)
Jawahar Tandon   65   Chief Executive Officer
Vivek Tandon   38   Chief Operating Officer, President and Director
David H. Clarke   74   Executive Chairman of the Board
David Olert   62   Vice President, Finance and Chief Financial Officer
Thomas Q. Watson   55   Vice President, Sales
Marcus S. Matejka   52   Vice President, Operations
Jonathan Clark   57   Director Nominee
Robert B. Machinist   62   Director Nominee
Christopher M. Miner   63   Director Nominee
Jonathan S. Orban   46   Director Nominee

Jawahar “Jay” Tandon — Chief Executive Officer .  Mr. Tandon has served as our Chief Executive Officer and a director since our inception in 2012. From 1993 to 1999, as a founder of Golden Power, Inc., a public company, he served as CEO and as a Director. Mr. Tandon, a founder of Celetronix, Inc., served as its President from 1999 until it was sold to Jabil Circuits in 2006. Mr. Tandon also founded and served as President of Tandon Enterprises, Inc. from 2006 to 2011. Mr. Tandon graduated from the University of Santa Clara with a Bachelor of Science in Electrical Engineering.

Vivek Tandon — Chief Operating Officer and President .  Mr. Tandon has served as Chief Operating Officer and President since August 2015 and has served as a director since our inception. Mr. Tandon served as the Executive Vice President, Marketing and Development since October 2014 and acted as a consultant to our company from January 2013 through October 2014. From January 2010 through August 2013 Mr. Tandon was VP of Business Development for Emlinq LLC, a manufacturer of military and medical electronics. Mr. Tandon has a degree in Business Management from Menlo College.

David H. Clarke — Executive Chairman of the Board .  Mr. Clarke has served as our Executive Chairman of the Board since September 2015. Mr. Clarke is currently Chief Executive Officer of GSB Holdings, Inc., a subsidiary of his family’s private business engaged in real estate development and investments. He also serves on the board and Audit Committee of Fiduciary Trust Company International, a money manager, which is a subsidiary of Franklin Resources, Inc. From June 2010 until October 2014, Mr. Clarke was chairman of Hong Kong-based United Pacific Industries, Limited, a conglomerate listed on the Hong Kong Stock Exchange. He also served as a director of United Pacific Industries, Limited since 2004. Previously he was Chairman and Chief Executive Officer of Jacuzzi Brands from June 1995 through October 2006.

David Olert — Vice President, Finance and Chief Financial Officer .  Mr. Olert has served as the Chief Financial Officer and Vice President, Finance since September 2015. Prior to his appointment, he served as Chief Financial Officer for InterMetro Communications a publicly traded long-distance provider, since July 2007. Mr. Olert is a certified public accountant and holds a Masters of Business Administration from William Howard Taft University and a Bachelors in Computer Science Concentration from Barry University.

Thomas Q. Watson — Vice President, Sales .  Mr. Watson has served as Vice President, Sales since 2015. Prior to Monster Digital Mr. Watson was the Regional Sales Manager for ViewSonic Corporation from October 2010 through May 2015. As Region Sales Manager Mr. Watson had complete account responsibility for Synnex, D&H Distribution, ADI and PC Connection for all ViewSonic categories. From January 2007 through September 2010 Mr. Watson was the President of Watson Sales Advisors which sell children’s Consumer Electronics (“CE”) products to mass CE retailers, drug chains and independent retailers. Mr. Watson holds a Bachelor of Science in Finance from North Georgia College.

Marc S. Matejka — Vice President, Operations .  Mr. Matejka has served as Vice President, Operations since July 2015. Mr. Matejka is an electrical engineer with over 25 years experience in engineering, operations and

62


 
 

TABLE OF CONTENTS

quality. From June 2011 to March 2015 he was the Director of Operations at US Seismic Systems, Inc. (USSI). USSI provided fiber optic solutions to energy markets in the oil and gas sector. USSI was a subsidiary of Arcorn Energy, an energy technology holding company. At USSI he was responsible for procurement, production, logistics and quality assurance. From April 2015 through June 2015 he was unemployed. From June 2006 to June 2011 Mr. Matejka was Sr. Manager of Global Engineering Services at Belkin International, Inc., a worldwide supplier of consumer electornic products. Mr. Matejka received his Master’s degree in Electrical Engineering from Swiss Federal Institute of Technology (ETH) in Zurich, Switzerland.

Jonathan Clark — Director Nominee .  Mr. Clark has agreed to join our board of directors prior to or upon our listing date on the Nasdaq Capital Market. Since 2009, Mr. Clark has been the Chief Executive Officer and President of Priority Posting and Publishing, Inc., a real estate services provider to trustees, law firms and banking related organizations. From 1988 to 2009 he held a number of executive positions, including President and Chief Executive Officer of Sundance Spas, Inc. Mr. Clark holds doctorate degrees in Psychology from the American Behavioral Studies Institute and a Bachelor of Business Degree from California State University — Fullerton.

Robert B. Machinist — Director Nominee .  Mr. Machinist has agreed to join our board of directors prior to or upon our listing date on the Nasdaq Capital Market. Mr. Machinist is the Chairman of CIFC Corp. and has been a member of that board since December 2004. He is currently Chairman of the Board of Advisors of MESA, a merchant bank specializing in media and entertainment industry transactions. Mr. Machinist also runs a private family investment company. In addition, he is a member of the boards of directors of United Pacific Industries, a publicly listed Hong Kong company, and Maimonides Medical Center. He was the Chairman of Atrinsic, a publicly-listed interactive media company, through 2008. From 1998 to December 2001, Mr. Machinist was managing director and head of investment banking for the Bank of New York and its Capital Markets division. From January 1986 to November 1998, he was president and one of the principal founders of Patricof & Co. Capital Corp. (and its successor companies), a multinational investment banking business, until its acquisition by the Bank of New York. Mr. Machinist received a B.A. from Vassar College.

Christopher M. Miner — Director Nominee .  Mr. Miner has agreed to join our board of directors prior to or upon our listing date on the Nasdaq Capital Market. Since January 2014, Mr. Miner has been a member of the board of director of Interush Holdings, Inc., a multi-level marketer, acting as its President since October 2015. Mr. Miner most recently served as a director to Craig Wireless, Ltd. a publically traded telecommunications company. He joined Craig Wireless as a consultant in 2010, was elected to the board in 2011 and served through February 2012, continuing as consultant until end of 2012. Mr. Miner was previously director of Cali-West, a manufacturing, construction and service company in the car care industry until 2010 when he sold the business. For nearly eight years Mr. Miner was active on the board of Herbalife International, a public reporting Health and Wellness Company. Mr. Miner was part of the special committee that managed the sale of Herbalife in 2002 and also chaired or participated in audit, compensation, and finance committees. Early technology engagements included serving as CFO of a NASDAQ reporting company, Technology Marketing Inc., and integration of several acquisitions substantially increasing company performance and valuation. In 1989 he founded Workstation Technologies, an international development company and marketer of compression and videoconferencing products to major telecommunication and computer manufacturers. Mr. Miner earned a Masters in Business Administration from the California State University in 1976 and Bachelors from the University of New York in 1973.

Jonathan S. Orban — Director Nominee .  Mr. Orban has agreed to join our board of directors prior to or upon our listing date on the Nasdaq Capital Market. From January 2012 to December 2014, Mr. Orban served as the Chief Executive Officer of GeneSolve, a body chemistry optimization software company. From 2005 through January 2012, Mr. Orban served as the Chief Executive Officer of Third Pillar Systems, a software platform in the commercial lending and leasing space. Third Pillar System’s software processed over $100 billion in leases and loans for companies like Bank of America, GE Capital, Citibank and Rabobank. Mr. Orban has many years of investment banking experience and worked as a medical device analyst. Mr. Orban served in Special Forces in the United States Army and graduated Special Operations Med School ). He completed his clinical rotations at Reynolds Hospital, OK. He researched and wrote several of the General Medical References that are still used to train the Special Forces today. Mr. Orban received his Bachelors’ in from University of California, Berkeley in 2003.

63


 
 

TABLE OF CONTENTS

Each of our officers serves at the discretion of our board of directors. Each of our directors holds office until his or her successor is duly elected and qualified or until his or her earlier resignation or removal. Vivek Tandon is the son of Jawahar Tandon. Other than the foregoing, there are no other family relationships among any of the officers or directors.

Director Independence

We have applied to have our common stock listed on the Nasdaq Capital Market. Generally, under the listing requirements and rules of Nasdaq, independent directors must comprise a majority of a listed company’s board of directors within one year of the closing of this offering. Prior to the effective date of this offering, we intend to elect to our Board four additional non-employee directors, none of which will have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and each of which will be “independent” as that term is defined under the listing requirements of Nasdaq. Accordingly, prior to the effective date of this offering, a majority of our directors will be independent, as required under applicable Nasdaq rules. In making this determination, our board of directors will consider the current and prior relationships that each non-employee director has with our company, if any, and all other facts and circumstances our board of directors deemed relevant in determining their independence, including the beneficial ownership of our capital stock, if any, by each non-employee director.

Board Committees

Our board of directors has established an audit committee, compensation committee and nominating and corporate governance committee to become operational as of the effective date of this offering. Our board of directors may establish other committees to facilitate the management of our business. The expected composition and functions of each committee upon completion of this offering are described below. Members will serve on these committees until their resignation or until otherwise determined by our board of directors.

Audit Committee

Our audit committee will consist of Jonathan Clark, Robert Machinist and Christopher Miner, with Mr. Machinist acting as the chair. The audit committee will consist solely of directors which satisfy the independence requirements under Nasdaq listing standards and Rule 10A-3(b)(1) of the Exchange Act. The chair of our audit committee is a person who our board of directors has determined is an “audit committee financial expert” within the meaning of SEC regulations. Each member of our audit committee is a person who our board of directors has determined has the requisite financial expertise required under the applicable requirements of Nasdaq. In arriving at this determination, the board will examine each audit committee member’s scope of experience and the nature of their employment in the corporate finance sector. The primary functions of this committee will include:

reviewing and approving the engagement of our independent registered public accounting firm to perform audit services and any permissible non-audit services;
evaluating the performance of our independent registered public accounting firm and deciding whether to retain their services;
monitoring the rotation of partners on the engagement team of our independent registered public accounting firm;
reviewing our annual and quarterly financial statements and reports and discussing the statements and reports with our independent registered public accounting firm and management, including a review of disclosures under “Management’s Discussion and Analysis of Financial Condition and Results of Operations;”
considering and approving or disapproving all related party transactions;
reviewing, with our independent registered public accounting firm and management, significant issues that may arise regarding accounting principles and financial statement presentation, as well as matters concerning the scope, adequacy and effectiveness of our financial controls;
conducting an annual assessment of the performance of the audit committee and its members, and the adequacy of its charter; and

64


 
 

TABLE OF CONTENTS

establishing procedures for the receipt, retention and treatment of complaints received by us regarding financial controls, accounting or auditing matters.

Compensation Committee

Our compensation committee will consist of Jonathan Clark, Jonathan Orban and Christopher Miner, with Mr. Miner acting as the chair. The compensation committee will consist solely of directors whom our board of directors has determined to be independent under Nasdaq listing standards, a “non-employee director” as defined in Rule 16b-3 promulgated under the Exchange Act and an “outside director” as that term is defined in Section 162(m) of the Internal Revenue Code of 1986, as amended, or the Code. The functions of this committee will include:

determining the compensation and other terms of employment of our chief executive officer and our other executive officers and reviewing and approving corporate performance goals and objectives relevant to such compensation;
reviewing and recommending to the full board of directors the compensation of our directors;
evaluating and administering the equity incentive plans, compensation plans and similar programs advisable for us, as well as reviewing and recommending to our board of directors the adoption, modification or termination of our plans and programs;
establishing policies with respect to equity compensation arrangements;
reviewing with management our disclosures under the caption “Compensation Discussion and Analysis” and recommending to the full board its inclusion in our periodic reports to be filed with the SEC; and
reviewing and evaluating, at least annually, the performance of the compensation committee and the adequacy of its charter.

Nominating and Corporate Governance Committee

Our nominating and corporate governance committee will consist of Jonathan Orban, Robert Machinist and Christopher Miner, with Mr. Orban acting as the chair. Our nominating and corporate governance committee will consist solely of directors whom our board of directors has determined to be independent under Nasdaq listing standards. The functions of this committee will include:

reviewing periodically and evaluating director performance on our board of directors and its applicable committees, and recommending to our board of directors and management areas for improvement;
interviewing, evaluating, nominating and recommending individuals for membership on our board of directors;
reviewing and recommending to our board of directors any amendments to our corporate governance policies; and
reviewing and assessing, at least annually, the performance of the nominating and corporate governance committee and the adequacy of its charter.

Code of Business Conduct and Ethics

In connection with this offering, our board of directors has adopted a code of business conduct and ethics that applies to all of our employees, officers and directors, including those officers responsible for financial reporting. Upon completion of this offering, our code of business conduct and ethics will be available on our website at www.monsterdigital.com . We intend to disclose any amendments to the code, or any waivers of its requirements, on our website to the extent required by the applicable rules and exchange requirements. The inclusion of our website address in this prospectus does not include or incorporate by reference into this prospectus the information on or accessible through our website.

65


 
 

TABLE OF CONTENTS

Compensation Committee Interlocks and Insider Participation

None of our executive officers serves, or served during our fiscal year ended December 31, 2014, as a member of the board of directors or compensation committee of any other entity that has or has had one or more executive officers serving as a member of our board of directors.

Non-Employee Director Compensation

Devinder Tandon was our only non-employee director for fiscal 2014; he resigned from our board of directors in May 2015. Mr Tandon did not receive compensation as a non-employee director during our fiscal year ended December 31, 2014. We have reimbursed and will continue to reimburse our non-employee directors for their travel, lodging and other reasonable expenses incurred in attending meetings of our board of directors and committees of our board of directors.

Further to David Clarke’s agreement to become Executive Chairman of the Board, in October 2015 we issued Mr. Clarke 1,000,000 shares of our common stock. Mr. Clarke has agreed not to transfer or sell any of these share until January 10, 2017. Our board of directors has established a compensation program for our non-employee, independent directors. Each such director will receive $3,000 a quarter and an initial shares or stock options grants of 50,000 shares; subsequent equity grants will be subject to the review and approval of the full board of directors.

Advisory Board

We have created an advisory board to provide us with advice and assistance on various matters regarding unmet industry needs and opportunities, customer feedback on existing products, proposed product offerings and assessment of other strategic corporate matters. None of the members of all advisory board can be an officer or employee of our company and we seek to have members which are opinion leaders in their respective fields.

Our sole current advisory board member is Noel Lee, the owner and Chief Executive Officer of Monster, Inc. We have entered into advisory board agreement with Mr. Lee whereby we are reimbursed for certain of his out-of-pocket expenses incurred in connection with company-related business. In addition, Noel Lee was issued a warrant to purchase up to 2,840,779 shares of our common stock at a per share exercise price of $1.00. We will seek to add other industry leaders to our advisory board in the future as opportunities present themselves.

66


 
 

TABLE OF CONTENTS

EXECUTIVE COMPENSATION

Summary Compensation Table

The following table sets forth information regarding the compensation awarded to or earned by the executive officers listed below during the year ended December 31, 2014. Throughout this prospectus, these officers are referred to as our named executive officers.

           
Name and Principal Position   Year   Salary ($)   Bonus ($)   Stock
Awards
($) (1)
  All Other Compensation ($)   Total
($)
Jawahar Tandon
Chief Executive Officer
    2014       250,000                         45,408 (1)       295,404  
    2013       230,769                         40,722 (1)       271,491  
Vivek Tandon
President (2)
    2014       78,587 (3)                         66,994 (3)       145,581  

(1) Consists of payments by us for medical and dental insurance premiums of $16,244, automobile expenses of $14,614 and country club membership of $14,550 in 2014, and payments by us for country club membership of $15,145, automobile expenses of $15,326 and dental and medical insurance premiums of $10,251 in 2103.
(2) Vivek Tandon became President in October 2014. From January through October 2014, Mr. Tandon was paid as a consultant to our company. His current annual salary is $225,000.
(3) Consists of automobile expenses of $6,994 and consulting fees of $60,000.

Annual compensation expenses for our other the Company’s executive officers are as follows: David Olert, salary of $185,000 and company-paid portion of medical and dental insurance of $22,500; Thomas Watson, salary of $150,000 and company-paid portion of medical and dental insurance of $13,380; and Marcus S. Matejka, salary of $150,000 and company-paid portion of medical and dental insurance of $10,104.

Outstanding Equity Awards at December 31, 2014

None of our named executive officers held any outstanding equity awards as of December 31, 2014.

Employment Agreements

Jawahar Tandon

We have an Executive Employment Agreement with Jawahar Tandon (“Executive”) whereby he serves as our Chief Executive Officer. The agreement renews automatically on June of each year unless terminated by either party with 60 days notice prior to May 30 of each year. Mr. Tandon is paid a base salary of $250,000, is entitled to an annual bonus of up to 30% of the base salary, and is allotted a monthly automobile and country club membership allowance totaling $3,500. General factors the board may consider in his bonus determination include our company’s financial performance, the level of responsibility, and contribution and performance of Mr. Tandon. Evaluation of these and other factors is subjective and no fixed, relative weights are assigned to the factors considered. Additionally, 100% of Mr. Tandon’s healthcare and medical premiums are paid by us.

2012 Omnibus Incentive Plan

We have adopted a 2012 Omnibus Incentive Plan (the “ Plan ”). An aggregate of 1,500,000 shares of our common stock is reserved for issuance and available for awards under the Plan, including incentive stock options granted under the Plan. The Plan administrator may grant awards to any employee, director, consultant or other person providing services to us or our affiliates. As of June 30, 2015, options to acquire an aggregate of 1,055,000 shares of common stock at a per share exercise price of $2.00 have been granted under the Plan.

The Plan shall be initially administered by the Board. The Plan administrator has the authority to determine, within the limits of the express provisions of the Plan, the individuals to whom awards will be granted, the nature, amount and terms of such awards and the objectives and conditions for earning such awards. The

67


 
 

TABLE OF CONTENTS

Board may at any time amend or terminate the Plan, provided that no such action may be taken that adversely affects any rights or obligations with respect to any awards previously made under the Plan without the consent of the recipient. No awards may be made under the Plan after the tenth anniversary of its effective date.

Awards under the Plan may include incentive stock options, nonqualified stock options, stock appreciation rights (“SARs”), restricted shares of common stock, restricted stock units, performance share or unit awards, other stock-based awards and cash-based incentive awards.

Stock Options .  The Plan administrator may grant to a participant options to purchase our common stock that qualify as incentive stock options for purposes of Section 422 of the Internal Revenue Code (“incentive stock options”), options that do not qualify as incentive stock options (“non-qualified stock options”) or a combination thereof. The terms and conditions of stock option grants, including the quantity, price, vesting periods, and other conditions on exercise will be determined by the Plan administrator. The exercise price for stock options will be determined by the Plan administrator in its discretion, but non-qualified stock options and incentive stock options may not be less than 100% of the fair market value of one share of the Company’s common stock on the date when the stock option is granted. Additionally, in the case of incentive stock options granted to a holder of more than 10% of the total combined voting power of all classes of our stock on the date of grant, the exercise price may not be less than 110% of the fair market value of one share of common stock on the date the stock option is granted. Stock options must be exercised within a period fixed by the Plan administrator that may not exceed ten years from the date of grant, except that in the case of incentive stock options granted to a holder of more than 10% of the total combined voting power of all classes of our stock on the date of grant, the exercise period may not exceed five years. At the Plan administrator’s discretion, payment for shares of common stock on the exercise of stock options may be made in cash, shares of our common stock held by the participant or in any other form of consideration acceptable to the Plan administrator (including one or more forms of “cashless” or “net” exercise).

Stock Appreciation Rights .  The Plan administrator may grant to a participant an award of SARs, which entitles the participant to receive, upon its exercise, a payment equal to (i) the excess of the fair market value of a share of common stock on the exercise date over the SAR exercise price, times (ii) the number of shares of common stock with respect to which the SAR is exercised. The exercise price for a SAR will be determined by the Plan administrator in its discretion; provided, however, that in no event shall the exercise price be less than the fair market value of our common stock on the date of grant.

Restricted Shares and Restricted Units .  The Plan administrator may award to a participant shares of common stock subject to specified restrictions (“restricted shares”). Restricted shares are subject to forfeiture if the participant does not meet certain conditions such as continued employment over a specified forfeiture period and/or the attainment of specified performance targets over the forfeiture period. The Plan administrator also may award to a participant units representing the right to receive shares of common stock in the future subject to the achievement of one or more goals relating to the completion of service by the participant and/or the achievement of performance or other objectives (“restricted units”). The terms and conditions of restricted share and restricted unit awards are determined by the Plan administrator.

Performance Awards .  The Plan administrator may grant performance awards to participants under such terms and conditions as the Plan administrator deems appropriate. A performance award entitles a participant to receive a payment from us, the amount of which is based upon the attainment of predetermined performance targets over a specified award period. Performance awards may be paid in cash, shares of common stock or a combination thereof, as determined by the Plan administrator.

Other Stock-Based Awards .  The Plan administrator may grant equity-based or equity-related awards, referred to as “other stock-based awards,” other than options, SARs, restricted shares, restricted units, or performance awards. The terms and conditions of each other stock-based award will be determined by the Plan administrator. Payment under any other stock-based awards will be made in common stock or cash, as determined by the Plan administrator.

68


 
 

TABLE OF CONTENTS

Cash-Based Awards .  The Plan administrator may grant cash-based incentive compensation awards, which would include performance-based annual cash incentive compensation to be paid to covered employees subject to Section 162(m) of the Code. The terms and conditions of each cash-based award will be determined by the Plan administrator.

Dividend Equivalents .  The Plan administrator may provide for the payment of dividends or dividend equivalents with respect to any shares of common stock subject to an award under the Plan.

Limitation on Liability and Indemnification Matters

Our Certificate of Incorporation and Bylaws provide that we will indemnify our directors and officers, and may indemnify our employees and other agents, to the fullest extent permitted by the Delaware General Corporation Law. However, Delaware law prohibits our amended and restated certificate of incorporation from limiting the liability of our directors for the following:

any breach of a director’s duty of loyalty to us or to our stockholders;
acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law;
unlawful payment of dividends or unlawful stock repurchases or redemptions; and
any transaction from which a director derived an improper personal benefit.

If Delaware law is amended to authorize corporate action further eliminating or limiting the personal liability of a director, then the liability of our directors will be eliminated or limited to the fullest extent permitted by Delaware law, as so amended. Our Certificate of Incorporation does not eliminate a director’s duty of care and, in appropriate circumstances, equitable remedies, such as injunctive or other forms of non-monetary relief, remain available under Delaware law. It also does not affect a director’s responsibilities under any other laws, such as the federal securities laws or other state or federal laws. Under our Bylaws, we are also empowered to enter into indemnification agreements with our directors, officers, employees and other agents and to purchase insurance on behalf of any person whom we are required or permitted to indemnify.

In addition to the indemnification required in our Certificate of Incorporation and Bylaws, we have entered into indemnification agreements with each of our current directors and executive officers. These agreements provide for the indemnification of such persons for all reasonable expenses and liabilities incurred in connection with any action or proceeding brought against them by reason of the fact that they are or were serving in such capacity. We believe that these Certificate of Incorporation and Bylaws provisions and indemnification agreements are necessary to attract and retain qualified persons as directors, officers and employees. Furthermore, we have obtained director and officer liability insurance to cover liabilities our directors and officers may incur in connection with their services to us and expect to increase the level upon completion of this offering.

The limitation of liability and indemnification provisions in our Certificate of Incorporation and Bylaws may discourage stockholders from bringing a lawsuit against directors for breach of their fiduciary duties. They may also reduce the likelihood of derivative litigation against directors and officers, even though an action, if successful, might benefit us and our stockholders. A stockholder’s investment may be harmed to the extent we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, or the Securities Act, may be permitted to 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. There is no pending litigation or proceeding naming any of our directors or officers as to which indemnification is being sought, nor are we aware of any pending or threatened litigation that may result in claims for indemnification by any director or officer.

69


 
 

TABLE OF CONTENTS

CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS

The following is a description of transactions since May 2012, to which we have been a party, in which the amount involved exceeded or will exceed $120,000, and in which any of our executive officers, directors, promoters or holders of more than 5% of any class of our voting securities, or an affiliate or immediate family member thereof, had or will have a direct or indirect material interest, other than compensation, termination and change in control arrangements, which are described under “Executive Compensation”. Jawahar Tandon, our Chief Executive Officer and founder, may be deemed to be a promoter within the meaning of SEC rules under the Securities Act. We believe the terms obtained or consideration that we paid or received, as applicable, in connection with the transactions described below were comparable to terms available or the amounts that would be paid or received, as applicable, in arm’s-length transactions with unrelated third parties.

Related Party Loans

From time to time since inception, we have obtained certain related party loans from Tandon Enterprises, a company controlled and owned by Jawahar Tandon, our Chief Executive Officer, and Devinder Tandon, one of our principal beneficial shareholders and a former director. The proceeds of the loans provided us with working capital. For the years ended December 31, 2013 and 2014 and the six months ended June 30, 2015, the net amount borrowed was $230,000, $460,000 and $(151,000), respectively. The loans were non-interest bearing and had no maturity date.

In September 2015 David Clarke, our Chairman of the Board and a significant stockholder of our company, loaned our company $100,000 further to a promissory note bearing interest at 5% per annum, principal and unpaid interest payable on demand.

Arrangements with Tandon Enterprises

Services Arrangement

From inception through the date of this prospectus, Tandon Enterprises has provided administrative, accounting, and operational support to our company. Such support includes providing warehouse space as required. We reimburse Tandon Enterprises for its actual costs of rendering the services. The fee was $248,000 and $172,000, and $0 for the years ended December 31, 2013 and 2014 and for the six months ended June 30, 2015, respectively. Devinder Tandon and Jawahar Tandon are founders, directors, and officers of Tandon Enterprises and serve as its Chief Executive Officer and President, respectively.

License and Sublicense Agreement

Further to a License and Sublicense Agreement entered into in May 2012, Tandon Enterprises agreed to grant us (i) a non-exclusive sublicense to the subject matter of certain patents and (ii) a non-exclusive license or sublicense, as the case may be, to certain know-how, trade secrets, inventions, data, technology, and other information now owned or licensed by Tandon, or which Tandon has the right to use or exploit relating to such patents, each to be used by us in connection with the development, manufacture, sale and distribution of assembled memory modules and memory data storage products. In consideration of the rights granted to us under this Agreement, we issued Tandon Enterprises 1,000,000 shares of our common stock.

Non-Competition and Non-Solicitation Agreement

Further to a Non-Competition and Non-Solicitation Agreement entered into in May 2012, Tandon Enterprises agreed not to engage in (i) the development, manufacture, sale and distribution of assembled memory modules and memory data storage products or (ii) the marketing, packaging, advertising and promotion of any of such products and services (the “Restricted Activities”). Tandon Enterprises agreed not to enter into any agreement to license or otherwise exploit any mark using the word “Monster” or any derivation thereof for use in any of the Restricted Activities. In addition, Tandon Enterprises, agreed that it would not (i) solicit, recruit or hire any employee of our company or (ii) solicit or encourage any employee of our company to leave our employment.

70


 
 

TABLE OF CONTENTS

Other arrangements

As of December 31, 2011, we entered an agreement whereby obligations of our company to related parties were assumed by Tandon Enterprises, Inc.. Tandon Enterprises, Inc. then forgave the assumed debt in totality. We recorded the debt forgiveness of $152,036 as a contribution to capital.

Until December 31, 2014, we sub-leased approximately 2,500 square feet from Tandon Enterprises for our executive offices and headquarters in Simi Valley, California at a monthly rate of $2,143, which we believed was a fair rental rate for such a sub-lease.

For the year ended December 31, 2013, we purchased $110,301 of products from SMLINQ, LLC, an entity controlled by Vivek Tandon, our Chief Operating Officer and President.

As of August 7, 2015, Jawahar Tandon and Vivek Tandon were each indebted to our company in the amount of approximately $184,000 and $115,000, respectively. In August 2015, pursuant to an arrangement with Tandon Enterprises, we transferred these receivables to Tandon Enterprises in consideration for an identical reduction in amounts owed by our company to Tandon Enterprises. As a result, neither Jawahar nor Vivek Tandon has any outstanding amounts due to our company.

Further to David Clarke’s agreement to become Executive Chairman of the Board, in October 2015 we issued Mr. Clarke 1,000,000 shares of our common stock. Mr. Clarke has agreed not to transfer or sell any of these shares until January 10, 2017.

Assignment and Assumption Agreement

As referenced herein, prior to our reorganization described below under the heading “Arrangements with WestPark Capital”, SDJ was owned solely by Devinder Tandon and Jawahar Tandon, who also substantially own Tandon Enterprises, Inc. Syrma Technologies Private Ltd. (“Syrma”) is owned by Manohar Tandon, the brother of Jawahar and Devinder Tandon. Prior to the execution of the Monster License Agreement, SDJ had primarily acted as a pass-through entity for transactions between Tandon Enterprises and Syrma. Tandon Enterprises and Syrma sold to each other memory chips and performed value-added services related to such chips, as well as transferring and selling equipment to manufacture and test memory chips to each other using SDJ as a conduit; the primary purpose for using the conduit was to allow Syrma to comply with applicable restrictions under its bank agreements. SDJ recorded substantial accounts payable to and accounts receivable from each of Syrma and Tandon Enterprises relating to such sales and services, as well as advances and loans between Syrma and Tandon Enterprises using SDJ as a conduit on an as-needed basis. In addition, each of Devinder Tandon and Jawahar Tandon personally made advances and loans to SDJ on an as-needed basis for working capital purposes. Also, Tandon Enterprises assumed certain of the liabilities of a company owned by Vivek Tandon but recorded on SDJ’s books. No representation can be made that any of such transactions by and among SDJ, Tandon Enterprises and Syrma were conducted as an “arms-length transaction.”

In May 2012, each of SDJ, Tandon Enterprises and Syrma entered into an Assumption of Liabilities and Assignment of Receivables Agreement (the “Assignment and Assumption Agreement”), effective December 31, 2011. The primary purpose of the transaction was for Syrma and Tandon Enterprises to take onto their books those liabilities and receivables that primarily related to the transactions referenced above and have them substantially removed from the books of SDJ. This would reflect the true nature of the transactions as opposed to having the transactions reflected on the books of SDJ when it merely acted as a conduit for the referenced sales, services and advances referenced above. Accordingly, these amounts are not reflected in our audited financial statements included in this prospectus.

As a result of the Assignment and Assumption Agreement, the net effect was that the net amount of obligations and receivables by and among these related parties were assumed by Tandon Enterprises. Upon the execution of such agreement, we had a net liability to Tandon Enterprises in the amount of $153,798. Tandon Enterprises then forgave the debt and we recorded the debt forgiveness as a contribution to capital.

Consulting Agreements

In May 2015, we entered into a one-year consulting agreement with David Clarke, our Executive Chairman of the Board and a significant shareholder in our company. Further to the agreement, we issued Mr. Clarke 1,250,000 shares of our common stock. Mr. Clarke has agreed not to transfer or sell any of these shares until

71


 
 

TABLE OF CONTENTS

January 10, 2017. We also agreed to pay all of Mr. Clarke’s expenses incurred in connection with the performance of his consulting duties. As of June 30, 2015, we owed Mr. Clarke approximately $14,600 in unreimbursed expenses.

During the years ended December 31, 2013 and 2014, we paid $10,000 a month to Vivek Tandon as consulting fees. An aggregate of $120,000 and $90,000 was paid to Mr. Tandon as a consultant for the years ended December 31, 2013 and 2014. Mr. Tandon became our President in October 2014 and our Chief Operating Officer in August 2015.

Cancellation of Shares

Between December 2014 and March 2015, we effected an exchange offer whereby all holders of convertible promissory note and warrants issued by us between April 2014 and March 2015 ($5.1 million principal amount of 6% convertible promissory notes convertible at $1.50 and warrants to purchase up to an aggregate of 4,594,699 shares of common stock at a per share exercise price of $1.50) were offered the ability to exchange such securities for shares of our common stock as follows: (i) for the settlement of all outstanding balances (principal and accrued interest) under each note at the rate of one share of common stock of the registrant for each $1.00 in outstanding principal amount of the note and (ii) for the cancellation of all warrants, one share of common stock for each two shares of common stock issuable upon exercise of the warrants. Further to the exchange offer, Jawahar Tandon agreed that for each new share issued by us further to the exchange offer up to 5,000,000 shares, he would cancel one share of our common stock beneficially held by him. An aggregate of 7,145,000 shares of common stock were issued by us pursuant to the exchange offer and the J Tandon Partnership Trust cancelled 5,000,000 shares of our common stock.

Between April and August 2015 we effected a rights offering to existing shareholders and to new investors. Further to the rights offering, for every $3.00 invested, the investor would receive three newly issued shares of our common stock and Jawahar Tandon would transfer two shares of common stock beneficially held by him to the investor. For the sake of expediency, we agreed to issue all shares to investors in the rights offering and Mr. Tandon would cancel those shares he would otherwise have had to transfer further to the rights offering. An aggregate of 5,333,346 shares of common stock were issued by us, 2,133,338 shares of which represented shares which would have otherwise been transferred by Mr. Tandon and which were simultaneously cancelled by the J Tandon Irrevocable Family Trust and J Tandon Irrevocable Partnership Trust.

Further to a private placement of common stock effected by us between May 2012 and June 2013, the J Tandon Irrevocable Family Trust agreed to transfer one share beneficially held by it for each five shares purchased by investors further to the private placement if the data memory division of Tandon Enterprises, Inc. was not transferred to us. Since said division was not transferred, the J Tandon Irrevocable Family Trust was obligated to transfer an aggregate of 1,559,080 shares of common stock beneficially held by it to investors in the private placement. For the sake of expediency, we agreed to issue all such shares to investors in the private placement and the J Tandon Irrevocable Family Trust cancelled an identical number of shares, such shares issued in June 2015.

Pursuant to our decision to cancel our proposed acquisition of Syrma Technologies Pvt. Ltd., in September 2015 Jawahar Tandon, our Chief Executive Officer, and Devinder Tandon, one of our significant stockholders and a former director, offered in the aggregate to each stockholder who purchased shares of our company for cash the opportunity to receive one additional share from Mssrs. Tandon’s beneficial holdings for each six shares purchased from our company by such stockholder (together the “Additional Shares”). A total of 21,754,572 shares were purchased by stockholders for cash; an aggregate of 3,625,762 Additional Shares were afforded these stockholders; 1,812,881 from each of Jawahar Tandon’s and Devinder Tandon’s beneficial holdings. For the sake of expediency, we issued the Additional Shares directly to electing stockholders and Mssrs. Tandon cancelled in the aggregate an equivalent number of shares beneficially held by them for each Additional Share referenced further to the previous sentence.

Indemnification Agreements

We have entered into indemnification agreements with each of our directors and executive officers. For more information regarding these agreements, see “Executive Compensation — Limitation on Liability and Indemnification Matters.”

72


 
 

TABLE OF CONTENTS

Arrangements with Monster, Inc. and affiliates

Monster License Agreement

We entered into a trademark license agreement with Monster, Inc. effective July 7, 2010. The agreement, as amended, gives us exclusive rights to utilize the tradenames “Monster Memory,” “Monster Digital” and the M (stylized mark on (i) action sport cameras, (ii) cable memory, (iii) flash based cards, (iv) flash based SSD drive products, (v) DRAM modules, (vi) USB flash drives and (vii) internal power supplies for personal computers. The 25 year agreement provides for the payment of royalties to Monster, Inc. on all sales of the referenced memory products, excluding sales to Monster, Inc., as follows:

Years 1 (2012) and 2: Royalties on all sales excluding sales to Monster, Inc. at a rate of four (4) percent, with no minimum;
Years 3 through 5: Minimum royalty payments of $50,000 per quarter up to a maximum of four (4) percent of all sales excluding sales to Monster, Inc.
Years 6 through 10: Minimum royalty payments of $125,000 per quarter up to a maximum of four (4) percent of all sales excluding sales to Monster, Inc.
Years 11 through 15: Minimum royalty payments of $187,500 per quarter up to a maximum of four (4) percent of all sales excluding sales to Monster, Inc.
Years 16 through 25: Minimum royalty payments of $250,000 per quarter up to a maximum of four (4) percent of all sales excluding sales to Monster, Inc.

Effective July 1, 2014, the royalty rate on certain products was reduced to 2% for a 12 month period.

At any time during the term of the agreement, a permanent license may be negotiated subject to the parties reaching a mutually acceptable agreement.

In August 2015, we executed a amendment the trademark license agreement with Monster whereby Monster granted us the additional right further to the aforementioned license agreement to use the name “Monster Digital, Inc.” as our corporate name. Further to the amendment, in addition to the royalties mentioned above, we issued Monster, Inc. 5,681,558 shares of our common stock and will pay it a cash fee of $500,000 payable over a 12 month period.

Noel Lee Advisory Board Agreement

In addition, in August 2015, and in connection with the aforementioned amendment to the trademark license agreement, we entered into a two-year advisory board agreement with Noel Lee, the Chief Executive Officer and sole shareholder of Monster, Inc. Further to the advisory board agreement, we issued Mr. Lee a warrant to purchase up to 2,840,779 shares of our common stock at a per share exercise price of $1.00.

Arrangements with WestPark Capital

Reorganization

In August 2012, SDJ, the predecessor of Monster Digital, became a wholly-owned subsidiary of Monster Digital (formerly known as WRASP 35, Inc. which changed its name to AOTS 35, Inc., a company wholly owned by WP Financial, an affiliate of WestPark Capital) further to a share exchange agreement. In connection with this reorganization, 100% of the issued and outstanding securities of SDJ were exchanged for securities of Monster Digital. An aggregate of 17,361,600 shares of common stock was issued to the shareholders of SDJ. Prior to the closing of the reorganization, the then-controlling stockholder of Monster Digital, WP Financial, agreed to the cancellation of an aggregate of 18,730,770 shares and warrants to purchase an aggregate of 27,800,560 shares of common stock held by it such that there were 2,558,400 shares of common stock and warrants to purchase an aggregate of 585,000 shares of common stock owned by it immediately after the reorganization.

WP Financial did not receive any consideration for the cancellation of the shares and warrants. The cancellation of the shares and warrants was accounted for as a contribution to capital. The number of shares and warrants cancelled was determined based on negotiations between WP Financial and SDJ. The parties to

73


 
 

TABLE OF CONTENTS

the transaction acknowledged that a conflict of interest existed with respect to the negotiations for the terms of the reorganization due to, among other factors, the fact that WestPark was advising SDJ in the transaction. The shareholders of SDJ negotiated an estimated value of SDJ and its subsidiaries and an estimated value of Monster Digital (based on the mutually desired capitalization of the company resulting from the reorganization) which therefore determined the capitalization of Monster Digital following the reorganization.

In addition, we paid a $155,000 success fee to WestPark for services being provided in connection with the reorganization, including coordinating the reorganization process, interacting with the principals of Monster Digital pre-reorganization and negotiating the definitive agreement for the reorganization of SDJ with Monster Digital, conducting a financial analysis of SDJ, conducting due diligence on SDJ and managing the interrelationship of legal and accounting activities. We also paid a $95,000 fee to WestPark for providing the use of Monster Digital for the reorganization.

Richard Rappaport, the former President of each of AOTS 35, Inc. (renamed Monster Digital, Inc.) and its indirect controlling stockholder through his control of WP Financial prior to the reorganization, indirectly holds a 100% interest in WestPark, an underwriter for this offering, due to the fact that he is the sole owner of the membership interests of the parent company of WestPark. Neither Mr. Rappaport nor WP Financial received any benefits in their individual capacities related to the transactions described above, except for WP Financial’s retention of shares in Monster Digital.

Private Placements

WestPark Capital acted as our placement agent in connection with a private placement of 7,795,400 shares of our common stock between May 2012 and June 2013. In connection therewith, we paid WestPark Capital commissions and expenses of $921,000 and issued them five year warrants to purchase an aggregate of up to 779,540 shares of our common stock at a per share exercise price of $1.00, which was the private placement per share price.

WestPark Capital also acted as our placement agent in connection with a private placement between April 2014 and March 2015 of $5.1 million worth of our convertible notes and warrants to purchase shares of our common stock. In connection therewith, we paid WestPark Capital commissions and expenses of $662,000 and issued them five year warrants to purchase an aggregate of up to 432,469 shares of our common stock at an exercise price of $1.50; the warrants issued to WestPark Capital had identical terms and conditions to those issued to investors in that private placement.

In December 2014, we issued 850,000 shares of our common stock to a non-executive employee of WestPark Capital for assistance in effecting an exchange offer of the aforementioned notes and warrants for shares of our common stock which we effected between December 2014 and March 2015.

WestPark Capital also acted as our Subscription Agent in connection with a rights offering between April and August 2015 of 4,623,275 shares of our common stock. In connection therewith, we paid WestPark Capital commissions and expenses of $448,000.

WestPark Capital acted as our placement agent in connection with a private placement on October 2015 of $1.96 million of promissory notes consisting of $1.6 million loaned to our company and a 22.5% loan organization fee payable on maturity, which is on the earlier of October 2016 or the closing date of our initial public offering. In connection therewith we paid WestPark Capital commission and expenses of $176,000.

Factoring Facility

In 2013, WestPark Capital acted as our agent in arranging a factoring facility. In connection therewith, we paid WestPark Capital a fee of $60,000.

Other arangements

In December 2013 and January 2014, David H. Clarke, our Executive Chairman of the Board, beneficially loaned Westpark Capital Financial Services LLC, the parent company of WestPark Capital, Inc., an aggregate of $350,000 evidenced by promissory notes bearing interest at 5% per annum and due five years from the date of issuance. In connection therewith Westpark Capital Financial Services LLC transferred to Mr. Clarke 113,750 shares of our common stock held by it and warrants to purchase up to 113,750 shares of our common

74


 
 

TABLE OF CONTENTS

stock held by it. The exercise price of the warrants is $1.00 and the warrants expire in 2017. All such loans and equity transfers were made by Westpark Capital Financial Services LLC prior to Mr. Clarke becoming Executive Chairman of the Board. All such notes remain outstanding.

As of June 30, 2015, Westpark Capital beneficially held over 5% of our common stock. In October 2015, WestPark Capital transferred 1,217,985 shares of the common stock held by it and warrants to purchase 602,789 shares of common stock to third parties further to prior contractual commitments; each of the transferees represented that he/she/it was an accredited investor.

Policies and Procedures for Transactions with Related Persons

We have adopted a policy to be effective on the effective date of this offering that our executive officers, directors, nominees for election as a director, beneficial owners of more than 5% of any class of our common stock and any members of the immediate family of any of the foregoing persons are not permitted to enter into a related person transaction with us without the prior consent of our audit committee. Any request for us to enter into a transaction with an executive officer, director, nominee for election as a director, beneficial owner of more than 5% of any class of our voting securities or any member of the immediate family of any of the foregoing persons, in which the amount involved exceeds $120,000 and such person would have a direct or indirect interest, must first be presented to our audit committee for review, consideration and approval. In approving or rejecting any such proposal, our audit committee is to consider the material facts of the transaction, including, but not limited to, whether the transaction is on terms no less favorable than terms generally available to an unaffiliated third party under the same or similar circumstances and the extent of the related person’s interest in the transaction. All of the transactions described above were entered into prior to the adoption of such policy, but after presentation, consideration and approval by our board of directors.

75


 
 

TABLE OF CONTENTS

PRINCIPAL STOCKHOLDERS

The following table sets forth, as of October 29, 2015, information regarding beneficial ownership of our capital stock by:

each person, or group of affiliated persons, known by us to beneficially own more than 5% of our common stock;
each of our named executive officers;
each of our directors and director nominees; and
all of our current executive officers, directors and director nominees as a group.

Beneficial ownership is determined according to the rules of the SEC and generally means that a person has beneficial ownership of a security if he, she or it possesses sole or shared voting or investment power of that security. Except as indicated by the footnotes below, we believe, based on the information furnished to us, that the persons named in the table below have sole voting and investment power with respect to all shares of common stock shown that they beneficially own, subject to community property laws where applicable. The information does not necessarily indicate beneficial ownership for any other purpose, including for purposes of Sections 13(d) and 13(g) of the Securities Act.

Our calculation of the percentage of beneficial ownership prior to this offering is based on 55,815,567 shares of our common stock outstanding as of October 29, 2015. We have based our calculation of the percentage of beneficial ownership after this offering on      shares of our common stock outstanding immediately after the closing of this offering (assuming no exercise of the underwriters’ option to purchase additional shares of common stock).

Unless otherwise indicated, the address of each beneficial owner listed in the table below is c/o Monster Digital, Inc., 2655 Park Center Drive, Unit C, Simi Valley, California 93065.

       
  Number of
Shares Beneficially
Owned
  Percentage
Beneficially
Owned
Name of Beneficial Owner             Before Offering   After
Offering
Named Executive Officers, directors and director nominees
                                   
Jawahar Tandon (1)     10,371,556                18.9 %           
David H. Clarke (2)     5,469,579                9.8 %           
Vivek Tandon                              
Jonathan Clark                              
Robert B. Machinist                              
All executive officers, directors and director nominees as a group (total of 8 persons)     15,613,636                28.0 %           
5% Stockholders:
                                   
Monster, Inc. (3)     8,522,337                14.8 %           
Noel Lee (3) (4)     8,522,337                14.8 %           
D Tandon Irrevocable Family Trust (5)     6,867,919                12.3 %           
Devinder Tandon (5)     6,867,919                12.3 %           

* Represents beneficial ownership of less than 1% of the outstanding common stock.
(1) Includes 9,371,556 shares held by the J Tandon Family Trust, of which Jawahar Tandon, and Shobha Tandon, the wife of Jawahar Tandon, are the trustees. Jawahar Tandon may be deemed the indirect beneficial owner of these securities since he shares sale, voting and investment control over the securities. Also includes 1,000,000 shares held by Tandon Enterprises, Inc., a company controlled by Jawahar Tandon.
(2) Represents 3,285,413 shares held by Mr. Clarke, 268,333 shares held by Leslie Clarke, Mr. Clarke’s wife, and 1,802,083 shares held by GBS Holdings, Inc., an entity which may be deemed controlled by Mr. Clarke but which is owned by Leslie Clarke and the children of Mr. Clarke. Includes warrants to

76


 
 

TABLE OF CONTENTS

purchase 81,250 shares of common stock held by Mr. Clarke and 32,500 shares of common stock held by GBS Holdings, Inc. Mr. Clarke may be deemed the indirect beneficial owner of these securities since he has shared sale, voting and investment control over the securities with his wife. The address of GSB Holdings, Inc. and Mr. Clarke is 14179 Laurel Trail, Wellington, Florida 33414.
(3) Represents 5,681,558 shares held by Monster, Inc. and warrants to purchase 2,840,779 shares of common stock held by Noel Lee, the Chief Executive Officer and sole shareholder of Monster, Inc.
(4) Mr. Lee may be deemed the indirect beneficial owner of these securities since he has sole sale, voting and investment control over the securities. The address of Monster, Inc. and Mr. Lee is 455 Valley Drive, Brisbane, CA 94005.
(5) Devinder Tandon is the trustee of the D Tandon Irrevocable Family Trust. Mr. Tandon may be deemed the indirect beneficial owner of these securities since he has sole sale, voting and investment control over the securities.

77


 
 

TABLE OF CONTENTS

DESCRIPTION OF CAPITAL STOCK
 
General

The following description of our capital stock summarizes the most important terms of our capital stock. The descriptions of our capital stock and certain provisions of our Certificate of Incorporation and Bylaws are summaries and are qualified by reference to the Certificate of Incorporation and Bylaws filed with the SEC as exhibits to our registration statement, of which this prospectus forms a part, and by the applicable provisions of Delaware law.

Our Certificate of Incorporation provides for common stock and undesignated preferred stock, the rights, preferences and privileges of which may be designated from time to time by our board of directors.

Our authorized capital stock consists of 110,000,000 shares, all with a par value of $0.0001 per share, of which 100,000,000 shares are designated as common stock and 10,000,000 shares designated as preferred stock.

As of October 29, 2015, we had outstanding 55,815,567 shares of common stock held by approximately 200 stockholders of record.

Common Stock

The holders of our common stock are entitled to one vote per share on all matters submitted to a vote of our stockholders. Subject to preferences that may be applicable to any preferred stock outstanding at the time, the holders of outstanding shares of common stock are entitled to receive ratably any dividends declared by our board of directors out of assets legally available therefor. In the event that we liquidate, dissolve or wind up, holders of our common stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preference of any then outstanding shares of preferred stock. Holders of common stock have no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of common stock are, and all shares of common stock to be outstanding upon completion of this offering will be, fully paid and nonassessable.

Preferred Stock

Our board of directors may, without further action by our stockholders, fix the rights, preferences, privileges and restrictions of up to an aggregate of 10,000,000 shares of preferred stock in one or more series and authorize their issuance. These rights, preferences and privileges could include dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms and the number of shares constituting any series or the designation of such series, any or all of which may be greater than the rights of our common stock. The issuance of our preferred stock could adversely affect the voting power of holders of our common stock and the likelihood that such holders will receive dividend payments and payments upon liquidation. In addition, the issuance of preferred stock could have the effect of delaying, deferring or preventing a change of control or other corporate action. Upon the closing of this offering, no shares of preferred stock will be outstanding, and we have no present plan to issue any shares of preferred stock.

Options

As of June 30, 2015, there were outstanding stock options under our 2012 Omnibus Incentive Plan to purchase up to 1,055,000 shares of common stock, all of which have an exercise price of $2.00 per share, vesting in four annual installments.

78


 
 

TABLE OF CONTENTS

Warrants

The owner and Chief Executive Officer of Monster, Inc. holds warrants to purchase an aggregate of 3,090,779 shares of common stock Warrants representing the right to purchase 250,000 shares have a per share exercise price of $2.00, and expire in 2017 and the balance have a per share exercise price of $1.00 per share and expire in 2025.

In connection with a private placement of convertible promissory notes and warrants effected by us in between April 2014 and March 2015, we issued investors in the private placement warrants to purchase an aggregate of 34,200 shares of our common stock at exercise price of $1.50, all of which remain outstanding.

We issued WestPark Capital Financial Services, LLC warrants to purchase an aggregate of 1,732,474 shares of common stock issued in connection with the reorganization of our company in 2012 and further to its role as placement agent in connection with private placements of common stock and convertible note and warrants effected by our company prior to this offering at exercise prices ranging from $.00035 to $1.50 and expiring between 2017 and 2020. In October 2015, WestPark Capital transferred 1,217,985 shares of the common stock held by it and warrants to purchase 602,789 shares of common stock to third parties further to prior contractual commitments; each of the transferees represented that he/she/it was an accredited investor.

Registration Rights

We have agreed to register all 5,681,558 shares of common stock held by Monster, Inc. upon demand. All of the shares included in an effective registration statement may be freely sold and transferred, subject to any applicable lock-up agreement.

Anti-Takeover Provisions

Certificate of Incorporation and Bylaws

Because our stockholders do not have cumulative voting rights, our stockholders holding a majority of the outstanding shares of common stock outstanding will be able to elect all of our directors. Our Certificate of Incorporation and Bylaws provide that all stockholder actions must be effected at a duly called meeting of stockholders and not by written consent. A special meeting of stockholders may be called by holders of a majority of our common stock, voting together as a single class, or by the majority of our whole board of directors, or our chief executive officer.

The foregoing provisions will make it more difficult for our existing stockholders to replace our board of directors as well as for another party to obtain control of us by replacing our board of directors. Since our board of directors has the power to retain and discharge our officers, these provisions could also make it more difficult for existing stockholders or another party to effect a change in management. In addition, the authorization of undesignated preferred stock makes it possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change our control.

These provisions are intended to enhance the likelihood of continued stability in the composition of our board of directors and its policies and to discourage certain types of transactions that may involve an actual or threatened acquisition of us. These provisions are also designed to reduce our vulnerability to an unsolicited acquisition proposal and to discourage certain tactics that may be used in proxy fights. However, such provisions could have the effect of discouraging others from making tender offers for our shares and may have the effect of deterring hostile takeovers or delaying changes in our control or management. As a consequence, these provisions also may inhibit fluctuations in the market price of our stock that could result from actual or rumored takeover attempts.

Section 203 of the Delaware General Corporation Law

We are subject to Section 203 of the Delaware General Corporation Law, which prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years after the date that such stockholder became an interested stockholder, with the following exceptions:

79


 
 

TABLE OF CONTENTS

before such date, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder;
upon closing of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction began, excluding for purposes of determining the voting stock outstanding (but not the outstanding voting stock owned by the interested stockholder) those shares owned by (i) persons who are directors and also officers and (ii) employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or
on or after such date, the business combination is approved by the board of directors and authorized at an annual or special meeting of the stockholders, and not by written consent, by the affirmative vote of at least 66 2 / 3 % of the outstanding voting stock that is not owned by the interested stockholder.

In general, Section 203 defines business combination to include the following:

any merger or consolidation involving the corporation and the interested stockholder;
any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder;
subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder;
any transaction involving the corporation that has the effect of increasing the proportionate share of the stock or any class or series of the corporation beneficially owned by the interested stockholder; or
the receipt by the interested stockholder of the benefit of any loss, advances, guarantees, pledges or other financial benefits by or through the corporation.

In general, Section 203 defines an “interested stockholder” as an entity or person who, together with the person’s affiliates and associates, beneficially owns, or within three years prior to the time of determination of interested stockholder status did own, 15% or more of the outstanding voting stock of the corporation.

Limitations of Liability and Indemnification

See “Executive Compensation — Limitation on Liability and Indemnification Matters.”

Listing

We have applied to list our common stock on The Nasdaq Capital Market under the symbol “MSDI.”

Transfer Agent and Registrar

The transfer agent and registrar for our common stock is Corporate Stock Transfer, Denver, Colorado.

80


 
 

TABLE OF CONTENTS

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for our capital stock. Future sales of our common stock in the public market, or the availability of such shares for sale in the public market, could adversely affect market prices prevailing from time to time. As described below, only a limited number of shares will be available for sale shortly after this offering due to contractual and legal restrictions on resale. Nevertheless, sales of our common stock in the public market after such restrictions lapse, or the perception that those sales may occur, could adversely affect the prevailing market price at such time and our ability to raise equity capital in the future.

Upon the closing of this offering,      shares of common stock will be outstanding, assuming no exercise of the underwriters’ option to purchase additional shares of common stock and no exercise of outstanding options and warrants. Of the outstanding shares, all of the shares sold in this offering will be freely tradable, except that any shares held by our affiliates, as that term is defined in Rule 144 under the Securities Act, may only be sold in compliance with the limitations described below.

The remaining shares of our common stock outstanding after this offering are restricted securities as such term is defined in Rule 144 under the Securities Act and are subject to lock-up agreements with us as described below. Following the expiration of the lock-up period, restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144 or 701 promulgated under the Securities Act, described in greater detail below.

Rule 144

In general, a person who has beneficially owned restricted shares of our common stock for at least six months would be entitled to sell their securities provided that (i) such person is not deemed to have been one of our affiliates at the time of, or at any time during the 90 days preceding, a sale and (ii) we are subject to the Exchange Act periodic reporting requirements for at least 90 days before the sale. Persons who have beneficially owned restricted shares of our common stock for at least six months but who are our affiliates at the time of, or any time during the 90 days preceding, a sale, would be subject to additional restrictions, by which such person would be entitled to sell within any three-month period only a number of securities that does not exceed the greater of either of the following:

1% of the number of shares of our common stock outstanding after this offering, which will equal      shares assuming no exercise of the underwriters’ option to purchase additional shares of common stock; or
the average weekly trading volume of our common stock on The Nasdaq Capital Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale;

provided, in each case, that we are subject to the Exchange Act periodic reporting requirements for at least 90 days before the sale. Such sales both by affiliates and by non-affiliates must also comply with the manner non-affiliates of sale, current public information and notice provisions of non-affiliates Rule 144.

Rule 701

Rule 701 under the Securities Act, as in effect on the date of this prospectus, permits re-sales of shares in reliance upon Rule 144 but without compliance with certain restrictions of Rule 144, including the holding period requirement. Most of our employees, executive officers, directors or consultants who purchased shares under a written compensatory plan or contract may be entitled to rely on the resale provisions of Rule 701, but all holders of Rule 701 shares are required to wait until 90 days after the date of this prospectus before selling their shares. However, substantially all Rule 701 shares are subject to lock-up agreements as described below and under “Underwriting” and will become eligible for sale at the expiration of those agreements.

Lock-Up Agreements and Registration

We have agreed with the underwriters that we will not, without the prior consent of Joseph Gunnar & Co., LLC, as representative of the underwriters, directly or indirectly sell, offer, contract or grant any option to sell, pledge, transfer, or otherwise dispose of or enter into any transaction which may result in the disposition of

81


 
 

TABLE OF CONTENTS

any shares of our common stock or securities convertible into, exchangeable or exercisable for any shares of our common stock (excluding the exercise of certain warrants and/or options currently outstanding and exercisable) for a period of six months after the date of this prospectus.

In addition, each of our executive officers and directors and certain principal shareholders owning over _% of the stock of our company, holding an aggregate of     shares of common stock, have agreed with the underwriters not to directly or indirectly sell, offer, contract or grant any option to sell, pledge, transfer (excluding intra-family transfers, transfers to a trust for estate planning purposes or to beneficiaries of officers, directors and stockholders upon their death), or otherwise dispose of or enter into any transaction which may result in the disposition of any shares of our common stock or securities convertible into, exchangeable or exercisable for any shares of our common stock, without the prior written consent of Joseph Gunnar & Co., LLC, as representative of the underwriters, for a period of      months after the date of this prospectus.

We have been advised by the underwriters that they have no present intention and there are no agreements or understandings, explicit or tacit, relating to the early release of any locked-up shares. Joseph Gunnar & Co., LLC, as representative of the underwriters, may, however, consent to an early release from the lock-up period if, in its opinion, the market for the common stock would not be adversely impacted by sales. The release of any lock-up would be considered on a case-by-case basis. Factors that Joseph Gunnar & Co., LLC may consider in deciding whether to release shares from the lock-up restriction include the length of time before the lock-up expires, the number of shares involved, the reason for the requested release, market conditions, the trading price of our securities, historical trading volumes of our securities and whether the person seeking the release is an officer, director or affiliate of us.

We have agreed to register all 5,681,558 shares of common stock held by Monster, Inc. upon demand. All of the shares included in an effective registration statement may be freely sold and transferred, subject to any applicable lock-up agreement.

Equity Incentive Plan

As soon as practicable after the closing of this offering, we intend to file a Form S-8 registration statement under the Securities Act to register shares of our common stock issued or reserved for issuance under our 2012 Omnibus Incentive Plan. This registration statement will become effective immediately upon filing, and shares covered by this registration statement will thereupon be eligible for sale in the public markets, subject to vesting restrictions, the lock-up agreements described above and Rule 144 limitations applicable to affiliates. For a more complete discussion of our equity compensation plans, see “Executive Compensation — Employee Benefit Plans.”

82


 
 

TABLE OF CONTENTS

UNDERWRITING

We and the underwriters named below have entered into an underwriting agreement with respect to the shares being offered. Subject to certain conditions, each underwriter has severally agreed to purchase the number of shares indicated in the following table.     is the representative of the underwriters.

 
Underwriters   Number of Shares
Joseph Gunnar & Co., LLC         
Axiom Capital Management Inc.         
Total
            

        

The underwriters are committed to take and pay for all of the shares being offered, if any are taken, other than the shares covered by the option described below unless and until this option is exercised.

The underwriters have an option to buy up to an additional      shares to cover sales by the underwriters of a greater number of shares than the total number set forth in the table above. They may exercise that option for 45 days. If any shares are purchased pursuant to this option, the underwriters will severally purchase shares in approximately the same proportion as set forth in the table above.

The following table shows the per share and total underwriting discounts and commissions to be paid to the underwriters. Such amounts are shown assuming both no exercise and full exercise of the underwriters’ option to purchase      additional shares.

   
Paid by Us   No Exercise   Full Exercise
Per Share   $          $       
Total   $     $  

We have agreed to pay a non-accountable expense allowance to the Underwriter equal to 1.0% of the gross proceeds received in this offering. In addition to the 1.0% non-accountable expense allowance, we have also agreed to pay or reimburse the Underwriter for certain of the Underwriter’s out-of-pocket expenses relating to the offering, including all reasonable fees and expenses of the Underwriter’s outside legal counsel in an amount not to exceed $200,000, and reasonable travel, lodging and other out-of-pocket expenses of the Underwriter incurred in connection with this offering and the road show in an amount not to exceed $75,000, of which $25,000 has been paid by us as an advance which shall be returned to us to the extent the expenses have not been actually incurred. Furthermore, pursuant to the underwriting agreement, the underwriters’ obligations are subject to customary conditions, representations and warranties contained in the underwriting agreement, such as receipt by the underwriters of officers’ certificates and legal opinions.

Shares sold by the underwriters to the public will initially be offered at the initial public offering price set forth on the cover of this prospectus. Any shares sold by the underwriters to securities dealers may be sold at a discount of up to $    per share from the initial public offering price. After the initial offering of the shares, the representatives may change the offering price and the other selling terms. The offering of the shares by the underwriters is subject to receipt and acceptance and subject to the underwriters’ right to reject any order in whole or in part.

We have agreed with the underwriters that we will not, without the prior consent of Joseph Gunnar & Co., LLC, as representative of the underwriters, directly or indirectly sell, offer, contract or grant any option to sell, pledge, transfer, or otherwise dispose of or enter into any transaction which may result in the disposition of any shares of our common stock or securities convertible into, exchangeable or exercisable for any shares of our common stock (excluding the exercise of certain warrants and/or options currently outstanding and exercisable) for a period of       months after the date of this prospectus.

In addition, each of our executive officers and directors and certain principal shareholders owning over _% of the stock of our company, holding an aggregate of     shares of common stock, have agreed with the underwriters not to directly or indirectly sell, offer, contract or grant any option to sell, pledge, transfer (excluding intra-family transfers, transfers to a trust for estate planning purposes or to beneficiaries of officers,

83


 
 

TABLE OF CONTENTS

directors and stockholders upon their death), or otherwise dispose of or enter into any transaction which may result in the disposition of any shares of our common stock or securities convertible into, exchangeable or exercisable for any shares of our common stock, without the prior written consent of Joseph Gunnar & Co., LLC, as representative of the underwriters, for a period of six months after the date of this prospectus.

We estimate that our share of the total expenses of the offering, excluding underwriting discounts and commissions, will be approximately $     million.

Upon the closing of this offering, we have agreed to sell to the Underwriters warrants to purchase a number of shares equal to 7% of the shares of our common stock sold in this offering, excluding any shares that may be sold pursuant to the underwriters’ exercise of the over-allotment option. The warrants will be exercisable at a per share exercise price equal to the public offering price, subject to standard anti-dilution adjustments for stock splits and similar transactions, and will become exercisable 180 days after the date of this prospectus and expire five years from the effective date of the registration statement date of which this prospectus forms a part. The warrants and the shares of common stock underlying the warrants have been deemed compensation by the FINRA and are therefore subject to a 180-day lock-up pursuant to FINRA Rule 5110(g)(1). The underwriters (or permitted assignees under the Rule) will not sell, transfer, assign, pledge, or hypothecate the warrants or the securities underlying the warrants, nor will it engage in any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of the warrants or the underlying securities for a period of 180 days from the date of this prospectus. Additionally, the warrants may not be sold transferred, assigned, pledged or hypothecated for a one-year period (including the foregoing 180 day period) following the effective date of the registration statement except to any underwriter and selected dealer participating in the offering and their bona fide officers or partners. Although the warrants and the underlying shares of common stock have been registered on the registration statement of which this prospectus forms a part, the warrants grant holders certain demand and “piggy back” registration rights. These rights apply to all of the securities directly and indirectly issuable upon exercise of the warrants. We will bear all fees and expenses attendant to registering the securities issuable on exercise of the warrants, other than underwriting commissions incurred and payable by the holders.

Until twelve months from the closing of the offering, Joseph Gunnar & Co., LLC and Axiom Capital Management, Inc. shall have a right of first refusal to act as lead or managing underwriters or exclusive financial advisors for any offering of securities, merger, acquisition or similar transaction.

Prior to the offering, there has been no public market for the shares. The initial public offering price has been negotiated among us and the representatives. Among the factors considered in determining the initial public offering price of the shares, in addition to prevailing market conditions, were our historical performance, estimates of our business potential and earnings prospects, an assessment of our management and the consideration of the above factors in relation to market valuation of companies in related businesses.

We have applied to list our common stock on The Nasdaq Capital Market under the symbol “MSDI.”

In connection with the offering, the underwriters may purchase and sell shares of our common stock in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering, and a short position represents the amount of such sales that have not been covered by subsequent purchases. A “covered short position” is a short position that is not greater than the amount of additional shares for which the underwriters’ option described above may be exercised. The underwriters may cover any covered short position by either exercising their option to purchase additional shares or purchasing shares in the open market. In determining the source of shares to cover the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase additional shares pursuant to the option described above. “Naked” short sales are any short sales that create a short position greater than the amount of additional shares for which the option described above may be exercised. The underwriters must cover any such naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of our common stock in the open market after pricing that could adversely affect investors who purchase in

84


 
 

TABLE OF CONTENTS

the offering. Stabilizing transactions consist of various bids for or purchases of our common stock made by the underwriters in the open market prior to the completion of the offering.

The underwriters may also impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of such underwriter in stabilizing or short covering transactions.

Purchases to cover a short position and stabilizing transactions, as well as other purchases by the underwriters for their own accounts, may have the effect of preventing or retarding a decline in the market price of our stock, and together with the imposition of the penalty bid, may stabilize, maintain or otherwise affect the market price of our common stock. As a result, the price of the common stock may be higher than the price that otherwise might exist in the open market. The underwriters are not required to engage in these activities and may end any of these activities at any time. These transactions may be effected on The Nasdaq Capital Market, in the over-the-counter market or otherwise.

The underwriters do not expect sales to discretionary accounts to exceed five percent of the total number of shares offered.

We have agreed to indemnify the several underwriters against certain liabilities, including liabilities under the Securities Act.

85


 
 

TABLE OF CONTENTS

LEGAL MATTERS

Manatt, Phelps & Phillips LLP of Costa Mesa, California, will pass upon the validity of the shares of common stock offered hereby. The underwriters are being represented by Schiff Hardin, LLP, Washington, D.C., in connection with the offering.

EXPERTS

The consolidated financial statements of Monster Digital, Inc. and Subsidiary as of December 31, 2014 and 2013 and for the years ended December 31, 2014 and 2013 included in this prospectus have been audited by CohnReznick LLP, an independent registered public accounting firm, as stated in their report appearing herein which includes an explanatory paragraph relating to our ability to continue as a going concern. Such financial statements have been so included in reliance upon the report of such firm given upon its authority as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to this offering of our common stock. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement, some items of which are contained in exhibits to the registration statement as permitted by the rules and regulations of the SEC. For further information with respect to us and our common stock, we refer you to the registration statement, including the exhibits and the financial statements and notes filed as a part of the registration statement. Statements contained in this prospectus concerning the contents of any contract or any other document are not necessarily complete. If a contract or document has been filed as an exhibit to the registration statement, please see the copy of the contract or document that has been filed. Each statement in this prospectus relating to a contract or document filed as an exhibit is qualified in all respects by the filed exhibit. The exhibits to the registration statement should be referenced for the complete contents of these contracts and documents. A copy of the registration statement and the exhibits filed therewith may be inspected without charge at the public reference room of the SEC, located at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may obtain information on the operation of the public reference rooms by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website that contains reports, proxy statements and other information about issuers, like us, that file electronically with the SEC. The address of that website is www.sec.gov .

As a result of this offering, we will become subject to the information and reporting requirements of the Exchange Act and, in accordance with this law, will file periodic reports, proxy statements and other information with the SEC. These periodic reports, proxy statements and other information will be available for inspection and copying at the SEC’s public reference facilities and the website of the SEC referred to above. We also maintain a website at http://www.monsterdigital.com . After the closing of this offering, you may access our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act with the SEC free of charge at our website as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. The information contained in, or that can be accessed through, our website is not part of this prospectus.

86


 
 

TABLE OF CONTENTS

MONSTER DIGITAL, INC.
AND SUBSIDIARY
 
CONSOLIDATED
FINANCIAL STATEMENTS
 
December 31, 2014 and 2013

F-1


 
 

TABLE OF CONTENTS

CONTENTS

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM     F-3  
CONSOLIDATED FINANCIAL STATEMENTS
        
CONSOLIDATED BALANCE SHEETS     F-4  
CONSOLIDATED STATEMENTS OF OPERATIONS     F-5  
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT     F-6  
CONSOLIDATED STATEMENTS OF CASH FLOWS     F-7  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS     F-8  

F-2


 
 

TABLE OF CONTENTS

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Monster Digital, Inc.

We have audited the accompanying consolidated balance sheets of Monster Digital, Inc. and Subsidiary as of December 31, 2013 and 2014, and the related consolidated statements of operations, shareholders’ deficit and cash flows for the years then ended. Monster Digital, Inc. and Subsidiary’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated 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 audits 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Monster Digital, Inc. and Subsidiary as of December 31, 2013 and 2014, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has incurred net losses and negative cash flows from operating activities for the years ended December 31, 2013 and 2014 and has an accumulated deficit as of December 31, 2014. These matters, among others, raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding these matters are also described in Note 2. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ CohnReznick LLP

 
Roseland, New Jersey
August 12, 2015, except for the effects of the matters discussed in the fourth, eighth and ninth paragraphs of Note 10 which are as of September 30, 2015.

F-3


 
 

TABLE OF CONTENTS

MONSTER DIGITAL, INC. AND SUBSIDIARY
 
CONSOLIDATED BALANCE SHEETS

   
  December 31,
     2013   2014
ASSETS
                 
Current assets
                 
Cash   $ 1,000     $ 97,000  
Accounts receivable, net of allowances of $54,000 and $664,000, respectively     870,000       3,569,000  
Inventories     744,000       2,587,000  
Prepaid expenses and other     150,000       68,000  
Deferred debt issuance costs     141,000       48,000  
Total current assets     1,906,000       6,369,000  
Deposits and other assets     25,000       42,000  
Total assets   $ 1,931,000     $ 6,411,000  
LIABILITIES AND SHAREHOLDERS’ DEFICIT
                 
Current liabilities
                 
Line of credit   $ 789,000     $ 5,051,000  
Accounts payable     837,000       3,765,000  
Accrued expenses     680,000       2,046,000  
Due to related parties     161,000       502,000  
Notes payable           35,000  
Total current liabilities     2,467,000       11,399,000  
Commitments and contingencies
                 
Shareholders’ deficit
                 
Preferred stock; 10,000,000 shares authorized — none issued            
Common stock; $.0001 par value; 100,000,000 shares authorized; 41,342,456 and 42,192,456 shares issued and outstanding, respectively     4,000       4,000  
Additional paid-in capital     5,537,000       12,142,000  
Accumulated deficit     (6,077,000 )       (17,134,000 )  
Total shareholders’ deficit     (536,000 )       (4,988,000 )  
Total liabilities and shareholders’ deficit   $ 1,931,000     $ 6,411,000  

 
 
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

F-4


 
 

TABLE OF CONTENTS

MONSTER DIGITAL, INC. AND SUBSIDIARY
 
CONSOLIDATED STATEMENTS OF OPERATIONS

   
  Year Ended December 31,
     2013   2014
Revenue   $ 3,444,000     $ 11,343,000  
Cost of goods sold     2,838,000       11,109,000  
Gross Profit     606,000       234,000  
Operating expenses
                 
Research and development     709,000       542,000  
Selling and marketing     1,515,000       3,722,000  
General and administrative     1,747,000       2,646,000  
Total operating expenses     3,971,000       6,910,000  
Operating loss     (3,365,000 )       (6,676,000 )  
Other expense, net
                 
Interest and finance expense     66,000       1,661,000  
Debt conversion expense           2,707,000  
Total other expenses     66,000       4,368,000  
Loss before income taxes     (3,431,000 )       (11,044,000 )  
Provision for income taxes     4,000       13,000  
Net Loss   $ (3,435,000 )     $ (11,057,000 )  
Loss Per Share
                 
Basic and Diluted   $ (0.09 )     $ (0.27 )  
Number of Shares used in Computation
                 
Basic and Diluted     39,611,372       41,591,634  

 
 
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

F-5


 
 

TABLE OF CONTENTS

MONSTER DIGITAL, INC. AND SUBSIDIARY
 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT

         
  Common Stock   Additional
Paid-in
Capital
  Accumulated
Deficit
  Shareholders’
Deficit
  Shares   Amount
Balance at December 31, 2012     37,130,000     $ 4,000     $ 2,525,000     $ (2,642,000 )     $ (113,000 )  
Private placement offering, net of Issuance costs     4,212,456             3,012,000             3,012,000  
Net loss                       (3,435,000 )       (3,435,000 )  
Balance at December 31, 2013     41,342,456       4,000       5,537,000       (6,077,000 )       (536,000 )  
Stock purchase warrants issued with convertible debt                 735,000             735,000  
Exchange of debt for equity     5,819,875       5,000       5,865,000             5,870,000  
Cancellation of founders’ shares in debt for equity exchange     (4,969,875 )       (5,000 )       5,000              
Net loss                       (11,057,000 )       (11,057,000 )  
Balance at December 31, 2014     42,192,456     $ 4,000     $ 12,142,000     $ (17,134,000 )     $ (4,988,000 )  

 
 
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

F-6


 
 

TABLE OF CONTENTS

MONSTER DIGITAL, INC. AND SUBSIDIARY
 
CONSOLIDATED STATEMENTS OF CASH FLOWS

   
  Year ended December 31,
     2013   2014
Cash flows from operating activities
                 
Net loss   $ (3,435,000 )     $ (11,057,000 )  
Adjustments to reconcile net loss to net cash used in operating activities:
                 
Amortization of deferred debt issuance costs and debt discount     40,000       1,147,000  
Debt conversion expense           2,707,000  
Accrued interest on debt converted to equity           98,000  
Provision for doubtful accounts     86,000       401,000  
Changes in operating assets and liabilities:
                 
Accounts receivable     (692,000 )       (3,100,000 )  
Inventories     (127,000 )       (1,843,000 )  
Prepaid expenses and other     (143,000 )       82,000  
Other assets     29,000       (17,000 )  
Accounts payable     295,000       2,928,000  
Accrued expenses     427,000       1,321,000  
Due to related party     (352,000 )       (119,000 )  
Net cash used in operating activities     (3,872,000 )       (7,452,000 )  
Cash flows from financing activities
                 
Private placement offering     3,887,000        
Private placement issuance costs     (874,000 )        
Short-term loan – related party, net     230,000       460,000  
Proceeds from issuance of convertible debt and warrants           3,466,000  
Proceeds from credit facility     1,928,000       14,599,000  
Payments on credit facility     (1,179,000 )       (10,337,000 )  
Deferred financing costs     (181,000 )       (640,000 )  
Net cash provided by financing activities     3,811,000       7,548,000  
Net increase (decrease) in cash     (61,000 )       96,000  
Cash, beginning of the year     62,000       1,000  
Cash, end of the year   $ 1,000     $ 97,000  
Supplemental disclosure of cash flow information
                 
Cash paid during the year for:
                 
Interest   $ 25,000     $ 370,000  
Income taxes   $ 4,000     $ 13,000  
Non-cash investing and financing activities:
                 
Exchange of debt for equity   $     $ 5,870,000  
Accrued deferred debt issuance costs   $     $ 45,000  

 
 
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

F-7


 
 

TABLE OF CONTENTS

MONSTER DIGITAL, INC. AND SUBSIDIARY
  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — BUSINESS ACTIVITY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES

Organization :  Monster Digital, Inc. (“TDI”), a Delaware corporation (formed in November 2010), and its subsidiary, SDJ Technologies, Inc. (“SDJ”) (collectively referred to as the “Company”), is an importer of high-end memory storage products and flash memory to be marketed and sold under the Monster Digital brand name pursuant to a long-term licensing agreement with Monster, Inc. Such memory storage products include high-end, rugged Solid State Drives (“SSDs”), Solid State Hybrid Drives (“SSHDs”) and removable flash memory secured digital cards (“SDs”). The Company sources its products from China, Taiwan and Hong Kong.

Basis of Presentation :  The consolidated financial statements of TDI and its subsidiary SDJ have been prepared in accordance with accounting principles generally accepted in the United States of America.

Principles of Consolidation :  The consolidated financial statements include accounts of TDI and SDJ. All significant intercompany transactions have been eliminated in consolidation.

Use of Estimates :  The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities (including sales returns, price protection allowances, bad debts, inventory reserves, warranty reserves, and asset impairments), disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates.

Concentration of Cash :  The Company maintains its cash in bank accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. Management believes the Company is not exposed to any significant credit risk on its cash balances.

Accounts Receivable :  Accounts receivable are carried at original invoice amount less allowance for doubtful accounts. Management determines the allowance for doubtful accounts by identifying troubled accounts and by using historical experience applied to an aging of accounts. Accounts receivable are written off when deemed uncollectible. Recoveries of receivables previously written off are recorded when received. Accounts receivable are considered to be past due if any portion of the receivable balance is outstanding for more than 90 days past the customer’s granted terms. The Company does not charge interest on past due balances or require collateral on its accounts receivables. As of December 31, 2013 and 2014, the allowance for doubtful accounts is approximately $54,000 and $664,000, respectively.

Inventory :  Inventory is stated at the lower of cost or market, with cost being determined on the weighted average cost method of accounting. The Company purchases finished goods and materials to assemble kits in quantities that it anticipates will be fully used in the near term. Changes in operating strategy, customer demand, and fluctuations in market values can limit the Company’s ability to effectively utilize all products purchased and can result in finished goods with above-market carrying costs which may cause losses on sales to customers. The Company’s policy is to closely monitor inventory levels, obsolescence and lower market values compared to costs and, when necessary, reduce the carrying amount of its inventory to its market value. As of December 31, 2013 and 2014, inventory on hand was comprised primarily of finished goods ready for sale.

Advertising :  Advertising costs are charged to expense when incurred. Advertising costs, which include market development expenses, were $51,000 and $565,000 for the years ended December 31, 2013 and 2014, respectively.

Fair Value of Financial Instruments :  Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on the assumptions that market participants would use in pricing an asset or liability. Fair value is based on a

F-8


 
 

TABLE OF CONTENTS

MONSTER DIGITAL, INC. AND SUBSIDIARY
  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — BUSINESS ACTIVITY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES  – (continued)

hierarchy of valuation techniques, which is determined on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s own market assumptions. These two types of inputs create a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1: Quoted prices for identical instruments in active markets.
Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3: Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

All stock purchase warrants (see Note 5) are valued under methods of fair value under the Level 3 tier, as described above.

The carrying amount for other financial instruments, which include cash, accounts receivable, accounts payable, and line of credit, approximate fair value based upon their short term nature and maturity.

Revenue Recognition :  Revenue is realized or realizable and earned when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) the sales price is fixed or determinable, (3) collectability is reasonably assured, and (4) products have been shipped and the customer has taken ownership and assumed the risk of loss.

Revenue is reduced by reserves for price protection, sales returns and allowances and rebates. Our reserve estimates are based upon historical data as well as projections of sales, customer inventories and market conditions and current contractual sales terms. If the Company reduces the list price of its products, certain customers may receive a credit from the Company (i.e.: price protection). The Company estimates the impact of such pricing changes on a regular basis and adjusts its allowances accordingly. Amounts charged to operations for price protection are calculated based on actual price changes on individual products and customer inventory levels. The reserve is then reduced by actual credits given to these customers at the time the credits are issued.

The Company also offers market development credits (“MDF credits”) to certain of its customers. These credits are also charged against revenue. Distributors and retailers take full ownership of their product upon receipt and sales are fully recognized at that time.

Shipping and Handling Costs :  Historically, the Company has not charged its customers for shipping and handling costs, which is a component of marketing and selling expenses. These costs totaled approximately $40,000 in 2013 and $283,000 in 2014.

Income Taxes :  Deferred tax assets and liabilities are determined based on the temporary differences between the financial reporting and tax basis of assets and liabilities and net operating loss carryforwards, applying enacted statutory tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is recorded when it is more likely than not that some or all of the deferred tax assets will not be realized.

The Company uses a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more likely than not to be realized upon settlement. As of December 31, 2013 and 2014, there are no known uncertain tax positions.

F-9


 
 

TABLE OF CONTENTS

MONSTER DIGITAL, INC. AND SUBSIDIARY
  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — BUSINESS ACTIVITY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES  – (continued)

The Company policy is to classify the liability for unrecognized tax benefits as current to the extent that it is more likely than not to be realized upon settlement and to the extent that the Company anticipates payment (or receipt) of cash within one year. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in the tax provision.

Product Warranty :  The Company’s memory products are sold under various limited warranty arrangements ranging from three years to five years on solid state drives and a limited lifetime warranty on all other products. Company policy is to establish reserves for estimated product warranty costs in the period when the related revenue is recognized. The Company has the right to return defective products to the manufacturer. As of December 31, 2013 and 2014, the Company has established a warranty reserve of $38,000 and $192,000, respectively, which are included in accrued expenses in the accompanying consolidated balance sheets. Activity in the product warranty liability is as follows:

 
Balance December 31, 2012   $ 46,000  
Increase for 2013 sales     19,000  
Settlements and payments     (27,000 )  
Balance December 31, 2013     38,000  
Increase for 2014 sales     269,000  
Settlements and payments     (115,000 )  
Balance December 31, 2014   $ 192,000  

Research and Development:   The Company incurs costs to improve the appeal and functionality of its products. Research and development costs are charged to expense when incurred.

Earnings (Loss) per Share:   Basic earnings (loss) per share is calculated by dividing net earnings (loss) (all of which is attributable to common stockholders) by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share is calculated similarly but includes potential dilution from the exercise of common stock warrants and conversion of debt to equity, except when the effect would be anti-dilutive. Earnings (loss) per share are computed using the “treasury stock method.” For 2013 and 2014, warrants outstanding for 1,550,005 and 1,815,347 shares of common stock, respectively, and $38,000 in convertible notes payable in 2014 have been excluded from the computation of diluted loss per share because their effect was anti-dilutive.

Recently issued accounting pronouncements  — In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity . Under ASU 2014-08, only disposals that represent a strategic shift that has (or will have) a major effect on the entity’s results and operations would qualify as discontinued operations, which could include a disposal of a major geographical area, a major line of business, a major equity method investment, or other major parts of an entity. ASU 2014-08 also expands the disclosure requirements for disposals of operations to include more information about assets, liabilities, income and expenses and requires entities to disclose information about disposals of individually significant components. ASU 2014-08 is effective in the first quarter of 2015, with early adoption permitted. ASU 2014-08 could impact our consolidated financial results in the event of a transaction as described above.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments

F-10


 
 

TABLE OF CONTENTS

MONSTER DIGITAL, INC. AND SUBSIDIARY
  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — BUSINESS ACTIVITY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES  – (continued)

and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective in the first quarter of 2018, with early adoption not permitted and requires either a retrospective or a modified retrospective approach to adoption. We have not yet selected a transition method and are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements — Going Concern , which requires that management of an entity should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued or available to be issued. This update will become effective beginning January 1, 2017, with early adoption permitted. The provisions of this standard are not expected to significantly impact the Company.

In April 2015, the FASB issued ASU 2015-03, Interest — Imputation of Interest , which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability instead of being presented as an asset. Debt disclosures will include the face amount of the debt liability and the effective interest rate. The update requires retrospective application and represents a change in accounting principle. The update is effective for fiscal years beginning after December 15, 2015. Early adoption is permitted for financial statements that have not been previously issued. The adoption of ASU 2015-03 is not expected to have a material impact on the Company’s consolidated financial statements.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory . The standard requires entities to measure most inventory “at the lower of cost and net realizable value,” thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market (market in this context is defined as one of three different measures, one of which is net realizable value). The standard is effective for the Company prospectively beginning January 1, 2017. The Company is currently evaluating the impact of the adoption of this guidance on its financial statements.

Other pronouncements issued by the FASB or other authoritative accounting standards groups with future effective dates are either not applicable or not significant to the consolidated financial statements of the Company.

NOTE 2 — GOING CONCERN

As of December 31, 2014, the Company has negative working capital of approximately $5,030,000, has a capital deficit of approximately $4,988,000, and has incurred cumulative net losses from its inception of approximately $17,134,000. These circumstances raise substantial doubt as to the Company’s ability to continue as a going concern. In response to this uncertainty, Management has taken certain measures to date in 2015 and has plans for the remainder of 2015 and beyond, with the objective of alleviating this concern. They include the following:

Subsequent to December 31, 2014, the Company raised $3,887,000, net of offering costs, upon the issuance of convertible notes payable and common stock purchase rights offering.
In order to meet customers’ needs for consumer products, the Company is continuing to develop new products to complement existing products and expand overall product offerings, with the objective of increasing revenue and gross profit percentages. The Company expects to offer up to three new product families consisting of up to twelve new products (or significant enhancements to existing products) in 2015.

While the Company believes it will be successful in obtaining the necessary financing to fund its operations, there are no assurances that such additional funding will be achieved and that it will succeed in its future

F-11


 
 

TABLE OF CONTENTS

MONSTER DIGITAL, INC. AND SUBSIDIARY
  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 — GOING CONCERN  – (continued)

operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts of liabilities that might be necessary should the Company be unable to continue in existence.

NOTE 3 — DEBT FINANCING

Credit Facility

In May 2012, the Company entered into a 12 month, $2.0 million accounts receivable based credit facility. The facility provided for a maximum advance rate of 85% against eligible receivables. The credit facility carried a base interest rate of prime plus 2% with additional fees for managing the facility. This credit facility expired in May 2013.

In November 2013, the Company entered into a 12 month, $2.0 million accounts receivable based credit facility with Marquette Commercial Finance. In September 2014, the available credit was increased to $8.0 million. The facility provides for a maximum advance rate of 80% against eligible receivables. The credit facility carries a per-annum interest rate of a base rate plus 3.5% (subject to a minimum of 6.75%), with the base rate being the greater of the prime lending rate or LIBOR plus 2.0%. In addition, there are fees for managing the facility. At December 31, 2013 and 2014, the total amount outstanding under the credit facility was $789,000 and $5,006,000, respectively. This credit facility was renewed in November 2014 and is set to expire in November 2015 unless terminated sooner under the provisions of the agreement by either party. The Company incurred approximately $172,000 in costs to secure and establish the credit facility. For the years ended December 31, 2013 and 2014, approximately $31,000 and $141,000, respectively, was amortized to interest and finance expense. Outstanding borrowings under the facility are collateralized by substantially all assets of the Company.

In March 2015, Marquette Commercial Finance notified the Company of its intent to terminate the contract and that it will continue to finance sales transactions with specific customers until such time that the Company is able to establish a credit facility with a different finance company.

In June 2015, the Company secured an accounts receivable financing facility with Bay View Funding. The new contract provides for maximum funding of $4 million and a factoring fee of 1.35% for the first 30 days and .45% for each 10-day period thereafter that the financed receivable remains outstanding. Upon the execution of this contract, the balance owed to Marquette was repaid and that contract was terminated. There are no covenants associated with this facility.

Purchase Order Purchase Agreement

In April 2014, the Company entered into a purchase order purchase agreement with Brookridge Funding (Brookridge). Under the agreement, the Company may present and assign to Brookridge customer purchase orders. Upon acceptance, Brookridge receives right, title and interest in the purchase order and all funds that may come due as a result of the purchase order. Brookridge purchases accepted purchase orders at a price not in excess of the cost of the applicable inventory required to fulfill the purchase order. Fees accrue at a rate of 2% of the funded amount for the first 20 days and an additional 1% for each 10 day period that the amount remains unpaid thereafter. There are no covenants associated with this facility. As of December 31, 2014, the amount due Brookridge under this agreement is $45,000, which is included in the caption “line of credit” on the accompanying consolidated balance sheet.

Convertible Debt

In April 2014, the Company initiated a private placement offering to issue up to $4.0 million of convertible promissory Notes. The amount of the offering was later increased to $6.0 million. Between April and December 2014, a total of $3,466,000 of convertible notes were issued. Direct costs incurred in connection with the offering totaled $640,000 cash plus warrants issued to the placement agent with an estimated value of $63,000. The Notes are due 12 months following their issuance and bear interest at 6% per annum, payable in

F-12


 
 

TABLE OF CONTENTS

MONSTER DIGITAL, INC. AND SUBSIDIARY
  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 — DEBT FINANCING  – (continued)

shares of common stock at the conversion rate of the Note. If the Company had completed a qualified underwritten public offering of its common stock prior to the Note maturity date (a “qualified IPO”), then the Note would be automatically converted into shares of common stock. The conversion price would be the greater of $1.50 or 50% of the qualified IPO price per share. If the Company had not completed a qualified IPO prior to the Note maturity date, then the holder had the right to convert the Note into common stock at $1.50 per share.

For each $1,000 principal amount of Notes, the holder received 667 Note warrants and 233 Vesting warrants, both of which are exercisable at $1.50 per share.

With respect to the Note warrants, if the Company had not completed a qualified IPO prior to the maturity date of the underlying Note, and the holder does not make an election to convert the Note in its entirety to common stock, then 50% of the Note warrants will be canceled. Unexercised warrants expire 5 years following their issuance.

The Vesting warrants vest and become exercisable monthly between July 1, 2014 and April 1, 2015. These warrants are not subject to forfeiture in the event the Company does not complete a qualified IPO. Unexercised Vesting warrants expire 3 years following the vesting date.

During 2014, none of the Note or Vesting warrants were exercised.

In conjunction with the convertible debt offering, the Company issued a total of 3,118,950 stock purchase warrants to Note holders and 231,142 stock purchase warrants to the placement agent. The Company accounted for these warrants in accordance with FASB ASC 470-20, Debt with Conversion and Other Options . The Company computed the value of the warrants using the Black-Scholes option pricing model (see Note 5) and recorded the fair value of warrants by allocating a portion of the proceeds to note holders’ warrants, based on their relative fair value, as a reduction to the carrying amount of the convertible debt. The discount recorded in connection with the warrant valuation is amortized over the term of the convertible notes and is recognized as non-cash interest expense.

The Company recorded a discount to the debt of $735,000 for the calculated fair value of the warrants issued in conjunction with the convertible notes in 2014. Also in connection with the issuance of convertible notes in 2014, the Company incurred debt issuance costs in the form of cash totaling $640,000. The debt discount and deferred debt issuance costs are amortized over the term of the convertible notes and is recognized as a non-cash interest expense using the effective interest method, resulting in an imputed interest rate of approximately 66% per annum. In 2014, a total of approximately $660,000 in non-cash interest expense was recognized as a result of the amortization of the debt discount and deferred debt issuance costs related to convertible debt.

Debt to Equity Exchange Offer

In December 2014, the Company extended an offer to its convertible Note holders for the exchange of convertible Notes, accrued interest and common stock purchase warrants into common stock. In the offer, the conversion rate on the principal amount of Notes was reduced from $1.50 per share to $1.00 per share, with accrued interest being cancelled. Furthermore, in exchange for the cancellation of all warrants, the Note holder receives 1 share of common stock for every 2 shares that would be issued upon exercise of the warrants.

As further inducement to the offer, for the new shares issued in connection with the exchange offer, the Company’s principal shareholder agreed to put back to the Company an equal number of shares owned by him (to a maximum of 5 million shares) and have such shares cancelled.

Through December 31, 2014, a total of $3,428,000 in convertible Notes have converted to equity pursuant to the exchange offer. As a result, of the foregoing exchange, $5,870,000 was credited to additional paid-in

F-13


 
 

TABLE OF CONTENTS

MONSTER DIGITAL, INC. AND SUBSIDIARY
  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 — DEBT FINANCING  – (continued)

capital, which is the net amount of the principal of the Notes, unpaid accrued interest, unamortized debt discount, and the debt conversion expense.

The debt conversion expense of $2,707,000 represents the estimated fair value of all securities and other consideration transferred in the exchange transaction in excess of the fair value of securities issuable pursuant to the original conversion terms.

NOTE 4 — ACCRUED EXPENSES

Accrued expenses consist of the following:

   
  December 31,
2013
  December 31,
2014
Royalties   $ 133,000     $ 488,000  
Market development credits     94,000       497,000  
Others     453,000       1,061,000  
Total   $ 680,000     $ 2,046,000  

NOTE 5 —  STOCKHOLDERS’ EQUITY

Effective October 12, 2011, the Company engaged the investment banking firm of WestPark Capital, Inc. (“WestPark” or “placement agent’) to assist the Company in issuing common stock through a Private Placement Offering. WestPark’s fees for securing the investment were 10% of the funds secured plus a non-accountable expense allowance of 1% of the funds secured. In addition, the placement agent was granted five year warrants equal to 10% of the shares issued to the private placement investors. Beginning in 2012 and through December 31, 2013, WestPark raised $5,418,000, net of fees of $1,732,000, from the Private Placement Offering. The offering was closed in 2013.

On June 4, 2012, the Company issued WestPark 2,808,400 shares of common stock and a stock purchase warrant to purchase 585,000 shares of the Company’s common stock in exchange for the cancellation of WestPark’s outstanding common stock and warrants in the Company prior to the 2012 reverse capitalization. Also in 2012, the Company issued WestPark stock purchase warrants to purchase 313,000 shares of the Company’s common stock in connection with the private placement of common stock during the year.

In 2013 the Company issued WestPark stock purchase warrants to purchase 402,005 shares of the Company’s common stock in connection with the private placement of common stock during the year. In connection the issuance of convertible debt in 2014 as described in Note 3, the Company issued to Westpark 231,142 stock purchase warrants as partial compensation for services. Also as described in Note 3, the Company issued to convertible note holders a total of 3,118,950 stock purchase warrants. All warrants described herein are classified within shareholders’ equity.

All warrants have been valued on the date of their issuance using the Black-Sholes option pricing model using the following assumptions and contractual terms:

                 
                 
            Valuation Assumption
Year Issued   Issued to   Number of
Warrants
  Year of
Expiration
  Exercise
Price per
Share
  Contractual
Term
  Dividend
Rate
  Risk-Free
Interest
Rate
  Stock
Price
Volatility
  Estimated
Value
2013:     Placement Agent       402,005       2018     $ 1.00       5 years       0.00 %       .36% – .78%       52.9% – 67.3%     $ 219,781  
2014:     Placement Agent       231,142       2019       1.50       5 years       0.00 %       .88% – 1.10%       46.5% – 47%       62,869  
       Note Holders       2,310,333       2019       1.50       5 years       0.00 %       .88% – 1.10%       46.5% – 47%       683,193  
       Note Holders       806,617       2017       1.50       3 years       0.00 %       .88% – 1.10%       46.5% – 47%       149,197  

The expected term is based upon contractual terms. The expected volatility is estimated by analyzing the historic volatility of similar public companies. The risk-free rate of return reflects the weighted average

F-14


 
 

TABLE OF CONTENTS

MONSTER DIGITAL, INC. AND SUBSIDIARY
  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 —  STOCKHOLDERS’ EQUITY  – (continued)

interest rate offered for US treasury rates over the expected life of the warrants. The fair value of the stock price of the Company’s common stock is based upon the prior private placement offering completed by the Company.

Activity with respect to warrants in 2013 and 2014 is as follows:

     
  Number of
Warrants
  Weighted Avg.
Exercise Price
  Expiration
Year
Balance at December 31, 2012     1,148,000     $ 0.71       2016 – 2017  
Issued in 2013     402,005       1.00       2018  
Outstanding at December 31, 2013     1,550,005       0.79        
Issued in 2014     3,350,092       1.50       2017 – 2019  
Cancelled in 2014     (3,084,750 )       1.50       2017 – 2019  
Outstanding at December 31, 2014     1,815,347     $ 0.88       2017 – 2019  

In 2012, the Company’s Board of Directors approved an incentive compensation plan which allows for the granting of stock options, stock appreciation rights, awards of restricted stock and restricted stock units, stock bonuses and other cash and stock-based performance awards. A total of 1.5 million shares of common stock have been approved and reserved for issuance under the plan. As of December 31, 2014, no stock options or other awards have been granted under the plan.

NOTE 6 — RELATED PARTY TRANSACTIONS

Office and Warehouse Usage:    In 2013 and 2014, the Company occupied a portion of office and warehouse space from SDJ Partners, LLC, a limited liability company owned by Sirjang Tandon, Devinder Tandon, and Jawahar Tandon. Jawahar Tandon and Devinder Tandon are founders and Directors of SDJ Technologies, Inc., Jawahar Tandon is a Director of Tandon Digital, Inc. (Devinder Tandon is a former Director) and Jawahar Tandon serves as Chief Executive Officer of both entities. The Company leased the facilities on a month-to-month basis. Rent expense for the years ended December 31, 2013 and 2014 was $72,000 and $54,000, respectively. At December 31, 2014, the amount due to SDJ Partners, LLC was $42,000. In February 2015, the Company relocated to a facility that is leased from an unrelated party.

Administrative Support:    From the formation of SDJ Technologies, Inc. in 2007 through December 31, 2014, Tandon Enterprises, Inc., a related party, has provided administrative, accounting, and operational support to the Company. The Company reimburses Tandon Enterprises, Inc. based on the actual costs incurred. The fees for the years ended December 31, 2013 and 2014 totaled $248,000 and $172,000, respectively. Total unpaid administrative support fees were $172,000 at December 31, 2014.

Employment Agreement:   The Company has an Executive Employment Agreement with Jawahar Tandon (“Executive”) to serve as the Company’s Chief Executive Officer. The agreement expires May 30, 2015 and shall be renewed automatically for an additional (1) year effective June 1, 2015 and each anniversary date thereafter. The agreement can be terminated by either party with 60 days notice prior to May 30, 2015 or any subsequent period thereafter. The Company shall pay the Executive a base annual salary of $250,000, which may be increased at the discretion of the Company. The Executive will be entitled to an annual bonus of up to 30% of the base salary, and is allotted a monthly automobile and country club membership allowance totaling $3,500. Additionally, the Company is to pay 100% of the Executive’s healthcare and medical premiums. At December 31, 2014, there were no unpaid expenses under this agreement.

Related Party Sales:   Sales to and purchases from EMLinQ, LLC., an entity related through partial indirect common ownership, amounted to $110,000 for the year ended December 31, 2013. There were no sales to or purchases from this entity in 2014, and as of December 31, 2014, there was no amount owed by or to this entity.

F-15


 
 

TABLE OF CONTENTS

MONSTER DIGITAL, INC. AND SUBSIDIARY
  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 — RELATED PARTY TRANSACTIONS  – (continued)

Borrowings:   From time to time, the Company receives short-term, non-interest bearing loans from Tandon Enterprises, Inc. for the purpose of funding temporary working capital needs. During 2014, the net amount borrowed was approximately $469,000.

Due to (from) related parties consists of the following:

   
  December 31,
2013
  December 31,
2014
Tandon Enterprises, Inc.   $ 54,000     $ 632,000  
SDJ Partners LLC     9,000       88,000  
EMLinQ, LLC     101,000        
Shareholders/Officers     (3,000 )       (218,000 )  
Total   $ 161,000     $ 502,000  

NOTE 7 — INCOME TAXES

For the years ended December 31, 2013 and 2014, the income tax provision of $4,000 and $13,000, respectively, consists of state income taxes currently paid or payable.

The deferred tax asset is comprised of the following:

   
  2013   2014
Deferred tax assets
                 
Net operating losses   $ 2,429,000     $ 4,678,000  
Accrued warranty     18,000       77,000  
Other accrued expenses           1,224,000  
Total deferred tax assets     2,447,000       5,979,000  
Valuation Allowance     (2,447,000 )       (5,979,000 )  
Net deferred tax asset   $     $  

The ultimate realization of the deferred tax asset is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. As of December 31, 2014, the state and federal net operating loss carry forwards are approximately $11,659,000 and $11,639,000, respectively. Due to the uncertainty surrounding the realization of these deferred tax assets, the Company has recorded a 100% valuation allowance. Net operating loss carry forwards expire between the years 2029 and 2034. Tax years ended December 31, 2014, 2013 and 2012 are open and subject to audit.

The reconciliation of the U.S. statutory rate with the Company’s effective test rate is summarized as follows:

   
  2013   2014
     % of pre-tax Earnings   % of pre-tax Earnings
Federal tax     (34.0 )%       (34.0 )%  
State tax, net     (6.1 )       (6.1 )  
Non-deductible expenses     0.2       8.4  
Change in valuation allowance     42.8       31.9  
Miscellaneous     (2.8 )       (0.1 )  
       0.1 %       0.1 %  

Management is not aware of any uncertain tax positions and does not expect the total amount of recognized tax benefits to change significantly in the next twelve months.

F-16


 
 

TABLE OF CONTENTS

MONSTER DIGITAL, INC. AND SUBSIDIARY
  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 — CUSTOMER AND VENDOR CONCENTRATIONS

Customers :

Approximately 32%, 22%, and 12% of the Company’s net sales were made to three customers for the year ended December 31, 2013. At December 31, 2013, the amount included in outstanding accounts receivable related to these three customers was $464,000.

Approximately 30%, 22%, and 15% of the Company’s net sales were made to three customers for the year ended December 31, 2014. At December 31, 2014, the amount included in outstanding accounts receivable related to these three customers was approximately $3,100,000.

Vendors :

Approximately 88% of the Company’s purchases were provided by one vendor for the year ended December 31, 2013. At December 31, 2013, the amount in accounts payable related to this vendor was $27,000.

Approximately 80% of the Company’s purchases were provided by one vendor for the year ended December 31, 2014. At December 31, 2014, the amount in accounts payable related to this vendor was $36,000.

NOTE 9 — COMMITMENTS AND CONTINGENCIES

Royalty

The Company entered into the initial trademark license agreement with Monster, Inc., (formerly Monster Cable Products, Inc.) effective July 7, 2010. In 2012, the agreement was amended giving the Company exclusive rights to utilize the name “Monster Digital” on memory products for a period of 25 years (expires July 7, 2035) under the following payment schedule of royalties to Monster, Inc. set forth below. This license agreement contains various termination clauses that include (i) change in control, (ii) breach of contract and (iii) insolvency, among others. The Company is required to remit royalty payments to Monster, Inc. on or before the 30 th day following the end of each calendar quarter. At any time during the term of the agreement, a permanent license may be negotiated.

Upon the amendment of the agreement in 2012, the Company issued warrants to Monster, Inc. for the purchase of 250,000 shares of common stock. The warrants are classified within shareholders’ equity and have an exercise price of $2.00 per share. The fair value of the warrants of $100,368, which was recognized as an expense in 2012, was determined using the Black-Sholes option pricing model,

The royalty schedule became effective in August 2011 and was further amended in April 2012. As amended, royalties under this contract are as follows:

Years 1 (2012) and 2:  Royalties on all sales excluding sales to Monster, Inc. at a rate of four (4) percent, with no minimum.
Years 3 through 5:  Minimum royalty payments of $50,000 per quarter up to a maximum of four (4) percent of all sales excluding sales to Monster, Inc.
Years 6 through 10:  Minimum royalty payments of $125,000 per quarter up to a maximum of four (4) percent of all sales excluding sales to Monster, Inc.
Years 11 through 15:  Minimum royalty payments of $187,500 per quarter up to a maximum of four (4) percent of all sales excluding sales to Monster, Inc.
Years 16 through 25:  Minimum royalty payments of $250,000 per quarter up to a maximum of four (4) percent of all sales excluding sales to Monster, Inc.

Effective July 1, 2014, the royalty rate on certain products was reduced from 4% to 2%, for a period of 12 months based on a mutual understanding between the Company and the licensor.

F-17


 
 

TABLE OF CONTENTS

MONSTER DIGITAL, INC. AND SUBSIDIARY
  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 — COMMITMENTS AND CONTINGENCIES  – (continued)

For the years ended December 31, 2013 and 2014, royalty expense amounted to $153,000 and $576,000, of which $133,000 and $491,000, respectively, are included in accrued expenses in the accompanying consolidated balance sheets. The Company was not in compliance with the royalty remittance policy for each period presented in the accompanying consolidated financial statements. Royalty expense is included as a component of selling and marketing expenses in the accompanying consolidated statements of operations.

General legal matters

The Company is subject to certain legal proceedings and claims arising in connection with the normal course of its business. In the opinion of management, there are currently no claims that would have material adverse effect on its consolidated financial position, results of operations or cash flows.

NOTE 10 — SUBSEQUENT EVENTS

Debt issuance and conversion

In the first quarter of 2015 as a continuation of the debt offering initiated in 2014, the Company issued convertible notes payable and warrants totaling $1,645,000. Net of offering costs and expenses of $414,000, the Company received $1,232,000. Pursuant to an exchange offer made to the note holders, all of the newly issued debt and related warrants were converted to 2,355,708 shares of common stock.

Stock purchase rights offering

In April 2015, the Company initiated a common stock purchase rights offering to its existing shareholders. The offering consists of 1,605,934 units, with each unit consisting of 3 newly issued shares of common stock and two shares of common stock owned by the Company’s principal shareholder and chairman. Each unit is offered for $3, with all proceeds going to the Company. In April through August 2015, the Company closed on the sale of approximately 1,066,669 units (representing approximately 3,200,007 newly issued common shares) and has received net proceeds of approximately $2,713,000.

Property lease :

In January 2015, the Company entered into a three year operating lease agreement for office, warehouse and production facilities. The monthly lease rate of approximately $11,000 is subject to an annual cost escalation of 3%.

Business acquisition

In December 2014, the Company entered into a letter of intent to acquire a business located in India. In 2015, the parties entered to definitive agreement in which the Company would acquire all of the shares of stock of the Indian company, including all outstanding shares of preferred stock, for $4 million in cash and $6 million in shares of common stock, with the stipulation that the closing of the transaction would be a date concurrent with the Company’s initial public offering of common stock. The number of shares of common stock to be delivered would be determined by the offering price in the initial public offering. On September 30, 2015, the Company decided not to pursue the acquisition and terminated the agreement.

Stock option grants

In May 2015, the Company grated stock options to employees for a total of 1,055,000 shares. The options have an exercise price of $2.00 per share, expire ten years after the grant date, and were vested as to between 25% to 75% of the shares underlying each of the grants as of the grant date, with the remaining shares vesting between March 2016 and February 2019.

Customer payment agreement

In July 2015, the Company entered into an agreement with a customer under which the Company will pay the customer a total of $835,000 owed to the customer for promotional and other credits related to sales that occurred in 2014. The credits were accrued as contra-sales in 2014. Under the terms of the agreement, there is no interest and the Company will make 12 monthly payments of $65,000 beginning in August 2015, and one final payment of $55,000 in August 2016.

F-18


 
 

TABLE OF CONTENTS

MONSTER DIGITAL, INC. AND SUBSIDIARY
  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 — SUBSEQUENT EVENTS  – (continued)

Management review of subsequent events

Management has performed an analysis of the activities and transactions subsequent to December 31, 2014 to determine the need for any adjustments to and/or disclosure within the consolidated financial statements for the year ended December 31, 2014. This analysis has been performed through August 12, 2015, the date the consolidated financial statements were available to be issued.

Amended trademark license agreement

In August 2015, the Company entered into an amendment to a trademark license agreement with Monster, Inc. whereby Monster, Inc. granted the Company to use the name “Monster Digital, Inc.” as its corporate name. Further to this amendment, the Company issued Monster, Inc. 5,681,558 shares of its common stock and will pay Monster, Inc. a cash fee of $500,000 payable over a 12 month period.

On August 27, 2015, the name of the Company was changed to Monster Digital, Inc.

F-19


 
 

TABLE OF CONTENTS

MONSTER DIGITAL, INC.
AND SUBSIDIARY
 
CONSOLIDATED
FINANCIAL STATEMENTS
 
June 30, 2015

F-20


 
 

TABLE OF CONTENTS

CONTENTS

 
CONSOLIDATED FINANCIAL STATEMENTS
        
CONSOLIDATED BALANCE SHEETS     F-22  
CONSOLIDATED STATEMENTS OF OPERATIONS     F-23  
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ DEFICIT     F-24  
CONSOLIDATED STATEMENTS OF CASH FLOWS     F-25  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS     F-26  

F-21


 
 

TABLE OF CONTENTS

MONSTER DIGITAL, INC. AND SUBSIDIARY
 
CONSOLIDATED BALANCE SHEETS

   
  December 31,
2014
  June 30,
2015
          (unaudited)
ASSETS
                 
Current assets
                 
Cash   $ 97,000     $ 106,000  
Accounts receivable, net of allowances of $664,000 and $343,000, respectively     3,569,000       464,000  
Inventories     2,587,000       3,789,000  
Prepaid expenses and other     68,000       218,000  
Deferred IPO and debt issuance costs     48,000       95,000  
Total current assets     6,369,000       4,672,000  
Deposits and other assets     42,000       34,000  
Total assets   $ 6,411,000     $ 4,706,000  
LIABILITIES AND SHAREHOLDERS’ DEFICIT
                 
Current liabilities
                 
Line of credit   $ 5,051,000     $ 1,513,000  
Accounts payable     3,765,000       5,218,000  
Accrued expenses     2,046,000       1,580,000  
Due to related parties     502,000       323,000  
Notes payable     35,000       38,000  
Total current liabilities     11,399,000       8,672,000  
Commitments and contingencies
                 
Shareholders’ deficit
                 
Preferred stock; 10,000,000 shares authorized — none issued            
Common stock; $.0001 par value; 100,000,000 shares authorized; 42,192,456 and 47,664,715 shares issued and outstanding, respectively     4,000       5,000  
Additional paid-in capital     12,142,000       17,440,000  
Accumulated deficit     (17,134,000 )       (21,411,000 )  
Total shareholders’ deficit     (4,988,000 )       (3,966,000 )  
Total liabilities and shareholders’ deficit   $ 6,411,000     $ 4,706,000  

 
 
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

F-22


 
 

TABLE OF CONTENTS

MONSTER DIGITAL, INC. AND SUBSIDIARY
 
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

   
  Six Months Ended June 30,
     2014   2015
Revenue   $ 3,270,000     $ 2,718,000  
Cost of goods sold     2,540,000       2,457,000  
Gross Profit     730,000       261,000  
Operating expenses
                 
Research and development     190,000       246,000  
Selling and marketing     687,000       1,389,000  
General and administrative     949,000       1,375,000  
Total operating expenses     1,826,000       3,010,000  
Operating loss     (1,096,000 )       (2,749,000 )  
Other expense, net
                 
Interest and finance expense     256,000       630,000  
Debt conversion expense           898,000  
Total other expenses     256,000       1,528,000  
Loss before income taxes     (1,352,000 )       (4,277,000 )  
Provision for income taxes     8,000        
Net Loss   $ (1,360,000 )     $ (4,277,000 )  
Loss Per Share
                 
Basic and Diluted   $ (0.03 )     $ (0.10 )  
Number of Shares used in Computation
                 
Basic and Diluted     39,606,276       44,757,931  

 
 
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

F-23


 
 

TABLE OF CONTENTS

MONSTER DIGITAL, INC. AND SUBSIDIARY
 
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ DEFICIT
(unaudited)

         
  Common Stock   Additional
Paid-in
Capital
  Accumulated
Deficit
  Shareholders’
Deficit
  Shares   Amount
Balance December 31, 2014     42,192,456     $ 4,000     $ 12,142,000     $ (17,134,000 )     $ (4,988,000 )  
Stock purchase warrants issued with convertible debt                 335,000             335,000  
Exchange of debt for equity     2,385,832             2,272,000             2,272,000  
Cancellation of founders’ shares in debt for equity exchange     (30,125 )                          
Cancellation of founders’ shares in connection with rights offering     (2,077,699 )                          
Issuance of Common Stock     5,194,250       1,000       2,637,000             2,638,000  
Amortization of non-cash stock-based compensation                 54,000             54,000  
Net loss                       (4,277,000 )       (4,277,000 )  
Balance June 30, 2015     47,664,715     $ 5,000     $ 17,440,000     $ (21,411,000 )     $ (3,966,000 )  

 
 
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

F-24


 
 

TABLE OF CONTENTS

MONSTER DIGITAL, INC. AND SUBSIDIARY
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

   
  Six Months Ended June 30,
     2014   2015
Cash flows from operating activities
                 
Net loss   $ (1,360,000 )     $ (4,277,000 )  
Adjustments to reconcile net loss to net cash used in operating activities:
                 
Amortization of stock-based compensation           54,000  
Amortization of deferred debt issuance costs and debt discount     116,000       463,000  
Debt conversion expense           898,000  
Accrued interest on debt converted to equity           12,000  
Provision for doubtful accounts           107,000  
Changes in operating assets and liabilities:
                 
Accounts receivable     (588,000 )       2,998,000  
Inventories     (556,000 )       (1,202,000 )  
Prepaid expenses and other     137,000       (180,000 )  
Other assets           8,000  
Accounts payable     (232,000 )       1,453,000  
Accrued expenses     (103,000 )       (466,000 )  
Due to related party     (103,000 )       (28,000 )  
Net cash used in operating activities     (2,689,000 )       (160,000 )  
Cash flows from financing activities
                 
Private placement offering           3,116,000  
Private placement issuance costs           (479,000 )  
Short-term loan – related party, net     151,000       (151,000 )  
Proceeds from issuance of convertible debt and warrants     2,500,000       1,645,000  
Proceeds from credit facility     3,103,000       4,330,000  
Payments on credit facility     (2,703,000 )       (7,868,000 )  
Deferred financing costs     (324,000 )       (424,000 )  
Net cash provided by financing activities     2,727,000       169,000  
Net increase in cash     38,000       9,000  
Cash, beginning of the period     1,000       97,000  
Cash, end of the period   $ 39,000     $ 106,000  
Supplemental disclosure of cash flow information
                 
Cash paid during the year for:
                 
Interest   $ 35,000     $ 142,000  
Non-cash investing and financing activities:
                 
Deferred IPO costs   $     $ 91,000  
Exchange of debt for equity   $     $ 2,272,000  

 
 
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

F-25


 
 

TABLE OF CONTENTS

MONSTER DIGITAL, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — BUSINESS ACTIVITY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES

Organization :  Monster Digital, Inc. (“MDI”), a Delaware corporation (formed in November 2010), and its subsidiary, SDJ Technologies, Inc. (“SDJ”) (collectively referred to as the “Company”), is an importer of high-end memory storage products and flash memory to be marketed and sold under the Monster Digital brand name acquired under a long-term licensing agreement with Monster, Inc. Such memory storage products include high-end, rugged Solid State Drives (“SSDs”), Solid State Hybrid Drives (“SSHDs”) and removable flash memory secured digital cards (“SDs”). The Company sources its products from China, Taiwan and Hong Kong.

Basis of Presentation :  The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with the SEC’s instructions for interim financial information. They do not include all information and footnotes necessary for a fair presentation of financial position, operating results and cash flows in conformity with U.S. GAAP for complete financial statements. These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes for the year ended December 31, 2014 included elsewhere in the prospectus. All significant intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, all adjustments (consisting of normal recurring adjustments and accruals) considered necessary for a fair presentation of the operating results for the period presented have been included in the interim period. Operating results for the six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for other interim periods or the year ending December 31, 2015.

As permitted under U.S. GAAP, interim accounting for certain expenses, including income taxes, are based on full year forecasts. For interim financial reporting purposes, income taxes are recorded based upon estimated annual effective income tax rates taking into consideration discrete items occurring in a quarter.

Principles of Consolidation :  The consolidated financial statements include accounts of MDI and SDJ. All significant intercompany transactions have been eliminated in consolidation.

Use of Estimates :  The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities (including sales returns, price protection allowances, bad debts, inventory reserves, warranty reserves, and asset impairments), disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates.

Concentration of Cash :  The Company maintains its cash in bank accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. Management believes the Company is not exposed to any significant credit risk on its cash balances.

Accounts Receivable :  Accounts receivable are carried at original invoice amount less allowance for doubtful accounts. Management determines the allowance for doubtful accounts by identifying troubled accounts and by using historical experience applied to an aging of accounts. Accounts receivable are written off when deemed uncollectible. Recoveries of receivables previously written off are recorded when received. Accounts receivable are considered to be past due if any portion of the receivable balance is outstanding for more than 90 days past the customer’s granted terms. The Company does not charge interest on past due balances or require collateral on its accounts receivable. As of December 31, 2014 and June 30 2015, the allowance for doubtful accounts is approximately $664,000 and $343,000, respectively.

F-26


 
 

TABLE OF CONTENTS

MONSTER DIGITAL, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — BUSINESS ACTIVITY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES  – (continued)

Inventories :  Inventories are stated at the lower of cost or market, with cost being determined on the weighted average cost method of accounting. The Company purchases finished goods and materials to assemble kits in quantities that it anticipates will be fully used in the near term. Changes in operating strategy, customer demand, and fluctuations in market values can limit the Company’s ability to effectively utilize all products purchased and can result in finished goods with above-market carrying costs which may cause losses on sales to customers. The Company’s policy is to closely monitor inventory levels, obsolescence and lower market values compared to costs and, when necessary, reduce the carrying amount of its inventory to its market value. As of December 31, 2014 and June 30, 2015, inventory on hand was comprised primarily of finished goods ready for sale and packaging and supplies.

Advertising :  Advertising costs are charged to expense when incurred. Advertising costs, which include market development expenses, were $97,000 for the six months ended June 30, 2014. There were no advertising costs in the current period.

Fair Value of Financial Instruments :  Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on the assumptions that market participants would use in pricing an asset or liability. Fair value is based on a hierarchy of valuation techniques, which is determined on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s own market assumptions. These two types of inputs create a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1: Quoted prices for identical instruments in active markets.
Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3: Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

All stock purchase warrants (see Note 5) are valued under methods of fair value under the Level 3 tier, as described above.

The carrying amount for other financial instruments, which include cash, accounts receivable, accounts payable, and line of credit, approximate fair value based upon their short term nature and maturity.

Revenue Recognition :  Revenue is realized or realizable and earned when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) the sales price is fixed or determinable, (3) collectability is reasonably assured, and (4) products have been shipped and the customer has taken ownership and assumed the risk of loss.

Revenue is reduced by reserves for price protection, sales returns and allowances, and rebates. Our reserve estimates are based upon historical data as well as projections of sales, customer inventories and market conditions and current contractual sales terms. If the Company reduces the list price of its products, certain customers may receive a credit from the Company (i.e.: price protection). The Company estimates the impact of such pricing changes on a regular basis and adjusts its allowances accordingly. Amounts charged to operations for price protection are calculated based on actual price changes on individual products and customer inventory levels. The reserve is then reduced by actual credits given to these customers at the time the credits are issued. We calculate the allowance for doubtful accounts and provision for sales returns and rebates based on management’s estimate of the amount expected to be uncollectible or returned on specific accounts. We provide for future returns, price protection and rebates at the time the products are sold. We

F-27


 
 

TABLE OF CONTENTS

MONSTER DIGITAL, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — BUSINESS ACTIVITY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES  – (continued)

calculate an estimate of future returns of product by analyzing units shipped, units returned and point of sale data to ascertain consumer purchases and inventory remaining with retail to establish anticipated returns. Price protection is calculated on a product by product basis. The objective of price protection is to mitigate returns by providing retailers with credits to ensure maximum consumer sales. Price protection is granted to retailers after they have presented the company an affidavit of existing inventory.

The Company also offers market development credits (“MDF credits”) to certain of its customers. These credits are also charged against revenue. Distributors and retailers take full ownership of their product upon receipt and sales are fully recognized at that time.

Shipping and Handling Costs :  Historically, the Company has not charged its customers for shipping and handling costs, which is a component of marketing and selling expenses. These costs totaled approximately $37,000 and $94,000 in the six months ended June 30, 2014 and 2015, respectively.

Income Taxes :  Deferred tax assets and liabilities are determined based on the temporary differences between the financial reporting and tax basis of assets and liabilities and net operating loss carryforwards, applying enacted statutory tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is recorded when it is more likely than not that some or all of the deferred tax assets will not be realized.

The Company uses a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more likely than not to be realized upon settlement. As of December 31, 2014 and June 30, 2015, there are no known uncertain tax positions.

The Company policy is to classify the liability for unrecognized tax benefits as current to the extent that it is more likely than not to be realized upon settlement and to the extent that the Company anticipates payment (or receipt) of cash within one year. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in the tax provision.

Product Warranty :  The Company’s memory products are sold under various limited warranty arrangements ranging from three years to five years on solid state drives and a limited lifetime warranty on all other products. Company policy is to establish reserves for estimated product warranty costs in the period when the related revenue is recognized. The Company has the right to return defective products to the manufacturer. The warranty reserve is included in accrued expenses in the accompanying consolidated balance sheets.

Research and Development :  The Company incurs costs to improve the appeal and functionality of its products. Research and development costs are charged to expense when incurred.

Earnings (Loss) per Share :  Basic earnings (loss) per share is calculated by dividing net earnings (loss) (all of which is attributable to common stockholders) by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share is calculated similarly but includes potential dilution from the exercise of common stock warrants and conversion of debt to equity, except when the effect would be anti-dilutive. Earnings (loss) per share are computed using the “treasury stock method.” Common stock purchase warrants, convertible notes payable and similar potentially dilutive instruments are excluded from the computation of diluted loss per share when their effect is anti-dilutive. For the periods ended June 30, 2014 and 2015, all such instruments were anti-dilutive (see Notes 3 and 5).

Recently issued accounting pronouncements  — In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and

F-28


 
 

TABLE OF CONTENTS

MONSTER DIGITAL, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — BUSINESS ACTIVITY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES  – (continued)

Disclosures of Disposals of Components of an Entity . Under ASU 2014-08, only disposals that represent a strategic shift that has (or will have) a major effect on the entity’s results and operations would qualify as discontinued operations, which could include a disposal of a major geographical area, a major line of business, a major equity method investment, or other major parts of an entity. ASU 2014-08 also expands the disclosure requirements for disposals of operations to include more information about assets, liabilities, income and expenses and requires entities to disclose information about disposals of individually significant components. ASU 2014-08 is effective in the first quarter of 2015, with early adoption permitted. ASU 2014-08 could impact our consolidated financial results in the event of a transaction as described above.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective in the first quarter of 2018, with early adoption not permitted and requires either a retrospective or a modified retrospective approach to adoption. We have not yet selected a transition method and are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements — Going Concern , which requires that management of an entity should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued or available to be issued. This update will become effective beginning January 1, 2017, with early adoption permitted. The provisions of this standard are not expected to significantly impact the Company.

Other pronouncements issued by the FASB or other authoritative accounting standards groups with future effective dates are either not applicable or not significant to the consolidated financial statements of the Company.

NOTE 2 — GOING CONCERN

As of June 30, 2015, the Company has negative working capital of approximately $4.0 million, has a capital deficit of approximately $4.0 million, and has incurred cumulative net losses from its inception of approximately $21.0 million. These circumstances raise substantial doubt as to the Company’s ability to continue as a going concern. In response to this uncertainty, Management has taken certain measures to date in 2015 and has plans for the remainder of 2015 and beyond, with the objective of alleviating this concern. They include the following:

Subsequent to June 30, 2015, the Company raised approximately $331,000, net of offering costs, upon the issuance of common stock purchase rights offering.
In order to meet customers’ needs for consumer products, the Company is continuing to develop new products to complement existing products and expand overall product offerings, with the objective of increasing revenue and gross profit percentages. The Company expects to offer up to 5 new products (or significant enhancements to existing products) in 2015. With an increase in revenue, the Company expects to be able to negotiate more favorable pricing terms with its foreign vendors as the volume of purchases increases, which will improve overall gross profit margins.

While the Company believes it will be successful in obtaining the necessary financing to fund its operations, there are no assurances that such additional funding will be achieved and that it will succeed in its future

F-29


 
 

TABLE OF CONTENTS

MONSTER DIGITAL, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 — GOING CONCERN  – (continued)

operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts of liabilities that might be necessary should the Company be unable to continue in existence.

NOTE 3 — DEBT AND EQUITY FINANCING

Credit Facility

In November 2013, the Company entered into a 12 month, $2 million accounts receivable based credit facility with Marquette Commercial Finance. In September 2014, the available credit was increased to $8 million. The facility provided for a maximum advance rate of 80% against eligible receivables. The credit facility carries a per-annum interest rate of a base rate plus 3.5% (subject to a minimum of 6.75%), with the base rate being the greater of the prime lending rate or LIBOR plus 2.0%. In addition, there were fees for managing the facility. At December 31, 2014, the total amount outstanding under the credit facility was $5,006,000. Outstanding borrowings under the facility were collateralized by substantially all assets of the Company.

In March 2015, Marquette Commercial Finance notified the Company of its intent to terminate the contract and that it will continue to finance sales transactions with specific customers until such time that the Company is able to establish a credit facility with a different finance company.

In June 2015, the Company secured an accounts receivable financing facility with Bay View Funding. The new contract provides for maximum funding of $4 million and a factoring fee of 1.35% for the first 30 days and .45% for each 10-day period thereafter that the financed receivable remains outstanding. Upon the execution of this contract, the balance owed to Marquette was repaid and that contract was terminated. The total amount outstanding under this Facility as of June 30, 2015 was $1,513,000. There are no covenants associated with this facility.

Purchase Order Purchase Agreement

In April 2014, the Company entered into a purchase order purchase agreement with Brookridge Funding (Brookridge). Under the agreement, the Company may present and assign to Brookridge customer purchase orders. Upon acceptance, Brookridge receives right, title and interest in the purchase order and all funds that may come due as a result of the purchase order. Brookridge purchases accepted purchase orders at a price not in excess of the cost of the applicable inventory required to fulfill the purchase order. Fees accrue at a rate of 2% of the funded amount for the first 20 days and an additional 1% for each 10 day period that the amount remains unpaid thereafter. As of December 31, 2014, the amount due Brookridge under this agreement was $45,000, which was included in the caption “line of credit” on the accompanying consolidated balance sheet. No amount was due to Brookridge as of June 30, 2015. There are no covenants associated with this facility.

Convertible Debt

In March 2014, the Company initiated a private placement offering to issue convertible promissory Notes. Between March and December 2014, a total of $3,465,500 of convertible notes were issued. Direct costs incurred in connection with the offering totaled $640,000 cash plus warrants issued to the placement agent with an estimated value of $63,000. The Notes are due 12 months following their issuance and bear interest at 6% per annum, payable in shares of common stock at the conversion rate of the Note.

For each $1,000 principal amount of Notes, the holder received 667 Note warrants and 233 Vesting warrants, both of which are exercisable at $1.50 per share. Unexercised Note warrants expire 5 years following their issuance while the Vesting warrants expire 3 years following the vesting date, which ended on April 1, 2015.

In conjunction with the convertible debt offering, the Company issued a total of 3,118,950 stock purchase warrants to Note holders and 212,572 stock purchase warrants to the placement agent. The Company accounted for these warrants in accordance with FASB ASC 470-20, Debt with Conversion and Other Options . The Company computed the value of the warrants using the Black-Scholes option pricing model (see

F-30


 
 

TABLE OF CONTENTS

MONSTER DIGITAL, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 — DEBT AND EQUITY FINANCING  – (continued)

Note 5) and recorded the fair value of warrants by allocating a portion of the proceeds to note holders’ warrants, based on their relative fair value, as a reduction to the carrying amount of the convertible debt. The discount recorded in connection with the warrant valuation is amortized over the term of the convertible notes and is recognized as non-cash interest expense.

During the six months ended June 30, 2014, the Company recorded a discount of $31,907 for the calculated fair value of the warrants issued in conjunction with $119,500 of convertible notes issued during the period. Also in connection with the issuance of convertible notes during that period, the Company incurred debt issuance costs in the form of cash totaling $17,000. The debt discount and deferred debt issuance costs are amortized over the term of the convertible notes and is recognized as a non-cash interest expense using the effective interest method.

Debt to Equity Exchange Offer

In December 2014, the Company extended an offer to its convertible Note holders for the exchange of convertible Notes, accrued interest and common stock purchase warrants into common stock. In the offer, the conversion rate on the principal amount of Notes was reduced from $1.50 per share to $1.00 per share, with accrued interest being cancelled. Furthermore, in exchange for the cancellation of all warrants, the Note holders received 1 share of common stock for every 2 shares that would have been issued upon exercise of the warrants.

As further inducement to the offer, for the new shares issued in connection with the exchange offer, the Company’s principal shareholder agreed to put back to the Company an equal number of shares owned by him (to a maximum of 5 million shares) and have such shares cancelled.

Through December 31, 2014, a total of $3,427,500 in convertible Notes had been converted to equity pursuant to the exchange offer.

For the six months ended June 30, 2015, the Company continued its private offering of convertible notes concurrent with a related offer to exchange the notes for shares of common stock on the terms indicated above. During the period, gross proceeds of $1,645,000 ($1,231,000 net of offering costs) were raised in the offering from the issuance of convertible notes payable. In March 2015, these notes were converted to common stock pursuant to the exchange offer, resulting in an inducement charge of $898,000. As a result of these transactions, an additional 2,355,708 common shares were issued during the period.

As of December 31, 2014 and June 30, 2015, a total of $35,000 and $38,000, respectively in principal of convertible notes payable remain outstanding. These notes matured in the second quarter of 2015.

F-31


 
 

TABLE OF CONTENTS

MONSTER DIGITAL, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 — ACCRUED EXPENSES

Accrued expenses consist of the following:

   
  December 31,
2014
  June 30,
2015
Royalties   $ 488,000     $ 156,000  
Market development credits     497,000       361,000  
Others     1,061,000       1,063,000  
Total   $ 2,046,000     $ 1,580,000  

NOTE 5 — STOCKHOLDERS’ EQUITY

Common Stock Purchase Warrants :  From 2011 through June 30, 2015, the Company issued common stock purchase warrants in connection with the initial formation of the Company, the execution of a license agreement, and the issuance of convertible notes payable. All warrants have been valued on the date of their issuance using the Black-Sholes option pricing model using various assumptions regarding stock price volatility, risk-free interest rates, expected dividend rates, and expected term of the contract. Through June 30, 2015, none of the warrants have been exercised, and for the year ended December 31, 2014 and six months ended June 30, 2015, 3,084,750 and 1,480,342 warrants, respectively, have been canceled in connection with the exchange offer described above (see Note 3). As of December 31, 2014 and June 30, 2015, warrants to purchase 1,815,347 and 1,873,373 shares of common stock, respectively, are outstanding. Unexercised warrants will expire from 2016 to 2019.

Common stock purchase rights offering :  In April 2015, the Company initiated a common stock purchase rights offering to its existing shareholders. The offering consists of 1,605,934 units, with each unit consisting of three newly issued shares of common stock and two shares of common stock owned by the Company’s principal shareholder and chairman. Each unit is offered for $3, with all proceeds going to the Company. In April through June, 2015, the Company closed on the sale of approximately 1,038,850 units (representing 3,116,550 newly issued common shares) and has received net proceeds of approximately $2,638,000.

Restricted Shares :  Subsequent to June 30, 2015, the Company issued 1,250,000 shares of restricted common stock to the Company’s Chairman of the Board pursuant to a consulting agreement. The consulting agreement was effective in May 2015 and $41,000 of compensation expense was recognized in June 2015 related to the stock issuance.

NOTE 6 — STOCK OPTIONS

In 2012, the Company’s Board of Directors approved the 2012 Omnibus Incentive Plan (the “Plan”) which allows for the granting of stock options, stock appreciation rights, awards of restricted stock and restricted stock units, stock bonuses and other cash and stock-based performance awards. A total of 1.5 million shares of common stock have been approved and reserved for issuance under the Plan. As of June 30, 2015, 1,055,000 had been granted under the Plan. There were 1,500,000 and 445,000 options available for grant at December 31, 2014 and June 30, 2015, respectively.

The Company follows the provision of the ASC Topic 718, Compensations – Stock Compensation which requires the measurement and recognition of compensation expense for all stock-based payment awards made to employees and non-employee directors, including employee stock options. Stock compensation expense based on the grant date fair value estimated in accordance with the provisions of ASC 718 is generally recognized as an expense over the requisite service period.

No options were granted in 2014.

F-32


 
 

TABLE OF CONTENTS

MONSTER DIGITAL, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 — STOCK OPTIONS  – (continued)

For the six months ended June 30, 2015, the following stock option grants were made:

       
Option Date   Options
Granted
  Exercise
Price
  Estimated
Fair
Value of
Underlying
Stock
  Intrinsic
Value
May 2015     1,055,000     $ 2.00     $ 0.39       None  

The Company’s Board of Directors granted options for 1,055,000 shares of common stock to certain employees on May 8, 2015. The option prices were determined based on such factors as recent equity transactions and other factors as deemed necessary and relevant in the circumstances. The exercise prices for options granted were set by the Company’s board of directors at a premium over fair market value of its commons stock at the time the grants were authorized.

In regards to the valuation of the Company’s common stock, the Board of Directors engaged an independent third party valuation of the Company. Factors included in the valuation included the Company’s present value of future cash flows, its capital structure, valuation of comparable companies, its existing licensing agreements and the growth prospects for its product line. These factors were incorporated into an income approach and a market approach in order to derive an overall valuation of the Company’s common stock of $0.39 per share at May 8, 2015.

The Company utilizes the Black-Scholes valuation method to value stock options and recognizes compensation expense over the vesting period. The expected life represents the period that the Company’s stock-based compensation awards are expected to be outstanding. The Company uses a simplified method provided in Securities and Exchange Commission release Staff Accounting Bulletin No. 110 which averages an awards weighted average vesting period and contractual term for “plain vanilla” share options. The expected volatility was estimated by analyzing the historic volatility of similar public companies. No dividend payouts were assumed as the Company has not historically paid, and is not anticipating to pay, dividends in the foreseeable future. The risk-free rate of return reflects the weighted average interest rate offered for US treasury rates over the expected life of the options.

A summary of significant assumptions used to estimate the fair value of the stock options granted in the six months ended June 30, 2015 are as follows:

 
Weighted average fair value of options granted     $0.03  
Expected term (years)     6.0 to 6.25  
Risk-free interest rate     1.89%  
Volatility     45.4%  
Dividend yield     None  

The Company recorded non-cash stock-based compensation of $13,000 during the six months ended June 30, 2015. There was no stock-based compensation recognized in 2014. An additional $18,000 of stock-based compensation remains to be amortized over 38 months.

F-33


 
 

TABLE OF CONTENTS

MONSTER DIGITAL, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 — STOCK OPTIONS  – (continued)

A summary of option activity for the Plan as of June 30, 2015 and changes during the six months then ended are represented as follows:

       
  Number of
Warrants
  Weighted
Avg.
Exercise
Price
  Weighted
Average
Remaining
Contract
Term (Years)
  Aggregate
Intrinsic
Value
Options outstanding January 1, 2015         $           $  
Granted     1,055,000       2.00       10        
Forfeited                        
Outstanding at June 30, 2015     1,055,000     $ 2.00       10     $  

NOTE 7 — RELATED PARTY TRANSACTIONS

Office and Warehouse Usage :  In 2014, the Company occupied a portion of office and warehouse space from SDJ Partners, LLC, a limited liability company owned by Sirjang Tandon, Devinder Tandon, and Jawahar Tandon. Jawahar Tandon and Devinder Tandon are founders and Directors of SDJ Technologies, Inc. and both are Directors of Tandon Digital, Inc. Jawahar Tandon serves as Chief Executive Officer of both entities. The Company leased the facilities on a month-to-month basis. Rent expense for the six months ended June 30, 2014 was approximately $24,000. In 2015, the Company relocated to a facility that is leased from an unrelated party and therefore discontinued its leasing arrangement with SDJ Partners, LLC.

Administrative Support :  Tandon Enterprises, Inc., a related party, provides administrative, accounting, and operational support to the Company. The Company reimburses Tandon Enterprises, Inc. based on the actual costs incurred. The fees for the six months ended June 30, 2014 and 2015 totaled $53,000 and $0, respectively. Total unpaid administrative support fees were $172,000 at December 31, 2014 and $0 at June 30, 2015.

Borrowings :  From time to time, the Company receives short-term, non-interest bearing loans from Tandon Enterprises, Inc. for the purpose of funding temporary working capital needs. For the six months ended June 30, 2014, the Company borrowed $151,000, net of repayments, and repaid net $151,000 during the six months ended June 30, 2015.

Employment Agreement :  The Company has an Executive Employment Agreement with Jawahar Tandon (“Executive”) to serve as the Company’s Chief Executive Officer. The agreement expired May 30, 2015 and was renewed automatically for an additional (1) year effective June 1, 2015 and shall be renewed each anniversary date thereafter. The agreement can be terminated by either party with 60 days’ notice prior to May 30, 2015 or any subsequent period thereafter. The Company shall pay the Executive a base annual salary of $250,000, which may be increased at the discretion of the Company. The Executive will be entitled to an annual bonus of up to 30% of the base salary, and is allotted a monthly automobile and country club membership allowance totaling $3,500. Additionally, the Company is to pay 100% of the Executive’s healthcare and medical premiums. At December 31, 2014 and June 30, 2015, there were no unpaid expenses under this agreement.

Due to (from) related parties consists of the following at December 31, 2014 and June 30, 2015:

   
  December 31,
2014
  June 30,
2015
Tandon Enterprises, Inc.   $ 632,000     $ 559,000  
SDJ Partners LLC     88,000       88,000  
Shareholders/Officers     (218,000 )       (324,000 )  
Total   $ 502,000     $ 323,000  

F-34


 
 

TABLE OF CONTENTS

MONSTER DIGITAL, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 — INCOME TAXES

For the six months ended June 30, 2014, the income tax provision consists of state income taxes currently paid or payable. As of December 31, 2014 and June 30, 2015, deferred tax assets have been fully reserved.

The ultimate realization of the deferred tax asset is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. Due to the uncertainty surrounding the realization of these deferred tax assets, the Company has recorded a 100% valuation allowance. Net operating loss carry forwards expire between the years 2029 and 2034. Tax years ended December 31, 2014, 2013 and 2012 are open and subject to audit.

The effective income tax benefit rate as a percentage of pre-tax loss differs from the expected combined federal and state income tax rate of approximately 40.1% as a result of the full valuation reserve applied to deferred tax assets.

Management is not aware of any uncertain tax positions and does not expect the total amount of recognized tax benefits to change significantly in the next twelve months.

NOTE 9 — CUSTOMER AND VENDOR CONCENTRATIONS

The majority of net sales are typically concentrated within relatively few customers. During 2014, approximately 67% of the Company’s sales were made to three customers which individually accounted for over 10% of total sales. At December 31, 2014, the amount included in outstanding accounts receivable related to these three customers was approximately $3.1 million. For the six months ended June 30, 2015, sales to two customers individually exceeded 10% and collectively accounted for approximately 59% of total sales. Accounts receivable from these customers at June 30, 2015 totaled $342,000.

The Company has historically purchased between 80-90% of its inventory from a single vendor in Asia. However, management does not believe that the Company is exposed to significant risk as a result of this inventory supply concentration. As of December 31, 2014, the amount of accounts payable related to this vendor was $36,000. There was no amount due as of June 30, 2015.

NOTE 10 — COMMITMENTS AND CONTINGENCIES

Royalty

The Company entered into the initial trademark license agreement with Monster, Inc., (formerly Monster Cable Products, Inc.) effective July 7, 2010. In 2012, the agreement was amended giving the Company exclusive rights to utilize the name “Monster Digital” on memory products for a period of 25 years (expires July 7, 2035) under the following payment schedule of royalties to Monster, Inc. This license agreement contains various termination clauses that include (i) change in control, (ii) breach of contract and (iii) insolvency, among others. The Company is required to remit royalty payments to Monster, Inc. on or before the 30 th day following the end of each calendar quarter. At any time during the term of the agreement, a permanent license may be negotiated.

The royalty schedule became effective in August 2011 and was further amended in April 2012. As amended, royalties under this contract are as follows:

Years 1 (2012) and 2:  Royalties on all sales excluding sales to Monster, Inc. at a rate of four (4) percent, with no minimum.
Years 3 through 5:  Minimum royalty payments of $50,000 per quarter up to a maximum of four (4) percent of all sales excluding sales to Monster, Inc.
Years 6 through 10:  Minimum royalty payments of $125,000 per quarter up to a maximum of four (4) percent of all sales excluding sales to Monster, Inc.

F-35


 
 

TABLE OF CONTENTS

MONSTER DIGITAL, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 — COMMITMENTS AND CONTINGENCIES  – (continued)

Years 11 through 15:  Minimum royalty payments of $187,500 per quarter up to a maximum of four (4) percent of all sales excluding sales to Monster, Inc.
Years 16 through 25:  Minimum royalty payments of $250,000 per quarter up to a maximum of four (4) percent of all sales excluding sales to Monster, Inc.

Effective July 1, 2014, the royalty rate on certain products was reduced from 4% to 2% for a period of 12 months, based on a mutual understanding between the Company and the licensor.

For the six months ended June 30, 2014 and 2015, royalty expense amounted to approximately $109,000 and $68,000, respectively which is included as a component of selling and marketing expenses in the accompanying consolidated statements of operations (see also Note 4). The Company was not in compliance with the royalty remittance policy for each period presented in the accompanying consolidated financial statements.

General legal matter

The Company is subject to certain legal proceedings and claims arising in connection with the normal course of its business. In the opinion of management, there are currently no claims that would have a material adverse effect on its consolidated financial position, results of operations or cash flows.

NOTE 11 — SUBSEQUENT EVENTS

Common stock purchase rights offering

In April 2015, the Company initiated a common stock purchase rights offering to its existing shareholders. The offering consists of 1,605,934 units, with each unit consisting of 3 newly issued shares of common stock and two shares of common stock owned by the Company’s principal shareholder and chief executive officer. Each unit is offered for $3, with all proceeds going to the Company. In July and August 2015, the Company closed on the sale of approximately 131,414 units (representing 394,242 newly issued common shares) and has received net proceeds of approximately $331,000.

Customer payment agreement

In July 2015, the Company entered into an agreement with a customer under which the Company will pay the customer a total of $835,000 owed to the customer for promotional and other credits related to sales that occurred in 2014. The credits were accrued as contra-sales in 2014. Under the terms of the agreement, there is no interest and the Company will make 12 monthly payments of $65,000 beginning in August 2015, and one final payment of $65,000 in August 2016.

Promissory notes

In October 2015, the Company issued $1.96 million of promissory notes; the notes are due and payable at the earlier of October 2016 or the closing date of the Company’s initial public offering, bear interest at the rate of 15% per annum and have a loan origination fee of $.225 for each dollar loaned. All principal, fees and interest are payable on the due date.

Management review of subsequent events

Management has performed an analysis of the activities and transactions subsequent to June 30, 2015 to determine the need for any adjustments to and/or disclosure within the consolidated financial statements. This analysis has been performed through October 30, 2015, the date the consolidated financial statements were available to be issued.

F-36


 
 

TABLE OF CONTENTS

  

[GRAPHIC MISSING]


 
 

TABLE OF CONTENTS

  

  

 

 
  
  

     Shares
Common Stock

 
  
  
  
  
  

[GRAPHIC MISSING]

 
  
  
  
  



 

PROSPECTUS



 

  
  
  

Joint Book-Running Managers

 
Joseph Gunnar & Co.   Axiom Capital Management, Inc.

 
  
 
  
 

Through and including            , 2016 (the 25 th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.
  
  
  

 

 


 
 

TABLE OF CONTENTS

PART II Information Not Required in Prospectus

Item 13. Other Expenses of Issuance and Distribution

The following table sets forth the costs and expenses, other than the underwriting discounts and commissions, payable in connection with the sale and distribution of the securities being registered. All amounts are estimated except the SEC registration fee, the FINRA filing fee and the Nasdaq listing fee. Except as otherwise noted, all the expenses below will be paid by us.

 
SEC registration fee   $     *  
FINRA filing fee    
Nasdaq initial listing fee    
Legal fees and expenses    
Accounting fees and expenses    
Printing and engraving expenses    
Transfer agent and registrar fees and expenses    
Miscellaneous fees and expenses         *  
Total   $     *  

* To be completed by amendment.

Item 14. Indemnification of Directors and Officers

Section 145 of the Delaware General Corporation Law authorizes a court to award, or a corporation’s board of directors to grant, indemnity to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities, including reimbursement for expenses incurred, arising under the Securities Act of 1933, as amended. Our amended and restated certificate of incorporation to be in effect prior to the closing of this offering provides for indemnification of our directors, officers, employees and other agents to the maximum extent permitted by the Delaware General Corporation Law, and our amended and restated bylaws to be in effect prior to the closing of this offering provide for indemnification of our directors, officers, employees and other agents to the maximum extent permitted by the Delaware General Corporation Law.

We have entered into indemnification agreements with our directors and executive officers, whereby we have agreed to indemnify our directors and executive officers to the fullest extent permitted by law, including indemnification against expenses and liabilities incurred in legal proceedings to which the director or executive officer was, or is threatened to be made, a party by reason of the fact that such director or executive officer is or was our director, officer, employee or agent, provided that such director or executive officer acted in good faith and in a manner that the director or executive officer reasonably believed to be in, or not opposed to, the our best interest. At present, there is no pending litigation or proceeding involving any of our directors or executive officers regarding which indemnification is sought, nor are we aware of any threatened litigation that may result in claims for indemnification.

We maintain insurance policies that indemnify our directors and officers against various liabilities arising under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, that might be incurred by any director or officer in his capacity as such.

The underwriters are obligated, under certain circumstances, pursuant to the underwriting agreement to be filed as Exhibit 1.1 hereto, to indemnify us, our officers and our directors against liabilities under the Securities Act of 1933, as amended.

Item 15. Recent Sales of Unregistered Securities.

The following sets forth information regarding all unregistered securities sold since the inception of the registrant in:

In August 2012, SDJ, Inc., the predecessor of the registrant, became a wholly-owned subsidiary of the registrant further to a share exchange agreement. In connection with this reorganization, 100% of the issued

II-1


 
 

TABLE OF CONTENTS

and outstanding securities of SDJ were exchanged for securities of the registrant. An aggregate of 33,192,400 shares of common stock was issued to the shareholders of SDJ, Inc. (7 persons). The registrant relied upon Rule 506 of Regulation D with respect to the issuant; all issuees were accredited investors.

In August 2012, the registrant issued Tandon Enterprises, Inc. an aggregate of 1,000,000 shares of common stock further to a license and sublicense agreement. The registrant relied upon Rule 506 of Regulation D with respect to the issuance; the issuee was an accredited investor.

In August 2012, the registrant issued Noel Lee, the Chief Executive Officer of Monster, Inc., a five year warrant to acquire 250,000 shares of common stock at a per share exercise price of $2.00. The registrant relied upon Rule 506 of Regulation D with respect to the issuance; the issuee was an accredited investor.

Between May 2012 and June 2013, the registrant issued an aggregate of 7,795,400 shares of common stock to a total of 94 investors at a per share price of $1.00. In connection with the offering, the registrant issued Westpark Capital LLC five year placement agent warrants to purchase up to an aggregate of 706,143 shares of common stock at a per share exercise price of $1.00. The registrant relied upon Rule 506 of Regulation D with respect to the issuant; all issuees were accredited investors.

Between April 2014 and March 2015 the registrant issued an aggregate of $5,110,224 of 6% promissory notes convertible into shares of the registrant’s common stock at a conversion price of $1.50, plus five year warrants to purchase up to 4,594,699 shares of common stock at a per share exercise price of $1.50. The notes and warrants were issued to an aggregate of 80 investors. In connection with the offering, the registrant issued WestPark capital LLC five year placement agent warrants to purchase up to an aggregate of 432,469 shares of common stock at a per share exercise price of $1.50. The registrant relied upon Rule 506 of Regulation D with respect to the issuant; all issuees were accredited investors.

Between December 2014 and March 2015 the registrant effected an exchange offer whereby all holders of convertible promissory note and warrants referenced above were offered the ability to exchange such securities for shares of the common stock of the registrant as follows: (i) for the settlement of all outstanding balances (principal and accrued interest) under each note at the rate of one share of common stock of the registrant for each $1.00 in outstanding principal amount of the note and (ii) for the cancellation of all warrants, one share of common stock for each two shares of common stock issuable upon exercise of the warrants. Further to the exchange offer, Jawahar Tandon, the registrant’s Chief Executive Officer, agreed that for each new share issued by the registrant further to the exchange offer up to 5,000,000 shares, he would cancel one share of common stock of the registrant beneficially held by him. An aggregate of 7,145,000 shares of common stock were issued by the registrant pursuant to the exchange offer and the J Tandon Irrevocable Trust cancelled 5,000,000 shares of common stock. The registrant relied upon Rule 506 of Regulation D with respect to the issuant; all issuees were accredited investors.

In December 2014, we issued 850,000 shares of our common stock to a non-executive employee of WestPark Capital for assistance in effecting an exchange offer of the aforementioned notes and warrants for shares of our common stock which we effected between December 2014 and March 2015. The registrant relied upon Rule 506 of Regulation D with respect to the issuance; the issuee was an accredited investor.

Between April and August 2015 the registrant effected a rights offering to existing shareholders of the registrant and to new investors. Further to the rights offering, for every $3.00 invested, the investor would receive three newly issued shares of the registrant and Jawahar Tandon, the registrant’s Chief Executive Officer, would transfer two shares of common stock beneficially held by him to the investor. For the sake of expediency, the registrant agreed to issue all shares to investors in the rights offering and Mr. Tandon would cancel those shares he would otherwise have had to transfer further to the rights offering. An aggregate of 5,333,346 shares of common stock were issued by the registrant to 85 investors, 2,133,338 shares of which represented shares which would have otherwise been transferred by Mr. Tandon and which were simultaneously cancelled by the J Tandon Irrevocable Family Trust and J Tandon Irrevocable Partnership Trust. The registrant relied upon Rule 506 of Regulation D with respect to the issuant; all issuees were accredited investors.

II-2


 
 

TABLE OF CONTENTS

In May 2015 the registrant issued David H. Clarke, the registrant’s Executive Chairman of the Board, an aggregate of 1,250,000 shares of common stock further to a consulting agreement. The registrant relied upon Rule 506 of Regulation D with respect to the issuance; the issuee was an accredited investor.

In May 2015 the registrant issued an aggregate of 1,055,000 stock options to 12 employees at a per share exercise price of $2.00. The registrant relied upon Rule 701 with respect to the issuance.

Further to the private placement of common stock effected by the registrant between May 2012 and June 2013, the J Tandon Irrevocable Family Trust agreed to transfer one share beneficially held by it for each five shares purchased by investors further to the private placement if the data memory division of Tandon Enterprises, Inc. was not transferred to the registrant. Since said division was not transferred, the J Tandon Irrevocable Family Trust was obligated to transfer an aggregate of 1,559,080 shares of common stock beneficially held by it to investors in the private placement. For the sake of expediency, the registrant agreed to issue all such shares to investors in the private placement and the J Tandon Irrevocable Family Trust cancelled an identical number of shares, such shares issued in June 2015.

In August 2015, further to an amended trademark license agreement with Monster, Inc. further to which the registrant was granted the right to use the name Monster Digitial, Inc. as its corporate name, the registrant issued Monster, Inc. an aggregate of 5,681,558 shares of common stock. The registrant relied upon Rule 506 of Regulation D with respect to the issuance; the issuee was an accredited investor.

In August 2015, the registrant issued Noel Lee a warrant to purchase up to 2,840,779 shares of common stock at a per share exercise price of $1.00 further to an advisory board agreement. The registrant relied upon Rule 506 of Regulation D with respect to the issuance; the issuee was an accredited investor.

Pursuant to the registrants decision to cancel its proposed acquisition of Syrma Technologies Pvt. Ltd., in September 2015 Jawahar Tandon, the registrant’s Chief Executive Officer, and Devinder Tandon, one of the registrant’s significant stockholders and a former director, offered in the aggregate to each stockholder who purchased shares of the registrant for cash the opportunity to receive one additional share from Mssrs. Tandon’s beneficial holdings for each six shares purchased from the registrant by such stockholder. A total of 21,754,572 shares were purchased by stockholders for cash; an aggregate of 3,625,762 shares from the Tandon’s beneficial holdings were afforded these stockholders; 1,812,881 from each of Jawahar Tandon’s and Devinder Tandon’s beneficial holdings. For the sake of expediency, the registrant issued these shares directly to electing stockholders and Mssrs. Tandon cancelled in the aggregate an equivalent number of shares beneficially held by them for each share referenced further to the previous sentence.

In October 2015, the registrant issued David H. Clarke, the registrant’s Executive Chairman of the Board, an aggregate of 1,000,000 shares of common stock further to his agreement to serve in this position. The registrant relied on Rule 506 of Regulation D with respect to the issuance; the issuee was an accredited investor.

None of the foregoing transactions involved any underwriters, underwriting discounts or commissions, or any public offering. We believe that the offers, sales and issuances of the above securities were exempt from registration under the Securities Act by virtue of Section 4(a)(2) of the Securities Act or Regulation D promulgated thereunder as transactions by an issuer not involving any public offering, or in reliance on Rule 701 promulgated under Section 3(b) of the Securities Act because the transactions were pursuant to compensatory benefit plans or contracts relating to compensation as provided under Rule 701. The recipients of the securities in each of these transactions represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were placed upon the stock certificates issued in these transactions. We believe all recipients had adequate information about us or had adequate access, through their relationships with us, to information about us.

Item 16. Exhibits and Financial Statement Schedules.

(a) Exhibits .  We have filed the exhibits listed on the accompanying Exhibit Index, which is incorporated herein by reference.

II-3


 
 

TABLE OF CONTENTS

(b) Financial Statement Schedules .  All schedules have been omitted because the information required to be presented in them is not applicable or is shown in the combined and consolidated financial statements or related notes.

Item 17. Undertakings

The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933, as amended, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933, as amended, and will be governed by the final adjudication of such issue.

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act, as amended, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3) In a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;
(iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and
(iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.

II-4


 
 

TABLE OF CONTENTS

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, we have duly caused this Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Simi Valley, State of California, on the 10 th day of November, 2015.

MONSTER DIGITAL, INC.

By: /s/ Jawahar Tandon

Jawahar Tandon
Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jawahar Tandon, as his true and lawful attorney-in-fact and agent, with full power of substitution and substitution, for him and in his name, place and stead, in any and all capacities, to sign (1) any and all amendments to this Form S-1 (including post-effective amendments) and (2) any registration statement or post-effective amendment thereto to be filed with the Securities and Exchange Commission pursuant to Rule 462(b) under the Securities Act of 1933, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission and any other regulatory authority, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute and substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

   
Signature   Title   Date
/s/ Jawahar Tandon

Jawahar Tandon
  Chief Executive Officer
(Principal Executive Officer)
  November 10, 2015
/s/ David Olert

David Olert
  Chief Financial Officer
(Principal Financial and Accounting Officer)
  November 10, 2015
/s/ Vivek Tandon

Vivek Tandon
  Chief Operating Officer, President and a Director   November 10, 2015
/s/ David Clarke

David Clarke
  Executive Chairman of the Board   November 10, 2015

II-5


 
 

TABLE OF CONTENTS

EXHIBIT INDEX

 
Exhibit No.   Description of Exhibit
1.1    Form of Underwriting Agreement.*
1.2    Form of Underwriters’ Warrant.*
3.1    Certificate of Incorporation of Monster Digital, Inc., as amended.
3.2    Bylaws of Monster Digital, Inc., as amended.
4.1    Form of Registrant’s Common Stock Certificate.*
5.1     Opinion of Manatt, Phelps & Phillips LLP.*
10.1     2012 Omnibus Incentive Plan.
10.2      Form of Option Agreement and Option Grant Notice under the 2012 Omnibus Incentive Plan.
10.3      Form of Restricted Stock Award Agreement and Notice of Grant of Restricted Stock Award under the 2012 Omnibus Incentive Plan.
10.4      Form of Restricted Stock Award Agreement and Notice of Grant of Restricted Stock Unit Award under the 2012 Omnibus Incentive Plan.
10.5      Trademark License Agreement dated July 7, 2010 by and between SDJ Technologies, Inc. and Monster Cable Products, Inc., as amended.
10.6      Building lease dated October 28, 2014 relating to registrant’s executive offices located at 2655 Park Center Drive, Unit C, Simi Valley, CA.
10.7      Purchase Order Purchase Agreement dated April 15, 2014 by and between MidCorp Credit, LLC d/b/a Brookridge Trading and SDJ Technologies, Inc.
10.8      Factoring Agreement dated June 3, 2015 by and between CSNK Working Capital Financial Corp. d/b/a Bay View Funding and SDJ Technologies, Inc.
10.9      Advisory Board Agreement dated effective as of August 18, 2015 by and between Noel Lee and registrant.
10.10     Warrant dated August 18, 2015 held by Noel Lee.
10.11     Consulting Agreement dated May 7, 2015 by and between registrant and David Clarke.
10.12     License and Sublease Agreement dated May 2012 by and between Tandon Enterprises, Inc. and SDJ Technologies, Inc.
10.13     Non-Competition and Non-Solicitation Agreement dated May 2012 by and between Tandon Enterprises, Inc.
10.14     Services Agreement dated May 2012 by and between Tandon Enterprises, Inc. and SDJ Technologies, Inc.
10.15     Employment Agreement dated June 1, 2012 by and between Tandon Digital, Inc. and Jawahar Tandon.
21.1     List of subsidiaries.
23.1     Consent of Manatt, Phelps & Phillips, LLP (included in Exhibit 5.1).*
23.2     Consent of CohnReznick LLP, independent registered public accounting firm.
24.1     Power of Attorney (contained in the signature page to this registration statement).
99.1     Consent of Director Nominee Jonathan Clark.
99.2     Consent of Director Nominee Robert B. Machinist.
99.3     Consent of Director Nominee Christopher M. Miner.
99.4     Consent of Director Nominee Jonathan S. Orban.

* To be filed by amendment.
previously filed.

II-6


   

Exhibit 3.1

 

State of Delaware  
Secretary of State  
Division of - Corporations  
Delivered 07:15 PM 11/09/2010  
FILED 07:05 PM 11/09/2010  
SRV 101073213 - 4896296 FILE  

 

CERTIFICATE OF INCORPORATION

 

OF

 

WRASP 35, Inc.

 

(Pursuant to Section 102 of the Delaware General Corporation Law)

 

1.          The name of the corporation is WRASP 35, Inc. (the “Corporation”),

 

2.          The address of its registered office in the State of Delaware is 1811 Silverside Road, Wilmington, Delaware 19810, County of New Castle. The name of its registered agent at such address is Vcorp Services, LLC.

 

3.          The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware (the “DGCL”).

 

4.          The Corporation is to have perpetual existence.

 

5.          The total number of shares of capital stock which the Corporation shall have authority to issue is: one hundred ten million (110,000,000). These shares shall be divided into two classes with one hundred million (100,000,000) shares designated as common stock at $.0001 par value (the “Common Stock”) and ten million (10,000,000) shares designated as preferred stock at $.0001 par value (the “Preferred Stock”).

 

The Preferred Stock of the Corporation shall be issued by the Board of Directors of the Corporation in one or more classes or one or more series within any class and such classes or series shall have such voting powers, full or limited, or no voting powers, and such designations, preferences, limitations or restrictions as the Board of Directors of the Corporation may determine, from time to time.

 

Holders of shares of Common Stock shall be entitled to cast one vote for each share held at all stockholders’ meetings for all purposes, including the election of directors. The Common Stock does not have cumulative voting rights.

 

No holder of shares of stock of any class shall be entitled as a matter of right to subscribe for or purchase or receive any part of any new or additional issue of shares of stock of any class, or of securities convertible into shares of stock of any class, whether now hereafter authorized or whether issued for money, for consideration other than money, or by way of dividend.

 

6.          The Board of Directors shall have the power to adopt, amend or repeal the by-laws of the Corporation.

 

1

 

  

7.          No director shall be personally liable to the Corporation or its stockholders for monetary damages for any breach of fiduciary duty by such director as a director. Notwithstanding the foregoing sentence, a director shall be liable to the extent provided by applicable law, (i) for breach of the director’s duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) pursuant to Section 174 of the DGCL or (iv) for any transaction from which the director derived an improper personal benefit. If the DGCL hereafter is amended to authorize the further elimination or limitation of the liability of directors, then the liability of a director of the Corporation, in addition to the limitation on personal liability provided herein, shall be limited to the fullest extent permitted by the amended DGCL. No amendment to or repeal of this Article 7 shall apply to or have any effect on the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment,

 

8.          The Corporation shall indemnify, to the fullest extent permitted by Section 145 of the DGCL, as amended from time to time, each person that such section grants the Corporation the power to indemnify.

 

9.          The name and mailing address of the incorporator is Melanie Figueroa, c/o Richardson & Patel LLP, 420 Lexington Avenue, Suite 2620, New York, NY 10170.

 

IN WITNESS WHEREOF, the undersigned, being the incorporator hereinbefore named, has executed, signed and acknowledged this certificate of incorporation this 9 th day of November, 2010.

 

  /s/ Melanie Figueroa
  Melanie Figueroa
  Incorporator

 

2

 

  

  State of Delaware
  Secretary of State
  Division of Corporations
  Delivered 04:01 PM 09/30/2011
  FILED 03:22 PM 09/30/2011
  SRV 111060047 - 4896296 FILE

 

STATE OF DELAWARE

CERTIFICATE OF AMENDMENT

OF CERTIFICATE OF INCORPORATION

OF WRASP 35, INC.

 

The corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware does hereby certify:

 

1.   The name of the Corporation (hereinafter called the “Corporation”) is WRASP 35, Inc.

 

2.   The Certificate of Incorporation of the Corporation is hereby amended by striking out Article 1 thereof and by substituting in lieu of said Article the following new Article 1

 

“The name of the corporation is AOTS 35, Inc. (the “Corporation”).”

 

3.   The amendment of the Certificate of Incorporation of the Corporation herein certified was duly adopted, pursuant to the provisions of Section 242 of the General Corporation Law of the State of Delaware, by at least a majority of the outstanding shares of common stock entitled to vote.

 

IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to be executed this 27th day of September, 2011.

 

  By: /s/ Anthony C. Pintsopoulos
    Anthony C. Pintsopoulos
    Secretary and Director

 

 

 

 

State of Delaware  
Secretary of State  
Division of - Corporations  
Delivered 04:59 PM 10/20/2011  
FILED 03:39 PM 10/20/2011  
SRV 111121222 - 4896296 FILE  

 

 

 

 

CERTIFICATE OF CHANGE OF LOCATION OF REGISTERED OFFICE

AND OF REGISTERED AGENT

 

AOTS 35, INC.

 

It is hereby certified that:

 

 

1. The name of the corporation (hereinafter called the "corporation") is:

 

AOTS 35, INC.

 

2. The registered office of the corporation within the State of Delaware is hereby changed to 2711 Centerville Road, Suite 400, City of Wilmington 19808, County of New Castle.

 

3. The registered agent of the corporation within the State of Delaware is hereby changed to Corporation Service Company, the business office of which is identical with the registered office of the corporation as hereby changed.

 

4. The corporation has authorized the changes hereinbefore set forth by resolution of its Board of Directors.

 

Signed on October 13, 2011

 

 

 

 

  By:       /s/ Anthony C. Pintsopoulos
  Anthony Pintsopoulos
  Chief Financial Officer

 

 

 

 

 

 

State of Delaware  
Secretary of State  
Division of Corporations  
Delivered 01:28 PM 06/01/2012  
FILED 01:28 PM 06/01/2012  
SRV 120691709 - 4896296 FILE  

 

STATE OF DELAWARE

 

SECOND AMENDMENT TO
CERTIFICATE OF INCORPORATION
OF
AOTS 35, INC.

 

The corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware does hereby certify:

 

1.  The name of the corporation is AOTS 35, Inc. (the “Corporation”).

 

2.  The Certificate of Amendment of Certificate of Incorporation of the Corporation is hereby amended by striking out Article 1 thereof and by substituting in lieu of said Article the following new Article 1

 

“The name of the corporation is Tandon Digital, Inc. (the “Corporation”).”

 

3.  The Second Amendment to Certificate of Incorporation of the Corporation herein certified was duly adopted, pursuant to the provisions of Section 242 of the General Corporation Law of the State of Delaware, by at least a majority of the outstanding shares of common stock entitled to vote.

 

IN WITNESS WHEREOF, the Corporation has caused this Second Amendment to Certificate of Incorporation to be executed this 29 th day of May, 2012.

 

  By: /s/ Anthony Pintsopoulos
    Anthony Pintsopoulos
    Secretary and Director

 

 

 

State of Delaware

Secretary of State

Division of Corporations

Delivered 02:24 PM 06/04/2012

FILED 02:22 PM 06/04/2012

SRV 120699692 - 4896296 FILE

 

CERTIFICATE OF AMENDMENT

TO

CERTIFICATE OF INCORPORATION

OF

TANDON DIGITAL, INC.

 

a Delaware corporation

 

 

Tandon Digital, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation"),

 

DOES HEREBY CERTIFY:

 

FIRST: That Article 5 of the Certificate of Incorporation of the Corporation, as amended, is amended to insert the following paragraph immediately following the last sentence of paragraph 4:

 

"Upon the filing and effectiveness (the "Effective Time") of this Certificate of Amendment with the Delaware Secretary of State, every one (1) outstanding share of Common Stock shall without further action by this Corporation or the holder thereof be split into and automatically become four (4) shares of Common Stock (the "Stock Split"). The number of authorized shares of Common Stock of the Corporation and the par value of the Common Stock shall remain as set forth in this Certificate of Incorporation, as amended."

 

SECOND: The amendment set forth has been duly approved by the Board of Directors of the Corporation and by the Stockholders entitled to vote thereon.

 

THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware.

 

IN WITNESS WHEREOF, I, the undersigned, being the President and Secretary of the Corporation, for the purpose of amending the Certificate of Incorporation of the Corporation pursuant to Section 242 of the Delaware General Corporation Law, do make and file this Certificate of Amendment,hereby declaring and certifying that the facts herein stated are true and accordingly have hereunto set my hand, as of this 4th day of June, 2012.

 

  By: /s/ Jawahar Tandon
  Jawahar Tandon
  President and Secretary

 

 

 

 

 

 

State of Delaware  
Secretary of State  
Division of Corporations  
Delivered 01:44 PM 03/18/2014  
FILED 01:44 PM 03/18/2014  
SRV 140344791 - 4896296 FILE  

 

 

 

STATE OF DELAWARE

CERTIFICATE FOR RENEWAL

AND REVIVAL OF CHARTER

 

The corporation organized under the laws of the State of Delaware, the charter of which was voided for non-payment of taxes and/or for failure to file a complete annual report, now desires to procure a restoration, renewal and revival of its charter pursuant to Section 312 of the General Corporation Law of the State of Delaware, and hereby certifies as follows:

 

1.  The name of the corporation is        Tandon Digital, Inc.      

 

 

2. The Registered Office of the corporation in the State of Delaware is located at               2711 Centerville Rd Suite 400           (Street),

 in the City of                 Wilmington                , County of        New Castle        Zip Code       19808    . The name of the Registered Agent at such address upon whom process against this Corporation may be served is          Corporation Service Company   .

 

 

3. The date of filing of the Corporation's original Certificate of Incorporation in Delaware was              November 9, 2010     

 

 

4. The renewal and revival of the charter of this corporation is to be perpetual.

 

5. The corporation was duly organized and carried on the business authorized by its charter until the     1st    day of     March    A.D.     2014    , at which time its charter became inoperative and void for non-payment of taxes and/or failure to file a complete annual report and the certificate for renewal and revival is filed by authority of the duly elected directors of the corporation in accordance with the laws of the State of Delaware.

 

 

 

 

  By: /s/ Jawahar Tandon
    Authorized Officer
  Name: Jawahar L. Tandon CEO
  Print or Type

 

 

 

 

 

CERTIFICATE OF AMENDMENT

OF THE

CERTIFICATE OF INCORPORATION

OF TANDON DIGITAL, INC.

 

Vivek Tandon and Jawahar Tandon do hereby certify that:

 

1.           They are the duly elected and acting President and Secretary, respectively, of TANDON DIGITAL, INC., a Delaware corporation (the “Corporation”).

 

2.           Article I of the Certificate of Incorporation of the Corporation is amended and restated in its entirety to read as follows:

 

“I

 

The name of this Corporation is Monster Digital, Inc.”

 

3.           The Corporation’s Board of Directors has duly approved the foregoing Certificate of Amendment of the Certificate of Incorporation of the Corporation.

 

4.          The foregoing Certificate of Amendment of the Certificate of Incorporation of the Corporation has been duly approved by the required vote of the stock of the Corporation in accordance with Sections 242 of the General Corporation Law of Delaware.

 

5.          All other provisions of the Certificate of Incorporation of the Corporation remain in full force and effect.

 

6.          This Certificate of Amendment of the Certificate of Incorporation of the Corporation shall become effective upon its filing in accordance with Section 103(d) of the General Corporation Law of the State of Delaware.

 

IN WITNESS WHEREOF, the undersigned have executed this Certificate of Amendment of the Certificate of Incorporation of the Corporation on August 25, 2015.

 

  /s/ Vivek Tandon
  Vivek Tandon, President
   
  /s/ Jawahar Tandon
  Jawahar Tandon, Secretary

 

 

 

 

Exhibit 3.2

 

MONSTER DIGITAL, INC.

a Delaware corporation

(the "Corporation")

 

AMENDED AND RESTATED BYLAWS

 

ARTICLE I.

MEETINGS OF STOCKHOLDERS

 

SECTION 1.           Annual Meetings of Stockholders . The annual meeting of the stockholders of the Corporation shall be held on such date, within 180 days of the end of each prior fiscal year, as shall be designated by the Board of Directors and stated in the notice of the meeting, and on any subsequent day or days to which such meeting may be adjourned, for the purposes of electing directors and of transacting such other business as may properly come before the meeting. The Board of Directors shall designate the place and time for the holding of such meeting.

 

At the annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the annual meeting. To be properly brought before the annual meeting of stockholders, business must be (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (iii) otherwise properly brought before the meeting by a stockholder of the Corporation who is a stockholder of record at the time of giving notice provided for in this Section 1 of Article I, who shall be entitled to vote at such meeting and who complies with the notice procedures set forth in this Section I of Article I. For business to be properly brought before an annual meeting by a stockholder, the stockholder, in addition to any other applicable requirements, must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than 90 days prior to the anniversary date of the immediately preceding annual meeting of stockholders of the Corporation. A stockholders notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting: (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business, (c) the class and number of shares of voting stock of the Corporation which are beneficially owned by the stockholder, (d) a representation that the meeting to bring the proposed business before the annual meeting, and (e) a description of any material interest of the stockholder in such business. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this Section 1 of Article I. The presiding officer of an annual meeting shall, if the facts warrant, determine and declare to the meeting that the business was not properly brought before the meeting in accordance with the provisions of this Section 1 of Article I, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted.

 

  1  

 

 

For business to be properly brought before an annual meeting by a stockholder, the stockholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this Section 1 of Article I.

 

SECTION 2.           Special Meetings of Stockholders . Special meetings of the stockholders may be called at any time by the Board of Directors pursuant to a resolution approved by a majority of the entire Board of Directors, by the Chairman of the Board, or the President of the Corporation. Upon written request of the persons who have duly called a special meeting, it shall be the duty of the Secretary of the Corporation to fix the date of the meeting to be held not less than ten or more than sixty days after the receipt of the request and to give due notice thereof in accordance with Section 4 of this Article. If the Secretary shall neglect or refuse to fix the date of the meeting and give notice thereof, the persons calling the meeting may do so.

 

SECTION 3.           Place of Meeting . Every special meeting of the stockholders shall be held at such place within or without the State of Delaware as the Board of Directors or person who has duly called a special meeting may designate, or, in the absence of such designation, at the registered office of the Corporation in the State of Delaware.

 

SECTION 4.           Notice of Meeting . Except as otherwise required by law, written notice of every meeting of the stockholders shall be given by the Secretary of the Corporation to each stockholder of record entitled to vote at the meeting, by placing such notice in the mail at least ten days, but not more than sixty days, prior to the day named for the meeting addressed to each stockholder at his address appearing on the books of the Corporation or supplied by him to the Corporation for the purpose of notice.

 

SECTION 5.           Record Date . The Board of Directors may fix a date, not less than ten or more than sixty days preceding the date of any meeting of stockholders, as a record date for the determination of stockholders entitled to notice of, or to vote at, any such meeting. The Board of Directors shall not close the books of the Corporation against transfers of shares during the whole or any part of such period. The initial determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of such meeting; provided, that the Board of Directors may, in its discretion, fix a new record date for the adjourned

 

SECTION 6.           Proxies . The notice of every meeting of the stockholders may be accompanied by a form of proxy approved by the Board of Directors in favor of such person or persons as the Board of Directors may select.

 

  2  

 

 

SECTION 7.           Quorum and Voting . A majority of the outstanding shares of stock of the Corporation entitled to vote, present in person or represented by proxy, shall constitute a quorum at any meeting of the stockholders, and the stockholders present at any duly convened meeting may continue to do business until adjournment notwithstanding any withdrawal from the meeting of holders of shares counted in determining the existence of a quorum. Directors shall be elected by a plurality of the votes cast in the election. For all other matters as to which no other voting requirement is specified by the General Corporation Law of the State of Delaware (the "General Corporation Law"), the Certificate of Incorporation (the "Certificate of Incorporation") or these By-laws, the affirmative vote required for stockholder action shall be that of a majority of the shares present in person or represented by proxy at the meeting (as counted for purposes of determining the existence of a quorum at the meeting). If so provided in the Certificate of Incorporation, stockholders may cumulate votes (i.e., cast for any candidate a number of votes greater than the number of votes which such stockholder normally is entitled to cast) at a stockholders' meeting at which directors are to be elected. In the case of a matter submitted for a vote of the stockholders as to which a stockholder approval requirement is applicable under the stockholder approval policy of any exchange or quotation system on which the capital stock of the Company is quoted or traded, for exemption under the requirements of Rule 16b-3 under the Securities Exchange Act of 1934 or under any provision of the Internal Revenue Code, in each case for which no higher voting requirement is specified by the General Corporation Law, the Certificate of Incorporation or these Bylaws, the vote required for approval shall be the requisite vote specified in such stockholder approval policy, Rule 16b-3 or Internal Revenue Code provision, as the case may be (or the highest such requirement if more-than one is applicable). For the approval of the appointment of independent public accountants (if submitted for a vote of the stockholders), the vote required for approval shall be a majority of the votes cast on the matter.

 

SECTION 8.           Adjournment . Any meeting of the stockholders may be adjourned from time to time, without notice other than by announcement at the meeting at which such adjournment is taken, and at any such adjourned meeting at which a quorum shall be present any action may be taken that could have been taken at the meeting originally called; provided that if the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the adjourned meeting.

 

SECTION 9.           Nominations for Election as a Director . Except with respect to the initial directors elected by the Incorporator, only persons who are nominated in accordance with the procedures set forth in these Bylaws shall be eligible for election as, and to serve as, directors. Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of stockholders (a) by or at the direction of the Board of Directors or (b) by any stockholder of the Corporation who is a stockholder of record at the time of giving of notice provided for in this Section 9 of Article I, who shall be entitled to vote for the election of directors at the meeting and who complies with the notice procedures set forth in this Section 9 of Article 1. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation.

 

  3  

 

 

To be timely, a stockholder's notice shall be delivered or mailed and received at the principal executive offices of the Corporation (i) with respect to an election to be held at the annual meeting of the stockholders of the Corporation, not less than 90 days prior to the anniversary date of the immediately preceding annual meeting of stockholders of the Corporation, and (ii) with respect to an election to be held at a special meeting of stockholders of the Corporation for the election of directors, not later than the close of business on the tenth day following the day on which notice of the date of the special meeting was mailed to stockholders of the Corporation as provided in Section 4 of Article I or public disclosure of the date of the special meeting was made, whichever first occurs.

 

Such stockholder's notice to the Secretary shall set forth (x) as to each person whom the Stockholder proposes to nominate for election or re-election as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person's written consent to being named in the proxy statement as a nominee and to serve as a director if elected), and (y) as to the stockholder, giving the notice (i) the name and address, as they appear on the Corporation's books, of such stockholder and (ii) the class and number of shares of voting stock of the Corporation which are beneficially owned by such stockholder. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the Secretary of the Corporation that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee.

 

Other than directors chosen pursuant to the provisions of Section 2 of Article 11, no person shall be eligible to serve as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 9 of Article l. The presiding officer of the meeting of stockholders shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by these Bylaws, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded.

 

For a nomination by a stockholder to be proper, a stockholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this Section 9 of Article 1.

 

SECTION 10.          Action by Consent of Stockholders in Lieu of Meeting . Unless otherwise restricted by the Certificate of Incorporation, any action required or permitted to be taken at any annual or special meeting of the stockholders of the Corporation may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the Corporation in the manner specified in Section 228(a) of the Delaware General Corporation Law, as amended from time to time. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing.

 

  4  

 

 

ARTICLE II.

BOARD OF DIRECTORS

 

SECTION 1.           Number of Directors . The business, affairs and property of the Corporation shall be managed by a board of not less than three or more than seven directors. The number of directors constituting the Board of Directors may be increased or decreased from time to time by resolution by the Board of Directors; provided, however, that no such decrease shall have the effect of shortening the term of any incumbent director. Each director shall hold office for the full term to which he shall have been elected and until his successor is duly elected and shall qualify, or until his earlier death, resignation, disqualification or removal. A director need not be a resident of the State of Delaware or a stockholder of the Corporation.

 

SECTION 2.           Vacancies . Except as provided in the Certificate of Incorporation of the Corporation, newly created directorships resulting from any increase in the number of directors and any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other cause shall be filled by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board of Directors. Any director elected in accordance with the preceding sentence shall hold office until such director's successor shall have been elected and qualified. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director.

 

SECTION 3.           Removal by Stockholders . Any director of the Corporation may be removed, whether or not for cause, from his office as a director by vote or other action of stockholders by the holders of the majority of the shares then entitled to vote at an election of directors.

 

SECTION 4.           Regular Meetings . Regular meetings of the Board of Directors shall be held at such place or places within or without the State of Delaware, at such hour and on such day as may be fixed by resolution of the Board of Directors, without further notice of such meetings. The time or place of holding regular meetings of the Board of Director may be changed by the Chairman of the Board or the President by giving written notice thereof as provided in Section 6 of this Article II.

 

SECTION 5.           Special Meetings . Special meetings of the Board of Directors shall be held, whenever called by the Chairman of the Board, the Chairman of the Executive Committee, the President, by two directors or by resolution adopted by the Board of Directors, at such place or places within or without the State of Delaware as may be stated in the notice of the meeting.

 

  5  

 

 

SECTION 6.           Notice . Notice of the time and place of, and general nature of the business to be transacted at, all special meetings of the Board of Directors, and written notice of any change in the time or place of holding the regular meetings of the Board of Directors, shall be delivered personally or by telephone to each director or sent by first-class mail, telecopier or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records of the Corporation. If the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. If the notice is delivered personally or by telephone, telecopier or by telegram, it shall be delivered personally or by telephone or by telecopier or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director provided, however, that notice of any meeting need not be given to any director if waived by him in writing, or if he shall be present at such meeting other than for purposes of objecting to the validity of the meeting.

 

SECTION 7.           Quorum . A majority of the directors in office shall constitute a quorum of the Board of Directors for the transaction of business; but a lesser number may adjourn from day to day until a quorum is present. Except as otherwise provided by law or in these Bylaws, all questions shall be decided by the vote of a majority of the directors present at a meeting at which a quorum is present.

 

SECTION 8.           Action by Written Consent . Any action which may be taken at a meeting of the directors or members of any committee thereof may be taken without a meeting if consent in writing setting forth the action so taken shall be signed by all of the directors or members of such committee as the case may be and shall be filed with the Secretary of the Corporation.

 

SECTION 9.           Meetings by Conference Telephone . Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, members of the Board of Directors of the Corporation, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors or such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 9 shall constitute presence in person at such meeting.

 

SECTION 10.          Chairman or Vice Chairmen . The Board of Directors may designate one or more of its members to be Chairman or Vice Chairmen of the Board, Chairman of the Executive Committee, and Chairman of any other committees of the Board and to hold such other positions on the Board as the Board of Directors may designate.

 

SECTION 11.          Compensation and Reimbursement of Expenses . The directors shall receive such compensation for their services as shall be determined by the Board of Directors and may be paid their expenses, if any, of attendance at each meeting of the Board of Directors. No such reimbursement shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like reimbursement for attending committee meetings.

 

  6  

 

 

ARTICLE III.

COMMITTEES

 

The Board of Directors may, by resolution adopted by a majority of the whole Board, designate one or more of its members to constitute (i) an Executive Committee which committee, during intervals between meetings of the Board, shall have and exercise the authority of the Board of Directors in the management of the business of the Corporation to the extent permitted by law; and (ii) one or more additional committees such as an Audit Committee to review the Corporation's financial statements and financial information and to act as liaison with the Corporation's auditors, a Compensation Committee to review and propose compensation for the officers and executives of the Corporation, which, to the extent provided in said resolution or resolutions and permitted by law, shall have and may exercise the power of the Board of Directors in the management of the business and affairs of the Corporation insofar as it pertains to the responsibilities of such committee or committees, and may authorize the seal of the Corporation to be affixed to all papers on which the Corporation desires to place a seal. Such additional committee or committees shall have such name or names as may be stated in these Bylaws or as may be determined from time to time by resolutions adopted by the Board of Directors.

 

ARTICLE IV.

OFFICERS

 

SECTION 1.           Designation and Removal . The officers of the Corporation shall consist of a Chairman of the Board, a Chief Executive Officer, a President, a Chief Operating Officer, a Chief Financial Officer, a Secretary, a Treasurer and such Executive, Group, Senior or other Vice Presidents, and other officers as may be elected or appointed by the Board of Directors. Any number of offices may be held by the same person. All officers shall hold office until their successors are elected or appointed, except that the Board of Directors may remove any officer at anytime at its discretion. The Board of Directors may empower the Chairman of the Board or the President to appoint such officers as the business of the Corporation may require, provided that notice of such appointment and its acceptance is deposited with the minutes of the Board of Directors. Any officer may be removed, either with or without cause, by an affirmative vote of the majority of the Board of Directors at any regular or special meeting of the Board of Directors or, except in the case of an officer chosen by the Board of Directors, by any officer upon whom such power of removal may be conferred by the Board of Directors. Nothing herein shall affect such rights as an officer may have under such officer's employment contract.

 

Any officer may resign at any time by giving written notice to the Corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice. Unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the right if any, of the Corporation under any employment contract to which the officer is a party.

 

  7  

 

 

SECTION 2.           Powers and Duties . The officers of the Corporation shall have such powers and duties as generally pertain to their offices, except as modified herein or by the Board of Directors, as well as such powers and duties as from time to time may be conferred by the Board of Directors. The Chairman of the Board shall have such duties as may be assigned to him by the Board of Directors and shall preside at meetings of the Board and at meetings of the stockholders. The Vice Chairmen shall provide guidance to the Board of Directors and either of the Vice Chairmen may act as the Chairman, as designated by a majority of the Board of Directors, if the Chairman is incapacitated or otherwise unavailable. The President shall be the chief executive officer of the Corporation and shall have general supervision over the business, affairs, and property of the Corporation.

 

ARTICLE V.

SEAL

 

The seal of the Corporation shall be in such form as the Board of Directors shall prescribe.

 

ARTICLE VI.

CERTIFICATES OF STOCK

 

Shares of the capital stock of the Corporation may be certificated or uncertificated, as provided under the DGCL. The shares of stock of the Corporation represented by certificates of stock, shall be signed by the President or such Vice President or other officer designated by the Board of Directors, countersigned by the Treasurer or the Secretary or an Assistant Treasurer or an Assistant Secretary; and such signature of the President, Vice President, or other officer, such countersignature of the Treasurer or Secretary or Assistant Treasurer or Assistant Secretary, or any of them, may be executed in facsimile, engraved or printed. In case any officer who has signed or whose facsimile signature has been placed upon any share certificate shall have ceased to be such officer because of death. resignation or otherwise before the certificate is issued, it may be issued by the Corporation with the same effect as if the officer had not ceased to be such at the date of its issue. Said certificates of stock shall be in such form as the Board of Directors may from time to time prescribe.

 

ARTICLE VII.

INDEMNIFICATION

 

SECTION 1.           General . The Corporation shall indemnify, and advance Expenses (as this and all other capitalized words are defined in Section 14 of this Article) to, Indemnitee to the fullest extent permitted by applicable law in effect on the date of effectiveness of these Bylaws, and to such greater extent as applicable law may thereafter permit The rights of Indemnitee provided under the preceding sentence shall include, but not be limited to, the right to be indemnified to the fullest extent permitted by § 145(b) of the D.G.C.L. in Proceedings by or in the right of the Corporation and to the fullest extent permitted by § 145(a) of the D.G.C.L. in all other Proceedings.

 

  8  

 

 

SECTION 2.           Expenses Related to Proceedings . If Indemnitee is, by reason of his Corporate Status, a witness in any proceeding or is a party to and is successful, on the merits or otherwise, in any Proceeding, he shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith as a witness or party as the case may be. If Indemnitee is a party to a proceeding and is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to any Matter in such Proceeding, the Corporation shall indemnify Indemnitee against all Expenses actually and reasonably incurred by him or on his behalf relating to each Matter. The termination of any Matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such Matter.

 

SECTION 3.           Advancement of Expenses . Indemnitee shall be advanced Expenses within ten days after requesting them to the fullest extent permitted by § 145(c) of the D.G.C.L.

 

SECTION 4.           Request for Indemnification and/or Advancement of Expenses . To obtain indemnification or advancement of expenses, Indemnitee shall submit to the Corporation a written request with such information as is reasonably available to Indemnitee. The Secretary of the Corporation shall promptly advise the Board of Directors of such request and in the case of a request for advancement of expenses, any undertaking required by § 145(e) of the D.G.C.L.

 

SECTION 5.           Determination of Entitlement: No Change of Control . If there has been no Change of Control at the time the request for indemnification is sent, Indemnitee's entitlement to indemnification shall be determined in accordance with § 145(d) of the D.G.C.L. If entitlement to indemnification is to be determined by Independent Counsel, the Corporation shall furnish notice to Indemnitee within ten days after receipt of the request for indemnification, specifying the identity and address of Independent Counsel. The Indemnitee may, within fourteen days after receipt of such written notice of selection, deliver to the Corporation a written objection to such selection. Such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of Independent Counsel and the objection shall set forth with particularity the factual basis of such assertion. If there is an objection to the selection of Independent Counsel, either the Corporation or Indemnitee may petition the Court of Chancery of the State of Delaware or any other court of competent jurisdiction for a determination that the objection is without a reasonable basis and/or for the appointment of Independent Counsel selected by the Court.

 

SECTION 6.           Determination of Entitlement: Change of Control . If there has been a Change of Control at the time the request for indemnification is sent, Indemnitee's entitlement to indemnification shall be determined in a written opinion by Independent Counsel selected jointly by Indemnitee and the Board of Directors. If no Independent Counsel has been agreed to within 21 days after either Indemnitee or the Board of Directors has first proposed a candidate for Independent Counsel, then either Indemnitee or the Board of Directors may petition the court of Chancery of the State of Delaware or any other Court of competent jurisdiction for appointment as Independent Counsel of a person selected by the Court.

 

  9  

 

 

SECTION 7.           Procedures of Independent Counsel . If a Change of Control shall have occurred before the request for indemnification is sent by Indemnitee, Indemnitee shall be presumed (except as otherwise expressly provided in this Article) to be entitled to indemnification upon submission of a request for indemnification in accordance with Section 4 of this Article, and thereafter the Corporation shall have the burden of proof to overcome the presumption in reaching a determination contrary to the presumption. The presumption shall be used by Independent Counsel as a basis for a determination of entitlement to indemnification unless the Corporation provides information sufficient to overcome such presumption by clear and convincing evidence or the investigation, review and analysis of Independent Counsel convinces him by clear and convincing evidence that the presumption should not apply.

 

Except in the event that the determination of entitlement to indemnification is to be made by Independent Counsel, if the person or persons empowered under Section 5 or 6 of this Article to determine entitlement to indemnification shall not have made and furnished to Indemnitee in writing a determination within sixty days after receipt by the Corporation of the request therefor, the requisite determination of entitlement to indemnification shall be deemed to have been made and Indemnitee shall be entitled to such indemnification unless Indemnitee knowingly misrepresented a material fact in connection with the request for indemnification or such indemnification is prohibited by law. The termination of any Proceeding or of any Matter therein, by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Article) of itself adversely affect the fight of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, or with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that his conduct was unlawful.

 

SECTION 8.           Independent Counsel Expenses . The Corporation shall pay any and all reasonable fees and expenses of Independent Counsel incurred acting pursuant to this Article and in any proceeding to which it is a party or witness in respect of its investigation and written report and shall pay all reasonable fees and expenses incident to the procedures in which such Independent Counsel was selected or appointed. No Independent Counsel may serve if a timely objection has been made to his selection until a Court has determined that such objection is without a reasonable basis or such objection is withdrawn.

 

  10  

 

 

SECTION 9.           Adjudication. In the event that (i) a determination is made pursuant to Section 5 or 6 that Indemnitee is not entitled to indemnification under this Article, (ii) advancement of Expenses is not timely made pursuant to Section 3 of this Article, (iii) Independent Counsel has not made and delivered a written opinion determining the request for indemnification (a) within 90 days after being appointed by the Court, or (b) within 90 days after objections to his selection have been overruled by the Court, or (c) within 90 days after the time for the Corporation or Indemnitee to object to his selection, or (iv) payment of indemnification is not made within 5 days after a determination of entitlement to indemnification has been made or deemed to been made pursuant to Section 5, 6 or 7 of this Article, Indemnitee shall be entitled to an adjudication in an appropriate court of the State of Delaware, or in any other court of competent jurisdiction, of his entitlement to such indemnification or advancement of Expenses. In the event that a determination shall have been made that Indemnitee is not entitled to indemnification, any judicial proceeding or arbitration commenced pursuant to this Section shall be conducted in all respects as a de novo trial on the merits and Indemnitee shall not be prejudiced by reason of that adverse determination. If a Change of Control shall have occurred, in any judicial proceeding commenced pursuant to this Section, the Corporation shall have the burden of proving that Indemnitee is not entitled to indemnification or advancement of Expenses, as the case may be. If a determination shall have been made or deemed to have been made that Indemnitee is entitled to indemnification, the Corporation shall be bound by such determination in any judicial proceeding commenced pursuant to this Section 9, or otherwise, unless Indemnitee knowingly misrepresented a material fact in connection with the request for indemnification, or such indemnification is prohibited by law.

 

The Corporation shall be precluded from asserting in any judicial proceeding commenced pursuant to this Section 9 that the procedures and presumptions of this Article are not valid, binding and enforceable and shall stipulate in any such court that the Corporation is bound by all provisions of this Article. In the event that Indemnitee, pursuant to this Section 9, seeks a judicial adjudication to enforce his rights under, or to recover damages for breach of, this Article, Indemnitee shall be entitled to recover from the Corporation, and shall be indemnified by the Corporation against, any and all Expenses actually and reasonably incurred by him in such judicial adjudication, but only if he prevails therein. If it shall be determined in such judicial adjudication that Indemnitee is entitled to receive part but not all of the indemnification or advancement of Expenses sought, the Expenses incurred by Indemnitee in connection with such judicial adjudication or arbitration shall be appropriately prorated.

 

SECTION 10.          Nonexclusivity of Rights . The rights of indemnification and advancement of Expenses as provided by this Article shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the Certificate of Incorporation, the Bylaws, any agreement, a vote of stockholders or a resolution of directors, or otherwise. No amendment, alteration or repeal of this Article or any provision thereof shall be effective as to any Indemnitee for acts, events and circumstances that occurred, in whole or in part, before such amendment, alteration or repeal. The provisions of this Article shall continue as to an Indemnitee whose Corporate Status has ceased and shall inure to the benefit of his heirs, executors and administrators.

 

SECTION 11.          Insurance and Subrogation . To the extent the Corporation maintains an insurance policy or policies providing liability insurance for directors or officers of the Corporation or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person serves at the request of the Corporation, Indemnitee shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of coverage available for any such director or officer under such policy or policies.

 

In the event of any payment hereunder, the Company shall be subrogated to the extent of such payment to all the rights of recovery of Indemnitee, who shall execute all papers required and take all action a necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights.

 

  11  

 

 

The Company shall not be liable under this Article to make any payment of amounts otherwise indemnifiable hereunder if, and to the extent that, Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise.

 

SECTION 12.          Severability . If any provision or provisions of this Article shall be held to be invalid, illegal or unenforceable for any reason whatsoever, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby; and, to the fullest extent possible, the provisions of this Article shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable.

 

SECTION 13.          Certain Persons Not Entitled to Indemnification . Notwithstanding any other provision of this Article, no person shall be entitled to indemnification or advancement of Expenses under this Article with respect to any Proceeding, or any Matter therein brought or made by such person against the Corporation.

 

SECTION 14.          Definitions . For purposes of this Article:

 

"Change of Control" means a change in control of the Corporation after the date of adoption of these Bylaws in any one of the following circumstances: (i) there shall have occurred an event required to be reported in response to Item 6(c) of Schedule 14A of Regulation 14A (or in response to any similar item on any similar schedule or form) promulgated under the Securities Exchange Act of 1934 (the "Act"), whether or not the Corporation is then subject to such reporting requirement; (ii) any "person" (as such term is used in Section 13(d) and 14(d) of the Act) shall have become the "beneficial owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Corporation representing 20% or more of the combined voting power of the Corporation's then outstanding voting securities without prior approval of at least two-thirds of the members of the Board of Directors in office immediately prior to such person attaining such percentage interest; (iii) the Corporation is a party to a merger, consolidation, sale of assets or other reorganization, or a proxy contest, as a consequence of which members of the Board of Directors in office immediately prior to such transaction or event constitute less than a majority of the Board of Directors thereafter; (iv) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors (including for this purpose any new director whose election or nomination for election by the Corporation's stockholders was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period) cease for any reason to constitute at least a majority of the Board of Directors.

 

"Corporate Status" describes the status of a person who is or was a director, officer, employee, agent or fiduciary of the Corporation or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person is or was serving at the request of the Corporation.

 

"D.G.C.L." means the Delaware General Corporation Law, as currently in effect or as amended from time to time.

 

  12  

 

 

"Expenses" shall include all reasonable attorneys' fees, retainers, court costs, transcript costs, fees of experts. witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, or being or preparing to be a witness in a Proceeding,, provided that such fees are actually incurred.

 

"Indemnitee" includes any person who is, or is threatened to be made, a witness in or a party to any Proceeding as described in Section I or 2 of this Article by reason of his Corporate Status.

 

"Independent Counsel" means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither presently is, nor in the five years previous to his selection or appointment has been, retained to represent: (i) the Corporation or Indemnitee in any matter material to either such party, or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder.

 

"Matter" is a claim, a material issue, or a substantial request for relief.

 

"Proceeding" includes any action, suit, arbitration, alternate dispute resolution mechanism, investigation, administrative hearing or any other proceeding whether civil, criminal, administrative or investigative, except one initiated by an Indemnitee pursuant to Section 9 of this Article to enforce his rights under this Article.

 

SECTION 15.          Notices . Any communication required or permitted to the Corporation shall be addressed to the Secretary of the Corporation and any such communication to Indemnitee shall be addressed to his home address unless he specifies otherwise and shall be personally delivered or delivered by overnight mail delivery.

 

SECTION 16.          Contractual Rights . The right to be indemnified or to the advancement or reimbursement of Expenses (i) is a contract right based upon good and valuable consideration, Pursuant to which Indemnitee may sue as if these provisions were set forth in a separate written contract between him or her and the Corporation, (ii) is and is intended to be retroactive and shall be available as to events occurring prior to the adoption of these provisions, and (iii) shall continue after any rescission or restrictive modification of such provisions as to events occurring prior thereto.

 

  13  

 

 

ARTICLE VIII.

AMENDMENTS

 

These Bylaws may be altered, amended, added to or repealed by the stockholders at any annual or special meeting or by written consent, by the vote or consent of stockholders entitled to cast at least a majority of the votes which all stockholders are entitled to cast (i.e., by -the vote of a majority of the outstanding shares entitled to vote), and, except as may be otherwise required by law, the power to alter, amend, add to or repeal these Bylaws is also vested in the Board of Directors (subject always to the power of the stockholders to change such action); provided, however, that notice of the general nature of any such action proposed to be taken shall be included in the notice of the meeting of stockholders or of the Board of Directors at which such action is taken.

 

Amended and restated as adopted and approved by the Board of Directors effective as of September 21, 2015.

 

  /s/ Jawahar Tandon
  Jawahar Tandon, Secretary

 

  14  

 

Exhibit 10.1

 

TANDON DIGITAL, INC.

 

2012 OMNIBUS INCENTIVE PLAN

 

Effective April 30, 2012  

 

 

 

 

TANDON DIGITAL, INC.

2012 OMNIBUS INCENTIVE PLAN

 

ARTICLE I

 

PURPOSE AND ADOPTION OF THE PLAN

 

1.01.       Purpose . The purpose of the Tandon Digital, Inc. 2012 Incentive Plan (as amended from time to time, the "Plan") is to assist in attracting and retaining highly competent employees, directors and consultants to act as an incentive in motivating selected employees, directors and consultants of the Company and its Subsidiaries to achieve long-term corporate objectives and to enable stock-based and cash-based incentive awards to qualify as performance-based compensation for purposes of the tax deduction limitations under Section 162(m) of the Code.

 

1.02.       Adoption and Term . The Plan has been approved by the Board and stockholders of the Company to be effective as of April 30, 2012. The Plan shall remain in effect until the tenth anniversary of the Effective Date, or until terminated by action of the Board, whichever occurs sooner.

  

ARTICLE II

 

DEFINITIONS

 

For the purpose of this Plan, capitalized terms shall have the following meanings:

 

2.01.       Affiliate means an entity in which, directly or indirectly through one or more intermediaries, the Company has at least a fifty percent (50%) ownership interest or, where permissible under Section 409A of the Code, at least a twenty percent (20%) ownership interest; provided , however , for purposes of any grant of an Incentive Stock Option, “Affiliate” means a corporation which, for purposes of Section 424 of the Code, is a parent or subsidiary of the Company, directly or indirectly.

 

2.02.       Award means any one or a combination of Non-Qualified Stock Options or Incentive Stock Options described in Article VI, Stock Appreciation Rights described in Article VI, Restricted Shares and Restricted Stock Units described in Article VII, Performance Awards described in Article VIII, other stock-based Awards described in Article IX, short-term cash incentive Awards described in Article X or any other Award made under the terms of the Plan.

 

2.03.       Award Agreement means a written agreement between the Company and a Participant or a written acknowledgment from the Company to a Participant specifically setting forth the terms and conditions of an Award granted under the Plan.

  2  

 

 

2.04.        Award Period means, with respect to an Award, the period of time, if any, set forth in the Award Agreement during which specified target performance goals must be achieved or other conditions set forth in the Award Agreement must be satisfied.

 

2.05.        Beneficiary means an individual, trust or estate who or which, by a written designation of the Participant filed with the Company, or if no such written designation is filed, by operation of law, succeeds to the rights and obligations of the Participant under the Plan and the Award Agreement upon the Participant's death.

 

2.06.        Board means the Board of Directors of the Company.

 

2.07.        Change in Control means, and shall be deemed to have occurred upon the occurrence of, any one of the following events:

 

(a)       The acquisition in one or more transactions, other than from the Company, by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act), other than the Company, an Affiliate or any employee benefit plan (or related trust) sponsored or maintained by the Company or an Affiliate, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of a number of Company Voting Securities in excess of 25% of the Company Voting Securities unless such acquisition has been approved by the Board;

 

(b)       Any election has occurred of persons to the Board that causes two-thirds of the Board to consist of persons other than (i) persons who were members of the Board on the effective date of the Plan and (ii) persons who were nominated for elections as members of the Board at a time when two-thirds of the Board consisted of persons who were members of the Board on the effective date of the Plan, provided, however, that any person nominated for election by a Board at least two-thirds of whom constituted persons described in clauses (i) and/or (ii) or by persons who were themselves nominated by such Board shall, for this purpose, be deemed to have been nominated by a Board composed of persons described in clause (i);

 

(c)       The consummation ( i.e. closing) of a reorganization, merger or consolidation involving the Company, unless, following such reorganization, merger or consolidation, all or substantially all of the individuals and entities who were the respective beneficial owners of the Outstanding Common Stock and Company Voting Securities immediately prior to such reorganization, merger or consolidation, following such reorganization, merger or consolidation beneficially own, directly or indirectly, more than 75% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors or trustees, as the case may be, of the entity resulting from such reorganization, merger or consolidation in substantially the same proportion as their ownership of the Outstanding Common Stock and Company Voting Securities immediately prior to such reorganization, merger or consolidation, as the case may be;

 

  3  

 

 

(d)       The consummation ( i.e. closing) of a sale or other disposition of all or substantially all the assets of the Company, unless, following such sale or disposition, all or substantially all of the individuals and entities who were the respective beneficial owners of the Outstanding Common Stock and Company Voting Securities immediately prior to such sale or disposition, following such sale or disposition beneficially own, directly or indirectly, more than 75% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors or trustees, as the case may be, of the entity purchasing such assets in substantially the same proportion as their ownership of the Outstanding Common Stock and Company Voting Securities immediately prior to such sale or disposition, as the case may be; or

 

(e)       a complete liquidation or dissolution of the Company.

 

2.08.        Code means the Internal Revenue Code of 1986, as amended. References to a section of the Code shall include that section and any comparable section or sections of any future legislation that amends, supplements or supersedes said section.

 

2.09.        Committee means the Compensation Committee of the Board.

 

2.10.        Common Stock means the common stock of the Company, par value $0.0001 per share.

 

2.11.        Company means Tandon Digital, Inc., a Delaware corporation, and its successors.

 

2.12.        Company Voting Securities means the combined voting power of all outstanding voting securities of the Company entitled to vote generally in the election of directors to the Board.

 

2.13.        Date of Grant means the date designated by the Committee as the date as of which it grants an Award, which shall not be earlier than the date on which the Committee approves the granting of such Award.

 

2.14.        Dividend Equivalent Account means a bookkeeping account in accordance with under Section 11.17 and related to an Award that is credited with the amount of any cash dividends or stock distributions that would be payable with respect to the shares of Common Stock subject to such Awards had such shares been outstanding shares of Common Stock.

 

2.15         Exchange Act means the Securities Exchange Act of 1934, as amended.

 

2.16.        Exercise Price means, with respect to a Stock Appreciation Right, the amount established by the Committee in the Award Agreement which is to be subtracted from the Fair Market Value on the date of exercise in order to determine the amount of the payment to be made to the Participant, as further described in Section 6.02(b).

 

  4  

 

  

2.17.       Fair Market Value means, as of any applicable date: (i) if the Common Stock is listed on a national securities exchange or is authorized for quotation on the Nasdaq National Market System (“NMS”), the closing sales price of the Common Stock on the exchange or NMS, as the case may be, on that date, or, if no sale of the Common Stock occurred on that date, on the next preceding date on which there was a reported sale; or (ii) if none of the above apply, the closing bid price as reported by the Nasdaq SmallCap Market on that date, or if no price was reported for that date, on the next preceding date for which a price was reported; or (iii) if none of the above apply, the last reported bid price published in the “pink sheets” or displayed on the National Association of Securities Dealers, Inc. (“NASD”), Electronic Bulletin Board, as the case may be; or (iv) if none of the above apply, the fair market value of the Common Stock as determined under procedures established by the Committee.

 

2.18.       Incentive Stock Option means a stock option within the meaning of Section 422 of the Code.

 

2.19.       Merger means any merger, reorganization, consolidation, exchange, transfer of assets or other transaction having similar effect involving the Company.

 

2.20.       Non-Qualified Stock Option means a stock option which is not an Incentive Stock Option.

 

2.21        Non-Vested Share means shares of the Company Common Stock issued to a Participant in respect of the non-vested portion of an Option in the event of the early exercise of such Participant’s Options pursuant to such Participant’s Award Agreement, as permitted in Section 6.06 below.

 

2.22.       Options means all Non-Qualified Stock Options and Incentive Stock Options granted at any time under the Plan.

 

2.23.       Outstanding Common Stock means, at any time, the issued and outstanding shares of Common Stock.

 

2.24.       Participant means a person designated to receive an Award under the Plan in accordance with Section 5.01.

 

2.25.       Performance Awards means Awards granted in accordance with Article VIII.

 

  5  

 

 

2.26.       Performance Goals means net sales, units sold or growth in units sold, return on stockholders' equity, customer satisfaction or retention, return on investment or working capital, operating income, economic value added (the amount, if any, by which net operating income after tax exceeds a reference cost of capital), EBITDA (as net income (loss) before net interest expense, provision (benefit) for income taxes, and depreciation and amortization), expense targets, net income, earnings per share, share price, reductions in inventory, inventory turns, on-time delivery performance, operating efficiency, productivity ratios, market share or change in market share, any one of which may be measured with respect to the Company or any one or more of its Subsidiaries and divisions and either in absolute terms or as compared to another company or companies, and quantifiable, objective measures of individual performance relevant to the particular individual's job responsibilities.

 

2.27.       Plan has the meaning given to such term in Section 1.01.

 

2.28.       Purchase Price , with respect to Options, shall have the meaning set forth in Section 6.01(b).

 

2.29.       Restricted Shares means Common Stock subject to restrictions imposed in connection with Awards granted under Article VII.

 

2.30.       Restricted Stock Unit means a unit representing the right to receive Common Stock or the value thereof in the future subject to restrictions imposed in connection with Awards granted under Article VII.

 

2.31.       Rule 16b-3 means Rule 16b-3 promulgated by the Securities and Exchange Commission under Section 16 of the Exchange Act, as the same may be amended from time to time, and any successor rule.

 

2.32.       Stock Appreciation Rights means awards granted in accordance with Article VI.

 

2.33       Termination of Service means the voluntary or involuntary termination of a Participant’s service as an employee, director or consultant with the Company or an Affiliate for any reason, including death, disability, retirement or as the result of the divestiture of the Participant's employer or any similar transaction in which the Participant's employer ceases to be the Company or one of its Subsidiaries. Whether entering military or other government service shall constitute Termination of Service, or whether and when a Termination of Service shall occur as a result of disability, shall be determined in each case by the Committee in its sole discretion.

 

  6  

 

   

ARTICLE III

 

ADMINISTRATION

 

3.01.        Committee .

 

(a)        Duties and Authority . The Plan shall be administered by the Committee and the Committee shall have exclusive and final authority in each determination, interpretation or other action affecting the Plan and its Participants. The Committee shall have the sole discretionary authority to interpret the Plan, to establish and modify administrative rules for the Plan, to impose such conditions and restrictions on Awards as it determines appropriate, and to make all factual determinations with respect to and take such steps in connection with the Plan and Awards granted hereunder as it may deem necessary or advisable. The Committee shall not, however, have or exercise any discretion that would disqualify amounts payable under Article X as performance-based compensation for purposes of Section 162(m) of the Code. The Committee may delegate such of its powers and authority under the Plan as it deems appropriate to a subcommittee of the Committee or designated officers or employees of the Company. In addition, the full Board may exercise any of the powers and authority of the Committee under the Plan. In the event of such delegation of authority or exercise of authority by the Board, references in the Plan to the Committee shall be deemed to refer, as appropriate, to the delegate of the Committee or the Board. Actions taken by the Committee or any subcommittee thereof, and any delegation by the Committee to designated officers or employees, under this Section 3.01 shall comply with Section 16(b) of the Exchange Act, the performance-based provisions of Section 162(m) of the Code, and the regulations promulgated under each of such statutory provisions, or the respective successors to such statutory provisions or regulations, as in effect from time to time, to the extent applicable.

 

(b)        Indemnification . Each person who is or shall have been a member of the Board or the Committee, or an officer or employee of the Company to whom authority was delegated in accordance with the Plan shall be indemnified and held harmless by the Company against and from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by such individual in connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action taken or failure to act under the Plan and against and from any and all amounts paid by him or her in settlement thereof, with the Company’s approval, or paid by him or her in satisfaction of any judgment in any such action, suit, or proceeding against him or her, provided he or she shall give the Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf; provided, however, that the foregoing indemnification shall not apply to any loss, cost, liability, or expense that is a result of his or her own willful misconduct. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company’s Certificate of Incorporation or Bylaws, conferred in a separate agreement with the Company, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless.

 

  7  

 

   

ARTICLE IV

 

SHARES

 

4.01.       Number of Shares Issuable . The total number of shares initially authorized to be issued under the Plan shall be 1,500,000 shares of Common Stock. The foregoing share limit shall be subject to adjustment in accordance with Section 11.07. The shares to be offered under the Plan shall be authorized and unissued Common Stock, or issued Common Stock that shall have been reacquired by the Company.

 

4.02.       Shares Subject to Terminated Awards . Common Stock covered by any unexercised portions of terminated or forfeited Options (including canceled Options) granted under Article VI, Restricted Stock or Restricted Stock Units forfeited as provided in Article VII, other stock-based Awards terminated or forfeited as provided under the Plan, and Common Stock subject to any Awards that are otherwise surrendered by the Participant may again be subject to new Awards under the Plan. Shares of Common Stock surrendered to or withheld by the Company in payment or satisfaction of the Purchase Price of an Option or tax withholding obligation with respect to an Award shall be available for the grant of new Awards under the Plan. In the event of the exercise of Stock Appreciation Rights, whether or not granted in tandem with Options, only the number of shares of Common Stock actually issued in payment of such Stock Appreciation Rights shall be charged against the number of shares of Common Stock available for the grant of Awards hereunder.

   

ARTICLE V

 

PARTICIPATION

 

5.01.       Eligible Participants . Participants in the Plan shall be such employees, directors and consultants of the Company and its Subsidiaries as the Committee, in its sole discretion, may designate from time to time. The Committee's designation of a Participant in any year shall not require the Committee to designate such person to receive Awards or grants in any other year. The designation of a Participant to receive Awards or grants under one portion of the Plan does not require the Committee to include such Participant under other portions of the Plan. The Committee shall consider such factors as it deems pertinent in selecting Participants and in determining the type and amount of their respective Awards. Subject to adjustment in accordance with Section 11.07, in any calendar year, no Participant shall be granted Awards in respect of more than 1.5 million shares of Common Stock (whether through grants of Options or Stock Appreciation Rights or other Awards of Common Stock or rights with respect thereto) or cash-based Awards for more than $1 million.

 

  8  

 

 

ARTICLE VI

 

STOCK OPTIONS AND STOCK APPRECIATION RIGHTS

 

6.01.        Option Awards .

 

(a)        Grant of Options . The Committee may grant, to such Participants as the Committee may select, Options entitling the Participant to purchase shares of Common Stock from the Company in such number, at such price, and on such terms and subject to such conditions, not inconsistent with the terms of this Plan, as may be established by the Committee. The terms of any Option granted under this Plan shall be set forth in an Award Agreement.

 

(b)        Purchase Price of Options . Subject to the requirements applicable to Incentive Stock Options under Section 6.01(d), the Purchase Price of each share of Common Stock which may be purchased upon exercise of any Option granted under the Plan shall be determined by the Committee.

 

(c)        Designation of Options . The Committee shall designate, at the time of the grant of each Option, the Option as an Incentive Stock Option or a Non-Qualified Stock Option; provided, however, that an Option may be designated as an Incentive Stock Option only if the applicable Participant is an employee of the Company on the Date of Grant.

 

(d)        Special Incentive Stock Option Rules . No Participant may be granted Incentive Stock Options under the Incentive Plan (or any other plans of the Company) that would result in Incentive Stock Options to purchase shares of Common Stock with an aggregate Fair Market Value (measured on the Date of Grant) of more than $100,000 first becoming exercisable by the Participant in any one calendar year. Notwithstanding any other provision of the Incentive Plan to the contrary, the Exercise Price of each Incentive Stock Option shall be equal to or greater than the Fair Market Value of the Common Stock subject to the Incentive Stock Option as of the Date of Grant of the Incentive Stock Option; provided , however , that no Incentive Stock Option shall be granted to any person who, at the time the Option is granted, owns stock (including stock owned by application of the constructive ownership rules in Section 424(d) of the Code) possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company, unless at the time the Incentive Stock Option is granted the price of the Option is at least one hundred ten percent (110%) of the Fair Market Value of the Common Stock subject to the Incentive Stock Option and the Incentive Stock Option by its terms is not exercisable for more than five years from the Date of Grant.

 

(e)        Rights As a Stockholder . A Participant or a transferee of an Option pursuant to Section 11.04 shall have no rights as a stockholder with respect to Common Stock covered by an Option until the Participant or transferee shall have become the holder of record of any such shares, and no adjustment shall be made for dividends in cash or other property or distributions or other rights with respect to any such Common Stock for which the record date is prior to the date on which the Participant or a transferee of the Option shall have become the holder of record of any such shares covered by the Option; provided, however, that Participants are entitled to share adjustments to reflect capital changes under Section 11.07.

 

  9  

 

 

6.02.        Stock Appreciation Rights .

 

(a)        Stock Appreciation Right Awards . The Committee is authorized to grant to any Participant one or more Stock Appreciation Rights. Such Stock Appreciation Rights may be granted either independent of or in tandem with Options granted to the same Participant. Stock Appreciation Rights granted in tandem with Options may be granted simultaneously with, or, in the case of Non-Qualified Stock Options, subsequent to, the grant to such Participant of the related Option; provided however, that: (i) any Option covering any share of Common Stock shall expire and not be exercisable upon the exercise of any Stock Appreciation Right with respect to the same share, (ii) any Stock Appreciation Right covering any share of Common Stock shall expire and not be exercisable upon the exercise of any related Option with respect to the same share, and (iii) an Option and Stock Appreciation Right covering the same share of Common Stock may not be exercised simultaneously. Upon exercise of a Stock Appreciation Right with respect to a share of Common Stock, the Participant shall be entitled to receive an amount equal to the excess, if any, of (A) the Fair Market Value of a share of Common Stock on the date of exercise over (B) the Exercise Price of such Stock Appreciation Right established in the Award Agreement, which amount shall be payable as provided in Section 6.02(c).

 

(b)        Exercise Price . The Exercise Price established under any Stock Appreciation Right granted under this Plan shall be determined by the Committee, but in the case of Stock Appreciation Rights granted in tandem with Options shall not be less than the Purchase Price of the related Option. Upon exercise of Stock Appreciation Rights granted in tandem with options, the number of shares subject to exercise under any related Option shall automatically be reduced by the number of shares of Common Stock represented by the Option or portion thereof which are surrendered as a result of the exercise of such Stock Appreciation Rights.

 

(c)         Payment of Incremental Value . Any payment which may become due from the Company by reason of a Participant's exercise of a Stock Appreciation Right may be paid to the Participant as determined by the Committee (i) all in cash, (ii) all in Common Stock, or (iii) in any combination of cash and Common Stock. In the event that all or a portion of the payment is made in Common Stock, the number of shares of Common Stock delivered in satisfaction of such payment shall be determined by dividing the amount of such payment or portion thereof by the Fair Market Value on the Exercise Date. No fractional share of Common Stock shall be issued to make any payment in respect of Stock Appreciation Rights; if any fractional share would be issuable, the combination of cash and Common Stock payable to the Participant shall be adjusted as directed by the Committee to avoid the issuance of any fractional share.

 

6.03.        Terms of Stock Options and Stock Appreciation Rights .

 

(a)        Conditions on Exercise . An Award Agreement with respect to Options or Stock Appreciation Rights may contain such waiting periods, exercise dates and restrictions on exercise (including, but not limited to, periodic installments) as may be determined by the Committee at the time of grant. In the event the Committee grants an Option or Stock Appreciation Right that would be subject to Section 409A of the Code, the Committee may include such additional terms, conditions and restrictions on the exercise of such Option or Stock Appreciation Right as the Committee deems necessary or advisable in order to comply with the requirements of Section 409A of the Code.

 

  10  

 

  

(b)           Duration of Options and Stock Appreciation Rights . Options and Stock Appreciation Rights shall terminate upon the first to occur of the following events:

 

(i)       Expiration of the Option or Stock Appreciation Right as provided in the Award Agreement; or

 

(ii)      Termination of the Award in the event of a Participant's disability, Retirement, death or other Termination of Service as provided in the Award Agreement; or

 

(iii)        In the case of an Incentive Stock Option, ten years from the Date of Grant (five years in certain cases, as described in Section 6.01(d)); or

 

(iv)      Solely in the case of a Stock Appreciation Right granted in tandem with an Option, upon the expiration of the related Option.

 

(c)         Acceleration or Extension of Exercise Time . The Committee, in its sole discretion, shall have the right (but shall not be obligated), exercisable on or at any time after the Date of Grant, to permit the exercise of an Option or Stock Appreciation Right (i) prior to the time such Option or Stock Appreciation Right would become exercisable under the terms of the Award Agreement, (ii) after the termination of the Option or Stock Appreciation Right under the terms of the Award Agreement, or (iii) after the expiration of the Option or Stock Appreciation Right.

 

6.04.       Exercise Procedures . Each Option and Stock Appreciation Right granted under the Plan shall be exercised under such procedures and by such methods as the Board may establish or approve from time to time. The Purchase Price of shares purchased upon exercise of an Option granted under the Plan shall be paid in full in cash by the Participant pursuant to the Award Agreement; provided, however, that the Committee may (but shall not be required to) permit payment to be made (a) by delivery to the Company of shares of Common Stock held by the Participant, (b) by a “net exercise” method under which the Company reduces the number of shares of Common Stock issued upon exercise by the largest whole number of shares with a Fair Market Value that does not exceed the aggregate Exercise Price, or (c) such other consideration as the Committee deems appropriate and in compliance with applicable law (including payment under an arrangement constituting a brokerage transaction as permitted under the provisions of Regulation T applicable to cashless exercises promulgated by the Federal Reserve Board, unless prohibited by Section 402 of the Sarbanes-Oxley Act of 2002). In the event that any Common Stock shall be transferred to the Company to satisfy all or any part of the Purchase Price, the part of the Purchase Price deemed to have been satisfied by such transfer of Common Stock shall be equal to the product derived by multiplying the Fair Market Value as of the date of exercise times the number of shares of Common Stock transferred to the Company. The Participant may not transfer to the Company in satisfaction of the Purchase Price any fractional share of Common Stock. Any part of the Purchase Price paid in cash upon the exercise of any Option shall be added to the general funds of the Company and may be used for any proper corporate purpose. Unless the Committee shall otherwise determine, any Common Stock transferred to the Company as payment of all or part of the Purchase Price upon the exercise of any Option shall be held as treasury shares.

 

  11  

 

  

6.05.       Change in Control . Unless otherwise provided by the Committee in the applicable Award Agreement, in the event of a Change in Control, no accelerated vesting of any Options or Stock Appreciation Rights outstanding on the date of such Change in Control shall occur.

 

6.06       Early Exercise. An Option may, but need not, include a provision by which the Participant may elect to exercise the Option in whole or in part prior to the date the Option is fully vested. The provision may be included in the Award Agreement at the time of grant of the Option or may be added to the Award Agreement by amendment at a later time. In the event of an early exercise of an Option, any shares of Common Stock received shall be subject to a special repurchase right in favor of the Company with terms established by the Board. The Board shall determine the time and/or the event that causes the repurchase right to terminate and fully vest the Common Stock in the Participant. Alternatively, in the sole discretion of the Board, one or more Participants may be granted stock purchase rights allowing them to purchase shares of Common Stock outright, subject to conditions and restrictions as the Board may determine.

 

 

ARTICLE VII

 

RESTRICTED SHARES AND RESTRICTED STOCK UNITS

 

7.01.       Award of Restricted Stock and Restricted Stock Units . The Committee may grant to any Participant an Award of Restricted Shares consisting of a specified number of shares of Common Stock issued to the Participant subject to such terms, conditions and forfeiture and transfer restrictions, whether based on performance standards, periods of service, retention by the Participant of ownership of specified shares of Common Stock or other criteria, as the Committee shall establish. The Committee may also grant Restricted Stock Units representing the right to receive shares of Common Stock in the future subject to such terms, conditions and restrictions, whether based on performance standards, periods of service, retention by the Participant of ownership of specified shares of Common Stock or other criteria, as the Committee shall establish. With respect to performance-based Awards of Restricted Shares or Restricted Stock Units intended to qualify as "performance-based" compensation for purposes of Section 162(m) of the Code, performance targets will consist of specified levels of one or more of the Performance Goals. The terms of any Restricted Share and Restricted Stock Unit Awards granted under this Plan shall be set forth in an Award Agreement which shall contain provisions determined by the Committee and not inconsistent with this Plan.

 

  12  

 

 

7.02         Restricted Shares .

 

(a)        Issuance of Restricted Shares . As soon as practicable after the Date of Grant of a Restricted Share Award by the Committee, the Company shall cause to be transferred on the books of the Company, or its agent, Common Stock, registered on behalf of the Participant, evidencing the Restricted Shares covered by the Award, but subject to forfeiture to the Company as of the Date of Grant if an Award Agreement with respect to the Restricted Shares covered by the Award is not duly executed by the Participant and timely returned to the Company. All Common Stock covered by Awards under this Article VII shall be subject to the restrictions, terms and conditions contained in the Plan and the Award Agreement entered into by the Participant. Until the lapse or release of all restrictions applicable to an Award of Restricted Shares, the share certificates representing such Restricted Shares may be held in custody by the Company, its designee, or, if the certificates bear a restrictive legend, by the Participant. Upon the lapse or release of all restrictions with respect to an Award as described in Section 7.02(d), one or more share certificates, registered in the name of the Participant, for an appropriate number of shares as provided in Section 7.02(d), free of any restrictions set forth in the Plan and the Award Agreement shall be delivered to the Participant.

 

(b)        Stockholder Rights . Beginning on the Date of Grant of the Restricted Share Award and subject to execution of the Award Agreement as provided in Section 7.02(a), the Participant shall become a stockholder of the Company with respect to all shares subject to the Award Agreement and shall have all of the rights of a stockholder, including, but not limited to, the right to vote such shares and the right to receive dividends; provided, however, that any Common Stock distributed as a dividend or otherwise with respect to any Restricted Shares as to which the restrictions have not yet lapsed, shall be subject to the same restrictions as such Restricted Shares and held or restricted as provided in Section 7.02(a).

 

(c)        Restriction on Transferability . None of the Restricted Shares may be assigned or transferred (other than by will or the laws of descent and distribution, or to an inter vivos trust with respect to which the Participant is treated as the owner under Sections 671 through 677 of the Code, except to the extent that Section 16 of the Exchange Act limits a Participant's right to make such transfers), pledged or sold prior to lapse of the restrictions applicable thereto.

 

(d)        Delivery of Shares Upon Vesting . Upon expiration or earlier termination of the forfeiture period without a forfeiture and the satisfaction of or release from any other conditions prescribed by the Committee, or at such earlier time as provided under the provisions of Section 7.04, the restrictions applicable to the Restricted Shares shall lapse. As promptly as administratively feasible thereafter, subject to the requirements of Section 11.05, the Company shall deliver to the Participant or, in case of the Participant's death, to the Participant's Beneficiary, one or more share certificates for the appropriate number of shares of Common Stock, free of all such restrictions, except for any restrictions that may be imposed by law.

 

  13  

 

 

(e)        Forfeiture of Restricted Shares . Subject to Sections 7.02(f) and 7.04, all Restricted Shares shall be forfeited and returned to the Company and all rights of the Participant with respect to such Restricted Shares shall terminate unless the Participant continues in the service of the Company or an Affiliate as an employee until the expiration of the forfeiture period for such Restricted Shares and satisfies any and all other conditions set forth in the Award Agreement. The Committee shall determine the forfeiture period (which may, but need not, lapse in installments) and any other terms and conditions applicable with respect to any Restricted Share Award.

 

(f)        Waiver of Forfeiture Period . Notwithstanding anything contained in this Article VII to the contrary, the Committee may, in its sole discretion, waive the forfeiture period and any other conditions set forth in any Award Agreement under appropriate circumstances (including the death, disability or Retirement of the Participant or a material change in circumstances arising after the date of an Award) and subject to such terms and conditions (including forfeiture of a proportionate number of the Restricted Shares) as the Committee shall deem appropriate.

 

7.03.       Restricted Stock Units .

 

(a)        Settlement of Restricted Stock Units . Payments shall be made to Participants with respect to their Restricted Stock Units as soon as practicable after the Committee has determined that the terms and conditions applicable to such Award have been satisfied or at a later date if distribution has been deferred. Payments to Participants with respect to Restricted Stock Units shall be made in the form of Common Stock, or cash or a combination of both, as the Committee may determine. The amount of any cash to be paid in lieu of Common Stock shall be determined on the basis of the Fair Market Value of the Common Stock on the date any such payment is processed. As to shares of Common Stock which constitute all or any part of such payment, the Committee may impose such restrictions concerning their transferability and/or their forfeiture as may be provided in the applicable Award Agreement or as the Committee may otherwise determine, provided such determination is made on or before the date certificates for such shares are first delivered to the applicable Participant.

 

(b)        Shareholder Rights . Until the lapse or release of all restrictions applicable to an Award of Restricted Stock Units, no shares of Common Stock shall be issued in respect of such Awards and no Participant shall have any rights as a shareholder of the Company with respect to the shares of Common Stock covered by such Award of Restricted Stock Units.

 

(c)        Waiver of Forfeiture Period . Notwithstanding anything contained in this Section 7.03 to the contrary, the Committee may, in its sole discretion, waive the forfeiture period and any other conditions set forth in any Award Agreement under appropriate circumstances (including the death, disability or retirement of the Participant or a material change in circumstances arising after the date of an Award) and subject to such terms and conditions (including forfeiture of a proportionate number of shares issuable upon settlement of the Restricted Stock Units constituting an Award) as the Committee shall deem appropriate.

 

  14  

 

  

(d)        Deferral of Payment . If approved by the Committee and set forth in the applicable Award Agreement, a Participant may elect to defer the amount payable with respect to the Participant’s Restricted Stock Units in accordance with such terms as may be established by the Committee, subject to the requirements of Section 409A of the Code.

 

7.04       Change in Control . Unless otherwise provided by the Committee in the applicable Award Agreement, no acceleration of the termination of any of the restrictions applicable to Restricted Shares and Restricted Stock Unit Awards shall occur in the event of a Change in Control.

 

 

ARTICLE VIII

 

PERFORMANCE AWARDS

 

8.01.         Performance Awards .

 

(a)        Award Periods and Calculations of Potential Incentive Amounts . The Committee may grant Performance Awards to Participants. A Performance Award shall consist of the right to receive a payment (measured by the Fair Market Value of a specified number of shares of Common Stock, increases in such Fair Market Value during the Award Period and/or a fixed cash amount) contingent upon the extent to which certain predetermined performance targets have been met during an Award Period. The Award Period shall be two or more fiscal or calendar years as determined by the Committee. The Committee, in its discretion and under such terms as it deems appropriate, may permit newly eligible Participants, such as those who are promoted or newly hired, to receive Performance Awards after an Award Period has commenced.

 

(b)        Performance Targets . Subject to Section 11.18, the performance targets applicable to a Performance Award may include such goals related to the performance of the Company or, where relevant, any one or more of its Subsidiaries or divisions and/or the performance of a Participant as may be established by the Committee in its discretion. In the case of Performance Awards to "covered employees" (as defined in Section 162(m) of the Code), the targets will be limited to specified levels of one or more of the Performance Goals. The performance targets established by the Committee may vary for different Award Periods and need not be the same for each Participant receiving a Performance Award in an Award Period.

 

(c)        Earning Performance Awards . The Committee, at or as soon as practicable after the Date of Grant, shall prescribe a formula to determine the percentage of the Performance Award to be earned based upon the degree of attainment of the applicable performance targets.

 

  15  

 

  

(d)        Payment of Earned Performance Awards . Subject to the requirements of Section 11.05, payments of earned Performance Awards shall be made in cash or Common Stock, or a combination of cash and Common Stock, in the discretion of the Committee. The Committee, in its sole discretion, may define, and set forth in the applicable Award Agreement, such terms and conditions with respect to the payment of earned Performance Awards as it may deem desirable.

 

8.02.       Termination of Service . In the event of a Participant’s Termination of Service during an Award Period, the Participant’s Performance Awards shall be forfeited except as may otherwise be provided in the applicable Award Agreement.

 

8.03.       Change in Control . Unless otherwise provided by the Committee in the applicable Award Agreement, in the event of a Change in Control, no accelerated vesting of any Performance Awards outstanding on the date of such Change in Control shall occur.

 

ARTICLE IX

 

OTHER STOCK-BASED AWARDS

 

9.01.       Grant of Other Stock-Based Awards . Other stock-based awards, consisting of stock purchase rights (with or without loans to Participants by the Company containing such terms as the Committee shall determine), Awards of Common Stock, or Awards valued in whole or in part by reference to, or otherwise based on, Common Stock, may be granted either alone or in addition to or in conjunction with other Awards under the Plan. Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine the persons to whom and the time or times at which such Awards shall be made, the number of shares of Common Stock to be granted pursuant to such Awards, and all other conditions of the Awards. Any such Award shall be confirmed by an Award Agreement executed by the Committee and the Participant, which Award Agreement shall contain such provisions as the Committee determines to be necessary or appropriate to carry out the intent of this Plan with respect to such Award.

 

9.02.         Terms of Other Stock-Based Awards . In addition to the terms and conditions specified in the Award Agreement, Awards made pursuant to this Article IX shall be subject to the following:

 

(a)       Any Common Stock subject to Awards made under this Article IX may not be sold, assigned, transferred, pledged or otherwise encumbered prior to the date on which the shares are issued, or, if later, the date on which any applicable restriction, performance or deferral period lapses; and

 

  16  

 

 

(b)       If specified by the Committee in the Award Agreement, the recipient of an Award under this Article IX shall be entitled to receive, currently or on a deferred basis, interest or dividends or dividend equivalents with respect to the Common Stock or other securities covered by the Award; and

 

(c)       The Award Agreement with respect to any Award shall contain provisions dealing with the disposition of such Award in the event of a Termination of Service prior to the exercise, payment or other settlement of such Award, whether such termination occurs because of Retirement, disability, death or other reason, with such provisions to take account of the specific nature and purpose of the Award.

   

ARTICLE X

 

SHORT-TERM CASH INCENTIVE AWARDS

 

10.01.       Eligibility . Executive officers of the Company who are from time to time determined by the Committee to be "covered employees" for purposes of Section 162(m) of the Code will be eligible to receive short-term cash incentive awards under this Article X.

 

10.02.       Awards .

 

(a)        Performance Targets . The Committee shall establish objective performance targets based on specified levels of one or more of the Performance Goals. Such performance targets shall be established by the Committee on a timely basis to ensure that the targets are considered "preestablished" for purposes of Section 162(m) of the Code.

 

(b)        Amounts of Awards . In conjunction with the establishment of performance targets for a fiscal year or such other short-term performance period established by the Committee, the Committee shall adopt an objective formula (on the basis of percentages of Participants' salaries, shares in a bonus pool or otherwise) for computing the respective amounts payable under the Plan to Participants if and to the extent that the performance targets are attained. Such formula shall comply with the requirements applicable to performance-based compensation plans under Section 162(m) of the Code and, to the extent based on percentages of a bonus pool, such percentages shall not exceed 100% in the aggregate.

 

(c)        Payment of Awards . Awards will be payable to Participants in cash each year upon prior written certification by the Committee of attainment of the specified performance targets for the preceding fiscal year or other applicable performance period.

 

(d)        Negative Discretion . Notwithstanding the attainment by the Company of the specified performance targets, the Committee shall have the discretion, which need not be exercised uniformly among the Participants, to reduce or eliminate the award that would be otherwise paid.

 

  17  

 

  

(e)        Guidelines . The Committee may adopt from time to time written policies for its implementation of this Article X. Such guidelines shall reflect the intention of the Company that all payments hereunder qualify as performance-based compensation under Section 162(m) of the Code.

 

(f)        Non-Exclusive Arrangement . The adoption and operation of this Article X shall not preclude the Board or the Committee from approving other short-term incentive compensation arrangements for the benefit of individuals who are Participants hereunder as the Board or Committee, as the case may be, deems appropriate and in the best of the Company.

  

ARTICLE XI

 

TERMS APPLICABLE GENERALLY TO AWARDS

GRANTED UNDER THE PLAN

 

11.01.       Plan Provisions Control Award Terms . Except as provided in Section 11.16, the terms of the Plan shall govern all Awards granted under the Plan, and in no event shall the Committee have the power to grant any Award under the Plan which is contrary to any of the provisions of the Plan. In the event any provision of any Award granted under the Plan shall conflict with any term in the Plan as constituted on the Date of Grant of such Award, the term in the Plan as constituted on the Date of Grant of such Award shall control. Except as provided in Section 11.03 and Section 11.07, the terms of any Award granted under the Plan may not be changed after the Date of Grant of such Award so as to materially decrease the value of the Award without the express written approval of the holder.

 

11.02.       Award Agreement . No person shall have any rights under any Award granted under the Plan unless and until the Company and the Participant to whom such Award shall have been granted shall have executed and delivered an Award Agreement or received any other Award acknowledgment authorized by the Committee expressly granting the Award to such person and containing provisions setting forth the terms of the Award.

 

11.03.       Modification of Award After Grant . No Award granted under the Plan to a Participant may be modified (unless such modification does not materially decrease the value of the Award) after the Date of Grant except by express written agreement between the Company and the Participant, provided that any such change (a) shall not be inconsistent with the terms of the Plan, and (b) shall be approved by the Committee.

 

  18  

 

 

11.04.       Limitation on Transfer . Except as provided in Section 7.01(c) in the case of Restricted Shares, a Participant's rights and interest under the Plan may not be assigned or transferred other than by will or the laws of descent and distribution, and during the lifetime of a Participant, only the Participant personally (or the Participant's personal representative) may exercise rights under the Plan. The Participant's Beneficiary may exercise the Participant's rights to the extent they are exercisable under the Plan following the death of the Participant. Notwithstanding the foregoing, to the extent permitted under Section 16(b) of the Exchange Act with respect to Participants subject to such Section, the Committee may grant Non-Qualified Stock Options that are transferable, without payment of consideration, to immediate family members of the Participant or to trusts or partnerships for such family members, and the Committee may also amend outstanding Non-Qualified Stock Options to provide for such transferability.

 

11.05.       Taxes . The Company shall be entitled, if the Committee deems it necessary or desirable, to withhold (or secure payment from the Participant in lieu of withholding) the amount of any withholding or other tax required by law to be withheld or paid by the Company with respect to any amount payable and/or shares issuable under such Participant's Award, or with respect to any income recognized upon a disqualifying disposition of shares received pursuant to the exercise of an Incentive Stock Option, and the Company may defer payment or issuance of the cash or shares upon exercise or vesting of an Award unless indemnified to its satisfaction against any liability for any such tax. The amount of such withholding or tax payment shall be determined by the Committee and shall be payable by the Participant at such time as the Committee determines in accordance with the following rules:

 

(a)       The Participant shall have the right to elect to meet his or her withholding requirement (i) by having withheld from such Award at the appropriate time that number of shares of Common Stock, rounded down to the nearest whole share, whose Fair Market Value is equal to the amount of withholding taxes due, (ii) by direct payment to the Company in cash of the amount of any taxes required to be withheld with respect to such Award or (iii) by a combination of shares and cash.

 

(b)       In the case of Participants who are subject to Section 16 of the Exchange Act, the Committee may impose such limitations and restrictions as it deems necessary or appropriate with respect to the delivery or withholding of shares of Common Stock to meet tax withholding obligations.

 

11.06.       Surrender of Awards; Authorization of Repricing . Any Award granted under the Plan may be surrendered to the Company for cancellation on such terms as the Committee and the holder approve. Without requiring shareholder approval, the Committee may substitute a new Award under this Plan in connection with the surrender by the Participant of an equity compensation award previously granted under this Plan or any other plan sponsored by the Company, including the substitution or grant of (i) an Option or Stock Appreciation Right with a lower exercise price than the Option or Stock Appreciation Right being surrendered, (ii) a different type of Award upon the surrender or cancellation of an Option or Stock Appreciation Right with an exercise price above the Fair Market Value of the underlying Common Stock on the date of such substitution or grant, or (iii) any other Award constituting a repricing of an Option or Stock Appreciation Right.

 

  19  

 

 

11.07.      Adjustments to Reflect Capital Changes .

 

(a)        Recapitalization . In the event of any corporate event or transaction (including, but not limited to, a change in the Common Stock or the capitalization of the Company) such as a merger, consolidation, reorganization, recapitalization, separation, partial or complete liquidation, stock dividend, stock split, reverse stock split, split up, spin-off, or other distribution of stock or property of the Company, a combination or exchange of Common Stock, dividend in kind, or other like change in capital structure, number of outstanding shares of Common Stock, distribution (other than normal cash dividends) to shareholders of the Company, or any similar corporate event or transaction, the Committee, in order to prevent dilution or enlargement of Participants’ rights under this Plan, shall make equitable and appropriate adjustments and substitutions, as applicable, to or of the number and kind of shares subject to outstanding Awards, the Purchase Price or Exercise Price for such shares, the number and kind of shares available for future issuance under the Plan and the maximum number of shares in respect of which Awards can be made to any Participant in any calendar year, and other determinations applicable to outstanding Awards. The Committee shall have the power and sole discretion to determine the amount of the adjustment to be made in each case.

 

(b)        Merger . In the event that the Company is a party to a Merger, outstanding Awards shall be subject to the agreement of merger or reorganization. Such agreement may provide, without limitation, for the continuation of outstanding Awards by the Company (if the Company is a surviving corporation), for their assumption by the surviving corporation or its parent or subsidiary, for the substitution by the surviving corporation or its parent or subsidiary of its own awards for such Awards, for accelerated vesting and accelerated expiration, or for settlement in cash or cash equivalents.

 

(c)        Options to Purchase Shares or Stock of Acquired Companies . After any Merger in which the Company or an Affiliate shall be a surviving corporation, the Committee may grant substituted options under the provisions of the Plan, pursuant to Section 424 of the Code, replacing old options granted under a plan of another party to the Merger whose shares or stock subject to the old options may no longer be issued following the Merger. The foregoing adjustments and manner of application of the foregoing provisions shall be determined by the Committee in its sole discretion. Any such adjustments may provide for the elimination of any fractional shares which might otherwise become subject to any Options.

 

11.08.       No Right to Continued Service . No person shall have any claim of right to be granted an Award under this Plan. Neither the Plan nor any action taken hereunder shall be construed as giving any Participant any right to be retained in the service of the Company or any of its Subsidiaries.

 

11.09.       Awards Not Includable for Benefit Purposes . Payments received by a Participant pursuant to the provisions of the Plan shall not be included in the determination of benefits under any pension, group insurance or other benefit plan applicable to the Participant which is maintained by the Company or any of its Subsidiaries, except as may be provided under the terms of such plans or determined by the Board.

 

  20  

 

  

11.10.      Governing Law . All determinations made and actions taken pursuant to the Plan shall be governed by the laws of Delaware and construed in accordance therewith.

 

11.11.      No Strict Construction . No rule of strict construction shall be implied against the Company, the Committee, or any other person in the interpretation of any of the terms of the Plan, any Award granted under the Plan or any rule or procedure established by the Committee.

 

11.12.      Compliance with Rule 16b-3 . It is intended that, unless the Committee determines otherwise, Awards under the Plan be eligible for exemption under Rule 16b-3. The Board is authorized to amend the Plan and to make any such modifications to Award Agreements to comply with Rule 16b-3, as it may be amended from time to time, and to make any other such amendments or modifications as it deems necessary or appropriate to better accomplish the purposes of the Plan in light of any amendments made to Rule 16b-3.

 

11.13.      Captions . The captions (i.e., all Section headings) used in the Plan are for convenience only, do not constitute a part of the Plan, and shall not be deemed to limit, characterize or affect in any way any provisions of the Plan, and all provisions of the Plan shall be construed as if no captions have been used in the Plan.

 

11.14.      Severability . Whenever possible, each provision in the Plan and every Award at any time granted under the Plan shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of the Plan or any Award at any time granted under the Plan shall be held to be prohibited by or invalid under applicable law, then (a) such provision shall be deemed amended to accomplish the objectives of the provision as originally written to the fullest extent permitted by law and (b) all other provisions of the Plan and every other Award at any time granted under the Plan shall remain in full force and effect.

 

11.15.      Amendment and Termination .

 

(a)        Amendment . The Board shall have complete power and authority to amend the Plan at any time; provided, however, that the Board shall not, without the requisite affirmative approval of stockholders of the Company, make any amendment which requires stockholder approval under the Code or under any other applicable law or rule of any stock exchange which lists Common Stock or Company Voting Securities. No termination or amendment of the Plan may, without the consent of the Participant to whom any Award shall theretofore have been granted under the Plan, adversely affect the right of such individual under such Award.

 

  21  

 

 

(b)        Termination . The Board shall have the right and the power to terminate the Plan at any time. No Award shall be granted under the Plan after the termination of the Plan, but the termination of the Plan shall not have any other effect and any Award outstanding at the time of the termination of the Plan may be exercised after termination of the Plan at any time prior to the expiration date of such Award to the same extent such Award would have been exercisable had the Plan not terminated.

 

11.16.      Foreign Qualified Awards . Awards under the Plan may be granted to such employees of the Company and its Subsidiaries who are residing in foreign jurisdictions as the Committee in its sole discretion may determine from time to time. The Committee may adopt such supplements to the Plan as may be necessary or appropriate to comply with the applicable laws of such foreign jurisdictions and to afford Participants favorable treatment under such laws; provided, however, that no Award shall be granted under any such supplement with terms or conditions inconsistent with the provision set forth in the Plan.

 

11.17.      Dividend Equivalents . For any Award granted under the Plan, the Committee shall have the discretion, upon the Date of Grant or thereafter, to establish a Dividend Equivalent Account with respect to the Award, and the applicable Award Agreement or an amendment thereto shall confirm such establishment. If a Dividend Equivalent Account is established, the following terms shall apply:

 

(a)        Terms and Conditions . Dividend Equivalent Accounts shall be subject to such terms and conditions as the Committee shall determine and as shall be set forth in the applicable Award Agreement. Such terms and conditions may include, without limitation, for the Participant’s Account to be credited as of the record date of each cash dividend on the Common Stock with an amount equal to the cash dividends which would be paid with respect to the number of shares of Common Stock then covered by the related Award if such shares of Common Stock had been owned of record by the Participant on such record date.

 

(b)        Unfunded Obligation . Dividend Equivalent Accounts shall be established and maintained only on the books and records of the Company and no assets or funds of the Company shall be set aside, placed in trust, removed from the claims of the Company's general creditors, or otherwise made available until such amounts are actually payable as provided hereunder.

 

11.18      Adjustment of Performance Goals and Targets. Notwithstanding any provision of the Plan to the contrary, the Committee shall have the authority to adjust any Performance Goal, performance target or other performance-based criteria established with respect to any Award under the Plan if circumstances occur (including, but not limited to, unusual or nonrecurring events, changes in tax laws or accounting principles or practices or changed business or economic conditions) that cause any such Performance Goal, performance target or performance-based criteria to be inappropriate in the judgment of the Committee; provided, that with respect to any Award that is intended to qualify for the "performance-based compensation" exception under Section 162(m) of the Code and the regulations thereunder, any adjustment by the Committee shall be consistent with the requirements of Section 162(m) and the regulations thereunder.

 

  22  

 

  

11.19       Legality of Issuance. Notwithstanding any provision of this Plan or any applicable Award Agreement to the contrary, the Committee shall have the sole discretion to impose such conditions, restrictions and limitations (including suspending exercises of Options or Stock Appreciation Rights and the tolling of any applicable exercise period during such suspension) on the issuance of Common Stock with respect to any Award unless and until the Committee determines that such issuance complies with (i) any applicable registration requirements under the Securities Act of 1933 or the Committee has determined that an exemption therefrom is available, (ii) any applicable listing requirement of any stock exchange on which the Common Stock is listed, (iii) any applicable Company policy or administrative rules, and (iv) any other applicable provision of state, federal or foreign law, including foreign securities laws where applicable.

 

11.20       Restrictions on Transfer. Regardless of whether the offering and sale of Common Stock under the Plan have been registered under the Securities Act of 1933 or have been registered or qualified under the securities laws of any state, the Company may impose restrictions upon the sale, pledge, or other transfer of such Common Stock (including the placement of appropriate legends on stock certificates) if, in the judgment of the Company and its counsel, such restrictions are necessary or desirable to achieve compliance with the provisions of the Securities Act of 1933, the securities laws of any state, the United States or any other applicable foreign law.

 

11.21       Further Assurances. As a condition to receipt of any Award under the Plan, a Participant shall agree, upon demand of the Company, to do all acts and execute, deliver and perform all additional documents, instruments and agreements which may be reasonably required by the Company, to implement the provisions and purposes of the Plan.

 

  23  

 

Exhibit 10.2

 

NOTICE OF GRANT OF [INCENTIVE/NON-QUALIFIED] STOCK OPTION AWARD

 

TANDON DIGITTAL, INC.

2012 OMNIBUS INCENTIVE PLAN

 

FOR GOOD AND VALUABLE CONSIDERATION, Tandon Digital, Inc. (the “Company”) hereby grants, pursuant to the provisions of the Company’s 2012 Omnibus Incentive Plan (the “Plan”), to the Participant designated in this Notice of Grant of [Incentive/Non-Qualified] Stock Option Award (the “Notice”) an option to purchase the number of shares of the common stock of the Company set forth in the Notice (the “Shares”), subject to certain restrictions as outlined below in this Notice and the additional provisions set forth in the attached Terms and Conditions of Stock Option Award (collectively, the “Agreement”). Also enclosed is a copy of the information statement describing important provisions of the Plan.

 

Optionee : [__________]

 

Date of Grant :               ____________ Type of Option :   [Incentive/Non-Qualified] Stock Option
Exercise Price per Share :           $____ Expiration Date :                ____________
Total Number of
Shares Granted :                      _______
Total Exercise Price :                              $______
Vesting Schedule :     [1/4 vesting on each of the first, second, third and fourth anniversaries of the date of the grant]

Exercise After Termination of Service :

 

Termination of Service for any reason : any non-vested portion of the Option expires immediately;

 

Termination of Service due to death or Disability : vested portion of the Option is exercisable by the Optionee (or, in the event of the Optionee’s death, the Optionee’s Beneficiary) for one year after the Optionee’s Termination;

 

Termination of Service for any reason other than death or Disability : vested portion of the Option is exercisable for a period of ninety days following the Optionee’s Termination.

 

In no event may this Option be exercised after the Expiration Date as provided above .

 

By signing below, the Optionee agrees that this [Incentive/Non-Qualified] Stock Option Award is granted under and governed by the terms and conditions of the Company’s 2012 Omnibus Incentive Plan and the attached Terms and Conditions.

 

Participant   Tandon Digital, Inc.
       
    By:  
    Title:  
Date:     Date:  

 

1  

 

 

TERMS AND CONDITIONS OF STOCK OPTION AWARD

 

1.            Grant of Option . The Option granted to the Optionee and described in the Notice of Grant is subject to the terms and conditions of the Plan, which is incorporated by reference in its entirety into these Terms and Conditions of Stock Option Award.

 

The Board of Directors of the Company has authorized and approved the 2008 Omnibus Incentive Plan (the “Plan”), which has been approved by the stockholders of the Company. The Committee has approved an award to the Optionee of a number of shares of the Company’s common stock, conditioned upon the Participant’s acceptance of the provisions set forth in the Notice and these Terms and Conditions within 60 days after the Notice and these Terms and Conditions are presented to the Optionee for review. For purposes of the Notice and these Terms and Conditions, any reference to the Company shall include a reference to any Affiliate.

 

If designated in the Notice of Grant as an Incentive Stock Option (“ISO”), this Option is intended to qualify as an Incentive Stock Option as defined in Section 422 of the Code. Nevertheless, to the extent that the Option fails to meet the requirements of an ISO under Section 422 of the Code, this Option shall be treated as a Non-Qualified Stock Option (“NSO”).

 

The Company intends that this Option not be considered to provide for the deferral of compensation under Section 409A of the Code and that this Agreement shall be so administered and construed. Further, the Company may modify the Plan and this Award to the extent necessary to fulfill this intent.

 

2.            Exercise of Option .

 

(a)           Right to Exercise . This Option shall be exercisable, in whole or in part, during its term in accordance with the Vesting Schedule set out in the Notice of Grant and with the applicable provisions of the Plan and this Option Agreement. No Shares shall be issued pursuant to the exercise of an Option unless the issuance and exercise comply with applicable laws. Assuming such compliance, for income tax purposes the Shares shall be considered transferred to the Optionee on the date on which the Option is exercised with respect to such Shares. The Committee may, in its discretion, (i) accelerate vesting of the Option, or (ii) extend the applicable exercise period to the extent permitted under Section 6.03 of the Plan.

 

(b)           Method of Exercise . The Optionee may exercise the Option by delivering an exercise notice in a form approved by the Company (the “Exercise Notice”) which shall state the election to exercise the Option, the number of Shares with respect to which the Option is being exercised, and such other representations and agreements as may be required by the Company. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Shares exercised. This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by the aggregate Exercise Price.

 

(c)           Acceleration of Vesting on Change in Control . Unless otherwise specified in the Notice of Grant, in the event of a Change in Control, no accelerated vesting of any Options outstanding on the date of such Change in Control shall occur.

 

2  

 

 

3.            Method of Payment . If the Optionee elects to exercise the Option by submitting an Exercise Notice under Section 2(b) of this Agreement, the aggregate Exercise Price (as well as any applicable withholding or other taxes) shall be paid by cash or check; provided, however , that the Committee may consent, in its discretion, to payment in any of the following forms, or a combination of them:

 

(a)          cash or check;

 

(b)          a “net exercise” (as described in the Plan or such other consideration received by the Company under a cashless exercise program approved by the Company in connection with the Plan;

 

(c)          surrender of other Shares owned by the Optionee which have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the Exercised Shares and any applicable withholding; or

 

(d)          any other consideration that the Committee deems appropriate and in compliance with applicable law.

 

4.            Restrictions on Exercise . This Option may not be exercised until such time as the Plan has been approved by the stockholders of the Company, or if the issuance of the Shares upon exercise or the method of payment of consideration for those shares would constitute a violation of any applicable law or regulation.

 

5.            Non-Transferability of Option . This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of the Optionee only by the Optionee [IF THE OPTION IS A NSO, THE FOLLOWING LANGUAGE MAY BE INCLUDED PERMITTING LIMITED TRANSFER OF THE OPTION] [; provided, however, that the Optionee may transfer the Options (i) pursuant to a qualified domestic relations order (as defined by the Code or the rules thereunder) or (ii) to any member of the Optionee’s Immediate Family or to a trust, limited liability company, family limited partnership or other equivalent vehicle, established for the exclusive benefit of one or more members of his Immediate Family by delivering to the Company a Notice of Assignment in a form acceptable to the Company. No transfer or assignment of the Option to or on behalf of an Immediate Family member under this Section 5 shall be effective until the Company has acknowledged such transfer or assignment in writing. “Immediate Family” means the Optionee’s parents, spouse, children, siblings, and grandchildren. Following transfer, the Options shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer. In the event an Option is transferred as contemplated in this Section 5, such Option may not be subsequently transferred by the transferee except by will or the laws of descent and distribution.] The terms of the Plan and this Option Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee.

 

6.            Term of Option . This Option may be exercised only within the term set out in the Notice of Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Option Agreement.

 

3  

 

 

7.            Withholding .

 

(a)          The Committee shall determine the amount of any withholding or other tax required by law to be withheld or paid by the Company with respect to any income recognized by the Optionee with respect to the Option Award.

 

(b)          The Optionee shall be required to meet any applicable tax withholding obligation in accordance with the provisions of Section 11.05 of the Plan.

 

(c)          Subject to any rules prescribed by the Committee, the Optionee shall have the right to elect to meet any withholding requirement (i) by having withheld from this Award at the appropriate time that number of whole shares of common stock whose fair market value is equal to the amount of any taxes required to be withheld with respect to such Award, (ii) by direct payment to the Company in cash of the amount of any taxes required to be withheld with respect to such Award or (iii) by a combination of shares and cash.

 

8.            Defined Terms . Capitalized terms used but not defined in the Notice and these Terms and Conditions shall have the meanings set forth in the Plan, unless such term is defined in any Employment Agreement between the Optionee and the Company or an Affiliate. Any terms used in the Notice and these Terms and Conditions, but defined in the Optionee’s Employment Agreement are incorporated herein by reference and shall be effective for purposes of the Notice and these Terms and Conditions without regard to the continued effectiveness of the Employment Agreement.

 

9.            Optionee Representations . The Optionee hereby represents to the Company that the Optionee has read and fully understands the provisions of the Notice, these Terms and Conditions and the Plan and the Optionee’s decision to participate in the Plan is completely voluntary. Further, the Optionee acknowledges that the Optionee is relying solely on his or her own advisors with respect to the tax consequences of this stock option award.

 

10.          Regulatory Limitations on Exercises . Notwithstanding the other provisions of this Option Agreement, no option exercise or issuance of shares of Common Stock pursuant to this Option Agreement shall be effective if (i) the shares reserved under the Plan are not subject to an effective registration statement at the time of such exercise or issuance, or otherwise eligible for an exemption from registration, or (ii) the Company determines in good faith that such exercise or issuance would violate any applicable securities or other law or regulation.

 

11.          Miscellaneous .

 

(a)           Notices . All notices, requests, deliveries, payments, demands and other communications which are required or permitted to be given under these Terms and Conditions shall be in writing and shall be either delivered personally or sent by registered or certified mail, or by private courier, return receipt requested, postage prepaid to the parties at their respective addresses set forth herein, or to such other address as either shall have specified by notice in writing to the other. Notice shall be deemed duly given hereunder when delivered or mailed as provided herein.

 

(b)           Waiver . The waiver by any party hereto of a breach of any provision of the Notice or these Terms and Conditions shall not operate or be construed as a waiver of any other or subsequent breach.

 

4  

 

 

(c)           Entire Agreement . These Terms and Conditions, the Notice and the Plan constitute the entire agreement between the parties with respect to the subject matter hereof.

 

(d)           Binding Effect; Successors . These Terms and Conditions shall inure to the benefit of and be binding upon the parties hereto and to the extent not prohibited herein, their respective heirs, successors, assigns and representatives. Nothing in these Terms and Conditions, express or implied, is intended to confer on any person other than the parties hereto and as provided above, their respective heirs, successors, assigns and representatives any rights, remedies, obligations or liabilities.

 

(e)           Governing Law . The Notice and these Terms and Conditions shall be governed by and construed in accordance with the laws of the State of Delaware.

 

(f)           Headings . The headings contained herein are for the sole purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of these Terms and Conditions.

 

(g)           Conflicts; Amendment . The provisions of the Plan are incorporated in these Terms and Conditions in their entirety. In the event of any conflict between the provisions of these Terms and Conditions and the Plan, the provisions of the Plan shall control. The Agreement may be amended at any time by written agreement of the parties hereto.

 

(h)           No Right to Continued Employment . Nothing in the Notice or these Terms and Conditions shall confer upon the Optionee any right to continue in the employ or service of the Company or affect the right of the Company to terminate the Optionee’s employment or service at any time.

 

(i)           Further Assurances . The Optionee agrees, upon demand of the Company or the Committee, to do all acts and execute, deliver and perform all additional documents, instruments and agreements which may be reasonably required by the Company or the Committee, as the case may be, to implement the provisions and purposes of the Notice and these Terms and Conditions and the Plan.

 

5  

 

Exhibit 10.3

 

NOTICE OF GRANT OF RESTRICTED STOCK AWARD

 

TANDON DIGITAL, INC.

2012 OMNIBUS INCENTIVE PLAN

 

FOR GOOD AND VALUABLE CONSIDERATION, Tandon Digital, Inc. (the “Company”) hereby grants, pursuant to the provisions of the Company’s 2012 Omnibus Incentive Plan (the “Plan”), to the Participant designated in this Notice of Grant of Restricted Stock Award (the “Notice”) the number of shares of the common stock of the Company set forth in the Notice, subject to certain restrictions as outlined below in this Notice and the additional provisions set forth in the attached Terms and Conditions of Restricted Stock Award (the “Agreement”). Also enclosed is a copy of the information statement describing important provisions of the Plan.

 

Participant: [__________]
   
Grant Date: [__________]

 

# of Shares of Restricted Stock: [________]

 

Purchase Price:          Subject to the withholding provisions of Paragraph 5 of the Terms and Conditions, this Restricted Stock Award does not require the Participant to pay any purchase price or other cash consideration in connection with the issuance or delivery of the Restricted Stock.

 

Vesting Schedule:          Subject to the provisions contained in Paragraphs 4, 5 and 6 of the Terms and Conditions, this Restricted Stock Award shall vest, and the applicable Restrictions set forth in the Terms and Conditions shall lapse in accordance with the following schedule, in the event the Participant does not have a Termination of Service prior to the applicable vesting date:

 

Date of Vesting   Cumulative Amount Vested  
[Sample Vesting Schedule]        
First Anniversary of Grant Date     25 %
Second Anniversary of Grant Date     50 %
Third Anniversary of Grant Date     75 %
Fourth Anniversary of Grant Date     100 %]

 

Change in Control: Unless otherwise specified in this Notice of Grant, no accelerated vesting of any Restricted Shares shall occur in the event of a Change in Control.

 

Forfeiture: The Participant’s rights in the Restricted Stock Award on which the Restrictions have not lapsed pursuant to the vesting schedule provisions above shall be forfeited in full in the event of the Participant’s Termination of Service for any reason.

 

By signing below, the Participant agrees that this Restricted Stock Award is granted under and governed by the terms and conditions of the Company’s 2008 Omnibus Incentive Plan and the attached Terms and Conditions.

 

Participant   Tandon Digital, Inc.
       
    By:  
    Title:  
Date:     Date:  

 

 

 

 

TERMS AND CONDITIONS OF RESTRICTED STOCK AWARD

 

These Terms and Conditions of Restricted Stock Award relates to the Notice of Grant of Restricted Stock Award (the “Notice”) attached hereto, by and between Tandon Digital, Inc. (the “Company”), and the person identified in the Notice (the “Participant”).

 

The Board of Directors of the Company has authorized and approved the 2012 Omnibus Incentive Plan (the “Plan”), which has been approved by the stockholders of the Company. The Committee has approved an award to the Participant of a number of shares of the Company’s common stock, conditioned upon the Participant’s acceptance of the provisions set forth in the Notice and these Terms and Conditions within 60 days after the Notice and these Terms and Conditions are presented to the Participant for review. For purposes of the Notice and these Terms and Conditions, any reference to the Company shall include a reference to any Affiliate.

 

1. Grant of Restricted Stock .

 

(a)        Subject to the terms and conditions of the Plan, as of the Grant Date, the Company grants to the Participant the number of shares of Common Stock set forth in the Notice (the “Restricted Shares”), subject to the restrictions set forth in Paragraph 2 of these Terms and Conditions, the provisions of the Plan and the other provisions contained in these Terms and Conditions. If and when the restrictions set forth in Paragraph 2 expire in accordance with these Terms and Conditions without forfeiture of the Restricted Shares, and upon the satisfaction of all other applicable conditions as to the Restricted Shares, such shares shall no longer be considered Restricted Shares for purposes of these Terms and Conditions.

 

(b)        As soon as practicable after the Grant Date, the Company shall direct that a stock certificate or certificates representing the applicable Restricted Shares be registered in the name of and issued to the Participant. Such certificate or certificates shall be held in the custody of the Company or its designee until the expiration of the applicable Restricted Period (as defined in Paragraph 3). On or before the date of execution of the Notice, the Participant has delivered to the Company one or more stock powers endorsed in blank relating to the Restricted Shares.

 

(c)        Except as provided in Paragraph 1(d), in the event that a certificate for the Restricted Shares is delivered to the Participant, such certificate shall bear the following legend (the “Legend”):

 

The ownership and transferability of this certificate and the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) of the Tandon Digital, Inc. 2012 Omnibus Incentive Plan and a Restricted Stock Award Notice entered into between the registered owner and Tandon Digital, Inc. Copies of such Plan and Notice are on file in the executive offices of Tandon Digital, Inc.

 

 

 

 

In addition, the stock certificate or certificates for the Restricted Shares shall be subject to such stop-transfer orders and other restrictions as the Company may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Common Stock is then listed, and any applicable federal or state securities law, and the Company may cause a legend or legends to be placed on such certificate or certificates to make appropriate reference to such restrictions.

 

(d)        As soon as administratively practicable following the expiration of the Restricted Period without a forfeiture of the Restricted Shares, and upon the satisfaction of all other applicable conditions as to the Restricted Shares, including, but not limited to, the payment by the Participant of all applicable withholding taxes, the Company shall deliver or cause to be delivered to the Participant a certificate or certificates for the applicable Restricted Shares which shall not bear the Legend.

 

2. Restrictions .

 

(a)         The Participant shall have all rights and privileges of a stockholder as to the Restricted Shares, including the right to vote and receive dividends or other distributions with respect to the Restricted Shares, except that the following restrictions shall apply:

 

(i) the Participant shall not be entitled to delivery of the certificate or certificates for the Restricted Shares until the expiration of the Restricted Period without a forfeiture of the Restricted Shares and upon the satisfaction of all other applicable conditions;

 

(ii)  none of the Restricted Shares may be sold, transferred, assigned, pledged or otherwise encumbered or disposed of during the Restricted Period applicable to such shares, except as provided in Section 7.02(c) of the Plan or as otherwise permitted by the Committee in its sole discretion or pursuant to rules adopted by the Committee in accordance with the Plan; and

 

(iii) all of the Restricted Shares shall be forfeited and returned to the Company and all rights of the Participant with respect to the Restricted Shares shall terminate in their entirety on the terms and conditions set forth in Paragraph 4.

 

(b)         Any attempt to dispose of Restricted Shares or any interest in the Restricted Shares in a manner contrary to the restrictions set forth in these Terms and Conditions shall be void and of no effect.

 

3. Restricted Period and Vesting . The “Restricted Period” is the period beginning on the Grant Date and ending on the date the Restricted Shares, or such applicable portion of the Restricted Shares, are deemed vested under the schedule set forth in the Notice. The Restricted Shares shall be deemed vested and no longer subject to forfeiture under Paragraph 4 in accordance with the vesting schedule set forth in the Notice or earlier, if specified in the Notice, in the event of a Change in Control.

 

 

 

 

4. Forfeiture .

 

(a)       Subject to Paragraph 6 below, if during the Restricted Period (i) the Participant incurs a Termination of Service, (ii) there occurs a material breach of the Notice or these Terms and Conditions by the Participant or (iii) the Participant fails to meet the tax withholding obligations described in Paragraph 5(b), all rights of the Participant to the Restricted Shares that have not vested in accordance with Paragraph 3 as of the date of such termination shall terminate immediately and be forfeited in their entirety.

 

(b)       In the event of any forfeiture under this Paragraph 4, the certificate or certificates representing the forfeited Restricted Shares shall be canceled to the extent of any Restricted Shares that were forfeited.

 

5. Withholding .

 

(a)       The Committee shall determine the amount of any withholding or other tax required by law to be withheld or paid by the Company with respect to any income recognized by the Participant with respect to the Restricted Shares.

 

(b)       The Participant shall be required to meet any applicable tax withholding obligation in accordance with the provisions of Section 11.05 of the Plan.

 

(c)       Subject to any rules prescribed by the Committee, the Participant shall have the right to elect to meet any withholding requirement (i) by having withheld from this Award at the appropriate time that number of whole shares of common stock whose fair market value is equal to the amount of any taxes required to be withheld with respect to such Award, (ii) by direct payment to the Company in cash of the amount of any taxes required to be withheld with respect to such Award or (iii) by a combination of shares and cash.

 

6. Committee Discretion . Notwithstanding any provision of the Notice or these Terms and Conditions to the contrary, the Committee shall have discretion under the Plan to waive any forfeiture of the Restricted Shares as set forth in Paragraph 4, the Restricted Period and any other conditions set forth in the Notice or these Terms and Conditions.

 

7. Defined Terms . Capitalized terms used but not defined in the Notice and Agreement shall have the meanings set forth in the Plan, unless such term is defined in any Employment Agreement between the Participant and the Company or an Affiliate. Any terms used in the Notice and Agreement, but defined in the Participant’s Employment Agreement are incorporated herein by reference and shall be effective for purposes of the Notice and these Terms and Conditions without regard to the continued effectiveness of the Employment Agreement.

 

8. Nonassignability . The Restricted Shares may not be sold, assigned, transferred (other than by will or the laws of descent and distribution, or to an inter vivos trust with respect to which the Participant is treated as the owner under Sections 671 through 677 of the Code), pledged, hypothecated, or otherwise encumbered or disposed of until the restrictions on such Shares, as set forth in the Notice and Agreement, have lapsed or been removed.

 

 

 

 

9. Participant Representations . The Participant hereby represents to the Company that the Participant has read and fully understands the provisions of the Notice, these Terms and Conditions and the Plan and the Participant’s decision to participate in the Plan is completely voluntary. Further, the Participant acknowledges that the Participant is relying solely on his or her own advisors with respect to the tax consequences of this restricted stock award.

 

10. Regulatory Restrictions on the Restricted Shares . Notwithstanding any other provision of the Plan, the obligation of the Company to issue Restricted Shares under the Plan shall be subject to all applicable laws, rules and regulations and such approval by any regulatory body as may be required. The Company reserves the right to restrict, in whole or in part, the delivery of the Restricted Shares pursuant to these Terms and Conditions prior to the satisfaction of all legal requirements relating to the issuance of such shares, to their registration, qualification or listing or to an exemption from registration, qualification or listing.

 

11. Miscellaneous .

 

11.1 Notices . All notices, requests, deliveries, payments, demands and other communications which are required or permitted to be given under these Terms and Conditions shall be in writing and shall be either delivered personally or sent by registered or certified mail, or by private courier, return receipt requested, postage prepaid to the parties at their respective addresses set forth herein, or to such other address as either shall have specified by notice in writing to the other. Notice shall be deemed duly given hereunder when delivered or mailed as provided herein.

 

11.2 Waiver . The waiver by any party hereto of a breach of any provision of the Notice or these Terms and Conditions shall not operate or be construed as a waiver of any other or subsequent breach.

 

11.3 Entire Agreement . These Terms and Conditions, the Notice and the Plan constitute the entire agreement between the parties with respect to the subject matter hereof.

 

11.4 Binding Effect; Successors . These Terms and Conditions shall inure to the benefit of and be binding upon the parties hereto and to the extent not prohibited herein, their respective heirs, successors, assigns and representatives. Nothing in these Terms and Conditions, express or implied, is intended to confer on any person other than the parties hereto and as provided above, their respective heirs, successors, assigns and representatives any rights, remedies, obligations or liabilities.

 

11.5 Governing Law . The Notice and these Terms and Conditions shall be governed by and construed in accordance with the laws of the State of Delaware.

 

 

 

 

11.6 Headings . The headings contained herein are for the sole purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of these Terms and Conditions.

 

11.7 Conflicts; Amendment . The provisions of the Plan are incorporated in these Terms and Conditions in their entirety. In the event of any conflict between the provisions of these Terms and Conditions and the Plan, the provisions of the Plan shall control. The Agreement may be amended at any time by written agreement of the parties hereto.

 

11.8 No Right to Continued Employment . Nothing in the Notice or these Terms and Conditions shall confer upon the Participant any right to continue in the employ or service of the Company or affect the right of the Company to terminate the Participant’s employment or service at any time.

 

11.9 Further Assurances . The Participant agrees, upon demand of the Company or the Committee, to do all acts and execute, deliver and perform all additional documents, instruments and agreements which may be reasonably required by the Company or the Committee, as the case may be, to implement the provisions and purposes of the Notice and these Terms and Conditions and the Plan.

 

 

 

Exhibit 10.4

 

NOTICE OF GRANT OF RESTRICTED STOCK UNIT AWARD

 

TANDON DIGITAL, INC.

2012 OMNIBUS INCENTIVE PLAN

 

FOR GOOD AND VALUABLE CONSIDERATION, Tandon Digital, Inc. (the “Company”) hereby grants, pursuant to the provisions of the Company’s 2012 Omnibus Incentive Plan (the “Plan”), to the Participant designated in this Notice of Grant of Restricted Stock Unit Award (the “Notice”) the number of shares of the common stock of the Company set forth in the Notice, subject to certain restrictions as outlined below in this Notice and the additional provisions set forth in the attached Terms and Conditions of Restricted Stock Unit Award (the “Agreement”). Also enclosed is a copy of the information statement describing important provisions of the Plan.

 

Participant: [__________]

 

Grant Date: [__________]

 

# of Restricted Stock Units:      [________]

 

Purchase Price: Subject to the withholding provisions of Section 5 of the Terms and Conditions, this Restricted Stock Unit Award does not require the Participant to pay any purchase price or other cash consideration in connection with this Award, including the issuance or delivery of Common Stock upon vesting of the Award.

 

Vesting Schedule: Subject to the provisions contained in Sections 4, 5 and 6 of the Terms and Conditions, this Restricted Stock Unit Award shall vest, and the applicable Restrictions set forth in the Terms and Conditions shall lapse in accordance with the following schedule, in the event the Participant does not have a Termination of Service prior to the applicable vesting date:

 

Date of Vesting   Cumulative Amount Vested  
[Sample Vesting Schedule]        
First Anniversary of Grant Date     25 %
Second Anniversary of Grant Date     50 %
Third Anniversary of Grant Date     75 %
Fourth Anniversary of Grant Date     100 %]

 

Change in Control: Unless otherwise specified in this Notice, no accelerated vesting of any Restricted Stock Units shall occur in the event of a Change in Control of the Company (as defined in and subject to the provisions of the Plan).

 

Forfeiture: The Participant’s rights in the Restricted Stock Unit Award on which the Restrictions have not lapsed pursuant to the vesting schedule provisions above shall be forfeited in full in the event of the Participant’s Termination of Service for any reason.

 

By signing below, the Participant agrees that this Restricted Stock Unit Award is granted under and governed by the terms and conditions of the Company’s 2007 Omnibus Incentive Plan and the attached Terms and Conditions.

 

Participant   Tandon Digital, Inc.
     
    By:  
      Title:  
Date:     Date:  

 

 

 

 

TERMS AND CONDITIONS OF RESTRICTED STOCK UNIT AWARD

 

These Terms and Conditions of Restricted Stock Unit Award relates to the Notice of Grant of Restricted Stock Unit Award (the “Notice”) attached hereto, by and between Tandon Digital, Inc. (the “Company”), and the person identified in the Notice (the “Participant”).

 

The Board of Directors of the Company has authorized and approved the 2012 Omnibus Incentive Plan (the “Plan”), which has been approved by the Company’s stockholders. The Committee has approved an award to the Participant of a number of shares of the Company’s common stock, conditioned upon the Participant’s acceptance of the provisions set forth in the Notice and these Terms and Conditions within 60 days after the Notice and these Terms and Conditions are presented to the Participant for review. For purposes of the Notice and these Terms and Conditions, any reference to the Company shall include a reference to any Affiliate.

 

1.            Grant of Restricted Stock Units .

 

(a)          As of the Grant Date set forth in the Notice of Grant, the Company grants to the Participant the number of Restricted Stock Units set forth in the Notice of Grant (the “Units”), which represent shares of the Company’s Common Stock. The Units are subject to the restrictions set forth in Section 2 of this Agreement, these Terms and Conditions, the provisions of the Plan and the other provisions contained in these Terms and Conditions.

 

(b)          The Units granted under this Agreement shall be reflected in a bookkeeping account maintained by the Company during the Restricted Period. If and when the restrictions set forth in Section 2 expire in accordance with the terms of this Agreement, and upon the satisfaction of all other applicable conditions as to the Units, such Units (and any related Dividend Units described in Section 1(c) below) not forfeited pursuant to Section 4 hereof shall be settled in cash or shares of Common Stock as provided in Section 1(e) of this Agreement and otherwise in accordance with the Plan.

 

(c)          With respect to each Unit, whether or not vested, that has not been forfeited (but only to the extent such award of Units has not been settled for cash or Common Stock), the Company shall, with respect to any cash dividends paid on the Common Stock, accrue and credit to the Participant’s bookkeeping account a number of Units having a Fair Market Value as of the date such dividend is paid equal to the cash dividends that would have been paid with respect to such Unit if it were an outstanding share of Common Stock (the “Dividend Units”). These Dividend Units thereafter shall (i) be treated as Units for purposes of future dividend accruals pursuant to this Section 1(c); and (ii) vest in such amounts (rounded to the nearest whole Unit) at the same time as the Units with respect to which such Dividend Units were received. Any dividends or distributions on Common Stock paid other than in cash shall accrue in the Participant’s bookkeeping account and shall vest at the same time as the Units in respect of which they are made (in each case in the same form, based on the same record date and at the same time, as such dividend or other distribution is paid on such Common Stock).

 

(d)          The Company’s obligations under this Agreement (with respect to both the Units and the Dividend Units, if any) shall be unfunded and unsecured, and no special or separate fund shall be established and no other segregation of assets shall be made. The rights of Participant under this Agreement shall be no greater than those of a general unsecured creditor of the Company. In addition, the Units shall be subject to such restrictions as the Company may deem advisable under the rules, regulations and other requirements of the Securities and Exchange Commission, any stock exchange upon which Common Stock is then listed, any Company policy and any applicable federal or state securities law.

 

 

 

 

(e)          Except as otherwise provided in this Agreement, settlement of the Units in accordance with the provisions of this Section 1(e) shall be delivered as soon as practicable after the end of the Restricted Period, and upon the satisfaction of all other applicable conditions as to the Units (including the payment by the Participant of all applicable withholding taxes). The Units so payable to the Participant shall be paid solely in shares of Common Stock, solely in cash based on the Fair Market Value of the Common Stock (determined as of the first business day next following the last day of the Restricted Period), or in a combination of the two, as determined by the Committee in its sole discretion.

 

2.            Restrictions .

 

(a)          The Participant shall have no rights as a stockholder of the Company by virtue of any Unit unless and until such Unit vests and resulting shares of Common Stock are issued to the Participant:

 

(b)          None of the Units may be sold, transferred, assigned, pledged or otherwise encumbered or disposed of during the Restricted Period, except as may be permitted by the Plan or as otherwise permitted by the Committee in its sole discretion or pursuant to rules adopted by the Committee in accordance with the Plan.

 

(c)          Any attempt to dispose of the Units or any interest in the Units in a manner contrary to the restrictions set forth in this Agreement shall be void and of no effect.

 

3.           Restricted Period and Vesting . The “Restricted Period” is the period beginning on the Grant Date and ending on the date the Units, or such applicable portion of the Units, are deemed vested under the schedule set forth in the Notice Subject to the provisions contained in Section 4, 5 and 6, the Units shall be deemed vested and no longer subject to forfeiture under Section 4 upon expiration of the Restricted Period, and the satisfaction of all other applicable conditions as to the Units (including the payment by the Participant of all applicable withholding taxes).

 

4.            Forfeiture .

 

Subject to Section 6 hereof, if during the Restricted Period (i) the Participant incurs a Termination of Service, (ii) there occurs a material breach of the Notice or these Terms and Conditions by the Participant, or (iii) the Participant fails to meet the tax withholding obligations described in Section 5(b) hereof, all rights of the Participant to the Units that have not vested in accordance with Section 3 as of the date of such termination shall terminate immediately and be forfeited in their entirety.

 

5.            Withholding .

 

(a)          The Committee shall determine the amount of any withholding or other tax required by law to be withheld or paid by the Company with respect to any income recognized by the Participant with respect to the Units.

 

- 2 -

 

 

(b)          The Participant shall be required to meet any applicable tax withholding obligation in accordance with the provisions of the Plan.

 

(c)          Subject to any rules prescribed by the Committee, the Participant shall have the right to elect to meet any withholding requirement (i) by having withheld from this Award at the appropriate time that number of whole shares of Common Stock whose Fair Market Value is equal to the amount of any taxes required to be withheld with respect to such Award, (ii) by direct payment to the Company in cash of the amount of any taxes required to be withheld with respect to such Award or (iii) by a combination of shares and cash.

 

6.            Committee’s Discretion . Notwithstanding any provision of this Agreement to the contrary, the Committee shall have discretion under Section 7.02(b) of the Plan to waive any forfeiture of the Units as set forth in Section 4 hereof, the Restricted Period and any other conditions set forth in this Agreement.

 

7.            Defined Terms . Capitalized terms used but not defined in the Notice and Agreement shall have the meanings set forth in the Plan, unless such term is defined in any Employment Agreement between the Participant and the Company or an Affiliate. Any terms used in the Notice and Agreement, but defined in the Participant’s Employment Agreement are incorporated herein by reference and shall be effective for purposes of the Notice and these Terms and Conditions without regard to the continued effectiveness of the Employment Agreement.

 

8.            Nonassignability . The Units may not be sold, assigned, transferred (other than by will or the laws of descent and distribution, or to an inter vivos trust with respect to which the Participant is treated as the owner under Sections 671 through 677 of the Code), pledged, hypothecated, or otherwise encumbered or disposed of until the restrictions on such Units, as set forth in the Notice and Agreement, have lapsed or been removed.

 

9.            Participant Representations . The Participant hereby represents to the Company that the Participant has read and fully understands the provisions of the Notice, these Terms and Conditions and the Plan and the Participant’s decision to participate in the Plan is completely voluntary. Further, the Participant acknowledges that the Participant is relying solely on his or her own advisors with respect to the tax consequences of this restricted stock award.

 

10.           Regulatory Restrictions on the Units . Notwithstanding any other provision of the Plan, the obligation of the Company to issue Common Stock in connection with this Award under the Plan shall be subject to all applicable laws, rules and regulations and such approval by any regulatory body as may be required. The Company reserves the right to restrict, in whole or in part, the delivery of Common Stock pursuant to these Terms and Conditions prior to the satisfaction of all legal requirements relating to the issuance of such shares, to their registration, qualification or listing or to an exemption from registration, qualification or listing.

 

11.           Miscellaneous .

 

11.1 Notices . All notices, requests, deliveries, payments, demands and other communications which are required or permitted to be given under these Terms and Conditions shall be in writing and shall be either delivered personally or sent by registered or certified mail, or by private courier, return receipt requested, postage prepaid to the parties at their respective addresses set forth herein, or to such other address as either shall have specified by notice in writing to the other. Notice shall be deemed duly given hereunder when delivered or mailed as provided herein.

 

- 3 -

 

 

11.2 Waiver . The waiver by any party hereto of a breach of any provision of the Notice or these Terms and Conditions shall not operate or be construed as a waiver of any other or subsequent breach.

 

11.3 Entire Agreement . These Terms and Conditions, the Notice and the Plan constitute the entire agreement between the parties with respect to the subject matter hereof.

 

11.4 Binding Effect; Successors . These Terms and Conditions shall inure to the benefit of and be binding upon the parties hereto and to the extent not prohibited herein, their respective heirs, successors, assigns and representatives. Nothing in these Terms and Conditions, express or implied, is intended to confer on any person other than the parties hereto and as provided above, their respective heirs, successors, assigns and representatives any rights, remedies, obligations or liabilities.

 

11.5 Governing Law . The Notice and these Terms and Conditions shall be governed by and construed in accordance with the laws of the State of Delaware.

 

11.6 Headings . The headings contained herein are for the sole purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of these Terms and Conditions.

 

11.7 Conflicts; Amendment . The provisions of the Plan are incorporated in these Terms and Conditions in their entirety. In the event of any conflict between the provisions of these Terms and Conditions and the Plan, the provisions of the Plan shall control. The Agreement may be amended at any time by written agreement of the parties hereto.

 

11.8 No Right to Continued Employment . Nothing in the Notice or these Terms and Conditions shall confer upon the Participant any right to continue in the employ or service of the Company or affect the right of the Company to terminate the Participant’s employment or service at any time.

 

11.9 Further Assurances . The Participant agrees, upon demand of the Company or the Committee, to do all acts and execute, deliver and perform all additional documents, instruments and agreements which may be reasonably required by the Company or the Committee, as the case may be, to implement the provisions and purposes of the Notice and these Terms and Conditions and the Plan.

 

- 4 -

 

Exhibit 10.5

 

 

 
 

 

 

 
 

 

 

 
 

 

 

 
 

 

 

 
 

 

 

 
 

 

 

 
 

 

 

 
 

 

 

 
 

 

 

 
 

 

 

 
 

 

 

 
 

 

 

 
 

 

 

 
 

 

 

 
 

 

 

 
 

 

 

 
 

 

 

 
 

 

 

 
 

 

 

 
 

 

 

 
 

 

 

 
 

 

 

 
 

 

 

 
 

 

 

 
 

 

 

 
 

 

 

 
 

 

 

 
 

 

 

 
 

 

 

 

 
 

 

AMENDMENT NO. 4 TO TRADEMARK. LICENSE AGREEMENT

 

This Amendment No. 4 to Trademark License Agreement ( “ Amendment No. 4 ”)” is made and entered into effective as of September 6, 2015(the “ Effective Date '') by and between Monster, Inc. f/k/a Monster Cable Products, Inc., a California corporation having an address at 455 Valley Drive, Brisbane, CA 94005 (“ Licensor ”), SDJ Technologies, Inc., a Delaware corporation having an address at 2655 Park Center Drive, Unit C, Simi Valley, CA 93065 (“ SDJ ”), and Tandon Digital, Inc., a Delaware corporation having an address at 2655 Park Center Drive, Unit C, Simi Valley, CA 93065 (“ Parent ”) (each of above entities are sometimes referred to as a “ Party ” and are collectively referred to as the “ Parties ”).

 

RECITALS

 

A. Licensee develops, manufactures, sells and distributes memory data storage and other products.

 

B. On July 7, 2010, Licensor and SDJ executed a Trademark License Agreement (the “ License Agreement ”) relating to the license of the Monster trademark and logos with respect to the manufacture, design, distribution, and sale of certain memory data storage products;

 

C. On July 7, 2010, April 4, 2012 and August 18, 2015 Licensor and SDJ effected Amendment No. 1, Amendment No. 2 and Amendment No. 3, respectively, to the Original License Agreement to further define the aforementioned granting of rights (“ Amendment No. 1 ”, “ Amendment No. 2 ” and “ Amendment No. 3 ”) (the License Agreement and Amendment Nos. 1, 2 and 3 are collectively referred to as the “ Original License Agreement ”);

 

D. Each of Parties wish to amend Exhibit “B” to the Original License Agreement to expand the scope of what may be sold under the License to include action sports cameras and Cable Memory;

.

 

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties agree as follows:

 

 

 

 

 
 

 

 

1. Exhibit B of the Original License Agreement is deleted and replaced by the following:

 

 

EXHIBIT B

 

LICENSED PRODUCTS

 

DRAM Modules

USB Flash Drives

Flash Based SD, M2, MicroSD, CF, ProDuo, card products

Inernal Power Supplies for pc’s

Hybrid Drives

Action Sports Cameras

Cable Memory

 

 

 

 

 

 

 

 

 

(signature page on following page)

 

 

 

 

 

 

 

 

 

 

 

CONFIDENTIAL
2
 

 

 

IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment No. 4 as the day and year first above written.

 

  LICENSOR :
  Monster, Inc.
   
  By: /s/ Ajay Vadera
  Name: Ajay Vadera
  Title: Chief Financial Officer
  Date:                                      
   
 

SDJ :

 

 

  SDJ TECHNOLOGIES, INC.
   
  By: /s/ Vivek Tandon
  Name: Vivek Tandon
  Title:                                  
     
 

PARENT:

 

  TANDON DIGITAL, INC.
   
  By: /s/ Vivek Tandon
  Name: Vivek Tandon
  Title:                                      

 

 

CONFIDENTIAL
3

 

Exhibit 10.6

 

 

AIR COMMERCIAL REAL ESTATE ASSOCIATION

STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE - NET

 

1.             Basic Provisions (“Basic Provisions”).

 

1.1            Parties: This Lease (“ Lease ”), dated for reference purposes only October 28, 2014, is made by and between Pacific Simi Associates, LP, a California limited partnership (“ Lessor ”) and SDJ Technologies, Inc., a Delaware corporation (“ Lessee ”), (collectively the “ Parties ”, or individually a “ Party ”).

 

1.2(a)       Premises: That certain portion of the Project (as defined below), including all improvements therein or to be provided by Lessor under the terms of this Lease, commonly known by the street address of 2655 Park Center Drive, Unit C, located in the City of Simi Valley, County of Ventura, State of California, with zip code 93065, as outlined on Exhibit A attached hereto (“ Premises ”) and generally described as (describe briefly the nature of the Premises): an approximately 11,738 sq. ft. industrial unit located in a multi-tenant industrial Project of approximately 154,024 total sq.ft. zoned LI-SP. In addition to Lessee’s rights to use and occupy the Premises as hereinafter specified, Lessee shall have non-exclusive rights to any utility raceways of the building containing the Premises (“ Building ”) and to the common Areas (as defined in Paragraph 2.7 below), but shall not have any rights to the roof or exterior walls of the Building or to any other buildings in the Project. The Promises, the Building, the Common Areas, the land upon which they are located, along with all other buildings and improvements thereon, are herein collectively referred to as the “ Project. ” (See also Paragraph 2)

 

1.2(b)       Parking: thirty-five (35) unreserved vehicle parking spaces. (See also Paragraph 2.6)

 

1.3            Term: Three (3) years and one (1) months (“ Original Term ”) commencing January 1, 2015 (“ Commencement Date ”) and ending January 31, 2018 (“ Expiration Date ”). (See also Paragraph 3 and 64)

 

1.4            Early Possession: If the Premises are available Lessee may have non-exclusive possession of the Premises commencing None (“ Early Possession Date ”). (See also Paragraphs 3.2 and 3.3)

 

1.5            Base Rent: $11,033.72 per month (“ Base Rent ”), payable on the first day of each month commencing January 1, 2015. (See also Paragraph 4)

 

¨ If this box is checked, there are provisions in this Lease for the Base Rent to be adjusted. See Paragraph _________

 

1.6            Lessee’s Share of Common Area Operating Expenses: 7.62 percent (7.62 %) (“ Lessee’s Share ”). In the event that the size of the Premises and/or the Project are modified during the term of this Lease, Lessor shall recalculate Lessee’s Share to reflect such modification.

 

1.7            Base Rent and Other Monies Paid Upon Execution:

 

(a)           Base Rent: $11,033.72 for the period 1/1/2015 through 1/31/2015.

 

(b)           Common Area Operating Expenses: $2,817.12 for the period 1/1/2015 through 1/31/2015.

 

(c)           Security Deposit: $13,850.84 (“ Security Deposit ”). (See also Paragraph 5)

 

(d)           Other: $-0- for N/A.

 

(e)           Total Due Upon Execution of this Lease: $27,701.68.

 

1.8            Agreed Use: Warehousing, general office and related uses. (See also Paragraph 6)

 

1.9            Insuring Party. Lessor is the “ Insuring Party ”. (See also Paragraph 8)

 

1.10          Real Estate Brokers: (See also Paragraph 15 and 25)

 

(a)           Representation: The following real estate brokers (the “ Brokers ”) and brokerage relationships exist in this transaction (check applicable boxes):

 

þ  Colliers International Greater Los Angeles, Inc. dba Colliers International represents Lessor exclusively (“ Lessor’s Broker ”);

þ  CBRE Commercial Real Estate Services represents Lessee exclusively (“ Lessee’s Broker ”); or

¨                                            represents both Lessor and Lessee (“ Dual Agency ”).

 

(b)           Payment to Brokers: Upon execution and delivery of this Lease by both Parties, Lessor shall pay to the Brokers for the brokerage services rendered by the Brokers the fee agreed to in the attached a separate written agreement With Colliers International. or if no such agreement is attached, the sum of ____________ or ________ % of the total Base Rent payable for the Original Term, the sum of ____________ or _________ of the total Base Rent payable during any period of time that the Lessee occupies the Premises subsequent to the Original Term, and/or the sum of _____________ or _______ % of the purchase price. In the event that the Lessee or anyone affiliated with Lessee acquires from Lessor any rights to the Premises.

 

1.11          Guarantor. The obligations of the Lessee under this Lease are to be guaranteed by Tandon Digital, Inc., a Delaware corporation (“ Guarantor ”). (See also Paragraph 37)

 

1.12          Attachments. Attached hereto are the following, all of which constitute a part of this Lease:

 

þ  an Addendum consisting of Paragraphs 6.2 (c) and 50 through 65.

  

   
     
INITIALS   INITIALS

 

©1999 -AIR COMMERCIAL REAL ESTATE ASSOCIATION FORM MTN-14-2/13E

 

  PAGE 1 OF 17  

 

 

þ  a site plan depicting the Premises;

þ  a site plan depicting the Project;

þ  a current set of the Rules and Regulations for the Project (Exhibit “C”);

¨ a current set of the Rules and Regulations adopted by the owners’ association;

¨ a Work Letter;

¨ other (specify); Paragraph 66 (Option (s) to Extend), Exhibit “A” (Site Plan of the Project and Premises), Exhibit “B” (CC&Rs), Exhibit “C” (Rules and Regulations), Exhibit “D” (Sign Criteria), Exhibit “E” (Hazardous Materials Addendum) and Exhibit “F” (Simi Valley Landfill Disclosure Statement), Exhibit “G” (the Improvements), and Guaranty of Lease.

 

2.             Premises.

 

2.1            Letting. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. While the approximate square footage of the Premises may have been used in the marketing of the Premises for purposes of comparison, the Base Rent stated herein is NOT tied to square footage and is not subject to adjustment should the actual size be determined to be different. NOTE: Lessee is advised to verify the actual size prior to executing this Lease.

 

2.2            Condition. Lessor shall deliver that portion of the Premises contained within the Building (“ Unit ”) to Lessee broom clean and free of debris on the Commencement Date or the Early Possession Date, whichever first occurs (“ Start Date ”), and, so long as the required service contracts described in Paragraph 7.1(b) below are obtained by Lessee and in effect within thirty days following the Start Date, warrants that the existing electrical, plumbing, fire sprinkler, lighting, heating, ventilating and air conditioning systems (“ HVAC ”), loading doors, sump pumps, if any, and all other such elements in the Unit, other then those constructed by Lessee, shall be in good operating condition on said data, that the structural elements of the roof, bearing walls and foundation of the Unit shall be free of materiel defects, and that the Unit does not contain hazardous levels of any mold or fungi defined as toxic under applicable state or federal law. If a non-compliance with such warranty exists as of the Start Date, or if one of such systems or elements should malfunction or fail within the appropriate warranty period, Lessor shall, as Lessors sole obligation with respect to such matter, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, malfunction or failure, rectify same at Lessor’s expense. The warranty periods shell be as follows: (i) 6 months as to the HVAC systems, and (ii) 30 days as to the remaining systems and other elements of the Unit. If Lessee does not give Lessor the required notice within the appropriate warranty period, correction of any such non-compliance, malfunction or failure shall be the obligation of Lessee at Lessee’s sole cost and expense (except for the repairs to the fire sprinkler systems, roof, foundations, and/or bearing walls - see Paragraph 7).

 

2.3            Compliance. Lessor warrants that to the best of its knowledge the improvements on the Premises and the Common Areas comply with the building codes that were in effect at the time that each such improvement, or portion thereof, was constructed, and also with all applicable laws, covenants or restrictions of record, regulations, and ordinances in effect on the Start Date (“ Applicable Requirements ”). Said warranty does not apply to the use to which Lessee will put the Premises, modifications which may be required by the Americans with Disabilities Act or any similar laws as a result of Lessee’s use (sea Paragraph 49), or to any Alterations or Utility Installations (as defined In Paragraph 7.3(a)) made or to be made by Lessee. NOTE: Lessee is responsible for determining whether or not the Applicable Requirements and especially the zoning are appropriate for Lessee’s Intended use, and acknowledges that past uses of the Premises may no longer be allowed. If the Premises do not comply with said warranty, Lessor shall, except as otherwise provided, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify the same at Lessors expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within 6 months following the Start Date, correction of that non-compliance shall be the obligation of Lessee at Lessee’s sole cost and expense. If the Applicable Requirements are hereafter changed so as to require during the term of this Lease the construction of an addition to or an alteration of the Unit, Premises and/or Building, the remediation of any Hazardous Substance, or the reinforcement or other physical modification of the Unit, Premises and/or Building (“ Capital Expenditure ”), Lessor and Lessee shall allocate the cost of such work as follows:

 

(a)          Subject to Paragraph 2.3(c) below, if such Capital Expenditures are required as a result of the specific and unique use of the Premises by Lessee as compared with uses by tenants in general, Lessee shall be fully responsible for the cost thereof, provided, however that if such Capital Expenditure is required during the last 2 years of this Lease and the cost thereof exceeds 6 months’ Base Rent, Lessee may instead terminate this Lease unless Lessor notifies Lessee, In writing, within 10 days after receipt of Lessee’s termination notice that Lessor has elected to pay the difference between the actual cost thereof and the amount equal to 6 months’ Base Rent. If Lessee elects termination, Lessee shall immediately cease the use of the Premises which requires such Capital Expenditure and deliver to Lessor written notice specifying a termination date at least 90 days thereafter. Such termination date shall, however, in no event be earlier then the last day that Lessee could legally utilize the Premises without commencing such Capital Expenditure.

 

(b)          If such Capital Expenditure is not the result of the specific and unique use of the Premises by Lessee (such as, governmentally mandated seismic modifications), then Lessor shall pay for such Capital Expenditure and Lessee shall only be obligated to pay, each month during the remainder of the term of this Lease or any extension thereof, on the date that on which the Base Rent is due, an amount equal to 1/144th of the portion of such costs reasonably attributable to the Premises. Lessee shall pay Interest on the balance but may prepay its obligation at any time. If, however, such Capital Expenditure is required during the last 2 years of this Lease or if lessor reasonably determines that it is not economically feasible to pay its share thereof, Lessor shall have the option to terminate this Lease upon 90 days prior written notice to Lessee unless Lessee notifies Lessor, in writing, within 10 days after receipt of Lessor’s termination notice that Lessee will pay for such Capital Expenditure. If Lessor does not elect to terminate, and fails to tender its share of any such Capital Expenditure, Lessee may advance such funds and deduct same, with Interest, from Rent until Lessor’s share of such costs have been fully paid. If Lessee is unable to finance Lessor’s share, or if the balance of the Rent due and payable for the remainder of this Lease is not sufficient to fully reimburse Lessee on an offset basis, Lessee shell have the right to terminate this Lease upon 30 days written notice to Lessor.

 

(c)          Notwithstanding the above, the provisions concerning Capital Expenditures are intended to apply only to non-voluntary, unexpected, and new Applicable Requirements. If the Capital Expenditures are instead triggered by Lessee as a result of an actual or proposed change in use, change in intensity of use, or modification to the Premises then, and in that event, Lessee shall either: (i) immediately cease such changed use or intensity of use and/or take such other steps as may be necessary to eliminate the requirement for such Capital Expenditure, or (ii) complete such Capital Expenditure at its own expense. Lessee shall not have any right to terminate this Lease.

 

2.4            Acknowledgements. Lessee acknowledges that: (a) It has been given an opportunity to inspect and measure the Premises, (b) it has been advised by Lessor end/or Brokers to satisfy itself with respect to the size and condition of the Premises (Including but not limited to the electrical, HVAC and fire sprinkler systems, security, environmental aspects, and compliance with Applicable Requirements and the Americans with Disabilities Act), and their suitability for Lessee’s intended use, (c) Lessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to its occupancy of the Premises, (d) it is not relying on any representation as to the size of the Premises made by Brokers or Lessor, (e) the square footage of the Premises was not material to Lessee’s decision to lease the Premise and pay the Rent stated herein, end (f) neither Lessor, Lessor’s agents, nor Brokers have made any oral or written representations or warranties with respect to said matters other than as set forth in this Lease. In addition, Lessor acknowledges that: (I) Brokers have made no representations, promises or warranties concerning Lessee’s ability to honor the Lease or suitability to occupy the Premises, and (II) it is Lessors sole responsibility to investigate the financial capability and/or suitability of all proposed tenants.

 

   
     
INITIALS   INITIALS

 

©1999 -AIR COMMERCIAL REAL ESTATE ASSOCIATION FORM MTN-14-2/13E

 

  PAGE 2 OF 17  

 

 

 

2.5            Lessee as Prior Owner/Occupant. The warranties made by Lessor in Paragraph 2 shall be of no force or effect if Immediately prior to the Start Date Lessee was the owner or occupant of the Premises. In such event, Lessee shall be responsible for any necessary corrective work.

 

2.6            Vehicle Parking. Lessee shall be entitled to use the number of parking spaces specified in Paragraph 1.2(b) on those portions of the Common Areas designated from time to time by Lessor for parking. Lessee shall not use more parking spaces than said number. Said parking spaces shall be used for parking by vehicles no larger than full-size passenger automobiles or pick-up trucks, herein called “Permitted Size Vehicles.” Lessor may regulate the loading and unloading of vehicles by adopting Rules and Regulations as provided In Paragraph 2.9. No vehicles other than Permitted Size Vehicles may be parked in the Common Area without the prior written permission of Lessor. In addition:

 

(a)          Lessee shall not permit or allow any vehicles that belong to or are controlled by Lessee or Lessee’s employees, suppliers, shippers, customers, contractors or invitees to be loaded, unloaded, or parked in areas other than those designated by Lessor for such activities.

 

(b)          Lessee shall not service or store any vehicles in the Common Areas.

 

(c)          If Lessee permits or allows any of the prohibited activities described in this Paragraph 2.6, then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove or tow away the vehicle involved and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor.

 

2.7            Common Areas - Definition. The term “Common Areas” is defined as all areas and facilities outside the Premises and within the exterior boundary line of the Project and interior utility raceways and installations within the Unit that are provided and designated by the Lessor from time to time for the general non-exclusive use of Lessor, Lessee and other tenants of the Project and their respective employees, suppliers, shippers, customers, contractors and invitees, including parking areas, loading and unloading areas, trash areas, roadways, walkways, driveways and landscaped areas.

 

2.8            Common Areas - Lessee’s Rights. Lessor grants to Lessee, for the benefit of Lessee and its employees, suppliers, shippers, contractors, customers and invitees, during the term of this Lease, the non-exclusive right to use, in common with others entitled to such use, the Common Areas as they exist from time to time, subject to any rights, powers, and privileges reserved by Lessor under the terms hereof or under the terms of any rules and regulations or restrictions governing the use of the Project. Under no circumstances shall the right herein granted to use the Common Areas be deemed to include the right to store any property, temporarily or permanently, in the Common Areas. Any such storage shall be permitted only by the prior written consent of Lessor or Lessor’s designated agent, which consent may be revoked at any time. In the event that any unauthorized storage shall occur then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove the property and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor.

 

2.9            Common Areas - Rules and Regulations. Lessor or such other person(s) as Lessor may appoint shall have the exclusive control and management of the Common Areas and shall have the right, from time to time, to establish, modify, amend and enforce reasonable rules and regulations (“ Rules and Regulations ”) for the management, safety, care, and cleanliness of the grounds, the parking and unloading of vehicles and the preservation of good order, as well as for the convenience of other occupants or tenants of the Building and the Project and their invitees. Lessee agrees to abide by and conform to all such Rules and Regulations, and shall use its best efforts to cause its employees, suppliers, shippers, customers, contractors and invitees to so abide and conform. Lessor shall not be responsible to Lessee for the non-compliance with said Rules and Regulations by other tenants of the Project

 

2.10          Common Areas - Changes. Lessor shell have the right, in Lessors sole discretion, from time to time:

 

(a)          To make changes to the Common Areas, including, without limitation, changes in the location, size, shape and number of driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, landscaped areas, walkways and utility raceways;

 

(b)          To close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available;

 

(c)          To designate other land outside the boundaries of the Project to be a part of the Common Areas;

 

(d)          To add additional buildings and improvements to the Common Areas;

 

(e)          To use the Common Areas while engaged in making additional improvements, repairs or alterations to the Project, or any portion thereof; and

 

(f)          To do end perform such other acts and make such other changes in, to or with respect to the Common Areas and Project as Lessor may, in the exercise of sound business judgment, deem to be appropriate.

 

3.             Term.

 

3.1            Term. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3.

 

3.2            Early Possession. Any provision herein granting Lessee Early Possession of the Premises is subject to and conditioned upon the Premises being available for such possession prior to the Commencement Date. Any grant of Early Possession only conveys a non-exclusive right to occupy the Premises. If Lessee totally or partially occupies the Premises prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such Early Possession. All other terms of this Lease (including but not limited to the obligations to pay Lessee’s Share of Common Area Operating Expenses, Real Property Taxes and insurance premiums end to maintain the Premises) shall be in effect during such period. Any such Early Possession shall not affect the Expiration Date.

 

3.3            Delay In Possession. Lessor agrees to use its best commercially reasonable efforts to deliver possession of the Premises to Lessee by the Commencement Date. If, despite said efforts, Lessor is unable to deliver possession by such date, Lessor shell not be subject to any liability therefor, nor shell such failure affect the validity of this Lease or change the Expiration Date. Lessee shell not, however, be obligated to pay Rent or perform its other obligations until Lessor delivers possession of the Premises and any period of rent abatement that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to what Lessee would otherwise have enjoyed under the terms hereof, but minus any days of delay caused by the acts or omissions of Lessee. If possession is not delivered within 60 days after the Commencement Date, as the same may be extended under the terms of any Work Letter executed by Parties, Lessee may, at its option, by notice in writing within 10 days after the end of such 60 day period, cancel this Lease, in which event the Parties shall be discharged from all obligations hereunder. IF such written notice is not received by Lessor within said 10 day period, Lessee’s right to cancel shall terminate. If possession of the Premises is not delivered within 120 days after the Commencement Date, this Lease shall terminate unless other agreements are reached between Lessor and Lessee, in writing.

 

3.4            Lessee Compliance. Lessor shall not be required to tender possession of the Premises to Lessee until Lessee complies with its obligation to provide evidence of insurance (Paragraph 8.5). Pending delivery of such evidence, Lessee shall be required to perform all of its obligations under this Lease from and after the Start Date, including the payment of Rent, notwithstanding Lessor’s election to withhold possession pending receipt of such evidence of Insurance. Further, if Lessee is required to perform any other conditions prior to or concurrent with the Start Date, the Start Date shall occur but Lessor may elect to withhold possession until such conditions are satisfied.

 

   

     
INITIALS   INITIALS

 

©1999 -AIR COMMERCIAL REAL ESTATE ASSOCIATION FORM MTN-14-2/13E

 

  PAGE 3 OF 17  

 

 

4.             Rent.

 

4.1            Rent Defined. All monetary obligations of Lessee to Lessor under the terms of this Lease (except for the Security Deposit) are deemed to be rent (“Rent”).

 

4.2            Common Area Operating Expenses. Lessee shall pay to Lessor during the term hereof, in addition to the Base Rent, Lessee’s Share (as specified in Paragraph 1.6) of all Common Area Operating Expenses, as hereinafter defined, during each calendar year of the term of this Lease, in accordance with the following provisions:

 

(e)           “ Common Area Operating Expenses ” are defined, for purposes of this Lease, as at costs incurred by Lessor relating to the ownership and operation of the Project, Including, but not limited to, the following:

 

(i)           The operation, repair and maintenance, in neat, clean, good order and condition, and if necessary the replacement, of the following:

 

(aa)         The Common Areas and Common Area improvements, including parking areas, loading and unloading areas, trash areas, roadways, parkways, walkways, driveways, landscaped areas, bumpers, irrigation systems, Common Area lighting facilities, fences and gates, elevators, roofs, exterior walls of the buildings, building systems and roof drainage systems.

 

(bb)         Exterior signs end any tenant directories.

 

(cc)         Any fire sprinkler systems.

 

(dd)         All other areas and improvements that are within the exterior boundaries of the Project but outside of the Premises and/or any other space occupied by a tenant.

 

(ii)          The cost of water, gas, electricity and telephone to service the Common Areas and any utilities not separately metered.

 

(iii)         The cost of trash disposal, pest control services, property management, security services, owners’ association dues and fees, the cost to repaint the exterior of any structures and the cost of any environmental inspections.

 

(iv)         Reserves set aside for maintenance, repair and/or replacement of Common Area improvements and equipment.

 

(v)          Real Property Taxes (as defined in Paragraph 10).

 

(vi)         The cost of the premiums for the insurance maintained by Lessor pursuant to Paragraph 8.

 

(vii)        Any deductible portion of an insured loss concerning the Building or the Common Areas.

 

(viii)       Auditors’, accountants’ and attorneys’ fees and costs related to the operation, maintenance, repair and replacement of the Project.

 

(ix)          The cost of any capital improvement to the Building or the Project not covered under the provisions of Paragraph 2.3 provided; however, that Lessor shall allocate the cost of any such capital improvement over a 12 year period and Lessee shall not be required to pay more than Lessee’s Share of 1/144th of the cost of such capital improvement in any given month.

 

(x)           The cost of any other services to be provided by Lessor that are stated elsewhere in this Lease to be a Common Area Operating Expense.

 

(b)          Any Common Area Operating Expenses and Real Property Taxes that are specifically attributable to the Unit, the Building or to any other building in the Project or to the operation, repair and maintenance thereof, shall be allocated entirely to such Unit, Building, or other building. However, any Common Area Operating Expenses and Real Property Taxes that are not specifically attributable to the Building or to any other building or to the operation, repair and maintenance thereof, shell be equitably allocated by Lessor to all buildings in the Project.

 

(c)          The inclusion of the improvements, facilities and services set forth in Subparagraph 4.2(a) shall not be deemed to impose an obligation upon Lessor to either have said improvements or facilities or to provide those services unless the Project already has the same, Lessor already provides the services, or Lessor has agreed elsewhere in this Lease to provide the same or some of them.

 

(d)          Lessee’s Share of Common Area Operating Expenses is payable monthly on the same day as the Base Rent is due hereunder. The amount of such payments shall be based on Lessor’s estimate of the annual Common Area Operating Expenses. Within 60 days after written request (but not more than once each year) Lessor shall deliver to Lessee a reasonably detailed statement showing Lessee’s Share of the actual Common Area Operating Expenses for the preceding year. If Lessee’s payments during such year exceed Lessee’s Share, Lessor shall credit the amount of such over-payment against Lessee’s future payments. If Lessee’s payments during such year were less than Lessee’s Share, Lessee shall pay to Lessor the amount of the deficiency within 10 days after delivery by Lessor to Lessee of the statement.

 

(e)          Common Area Operating Expenses shall not include any expenses paid by any tenant directly to third parties, or as to which Lessor is otherwise reimbursed by any third party, other tenant, or insurance proceeds.

 

4.3            Payment. Lessee shall cause payment of Rent to be received by Lessor in lawful money of the United States, without offset or deduction (except as specifically permitted in this Lease), on or before the day on which it is due. All monetary amounts shall be rounded to the nearest whole dollar. In the event that any invoice prepared by Lessor is inaccurate such inaccuracy shall not constitute a waiver and Lessee shall be obligated to pay the amount set forth in this Lease. Rent for any period during the term hereof which is for less than one full calendar month shall be prorated based upon the actual number of days of said month. Payment of Rent shall be made to Lessor at its address stated herein or to such other persons or place as Lessor may from time to time designate in writing. Acceptance of a payment which is less than the amount then due shall not be a waiver of Lessor’s rights to the balance of such Rent, regardless of Lessors endorsement of any check so stating. In the event that any check, draft, or other instrument of payment given by Lessee to Lessor is dishonored for any reason, Lessee agrees to pay to Lessor the sum of $25 in addition to any Late Charge and Lessor, at its option, may require all future Rent be paid by cashier’s check. Payments will be applied first to accrued late charges and attorney’s fees, second to accrued interest, then to Base Rent and Common Area Operating Expenses, and any remaining amount to any other outstanding charges or costs.

 

5.             Security Deposit. Lessee shall deposit with Lessor upon execution hereof the Security Deposit as security for Lessee’s faithful performance of its obligations under this Lease. If Lessee fails to pay Rent, or otherwise Defaults under this Lease, Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount already due Lessor, for Rents which will be due in the future, and/ or to reimburse or compensate Lessor for any liability, expense, loss or damage which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of the Security Deposit, Lessee shall within 10 days after written request therefor deposit monies with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. If the Base Rent increases during the tarn of this Lease, Lessee shall, upon written request from Lessor, deposit additional monies with Lessor so that the total amount of the Security Deposit shall at all times bear the same proportion to the increased Base Rent as the initial Security Deposit bore to the initial Base Rent. Should the Agreed Use be amended to accommodate a material change in the business of Lessee or to accommodate a sublessee or assignee, Lessor shall have the right to increase the Security Deposit to the extent necessary, in Lessor’s reasonable judgment, to account for any increased wear and tear that the Premises may suffer as a result thereof. If change In control of Lessee occurs during this Lease and following such change the financial condition of Lessee Is, In Lessor’s reasonable judgment, significantly reduced, Lessee shall deposit such additional monies with Lessor as shall be sufficient to cause the Security Deposit to be at a commercially reasonable level based on such change in financial condition. Lessor shall not be required to keep the Security Deposit separate from its general accounts. Within 90 days after the expiration or termination of this Lease, Lessor shall return that portion of the Security Deposit not used or applied by Lessor. No part of the Security Deposit shall be considered to be held in trust, to bear interest or to be prepayment for any monies to be paid by Lessee under this Lease.

 

   

     
INITIALS   INITIALS

 

©1999 -AIR COMMERCIAL REAL ESTATE ASSOCIATION FORM MTN-14-2/13E

 

  PAGE 4 OF 17  

 

 

6.             Use.

 

6.1            Use. Lessee shall use and occupy the Premises only for the Agreed Use, or any other legal use which is reasonably comparable thereto, end for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that is unlawful, creates damage, waste or a nuisance, or that disturbs occupants of or causes damage to neighboring premises or properties. Other than guide, signal and seeing eye dogs, Lessee shell not keep or allow in the Premises any pets, animals, birds, fish, or reptiles. Lessor shall not unreasonably withhold or delay its consent to any written request for a modification of the Agreed Use, so long as the same will not impair the structural integrity of the Building or the mechanical or electrical systems therein, and/or is not significantly more burdensome to the Project. If Lessor elects to withhold consent, Lessor shall within 7 days after such request give written notification of same, which notice shall include an explanation of Lessor’s objections to the change in the Agreed Use.

 

6.2            Hazardous Substances.

 

(a)           Reportable Uses Require Consent. The term “ Hazardous Substance ” as used in this Lease shell mean any product, substance, or waste whose presence, use, manufacture, disposal, transportation, or release, either by itself or in combination with other materials expected to be on the Premises, is either: (I) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for potential liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substances shall include, but not be limited to, hydrocarbons, petroleum, gasoline, and/or crude oil or any products, by-products or fractions thereof. Lessee shall not engage in any activity in or on the Premises which constitutes a Reportable Use of Hazardous Substances without the express prior written consent of Lessor and timely compliance (at Lessee’s expense) with all Applicable Requirements. “Reportable Use” shall mean (I) the installation or use of any above or below ground storage tank, (II) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority, and/or (III) the presence at the Premises of a Hazardous Substance with respect to which any Applicable Requirements requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may use any ordinary and customary materials reasonably required to be used in the normal course of the Agreed Use, ordinary office supplies (copier toner, liquid paper, glue, etc.) and common household cleaning materials, so long as such use is in compliance with all Applicable Requirements, is not a Reportable Use, and does not expose the Premises or neighboring property to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may condition its consent to any Reportable Use upon receiving such additional assurances as Lessor reasonably deems necessary to protect Itself, the public, the Premises and/or the environment against damage, contamination, injury and/or liability, Including, but not limited to, the installation (and removal on or before Lease expiration or termination) of protective modifications (such as concrete encasements) and/or increasing the Security Deposit.

 

(b)           Duty to Inform Lessor. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall Immediately give written notice of such fact to Lessor, and provide Lessor with a copy of any report, notice, claim or other documentation which it has concerning the presence of such Hazardous Substance.

 

(c)           Lessee Remediation. Lessee shell not cause or permit any Hazardous Substance to be spilled or released in, on, under, or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee’s expense, comply with all Applicable Requirements and take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of the Premises or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance brought onto the Premises during the term of this Lease, by or for Lessee, or any third party.

 

(d)           Lessee Indemnification. Lessee shall indemnity, defend and hold Lessor, its agents, employees, lenders and ground lessor, If any, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, claims; expenses, penalties, and attorneys’ and consultants’ fees arising out of or involving any Hazardous Substance brought onto the Premises by or for Lessee, or any third party (provided, however, that Lessee shall have no liability under this Lease with respect to underground migration of any Hazardous Substance under the Premises from areas outside of the Project not caused or contributed to by Lessee). Lessee’s obligations shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances, unless specifically so agreed by Lessor in writing at the time of such agreement.

 

(e)           Lessor Indemnification. Except as otherwise provided in paragraph 8.7, Lessor and its successors and assigns shall indemnify, defend, reimburse and hold Lessee, its employees and lenders, harmless from and against any and all environmental damages, including the cost of remediation, which are suffered as a direct result of Hazardous Substances on the Premises prior to Lessee taking possession or which are caused by the gross negligence or willful misconduct of Lessor, its agents or employees. Lessor’s obligations, as and when required by the Applicable Requirements, shall include, but not be limited to, the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease.

 

(f)           Investigations and Remediations. Lessor shall retain the responsibility and pay for any investigations or remediation measures required by governmental entities having jurisdiction with respect to the existence of Hazardous Substances on the Premises prior to the Lessee taking possession, unless such remediation measure is required as a result of Lessee’s use (including “Alterations”, as defined in paragraph 7.3(a) below) of the Premises, in which event Lessee shall be responsible for such payment. Lessee shall cooperate fully in any such activities et the request of Lessor, Including allowing Lessor and Lessor’s agents to have reasonable access to the Premises at reasonable times in order to carry out Lessor’s investigative end remedial responsibilities.

 

(g)           Lessor Termination Option. If a Hazardous Substance Condition (see Paragraph 9.1(e)) occurs during the term of this Lease, unless Lessee is legally responsible therefor (in which case Lessee shell make the investigation and remediation thereof required by the Applicable Requirements and this Lease shall continue in full force and effect, but subject to Lessors rights under Paragraph 6.2(d) and Paragraph 13), Lessor may, at Lessor’s option, either (I) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessors expense, in which event this Lease shell continue in full force and effect, or (ii) if the estimated cost to remediate such condition exceeds 12 times the then monthly Base Rent or $100,000, whichever is greater, give written notice to Lessee, within 30 days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition, of Lessors desire to terminate this Lease as of the date 60 days following the date of such notice. In the event Lessor elects to give a termination notice, Lessee may, within 10 days thereafter, give written notice to Lessor of Lessee’s commitment to pay the amount by which the cost of the remediation of such Hazardous Substance Condition exceeds an amount equal to 12 times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within 30 days following such commitment. In such event, this Lease shall continue in full force and effect, and Lessor shall proceed to make such remediation as soon as reasonably possible after the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the time provided, this Lease shall terminate as of the date specified in Lessor’s notice of termination.

 

   

     
INITIALS   INITIALS

 

©1999 -AIR COMMERCIAL REAL ESTATE ASSOCIATION FORM MTN-14-2/13E

 

  PAGE 5 OF 17  

 

 

6.3            Lessee’s Compliance with Applicable Requirements. Except as otherwise provided in this Lease, Lessee shall, at Lessee’s sole expense, fully, diligently and in a timely manner, materially comply with all Applicable Requirements, the requirements of any applicable fire insurance underwriter or rating bureau, end the recommendations of Lessor’s engineers and/or consultants which relate in any manner to such Requirements, without regard to whether said Requirements are now in effect or become effective after the Start Date. Lessee shall, within 10 days after receipt of Lessor’s written request, provide Lessor with copies of all permits and other documents, and other information evidencing Lessee’s compliance with any Applicable Requirements specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving the failure of Lessee or the Premises to comply with any Applicable Requirements. Likewise, Lessee shall immediately give written notice to Lessor of: (i) any water damage to the Premises and any suspected seepage, pooling, dampness or other condition conducive to the production of mold; or (ii) any mustiness or other odors that might indicate the presence of mold in the Premises.

 

6.4            Inspection; Compliance. Lessor and Lessor’s “Lender” (as defined in Paragraph 30) and consultants shell have the right to enter into Premises at any time, in the case of an emergency, and otherwise at reasonable times after reasonable notice, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease. The cost of any such inspections shall be paid by Lessor, unless a violation of Applicable Requirements, or a Hazardous Substance Condition (see Paragraph 9.1) is found to exist or be imminent, or the inspection is requested or ordered by a governmental authority. In such case, Lessee shall upon request reimburse Lessor for the cost of such inspection, so long as such inspection is reasonably related to the violation or contamination. In addition, Lessee shall provide copies of all relevant material safety data sheets (MSDS) to Lessor within 10 days of the receipt of written request therefor.

 

7.             Maintenance; Repairs, Utility Installations; Trade Fixtures and Alterations.

 

7.1            Lessee’s Obligations.

 

(a)           In General. Subject to the provisions of Paragraph 2.2 (Condition), 2.3 (Compliance), 6.3 (Lessee’s Compliance with Applicable Requirements), 7.2 (Lessor’s Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at Lessee’s sole expense, keep the Premises, utility Installations (intended for Lessee’s exclusive use, no matter where located), and Alterations in good order, condition and repair (whether or not the portion of the Premises requiring repairs, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee’s use, any prior use, the elements or the age of such portion of the Premises), including, but not limited to, all equipment or facilities, such as plumbing, HVAC equipment, electrical, lighting facilities, boilers, pressure vessels, fixtures, interior walls, interior surfaces of exterior walls, ceilings, floors, windows, doors, plate glass, and skylights but excluding any items which are the responsibility of Lessor pursuant to Paragraph 7.2. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices, specifically including the procurement and maintenance of the service contracts required by Paragraph 7.1(b) below. Lessee’s obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair.

 

(b)           Service Contracts. Lessee shall, at Lessee’s sole expense, procure and maintain contracts, with copies to Lessor, in customary form and substance for, and with contractors specializing and experienced in the maintenance of the following equipment and improvements, if any, if and when installed on the Premises: (i) HVAC equipment, (ii) boiler and pressure vessels, and (iii) clarifiers. However, Lessor reserves the right, upon notice to Lessee, to procure and maintain any or all of such service contracts, and Lessee shall reimburse Lessor, upon demand, for the cost thereof.

 

(c)           Failure to Perform. If Lessee fails to perform Lessee’s obligations under this Paragraph 7.1, Lessor may enter upon the Premises after 10 days’ prior written notice to Lessee (except in the case of an emergency, in which case no notice shall be required), perform such obligations on Lessee’s behalf, and put the Premises in good order, condition and repair, and Lessee shall promptly pay to Lessor a sum equal to 115% of the cost thereof.

 

(d)           Replacement. Subject to Lessee’s indemnification of Lessor as set forth in Paragraph 8.7 below, and without relieving Lessee of liability resulting from Lessee’s failure to exercise and perform good maintenance practices, if an item described in Paragraph 7.1(b) cannot be repaired other than at a cost which is in excess of 50% of the cost of replacing such item, then such item shall be replaced by Lessor, and the cost thereof shall be prorated between the Parties and Lessee shall only be obligated to pay, each month during the remainder of the term of this Lease, on the date on which Base Rent is due, an amount equal to the product of multiplying the cost of such replacement by a fraction, the numerator of which is one, and the denominator of which is 144 (ie. 1/144th of the cost per month). Lessee shall pay interest on the unamortized balance but may prepay its obligation at any time.

 

7.2            Lessor’s Obligations. Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance), 4.2 (Common Area Operating Expenses), 6 (Use), 7.1 (Lessee’s Obligations), 9 (Damage or Destruction) and 14 (Condemnation), Lessor, subject to reimbursement pursuant to Paragraph 4.2, shall keep in good order, condition and repair the foundations, exterior walls, structural condition of interior bearing wells, exterior roof, fire sprinkler system, Common Area fire alarm and/or smoke detection systems, fire hydrants, parking lots, walkways, parkways, driveways, landscaping, fences, signs and utility systems serving the Common Areas and all parts thereof, as well as providing the services for which there is a Common Area Operating Expense pursuant to Paragraph 4.2. Lessor shall not be obligated to paint the exterior or interior surfaces of exterior walls nor shall Lessor be obligated to maintain, repair or replace windows, doors or plate glass of the Premises. Lessee expressly waives the benefit of any statute now or hereafter in effect to the extent it is inconsistent with the terms of this Lease.

 

7.3           Utility Installations; Trade Fixtures; Alterations.

 

(a)           Definitions. The term “ Utility Installations refers to all floor and window coverings, air and/or vacuum lines, power panels, electrical distribution, security and fire protection systems, communication cabling, lighting fixtures, HVAC equipment, plumbing, and fencing in or on the Premises. The term “ Trade Fixtures ” shall mean Lessee’s machinery and equipment that can be removed without doing material damage to the Premises. The term “Alterations” shall mean any modification of the improvements, other then Utility Installations or Trade Fixtures, whether by addition or deletion. “ Lessee Owned Alterations and/or Utility Installations ” are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4(a).

 

(b)           Consent. Lessee shall not make any Alterations or Utility Installations to the Premises without Lessor’s prior written consent. Lessee may, however, make non-structural Alterations or Utility Installations to the interior of the Premises (excluding the roof) without such consent but upon notice to Lessor, as long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof or any existing walls, will not affect the electrical, plumbing, HVAC, and/or life safety systems, and the cumulative cost thereof during this Lease as extended does not exceed a sum equal to 3 month’s Base Rent in the aggregate or a sum equal to one month’s Base Rent in any one year. Notwithstanding the foregoing, Lessee shell not make or permit any roof penetrations and/or install anything on the roof without the prior written approval of Lessor. Lessor may, as a precondition to granting such approval, require Lessee to utilize a contractor chosen and/or approved by Lessor. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall he presented to Lessor in written form with detailed plans. Consent shall be deemed conditioned upon Lessee’s: (i) acquiring all applicable governmental permits, (ii) furnishing Lessor with copies of both the permits and the plans and specifications prior to commencement of the work, and (iii) compliance with all conditions of said permits and other Applicable Requirements in a prompt and expeditious manner. Any Alterations or Utility Installations shall be performed in a workmanlike manner with good and sufficient materials. Lessee shall promptly upon completion furnish Lessor with as-built plans and specifications. For work which costs an amount in excess of one month’s Base Rent, Lessor may condition its consent upon Lessee providing a lien and completion bond in an amount equal to 150% of the estimated cost of such Alteration or Utility Installation and/or upon Lessee’s posting an additional Security Deposit with Lessor.

 

   

     
INITIALS   INITIALS

 

©1999 -AIR COMMERCIAL REAL ESTATE ASSOCIATION FORM MTN-14-2/13E

 

  PAGE 6 OF 17  

 

 

(c)           Liens; Bonds. Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanic’s or materialman’s lien against the Premises or any interest therein. Lessee shall give Lessor not less than 10 days notice prior to the commencement of any work in, on or about the Premises, and Lessor shall have the right to post notices of non-responsibility. If Lessee shall contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof. If Lessor shall require, Lessee shall furnish a surety bond in an amount equal to 150% of the amount of such contested lien, claim or demand, indemnifying Lessor against liability for the same. If Lessor elects to participate in any such action, Lessee shell pay Lessor’s attorneys’ fees and costs.

 

7.4           Ownership; Removal; Surrender; and Restoration.

 

(a)           Ownership. Subject to Lessor’s right to require removal or elect ownership as hereinafter provided, at Alterations and Utility Installations made by Lessee shall be the property of Lessee, but considered a part of the Premises. Lessor may, at any time, elect in writing to be the owner of all or any specified part of the Lessee Owned Alterations and Utility Installations. Unless otherwise instructed per paragraph 7.4(b) hereof, all Lessee Owned Alterations and Utility Installations shall, at the expiration or termination of this Lease, become the property of Lessor and be surrendered by Lessee with the Premises.

 

(b)           Removal. By delivery to Lessee of written notice from Lessor not earlier than 90 and not later than 30 days prior to the end of the term of this Lease, Lessor may require that any or all Lessee Owned Alterations or Utility Installations be removed by the expiration or termination of this Lease. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent.

 

(c)           Surrender; Restoration. Lessee shall surrender the Premises by the Expiration Date or any earlier termination date, with all of the improvements, parts and surfaces thereof broom clean and free of debris, and in good operating order, condition and state of repair, ordinary wear and tear excepted. “Ordinary wear and tear” shall not include any damage or deterioration that would have been prevented by good maintenance practice. Notwithstanding the foregoing, if this Lease is for 12 months or less, then Lessee shall surrender the Premises in the same condition as delivered to Lessee on the Start Date with NO allowance for ordinary wear and tear. Lessee shall repair any damage occasioned by the installation, maintenance or removal of Trade Fixtures, Lessee owned Alterations and/or Utility Installations, furnishings, and equipment as well as the removal of any storage tank installed by or for Lessee. Lessee shall also completely remove from the Premises any and all Hazardous Substances brought onto the Premises by or for Lessee, or any third parry (except Hazardous Substances which were deposited via underground migration from areas outside of the Project) even if such removal would require Lessee to perform or pay for work that exceeds statutory requirements. Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee. Any personal property of Lessee not removed on or before the Expiration Date or any earlier termination date shall be deemed to have been abandoned by Lessee and may be disposed of or retained by Lessor as Lessor may desire. The failure by Lessee to timely vacate the Premises pursuant to this Paragraph 7.4(c) without the express written consent of Lessor shall constitute a holdover under the provisions of Paragraph 26 below.

 

8.            Insurance; Indemnity.

 

8.1           Payment of Premiums. The cost of the premiums for the insurance policies required to be carried by Lessor, pursuant to Paragraphs 8.2(b), 8.3(a) and 8.3(b), shall be a Common Area Operating Expense. Premiums for policy periods commencing prior to, or extending beyond, the term of this Lease shall be prorated to coincide with the corresponding Start Date or Expiration Date.

 

8.2           Liability Insurance.

 

(a)           Carried by Lessee. Lessee shall obtain and keep in force a Commercial General Liability policy of insurance protecting Lessee and Lessor as an additional insured against claims for bodily injury, personal injury and property damage based upon or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $1,000,000 per occurrence with an annual aggregate of not less than $2,000,000. Lessee shall add Lessor as an additional insured by means of an endorsement at least as broad as the Insurance Service Organization’s “Additional insured-Managers or Lessors of Premises” Endorsement. The policy shall not contain any intra-insured exclusions as between Insured persons or organizations, but shall include coverage for liability assumed under this Lease as an “ insured contract for the performance of Lessee’s indemnity obligations under this Lease. The limits of said insurance shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. Lessee shall provide an endorsement on its liability policy(ies) which provides that its insurance shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only.

 

(b)           Carried by Lessor. Lessor shall maintain liability insurance as described in Paragraph 8.2(a), in addition to, and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein.

 

8.3           Property Insurance - Building, Improvements and Rental Value.

 

(a)           Building end Improvements. Lessor shall obtain and keep in force a policy or policies of insurance in the name of Lessor, with loss payable to Lessor, any ground-lessor, and to any Lender insuring loss or damage to the Premises. The amount of such insurance shall be equal to the full insurable replacement cost of the Premises, as the same shell exist from time to time, or the amount required by any Lender, but in no event more than the commercially reasonable and available insurable value thereof. Lessee Owned Alterations and Utility Installations, Trade Fixtures, and Lessee’s personal property shall be insured by Lessee not by Lessor. If the coverage is available and commercially appropriate, such policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender), including coverage for debris removal and the enforcement of any Applicable Requirements requiring the upgrading, demolition, reconstruction or replacement of any portion of the Premises as the result of a covered loss, Said policy or policies shall also contain an agreed valuation prevision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. If such insurance coverage has a deductible clause, the deductible amount shall not exceed $5,000 per occurrence.

 

(b)           Rental Value. Lessor shall also obtain and keep in force a policy or policies in the name of Lessor with loss payable to Lessor and any Lender, insuring the loss of the full Rent for one year with an extended period of indemnity for an additional 180 days (“ Rental Value Insurance ”). Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected Rent otherwise payable by Lessee, for the next 12 month period.

 

   

     
INITIALS   INITIALS

 

©1999 -AIR COMMERCIAL REAL ESTATE ASSOCIATION FORM MTN-14-2/13E

 

  PAGE 7 OF 17  

 

 

(c)           Adjacent Premises. Lessee shall pay for any increase in the premiums for the property insurance of the Building and for the Common Areas or other buildings in the Project if said increase is caused by Lessee’s acts, omissions, use or occupancy of the Premises.

 

(d)           Lessee’s Improvements. Since Lessor is the Insuring Party, Lessor shell not be required to insure Lessee Owned Alterations and Utility Installations unless the item in question has become the property of Lessor under the terms of this Lease.

 

8.4            Lessee’s Property; Business Interruption Insurance; Worker’s Compensation Insurance.

 

(a)           Properly Damage. Lessee shall obtain and maintain insurance coverage on all of Lessee’s personal property, Trade Fixtures, and Lessee Owned Alterations and Utility Installations. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property, Trade Fixtures and Lessee Owned Alterations and Utility Installations.

 

(b)           Business Interruption. Lessee shall obtain and maintain loss of income and extra expense insurance in amounts as will reimburse Lessee for direct or indirect loss of earnings attributable to all perils commonly insured against by prudent lessees in the business of Lessee or attributable to prevention of access to the Premises as a result of such perils.

 

(c)           Worker’s Compensation Insurance. Lessee shall obtain and maintain Worker’s Compensation Insurance in such amount as may be required by Applicable Requirements. Such policy shall include a ‘Waiver of Subrogation’ endorsement. Lessee shall provide Lessor with a copy of such endorsement along with the certificate of insurance or copy of the policy required by paragraph 8.5.

 

(d)           No Representation of Adequate Coverage. Lessor makes no representation that the limits or forms of coverage of insurance specified herein are adequate to cover Lessee’s property, business operations or obligations under this Lease.

 

8.5            Insurance Policies. Insurance required herein shall be by companies maintaining during the policy term a “General Policyholders Rating” of at least A-, VII, as set forth in the most current issue of “Best’s Insurance Guide”, or such other rating as may be required by a Lender. Lessee shall not do or permit to be done anything which invalidates the required insurance policies. Lessee shall, prior to the Start Date, deliver to Lessor certified copies of policies of such insurance or certificates with copies of the required endorsements evidencing the existence and amounts of the required insurance. No such policy shall be cancelable or subject to modification except after 30 days prior written notice to Lessor. Lessee shall, at least 10 days prior to the expiration of such policies, furnish Lessor with evidence of renewals or “insurance binders” evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. Such policies shall be for a term of at least one year, or the length of the remaining term of this Lease, whichever is less. If either Party shall fall to procure and maintain the insurance required to be carried by it, the other Party may, but shall not be required to, procure and maintain the same.

 

8.6            Waiver of Subrogation. Without effecting any other rights or remedies, Lessee and Lessor each hereby release and relieve the other, and waive their entire right to recover damages against the other, for loss of or damege to its property arising out of or incident to the perils required to be insured against herein. The effect of such releases and waivers is not limited by the amount of insurance carried or required, or by any deductibles applicable hereto. The Parties agree to have their respective property damage insurance carriers waive any right to subrogation that such companies may have against Lessor or Lessee, as the case may be, so long as the insurance is not invalidated thereby.

 

8.7            Indemnity. Except for Lessor’s gross negligence or willful misconduct, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor’s master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, liens, judgments, penalties, attorneys’ and consultants’ fees, expenses and/or liabilities arising out of, involving, or in connection with, the use and/or occupancy of the Premises by Lessee. If any action or proceeding is brought against Lessor by reason of any of the foregoing matters, Lessee shall upon notice defend the same et Lessee’s expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be defended or indemnified.

 

8.8            Exemption of Lessor and its Agents from Liability. Notwithstanding the negligence or breach of this Lease by Lessor or its agents, neither Lessor nor its agents shall be liable under any circumstances for: (i) injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee’s employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, indoor air quality, the presence of mold or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, HVAC or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of the Building, or from other sources or places, (ii) any damages arising from any act or neglect of any other tenant of Lessor or from the failure of Lessor or its agents to enforce the provisions of any other lease in the Project, or (iii) injury to Lessee’s business or for any loss of income or profit therefrom. Instead, it is intended that Lessee’s sole recourse in the event of such damages or injury be to file a claim on the insurance policy(ies) that Lessee is required to maintain pursuant to the provisions of paragraph 8.

 

8.9            Failure to Provide Insurance. Lessee acknowledges that any failure on its part to obtain or maintain the insurance required herein will expose Lessor to risks and potentially cause Lessor to incur costs not contemplated by this Lease, the extent of which will be extremely difficult to ascertain. Accordingly, for any month or portion thereof that Lessee does not maintain the required insurance and/or does not provide Lessor with the required binders or certificates evidencing the existence of the required insurance, the Bass Rent shall be automatically increased, without any requirement for notice to Lessee, by an amount equal to 10% of the then existing Base Rent or $100, whichever is greater. The parties agree that such increase in Base Rent represents fair and reasonable compensation for the additional risk/costs that Lessor will incur by reason of Lessee’s failure to maintain the required insurance. Such increase in Base Rent shall in no event constitute a waiver of Lessee’s Default or Breach with respect to the failure to maintain such insurance, prevent the exercise of any of the other rights and remedies granted hereunder, nor relieve Lessee of its obligation to maintain the insurance specified in this Lease.

 

9.             Damage or Destruction.

 

9.1            Definitions.

 

(a)          “ Premises Partial Damage ” shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, which can reasonably be repaired in 3 months or less from the date of the damage or destruction, and the cost thereof does not exceed a sum equal to 6 month’s Base Rent. Lessor shall notify Lessee in writing within 30 days from the date of the damage or destruction as to whether or not the damage is Partial or Total.

 

(b)          “ Premises Total Destruction ” shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which cannot reasonably be repaired in 3 months or less from the date of the damage or destruction and/or the cost thereof exceeds a sum equal to 6 month’s Base Rent. Lessor shall notify Lessee in writing within 30 days from the date of the damage or destruction as to whether or not the damage is Partial or Total.

 

(c)          “ Insured Loss ” shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits involved.

 

(d)          “ Replacement Cost ” shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of Applicable Requirements, and without deduction for depreciation.

 

   

     
INITIALS   INITIALS

 

©1999 -AIR COMMERCIAL REAL ESTATE ASSOCIATION FORM MTN-14-2/13E

 

  PAGE 8 OF 17  

 

 

(e)          “ Hazardous Substance Condition ” shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance, in, on, or under the,Premises which requires restoration.

 

9.2            Partial Damage - Insured Loss. If a Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor’s expense, repair such damage (but not Lessee’s Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force end effect; provided, however, that Lessee shall, at Lessor’s election, make the repair of any damage or destruction the total cost to repair of which is $10,000 or less, end, in such event, Lessor shall make any applicable insurance proceeds available to Lessee on a reasonable basis for that purpose. Notwithstanding the foregoing, if the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair, the Insuring Party shall promptly contribute the shortage in proceeds as and when required to complete said repairs. In the event, however, such shortage was due to the fact that, by reason of the unique nature of the improvements, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within 10 days following receipt of written notice of such shortage and request therefor. If Lessor receives said funds or adequate assurance thereof within said 10 day period, the party responsible for making the repairs shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If such funds or assurance are not received, Lessor may nevertheless elect by written notice to Lessee within 10 days thereafter to: (i) make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect, or (ii) have this Lease terminate 30 days thereafter. Lessee shall not be entitled to reimbursement of any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party.

 

9.3            Partial Damage - Uninsured Loss. if a Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee’s expense), Lessor may either: (i) repair such damage as soon as reasonably possible at Lessor’s expense, in which event this Lease shall continue in full force and effect, or (ii) terminate this Lease by giving written notice to Lessee within 30 days after receipt by Lessor of knowledge of the occurrence of such damage. Such termination shall be effective 60 days following the date of such notice. In the event Lessor elects to terminate this Lease, Lessee shall have the right within 10 days after receipt of the termination notice to give written notice to Lessor of Lessee’s commitment to pay for the repair of such damage without reimbursement from Lessor. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within 30 days after making such commitment. In such event this Lease shall continue in full force end effect, and Lessor shall proceed to make such repairs as soon as reasonably possible after the required funds are available. If Lessee does not make the required commitment, this Lease shall terminate as of the date specified in the termination notice.

 

9.4            Total Destruction. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs, this Lease shall terminate 60 days following such Destruction. If the damage or destruction was caused by the gross negligence or willful misconduct of Lessee, Lessor shall have the right to recover Lessors damages from Lessee, except as provided in Paragraph 8.6.

 

9.5            Damage Near End of Term. If at any time during the lest 6 months of this Lease there is damage for which the cost to repair exceeds one month’s Base Rent, whether or not an Insured Loss, Lessor may terminate this Lease effective 60 days following the date of occurrence of such damage by giving a written termination notice to Lessee within 30 days after the date of occurrence of such damage. Notwithstanding the foregoing, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, (a) exercising such option and (b) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs on or before the earlier of (i) the date which is 10 days after Lessee’s receipt of Lessors written notice purporting to terminate this Lease, or (ii) the day prior to the date upon which such option expires. If Lessee duly exercises such option during such period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor’s commercially reasonable expense, repair such damage as soon as reasonably possible and this Lease shell continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during such period, then this Lease shall terminate on the date specified in the termination notice and Lessee’s option shall be extinguished.

 

9.6            Abatement of Rent; Lessee’s Remedies.

 

 (a)           Abatement. In the event of Premises Partial Damage or Premises Total Destruction or a Hazardous Substance Condition for which Lessee is not responsible under this Lease, the Rent payable by Lessee for the period required for the repair, remediation or restoration of such damage shall be abated in proportion to the degree to which Lessee’s use of the Premises is impaired, but not to exceed the proceeds received from the Rental Value insurance. All other obligations of Lessee hereunder shall be performed by Lessee, and Lessor shall have no liability for any such damage, destruction, remediation, repair or restoration except as provided herein.

 

 (b)           Remedies. If Lessor is obligated to repair or restore the Premises and does not commence, in a substantial and meaningful way, such repair or restoration within 90 days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice, of Lessee’s election to terminate this Lease on a date not less than 60 days following the giving of such notice. If Lessee gives such notice and such repair or restoration is not commenced within 30 days thereafter, this Lease shall terminate as of the date specified in said notice. If the repair or restoration is commenced within such 30 days, this Lease shall continue in full force and effect. “Commence” shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs.

 

9.7            Termination; Advance Payments. Upon termination of this Lease pursuant to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee’s Security Deposit as has not been, or is not then required to be, used by Lessor.

 

10.            Real Property Taxes.

 

10.1          Definition. As used herein, the term “Real Property Taxes” shall include any form of assessment; real estate, general, special, ordinary or extraordinary, or rental levy or tax (other than inheritance, personal income or estate taxes); improvement bond; and/or license fee imposed upon or levied against any legal or equitable interest of Lessor in the Project, Lessor’s right to other income therefrom, and/or Lessors business of leasing, by any authority having the direct or indirect power to tax and where the funds are generated with reference to the Project address and where the proceeds so generated are to be applied by the city, county or other local taxing authority of a jurisdiction within which the Project is located. The term ‘Real Property Taxes” shall also include any tax, fee, levy, assessment or charge, or any increase therein: (i) imposed by reason of events occurring during the term of this Lease, including but not limited to, a change in the ownership of the Project, (ii) a change in the improvements thereon, and/or (iii) levied or assessed on machinery or equipment provided by Lessor to Lessee pursuant to this Lease. In calculating Real Properly Taxes for any calendar year, the Real Property Taxes for any real estate tax year shall be included in the calculation of Real Property Taxes for such calendar year based upon the number of days which such calendar year and tax year have in common.

 

10.2          Payment of Taxes. Except as otherwise provided in Paragraph 10.3, Lessor shall pay the Real Property Taxes applicable to the Project, and said payments shell be included in the calculation of Common Area Operating Expenses in accordance with the provisions of Paragraph 4.2.

 

   

     
INITIALS   INITIALS

 

©1999 -AIR COMMERCIAL REAL ESTATE ASSOCIATION FORM MTN-14-2/13E

 

  PAGE 9 OF 17  

 

 

10.3          Additional Improvements. Common Area Operating Expenses shall not include Real Properly Taxes specified in the tax assessor’s records and work sheets as being caused by additional improvements placed upon the Project by other lessees or by Lessor for the exclusive enjoyment of such other lessees. Notwithstanding Paragraph 10.2 hereof, Lessee shall, however, pay to Lessor at the time Common Area Operating Expenses are payable under Paragraph 4.2, the entirety of any increase in Reel Property Taxes if assessed solely by reason of Alterations, Trade Fixtures or Utility Installations placed upon the Premises by Lessee or at Lessee’s request or by reason of any alterations or improvements to the Premises made by Lessor subsequent to the execution of this Lease by the Parties.

 

10.4          Joint Assessment. If the Building is not separately assessed, Real Properly Taxes allocated to the Building shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be determined by Lessor from the respective valuations assigned in the assessor’s work sheets or such other information as may be reasonably available. Lessors reasonable determination thereof, in good faith, shell be conclusive.

 

10.5          Personal Property Taxes. Lessee shall pay prior to delinquency all taxes assessed against and levied upon Lessee Owned Alterations and Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee contained in the Premises. When possible, Lessee shall cause its Lessee Owned Alterations and Utility Installations, Trade Fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. If any of Lessee’s said properly shall be assessed with Lessor’s real property, Lessee shall pay Lessor the taxes attributable to Lessee’s property within 10 days after receipt of a written statement setting forth the taxes applicable to Lessee’s property.

 

11.            Utilities and Services. Lessee shall pay for all water, gas, heat, light, power, telephone, trash disposal and other utilities and services supplied to the Premises, together with any taxes thereon. Notwithstanding the provisions of Paragraph 4.2, if at any time in Lessor’s sole Judgment, Lessor determines that Lessee is using a disproportionate amount of water, electricity or other commonly metered utilities, or that Lessee is generating such a large volume of trash as to require an increase in the size of the trash receptacle and/or an increase in the number of times per month that it is emptied, then Lessor may increase Lessee’s Base Rent by an amount equal to such increased costs. There shall be no abatement of Rent and Lessor shall not be liable in any respect whatsoever for the inadequacy, stoppage, interruption or discontinuance of any utility or service due to riot, strike, labor dispute, breakdown, accident, repair or other cause beyond Lessor’s reasonable control or in cooperation with governmental request or directions.

 

12.            Assignment and Subletting.

 

 12.1         Lessor’s Consent Required.

 

(a)          Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or encumber (collectively, “ assign or assignment ”) or sublet all or any part of Lessee’s interest in this Lease or in the Premises without Lessors prior written consent.

 

(b)          Unless Lessee is a corporation and its stock is publicly traded on a national stock exchange, a change in the control of Lessee shall constitute an assignment requiring consent. The transfer, on a cumulative basis, of 25% or more of the voting control of Lessee shall constitute a change in control for this purpose.

 

(c)          The involvement of Lessee or its assets in any transaction, or series of transactions (by way of merger, sale, acquisition, financing, transfer, leveraged buy-out or otherwise), whether or not a formal assignment or hypothecation of this Lease or Lessee’s assets occurs, which results or will result in a reduction of the Net Worth of Lessee by an amount greater than 25% of such Net Worth as it was represented at the time of the execution of this Lease or at the time of the most recent assignment to which Lessor has consented, or as it exists immediately prior to said transaction or transactions constituting such reduction, whichever was or is greeter, shall be considered an assignment of this Lease to which Lessor may withhold its consent. “ Net Worth of Lessee ” shall mean the net worth of Lessee (excluding any guarantors) established under generally accepted accounting principles.

 

(d)          An assignment or subletting without consent shall, at Lessors option, be a Default curable after notice per Paragraph 13.1(c), or a noncurable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unapproved assignment or subletting as a noncurable Breach, Lessor may either: (i) terminate this Lease, or (ii) upon 30 days written notice, increase the monthly Base Rent to 110% of the Base Rent then in effect. Further, in the event of such Breach and rental adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to 110% of the price previously in effect, and (ii) all fixed and non-fixed rental adjustments scheduled during the remainder of the Lease term shell be increased to 110% of the scheduled adjusted rent.

 

(e)          Lessee’s remedy for any breach of Paragraph 12.1 by Lessor shall be limited to compensatory damages and/or injunctive relief.

 

(f)          Lessor may reasonably withhold consent to a proposed assignment or subletting if Lessee is in Default at the time consent is requested.

 

(g)          Notwithstanding the foregoing, allowing a de minimis portion of the Premises, ie. 20 square feet or less, to be used by a third party vendor in connection with the installation of a vending machine or payphone shall not constitute a subletting.

 

 12.2         Terms and Conditions Applicable to Assignment and Subletting.

 

(a)          Regardless of Lessor’s consent, no assignment or subletting shall: (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of any obligations hereunder, or (iii) alter the primary liability of Lessee for the payment of Rent or for the performance of any other obligations to be performed by Lessee.

 

(b)          Lessor may accept Rent or performance of Lessee’s obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of Rent or performance shall constitute a waiver or estoppel of Lessor’s right to exercise its remedies for Lessee’s Default or Breach.

 

(c)          Lessors consent to any assignment or subletting shall not constitute consent to any subsequent assignment or subletting.

 

(d)          In the event of any Default or Breech by Lessee, Lessor may proceed directly against Lessee, any Guarantors or anyone else responsible for the performance of Lessee’s obligations under this Lease, including any assignee or sublessee, without first exhausting Lessors remedies against any other person or entity responsible therefore to Lessor, or any security held by Lessor.

 

(e)          Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessors determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any, together with a fee of $500 as consideration for Lessors considering and processing said request. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested. (See also Paragraph 36)

 

(f)          Any assignee of, or sublessee under, this Leese shall, by reason of accepting such assignment, entering into such sublease, or entering into possession of the Premises or any portion thereof, be deemed to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented to in writing.

 

(g)          Lessor’s consent to any assignment or subletting shall not transfer to the assignee or sublessee any Option granted to the original Lessee by this Lease unless such transfer is specifically consented to by Lessor in writing. (See Paragraph 39.2)

 

   

     
INITIALS   INITIALS

 

©1999 -AIR COMMERCIAL REAL ESTATE ASSOCIATION FORM MTN-14-2/13E

 

  PAGE 10 OF 17  

 

 

12.3          Additional Terms and Conditions Applicable to Subletting. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein:

 

(a)          Lessee hereby assigns and transfers to Lessor all of Lessee’s interest in all Rent payable on any sublease, and Lessor may collect such Rent and apply same toward Lessee’s obligations under this Lease; provided, however, that until a Breach shall occur in the performance of Lessee’s obligations, Lessee may collect said Rent. In the event that the amount collected by Lessor exceeds Lessee’s then outstanding obligations any such excess shall be refunded to Lessee. Lessor shall not, by reason of the foregoing or any assignment of such sublease, nor by reason of the collection of Rent, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee’s obligations to such sublessee. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor slating that a Breach exists in the performance of Lessee’s obligations under this Leese, to pay to Lessor all Rent due end to become due under the sublease. Sublessee shall rely upon any such notice from Lessor and shall pay all Rents to Lessor without any obligation or right to inquire as to whether such Breach exists, notwithstanding any claim from Lessee to the contrary.

 

(b)          In the event of a Breach by Lessee, Lessor may, at its option, require sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any prior Defaults or Breaches of such sublessor.

 

(c)          Any matter requiring the consent of the sublessor under a sublease shall also require the consent of Lessor.

 

(d)          No sublessee shall further assign or sublet all or any part of the Premises without Lessor’s prior written consent.

 

(e)          Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee.

 

13.            Default; Breach; Remedies.

 

13.1          Default; Breach. A “ Default ” is defined as a failure by the Lessee to comply with or perform any of the terms, covenants, conditions or Rules and Regulations under this Lease. A “ Breach ” is defined as the occurrence of one or more of the following Defaults, and the failure of Lessee to cure such Default within any applicable grace period:

 

(a)          The abandonment of the Premises; or the vacating of the Premises without providing a commercially reasonable level of security, or where the coverage of the property insurance described in Paragraph 8.3 is jeopardized as a result thereof, or without providing reasonable assurances to minimize potential vandalism.

 

(b)          The failure of Lessee to make any payment of Rent or any Security Deposit required to be made by Lessee hereunder, whether to Lessor or to a third party, when due, to provide reasonable evidence of insurance or surety bond, or to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of 3 business days following written notice to Lessee. THE ACCEPTANCE BY LESSOR OF A PARTIAL PAYMENT OF RENT OR SECURITY DEPOSIT SHALL NOT CONSTITUTE A WAIVER OF ANY OF LESSOR’S RIGHTS, INCLUDING LESSOR’S RIGHT TO RECOVER POSSESSION OF THE PREMISES.

 

(c)          The failure of Lessee to allow Lessor and/or its agents access to the Premises or the commission of waste, act or acts constituting public or private nuisance, and/or an illegal activity on the Premises by Lessee, where such actions continue for a period of 3 business days following written notice to Lessee.

 

(d)          The failure by Lessee to provide (i) reasonable written evidence of compliance with Applicable Requirements, (ii) the service contracts, (iii) the rescission of an unauthorized assignment or subletting, (iv) an Estoppel Certificate or financial statements, (v) a requested subordination, (vi) evidence concerning any guaranty and/or Guarantor, (vii) any document requested under Paragraph 41, (viii) material data safety sheets (MSDS), or (ix) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of 10 days following written notice to Lessee.

 

(e)          A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 2.9 hereof, other than those described in subparagraphs 13.1(a), (b), (c) or (d), above, where such Default continues for a period of 30 days after written notice; provided, however, that if the nature of Lessee’s Default is such that more than 30 days are reasonably required for its cure, then it shall not be deemed to be a Breech if Lessee commences such cure within said 30 day period and thereafter diligently prosecutes such cure to completion.

 

(f)         The occurrence of any of the following events: (i) the making of any general arrangement or assignment for the benefit of creditors; (ii) becoming a “debtor” as defined in 11 U.S.C. § 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within 60 days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee’s assets located at the Premises or of Lessee’s interest in this Lease, where possession is not restored to Lessee within 30 days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee’s assets located at the Premises or of Lessee’s Interest in this Lease, where such seizure is not discharged within 30 days; provided, however, in the event that any provision of this subparagraph is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions.

 

(g)          The discovery that any financial statement of Lessee or of any Guarantor given to Lessor was materially false.

 

(h)          If the performance of Lessee’s obligations under this Lease is guaranteed: (i) the death of a Guarantor, (ii) the termination of a Guarantor’s liability with respect to this Lease other than in accordance with the terms of such guaranty, (iii) a Guarantor’s becoming insolvent or the subject of a bankruptcy filing, (iv) a Guarantor’s refusal to honor the guaranty, or (v) a Guarantor’s breach of its guaranty obligation on an anticipatory basis, and Lessee’s failure, within 60 days following written notice of any such event, to provide written alternative assurance or security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the Guarantors that existed at the time of execution of this Lease.

 

13.2          Remedies. If Lessee fails to perform any of its affirmative duties or obligations, within 10 days after written notice (or in case of an emergency, without notice), Lessor may, at its option, perform such duty or obligation on Lessee’s behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. Lessee shall pay to Lessor an amount equal to 115% of the costs and expenses incurred by Lessor in such performance upon receipt of an invoice therefor. In the event of a Breach, Lessor may, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach:

 

   

     
INITIALS   INITIALS

 

©1999 -AIR COMMERCIAL REAL ESTATE ASSOCIATION FORM MTN-14-2/13E

 

  PAGE 11 OF 17  

 

 

 (a)          Terminate Lessee’s right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Lessee shall immediately surrender possession to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the unpaid Rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee’s failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom including but not limited to the cost of recovering possession of the Premises, expenses of relatting, including necessary renovation and alteration of the Premises, reasonable attorneys’ fees, and that portion of any leasing commission paid by Lessor in connection with this Lease applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the immediately preceding sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of the District within which the Premises are located at the time of award plus one percent. Efforts by Lessor to mitigate damages caused by Lessee’s Breach of this Lease shall not waive Lessor’s right to recover any damages to which Lessor is otherwise entitled. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding any unpaid Rent and damages as are recoverable therein, or Lessor may reserve the right to recover all or any part thereof in a separate suit. If a notice and grace period required under Paragraph 13.1 was not previously given, a notice to pay rent or quit, or to perform or quit given to Lessee under the unlawful detainer statute shall also constitute the notice required by Paragraph 13.1. In such case, the applicable grace period required by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute.

 

 (b)          Continue the Lease and Lessee’s right to possession and recover the Rent as it becomes due, in which event Lessee may sublet or assign, subject only to reasonable limitations. Acts of maintenance, efforts to relet, and/or the appointment of a receiver to protect the Lessor’s interests, shall not constitute a termination of the Lessee’s right to possession.

 

 (c)          Pursue any other remedy now or hereafter available under the laws or judicial decisions of the state wherein the Premises are located. The expiration or termination of this Lease and/or the termination of Lessee’s right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee’s occupancy of the Premises.

 

13.3          Inducement Recapture. Any agreement for free or abated rent or other charges, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee’s entering into this Lease, all of which concessions are hereinafter referred to as “Inducement Provisions” , shall be deemed conditioned upon Lessee’s full and faithful performance of all of the terms, covenants and conditions of this Lease. Upon Breach of this Lease by Lessee, any such Inducement Provision shell automatically be deemed deleted from this Lease and of no further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an Inducement Provision shall be immediately due and payable by Lessee to Lessor, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of the Breach which initiated the operation of this paragraph shall not be deemed a waiver by Lessor of the provisions of this paragraph unless specifically so stated in writing by Lessor at the time of such acceptance.

 

13.4          Late Charges. Lessee hereby acknowledges that late payment by Lessee of Rent will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent shall not be received by Lessor within 5 days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall immediately pay to Lessor a one-time late charge equal to 10% of each such overdue amount or $100, whichever is greater. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of such late payment. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee’s Default or Breach with respect to such overdue amount, nor prevent the exercise of any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for 3 consecutive installments of Base Rent, then notwithstanding any provision of this Lease to the contrary, Base Rent shall, at Lessor’s option, become due and payable quarterly in advance.

 

13.5          Interest. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor, when due shell bear interest from the 31st day after it was due. The interest (“Interest”) charged shall be computed at the rate of 10% per annum but shall not exceed the maximum rate allowed by law. Interest is payable in addition to the potential late charge provided for in Paragraph 13.4.

 

13.6          Breach by Lessor.

 

 (a)           Notice of Breach. Lessor shall not be deemed in breech of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph, a reasonable time shall in no event be less than 30 days after receipt by Lessor, and any Lender whose name and address shall have been furnished Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor’s obligation is such that more than 30 days are reasonably required for its performance, then Lessor shall not be in breach if performance is commenced within such 30 day period and thereafter diligently pursued to completion.

 

 (b)           Performance by Lessee on Behalf of Lessor. In the event that neither Lessor nor Lender cures said breach within 30 days after receipt of said notice, or if having commenced said cure they do not diligently pursue it to completion, then Lessee may elect to cure said breach at Lessee’s expense and offset from Rent the actual and reasonable cost to perform such cure, provided however, that such offset shall not exceed an amount equal to the greater of one month’s Base Rent or the Security Deposit, reserving Lessee’s right to reimbursement from Lessor for any such expense in excess of such offset. Lessee shall document the cost of said cure and supply said documentation to Lessor.

 

14.            Condemnation. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (collectively “ Condemnation ”), this Lease shall terminate as to the part taken as of the date the condemning authority takes title or possession, whichever first occurs. If more then 10% of the floor area of the Unit, or more than 25% of the parking spaces is taken by Condemnation, Lessee may, at Lessee’s option, to be exercised in writing within 10 days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within 10 days after the condemning authority shell have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in proportion to the reduction in utility of the Premises caused by such Condemnation. Condemnation awards and/or payments shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold, the value of the part taken, or for severance damages; provided, however, that Lessee shall be entitled to any compensation paid by the condemnor for Lessee’s relocation expenses, loss of business goodwill and/or Trade Fixtures, without regard to whether or not this Lease is terminated pursuant to the provisions of this Paragraph. All Alterations and Utility Installations made to the Premises by Lessee, for purposes of Condemnation only, shall be considered the property of the Lessee and Lessee shall be entitled to any and all compensation which is payable therefor. In the event that this Lease is not terminated by reason of the Condemnation, Lessor shall repair any damage to the Premises caused by such Condemnation.

 

15.            Brokerage Fees.

 

 15.1          Additional Commission. In addition to the payments owed pursuant to Paragraph 1.10 above, and unless Lessor and the Brokers otherwise agree in writing, Lessor agrees that: (a) if Lessee exercises any Option, (b) if Lessee or anyone affiliated with Lessee acquires from Lessor any rights to the Premises or other premises owned by Lessor and located within the Project, (c) if Lessee remains in possession of the Premises, with the consent of Lessor, after the expiration of this Lease, or (d) if Base Rent is increased, whether by agreement or operation of an escalation clause herein, then, Lessor shall pay Brokers a fee in accordance with the fee schedule of the Brokers in effect at the time the Lease was executed.

 

   

     
INITIALS   INITIALS

 

©1999 -AIR COMMERCIAL REAL ESTATE ASSOCIATION FORM MTN-14-2/13E

 

  PAGE 12 OF 17  

 

 

15.2          Assumption of Obligations. Any buyer or transferee of Lessor’s interest in this Lease shall be deemed to have assumed Lessor’s obligation hereunder. Brokers shall be third party beneficiaries of the provisions of Paragraphs 1.10, 15, 22 and 31. If Lessor fails to pay to Brokers any amounts due as and for brokerage fees pertaining to this Lease when due, then such amounts shall accrue interest. In addition, if Lessor falls to pay any amounts to Lessee’s Broker when due, Lessee’s Broker may send written notice to Lessor and Lessee of such failure and if Lessor fails to pay such amounts within 10 days after said notice, Lessee shall pay said monies to its Broker and offset such amounts against Rent. In addition, Lessee’s Broker shall be deemed to be a third party beneficiary of any commission agreement entered into by and/or between Lessor and Lessor’s Broker for the limited purpose of collecting any brokerage fee owed.

 

15.3          Representations and Indemnities of Broker Relationships. Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder (other than the Brokers, if any) in connection with this Lease, and that no one other than said named Brokers is entitled to any commission or finder’s fee in connection herewith. Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the Indemnifying Party, including any costs, expenses, attorneys’ fees reasonably incurred with respect thereto.

 

16.           Estoppel Certificates.

 

(a)          Each Party (as “ Responding Party ”) shall within 10 days after written notice from the other Party (the “ Requesting Party ”) execute, acknowledge and deliver to the Requesting Party a statement in writing in form similar to the then most current “Estoppel Certificate” form published by the AIR Commercial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party.

 

(b)          If the Responding Party shall fail to execute or deliver the Estoppel Certificate within such 10 day period, the Requesting Party may execute an Estoppel Certificate stating that: (i) the Lease is in full force and effect without modification except as may be represented by the Requesting Party, (ii) there are no uncured defaults in the Requesting Party’s performance, and (iii) if Lessor is the Requesting Party, not more than one month’s rent has been paid in advance. Prospective purchasers and encumbrancers may rely upon the Requesting Party’s Estoppel Certificate, and the Responding Party shall be estopped from denying the truth of the facts contained in said Certificate. In addition, Lessee acknowledges that any failure on its part to provide such an Estoppel Certificate will expose Lessor to risks and potentially cause Lessor to incur costs not contemplated by this Lease, the extent of which will be extremely difficult to ascertain. Accordingly, should the Lessee fail to execute and/or deliver a requested Estoppel Certificate in a timely fashion the monthly Base Rent shall be automatically increased, without any requirement for notice to Lessee, by an amount equal to 10% of the then existing Base Rent or $100, whichever is greater for remainder of the Lease. The Parties agree that such increase in Base Rent represents fair and reasonable compensation for the additional risk/costs that Lessor will incur by reason of Lessee’s failure to provide the Estoppel Certificate. Such increase in Base Rent shall in no event constitute a waiver of Lessee’s Default or Breath with respect to the failure to provide the Estoppel Certificate nor prevent the exercise of any of the other rights and remedies granted hereunder.

 

(c)          If Lessor desires to finance, refinance, or sell the Premises, or any part thereof, Lessee and all Guarantors shall within 10 days after written notice from Lessor deliver to any potential lender or purchaser designated by Lessor such financial statements as may be reasonably required by such lender or purchaser, including but not limited to Lessee’s financial statements for the past 3 years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth.

 

17.            Definition of Lessor. The term “Lessor” as used herein shall mean the owner or owners at the time in question of the fee title to the Premises, or, if this is a sublease, of the Lessee’s interest in the prior lease. In the event of a transfer of Lessor’s title or interest in the Premises or this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor. Upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined.

 

18.            Severability. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof.

 

19.            Days. Unless otherwise specifically indicated to the contrary, the word “days” as used in this Leese shall mean and refer to calender days.

 

20.            Limitation on Liability. The obligations of Lessor under this Lease shall not constitute personal obligations of Lessor, or its partners, members, directors, officers or shareholders, and Lessee shall look to the Premises, and to no other assets of Lessor, for the satisfaction of any liability of Lessor with respect to this Lease, and shall not seek recourse against Lessor’s partners, members, directors, officers or shareholders, or any of their personal assets for such satisfaction.

 

21.            Time of Essence. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Leese.

 

22.            No Prior or Other Agreements; Broker Disclaimer. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Lessor and Lessee each represents and warrants to the Brokers that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to this Lease end as to the use, nature, quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party.

 

23.            Notices.

 

 23.1 Notice Requirements. All notices required or permitted by this Lease or applicable law shall be in writing and may be delivered in person (by hand or by courier) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party’s signature on this Lease shall be that Party’s address for delivery or mailing of notices. Either Party may by written notice to the other specify a different address for notice, except that upon Lessee’s taking possession of the Premises, the Premises shall constitute Lessee’s address for notice. A copy of all notices to Lessor shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate in writing.

 

 23.2 Date of Notice. Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given 72 hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantees next day delivery shall be deemed given 24 hours after delivery of the same to the Postal Service or courier. Notices transmitted by facsimile transmission or similar means shall be deemed delivered upon telephone confirmation of receipt (confirmation report from fax machine is sufficient), provided a copy is also delivered via delivery or mail. If notice is received on a Saturday, Sunday or legal holiday, it shall be deemed received on the next business day.

 

24.           Waivers.

 

(a)          No waiver by Lessor of the Default or Breech of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breech by Lessee of the same or of any other term, covenant or condition hereof. Lessor’s consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor’s consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent.

 

   

     
INITIALS   INITIALS

 

©1999 -AIR COMMERCIAL REAL ESTATE ASSOCIATION FORM MTN-14-2/13E

 

  PAGE 13 OF 17  

 

 

(b)          The acceptance of Rent by Lessor shall not be a waiver of any Default or Breech by Lessee. Any payment by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment.

 

(c)          THE PARTIES AGREE THAT THE TERMS OF THIS LEASE SHALL GOVERN WITH REGARD TO ALL MATTERS RELATED THERETO AND HEREBY WAIVE THE PROVISIONS OF ANY PRESENT OR FUTURE STATUTE TO THE EXTENT THAT SUCH STATUTE IS INCONSISTENT WITH THIS LEASE.

 

25.           Disclosures Regarding The Nature of a Real Estate Agency Relationship.

 

(a)          When entering into a discussion with a real estate agent regarding a real estate transaction, a Lessor or Lessee should from the outset understand what type of agency relationship or representation it has with the agent or agents in the transaction. Lessor and Lessee acknowledge being advised by the Brokers in this transaction, as follows:

 

(i)         Lessor’s Agent. A Lessor’s agent under a listing agreement with the Lessor acts as the agent for the Lessor only. A Lessor’s agent or subagent has the following affirmative obligations: To the Lessor: A fiduciary duty of utmost care, integrity, honesty, and loyalty in dealings with the Lessor. To the Lessee and the Lessor: (a) Diligent exercise of reasonable skills and care in performance of the agent’s duties. (b) A duty of honest and fair dealing and good faith. (c) A duly to disclose all facts known to the agent materially affecting the value or desirability of the property that are not known to, or within the diligent attention and observation of, the Parties. An agent is not obligated to reveal to either Party any confidential information obtained from the other Party which does not involve the affirmative duties set forth above.

 

(ii)          Lessee’s Agent. An agent can agree to act as agent for the Lessee only. In these situations, the agent is not the Lessor’s agent, even if by agreement the agent may receive compensation for services rendered, either in full or in part from the Lessor. An agent acting only for a Lessee has the following effirmative obligations. To the Lessee: A fiduciary duty of utmost care, integrity, honesty, and loyalty in dealings with the Lessee. To the Lessee and the Lessor: (a) Diligent exercise of reasonable skills and care in performance of the agents duties. (b) A duty of honest and fair dealing and good faith. (c) A duty to disclose all facts known to the agent materially affecting the value or desirability of the property that are not known to, or within the diligent attention and observation of, the Parties. An agent is not obligated to reveal to either Party any confidential information obtained from the other Party which does not involve the affirmative duties set forth above.

 

(iii)         Agent Representing Both Lessor and Lessee. A real estate agent, either acting directly or through one or more associate licenses, can legally be the agent of both the Lessor and the Lessee in a transaction, but only with the knowledge and consent of both the Lessor and the Lessee. In a dual agency situation, the agent has the following affirmative obligations to both the Lessor and the Lessee: (a) A fiduciary duty of utmost care, integrity, honesty and loyalty in the dealings with either Lessor or the Lessee. (b) Other duties to the Lessor and the Lessee as stated above in subparagraphs (i) or (ii) In representing both Lessor and Lessee, the agent may not without the express permission of the respective Party, disclose to the other Party that the Lessor will accept rent in an amount less than that indicated in the listing or that the Lessee is willing to pay a higher rent than that offered. The above duties of the agent in a real estate transaction do not relieve a Lessor or Lessee from the responsibility to protect their own interests. Lessor and Lessee should carefully read all agreements to assure that they adequately express their understanding of the transaction. A real estate agent is a person qualified to advise about real estate. If legal or tax advice is desired, consult a competent professional.

 

(b)          Brokers have no responsibility with respect to any Default or Breach hereof by either Party. The Parties agree that no lawsuit or other legal proceeding involving any breach of duty, error or omission relating to this Lease may be brought against Broker more than one year after the Start Date and that the liability (including court costs and attorneys’ fees), of any Broker with respect to any such lawsuit and/or legal proceeding shall not exceed the fee received by such Broker pursuant to this Lease; provided, however, that the foregoing limitation on each Broker’s liability shall not be applicable to any gross negligence or willful misconduct of such Broker.

 

(c)          Lessor and Lessee agree to identify to Brokers as “Confidential” any communication or information given Brokers that is considered by such Party to be confidential.

 

26.           No Right To Holdover. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or termination of this Lease. In the event that Lessee holds over, then the Base Rent shall be increased to 150% of the Base Rent applicable immediately preceding the expiration or termination. Nothing contained herein shall be construed as consent by Lessor to any holding over by Lessee.

 

27.           Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity.

 

28.           Covenants and Conditions; Construction of Agreement. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. In construing this Lease, all headings and titles are for the convenience of the Parties only and shall not be considered a part of this Lease. Whenever required by the context, the singular shall include the plural and vice versa. This Lease shall not be construed as if prepared by one of the Parties, but rather according to its fair meaning as a whole, as if both Parties had prepared it.

 

29.           Binding Effect; Choice of Law. This Lease shall be binding upon the parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located.

 

30.           Subordination; Attornment; Non-Disturbance.

 

30.1          Subordination. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, “Security Device” ), now or hereafter placed upon the Premises, to any and all advances made on the security thereof, and to all renewals, modifications, and extensions thereof. Lessee agrees that the holders of any such Security Devices (in this Lease together referred to as “Lender” ) shall have no liability or obligation to perform any of the obligations of Lessor under this Leese. Any Lender may elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device by giving written notice thereof to Lessee, whereupon this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof.

 

30.2          Attornment. In the event that Lessor transfers title to the Premises, or the Premises are acquired by another upon the foreclosure or termination of a Security Devise to which this Lease is subordinated (i) Lessee shall, subject to the non-disturbance provisions of Paragraph 30.3, attom to such new owner, and upon request, enter into a new lease, containing all of the terms and provisions of this Lease, with such new owner for the remainder of the term hereof, or, at the election of the new owner, this Lease will automatically become a new lease between Lessee and such new owner, and (ii) Lessor shall thereafter be relieved of any further obligations hereunder and such new owner shall assume all of Lessor’s obligations, except that such new owner shall not: (a) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership; (b) be subject to any offsets or defenses which Lessee might have against any prior lessor, (c) be bound by prepayment of more than one month’s rent, or (d) be liable for the return of any security deposit paid to any prior lessor which was not paid or credited to such now owner.

  

   
     
INITIALS   INITIALS

 

©1999 -AIR COMMERCIAL REAL ESTATE ASSOCIATION FORM MTN-14-2/13E

 

  PAGE 14 OF 17  

 

 

 30.3          Non-Disturbance. With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee’s subordination of this Lease shall be subject to receiving a commercially reasonable non-disturbance agreement (a “Non-Disturbance Agreement” ) from the Lender which Non-Disturbance Agreement provides that Lessee’s possession of the Premises, and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and shorn to the record owner of the Premises. Further, within 60 days after the execution of this Lease, Lessor shall, if requested by Lessee, use its commercially reasonable efforts to obtain a Non-Disturbance Agreement from the holder of any pre-existing Security Device which is secured by the Premises. In the event that Lessor is unable to provide the Non-Disturbance Agreement within said 60 days, then Lessee may, at Lessee’s option, directly contact Lender and attempt to negotiate for the execution and delivery of a Non-Disturbance Agreement.

 

 30.4          Self-Executing. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that, upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of the Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any subordination, ettornment and/or Non-Disturbance Agreement provided for herein.

 

31.            Attorneys’ Fees. If any Party or Broker brings an action or proceeding involving the Premises whether founded in tort, contract or equity, or to declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorneys’ fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term, “Prevailing Party” shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorneys’ fees award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse at attorneys’ fees reasonably incurred. In addition, Lessor shall be entitled to attorneys’ fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach ($200 is a reasonable minimum per occurrence for such services and consultation).

 

32.            Lessor’s Access; Showing Premises; Repairs. Lessor and Lessor’s agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times after reasonable prior notice for the purpose of showing the same to prospective purchasers, lenders, or tenants, and making such alterations, repairs, improvements or additions to the Premises as Lessor may deem necessary or desirable and the erecting, using and maintaining of utilities, services, pipes and conduits through the Premises and/or other premises as long as there is no material adverse effect on Lessee’s use of the Premises. All such activities shell be without abatement of rent or liability to Lessee.

 

33.            Auctions. Lessee shall not conduct, nor permit to be conducted, any auction upon the Premises without Lessor’s prior written consent. Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to permit an auction.

 

34.            Signs. Lessor may place on the Premises ordinary “For Sale” signs at any time and ordinary “For Leese” signs during the last 6 months of the term hereof. Except for ordinary “For Sublease” signs which may be placed only on the Premises, Lessee shall not place any sign upon the Project without Lessor’s prior written consent. All signs must comply with all Applicable Requirements.

 

35.            Termination; Merger. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shell automatically terminate any sublease or lesser estate in the Premises; provided, however, that Lessor may elect to continue any one or all existing subtenancies. Lessor’s failure within 10 days following any such event to elect to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor’s election to have such event constitute the termination of such interest.

 

36.            Consents. Except as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor’s actual reasonable costs and expenses (including but not limited to architects’, attorneys’, engineers’ and other consultants’ fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent, including but not limited to consents to an assignment, a subletting or the presence or use of a Hazardous Substance, shall be paid by Lessee upon receipt of an invoice and supporting documentation therefor. Lessor’s consent to any act, assignment or subletting shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, not shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. The failure to specify herein any particular condition to Lessor’s consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. In the event that either Party disagrees with any determination made by the other hereunder and reasonably requests the reasons for such determination, the determining party shall furnish its reasons in writing and in reasonable detail within 10 business days following such request.

 

37.            Guarantor.

 

 37.1          Execution. The Guarantors, if any, shall each execute a guaranty in the form most recently published by the AIR Commercial Real Estate Association.

 

 37.2          Default. It shall constitute a Default of the Lessee if any Guarantor fails or refuses, upon request to provide: (a) evidence of the execution of the guaranty, including the authority of the party signing on Guarantor’s behalf to obligate Guarantor, and in the case of a corporate Guarantor, a certified copy of a resolution of its board of directors authorizing the making of such guaranty, (b) current financial statements, (c) an Estoppel Certificate, or (d) written confirmation that the guaranty is still in effect.

 

38.            Quiet Possession. Subject to payment by Lessee of the Rent and performance of all of the cevenants, conditions and provisions on Lessee’s part to be observed and performed under this Lease, Lessee shall have quiet possession and quiet enjoyment of the Premises during the term hereof.

 

39.            Options. If Lessee is granted any option, as defined below, then the following provisions shall apply.

 

 39.1          Definition. “Option” shall mean: (a) the right to extend or reduce the term of or renew this Lease or to extend or reduce the term of or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal or first offer to lease either the Premises or other property of Lessor; (c) the right to purchase, the right of first offer to purchase or the right of first refusal to purchase the Premises or other property of Lessor.

 

 39.2          Options Personal To Original Lessee. Any Option granted to Lessee in this Lease is personal to the original Lessee, and cannot be assigned or exercised by anyone other than said original Lessee and only while the original Lessee is in full possession of the Premises and, if requested by Lessor, with Lessee certifying that Lessee has no intention of thereafter assigning or subletting.

 

 39.3          Multiple Options. In the event that Lessee has any multiple Options to extend or renew this Lease, a later Option cannot be exercised unless the prior Options have been validly exercised.

 

 39.4          Effect of Default on Options.

 

 (a)          Lessee shall have no right to exercise an Option: (i) during the period commencing with the giving of any notice of Default and continuing until said Default is cured, (ii) during the period of time any Rent is unpaid (without regard to whether notice thereof is given Lessee), (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessee has been given 3 or more notices of separate Default, whether or not the Defaults are cured, during the 12 month period immediately preceding the exercise of the Option.

 

 (b)          The period of time within which en Option may be exercised shall not be extended or enlarged by reason of Lessee’s inability to exercise an Option because of the provisions of Paragraph 39.4(a).

 

   
     
INITIALS   INITIALS

 

©1999 -AIR COMMERCIAL REAL ESTATE ASSOCIATION FORM MTN-14-2/13E

 

  PAGE 15 OF 17  

 

 

(c)          An Option shall terminate and be of no further force or effect, notwithstanding Lessee’s due and timely exercise of the Option, if, after such exercise and prior to the commencement of the extended term or completion of the purchase, (i) Lessee falls to pay Rent for a period of 30 days after such Rent becomes due (without any necessity of Lessor to give notice thereof),or (ii) if Lessee commits a Breach of this Lease.

 

40.            Security Measures. Lessee hereby acknowledges that the Rent payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties.

 

41.            Reservations. Lessor reserves the right: (i) to grant, without the consent or joinder of Lessee, such easements, rights and dedications that Lessor deems necessary, (ii) to cause the recordation of parcel maps and restrictions, and (iii) to create and/or install new utility raceways, so long as such easements, rights, dedications, maps, restrictions, and utility raceways do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate such rights.

 

42.            Performance Under Protest. If at any time a dispute shell arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment “under protest” and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay. A Party who does not initiate suit for the recovery of sums paid “under protest” within 6 months shall be deemed to have waived its right to protest such payment.

 

43.            Authority; Multiple Parties; Execution.

 

(a)          If either Party hereto is a corporation, trust, limited liability company, partnership, or similar entity, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. Each Party shall, within 30 days after request, deliver to the other Party satisfactory evidence of such authority.

 

(b)          If this Lease is executed by more then one person or entity as “Lessee”, each such person or entity shall be jointly and severally liable hereunder. It is agreed that any one of the named Lessees shall be empowered to execute any amendment to this Lease, or other document ancillary thereto and bind all of the named Lessees, and Lessor may rely on the same as if all of the named Lessees had executed such document.

 

(c)          This Lease may be executed by the Parties in counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument.

 

44.            Conflict. Any conflict between the printed provisions of this Lease end the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions.

 

45.            Offer. Preparation of this Lease by either party or their agent and submission of same to the other Party shall not be deemed an offer to lease to the other Party. This Lease is not intended to he binding until executed and delivered by all Parties hereto.

 

46.            Amendments. This Lease may be modified only in writing, signed by the Parties in interest at the time of the modification. As long as they do not materially change Lessee’s obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by a Lender in connection with the obtaining of normal financing or refinancing of the Premises.

 

47.            Waiver of Jury Trial. THE PARTIES HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING INVOLVING THE PROPERTY OR ARISING OUT OF THIS AGREEMENT.

 

48.            Arbitration of Disputes. An Addendum requiring the Arbitration of all disputes between the Parties and/or Brokers arising out of this Lease ¨ is   þ is not attached to this Lease.

 

49.            Accessibility; Americans with Disabilities Act.

 

(a)          The Premises: þ have not undergone an inspection by a Certified Access Specialist ( CASp ). ¨ have undergone an inspection by a Certified Access Specialist (CASp) and it was determined that the Premises met at applicable construction-related accessibility standards pursuant to California Civil Code §55.51 et seq. ¨ have undergone an inspection by a Certified Access Specialist (CASp) and it was determined that the Premises did not meet all applicable construction-related accessibility standards pursuant to California Civil Code §55.51 et seq.

 

(b)          Since compliance with the Americans with Disabilities Act (ADA) is dependent upon Lessee’s specific use of the Premises, Lessor makes no warranty or representation as to whether or not the Premises comply with ADA or any similar legislation. In the event that Lessee’s use of the Premises requires modifications or additions to the Premises in order to be in ADA compliance, Lessee agrees to make any such necessary modifications and/or additions at Lessee’s expense.

 

LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES.

 

ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AIR COMMERCIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES. THE PARTIES ARE URGED TO:

 

1.            SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE.

 

2.            RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, COMPLIANCE WITH THE AMERICANS WITH DISABILITIES ACT AND THE SUITABILITY OF THE PREMISES FOR LESSEE’S INTENDED USE.

 

WARNING: IF THE PREMISES ARE LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE STATE IN WHICH THE PREMISES ARE LOCATED.

 

   

     
INITIALS   INITIALS

 

©1999 -AIR COMMERCIAL REAL ESTATE ASSOCIATION FORM MTN-14-2/13E

 

  PAGE 16 OF 17  

 

 

The parties here to have executed this lease at the place and on the dates specified above their respective signatures.

 

Executed at: Los Angeles, CA   Executed at:  
On: Nov. 21, 2014   On:  

 

By LESSOR:   By LESSEE:
     
Pacific Simi Associates, LP, a California   SDJ Technologies, Inc., a Delaware
limited partnership   corporation

 

By: /s/ David Rosen   By: /s/ Jay Tandon
Name Printed: David Rosen   Name Printed: Jay Tandon
Title: President/Treasurer of the General Partner   Title: CEO
         
By:     By: /s/ Vivek Tandon
Name Printed:     Name Printed: Vivek Tandon
Title:     Title: Executive Vice President
Address:     Address: 2655 Park Center Drive, Unit C
      simi valley, CA 93065
         

 

Telephone: (310) 477-5300 X136   Telephone: (___)
Facsimile: (310) 575-5823   Facsimile: (___)
Email:     Email:  
Email:     Email:  
Federal ID No.     Federal ID No.  

 

BROKER:   BROKER:
Colliers International   CBRE Commercial Real Estate Services
     

 

Attn: John Erickson   Attn: Robert Kahn
Title: Senior Vice President   Title: First Vice President
Address: 27200 Tourney Road, Suite 300   Address: 771 East Daily Drive, Suite 300
Valencia, CA 91355   Camarillo, CA 93010
Telephone: (661) 253-5202   Telephone: (805) 465-1632
Facsimile: (661) 253-5302   Facsimile: (805) 465-1665
Email: john.erickson@colliers com   Email: bob.kahn@cbre.com
Federal ID No.     Federal ID No.  
Broker/Agent DRE License #: 01908231 / 00977578   Broker/Agent DRE License #: 00845914
         
         

 

NOTICE: These forms are often modified to meet changing requirements of law and industry needs. Always write or call to make sure you are utilizing the most current form: AIR Commercial Real Estate Association, 500 N Brand Blvd, Suite 900, Glendale, CA 91203.

Telephone No. (213) 687-8777. Fax No.: (213) 687-8616.

 

©Copyright 1999 By AIR Commercial Real Estate Association.

 

All rights reserved. No part of these works may be reproduced in any form without permission in writing.

 

   

     
INITIALS   INITIALS

 

©1999 -AIR COMMERCIAL REAL ESTATE ASSOCIATION FORM MTN-14-2/13E

 

  PAGE 17 OF 17  

 

 

EXHIBIT G

 

 

  PAGE 1 of 1  

 

 

 

AIR COMMERCIAL REAL ESTATE ASSOCIATION
GUARANTY OF LEASE

 

WHEREAS,Pacific Simi Associates, LP, a California limited partnership, hereinafter “Lessor”, and SDJ Technologies, Inc., a Delaware corporation, hereinafter “Lessee”, are about to execute a document entitled “Lease” dated October 28, 2014 concerning the premises commonly known as 2655 Park Center Drive, Unit C, Valencia, CA 93065 wherein Lessor will lease the premises to Lessee, and

 

WHEREAS, Tandon Digital, Inc., a Delaware corporation hereinafter “Guarantors” have a financial Interest in Lessee, and

 

WHEREAS, Lessor would not execute the Lease if Guarantors did not execute and deliver to Lessor this Guaranty of Lease.

 

NOW THEREFORE, In consideration of the execution of said Lease by Lessor end as a material inducement to Lessor to execute said Lease, Guarantors hereby jointly, severally, unconditionally and irrevocably guarantee the prompt payment by Lessee of all rents and all other sums payable by Lessee under said Lease and the faithful and prompt performance by Lessee of each and every one of the terms, conditions and covenants of said Lease to be kept and performed by Lessee.

 

It is specifically agreed by Lessor and Guarantors that: (i) the terms of the foregoing Lease may be modified by agreement between Lessor and Lessee, or by a course of conduct, and (ii) said Lease may be assigned by Lessor or any assignee of Lessor without consent or notice to Guarantors and that this Guaranty shall guarantee the performance of said Lease as so modified.

 

This Guaranty shall not be released, modified or affected by the failure or delay on the part of Lessor to enforce any of the rights or remedies of the Lessor under said Lease.

 

No notice of default by Lessee under the Lease need be given by Lessor to Guarantors, it being specifically agreed that the guarantee of the undersigned is a continuing guarantee under which Lessor may proceed immediately against Lessee and/or against Guarantors following any breach or default by Lessee or for the enforcement of any rights which Lessor may have as against Lessee under the terms of the Lease or at law or in equity.

 

Lessor shall have the right to proceed against Guarantors following any breach or default by Lessee under the Lease without first proceeding against Lessee and without previous notice to or demand upon either Lessee or Guarantors.

 

Guarantors hereby waive (a) notice of acceptance of this Guaranty. (b) demand of payment, presentation and protest, (c) all right to assert or plead any statute of limitations relating to this Guaranty or the Lease, (d) any right to require the Lessor to proceed against the Lessee or any other Guarantor or any other person or entity liable to Lessor, (e) any right to require Lessor to apply to any default any security deposit or other security it may hold under the Lease, (f) any right to require Lessor to proceed under any other remedy Lessor may have before proceeding against Guarantors, (g) any right of subrogation that Guarantors may have against Lessee.

 

Guarantors do hereby subordinate all existing or future indebtedness of Lessee to Guarantors to the obligations owed to Lessor under the Lease and this Guaranty.

 

If a Guarantor is married, such Guarantor expressly agrees that recourse may be had against his or her separate property for all of the obligations hereunder.

 

The obligations of Lessee under the Lease to execute and deliver estoppel statements and financial statements, as therein provided, shall be deemed to also require the Guarantors to do and provide the same to Lessor. The failure of the Guarantors to provide the same to Lessor shall constitute a default under the Lease.

 

The term “lessor” refers to and means the Lessor named in the Lease and also Lessor’s successors and assigns. So long as Lessor’s interest in the Lease, the leased premises or the rents, issues and profits therefrom, are subject to any mortgage or deed of trust or assignment for security, no acquisition by Guarantors of the Lessor’s interest shall affect the continuing obligation of Guarantors under this Guaranty which shall nevertheless continue in full force and effect for the benefit of the mortgagee, beneficiary, trustee or assignee under such mortgage, deed of trust or assignment and their successors and assigns.

 

The term “Lessee” refers to and means the Lessee named in the Lease and also Lessee’s successors and assigns.

 

Any recovery by Lessor from any other guarantor or insurer shall first be credited to the portion of Lessee’s indebtedness to Lessor which exceeds the maximum liability of Guarantors under this Guaranty.

 

No provision of this Guaranty or right of the Lessor can be waived, nor can the Guarantors be released from their obligations except in writing signed by the Lessor.

 

Any litigation concerning this Guaranty shall be initiated in a state court of competent jurisdiction in the county in which the leased premises are located and the Guarantors consent to the jurisdiction of such court. This Guaranty shall be governed by the laws of the State in which the leased premises are located and for the purposes of any rules regarding conflicts of law the parties shall be treated as if they were all residents or domiciles of such State.

 

In the event any action be brought by said Lessor against Guarantors hereunder to enforce the obligation of Guarantors hereunder, the unsuccessful party in such action shall pay to the prevailing party therein a reasonable attorneys fee. The attorney’s fee award shall not be computed in accordance with any court fee schedule, but shall be such as to full reimburse all attorney’s fees reasonably incurred.

 

If any Guarantor is a corporation, partnership, or limited liability company, each individual executing this Guaranty on seid entity’s behalf represents and warrants that he or she is duly authorized to execute this Guaranty on behalf of such entity.

 

If this Form has been filled in, it has been prepared for submission to your attorney for his approval. No representation or recommendation is made by the AIR Commercial Real Estate Association, the real estate broker or its agents or employees as to the legal sufficiency, legal effect, or tax consequences of this Form or the transaction relating thereto.

 

Signatures on the following Page.

 

©1996 -AIR COMMERCIAL REAL ESTATE ASSOCIATION FORM GR-2-09/06E

 

  PAGE 1 OF 2  

 

 

Executed at:     Tandon Digital, Inc.
On:     By: /s/ Jay Tandon
Address:     Jay Tandon, CEO
     
     
    By: /s/ Vivek Tandon
    Vivek Tandon, Executive Vice President Director
     
    “GUARANTORS”

 

©1996 -AIR COMMERCIAL REAL ESTATE ASSOCIATION FORM GR-2-09/06E

 

  PAGE 2 OF 2  

 

   

ADDENDUM TO STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE-NET
DATED: October 28, 2014
BY AND BETWEEN PACIFIC SIMI ASSOCIATES, LP, A CALIFORNIA LIMITED
PARTNERSHIP, AS LESSOR
AND
SDJ TECHNOLOGIES, INC., A DELAWARE CORPORATION, AS LESSEE
FOR THE PROPERTY COMMONLY KNOWN AS 2655 PARK CENTER DRIVE, UNITC, SIMI
VALLEY, CALIFORNIA

 

6.2(c) HAZARDOUS SUBSTANCES :
(i) Lessee accepts the Premises as being in good and sanitary order, condition and repair and accepts the building and other improvements in their present condition. Lessee agrees on the last day of this term of this Lease, to surrender the Premises to Lessor in good and sanitary order, condition and repair, except for such wear and tear as would be normal for the period of the Lessee’s occupancy.

 

No spill, deposit, emission, leakage or other release of a Hazardous Substance in the atmosphere, soils, groundwater and waters shall be deemed to be wear and tear. Lessee shall be responsible to promptly and completely clean up any such release as shall occur by fault of Lessee on the leased Premises during the term of the Lease and shall surrender the Premises free of any contamination or other damage caused by such occurrence during the term of the Lease.

 

(ii) Maintenance of Premises: Lessee shall, at its sole cost, keep and maintain the inside of the Premises in good and sanitary order, condition and repair. As part of this maintenance obligation, Lessee shall promptly respond to and clean up any release or threatened release of any Hazardous Substance into the drainage systems, soils, groundwater, waters, or atmosphere, in a safe manner, in accordance with applicable law, and as authorized or approved by all federal, state and/or local agencies having authority to regulate the permitting, handling and cleanup of hazardous substances.

 

(iii) Use of Hazardous Substances: Lessee shall not use, store, generate, treat, transport, or dispose of any hazardous substance on the Premises, without first obtaining Lessor’s approval in writing at least ten (10) days prior to bringing any Hazardous Substances onto the Premises. Lessor may withdraw approval of any such substance at any time, for reasonable causes related to the threat of site contamination, or damage or injury to persons, property or resources on or near the site. Upon receipt of such disapproval, Lessee shall remove the substance from the site. Lessor’s failure to approve the use of a Hazardous Substance under this paragraph shall not limit or affect Lessee’s obligation under this Lease, including Lessee’s duty to remedy or remove releases or threatened releases; to comply with applicable law relating to the use, storage, generation, treatment, transportation, and/or disposal of such substances; or to indemnify Lessor against any harms or damages caused by such substances.

 

(iv) Reports to Lessor: Lessee shall, if requested provide Lessor with a written report listing the substances which are present on or in the Premises; all releases of Hazardous Substances-related compliance activities, including all contacts with administrative agencies in any way concerning Hazardous Substances and all requests from third parties for cleanup or compliance occurring or received; and all licenses, certificates, manifests, business plans, chain of custody documents, consent agreements or other contracts relating to hazardous substances executed or requested during that time period. The report shall include copies of all documents and correspondence related to such activities and written reports of verbal contacts.

 

(v) Entry by Lessor: Lessee shall permit Lessor and his agents to enter into and upon said Premises, with reasonable notice and during business hours, except in the case of an emergency, for the purpose of inspecting the Premises and all activities thereon, including activities involving hazardous substances, or for purposes of maintaining the building.

 

(vi) For the purpose of the Premises, the term Hazardous Substances shall mean:

 

(a) Any “Hazardous Substances” as such term is presently defined in Section 101 (14) of the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended (42 USC Section 9601 et seq), and any regulations promulgated thereunder (CERCLA); and

 

(b) Any additional substances or materials which are now or hereafter defined as hazardous substance for purposes of CERCLA; and

 

Addendum – Page 1 of 5

 

  

ADDENDUM TO STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE-NET
DATED: October 28, 2014
BY AND BETWEEN PACIFIC SIMI ASSOCIATES, LP, A CALIFORNIA LIMITED
PARTNERSHIP, AS LESSOR
AND
SDJ TECHNOLOGIES, INC., A DELAWARE CORPORATION, AS LESSEE
FOR THE PROPERTY COMMONLY KNOWN AS 2655 PARK CENTER DRIVE, UNITC, SIMI
VALLEY, CALIFORNIA

 

(c) Any additional substances or materials which are now or hereafter defined as hazardous substances; hazardous waste, toxic waste or toxic substances under other federal law or under any state, county, municipal or other law applicable to the Premises, or the uses or business activity referred to herein or under any regulation promulgated pursuant thereto.

 

50. DAYS:

Any references to “days” which appear throughout the Lease shall mean calendar days.

 

51. LIMITATION OF LIABILITY:

This Lease is executed by an Agent, Officer and/or Trustee of the Owner, in his capacity as such Agent, Officer and/or Trustee. By acceptance of this Lease, Lessee agrees that, for the payment of any claim or the performances of any obligation hereunder, recourse shall be had only in this property, and to no other assets of the Owner, and no Shareholder, Trustee, Officer, Employee or Agent shall be personally liable therefore.

 

52. EXHIBITS:

  Exhibit A: Site Plan of the Project and the Premises
  Exhibit B: Declaration of Covenants and Restrictions
  Exhibit C: Rules and Regulations
  Exhibit D: Sign Criteria
  Exhibit E: Hazardous Materials Addendum
  Exhibit F: Simi Valley Landfill Disclosure Statement
  Exhibit G: The Improvements

 

All of the foregoing Exhibits are attached to this Lease and by this reference made a part hereof.

 

53. COVENANTS, CONDITIONS AND RESTRICTIONS:

Lessee hereby acknowledges that the Premises and Lessee’s use and occupancy thereof are subject to all covenants, conditions, restrictions, easements, encumbrances and other matters now or hereafter of record or apparent, including but not limited to those certain sets of Declaration of Covenants, Conditions and Restrictions (“CC&Rs”) recorded in the Office of the Ventura County Recorder as follows:

 

a. Declaration As To Covenants, Conditions, Restrictions and Easements, and Common Facility Provisions For Simi Valley Business Center, recording number 145025.
b. First Amended and Restated Declaration As To Covenants, Conditions, Restrictions and Easements, and Common Facility Provisions For Simi Valley Business Center, recording number 86-103704.
c. Amendment to First Amended and Restated Declaration As To Covenants, Conditions, Restrictions and Easements, and Common Facility Provisions For Simi Valley Business Center, recording number 90-078441.
d. Declaration Of Deannexation and Second Amendment to First Amended and Restated Declaration As To Covenants, Conditions, Restrictions and Easements, and Common Facility Provisions For Simi Valley Business Center, recording number 94-171791.
e. Third Amendment to First Amended and Restated Declaration As To Covenants, Conditions, Restrictions and Easements, and Common Facility Provisions For Simi Valley Business Center, recording number 97-171951.
f. Fourth Amendment to First Amended and Restated Declaration As To Covenants, Conditions, Restrictions and Easements, and Common Facility Provisions For Simi Valley Business Center, recording number DOC-2002-0160022-00.

 

The CC&Rs are hereby incorporated into this Lease in their entirety. Lessee acknowledges that it has received a complete copy of the CC&Rs, has had an opportunity to review the CC&Rs in their entirety, and agrees to comply with the CC&Rs as evidenced by the initialed copy of page one of the CC&Rs attached hereto as Exhibit “B”.

 

Addendum – Page 2 of 5

 

  

ADDENDUM TO STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE-NET
DATED: October 28, 2014
BY AND BETWEEN PACIFIC SIMI ASSOCIATES, LP, A CALIFORNIA LIMITED
PARTNERSHIP, AS LESSOR
AND
SDJ TECHNOLOGIES, INC., A DELAWARE CORPORATION, AS LESSEE
FOR THE PROPERTY COMMONLY KNOWN AS 2655 PARK CENTER DRIVE, UNITC, SIMI
VALLEY, CALIFORNIA

 

54. SIGNAGE:

All signs for the exterior of the building shall be approved by the City of Simi Valley, CC&R’s and the Lessor before fabrication and installation and shall conform to sign specifications as set forth in the sign criteria, Exhibit D. Cost of signage, including removal and restoration, to be paid by Lessee.

 

55. This provision intentionally omitted.

 

56. DRIVEWAY EASEMENT:

Lessee acknowledges that its right to use the driveways is nonexclusive and other building occupants have the same rights. Lessee may not block, fence, or otherwise restrict the use of the driveways of the Premises.

 

57. AIR CONDITIONING MAINTENANCE:

Subject to the warranties contained in Paragraph #2.2, it is agreed by the parties hereto that Lessee shall maintain during the term of the herein Lease or any extension thereof a regular full-service, air conditioning maintenance contract with a qualified air conditioning contractor acceptable to the Lessor, and shall furnish to Lessor a copy of the current maintenance contract. Such contract shall include the changing of filters at the intervals recommended by the equipment manufacturer or maintenance contractor.

 

58. HOLDING OVER:

In reference to Paragraph 26 herein, and in partial modification hereof, if Lessee, with Lessor’s consent, remains in possession of the Premises or any part thereof after the expiration of the term hereof, such occupancy shall be a tenancy from month-to-month upon all provisions of this Lease pertaining to the obligations of the Lease except that the monthly base rent due in advance will be 150% of the previous monthly rent of the term.

 

59. RELATIONSHIP OF PARTIES:

Neither the method of computation of rent nor any other provisions contained in this Lease nor any acts of the parties will be deemed or construed by that party of by any third person to create the relationship of principal and agent or of partnership or of joint venture of any association between Lessor and Lessee, other than the relationship of Lessor and Lessee.

 

60. MODIFICATION:

This Lease contains all of the terms agreed upon by Lessor and Lessee with respect to the Premises. All prior, negotiations, correspondence, and agreements are superseded by this Lease. No officer, partner, agent, or employee of any party has any authority to make representations or promises not contained in this Lease, and each of the parties agrees that it has not executed this Lease in reliance upon any representations or promises not set forth in this Lease. This Lease may not be modified or changed except by written instrument signed by Lessor and Lessee.

 

61. TENANT IMPROVEMENTS:

By taking possession of the Premises, Lessee accepts the Premises in its then “as is” condition and acknowledges that the Premises are in good and satisfactory condition as of the time Lessee takes possession of the Premises, subject to Paragraphs #2.2 and #2.3.

 

Notwithstanding the foregoing, as soon as reasonably and commercially possible following mutual execution of the Lease Agreement, Lessor, at its sole cost, expense and effort, except as provided in the following paragraph, will construct the improvements roughly depicted on Exhibit “G” attached hereto and generally described as follows (the “improvements” ):

 

a. Add Glass Double Doors to the back end of the Lobby Area.
b. Create an entry into the Private Restroom from Office #2 as shown so that there are two entries into the restroom (if possible). In addition, install a cabinet with a few drawers in the Private Restroom. Upgrade Private Restroom if possible.
c. Fill in Opening to the right of the existing door into the I.T./Phone Closet.
d. Create an opening into the Coffee Room from Office #19. NOTE: The dotted line running through the Office #19 area exists (as a wall and door) and please leave it “as is.” The dotted line indicated is simply to help both parties understand what “is there” at the current time, as the Plan we are working from is not 100% accurate and up-to-date.

 

Addendum – Page 3 of 5

 

 

ADDENDUM TO STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE-NET
DATED: October 28, 2014
BY AND BETWEEN PACIFIC SIMI ASSOCIATES, LP, A CALIFORNIA LIMITED
PARTNERSHIP, AS LESSOR
AND
SDJ TECHNOLOGIES, INC., A DELAWARE CORPORATION, AS LESSEE
FOR THE PROPERTY COMMONLY KNOWN AS 2655 PARK CENTER DRIVE, UNITC, SIMI
VALLEY, CALIFORNIA

 

e. In the current large bullpen, please create Offices 8 and 9 and also close up the opening in the wall from Office #19 that would have led into Office #9 (there is also currently an opening on the side off Office #19 that leads into the proposed hallway).
f. Create Office #18 within the Bullpen.
g. Create Offices 10, 11, 12, and 13 within the Bullpen.
h. Create Conference Room CR-2 within the Bullpen.
i. Create Offices #14 and #15 within the Bullpen (NOTE: Unlike what the Floor Plan we are working from indicated, Office #15 does not exist).
j. Add a 2 nd Door to Office #17.
k. Remove the wall from Office #20 so as to create a larger Bullpen as shown.
I. Create a “Secure Storage” Room in the SE corner of the building. This shall include installing a different type of wall that is not drywall on two sides, adding a rolling slider door made of steel, removing the suspended T-Bar ceiling and replacing it with a hard ceiling, etc.
m. Replace all Stained, Broken or Missing Ceiling Tiles throughout the Premises.
n. Where all doors are missing, please install doors. All doors shall be the same doors and shall be stained as needed.
o. Remove anti-static tile in warehouse and in Secure Storage Room, and paint the concrete with an antistatic paint.
p. All Office Walls shall be painted in a bright white color, such as a Pearl White.
q. All HVAC Vents shall be cleaned or replaced as needed.
r. All lighting shall be adjusted so as to work with the Proposed Floor Plan, if necessary.
s. All new offices shall have a box installed for future internet access. Lessee, at its sole cost and expense shall install the internet access/cabling. Lessor, at Lessor’s sole cost and expense shall install building standard electrical outlets in the new offices.
t. Repair or Replace any damaged Blinds.
u. Clean all windows and Mullions.
v. Remove Tape along edge of Front Doors.
w. This item intentionally deleted.
x. This item intentionally deleted.
y. Paint Light Post near the Lawn Area.
z. This item intentionally deleted.
aa. This item intentionally deleted.
bb. This item intentionally deleted.
cc. This item intentionally deleted.
dd. Align Front Doors so that they don’t drag.
ee. Remove Plastic Signage on the Lobby Windows (indicates former tenant and hours of operation, etc.).
ff. All office areas throughout Premises shall be replaced with new building standard carpet.
gg. Tiles shall be replaced with new tiles in the lunch room as needed.

 

All Improvements will be constructed in a good and workman like manner utilizing building standard specifications and materials.

 

Excluded shall be the cost of any tenant specific improvements to the Premises including specialized HVAC or warehouse areas, over standard electrical requirements, warehouse flooring or modular furniture.

 

62. PREMISES: CONDITION (continued):

Notwithstanding any provision contained in this Lease or any prior leases to the contrary, upon expiration or early termination of the Lease, at Lessor’s option, Lessee, at its sole cost and expense, shall be obligated to return the Premises to its condition as of the Commencement Date . Lessee shall not be responsible for ordinary wear and tear to the Premises. Any agreement to the contrary to this provision must be in writing and signed by both Parties.

 

63. RENT: COMMON AREA OPERATING EXPENSES (continued):

Lessor’s failure to provide a detailed statement of actual Common Area Operating Expenses for the preceding year by the date provided for in the Lease shall in no way excuse Lessee from its obligation to pay its pro rata share of the Common Area Operating expenses, nor shall it constitute a waiver of Lessor’s right to bill and collect such pro rata share of Common Area Operating Expenses from Lessee in accordance with this clause.

 

64. RENT ABATEMENT:

Lessee’s Base Rent shall be abated for the month of December 2015 for a total of one (1) month’s Rent Abatement.

 

Addendum – Page 4 of 5

 

  

ADDENDUM TO STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE-NET
DATED: October 28, 2014
BY AND BETWEEN PACIFIC SIMI ASSOCIATES, LP, A CALIFORNIA LIMITED
PARTNERSHIP, AS LESSOR
AND
SDJ TECHNOLOGIES, INC., A DELAWARE CORPORATION, AS LESSEE
FOR THE PROPERTY COMMONLY KNOWN AS 2655 PARK CENTER DRIVE, UNITC, SIMI
VALLEY, CALIFORNIA

 

65. HVAC SYSTEM:

Lessee shall be responsible for the first $500.00 of each repair. If the repair cost is over $500, then Lessee shall contact Lessor prior to having that work completed and Lessor shall arrange for the repair and then charge Lessee $500. If during the term of this Lease Lessor replaces the HVAC unit(s) with a new unit, then Lessee shall become responsible for all costs to repair and maintain to the unit (as outlined in the Lease).

 

This $500 limitation does not apply to quarterly maintenance which is paid through Common Area Operating Expenses.

 

CONSULT YOUR ATTORNEY/ADVISORS – This document has been prepared for approval by your attorney. No representation or recommendation is made by Colliers International, or the American Industrial Real Estate Association (A.I.R.) or the agents or employees, of this document or the transaction to which it relates. These are questions for your attorney.

 

On any real estate transaction, it is recommended that you consult with a professional, such as a civil engineer, industrial hygienist or other person with experience in evaluating the condition of the property, including the possible presence of asbestos, hazardous materials and underground storage tanks.

 

In addition, please be advised that an Owner or Tenant of real property may be subject to the Americans with Disabilities Act (the ADA), a Federal law codified at 42 USC Section 12101 et seq. Among other requirements of the ADA that could apply to your property, Title III of the ADA requires Owners and Tenants of “public accommodations” to remove barriers to access by disabled persons and provide auxiliary aids and services for hearing, vision or sped impaired persons by January 26, 1992. The regulations under Title III of the ADA has codified at 28 CFR Part 36.

 

Colliers International recommends that you and your attorney, engineer and/or architect review the ADA and the regulations, and if appropriate, your proposed lease agreement, to determine if this law would apply to you, and the nature of the requirement.

 

LESSOR:   LESSEE:
     
By: /s/ David Rosen   By: /s/ Jay Tandon
  David Rosen     Jay Tandon
        CEO
         
Date:   11.12.14   By: /s/ Vivek Tandon
        Vivek Tandon
        Executive Vice President
         
      Date:   

 

Addendum – Page 5 of 5

 

 

 

 

OPTION(S) TO EXTEND

STANDARD LEASE ADDENDUM

 

  Dated   October 28, 2014
       
  By and Between (Lessor)   Pacific Simi Associates, LP, a California limited
    partnership
     
  By and Between (Lessee) SDJ Technologies, Inc., a Delaware corporation
     
  Address of Premises: 2655 Park Center Drive, Unit C, Simi Valley, CA
    93065

 

Paragraph 66   

 

A.   OPTION(S) TO EXTEND:

Lessor hereby grants to Lessee the option to extend the term of this Lease for one (1) additional thirty-six (36) month period(s) commencing when the prior term expires upon each and all of the following terms and conditions:

 

(i)   In order to exercise an option to extend, Lessee must give written notice of such election to Lessor and Lessor must receive the same at least 6 but not more than months prior to the date that the option period would commence, time being of the essence. If proper notification of the exercise of an option is not given and/or received, such option shall automatically expire. Options (if there are more than one) may only be exercised consecutively.

 

(ii)   The provisions of paragraph 39, including those relating to Lessee’s Default set forth in paragraph 39.4 of this Lease, are conditions of this Option.

 

(iii)   Except for the provisions of this Lease granting an option or options to extend the term, all of the terms and conditions of this Lease except where specifically modified by this option shall apply.

 

(iv)   This Option is personal to the original Lessee, and cannot be assigned or exercised by anyone other than said original Lessee and only while the original Lessee is in full possession of the Premises and without the intention of thereafter assigning or subletting.

 

(v)   The monthly rent for each month of the option period shall be calculated as follows, using the method(s) indicated below:

 

(Check Method(s) to be Used and Fill in Appropriately)

 

¨    I.   Cost of Living Adjustment(s) (COLA)

 

a.   On (Fill in-COLA Dates): _____________________________________________________________ the Base Rent shall be adjusted by the change, if any, from the Base Month specified below, in the Consumer Price Index of the Bureau of Labor Statistics of the U.S. Department of Labor for (select one): ¨ CPI W (Urban Wage Earners and Clerical Workers) or þ CPI U (All Urban Consumers), for (Fill in Urban Area):

_______________________________________________________________________________________________

All Items (1982-1984 – 100), herein referred to as “CPI”.

 

b.   The monthly rent payable in accordance with Paragraph A.I.a. of this Addendum shall be calculated as follows: the Base Rent set forth in paragraph 1.5 of the attached Lease, shall be multiplied by a fraction the numerator of which shall be the CPI of the calendar month 2 months prior to the month(s) specified in paragraph A.I.a above during which the adjustment is to take effect, and the denominator of which shall be the CPI of the calendar month which is 2 months prior to (select one): ¨ the first month of this term of this Lease as set-forth in paragraph 1.3 (“Base-Month”) or þ (Fill in Other “Base Month”):

________________________________________________________________________________________________

The sum so calculated shall constitute the new monthly rent hereunder, but in no event, shall any such new monthly rent be less than the rent payable for the month immediately preceding the rent adjustment.

 

c.   In the event the compilation and/or publication of the CPI shall be transferred to any other governmental department or bureau or agency or shall be discontinued, then the index most nearly the same as the CPI shall be used to make such calculation. In the event that the Parties cannot agree on such alternative index, then the matter shall be submitted for decision to the American Arbitration Association in accordance with the then rules of said Association and the decision of the arbitrators shall be binding upon the parties. The cost of said Arbitration shall be paid equally by the parties.

 

þ    II.   Market Rental Value Adjustment(s) (MRV)  

a.   On (Fill in MRV Adjustment Date(s)) February 1, 2018 the Base Rent shall be adjusted to the “Market Rental Value” of the property as follows:

 

1)   Four months prior to each Market Rental Value Adjustment Date described above, the Parties shall attempt to agree upon what the new MRV will be on the adjustment date. If agreement cannot be reached, within thirty days, then:

 

(a)   Lessor and Lessee shall immediately appoint a mutually acceptable appraiser or-broker to establish the new MRV within the next 30 days. Any associated-costs will be split equally between the Parties, or

 

(b)   Both Lessor and Lessee shall each immediately make a reasonable determination of the MRV and submit such determination, in writing, to arbitration in-accordance with the following provisions:

 

   
   
INITIALS     INITIALS
       
©2000 - AIR COMMERCIAL REAL ESTATE ASSOCIATION FORM OE-3-8/00E

 

  PAGE 1 OF 2  

 

  

(i)   Within 15 days thereafter, Lesser and Lessee shall each select an o appraiser or þ broker (“ Consultant ” - check one) of their choice to act as an arbitrator. The two arbitrators so appointed shall immediately select a third mutually acceptable Consultant to act as a third arbitrator.

 

(ii)   The 3 arbitrators shall within 30 days of the appointment of the third arbitrator reach a decision as to what the actual MRV for the Premises is, and whether Lesser’s or Lessee’s submitted MRV is the closest thereto. The decision of a majority of the arbitators shall be binding on the Parties. The submitted MRV which is determined to be the closest to the actual MRV shall thereafter be used by the Parties.

 

(iii)   If either of the Parties fails to appoint an arbitrator within the specified 15 days, the arbitrator timely appointed by one of them shall reach a decision on his or her own, and said decision shall be binding on the Parties.

 

(iv)   The entire cost of such arbitration shall be paid by the party whose submitted MRV is not selected, ie. the one that is NOT the closest to the actual MRV.

 

2)   Notwithstanding the foregoing, the new MRV shall not bo loss than the rent payable for the month immediately preceding the rent adjustment increased by three percent (3%).

 

b.   Upon the establishment of each New Market Rental Value:

 

1) the new MRV will become the new “Base Rent” for the purpose of calculating any further Adjustments, and

2) the first month of each Market Rental Value term shall become the new “Base Month” for the purpose of calculating any further Adjustments.

 

þ    III.  Fixed Rental Adjustment(s) (FRA)  

The Base Rent shall be increased to the following amounts on the dates set forth below:

 

On (Fill in FRA Adjustment Date(s)):   The New Base Rent shall be:  
February 1, 2019   ***  
February 1, 2020   ***  
       
       
       
    ***Prior year’s monthly Base  
    Rent increased by three    
    percent (3%).  
       
       

 

B.   NOTICE:  

Unless specified otherwise herein, notice of any rental adjustments, other than Fixed Rental Adjustments, shall be made as specified in paragraph 23 of the Lease.

 

C.   BROKER’S FEE:  

The Brokers shall be paid a Brokerage Fee for each adjustment specified above in accordance with paragraph 15 of the Lease.

 

NOTICE: These forms are often modified to meet changing requirements of law and industry needs. Always write or call to make sure you are utilizing the most current form: AIR Commercial Real Estate Association, 800 W 6th Street, Suite 800, Los Angeles, CA 90017. Telephone No. (213) 687-8777. Fax No.: (213) 687-8616.

 

   
   
INITIALS     INITIALS
       
©2000 - AIR COMMERCIAL REAL ESTATE ASSOCIATION FORM OE-3-8/00E

 

  PAGE 2 OF 2  

 

 

EXHIBIT A

 

 

 

Not to Scale

 

PAGE 1 of 1

 

 

EXHIBIT B

 

 

 

PAGE 1 of 6

 

 

EXHIBIT B

 

 

 

PAGE 2 of 6

 

 

EXHIBIT B

 

 

 

PAGE 3 of 6

 

  

EXHIBIT B

 

 

 

PAGE 4 of 6

 

 

EXHIBIT B

 

 

 

PAGE 5 of 6

 

 

EXHIBIT B

 

 

 

PAGE 6 of 6

 

 

EXHIBIT “C”

RULES AND REGULATIONS

 

The rules and regulations set forth herein below are a part of that certain Lease to which these rules and regulations are an Exhibit “C” and into which lease these rules and regulations are hereby incorporated by this reference:

 

1.    No sign, placard, picture, advertisement, name or notice shall be inscribed, displayed or printed or affixed on or any part of the outside of the Building without the written consent of Lessor first had and obtained and Lessor shall have the right to remove and such sign, placard, picture, advertisement, name or notice without notice to and at the expense of the Lessee.

 

All approved signs or lettering on doors shall be printed, painted, affixed or inscribed at the expense of Lessee by a person approved of or by the Lessor.

 

Lessor shall not place anything or allow anything to be placed near the glass of any window, door, partition, or wall which may appear unsightly from outside the Premises.

 

2.    No Lessee shall obtain for use upon the Premises ice, drinking water, towel and other services or accept barbering or bootblacking services on the Premises, except from person authorized by the Lessor and at the hours and under regulations fixed by the Lessor.

 

3.    The directory or name identification of the Building, if any, will be provided exclusively for the display of the names and location of Lessee and other Lessees in the Building, and Lessor reserves the right to exclude any other names therefrom.

 

4.    All sidewalks, halls, passages, exits, entrances, elevators and stairways of the Building, if any, shall not be obstructed by any Lessee or used by him for any purpose other than for ingress to and egress from his respective Premises. The halls, passages, exits, entrances, elevators, stairways, balconies and roof are not for use of the general public and the Lessor shall in all cases retain the right to control and prevent access thereto by all persons whose presence in the judgment of the Lessor shall be prejudicial to the safety, character, reputation and interests of the Building and its Lessees, provided that nothing herein contained shall be construed to prevent such access to persons with whom the Lessee normally deals in the ordinary course of Lessee’s business unless such persons are engaged in illegal activities. No Lessee and no employee or invitee shall go upon the roof of the Building without the prior consent of Lessor. For purposes of Lessee’s obligations, if any, of repair and maintenance of the heating, ventilating and air conditioning systems to the Premises, Lessee shall use a maintenance firm selected or designated by Lessor unless Lessee demonstrates by written evidence reasonably satisfactory to Lessor that the rates quoted by such firm for such work are not competitive with rates quoted by one or more other firms which Lessee proposes to use.

 

5.    Lessee shall not alter any lock nor install any new or additional locks or any bolts on any door of the Premises.

 

6.    Lessee shall not overload the floor of the Premises or mark, drive nails, screw or drill into the partitions, woodwork or plaster or in any way deface the Premises or any part thereof.

 

7.    Lessee shall not us, keep or permit to be used or kept any foul or noxious gas or substance in the Premises, or permit or suffer the Premises to be occupied or used in a manner of offensive or objectionable to the Lessor or other occupants of the Building by reason of noise, odors and/or vibrations, or interfere in any way with other Lessees or those having business therein, nor shall any animals or birds be brought in or kept in or about the Premises of the Building.

 

8.    No cooking shall be done or permitted by any Lessee on the Premises; however the preparation of coffee, tea, hot chocolate and similar items by Lessee for its employees and business visitors shall be permitted. Nor shall the Premises be used for washing clothes, for lodging, or any improper, objectionable or immoral purposes.

 

9.    Lessee shall not use or keep in the Premises or the Building any kerosene, gasoline, or inflammable or combustible fluid or material, or use any method of heating or air conditioning other than that supplied by Lessor. Any permitted corrosive, flammable or other special wastes shall be handled for disposal as directed by Lessor.

 

10.  Lessor will direct electricians as to where and how telephone and telegraph wires are to be introduced. No boring or cutting for wires will be allowed without the consent of Lessor. The location of telephones, call boxes and other office equipment affixed to the Premises shall be subject to the approval of Lessor.

 

Exhibit “C”
Page 1 of 3

 

 

11.    Each Lessee, upon termination of his tenancy, shall deliver to the Lessor the keys of offices, rooms and toilet rooms, if any, which shall have been furnished the Lessee or which the Lessee shall have made, and in the event of loss of any keys so furnished, shall pay the Lessor thereof.

 

12.    No Lessee shall lay linoleum, tile, carpet or other similar floor covering so that the same shall be affixed to the floor of the Premises in any manner except as approved by the Lessor. The expense of repairing any damage resulting from a violation of this rule of any floor covering shall be borne by the Lessee by whom, or by whose contractors, employees, or invitees, the damage shall have been caused.

 

13.    On Saturdays, Sundays, and legal holidays, and on other days between the hours of 6:00 p.m. and 8:00 a.m. the following day, access to the Building, or to the halls, corridors or stairways in the Building, if any, or to the Premises may be refused unless the person seeking access is known to the person or employee of the Building in charge or has a pass or is properly identified. The Lessor shall in no case be liable for damages for any en - or with regard to the admission to or exclusion from the Building of any person. In case of invasion, mob, riot, public excitement or other commotion, the Lessor reserves the right to prevent access to the Building during the continuance of the same by closing the doors or otherwise, for the safety of the Lessees and protection of property in the Building and the Buildings.

 

14.    Lessee shall see that the doors of the Premises are closed mid securely locked before leaving the Building and must observe strict care and caution that all water faucets or water apparatus are entirely shut off before Lessee or Lessee’s employees leave the Building, and that all electricity shall be carefully shut off, so as to prevent waste or damage, and for any default or carelessness Lessee shall make good all injuries sustained by other lessees or occupants of the Building or Lessor.

 

15.    Lessee reserves the right to expel from the Building any person, who in the judgment of Lessor, is intoxicated or under the influence of liquor or drugs, or who shall in any manner do any act in violation of any Rules and Regulations of the Building.

 

16.    Requirements of Lessee as to any matters within Lessor’s obligations pursuant to its Lease will be attended to only upon application at the Office of the Project. Employee’s of Lessor shall not perform any work or do anything outside of their regular duties unless under special instructions from the Lessor, an no employee will admit any person (Lessee or otherwise) to any office without specific instructions for the Lessor.

 

17.    No vending machine or machines or any description shall be installed, maintained or operated upon the Premises without the written consent of the Lessor, except for vending machines onsite for soft drinks, water, coffee and snacks.

 

18.    Lessor shall have the right, exercisable without notice and without liability to Lessee, to change the name and street address of the Building of which the Premises are a part.

 

19.    Lessee shall not disturb, solicit or canvass any occupant of the Building and shall cooperate to prevent the same.

 

20.    Without the written consent of Lessor, Lessee shall not use the name of the Building in connection with or in promoting or advertising the business of Lessee except as Lessee’s address.

 

21.    Lessee’s use of the common areas shall be limited to access and parking purposes and under no circumstances shall Lessee be permitted to store any goods or equipment, conduct any operations, or construct or place any improvements, barriers or obstructions in the Common Areas, or otherwise adversely affect the appearance thereof.

 

22.    Canvassing, soliciting and peddling in the Building are prohibited and Lessee shall cooperate to prevent the same.

 

23.    The toilet rooms, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed and no foreign substance of any kind whatsoever shall be thrown therein and the expense of any breakage, stoppage or damage resulting from the violation of this rule shall be borne by the Lessee who, or whose employees or invitees shall have caused it.

 

24.    Lessee shall not install any radio or television antenna, loudspeaker or other device on the roof or exterior walls of it Premises.

 

25.    Lessor reserves the right to make other and further nondiscriminatory Rules and Regulations as in its judgment may be necessary or desirable for the operations of the Premises, the Building and the Common Areas. Lessee agrees to abide by all Rules and Regulations which are adopted.

 

Exhibit “C”
Page 2 of 3

 

 

26.    No aerial shall be erected on the roof or exterior walls of the premises, or on the ground without, in each instance, the written consent of the Lessor. Any aerial or antenna so installed without such written consent shall be subject to removal without notice.

 

27.    No Lessee shall do or permit anything to be done in the Leased Premises or bring or keep anything therein which shall increase the risk of fire or obstruct or interfere with the right of other Lessees or violate or act at variance with the laws relating to fire or with the regulations of the Department or the Board of Health of the jurisdiction.

 

    /s/ Jay Tandon
Lessor’s Initials   Lessee’s Initials

 

Exhibit “C”
Page 3 of 3

 

 

EXHIBIT D
Sign Criteria

 

These criteria have been established for the purpose of assuring an outstanding industrial complex and for the mutual benefits of all Lessees. Conformance will be strictly enforced, and any installed nonconforming or unapproved signs must be brought into conformance at the expense of the Lessee.

 

A. General Requirements:
1. The lessee shall submit a sketch of the proposed sign to Lessor for approval.
2. All signs shall be constructed and installed at Lessee’s expense.
3. Lessee shall be responsible for the fulfillment of all requirements of these criteria.

 

B. General Specifications
1. No electrical or audible signs will be permitted.
2. Sign dimensions will be as specified by city ordinance, the CC&Rs and Lessor.
3. Sign copy will be restricted to company name and logo only.
4. The style and size of the individual company name may vary.
5. The sign must have a size, shape, composition, design and color specified by city ordinance and by Lessor.
6. Placement of the sign and method or attachment to the building will be directed by the Lessor.
7. Upon removal of any sign, any damage to the building must be repaired by Lessee.

 

 

 

 

EXHIBIT E
HAZARDOUS MATERIALS ADDENDUM

 

This Hazardous Materials Addendum (the “ Addendum ”) is made and entered into by and between Pacific Simi Associates, LP a California limited partnership (“ Lessor ”) and Automated SDJ Technologies, Inc., a Delaware corporation (“ Lessee ”), as of the date set forth on that certain Lease by and between Lessor and Lessee (collectively the “Lease”) between Lessor and Lessee to which this Addendum is attached and made a part hereof by this reference.

 

The terms, covenants and conditions set forth herein are intended to and shall have the same force and effect as if set forth in the Lease. To the extent the provisions of this Addendum are inconsistent with any provisions of the Lease, this Addendum shall supersede and control.

 

1. Use of Hazardous Materials. Lessee shall not cause or permit any Hazardous Material, as defined in Paragraph 5 of this Addendum, to be generated, brought onto, used, stored, or disposed of in or about the Premises or the Building by Lessee or its agents, employees, contractors, sublessees, or invitees, except for limited quantities of standard office and janitorial supplies containing chemicals categorized as Hazardous Materials, or those Hazardous Materials agreed to by Lessor in writing Lessee shall:

 

(a)          Use, store, and dispose of all such Hazardous Material in strict compliance with all applicable statues, ordinances, and regulations in effect during the Lease Term that relate to public health and safety and protection of the environment (“Environmental Laws”) , including those Environmental Laws identified in Paragraph 5 of this Addendum; and

 

(b)          Comply at all times during the Lease Term with all Environmental Laws.

 

2. Indemnification. Lessee shall, at Lessee’s sole expense and with counsel reasonably acceptable to Lessor, indemnify, defend and hold harmless Lessor and Lessor’s shareholders, directors, officers, employees, partners, affiliates, and agents with respect to all losses arising out of or resulting from the release of any Hazardous Material in or about the Premises or the Building, or the violation of any Environmental Law, by Lessee or Lessee’s agents, contractors or invitees. This indemnification includes:

 

(a)          Losses attributable to diminution in the value of the Premises or the Building;

 

(b)          Loss or restriction of use of rentable space in the Building;

 

(c)          Adverse effect on the marketing of any space in the Building; and

 

(d)          All other liabilities, obligations, penalties, fines, claims, actions (including remedial or enforcement actions of any kind and administrative or judicial proceedings, orders, or judgments), damages (including consequential and punitive damages), and costs (including attorney, consultant, and expert fees and expenses) resulting from the release or violation.

 

This indemnification shall survive the expiration or termination of this Lease.

 

3. Remediation Obligations. If the presence of any Hazardous Material brought onto the Premises or the Building by Lessee or Lessee’s employees, agents, contractors, or invitees results in contamination of the Building, Lessee shall promptly take all necessary actions, at Lessee’s sole expense, to return the Premises or the Building to the condition that existed before the introduction of such Hazardous Material. Lessee shall first obtain Lessor’s approval of the proposed remedial action. This provision does not limit the indemnification obligation set forth in Paragraph 2 of this Addendum.

 

 

 

 

4. Additional Insurance or Financial Capacity. If at any time it reasonably appears to Lessor that Lessee is not maintaining sufficient insurance or other means of financial capacity to enable Lessee to fulfill its obligations to Lessor hereunder regarding environmental matters, whether or not then accrued, liquidated, conditional or contingent, upon written notice from Lessor, Lessee shall procure and thereafter maintain in full force and effect such insurance or other form of financial assurance, with or from companies or persons and in forms reasonably acceptable to Lessor, as Lessor may from time to time reasonably request.

 

5. Definition of Hazardous Material. As used in this Addendum, the term “Hazardous Material” shall mean any hazardous or toxic substance, material, or waste that is or becomes regulated by the United States, the State, the County, or the City in which the Premises is located, or any other local government authority having jurisdiction over the Building, Hazardous Material includes:

 

(a)          Any “hazardous substance” as that term is defined in the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as may be amended from time to time (CERCLA) (42 United States Code Sections 9601-9675);

 

(b)          “Hazardous waste” as that term is defined in the Resource Conservation and Recovery Act of 1976, as may be amended from time to time (RCRA) (42 United State Code Sections 6901-6992k);

 

(c)          Any pollutant, contaminant, or hazardous, dangerous, or toxic chemical, material, or substance, within the meaning of any other applicable federal, state, or local law, regulation, ordinance, or requirement (including consent decrees and administrative orders imposing liability or standards of conduct concerning any hazardous, dangerous, or toxic waste, substance, or material, now or hereafter in effect);

 

(d)          Petroleum products;

 

(e)          Radioactive material, including any source, special nuclear, or byproduct material as defined in 42 United States Code Sections 2011-2297g-4 (as may be amended from time to time);

 

(f)          Asbestos in any form or condition; and

 

(g)          Polycblorinated biphenyls (PCBs) and substances or compounds containing PCBs.

 

6. Guaranty. If Lessee is a corporation, the officers of the corporation, upon execution of this Addendum, agree to personally guarantee:

 

(a)          the full performance of any obligations described in this Addendum; and

 

(b)           the payment of any costs associated with the remediation or indemnification obligations described in this Addendum.

 

Lessee: SDJ Technologies, Inc., a Delaware corporation

 

/s/ Jay Tandon    
Jay Tandon, CEO   Date
     
/s/ Vivek Tandon    
Vivek Tandon, Executive Vice President   Date

 

 

 

 

EXHIBIT F

DISCLOSURE STATEMENT

 

The Simi Valley Landfill (the “Landfill”) lies to the north of the Simi Valley Business Center across from the Simi Valley Freeway. Portions of the Landfill accepted hazardous substances (Class I substance) from 1972 to 1980. As of July 1, 1996, the State of California Regional Water Quality Board - Los Angeles Regions is conducting regular monitoring of the Landfill. The owner of the Property retained an expert to conduct an examination of the soil and groundwater at and adjacent to the Simi Valley Business Center in order to determine the likelihood of hazardous substances migrating to the Simi Valley Center from the Landfill. The study, conducted by Applied Geosciences, Inc., concluded (i) that there was less than 1/10 th of 1% chance that any hazardous substances from the Landfill had previously migrated to the Property and (ii) that there was less than 1% chance that any hazardous substances from the Landfill would migrate to the Simi Valley Business Center during the next 100 years. A copy of the study is available upon request.

 

The undersigned acknowledges receipt of the Disclosure Statement.

 

  Lessee:
   
  /s/ Jay Tandon

 

 

 

Exhibit 10.7

 

PURCHASE ORDER PURCHASE AGREEMENT

 

THIS PURCHASE ORDER PURCHASE AGREEMENT ("Agreement") is made and entered into this 15 th day of April, 2014 by and between MidCap Credit LLC d/b/a Brookridge Funding, a Texas limited liability company, with its place of business located at 26 Mill Plain Road, Danbury, CT 06811 ("Funder") and SDJ Technologies, Inc., a Delaware corporation, with its principal place of business located at 2125 B Madera Road, Simi Valley, CA 93065 (the "Client").

 

WITNESSETH:

 

WHEREAS , Client is engaged primarily in the high performance storage device business (the "Inventory") and may sell and deliver such merchandise to its customers on a credit basis; and

 

WHEREAS , Client desires to obtain funds for operation of its business through the sale of Purchase Orders issued by purchasers of Inventory (each a "Customer") acceptable to Funder; and

 

WHEREAS , Funder is willing to purchase from Client, from time to time, purchase orders issued by Customers to Client ("Purchase Orders") subject to the terms set forth in this Agreement.

 

NOW, THEREFORE, in consideration of the covenants and conditions set forth herein, and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties agree as follows:

 

1. Sale of Purchase Orders. Client shall, from time to time, at Client's option, sell, transfer and assign all of its right, title and interest in and to Accepted Purchase Orders (as that term is defined in Section 2 below) to Funder, together with all moneys due or which may become due upon such Accepted Purchase Orders. Accepted Purchase Orders shall be identified by separate and subsequent written assignments to Funder of such Accepted Purchase Orders on a form to be provided to Client by Funder; however, in the absence of such separate written assignment, this Agreement shall be deemed to evidence the assignment of such Accepted Purchase Orders sold. Additionally, to the extent that any Letters of Credit ("Letters of Credit") have been issued in conjunction with any Accepted Purchase Order and/or there has been a Performance Bond or other form of performance guaranty ("Performance Guaranties") issued by, or on behalf of, the applicable seller of the Inventory with respect to any Accepted Purchase Order then any such Letters of Credit and/or Performance Guaranties shall be identified by separate and subsequent written assignments to Funder of such Letters of Credit and/or Performance Guaranties.

 

2. Approval. Client shall submit the original of each Purchase Order, and such other documents in a form satisfactory to Funder as may be required by Funder (collectively, the "Support Documents"; which shall include, without limitation, any applicable Letters of Credit and/or Performance Guaranties and any other documents which support the Purchase Order) to Funder for approval, which approval may be denied by Funder in its sole discretion, with or without cause. Funder shall advise Client of its acceptance of a submitted Purchase Order and the Support Documents (collectively, an "Accepted Purchase Order") or rejection of a submitted Purchase Order within a reasonable time following receipt of the items set out in the first sentence of this Section.

 

3. Purchase Price. Upon receipt of a complete Accepted Purchase Order and all assignments and other documentation related thereto required by Funder in its sole discretion (all in form and substance satisfactory to Funder), Funder agrees to purchase Accepted Purchase Orders from Client at a price not in excess of the cost of the applicable Inventory (the "Purchase Price") whereby in such event Funder will provide the purchase money which may take the form of a letter of credit for such Inventory.

 

 

 

 

4. Fees and Collection.

 

a. Client acknowledges and agrees that it will be responsible for all bank fees related to funding. Client will not be responsible for any other third party fees unless mutually agreed upon in advance.

 

b. Client has entered into a MFC Account Assignment and Security Agreement with Marquette Commercial Finance, Inc. ("Marquette"), dated November 13, 2013 (the "Marquette Agreement"). Upon shipment or delivery of the items specified in an Accepted Purchase Order, an invoice will be generated by Client (each, an "Invoice") which will become the sole property of Funder until such time as all sums due to Funder pursuant to this Agreement are paid in full. All proceeds received with respect to an Accepted Purchase Order and/or the Invoice resulting therefrom are to be applied first to pay Funder's Fees, then to repay Funder for the Purchase Price of all of the then outstanding Accepted Purchase Orders, with any remainder being remitted to Client. The Funder's Fees shall be two percent (2.0%) of the Purchase Price for the first twenty (20) days from the date of any applicable purchase and an additional one percent (1.0%) per 10-day increment thereafter.

 

5. Minimum Fees. It is expressly understood and agreed that Funder's Fees (a) shall be no less than one thousand ($1,000) per transaction; and (2) in the aggregate shall total not less than twenty five thousand dollars ($25,000) per year during the life of this Agreement. Client will pay to Funder any shortfall upon the anniversary of this Agreement.

 

6. Recourse. Funder shall be entitled to immediate and full recourse against and repayment by Client and to demand payment with respect to any Accepted Purchase Orders for the full Purchase Price, Funder's Fees and all other sums due thereon, if one of the following events occurs:

 

a. An Accepted Purchase Order is not filled and/or invoiced to a Customer within sixty (60) days following payment of the Purchase Price, regardless of the reason.

 

b. A Credit Problem, as defined as a Customer's inability to pay debts as they become due because of insolvency, the filing of a voluntary petition in bankruptcy, the quitting of business and the like, regardless of the validity of any such problem.

 

c. A Credit Dispute, as defined as a claim by any Customer against Client, of any kind whatsoever the reduces the amount collectable from Customer, arising from any kind of disagreement between Customer and Client, valid or invalid, at any time, both before and/or after signing of this Agreement, regardless of the validity of any such dispute.

 

d. Client breaches any warranty, representation or promise in this Agreement, or when any representation or warranty made by Client is untrue.

 

e. Client contributes to or aggravates in any manner the Credit Problems of a Customer.

 

f. A Customer alleges a claim of loss or offset of any kind against Client or Funder, regardless of the validity of any such claim or offset.

 

g. A mistaken, incorrect and/or erroneous Purchase Order is submitted by Client to Funder.

 

h. Any circumstance arises which, in the Funder's commercially reasonable judgment, may delay, prevent or threaten to delay or prevent payment of the Accepted Purchase Order in full to Funder.

 

i. Any fraud shall have been committed by Client.

 

2  

 

 

j. The Purchase Price, Funder's fees and all other sums due with respect to an Accepted Purchase Order are not paid to Funder within ninety (90) days of the applicable purchase date, whether by a Customer invoiced for such Accepted Purchase Order or otherwise, regardless of the reason.

 

7. Remedies. Within three business days following Funder's demand for payment, Client will pay Funder the Purchase Price, Funder's fees and all other sums due with respect to any Accepted Purchase Order with respect to which any one or more of the events set out in Paragraph 6 above has occurred, regardless of the validity of any such event. If Funder does not receive full payment therefore within the time provided herein, Funder shall have, in addition to all other remedies provided for under this Agreement and by law, the right to:

 

a. Withdraw from and off-set such amount to any sums, monies or other properties then or thereafter, in Funder's possession or in transit and any future Purchase Prices coming due the Client, and to charge-back or sell back the Accepted Purchase Order to the Client.

 

b. Except as to any accounts purchased by Marquette, in Funder's sole discretion, at any time, to notify any account debtor/customer of Client to make payments directly to Funder, irrespective of whether such account has been purchased by Funder.

 

c. Exercise any and all remedies available to a secured party under the Uniform Commercial Code or otherwise at law.

 

8. Notice of Dispute. At the time Funder purchases an Accepted Purchase Order, no defense, offset, or counterclaim shall exist with respect thereto. Client shall provide written notice to Funder within twenty-four hours of Client obtaining any knowledge from any source of any dispute, disagreement or irregularity of any kind between the Client and a Customer. Funder shall have the right, but not the obligation, to settle any dispute with respect to such Accepted Purchase Order or any account directly with any Customer; however, any such settlement shall not relieve Client from responsibility for full payment of such Accepted Purchase Order.

 

9. Property of Funder. Upon Funder's purchase of an Accepted Purchase Order, in the event Marquette fails to purchase the invoice generated therefrom (a "BF Account") any and all payments from that Customer as to that Accepted Purchase Order are hereby assigned by Client to Funder and are the sole property of Funder and Client agrees not to interfere with payment thereof by the Customer; however, should Client pay any such Accepted Purchase Order in full to Funder, or should any such Accepted Purchase Order be charged back or sold back to Client by Funder, and Funder shall have received full payment therefore, then title thereto shall revert to the Client.

 

10. Payments Received by Client. Client warrants and represents that at the time Funder purchases an Accepted Purchase Order, no payment will have been made by the Customer named therein, either to or for the benefit of the Client, with respect to such Accepted Purchase Order. In the event that Client receives a payment which is the property of Funder, Client shall be deemed to have received same in trust for Funder, and Client shall immediately turn over such payment to Funder. In the event that Client receives a payment which is comprised of moneys belonging partially to Client and partially to Funder, Client shall immediately turn over said payment, in its original form, duly endorsed over, to Funder, and Funder shall, upon clearance by Funder's bank of the payment instrument, forward a check to Client for Client's portion of the payment.

 

If Client fails to turn over to Funder any checks which are the property of Funder or other form of payment which is the property of Funder received by it or in the event the Client deposits any such checks into its own account, this shall be an event of default of this contract, and in addition the Client shall pay Funder the entire Invoice Amount related to such payment at once plus liquidated damages equal to twenty percent (20%) of the amount so deposited. The parties agree to liquidate damages by reason of the fact that the damages that are to be expected as a result of such deposit are uncertain in amount and/or difficult to prove. The parties therefore intend to liquidate damages resulting from such deposit in advance and agree that the amount stipulated is reasonable as damages for the deposit by Client of such payments. Nothing herein shall serve to limit Funder's remedies for the continued wrongful retention by Client of Funder's property in the event that Client fails to immediately pay to Funder any monies received by it.

 

3  

 

 

11. Representations and Warranties of Client. Client hereby represents and warrants that:

 

a. Client is a corporation, validly formed, existing, and in good standing under the laws of the State of Delaware, and is properly licensed and authorized to operate its business. Client's identification number for Federal Income Tax purposes is 26-1199913 and Client's state organizational identification number is 4434842. Client's chief executive office and principal place of business is located at 2125 B Madera Road, Simi Valley, CA 93065. Client's exact legal name is SDJ Technologies, Inc. and Client has not used any other name or been a party to any merger or acquisition in the five-year period immediately preceding the date of this Agreement. The undersigned signatory on behalf of Client represents that he or she has full power and authority to execute this Agreement and bind Client hereto.

 

b. Each Customer of Client is solvent and Client has provided, and will continue to provide, to Funder all documents and information available to Client concerning the business and creditworthiness of each such Customer.

 

c. Client is not, and will not be, insolvent as that term is defined under the United States Bankruptcy Code and the Uniform Commercial Code.

 

d. At the time of purchase of any Accepted Purchase Order by Funder, Client will be the lawful owner thereof, with good and undisputed title thereto, free and clear of any liens or encumbrances. Each Accepted Purchase Order shall represent an accurate and undisputed statement of bona fide purchase by a Customer for Inventory from Client in the ordinary course of the Client's business for a sum certain which will be due and payable arising out of a bona fide sale, delivery and acceptance of merchandise or performance of service by Client to Customer in the ordinary course of Client's business, and no person, firm or corporation, except Marquette, shall have any lien on, or claim to, such accounts or to the merchandise described thereon or any part thereof.

 

e. Client shall furnish Funder with full financial statements and other documents and information, including but not limited to proof of payment and/or compliance with all Federal, State and/or local tax requirements, as may be reasonably requested by Funder from time to time.

 

f. Client shall notify Funder in writing immediately after obtaining any knowledge from any source of the filing, recording or perfection by any means of any non-consensual lien, claim, levy, attachment, encumbrance or other court or legal proceeding or process against Client or any Customer, or against any property of Client or of any Customer.

 

g. Client does not and will not in any manner, whether directly or indirectly, own, control or exercise dominion over the business of any account debtor/Customer whose Accepted Purchase Order is to be offered or sold by Client to Funder.

 

h. Each and every document, statement, record, book, account, and invoice, and all information, whether financial or otherwise, provided to Funder by Client, whether heretofore or hereafter, shall be true, accurate and correct in all respects.

 

i. Client shall not, under any circumstances, interfere with Funder's rights under this Agreement in any manner whatsoever.

 

j. Client has not and shall not transfer, assign, or pledge any of its accounts (as such terms are defined in the Revised Uniform Commercial Code) and shall not grant a security interest therein, to any party other than Funder and Marquette.

 

4  

 

 

k. Client has not transferred, pledged or granted a security interest in its assets, or any of them, which Client has not fully disclosed in writing to Funder dated the date hereof.

 

l. Client has not permitted and shall not permit any lien, encumbrance or security interest to be created upon its assets, or any of them, including but not limited to its accounts receivable and inventory, without the prior written consent of Funder, except for Marquette.

 

m. Client shall maintain its assets in good order and repair and shall maintain a policy or policies of insurance thereon satisfactory to Funder.

 

n. Client shall not sell, assign, pledge or encumber this Agreement or any rights whatsoever hereunder.

 

o. Client will maintain such insurance covering Client's business and/or the property of Client's Customers as is customary for businesses similar to the business of Client and name Funder as loss payee of such insurance with respect to all of Client's inventories as its interests may appear.

 

p. Client will notify Funder in writing prior to any change in the location of Client's place(s) of business or, if Client has or intends to acquire any additional place(s) of business, or prior to any change in Client's chief executive office, the office or offices where Client's books and records concerning accounts are located.

 

q. Client will immediately notify Funder in writing of any proposed change of Client's name, identity, legal entity, corporate structure, use of additional trade name(s), and/or any proposed change in any of the officers, principals, partners, and/or owners of Client.

 

r. Client will work diligently to complete all Accepted Purchase Orders and will promptly take such further action as Funder may reasonably request from time to time in order to cause the Customer to make payment with respect thereto.

 

12. Grant of Security Interest.

 

a. As a further inducement for Funder to enter into this Agreement, to secure the payment and performance of any and all obligations now or hereafter owing by Client to Funder, whether direct or indirect, absolute or contingent, the Client hereby pledges, sets over, assigns, delivers and grants a first priority security interest to Funder in all of Client's presently existing and hereafter acquired Assets, Accounts, Deposit Account, Investment Property, Inventory, General Intangibles (as such terms are defined in the Uniform Commercial Code of Connecticut, as it may be revised or amended from time to time), Letters of Credit and all proceeds and products thereof, and all insurance policies and records pertaining thereto (collectively the "Collateral") provided, however, that no security interest is granted to Funder in the trade name or license to use the name "Monster Digital"

 

b. Client shall, upon request of Funder, furnish to Funder such further information, execute and deliver to Funder such documents and instruments (including, without limitation, Uniform Commercial Code financing statements) and shall do such other acts and things as Funder may at any time reasonably request relating to the perfection or protection of the security interest created by this Agreement or for the purpose of carrying out the intent of this Agreement. Without limiting the foregoing, Client shall cooperate and do all acts deemed necessary or advisable by Funder to continue in Funder a perfected first security interest in the Collateral, and shall obtain and furnish to Funder any subordinations, releases, landlord waivers, lessor waivers, mortgagee waivers, or control agreements, and similar documents as may be from time to time requested by, and in form and substance satisfactory to Funder, subject to the exceptions and limitations of the preceding subsection (a).

 

5  

 

 

c. Client authorizes Funder to file a financing statement and amendments thereto describing the Collateral and containing any other information required by the applicable Uniform Commercial Code and all proper terminations of the filings of other secured parties with respect to the Collateral, in such form and substance as Funder, in its sole discretion, may determine. Client irrevocably grants to Funder the power to sign Client's name and generally to act on behalf of Client to execute and file applications for title, transfers of title, financing statements, notices of lien, demands for terminations of other security interests in any of the Collateral and other documents pertaining to any or all of the Collateral; this power is coupled with Funder's interest in the Collateral. Client shall, if any certificate of title be required or permitted by law for any of the Collateral, obtain and promptly deliver to Funder such certificate showing the lien of this Agreement with respect to the Collateral. Client ratifies its prior authorization for Funder to file financing statements and amendments thereto describing the Collateral and containing any other information required by the Uniform Commercial Code if filed prior to the date hereof.

 

d. With respect to the security interest in Inventory granted herein and with respect to each Accepted Purchase Order, Client acknowledges such security interest is a purchase money security interest and all advances made by Funder to Client shall be used exclusively by Client to purchase items of Inventory.

 

13. Power of Attorney. In order to facilitate performance of this Agreement, Client irrevocably appoints Funder, or any person(s) designated by Funder, as its attorney in fact, which said appointment is coupled with an interest and shall remain in full force and effect until all Purchase Prices of Accepted Purchase Orders sold to Funder have been paid in full and all obligations of Client to Funder have been fully discharged, with full power to:

 

a. Strike or cover Client's address on all invoices and statements of Account mailed or to be mailed to Customers and to substitute thereon the designated address.

 

b. Receive and open all mail addressed to Client, or to Client's trade name at Funder's address and the designated address.

 

c. Endorse the name of Client or Client's trade name on any checks or other evidences of payment that come into Funder's possession on accounts owing to Funder by Client or on which Funder holds a security interest and on any invoices or other documents relating to any of such Accepted Purchase Orders or accounts, and deposit same into any account of Funder, or such other account as Funder shall choose.

 

d. In the event of default in Client's name, or otherwise, demand, sue for, collect, and, without the need for Client's prior approval, give releases for, any and all moneys due or coming due on accounts purchased by or pledged to Funder.

 

e. In the event of default compromise, settle, prosecute or defend any action, claim or proceeding concerning accounts purchased by or pledged to Funder.

 

f. Do any and all things reasonably necessary or proper to carry out the purpose and intent of this Agreement.

 

14. Default. Any one or more of the following shall represent a default under this Agreement:

 

a. The failure of Client to pay any Purchase Price, Funder's fees or any other sums or other indebtedness to Funder when due.

 

b. The breach by Client of any term, provision, warranty, representation or promise made hereunder or under any other agreement between Funder and Client.

 

c. The appointment of a receiver or trustee of all or a substantial portion of the assets of the Client, the insolvency of Client or the inability of Client to pay debts as they mature, or an assignment by Client for the benefit of creditors, or the voluntary or involuntary filing of a petition in bankruptcy court or a similar proceeding in any court by the Client or by any guarantor of Client's obligations hereunder.

 

6  

 

 

d. The filing or service of any levy, attachment, execution, tax assessments or similar process affecting or which could threaten the Collateral.

 

e. The furnishing at any time to Funder of a materially false or inaccurate document, representation, warranty, or other information, whether financial or otherwise.

 

15. Remedies. In the event of a default, Funder shall have the right to do the following, in addition to any other remedies provided hereunder or by law:

 

a. Declare any and all amounts due hereunder and any other indebtedness owing by Client to Funder to be immediately due and payable.

 

b. Enforce the security interest granted hereunder including to have a receiver appointed to take possession of all or any part of the Collateral, with the power to protect and preserve the Collateral, to operate the Client preceding foreclosure or sale, and to apply the proceeds, over and above the cost of the receivership, against the indebtedness. The receiver may serve without bond if permitted by law. Funder's right to the appointment of a receiver shall exist whether or not the apparent value of the Collateral exceeds the amount due the Funder under this Agreement by a substantial amount. Receiver may be appointed by a court of competent jurisdiction upon ex parte application and without notice, notice being expressly waived.

 

c. Require Client to assemble the Collateral and the records pertaining to all Accepted Purchase Orders, any accounts and/or Inventory and produce them to Funder at such time and place as Funder designates.

 

d. Enter the Client's premises and take possession of the Collateral and of all records pertaining to the Accepted Purchase Orders, any accounts and/or any other Collateral.

 

c. Grant extensions, compromise claims and settle disputes with respect to any accounts purchased by Funder or otherwise pledged hereunder, irrespective of the price of methods of payment, all without prior notice to or permission of Client.

 

f. In connection with the assembly and/or disposition of any Collateral, to use any trademark, trade name, trade style, copyright, patent right or technical process used or utilized by Client.

 

g. Return to Client any surplus realized and hold Client liable for any deficiency as provided in the Uniform Commercial Code or by state law.

 

h. Collect post-default damages (in addition to all advances, Purchase price(s) and Funder Fees as well as all other sums due hereunder) equal to three and one-half percent (3.50%) of the amount demanded by Funder for each 30-day period or portion thereof following Funder's demand for payment until such demanded sums are paid in full.

 

i. To collect any and all sums due hereunder or otherwise from Client to Funder, initiate electronic debit entries through the ACH system to Client's account or any other deposit account maintained by Client wherever located, and to initiate as necessary credit entries and other adjustments as to any debit entries made in error.

 

j. Instruct the United States Postal Service to redirect all mail addressed to Client, or to Client's trade name to Funder's address.

 

k. Without regard to any waste, adequacy of the security or solvency of Client, apply for the appointment of a receiver of the Collateral, to which appointment Client hereby irrevocably consents, whether or not foreclosure or repossession proceedings have been commenced hereunder or under any related agreement and whether or not a foreclosure sale or secured party sale has occurred.

 

7  

 

 

16. Maximum Amount. It is specifically understood and agreed that Funder shall have no obligation hereunder to review, or otherwise purchase Purchase Orders, if at any time the aggregate total of all Accepted Purchase Orders purchased by Funder and not yet paid shall exceed the total sum one million five hundred thousand dollars ($1,500,000).

 

17. Confidentiality. Funder acknowledges that any knowledge or information relating to Client is valuable, proprietary and confidential in nature, and Funder agrees to use reasonable efforts to maintain the confidentiality of such information subject to the exercise by Funder of all of Funder's rights and remedies hereunder; provided however, that the following shall be excepted from the provisions of this Section: (i) any disclosures required by law or required to be made to any governmental agencies, or (ii) any disclosures to Funder's independent certified public accounting firm or to other persons or entities that may need to know for the purpose of its business or operations, or (iii) any disclosures of information that was in the public domain at the time of receipt or subsequently comes into the public domain (other than as a result of an unauthorized disclosure), or (iv) disclosures of the type that are customary in the ordinary course of business.

 

18. Termination. Client hereby agrees that for a period of twelve months it may only sell its Purchase Orders to Funder under the terms and conditions of this Agreement, should it decide to sell any such Purchase Orders. Should Client sell or otherwise pledge its Purchase Orders with anyone other than Funder during this twelve month period, Funder will be entitled to liquidated damages of twenty five thousand dollars ($25,000). The parties agree to liquidate damages in this manner because although Funder will suffer damages as a result of a breach by Client of this provision, such damages will be difficult if not impossible to quantify and the parties agree that the foregoing represents a reasonable approximation of the amount thereof. After that point this Agreement shall continue until terminated by thirty (30) days prior notice by either party; provided, however, that no such termination shall terminate or otherwise affect Client's obligations hereunder incurred or accrued prior to such termination. Following any termination, Client shall remain fully liable to Funder for any Purchase Orders purchased before such termination, and Funder will continue to hold a security interest in the Collateral until all existing indebtedness of Client to Funder has been paid in full or otherwise satisfied.

 

19. Indemnification. Client shall indemnify and hold Funder harmless against any and all liability, claim, demand, ill-will and damage arising from Funder collecting or attempting to collect any account or to liquidate any Inventory, provided that Funder has complied with all applicable laws in its collection efforts, and from the failure of Client to pay withholding taxes due and payable to any taxing authority; together with all costs and reasonable attorneys' fees.

 

20. Patriot Act Representations and Covenants. On the date of this Agreement, and during the term hereof:

 

a. Neither Client nor any of its owners, subsidiaries or affiliates is, or shall be, in violation of any laws relating to terrorism or money laundering ("Anti-Terrorism Laws"), including Executive Order No. 13224 on Terrorist Financing, effective September 24, 2001 (the "Executive Order"), and the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, Public Law 107-56.

 

b. Neither Client nor any of its owners, subsidiaries or affiliates or other agent of Client, acting or benefiting in any capacity in connection with the transactions contemplated hereunder, is, or shall be, any of the following: (i) a person that is listed in the annex to, or is otherwise subject to the provisions of, the Executive Order; (ii) a person owned or controlled by, or acting for or on behalf of, any person that is listed in the annex to, or is otherwise subject to the provisions of, the Executive Order; (iii) a person with which Funder is prohibited from dealing or otherwise engaging in any transaction by any Anti-Terrorism Law; (iv) a person that commits, threatens or conspires to commit or supports "terrorism" as defined in the Executive Order; or (v) a person that is named as a "specially designated national and blocked person" on the most current list published by the U.S. Treasury Department Office of Foreign Assets Control ("OFAC") at its official website or any replacement website or other replacement official publication of such list.

 

8  

 

 

c. Neither Client nor any agent of any of its owners, subsidiaries or affiliates acting in any capacity in connection with the transactions contemplated hereunder (i) conducts, or will conduct, any business or engages in making or receiving any contribution of funds, goods or services to or for the benefit of any person described in paragraph (b) above, (ii) deals in, or will otherwise engage in any transaction relating to, any property or interests in property blocked pursuant to the Executive Order, or (iii) engages in, conspires to engage in, or will engage in any transaction that evades or avoids, or has the purpose of evading or avoiding, or attempts to violate, any of the prohibitions set forth in any Anti-Terrorism Law.

 

21. Acknowledgment. By executing this Agreement, Client acknowledges and agrees to abide by any instruction received from Veritas Financial Partners LLC ("Veritas") to forward payments due to Funder under this Agreement to an account specified by Veritas and any other instruction or demand regarding Client's obligations hereunder, notwithstanding any of the other terms of this Agreement. This instruction may not be modified or revoked by Funder and may only be modified or terminated by Veritas. Funder agrees to hold Client harmless in the event that it complies with the notice and instructions of Veritas.

 

22. Miscellaneous.

 

a. Waivers. No action taken pursuant to this Agreement, including any investigation by or on behalf of any party shall be deemed to constitute a waiver by the party taking such action of compliance with any representation, warranty, covenant or agreement contained herein or and in any documents delivered in connection herewith. No waiver by any party hereto of any right or remedy shall be effective unless in writing and signed by the party waiving said right or remedy. A waiver of a right or remedy under this Agreement is not a waiver of the right or remedy on any subsequent occasion.

 

b. Notices. All notices, requests, demands and other communications which are required or may be given under this Agreement shall be in writing and shall be delivered or mailed, by registered or certified, to the party at the address set out herein above or to such other address as such party shall have specified by notice in writing to the other party. Any such notice shall be deemed to have been received on the date of actual receipt.

 

c. Sections and Other Headings. The section and other headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretations of this Agreement.

 

d. Governing Law. This agreement and all transactions contemplated hereby shall be governed by, construed and enforced in accordance with the laws of the State of Connecticut, exclusive of its choice of law rules. The parties herein waive trial by jury and agree to submit to the personal jurisdiction and venue of a court of subject matter jurisdiction located in Connecticut. In addition to any other relief to which Funder may be entitled, Client agrees to reimburse Funder for Finder's reasonable attorney's fees, court costs, and all other expenses, whether or not taxable by the court as costs, incurred in enforcing its rights under this Agreement, including, without limitation, in enforcing the security interest granted herein and/or preserving the collateral subject thereto.

 

e. Effective Date. This Agreement shall become effective upon acceptance and execution hereof by Funder's authorized representative.

 

f. Reliance by Funder. All representations and warranties made by Client herein and in the Application Form are true and correct and Client acknowledges and understands that Funder has relied thereon in entering into this Agreement.

 

9  

 

 

g. Entire Agreement; Severability. This Agreement constitutes the entire agreement of the parties as to the subject matter set forth herein and may be amended or modified only by written instrument executed by both parties. In the event any one or more of the provisions contained in this Agreement is held to be invalid, illegal or unenforceable in any respect, then such provision shall be ineffective only to the extent of such prohibition or invalidity, and the validity, legality, and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby.

 

h. Assignment. Funder may assign this contract without notice to or the consent of the Client.

 

i. Jury Trial Waiver. THE PARTIES TO THIS AGREEMENT HEREBY UNCONDITIONALLY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF, DIRECTLY OR INDIRECTLY, THIS AGREEMENT, ANY OF THE RELATED DOCUMENTS, ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS TRANSACTION OR ANY RELATED TRANSACTIONS, AND/OR THE RELATIONSHIP THAT IS BEING ESTABLISHED BETWEEN THEM. The scope of this waiver is intended to be all encompassing of any and all disputes that may be filed in any court (including, without limitation, contract claims, tort claims, breach of duty claims, and all other common law and statutory claims). THIS WAIVER IS IRREVOCABLE MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT, ANY RELATED DOCUMENTS, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THIS TRANSACTION OR ANY RELATED TRANSACTION. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court.

 

j. USA Patriot Act. Funder hereby notifies the Client that pursuant to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)), it is required to obtain, verify and record information that identifies the Client and each other party to the transaction contemplated hereunder, which information includes the name and address of the Client and each such other party and other information that will allow Funder to identify the Client and each such other party in accordance therewith.

 

Commercial Transaction. CLIENT ACKNOWLEDGES THAT THE WITHIN AGREEMENT EVIDENCES A COMMERCIAL TRANSACTION AND THAT IT COULD, UNDER CERTAIN CIRCUMSTANCES HAVE THE RIGHT UNDER CHAPTER 903A, AS FROM TIME TO TIME AMENDED, OF THE CONNECTICUT GENERAL STATUTES, SUBJECT TO CERTAIN LIMITATIONS, TO NOTICE OF AND HEARING ON THE RIGHT OF FUNDER TO OBTAIN A PREJUDGMENT REMEDY, SUCH AS ATTACHMENT, GARNISHMENT AND/OR REPLEVIN, UPON COMMENCING ANY LITIGATION AGAINST CLIENT. NOTWITHSTANDING, CLIENT HEREBY WAIVES ALL RIGHTS TO NOTICE, JUDICIAL HEARING OR PRIOR COURT ORDER TO WHICH IT MIGHT OTHERWISE HAVE THE RIGHT UNDER SAID CHAPTER 903a AS FROM TIME TO TIME AMENDED, OR UNDER ANY OTHER STATE OR FEDERAL STATUTE OR CONSTITUTION IN CONNECTION WITH THE OBTAINING BY FUNDER OF ANY PREJUDGMENT REMEDY BY REASON OF THIS PURCHASE ORDER PURCHASE AGREEMENT, OR BY REASON OF CLIENT'S OBLIGATIONS OR ANY RENEWALS OR EXTENSIONS OF THE SAME, CLIENT ALSO WAIVES ANY AND ALL OBJECTION WHICH IT MIGHT OTHERWISE ASSERT, NOW OR IN THE FUTURE, TO THE EXERCISE OR USE BY FUNDER OF ANY RIGHT OF SETOFF, REPOSSESSION OR SELF HELP AS MAY PRESENTLY EXIST UNDER STATUTE OR COMMON LAW.

 

10  

 

 

IN WITNESS WHEREOF , this Agreement has been executed by each of the individual parties hereto and signed by an officer thereunto duly authorized and attested under the corporate seal of the Secretary of the corporate party hereto, if any, all on the date and year set out hereinafter.

 

SIGNED, SEALED AND DELIVERED      
IN THE PRESENCE OF:      
    CLIENT: SDJ Technologies, Inc.
     
/s/ Loren M. Eltiste   By: /s/ Jawahar Tandon
Print Name:  Loren M. Eltiste     Jawahar Tandon
  Witness     President

 

/s/ Asif Khan     (Corporate Seal)
Print Name: Asif Khan      
  Witness      
    Date: April 15, 2014

 

      BROOKRIDGE FUNDING
         
By:  /s/ Michael  P. Hilton   By: /s/ John A. McNiff III
  Michael  P. Hilton,     John A. McNiff III,
  Co-President     Co-President
         
      Dated: 4/15/14

 

11  

 

 

Exhibit 10.8 

 

 

 
 

 

 

 
 

 

 

 
 

 

 

 
 

 

 

 
 

 

 

 
 

 

 

 
 

 

 

 
 

 

 

 
 

 

 

 

 

Exhibit 10.9

 

TANDON DIGITAL, INC.

 

ADVISORY BOARD MEMBER AGREEMENT

 

THIS ADVISORY BOARD MEMBER AGREEMENT (this “Agreement”) is by and between Noel Lee (“Advisor”), and Tandon Digital, Inc., a Delaware corporation (the “Company”). The parties hereby agree as follows:

 

1.           Scope of Advisory Services . Advisor shall be appointed to the Advisory Board. Advisor shall provide to the Company general advice and input regarding business development and strategy and product development (the “Advisory Services”). Any additional Advisory Services will be as agreed in writing between Advisor and the Board of Directors of the Company (the “Board”). Advisor will be required to report to the Board or the CEO if designated by the Board concerning the Advisory Services. The Company shall have the right to publicly identify Advisor as a member of its Advisory Board subject to written approval from Advisor.

 

2.           Compensation . Subject to the terms of this Agreement and approval by the Board, the Company shall recommend to the Board that Advisor receive a warrant in the form attached hereto as Exhibit A .

 

3.           Reimbursement of Expenses . The Company agrees to reimburse Advisor for all pre-approved travel, telephone and other out-of-pocket expenses incurred in performing the Advisory Services, in accordance with the Company’s reimbursement policies and provided that the Advisor submit to the Company documentation as requested by the Company with respect to such expenses.

 

4.           Independent Contractor Relationship . Advisor’s relationship with the Company is that of an independent contractor, and nothing in this Agreement is intended to, or shall be construed to, create a partnership, agency, joint venture, employment or similar relationship. Advisor will not be entitled to any of the benefits that the Company may make available to its employees, including, but not limited to, group health or life insurance, profit-sharing or retirement benefits. Advisor is not authorized to make any representation, contract or commitment on behalf of the Company unless specifically requested or authorized in writing to do so by the Company. Advisor is solely responsible for, and will file, on a timely basis, all tax returns and payments required to be filed with, or made to, any federal, state or local tax authority with respect to the performance of services under this Agreement. Advisor is solely responsible for, and must maintain adequate records of, expenses incurred in the course of performing services under this Agreement. No part of Advisor’s compensation will be subject to withholding by the Company for the payment of any social security, federal, state or any other employee payroll taxes. The Company will regularly report amounts paid to Advisor by filing Form 1099-MISC with the Internal Revenue Service as required by law.

 

5.           Information; Rights . Advisor acknowledges and agrees that all information, ideas, concepts, improvements, inventions and works of authorship related to the Company’s business that are provided by Advisor to the Company in connection with the Advisory Services shall be solely owned by the Company, whether or not patented or copyrighted and without regard to any termination of this Agreement. The Advisor further agrees to assign, and hereby irrevocably and unconditionally assigns, to the Company all of the Advisor’s right, title and interest, including, without limitation, all patent, copyright, mask work, trade secret and trademark rights, in and to such ideas, concepts, improvements, inventions and works of authorship in perpetuity.

 

  1  

 

  

6.           Confidentiality . “Confidential Information” means any information related to the Company’s business and current, future and proposed technology, products and services. Except as permitted in this Section, Advisor shall not use, disseminate or in any way disclose the Confidential Information. Advisor may use the Confidential Information solely to provide advice and input to the Company hereunder. Advisor shall immediately give notice to the Company of any unauthorized use or disclosure of the Confidential Information. Advisor shall assist the Company in remedying any such unauthorized use or disclosure of the Confidential Information. Advisor agrees not to communicate any information to the Company in violation of the proprietary rights of any third party.

 

7.           Ownership and Return of Confidential Information and Company Property . All Confidential Information and any materials furnished to Advisor by the Company hereunder (the “Company Property”), are the sole and exclusive property of the Company. Within five (5) days after any request by the Company, Advisor shall destroy or deliver to the Company, at the Company’s option, (a) all Company Property and (b) all materials in Advisor’s possession or control that contain or disclose any Confidential Information.

 

8.           Term and Termination . This Agreement is effective as of August 18, 2015 and will continue unless otherwise terminated as set forth below. Either party may terminate this Agreement without cause at any time on or after August 18, 2017, with termination effective five (5) days after delivery to the other party of written notice of termination. The Company also may terminate this Agreement immediately upon Advisor’s breach or suspected breach of Sections 5, 6 and 7. The provisions of Sections 5, 6, 7, 8 and 9 will survive any termination or expiration of this Agreement indefinitely.

 

9.           General Provisions .

 

9.1         Successors and Assigns . Advisor may not subcontract or otherwise delegate Advisor’s obligations under this Agreement without the Company’s prior written consent. Subject to the foregoing, this Agreement will be for the benefit of the Company’s successors and assigns, and will be binding on Advisor’s assignees.

 

9.2         Injunctive Relief . Advisor’s obligations under this Agreement are of a unique character that gives them particular value; Advisor’s breach of any of such obligations will result in irreparable and continuing damage to the Company for which money damages are insufficient, and the Company shall be entitled to injunctive relief and/or a decree for specific performance, and such other relief as may be proper (including money damages if appropriate).

 

9.3         Notices . Any notice required or permitted by this Agreement shall be in writing and shall be delivered as follows, with notice deemed given as indicated: (a) by personal delivery, when actually delivered; (b) by overnight courier, upon written verification of receipt; (c) by facsimile transmission, upon acknowledgment of receipt of electronic transmission; or (d) by certified or registered mail, return receipt requested, upon verification of receipt. Notice shall be sent to the addresses set forth above or to such other address as either party may provide in writing.

 

9.4         No Conflict of Interest . During the term of this Agreement, Advisor will not accept work, enter into a contract or accept an obligation inconsistent or incompatible with Advisor’s obligations, or the scope of services to be rendered for the Company, under this Agreement. Advisor warrants that there is no other existing contract or duty on Advisor’s part that conflicts with or is inconsistent with this Agreement. Advisor agrees to indemnify Company from any and all loss or liability incurred by reason of the alleged breach by Advisor of any services agreement with any third party.

 

  2  

 

  

9.5            Indemnity . The Company will indemnify and hold Advisor harmless against any and all losses, claims, suits, judgments, damages, liabilities, costs or expenses, including reasonable legal fees and expenses, to which he may become subject in connection with the good faith performance of Advisor’s responsibilities under this Agreement, except to the extent any such losses, claims, suits, judgments, damages, liabilities, costs or expenses arise from Advisor’s gross negligence, willful misconduct or breach of this Agreement. In the event the Company shall be obligated hereunder to indemnify Advisor pursuant to this provision, the Company shall be entitled to assume the defense of any claim, suit, action or investigation that forms the basis for indemnification.

 

9.6            Non-Disparagement . Advisor agrees that it will not, during or after the term of this Agreement, make any negative, false, or disparaging statements (written or oral) to the Company’s customers, potential customers, press, or any third party regarding the Company or its technology, products or services.

 

9.7            Governing Law; Forum . This Agreement shall be governed in all respects by the laws of the United States of America and by the laws of the State of California, as such laws are applied to agreements entered into and to be performed entirely within California between California residents. Each of the parties irrevocably consents to the exclusive personal jurisdiction of the federal and state courts located in Los Angeles, CA, as applicable, for any matter arising out of or relating to this Agreement, except that in actions seeking to enforce any order or any judgment of such federal or state courts located in California, such personal jurisdiction shall be nonexclusive.

 

9.8            Severability . If a court of law holds any provision of this Agreement to be illegal, invalid or unenforceable, (a) that provision shall be deemed amended to achieve an economic effect that is as near as possible to that provided by the original provision and (b) the legality, validity and enforceability of the remaining provisions of this Agreement shall not be affected thereby.

 

9.9            Waiver; Modification . If the Company waives any term, provision or Advisor’s breach of this Agreement, such waiver shall not be effective unless it is in writing and signed by the Company. No waiver by a party of a breach of this Agreement shall constitute a waiver of any other or subsequent breach by Advisor. This Agreement may be modified only by mutual written agreement of authorized representatives of the parties.

 

9.10          Entire Agreement . This Agreement constitutes the entire agreement between the parties relating to this subject matter and supersedes all prior or contemporaneous agreements concerning such subject matter, written or oral.

 

  3  

 

 

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date set forth in Section 8 above.

 

TANDON DIGITAL, INC.   ADVISOR
       
By: /s/Jawahar Tandon   /s/Noel Lee
  Jawahar Tandon, President & CEO   Noel Lee

 

[SIGNATURE PAGE TO ADVISORY BOARD AGREEMENT]

 

  4  

 

  

EXHIBIT A

 

WARRANT

 

  5  

 

 

 

Exhibit 10.10

 

THIS WARRANT AND THE UNDERLYING SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ ACT ”). THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO SUCH SECURITIES UNDER THE ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.

 

TANDON DIGITAL, INC.

 

WARRANT TO PURCHASE COMMON STOCK

 

No. CS-W-1 August 18,  2015

Void After August 17, 2025

 

This Certifies That , for value received, Noel Lee, or his assigns, (the “ Holder ”) is entitled to subscribe for and purchase at the Exercise Price (defined below) from Tandon Digital, Inc. , a Delaware corporation, (the “ Company ”), up to 2,840,779 shares of the Company’s common stock (the “ Common Stock ”).

 

1.           Certain Definitions. As used herein, the following terms shall have the following respective meanings:

 

1.1            Asset Transfer ” shall mean the sale, lease or other disposition of all, or substantially, all the assets of the Company in one or a series of transactions to any person or entity other than a wholly owned subsidiary of the Company.

 

1.2            Exclusive License ” shall mean the grant of an exclusive license to all, or substantially all, of the Company’s intellectual property that is used to generate all, or substantially all, of the Company’s revenues to any person or entity other than a wholly owned subsidiary of this Company.

 

1.3            Exercise Period ” shall mean the period commencing with the date hereof and ending on the earlier to occur of: (i) the 10-year anniversary of the date hereof, (ii) an Asset Transfer, or (iii) the date of the closing of the initial public offering of the Company’s Common Stock pursuant to a registration statement under the Act, (such offering, the “ IPO ”), or two days preceding the closing date of any reorganization, consolidation or merger of the Company, or any simultaneous sale of more than a majority of the then-outstanding securities of the Company other than a mere reincorporation transaction (an “ Acquisition ”) (such earlier date, the “ Termination Date ”).

 

1.4            Exercise Price ” shall mean $1.00 per share, subject to adjustment pursuant to Section 5 below.

 

1.5            Exercise Shares ” shall mean the shares of the Common Stock issuable upon exercise of this Warrant, subject to adjustment pursuant to the terms herein, including but not limited to adjustment pursuant to Section 5 below.

 

     
 

 

2.           Exercise of Warrant.

 

2.1           Generally. The rights represented by this Warrant may be exercised in whole or in part at any time or from time to time during the Exercise Period by delivery of the following to the Company at its principal office (or at such other address as it may designate by notice in writing to the Holder): (i) an executed Notice of Exercise in the form attached hereto; (ii) payment of the Exercise Price either by cancellation of indebtedness or in cash, check or wire transfer of immediately available funds; and (iii) this Warrant.

 

2.2           Issuance of Certificates. Upon the exercise of the rights represented by this Warrant, a certificate or certificates for the Exercise Shares so purchased, registered in the name of the Holder or persons affiliated with the Holder, if the Holder so designates, shall be issued and delivered to the Holder within a reasonable time after the rights represented by this Warrant shall have been so exercised. The person in whose name any certificate or certificates for Exercise Shares are to be issued upon exercise of this Warrant shall be deemed to have become the holder of record of such shares on the date on which this Warrant was surrendered and payment of the Exercise Price was made, irrespective of the date of delivery of such certificate or certificates, except that, if the date of such surrender and payment is a date when the stock transfer books of the Company are closed, such person shall be deemed to have become the holder of such shares at the close of business on the next succeeding date on which the stock transfer books are open.

 

2.3           Net Exercise . Notwithstanding any provisions herein to the contrary, if the fair market value of one share of Common Stock is greater than the Exercise Price (at the date of calculation as set forth below), in lieu of exercising this Warrant by payment of cash or cancellation of indebtedness, the Holder may elect to receive shares equal to the value (as determined below) of this Warrant (or the portion thereof being canceled) by surrender of this Warrant at the principal office of the Company together with the properly endorsed Notice of Exercise in which event the Company shall issue to the Holder a number of shares of Common Stock, computed using the following formula:

 

  X = Y (A-B)  
  A  

 

Where X =   the number of shares of Common Stock to be issued to the Holder
     
Y =   the number of shares of Common Stock purchasable under the Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being canceled (at the date of such calculation)
     
A =   the fair market value of one share of Common Stock (at the date of such calculation)
     
B =   Exercise Price (as adjusted to the date of such calculation)

 

For purposes of the above calculation, the fair market value of one share of the Common Stock as determined in good faith by the Board of Directors of the Company.

 

2.4            Automatic Net Exercise Events . If Holder does not elect to exercise in full this Warrant during the Exercise Period, this Warrant shall be automatically net exercised in full in accordance with the provisions of Section 2.3 above immediately prior to the expiration of this Warrant on the Termination Date.

 

  2  
 

3.           Covenants of the Company.

 

3.1           Covenants as to Exercise Shares. The Company covenants and agrees that all Exercise Shares that may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be validly issued and outstanding, fully paid and nonassessable, and free from all taxes, liens and charges with respect to the issuance thereof. The Company further covenants and agrees that the Company will at all times during the Exercise Period, have authorized and reserved, free from preemptive rights, a sufficient number of shares of its Common Stock to provide for the exercise of the rights represented by this Warrant. If at any time during the Exercise Period the number of authorized but unissued shares of Common Stock shall not be sufficient to permit exercise of this Warrant, the Company will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes.

 

3.2           No Impairment . Except and to the extent as waived or consented to by the Holder, the Company will not, by amendment of its Certificate of Incorporation, as amended, 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 such action as may be necessary or appropriate in order to protect the exercise rights of the Holder against impairment.

 

3.3           Notices of Record Date. In the event of any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend which is the same as cash dividends paid in previous quarters) or other distribution, the Company shall mail to the Holder, at least 10 days prior to the date specified herein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend or distribution.

 

4.           Representations of Holder.

 

4.1           Acquisition of Warrant for Personal Account. The Holder represents and warrants that it is acquiring this Warrant and the Exercise Shares solely for its account for investment and not with a view to or for sale or distribution of this Warrant or Exercise Shares or any part thereof. The Holder also represents that the entire legal and beneficial interests of the Warrant and Exercise Shares the Holder is acquiring is being acquired for, and will be held for, its account only.

 

4.2           Securities Are Not Registered.

 

(a)           The Holder understands that the Warrant and the Exercise Shares have not been registered under the Act on the basis that no distribution or public offering of the stock of the Company is to be effected. The Holder realizes that the basis for the exemption may not be present if, notwithstanding its representations, the Holder has a present intention of acquiring the securities for a fixed or determinable period in the future, selling (in connection with a distribution or otherwise), granting any participation in, or otherwise distributing the securities. The Holder has no such present intention.

 

  3  
 

 

(b)           The Holder recognizes that the Warrant and the Exercise Shares must be held indefinitely unless they are subsequently registered under the Act or an exemption from such registration is available. The Holder recognizes that the Company has no obligation to register the Warrant or the Exercise Shares of the Company, or to comply with any exemption from such registration.

 

(c)           The Holder is aware that neither the Warrant nor the Exercise Shares may be sold pursuant to Rule 144 adopted under the Act unless certain conditions are met, including, among other things, the existence of a public market for the shares, the availability of certain current public information about the Company, the resale following the required holding period under Rule 144 and the number of shares being sold during any three month period not exceeding specified limitations. Holder is aware that the conditions for resale set forth in Rule 144 have not been satisfied and that the Company presently has no plans to satisfy these conditions in the foreseeable future.

 

(d)           The Holder recognizes that the exercise of the Warrant and any ultimate resale of the Exercise Shares involves a high degree of risk in that (i) the Company will need additional capital to operate its business but has no assurance of additional necessary capital; (ii) an investment in the Company is highly speculative and only investors who can afford the loss of their entire investment should consider investing in the Company and the Exercise Shares; (iii) an investor may not be able to liquidate his, her or its investment; (iv) transferability of the Exercise Shares is extremely limited; (v) an investor could sustain the loss of his, her or its entire investment; and (vi) the Company is and will be subject to numerous other risks and uncertainties, including without limitation, significant and material risks relating to the Company’s business and risks associated with any start-up operation.

 

(e)           The Holder represents that he is an “accredited investor” as such term is defined in Rule 501 of Regulation D promulgated under the Act, and that it is able to bear the economic risk of an investment in the Exercise Shares.

 

(f)           The Holder acknowledges that he has prior investment experience, including without limitation, investment in non-listed and non-registered securities, or he has employed the services of an investment advisor, attorney or accountant to read all of the documents furnished or made available by the Company and to evaluate the merits and risks of such an investment on its behalf, and that it recognizes the highly speculative nature of this investment.

 

(g)           The Holder acknowledges and hereby represents that he has been furnished or given access by the Company with or to all information regarding the Company which it had requested or desired to know; that all documents which could be reasonably provided have been made available for its inspection and review; that it has been afforded the opportunity to ask questions of and receive answers from duly authorized representatives of the Company concerning the terms and conditions of this Warrant, and any additional information which it had requested. The Holder further represents and acknowledges that the Holder has not seen or received any advertisement or general solicitation with respect to the sale of any of the securities of the Company.

 

  4  
 

 

(h)           The Holder acknowledges that this issuance of this Warrant and the exercise of the Warrant and ultimate resale of the Exercise Shares may involve tax consequences, and that it must retain its own professional advisors to evaluate the tax and other consequences of its receipt of the Warrant.

 

4.3           Market Stand-Off . The Holder hereby agrees that the Holder shall not sell, transfer, make any short sale of, grant any option for the purchase of, or enter into any hedging or similar transaction with the same economic effect as a sale of, any Common Stock (or other securities) of the Company held by such Holder before the effective date of the registration statement for the first firm commitment underwritten public offering of its Common Stock registered under the Securities Act (the “ Initial Offering ”) for a period specified by the representative of the underwriters of Common Stock of the Company not to exceed one hundred eighty (180) days following the effective date of the Initial Offering, which period may be extended up to an additional 18 days to enable the underwriter(s) to comply with NASD Rule 2711(f)(4), or the applicable successor FINRA rule when published, if applicable to the Initial Offering; provided that all officers and directors of the Company, and their respective Affiliates, and all holders of at least five percent (5%) of the Company’s voting securities enter into similar agreements; and provided, further that any releases from such agreements by the underwriters shall be made only on a pro rata basis.

 

4.4           Legend. The Holder understands and agrees that all certificates evidencing the shares to be issued to the Holder may bear the following legend:

 

THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”). THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER THE ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.

 

5.           Adjustment of Exercise Price. In the event of changes in the outstanding Common Stock by reason of stock dividends, stock splits, recapitalizations, reclassifications, combinations or exchanges of shares, separations, reorganizations, liquidations, or the like, the number and class of shares available under this Warrant in the aggregate and the Exercise Price shall be correspondingly adjusted to give the Holder Warrant, on exercise for the same aggregate Exercise Price, the total number, class, and kind of shares as the Holder would have owned had this Warrant been exercised prior to the event and had the Holder continued to hold such shares until after the event requiring adjustment. The form of this Warrant need not be changed because of any adjustment in the number of Exercise Shares subject to this Warrant.

 

  5  
 

 

6.           Fractional Shares. No fractional shares shall be issued upon the exercise of this Warrant as a consequence of any adjustment pursuant hereto. All Exercise Shares (including fractions) issuable upon exercise of this Warrant may be aggregated for purposes of determining whether the exercise would result in the issuance of any fractional share. If, after aggregation, the exercise would result in the issuance of a fractional share, the Company shall, in lieu of issuance of any fractional share, pay the Holder otherwise entitled to such fraction a sum in cash equal to the product resulting from multiplying the then current fair market value of an Exercise Share by such fraction.

 

7.           No Stockholder Rights. This Warrant in and of itself shall not entitle the Holder to any voting rights or other rights as a stockholder of the Company.

 

8.           Transfer of Warrant. This Warrant and all rights hereunder are transferable, in whole only, upon the prior written consent of the Company, by the Holder in person or by duly authorized attorney, upon delivery of this Warrant and the form of assignment attached hereto to any transferee designated by Holder. The transferee shall sign an investment letter in form and substance satisfactory to the Company.

 

9.           Lost, Stolen, Mutilated or Destroyed Warrant. If this Warrant is lost, stolen, mutilated or destroyed, the Company may, on such terms as to indemnity or otherwise as it may reasonably impose (which shall, in the case of a mutilated Warrant, include the surrender thereof), issue a new Warrant of like denomination and tenor as the Warrant so lost, stolen, mutilated or destroyed. Any such new Warrant shall constitute an original contractual obligation of the Company, whether or not the allegedly lost, stolen, mutilated or destroyed Warrant shall be at any time enforceable by anyone.

 

10.          Modification and Waiver . Any term of this Warrant may be amended and the observance of any term of this Warrant may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the Holder.

 

11.          Notices.

 

11.1         Generally. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (i) upon personal delivery to the party to be notified, (ii) five days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (iii) one day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the Company at the address listed on the signature page, or at such other address as the Company or Holder may designate by 10 days advance written notice to the other parties hereto.

 

11.2         Required Notices. If at any time during the Exercise Period, the Company: (i) declares any dividend upon the Common Stock; (ii) effects any capital reorganization or reclassification of its capital stock, (iii) consummates an Acquisition; (iv) consummates an Asset Transfer, (v) closes its Initial Offering, or (vi) any voluntary or involuntary liquidation, dissolution or winding up of the Company, then the Company shall provide Holder with at least 20 days prior written notice of such corporate action.

 

  6  
 

 

12.          Acceptance. Receipt of this Warrant by the Holder shall constitute acceptance of and agreement to all of the terms and conditions contained herein.

 

13.          Governing Law; Venue. This Warrant is to be construed in accordance with and governed by the internal laws of the State of California without giving effect to any choice of law rule that would cause the application of the laws of any jurisdiction other than the internal laws of the State of California to the rights and duties of the parties. All disputes and controversies arising out of or in connection with this Agreement shall be resolved exclusively by the state and federal courts located in Los Angeles County in the State of California, and each party hereto agrees to submit to the jurisdiction of said courts and agrees that venue shall lie exclusively with such courts.

 

[ Remainder of Page Intentionally Left Blank ]

 

  7  
 

 

In Witness Whereof , the Company has caused this Warrant to be executed by its duly authorized officer as of August 18, 2015.

 

  TANDON DIGITAL, INC.
     
  By: /s/ Vivek Tandon

 

  Name: Vivek Tandon

 

  Title: President

 

  8  
 

 

NOTICE OF EXERCISE

 

TO: TANDON DIGITAL, INC.

 

(1)          ¨          The undersigned hereby elects to purchase ________ shares of Common Stock of Tandon Digital, Inc. (the “ Company ”) pursuant to the terms of the attached Warrant, and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.

 

¨          The undersigned hereby elects to purchase ________ shares of Common Stock of the Company pursuant to the terms of the net exercise provisions set forth in Section 2.3 of the attached Warrant, and shall tender payment of all applicable transfer taxes, if any.

 

(2)          Please issue a certificate or certificates representing said shares of Common Stock in the name of the undersigned or in such other name as is specified below:

 

     
  (Name)  
     
     
     
  (Address)  

 

(3)          The undersigned represents that (i) the aforesaid shares of Common Stock are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such shares; (ii) the undersigned is aware of the Company’s business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision regarding its investment in the Company; (iii) the undersigned is experienced in making investments of this type and has such knowledge and background in financial and business matters that the undersigned is capable of evaluating the merits and risks of this investment and protecting the undersigned’s own interests; (iv) the undersigned understands that the shares of Common Stock issuable upon exercise of this Warrant have not been registered under the Securities Act of 1933, as amended (the “ Act ”), by reason of a specific exemption from the registration provisions of the Act, which exemption depends upon, among other things, the bona fide nature of the investment intent as expressed herein, and, because such securities have not been registered under the Act, they must be held indefinitely unless subsequently registered under the Act or an exemption from such registration is available; (v) the undersigned is aware that the aforesaid shares of Common Stock may not be sold pursuant to Rule 144 adopted under the Act unless certain conditions are met and until the undersigned has held the shares for the number of years prescribed by Rule 144, that among the conditions for use of the Rule is the availability of current information to the public about the Company and the Company has not made such information available and has no present plans to do so; and (vi) the undersigned agrees not to make any disposition of all or any part of the aforesaid shares of Common Stock unless and until there is then in effect a registration statement under the Act covering such proposed disposition and such disposition is made in accordance with said registration statement, or the undersigned has provided the Company with an opinion of counsel satisfactory to the Company, stating that such registration is not required.

 

  1  
 

 

     
 (Date)   (Signature)
     
     
    (Print name)

 

  2  
 

 

FORM OF ASSIGNMENT

 

(To assign the foregoing Warrant, execute this form and supply required information. Do not use this form to purchase shares.)

 

For Value Received , the foregoing Warrant and all rights evidenced thereby are hereby assigned to

 

Name:  

(Please Print)

 

Address:  

(Please Print)

 

Dated: __________, 20__

 

Holder’s    
Signature:    
     
Holder’s    
Address:    

 

NOTE : The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatever. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.

 

  1  

 

 

 

Exhibit 10.11

 

CONSULTING AGREEMENT

 

THIS CONSULTING AGREEMENT (this " Agreement ") is entered into by and between Tandon Digital, Inc., a Delaware corporation (the “ Company ”, sometimes also referred to as “ Tandon ”), and David H. Clarke, an individual (" Consultant "), effective as of the 7th day of May 2015 (the " Effective Date ").

 

recitals

 

A.           Consultant has extensive experience in providing advisory, consumer marketing and management related services for businesses;

 

B.           The Company desires to retain Consultant to advise the Company on conducting its business and to obtain from Consultant such services; and

 

C.           The Company and Consultant desire to memorialize and formalize the terms of their relationship on the terms and conditions set forth herein.

 

In consideration of the foregoing recitals and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereby agree as follows:

 

AGREEMENT

 

1.             Engagement as Consultant . The Company agrees to retain Consultant to act as an independent consultant to provide the Company with services as a strategic adviser and consultant to the Company, including, but not limited to, matters with respect to business development, brand development and guidance, strategic planning and presentations in support of Tandon’s business (collectively, the “ Services ”), and Consultant agrees to provide such Services.

 

2.            Term . The term (“ Term ”) of this Agreement shall commence on the date hereof and shall continue unless terminated in accordance with Section 5 hereof.

 

3.            Consideration .

 

(a)           Share Compensation. In consideration of the Services to be provided by Consultant, the Company shall issue to Consultant 1,250,000 shares of its common stock (the “ Tandon Shares ”. In addition, the Company shall reimburse Consultant for reasonable travel and other expenses Consultant incurs in connection with performing the Services. To obtain reimbursement, Consultant shall submit to the Chief Executive Officer of the Company an invoice describing expenses incurred under this Agreement. Company shall provide any documentation requirements and any travel policy restrictions to Consultant in writing in advance, or be foreclosed from relying on such requirements and restrictions to deny reimbursement. The Company shall pay to Consultant invoiced amounts within thirty (30) days after the date of invoice.

 

 

 

 

(b)           Investment Representations, Acknowledgements and Understandings .

  

(i)          Consultant acknowledges that the purchase of the Tandon Shares involves a high degree of risk in that (1) Tandon will need additional capital to operate its business but has no assurance of additional necessary capital; (2) an investment in Tandon is highly speculative and only investors who can afford the loss of their entire investment should consider investing in Tandon; (3) Consultant may not be able to liquidate his investment; (4) transferability of the Tandon Stock is extremely limited; (5) Consultant could sustain the loss of his entire investment; and (6) Tandon is and will be subject to numerous other risks and uncertainties, including without limitation, significant and material risks relating to Tandon’s business and operations, and the industries, markets and geographic regions in which Tandon competes;

 

(ii)         Consultant acknowledges that he has prior investment experience, including without limitation, investment in non-listed and non-registered securities, or he, has employed the services of an investment advisor, attorney or accountant to read all of the documents furnished or made available by Tandon to him and to evaluate the merits and risks of such an investment on his behalf, and that he recognizes the highly speculative nature of this investment.

 

(iii)        Consultant hereby represents that he has been furnished or given access by Tandon with or to all information regarding Tandon and its financial conditions and results of operations which he had requested or desired to know; that all documents which could be reasonably provided have been made available for his inspection and review; that he has been afforded the opportunity to ask questions of and receive answers from duly authorized representatives of Tandon which he had requested.

 

(iv)        Consultant acknowledges that the purchase of the Tandon Shares involves tax consequences, and that he must retain his own professional advisors to evaluate the tax and other consequences of an investment in the Tandon Shares.

 

(v)         Consultant represents that the Tandon Shares are being purchased for his own account, for investment and not for distribution or resale to others. Consultant agrees that he will not sell or otherwise transfer any of the Tandon Shares unless they are registered under the Act or unless an exemption from such registration is available and, upon Tandon’s request, Tandon receives an opinion of counsel reasonably satisfactory to Tandon confirming that an exemption from such registration is available for such sale or transfer.

 

(vi)        Consultant understands that Rule 144 (the “Rule”) promulgated under the Act requires, among other conditions, a six (6) month holding period prior to the resale (in limited amounts) of securities acquired in a non-public offering without having to satisfy the registration requirements under the Act. Consultant understands that Tandon makes no representation or warranty regarding its fulfillment in the future of any reporting requirements under the Exchange Act, or its dissemination to the public of any current financial or other information concerning Tandon, as is required by Rule 144 as one of the conditions of its availability.

 

(vii)       Consultant understands that he certificates evidencing the Tandon Shares to be issued will bear the following legend:

 

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY STATE SECURITIES LAWS AND NEITHER SUCH SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR OTHERWISE TRANSFERRED EXCEPT (1) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS OR (2) PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS, IN WHICH CASE THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO THE COMPANY AN OPINION OF COUNSEL, WHICH COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH SECURITIES MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR OTHERWISE TRANSFERRED IN THE MANNER CONTEMPLATED PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS, OR (3) IN ACCORDANCE WITH THE PROVISIONS OF REGULATION S PROMULGATED UNDER THE SECURITIES ACT, AND BASED ON AN OPINION OF COUNSEL, WHICH COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO THE COMPANY, THAT THE PROVISIONS OF REGULATION S HAVE BEEN SATISFIED.

 

  - 2 -  

 

 

(c)           Limitations on Transfer. Other than as set forth below, the Consultant agrees that until January 10, 2017, he shall not: (a) sell, assign, exchange, transfer, pledge, distribute or otherwise dispose of (i) any of the Tandon Shares, or (ii) any interest (including, without limitation, an option to buy or sell) in any of the Tandon Shares, in whole or in part, and no such attempted transfer shall be treated as effective for any purpose; or (b) engage in any transaction in respect to any of the Tandon Shares or any interest therein, the intent or effect of which is the effective economic disposition of such shares. Notwithstanding the foregoing, the Consultant may transfer Tandon Shares to any of the following (a “ Transferee ”): (i) by beneficiary designation, will or intestate succession or (ii) to the Immediate Family (as defined below) of the Consultant or to a trust established by the Consultant for the benefit of the Consultant or the Consultant ’s Immediate Family, provided in either case that the Transferee agrees in writing on a form prescribed by the Company to be bound by all provisions of this Section 3(c) as though such Transferee were the Consultant hereunder. For the purposes of this Agreement, the term “ Immediate Family ” shall mean spouse, lineal descendant or antecedent, father, mother, brother or sister.

 

4.             Nature of Consultant's Relationship to the Company .

 

(a)           Independent Contractor Status . Consultant is an independent contractor and not an employee of the Company for any purpose whatsoever, including state and federal taxes and workers' compensation insurance. Neither this Agreement, the relationship created between the parties hereto pursuant to this Agreement, nor any course of dealing between the parties hereto is intended to create, or shall create, an employment relationship, a joint venture, partnership or any similar relationship. Consultant does not have, nor shall Consultant hold out Consultant as having, any right, power, or authority to create any contract or obligation, either express or implied, on behalf of, in the name of, or binding upon the Company, or to pledge the Company's credit, or to extend credits in the name of the Company.

 

(b)           Taxes . The Company will not withhold any monies for any state, local or federal taxing authorities from compensation earned by Consultant pursuant to this Agreement.

 

(c)           Fringe Benefits . Consultant shall receive no fringe benefits under this Agreement whatsoever, and accordingly, shall receive no insurance benefits, disability income, vacation, holiday pay, sick pay, or any other similar benefits.

 

(d)           Workers' Compensation and Other Insurance Coverage . The Company shall not provide workers' compensation coverage or any other insurance coverage for Consultant. Any and all workers' compensation coverage or other insurance coverage shall be the sole responsibility of Consultant.

 

(e)           Hours . The time devoted by Consultant to the performance of this Agreement shall be left to the sole discretion of Consultant. Consultant shall not be required to work any specified hours or specified days.

 

  - 3 -  

 

  

5.            Term .

 

(a)          This Agreement shall remain in effect for a term of one (1) year commencing on the date first written above, unless sooner terminated as hereinafter provided, or unless extended by agreement of the parties.

 

(b)          This Agreement may be terminated by either party, with or without cause, upon thirty (30) days prior written notice to the other; provided that if Consultant terminates this Agreement, Consultant shall wind up in an orderly fashion assignments for the Company which Consultant began prior to the date of notice of termination hereunder.

 

(c)          Upon termination of this Agreement for any reason, Consultant shall be entitled to retain all compensation referenced in Section 3 herein, such compensation having been deemed earned in full, and shall be entitled to receive such compensation and reimbursement, if any, accrued under the terms of this Agreement, but unpaid, as of the date Consultant ceases work under this Agreement.

 

6.             Confidential Information .

 

(a)           Definition of Confidential Information . In the course of Consultant's performance of any Services for the Company, Consultant may have access to and there may be disclosed to Consultant, information of a confidential nature and/or trade secrets that have great value to the Company. Such information (" Confidential Information ") includes, but is not limited to, any written, oral and visual information relating to: ideas, concepts, designs, manufacturing or market techniques, know-how, processes, techniques, formulas, data, costs, developments, works in progress, products, trade secrets, computer programs, data bases, software and systems, customer lists, pricing and fee information, suppliers, business plans or financial information; creations and technical information of the Company, or any of its clients, consultants or licensees; or information acquired by Consultant from the Company's employees or agents or from the inspection of the Company's property and information disclosed to the Company by third parties. Except for Consultant's relationship with the Company, Consultant hereby acknowledges that Consultant would not otherwise have access to such Confidential Information.

 

(b)           Protection of Confidential Information . During the Term and at any time thereafter, Consultant will keep all Confidential Information in confidence and will not disclose any Confidential Information to any other person except (i) to the persons designated in writing by the Chief Executive Officer of the Company, (ii) to the extent such disclosure may be required by law after consultation with the Company's legal counsel and (iii) if such information at the time is generally known to the public through no breach of this Agreement by Consultant or any breach by Consultant of any contractual or fiduciary duty. Consultant will not use any Confidential Information for the gain or benefit of any party outside the Company or for Consultant's own personal gain or benefit outside the scope of Services to be performed for the Company. Consultant will not cause the transmission, removal or transport of Confidential Information from the Company's premises without prior written approval from the Chief Executive Officer of the Company.

 

(c)           Return of Company Property . At the time of termination of this Agreement Consultant will deliver to the Company (and will not keep in Consultant's possession or deliver to anyone else) any and all computer programs, software, files or systems devices, records, data, notes, reports, proposals, lists, correspondence, specifications, drawings, blueprints, sketches, materials, equipment, designs, software, computer disks, photographs, photostats, negatives, undeveloped film, tape recordings or other electronic recordings, other documents or property, or reproductions of any of the aforementioned items, belonging to the Company.

 

  - 4 -  

 

   

(d)           Representation . Consultant represents that Consultant's performance of all the terms of this Agreement will not breach any agreement to keep in confidence proprietary information acquired by Consultant in confidence or in trust prior to Consultant's engagement by the Company. Consultant has not entered into, and agrees not to enter into, any oral or written agreement in conflict herewith.

 

(e)           Exceptions . Notwithstanding the other provisions of this Agreement, nothing received by Consultant shall be considered to be Confidential Information of the Company, if (i) it has been rightfully received by Consultant from a third party without confidentiality limitations; (ii) it was known to Consultant prior to his first receipt from the Company, as shown by files or other back-up documentation existing at the time of initial disclosure; or (iii) it is required to be disclosed in the context of any administrative or judicial proceeding, provided that prior written notice of such required disclosure and an opportunity to oppose or limit disclosure is given to the Company.

 

7.             Inventions .

 

(a)           Assignment of Inventions . Consultant agrees that he will promptly make full written disclosure to the Company, will hold in trust for the sole right and benefit of the Company, and hereby assigns to the Company, or its designee, all of Consultant’s right, title and interest throughout the world in and to any and all inventions, original works of authorship, developments, concepts, know-how, improvements or trade secrets, whether or not patentable or registrable under copyright or similar laws, which Consultant may solely or jointly conceive or develop or reduce to practice, or cause to be conceived or developed or reduced to practice, during the Term (collectively referred to as “Inventions”), except as provided in Section 7(e) below. Consultant further acknowledges that all Inventions which are made by Consultant (solely or jointly with others) within the scope of and during Term are “works made for hire” (to the greatest extent permitted by applicable law) and are compensated by such amounts paid to Consultant under this Agreement, unless regulated otherwise by the mandatory law of the State of California.

 

(b)           Maintenance of Records . Consultant agrees to keep and maintain adequate and current written records of all Inventions made by Consultant (solely or jointly with others) during the Term. The records may be in the form of notes, sketches, drawings, flow charts, electronic data or recordings, notebooks, and any other format. The records will be available to and remain the sole property of the Company at all times. Consultant agrees not to remove such records from the Company’s place of business except as expressly permitted by Company policy which may, from time to time, be revised at the sole election of the Company for the purpose of furthering the Company’s business.

 

(c)           Patent and Copyright Rights . Consultant agrees to assist the Company or its designee, at its expense, in every proper way to secure the Company’s, or its designee’s, rights in the Inventions and any copyrights, patents, trademarks, mask work rights, moral rights, or other intellectual property rights relating thereto in any and all countries, including the disclosure to the Company or its designee of all pertinent information and data with respect thereto, the execution of all applications, specifications, oaths, assignments, recordations, and all other instruments which the Company or its designee shall deem necessary in order to apply for, obtain, maintain and transfer such rights, or if not transferable, waive such rights, and in order to assign and convey to the Company or its designee, and any successors, assigns and nominees the sole and exclusive rights, title and interest in and to such Inventions, and any copyrights, patents, mask work rights or other intellectual property rights relating thereto. Consultant further agrees that Consultant’s obligation to execute or cause to be executed, when it is in his power to do so, any such instrument or papers shall continue after the termination of this Agreement until the expiration of the last such intellectual property right to expire in any country of the world.

  - 5 -  

 

   

(d)           Power of Attorney . If the Company or its designee is unable because of Consultant’s mental or physical incapacity or unavailability or for any other reason to secure Consultant’s signature to assign any of the Inventions under Section 7(a) hereof, or to apply for or to pursue any application for any United States or foreign patents, copyright, mask works or other registrations covering Inventions or original works of authorship assigned to the Company or its designee under this Agreement, then Consultant hereby irrevocably designates and appoints the Company and its duly authorized officers and agents as Consultant’s agent and attorney in fact, to act for and on Consultant’s behalf and stead to execute and file any such assignments or applications, and to do all other lawfully permitted acts to further the assignment of the Inventions, or the application for, prosecution, issuance, maintenance or transfer of letters patent, copyright or other registrations thereon with the same legal force and effect as if originally executed by Consultant. Consultant hereby waives and irrevocably quitclaims to the Company or its designee any and all claims, of any nature whatsoever, which Consultant now or hereafter has for infringement of any and all proprietary rights assigned to the Company or such designee.

 

(e)           Exception to Assignments . Consultant understands that the provisions of this Agreement requiring assignment of Inventions to the Company do not apply to any invention that Consultant developed on his own time, without using the Company’s equipment, supplies, facilities or trade secret information except for those inventions that either: (i) relate at the time of conception or reduction to practice of the invention to the Company’s business, or actual or demonstrably anticipated research or development of the Company; or (ii) result from any work performed by Consultant for the Company. Consultant will advise the Company promptly in writing of any inventions that Consultant believes meet such provisions.

 

8.             Rights and Remedies Upon Breach . If Consultant breaches, or threatens to breach Sections 6 or 7 of this Agreement, the Company will have the following rights and remedies, each of which rights and remedies shall be independent of the other and severally enforceable, and all of which shall be in addition to, and not in lieu of, any other rights and remedies available to the Company under law or in equity:

 

(a)           Specific Performance . The right and remedy to have this Agreement specifically enforced by any court of competent jurisdiction, it being acknowledged and agreed that any such breach or threatened breach will cause irreparable injury to the Company and that money damages will not provide an adequate remedy to the Company.

 

(b)           Injunctive Relief . The right and remedy to apply to any court of law or equity having jurisdiction for injunctive relief (without the posting of a bond or other security), it being acknowledged and agreed that any such breach or threatened breach will cause irreparable injury to the Company and that money damages will not provide an adequate remedy to the Company.

 

9.           Entire Agreement; Interpretation . This Agreement constitutes the entire agreement and understanding of the parties with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements and understandings relating to the subject matter hereof, written or otherwise. This Agreement may be amended or modified only by a written instrument executed by Consultant and by an authorized representative of the Company.

 

10.          Waiver . Any failure to exercise or delay in exercising any right, power or privilege herein contained, or any failure or delay at any time to require the other party's performance of any obligation under this Agreement, shall not affect the right to subsequently exercise that right, power or privilege, or to require performance of that obligation. A waiver of any of the provisions of this Agreement shall not be deemed, nor shall it constitute, a waiver of any other provision, whether or not similar, nor shall any waiver constitute a continuing waiver.

 

  - 6 -  

 

   

11.          Assignment; Binding Effect . This Agreement shall inure to the benefit of, and be enforceable by, the Company and its successors and assigns; however, this Agreement is personal to Consultant and may not be assigned by Consultant in whole or in part.

 

12.          Severability . If any provision of this Agreement shall be unlawful, void or for any reason unenforceable, it shall be deemed separable from, and shall in no way affect the validity or enforceability of, the remaining provisions of this Agreement, and the rights and obligations of the parties shall be enforced to the fullest extent possible.

 

13.          Governing Law . This Agreement shall be construed in accordance with, and governed by, the laws of the State of Delaware.

 

14.          Arbitration . Other than seeking court intervention for injunctive relief, specific performance and the like, all disputes arising out of or relating in any way to Consultant’s performance of the Services hereunder, this Agreement or the termination of this Agreement, shall be adjudicated in binding arbitration as described in more detail in this Section. Any dispute submitted to arbitration pursuant to this Section shall be determined by arbitration in accordance with the rules of the Judicial, Arbitration and Mediation Services (JAMS). The parties shall mutually select a single arbitrator to hear the matter; provided that if the parties are unable to agree, the arbitrator shall be selected by JAMS. The arbitration shall be held in Los Angeles County, California. Any decision made by the arbitrator shall be final, binding and conclusive on the parties and each party to the arbitration shall be entitled to enforce such decision to the fullest extent permitted by law and entered in any court of competent jurisdiction.

 

15.          Notices . Unless otherwise provided herein, any notice to be given hereunder by any party to the other shall be in writing and delivered in person or by commercial overnight courier, by facsimile transmission or mailed by certified mail, postage prepaid, return receipt requested, as follows:

 

To Company:  

Tandon Digital, Inc.

2655 Park Center Drive, Unit C

Simi Valley, CA 93065

Attn: Jawahar Tandon

 

To Consultant:  

David H. Clarke

14179 Laurel Trail

Wellington, FL 33414

 

Any such notice or other communication shall be deemed received and effective upon the earlier of (a) if personally delivered, the date of delivery to the address of the person to receive such notice; (b) if delivered by commercial overnight carrier, one (1) day following the receipt of such communication by such carrier from the sender; (c) if mailed, forty-eight (48) hours after the date of posting by the United States Post Office as shown by the sender's registry or certification receipt, as the case may be; or (d) if given by facsimile, when sent. Notice of change of address shall be given by written notice in the manner detailed in this Section 15.

 

16.          Attorneys' Fees; Costs . If any action at law or in equity (including an arbitration) is brought to enforce or interpret the terms of this Agreement or any obligation owing hereunder, the prevailing party shall be entitled to reasonable attorneys' fees and all costs and expenses of suit or arbitration.

 

  - 7 -  

 

  

17.          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.

 

[Signature Page(s) to Follow]

 

  - 8 -  

 

 

IN WITNESS WHEREOF, the parties hereto have executed this Consulting Agreement as of the date first above written.

 

CONSULTANT   TANDON DIGITAL, INC.
       
    By: /s/ Jawahar Tandon
    Name: Jawahar Tandon
/s/ David H. Clarke   Title: Chief Executive Officer
David H. Clarke      

 

  - 9 -  

 

 

 

 

 

Exhibit 10.12

 

 

LICENSE AND SUBLICENSE AGREEMENT This License and Sublicense Agreement is made as of this 1st day of May, 2012, by and between SDJ Technologies, Inc. ("SDJ"), a corporation organized and existing under the laws of the State of Delaware, having an office at 2125 B Madera Road, Simi Valley, CA 93065, and Tandon Enterprises, Inc. ("Tandon"), a corporation organized and existing under the laws of the State of Delaware, having an office at 2125 B Madera Road, Simi Valley, CA 93065. RECITALS: WHEREAS, Tandon is the licensee of certain Patents and owner or licensor of or has the right to use or exploit, certain Technical Information (as hereinafter defined); and WHEREAS, Tandon wishes to grant to SDJ a non-exclusive sublicense to use the subject matter of certain Patents and a non-exclusive license or sublicense, as the case may be, to certain Technical Information, each to be used by SDJ in connection with the development, manufacture, sale and distribution of Products (as hereinafter defined) and SDJ wishes to receive such a license, on the terms and subject to the conditions set forth herein; NOW, THEREFORE, in consideration of the mutual covenants and agreements provided herein, SDJ and Tandon hereby agree as follows: I. Definitions A. “ Affiliate” means, with respect to a party, any corporation or other business entity directly or indirectly controlling, controlled by or under common control with such party; as used herein, the term "control" means possession of the power to direct, or cause the direction of the management and policies of a corporation or other entity whether through the ownership of voting securities, by contract or otherwise. B. " Licensed Patents " means all patents and patent applications listed in Exhibit A attached hereto and made a part hereof. C. " Products " means (i) assembled memory modules and (ii) memory data storage products. D. " Technical Information " means all know-how, trade secrets, inventions, data, technology, and other information now owned or licensed by Tandon, or which Tandon has the right to use or exploit, or hereafter acquired licensed or sublicensed by Tandon during the term of this Agreement, relating to the Licensed Patents, including, but not limited to, (i) scientific data, (ii) processes and analytic methodology and (iii) that listed in Exhibit A attached hereto and made a part hereof. II. Grant of License Subject to the terms of this Agreement, Tandon hereby grants, and SDJ hereby accepts, a similar non-exclusive, worldwide, royalty-free non-transferable, non-sublicensable, sublicense to use the subject matter of the Licensed Patents and a similar non-exclusive license or sub-license, as the

 

 
 

 

 

  case may be, to the Technical Information, each for use by SDJ solely in connection with the manufacture, design, distribution and sale of Products. III. Fee In consideration of the rights granted to SDJ under this Agreement, SDJ shall issue to Tandon as a fee a one time issuance of 1,000,000 shares of its common stock. IV. Disclosure of New Information, Developments, and Improvements A. Disclosure . Tandon shall keep SDJ fully informed of all relevant information it becomes aware of concerning the Licensed Patents. Toward such end, Tandon shall freely provide SDJ with all Technical Information or other know-how, trade secrets, inventions, data, technology and information acquired or developed by Tandon or its Affiliates, or which Tandon or its Affliates have the right to use or exploit, during the term of this Agreement relating to the Licensed Patents. B. Cooperation . In connection with the furnishing by Tandon of Technical Information, Tandon agrees, at the request and expense of SDJ, to (i) allow SDJ personnel to visit Tandon's manufacturing and research facilities and to consult with Tandon personnel at mutually agreeable times, to discuss and review the Technical Information for the purposes contemplated by this Agreement; and (ii) send Tandon personnel to visit SDJ's manufacturing and research facilities at mutually agreeable times, to similarly discuss and review such Technical Information. V. Confidential Information During the term of this Agreement and for a period of 5 (five) years after expiration or termination hereof, each party shall keep confidential and not disclose to others or use for any purpose other than as authorized herein, any confidential information supplied by the other party or its employees or representatives and identified by the disclosing party as confidential ("Confidential Information"); provided, however, that these obligations of confidentiality and non-use shall not apply to the extent that the receiving party can establish that information is not the other party's Confidential Information, including but not limited to establishing that the information: (i) entered the public domain without the receiving party's breach of any obligation owed to the disclosing party; (ii) had become known to the receiving party prior to the disclosing party's disclosure of such information; (iii) was permitted to be disclosed by the prior written consent of the disclosing party; (iv) had become known to the receiving party from a source other than the disclosing party, other than by breach of a confidentiality obligation owed to the disclosing party; (v) was disclosed by the disclosing party to a third party without restrictions on its disclosure; or (vi) was independently developed by the receiving party without breach of this Agreement. In addition, each party shall have the right to disclose Confidential Information supplied by the other party to third parties under a secrecy agreement with essentially the same confidentiality provisions provided herein, solely in connection with the exercise of its rights under this Agreement. IV. Infringement

 

 
 

 

 

  A. Defense of Litigation. If any infringement action is brought against SDJ or any of its Affiliates because of actual or anticipated infringement regarding the subject matter hereof, SDJ shall promptly notify Tandon and send Tandon copies of all papers that have been served. Tandon shall promptly defend against such infringement action, once notified by SDJ. If Tandon fails to defend such infringement action after being notified by SDJ, SDJ shall have the right but not the obligation to defend the action itself. If SDJ does undertake such defense, Tandon shall cooperate with SDJ and SDJ shall be entitled to select counsel. B. Response to Infringement by Third Parties. If, during the term of subject matter hereof of them, this Agreement, either party becomes aware of any third party infringement or threatened infringement of any subject matter hereof, the following provisions shall apply: (i) The party having such knowledge shall promptly give notice to the other party, with all available details. (ii) Tandon shall have the right, but not the obligation, to bring suit in its name, or in the name of SDJ if necessary, at its own expense to restrain such infringement and to recover profits and damages. SDJ agrees to being joined as a party plaintiff and to cooperate in the prosecution thereof as is reasonably necessary, at Tandon's expense. If Tandon decides to undertake such suit, then Tandon shall have the sole right to control prosecution, and the right to settle and compromise such action with SDJ's prior written consent, which shall not be unreasonably withheld. (iii) If Tandon fails to take action within sixty (60) days after becoming aware of such infringement, in the first instance or by notice from SDJ, then SDJ, at any time prior to Tandon thereafter filing an action, shall have the right but not the obligation to take such action in its own name or in the name of Tandon as it deems necessary or appropriate. Tandon shall cooperate with SDJ as is reasonably necessary in any such action brought by SDJ. If SDJ brings legal action, SDJ shall have the sole right to control prosecution, and the right to settle and compromise such action with Tandon's prior written consent, which shall not be unreasonably withheld. (iv) In the event any monetary recovery in connection with such infringement action is obtained, such recovery shall be applied in the following priority: first, to reimburse Tandon and SDJ by the proportion and up to the extent of their out-of-pocket expenses (including reasonable attorneys' fees) in prosecuting such infringement; second, to be shared by the proportion and up to the extent of any damages established, third, the balance, if any, to be shared one-half by Tandon and one-half by SDJ. VII. Representations, Warranties, and Covenants A. Tandon Representations . Tandon represents, warrants and covenants that: (i) Tandon is a corporation duly organized, existing and in good standing under the laws of the State of Delaware with full right, power and authority to enter into and perform this Agreement and to grant all of the rights, powers and authorities herein granted.

 

 
 

 

 

  (ii) The execution, delivery, and performance of this Agreement do not conflict with, violate, or breach any agreement to which Tandon is a party, or Tandon's certificate of incorporation or bylaws. (iii) This Agreement has been duly executed and delivered by Tandon and is a legal, valid, and binding obligation enforceable against Tandon in accordance with its terms. (iv) Tandon knows of no fact which does or could materially adversely affect the rights granted to SDJ hereunder. B. SDJ Representations . SDJ represents, warrants and covenants that: (i) SDJ is a corporation duly organized, existing, and in good standing under the laws of the State of Delaware, with full right, power and authority to enter into and perform this Agreement and to grant all of the rights, powers, and authorities herein granted. (ii) The execution, delivery, and performance of this Agreement do not conflict with, violate, or breach any agreement to which SDJ is a party, or SDJ's certificate of incorporation or bylaws. (iii) This Agreement has been duly executed and delivered by SDJ, and is a legal, valid, and binding obligation enforceable against SDJ in accordance with its terms. VIII. Term and Termination A. Term . This Agreement shall be effective as of the date first set forth above and shall remain in effect for years, unless earlier terminated as provided herein. The provisions of Paragraphs V., VI. B and VII hereof shall survive the expiration or termination of this Agreement, except as otherwise provided herein. B. Termination for Breach . If either SDJ or Tandon breaches or defaults in the performance or observance of any of the material provisions of this Agreement, and such breach or default is not cured within thirty (30) days after the giving of notice by the other party specifying such breach or default, the non-defaulting party shall have the right to terminate this Agreement, effective without further notice to the defaulting party. C. Effect of Termination . Except as otherwise provided in this Agreement, upon termination of this Agreement: (i) All rights, privileges, licenses and sublicenses granted hereunder shall terminate and revert to Tandon, and SDJ shall not thereafter make any use whatsoever of any Technical Information or Licensed Patents; (ii) Except as provided herein, SDJ shall promptly return or provide to Tandon all Technical Information previously supplied by Tandon; and

 

 
 

 

 

(iii) Tandon, at its election, shall grant SDJ sufficient time to sell off its existing stock of the Products. (iv) Notwithstanding anything herein to the contrary, SDJ shall be entitled to retain one archival copy of all materials covered by Paragraph V., for the sole purpose of determining SDJ's ongoing confidentiality obligations. D. No Prejudice . Termination of this Agreement for any reason shall be without prejudice to and shall not affect the right of either party to recover any and all damages to which it may be entitled, or exercise any other remedies which it may otherwise have. IX. No other License or Sublicense During the term hereof, Tandon agrees that if shall not grant any other right to use or exploit or any license or sublicense, to any third party with respect to the Licensed Patents or the Technical Information. X. Miscellaneous A. Entire Agreement . This Agreement sets forth the entire agreement and understanding between the parties and supersedes all previous agreements, promises, representations, understandings, and negotiations, whether written or oral, between the parties with respect to the subject matter hereof; none of the terms of this Agreement shall be amended or modified except in writing signed by the parties hereto. B. Assignment . Neither party may assign any right or obligation hereunder without the written consent of the other party, except if such assignment arises under a transaction in which the assigning party is selling its entire business or a line of business to which this Agreement relates or that party is being acquired or merging with a third party. This Agreement shall be binding upon and inure to the benefit of the parties' respective successors and assigns. Any attempted assignment in violation of this provision shall be void and of no effect. C. Severability . If and solely to the extent that any provision of this Agreement shall be invalid or unenforceable, or shall render this entire Agreement to be unenforceable or invalid, such offending provision shall be of no effect and shall not affect the validity of the remainder of this Agreement or any of its provisions; provided, however, the parties shall use their respective reasonable efforts to renegotiate the offending provisions to best accomplish the original intentions of the parties. D. Waivers . A waiver by either party of any term or condition of this Agreement in any one instance shall not be deemed or construed to be a waiver of such term or condition for any similar instance in the future or of any subsequent breach hereof. All rights, remedies, undertakings, obligations and agreements contained in this Agreement shall be cumulative and none of them shall be a limitation of any other remedy, right, undertaking, obligation, or agreement.

 

 
 

 

 

  E. Notices . Any notice, consent or approval permitted or required under this Agreement shall be in writing sent by registered or certified airmail, postage pre-paid, or by overnight courier or by facsimile (confirmed by mail) and addressed as set forth on the first page of this agreement. All notices shall be deemed to be effective on the date of mailing. In case any party changes its address at which notices are to be received, written notice of such change shall be given as soon as practicable to the other party. F. Compliance with Law . Each party hereto shall comply with all applicable laws, rules, ordinances, guidelines, consent decrees and regulations of any federal, state or other governmental authority. G. Force Majeure . No party shall be liable for failure to perform or delay in performing obligations set forth in this Agreement, and no party shall be deemed in breach or default of its obligations, if, to the extent and for so long as, such failure, delay, breach, or default is due to natural disasters or any similar causes reasonably beyond the control of such party. Any party desiring to invoke the protection of Force Majeure shall promptly notify the other party of such desire and shall use reasonable efforts to resume performance of its obligations. H. Governing Law . This Agreement is deemed to have been entered into in the State of California, and its interpretation, construction, and the remedies for its enforcement or breach are to be applied pursuant to and in accordance with the laws of the State of California. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first written above by their duly authorized officers. Tandon Enterprises, Inc. By: Name: Title: SDJ Technologies, Inc. By: Name: Title:

 

 
 

 

 

  Exhibit A Licensed Patents U.S. Patent 8,122,319 U.S. Patent No. 6,119,049 U.S. Reissue Patent No. RE 39,016 U.S. Patent No. 7,238,550 Technical Information That “unpatented technology” referenced in Section 4 of that certain Technology Transfer and Hold Harmless Agreement by and between Tandon Enterprises, Inc. and Chuck Peddle.

 

 

 

Exhibit 10.13

 

 

 

NON-COMPETITION AND NON-SOLICITATION AGREEMENT This Non-Competition And Non-Solicitation Agreement (this “Agreement”) is dated as of May 1, 2012 by and between Tandon Enterprises, Inc., a Delaware corporation (“Tandon”), and SDJ Technologies, Inc., a Delaware corporation (“SDJ”). RECITALS WHEREAS, to date, Syrma Technologies Pvt Ltd. (“Syrma”) has overseen and fulfilled, on behalf of, SDJ, an assembled memory module business (the “AMM Business”) pursuant to which Syrma (i) assembled the modules, (ii) shipped directly to SDJ’s customers and (iii) effected the invoicing with respect to such shipment and sales; WHEREAS, further to a services agreement of even date herewith, Syrma and SDJ have agree that the relationship regarding the AMM Business will be altered as follows (i) Syrma will act as a contract manufacturer and will ship such modules to SDJ’s customers of the aforementioned assembled memory modules further to a customary EMS contract and (ii) SDJ will invoice it’s customers directly; [WHEREAS, to support the AMM Business, Tandon and Syrma executed a License Agreement of even date herewith (the “Syrma License”) whereby Tandon agreed to license certain intellectual property to Syrma necessary for the operation of the AMM Business;] WHEREAS, on July 7, 2010, SDJ and Monster Cable Products, Inc. (“Monster”) executed a License Agreement, as amended on each of August 24, 2011 and April 4, 2012 (the “Monster License”) whereby Monster granted SDJ the exclusive, world-wide right to develop, manufacture, sell and distribute memory data storage products under the Monster trademarks and logos (the “Monster Business”); WHEREAS, to support the Monster Business, Tandon and SDJ executed a License Agreement of even date herewith (the “SDJ License”) whereby Tandon agreed to license certain intellectual property to SDJ necessary for the operation of the Monster Business in exchange for shares of SDJ common stock; WHEREAS, the AMM Business and Monster Business are together known as the “Business”; WHEREAS, following the SEA Closing Date, SDJ desires to receive, and Tandon is willing to provide, or cause to provide for a limited period of time, certain services in connection with the Business, subject to the terms and conditions of a Services Agreement of each date herewith (the “Services Agreement”); WHEREAS, each of the SDJ License, Syrma License [and SDJ Sublicense] and Services Agreement shall be effective as of the closing of that certain Share Exchange Agreement of even date herewith (the “SEA”) by and between Tandon Digital, Inc., a Delaware corporation (’’Tandon Digital"), and SDJ, the closing of the SEA to be conditioned on the initial closing of up to a $5.5 million private placement of Tandon Digital's common stock (the “SEA Closing Date”);

 

 
 

 

 

WHEREAS, on and after the SEA Date, SDJ is to continue to engage in the Business, including the Restricted Activities (as defined herein); NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained herein, in the SEA and in the other documents referenced above, the parties hereto agree as follows: SECTION 1. Definitions . For purposes of this Agreement, the following terms shall have the following meanings: (a) “ Affiliates ” means, with respect to a party, any corporation or other business entity directly or indirectly controlling, controlled by or under common control with such party; as used herein, the term "control" means possession of the power to direct, or cause the direction of the management and policies of a corporation or other entity whether through the ownership of voting securities, by contract or otherwise. (b) “SDJ Bankruptcy” means that date SDJ becomes insolvent; or SDJ files a petition in bankruptcy or insolvency; or SDJ is adjudicated bankrupt or insolvent; or if SDJ files any petition or answer seeking reorganization, readjustment or arrangement of SDJ’s business under any law relating to bankruptcy or insolvency; or if a receiver, trustee or liquidator is appointed for any of the property of SDJ and within 60 days thereof SDJ fails to secure a dismissal thereof; or SDJ makes any assignment for the benefit of creditors; or of government expropriation of any material portion of the assets of SDJ. (c) “ Competing Business ” means any business that is engaged, directly or indirectly, in Restricted Activities. (d) “ Non-Compete Period ” means the period commencing on the SEA Closing Date and automatically terminating without further documentation on earlier of (i) the termination of the SDJ License or (ii) the SDJ Bankruptcy. (e) “ Non-Solicitation Period ” means that period commencing on the SEA Closing Date and automatically terminating without further documentation on the (i) earlier of the termination of the SDJ License or (ii) the SDJ Bankruptcy. (f) “ Restricted Activities ” means (i) the development, manufacture, sale and distribution of assembled memory modules and memory data storage products; (ii) the marketing, packaging, advertising and promotion of any of the products and services listed in this definition; in each case, carried on within the Territory during the Non-Compete Period. (g) “ Territory ” means the United States of America, Puerto Rico and Canada [others?] SECTION 2. Effectiveness . This Agreement shall be effective as of the SEA Closing Date and (a) shall be null and void and of no further force and effect if the SEA Agreement is terminated in accordance with its terms prior to SEA Closing Date and (b) shall terminate at the end of the Non-Compete Period.

 

 
 

 

 

 SECTION 3. Agreement Not to Compete . (a) Except as provided in Sections 3(b) and (c), Tandon shall not and shall cause each of its Affiliates not to, (i) directly or indirectly, participate in, engage in or carry on any Restricted Activities or own, operate, control, share any revenues of or have any profit or other debt o r equity interest in any Competing Business or (ii) actively assist any person or entity (other then SDJ or its subsidiaries) in any way (including by means of proving financing to such Person), directory or indirectly, to participate in, engage in or carry on any Restricted Activities or own, operate, control, share any revenues of or have any profit or other debt or equity interest in any Competing Business. (b) Notwithstanding anything herein to the contrary, Section 3(a) shall not prohibit either Tandon or its Subsidiaries from the following activities. (i) in the ordinary course of business of Tandon or any of its Affiliates, the purchase of products or services from, or sale of products or services to, a person or entity that is engaged in Restricted Activities, provided that the primary purpose of any such purchases or sales is not to assist such person or entity in engaging in or establishing a Competing Business; or (ii) the beneficial ownership of not more than an aggregate of 5.0% of the outstanding voting power of any person or entity engaged in any Competing Business whose securities are listed on any national securities exchange or automated quotation system, provided that Tandon nor Syrma, or any of its Affiliates, directly or indirectly, controls such Competing Business; (c) the event Tandon or any of its Affiliates acquires an ownership or other interest in, any Competing Business in excess of the percentage threshold set forth in Section 3(b)(ii), Section 3(a) shall nevertheless be deemed not breached in the event that Tandon, or the relevant Affiliate, uses all reasonable efforts to dispose of such interest or indebtedness in excess of such thresholds in a bona fide sale at market value (as determined in good faith by the Board of Directors of Tandon) as soon as possible, Tandon, or the relevant Affiliates completes the sale of such interest or indebtedness in excess of such thresholds within 12 months of the date of acquisition of such interest or indebtedness. For the avoidance of doubt, Tandon, or the relevant Affiliates, will be in breach of this Agreement if it continues to have any ownership or other interest in, or indebtedness of, such Competing Business in excess of such thresholds beyond 12 months following the date of the acquisition of such interest or indebtedness. (d) During the Non-Compete Period, Tandon shall not, and shall cause each of its Affiliates not to, enter into any agreement to license or otherwise exploit any mark using the word "Monster" or any derivation thereof for use in any Restricted Activities or Competing Business. SECTION 4. Agreement not to Solicit .

 

 
 

 

 

 (a) During the Non-Solicitation Period, neither Tandon nor any of its Affiliates will (a) solicit, recruit or hire any employee of SDJ or any of its subsidiaries or (b) solicit or encourage any employee of SDJ or any of its subsidiaries to leave the employment of SDJ or such subsidiary, provided that this Section will not prohibit (i) general solicitations of or advertisements for employment by Tandon or any of its Affiliates that are not specifically directed toward such employees and (ii) the solicitation, recruitment or hiring by Tandon or any of its Affiliates of any such employee whose employment with SDJ or any of its subsidiaries was involuntarily terminated prior to such solicitation, recruitment or hiring. (b) During the Non-Solicitation Period, neither SDJ nor any of its subsidiaries will (a) solicit, recruit or hire any employee of Tandon or any of its Affiliates or (b) solicit or encourage any employee of Tandon or any of its Subsidiaries to leave the employment of Tandon or such Affiliates, provided that this Section will not prohibit (i) general solicitations of or advertisements for employment by SDJ or any of its subsidiaries that are not specifically directed toward such employees and (ii) the solicitation, recruitment or hiring by SDJ or any of its subsidiaries of any such employee whose employment with Tandon or any of its Affiliates was involuntarily terminated prior to such solicitation, recruitment or hiring. SECTION 5. Miscellaneous . (a) Expenses . All costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such costs and expenses. (b) Notices . All notices, requests, consents, claims, demands, waivers and other communications hereunder shall be in writing and shall be deemed to have been given (i) when delivered by hand (with written confirmation of receipt); (ii) when received by the addressee if sent by a nationally recognized overnight courier (receipt requested); (iii) on the date sent by facsimile or e-mail of a PDF document (with confirmation of transmission) if sent during normal business hours of the recipient, and on the next business day if sent after normal business hours of the recipient; or (iv) on the third day after the date mailed, by certified or registered mail, return receipt requested, postage prepaid. Such communications must be sent to the respective parties at the following addresses (or at such other address for a party as shall be specified in a notice given in accordance with this Section 5(b)): If to Tandon: 2125 B Madera Road, Simi Valley, CA 93065 Facsimile: 805-582-4431 E-mail: dltandon@tandon.com Attention: CEO If to SDJ: 2125 B Madera Road, Simi Valley, CA 93065 Facsimile: 805-582-4431 E-mail: jltandon@monsterdigital.com Attention: CEO

 

 
 

 

 

 (c) Headings . The headings in this Agreement are for reference only and shall not affect the interpretation of this Agreement. (d) Severability . If any term or provision of this Agreement is invalid, illegal or unenforceable in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other term or provision of this Agreement or invalidate or render unenforceable such term or provision in any other jurisdiction. (e) Entire Agreement . This Agreement and the documents to be delivered hereunder constitute the sole and entire agreement of the parties to this Agreement with respect to the subject matter contained herein, and supersede all prior and contemporaneous understandings and agreements, both written and oral, with respect to such subject matter. (f) Assignability . This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns; provided, however, that no party hereto may assign its rights or delegate its obligations under this Agreement without the express prior written consent of the other party hereto. Notwithstanding anything herein to the contrary, (i) in the event any person or entity acquires, by any means, including by merger or consolidation, assets of SDJ or its subsidiaries, including equity interests in any such Subsidiaries, that constitute all or substantially all the consolidated assets of SDJ and its subsidiaries, SDJ may assign its rights and obligations hereunder to such acquirer and (ii) Tandon agrees not to effect or enter into any agreement to effect, any sale, transfer or other disposition by any means of assets constituting all or substantially all the consolidated assets of Tandon to any person or entity if the successor, surviving or acquiring person or entity will not automatically succeed to the obligations of Tandon under this Agreement by operation of law, unless such person or entity agrees in writing, for the benefit of SDJ, to assume the obligations of Tandon hereunder with respect to the assets so acquired by such person entity. (g) No Third-party Beneficiaries . Except as provided herein, this Agreement is for the sole benefit of the parties hereto and their respective successors and permitted assigns and nothing herein, express or implied, is intended to or shall confer upon any other person or entity any legal or equitable right, benefit or remedy of any nature whatsoever under or by reason of this Agreement. (h) Amendment and Modification . This Agreement may only be amended, modified or supplemented by an agreement in writing signed by each party hereto. (i) Waiver . No waiver by any party of any of the provisions hereof shall be effective unless explicitly set forth in writing and signed by the party so waiving. No waiver by any party shall operate or be construed as a waiver in respect of any failure, breach or default not expressly identified by such written waiver, whether of a similar or different character, and whether occurring before or after that waiver. No failure to exercise, or delay in exercising, any right, remedy, power or privilege arising from this Agreement shall operate or be construed as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege

 

 
 

 

 

hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. (j) Governing Law . This Agreement shall be governed by and construed in accordance with the internal laws of the State of California without giving effect to any choice or conflict of law provision or rule (whether of the State of California or any other jurisdiction) that would cause the application of laws of any jurisdiction other than those of the State of California . (k) Submission to Jurisdiction . Any legal suit, action or proceeding arising out of or based upon this Agreement or the transactions contemplated hereby may be instituted in the federal courts of the United States of America or the courts of the State of California in each case located in the city of Los Angeles and county of Los Angeles, and each party irrevocably submits to the exclusive jurisdiction of such courts in any such suit, action or proceeding. (l) Waiver of Jury Trial . Each party acknowledges and agrees that any controversy which may arise under this Agreement is likely to involve complicated and difficult issues and, therefore, each such party irrevocably and unconditionally waives any right it may have to a trial by jury in respect of any legal action arising out of or relating to this Agreement or the transactions contemplated hereby. (m) Specific Performance . The parties agree that irreparable damage would occur if any provision of this Agreement were not performed in accordance with the terms hereof and that the parties shall be entitled to specific performance of the terms hereof, in addition to any other remedy to which they are entitled at law or in equity. (n) Counterparts . This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall be deemed to be one and the same agreement. A signed copy of this Agreement delivered by facsimile, e-mail or other means of electronic transmission shall be deemed to have the same legal effect as delivery of an original signed copy of this Agreement.

 

 
 

 

 

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. Tandon Enterprises, Inc. By: Name: Title: SDJ Technologies, Inc. By: Name: Title:

 

 

 

Exhibit 10.14 

 

 

SERVICES AGREEMENT This Services Agreement dated as of May 1, 2012 (this "Agreement") by and between Tandon Enterprises, Inc., a Delaware corporation (“Tandon”) and SDJ Technologies, Inc., a Delaware corporation (“SDJ”). RECITALS WHEREAS, through January 23, 2012, Syrma Technologies Pvt Ltd. (“Syrma”), on behalf of SDJ, had overseen and fulfilled, on behalf of SDJ, an assembled memory module business (the “AMM Business”) pursuant to which Syrma (i) assembled the modules, (ii) shipped directly to SDJ’s customers and (iii) effected the invoicing with respect to such shipment and sales; WHEREAS, further to a Business Process Outsourcing Services dated January 23, 2012, Syrma and SDJ agreed that the relationship regarding the AMM Business would be altered as follows (i) Syrma would act as a contract manufacturer and would ship such modules to SDJ’s customers of the aforementioned assembled memory modules further to a customary EMS contract and (ii) SDJ would invoice its customers directly; WHEREAS, on July 7, 2010, SDJ and Monster Cable Products, Inc. (“Monster”) executed a License Agreement, as amended on each of August 24, 2011 and April 4, 2012 (the “Monster License”) whereby Monster granted SDJ the exclusive, worldwide right to develop, manufacture, sell and distribute certain memory data storage products under the Monster Digital trademark and M (stylized) mark (the “Monster Business”); WHEREAS, to support the Monster Business, Tandon and SDJ executed a License Agreement of even date herewith (the “SDJ License”) whereby Tandon agreed to license certain intellectual property to SDJ necessary for the operation of the Monster Business in exchange for shares of SDJ common stock; WHEREAS, the AMM Business and Monster Business are together known as the “Business”; WHEREAS, further to that certain Share Exchange Agreement of even date herewith (the “SEA”) by and between Tandon Digital, Inc., a Delaware corporation (’’Tandon Digital"), and SDJ, SDJ will become a wholly-owned subsidiary of Tandon Digital, the closing of the SEA to be conditioned on the initial closing of up to a $5.5 million private placement of Tandon Digital’s common stock (the “SEA Closing Date”); WHEREAS, from January 1, 2012, SDJ has received, and desires to continue to receive, and Tandon has provided and is willing to continue to provide, or cause to provided for a limited period of time, certain services in connection with the Business, subject to the terms and conditions of this Agreement. NOW, THEREFORE, in consideration of the foregoing and the mutual agreements and covenants set forth herein, the parties hereby agree as follows:

 

 
 

 

 

1. Definitions. For the purposes of this Agreement, the following terms shall have the following meanings: "SDJ Affiliate" means any conjunction or other business entity controlled by SDJ, the term “control” meaning possession of the power to directly clause the direction of the management and politics of a corporation or other entity whether through the ownership of voting securities, contract or otherwise. "Business Day" means any calendar day that is not a Saturday, Sunday or legal holiday. 2. Provision of Services. (a) Subject to the terms and conditions of this Agreement, Tandon shall provide, or cause to be provided, to SDJ and the SDJ Affiliates, solely for the benefit of the Business in the ordinary course of business, the services (the "Services") described in Schedule A, the terms of which are incorporated herein by reference, for periods commencing effective as of January 1, 2012 and ending on the relevant date specified in Schedule A (the "Service Period"), unless such period is earlier terminated in accordance with the terms hereof. The Services shall be performed on Business Days during hours that constitute regular business hours for each of Tandon and SDJ, unless otherwise agreed. Neither SDJ nor the SDJ Affiliates shall resell, subcontract, license, sublicense or otherwise transfer any of the Services to any person or entity whatsoever or permit use of any of the Services by any person or entity other than by SDJ and the SDJ Affiliates directly in connection with the conduct of the Business in the ordinary course of business. (b) Notwithstanding anything to the contrary in this Section 2 (but subject to the second succeeding sentence), Tandon shall have the exclusive right to select, employ, pay, supervise, administer, direct and discharge any of its employees who will perform Services. Tandon shall be responsible for paying such employees' compensation and providing to such employees any benefits. With respect to each Service identified in Schedule A, Tandon shall use commercially reasonable efforts to have qualified individuals participate in the provision of such Service; provided, however, that (i) Tandon shall not be obligated to have any individual participate in the provision of any Service if either of them determines that such participation would adversely affect Tandon or any of its Affiliates; and (ii) Neither Tandon nor any of its Affiliates shall not be required to continue to employ any particular individual during the applicable Service Period. (c) SDJ acknowledges that the purpose of this Agreement is to enable it to receive the Services on an interim basis. Accordingly, SDJ shall use commercially reasonable efforts to make or obtain, or cause to be made or obtained, any filings, registrations, approvals, permits or licenses; implement, or cause to be implemented, any systems; purchase, or cause to be purchased, any equipment; and take, or cause to be taken, any and all other actions, in each case necessary or advisable to enable SDJ to provide the Services for SDJ as soon as reasonably practical, and in any event prior to the expiration of the relevant Service Periods. For the avoidance of doubt, SDJ acknowledges that Tandon shall not be required to provide any Service for a period longer than the applicable Service Period.

 

 
 

 

 

 3. Standard of Performance. (a) Tandon shall use commercially reasonable efforts to provide, or cause to be provided, to SDJ and the SDJ Affiliates, each Service in a manner generally consistent with the manner and level of care with which such Service was provided to the Business immediately prior to the SEA Closing Date (or, with respect to any Service not provided by Tandon to SDJ or any SDJ Affiliate prior to the SEA Closing Date, generally consistent with the manner and level of care with which such Service is performed by Tandon, for its own behalf), unless otherwise specified in this Agreement or Schedule A. Notwithstanding the foregoing, Tandon shall not have any obligation hereunder to provide to SDJ or any SDJ Affiliate (i) any improvements, upgrades, updates, substitutions, modifications or enhancements to any of the Services unless otherwise specified in Schedule A or (ii) any Service to the extent that the need for such Service arises, directly or indirectly, from the acquisition by SDJ or any SDJ Affiliate, outside the ordinary course of business, of any assets of, or any equity interest in, any Person. SDJ acknowledges and agrees that Tandon may be providing services similar to the Services provided hereunder and/or services that involve the same resources as those used to provide the Services to its business units and/or other third parties, and, accordingly, Tandon reserves the right to modify any of the Services or the manner in which any of the Services are provided in the ordinary course of business; provided, however, that no such modification shall materially diminish the Services or have a materially adverse effect on the Business. (b) Tandon will use commercially reasonable efforts not to establish priorities, as between, on the one hand, and SDJ and the SDJ Affiliates, on the other hand, as to the provision of any Service, and will use commercially reasonable efforts to provide the Services within a time frame so as not to materially disrupt the Business. Notwithstanding the foregoing, SDJ acknowledges and agrees that, due to the transitional nature of the Services, Tandon shall have the right to establish reasonable priorities as between Tandon, on the one hand, and SDJ and the SDJ Affiliates, on the other hand, as to the provision of any Service if Tandon determines that such priorities are necessary to avoid any adverse effect to Tandon. If any such priorities are established, Tandon shall advise SDJ as soon as possible of any Services that will be delayed as a result of such prioritization, and will use commercially reasonable efforts to minimize the duration and impact of such delays. 4. Fees for Services. (a) As compensation for the Services, SDJ and Tandon agree that (i) there shall be no charge to SDJ for the period from January 1, 2012 through that date which is thirty (30) days following the Closing Date (the “Effective Billing Date”) and (ii) from the Effective Billing Date through the end of the Service Period, SDJ shall pay Tandon, in accordance with this Agreement, Tandon’s actual costs of rendering the Services. (b) In addition to the compensation set out in subparagraph (a) above, Tandon shall be entitled to reimbursement for reasonable and customary out-of-pocket expenses incurred in connection with this Agreement. (c) Tandon shall submit statements of account to SDJ on a quarterly basis with respect to all amounts payable by SDJ to Tandon hereunder (the “Invoiced Amount”), setting out the Services provided by reference to Schedule A and the amount billed to SDJ as a result of providing such Services, together with, in arrears, any Commingled Invoice Statement (as

 

 
 

 

 

 defined below), and any other invoices for Services provided by third parties, in each case setting out the Services provided by the applicable third parties by reference to Schedule A). SDJ shall pay the Invoiced Amount to Tandon by wire transfer in immediately available funds to an account specified by Tandon, or in such other manner as specified by Tandon in writing, within 30 days of the date of delivery to SDJ of the applicable statement of account. (d) Tandon may engage third-party contractors, at a reasonable cost, to perform or provide any of the Services or any secretarial, administrative, telephone, e-mail or other services necessary or ancillary to the Services (collectively, the “Ancillary Services”) (all of which may be contracted for separately by Tandon on behalf of SDJ) after giving notice to SDJ, reasonably in advance of the commencement of such Services and Ancillary Services to be so provided by such contractors, of the identity of such contractors, each Service and Ancillary Service to be provided by such contractors and a good faith estimate of the cost (or formula for determining the cost) of the Services and Ancillary Services to be so provided by such contractors. SDJ may, in its sole discretion, decline to accept any such Services or Ancillary Services to be provided by any such contractors by giving prompt written notice to Tandon, provided that, if SDJ so declines any Service or Ancillary Service from any such contractors, then thereafter, notwithstanding anything in this Agreement to the contrary, Tandon shall be excused from any obligation to provide such Service or Ancillary Service. (e) Tandon may cause any third party to which amounts are payable by or for the account of SDJ in connection with Services or Ancillary Services to issue a separate invoice to SDJ for such amounts. SDJ shall pay or cause to be paid any such separate third party invoice in accordance with the payment terms thereof. Any third party invoices that aggregate Services or Ancillary Services for the benefit of SDJ and Tandon, on the one hand, with services not for the benefit of SDJ and Tandon, on the other hand (each, a “Commingled Invoice”), shall be separated by Tandon. Tandon shall prepare a statement indicating that portion of the invoiced amount of such Commingled Invoice that is attributable to Services or the Ancillary Services rendered for the benefit of SDJ and the SDJ (the “Commingled Invoice Statement”). Tandon shall deliver such Commingled Invoice Statement and a copy of the Commingled Invoice to SDJ. SDJ shall, within 30 days after the date of delivery to SDJ of such Commingled Invoice Statement, pay or cause to be paid the amount set forth on such Commingled Invoice Statement to the third party, and shall deliver evidence of such payment to Tandon. Tandon shall not be required to use its own funds for payments to any third party providing any of the Services or Ancillary Services or to satisfy any payment obligation of SDJ or any of Affiliates to any third party provider; provided, however, that in the event Tandon does use its own funds for any such payments to any third party, SDJ shall reimburse Tandon for such payments as invoiced by Tandon within 30 days following the date of delivery of such invoice from Tandon. (f) Tandon may, in its discretion and without any liability, suspend any performance under this Agreement upon failure of SDJ to make timely any payments required under this Agreement beyond the applicable cure date specified in Section 5(d) of this Agreement. 5. Terms; Termination (a) The performance of the Services under this Agreement shall commence on the SEA Closing Date and shall continue in full force and effect until the end of the last Service Period or the earlier date upon which this Agreement has been otherwise terminated in accordance with the terms hereof. 

 

 
 

 

 

 (b) During the term of this Agreement, SDJ may instruct Tandon to discontinue providing certain Services or otherwise reduce its level of such Services upon giving Tandon 30 days prior written notice. Upon the early termination of any Service pursuant to this Section 5(b) or upon the expiration of this Agreement, following the effective time of the termination, Tandon shall not be obligated to provide such Service. (c) SDJ may terminate this Agreement in its entirety upon 30 days prior written notice to Tandon. (d) Each of Tandon and SDJ shall have, in addition to any other rights and remedies it may have, the right to terminate this Agreement on 30 days' prior written notice to the other, if the other party shall breach or default in the performance of any material provision of this Agreement; provided, however, that if it is possible for such breach or default to be cured and the party receiving such notice of termination shall cure such breach or default within a 30 day period after receipt of such notice, then this Agreement shall continue in full force and effect. (e) Tandon shall have the right, notwithstanding any other provisions of this Agreement, and in addition to any other rights and remedies it may have, to terminate this Agreement forthwith and at any time if SDJ becomes insolvent; or if SDJ files a petition in bankruptcy or insolvency; or if SDJ is adjudicated bankrupt or insolvent; or if SDJ files any petition or answer seeking reorganization, readjustment or arrangement of SDJ’s business under any law relating to bankruptcy or insolvency; or if a receiver, trustee or liquidator is appointed for any of the property of SDJ and within 60 days thereof SDJ fails to secure a dismissal thereof; or if SDJ makes any assignment for the benefit of creditors; or in the event of government expropriation of any material portion of the assets of SDJ. (f) If SDJ shall fail to pay any financial obligation to Tandon incurred by it under this Agreement within ten (10) Business Days after notice from Tandon, then Tandon shall have the right, notwithstanding Subsection (d) of this Section 5 or any other provisions of this Agreement, and in addition to any other rights and remedies it may have, to terminate this Agreement forthwith. (g) In any event, no termination, cancelation or expiration of this Agreement shall prejudice the right of either party hereto to recover any payment due at the time of termination, cancelation or expiration, nor shall it prejudice any cause of action or claim of either party hereto accrued or to accrue by reason of any breach or default by the other party hereto. (h) Notwithstanding any provision herein to the contrary, Sections 4 and 9 of this Agreement shall survive the termination of this Agreement. 6. Intellectual Property. SDJ grants to Tandon a limited, non-exclusive, fully paid-up, nontransferable, revocable license, without the right to sublicense, for the term of this Agreement to use all intellectual property owned by or, to the extent permitted by the applicable license, licensed to SDJ solely to the extent necessary for Tandon to perform its obligations hereunder. 7. Cooperation: Access. SDJ shall, and shall cause the SDJ Affiliates to, permit Tandon and its employees and representatives access, on Business Days during hours that constitute regular business hours for SDJ and upon reasonable prior request, to the premises of SDJ and the SDJ Affiliates and such data, books, records and personnel designated by SDJ and the SDJ Affiliates

 

 
 

 

 

 as involved in receiving or overseeing the Services as Tandon may reasonably request for the purposes of providing the Services. Any documentation so provided to Tandon pursuant to this Section will be subject to the confidentiality obligations set forth in Section 9 of this Agreement. 8. Indemnity (a) Neither of SDJ nor any of the SDJ Affiliates nor any of its or their respective officers, directors, employees, agents, attorneys-in-fact, contractors or other representatives shall be liable for any action taken or omitted to be taken by SDJ or such person under or in connection with this Agreement, except that SDJ and the SDJ Affiliates shall be liable for direct damages or losses incurred by Tandon arising out of the gross negligence or willful misconduct of SDJ or any of the SDJ Affiliates or any of its or their respective officers, directors, employees, agents, attorneys-in-fact, contractors or other representatives in the performance or nonperformance of its obligations under this Agreement. (b) Neither Tandon nor any of its officers, directors, employees, agents, attorneys-in-fact, contractors or other representatives shall be liable for any action taken or omitted to be taken by Tandon or such person under or in connection with this Agreement, except that Tandon shall be liable for direct damages or losses incurred by SDJ or the SDJ Affiliates arising out of the gross negligence or willful misconduct of Tandon or any of its respective officers, directors, employees, agents, attorneys-in-fact, contractors or other representatives in the performance or nonperformance of the Services by Tandon. 9. Miscellaneous (a) Expenses. All costs and expenses incurred in connection with this Agreement the transactions contemplated hereby shall be paid by the party incurring such costs and expenses. (b) Notices. All notices, requests, consents, claims, demands, waivers and other communications hereunder shall be in writing and shall be deemed to have been given (i) when delivered by hand (with written confirmation of receipt); (ii) when received by the addressee sent by a nationally recognized overnight courier (receipt requested); (iii) on the date sent by facsimile or e-mail of a PDF document (with confirmation of transmission) if sent during normal business hours of the recipient, and on the next business day if sent after normal business hours of the recipient; or (iv) on the third day after the date mailed, by certified or registered mail, return receipt requested, postage prepaid. Such communications must be sent to the respective parties at the following addresses (or at such other address for a party as shall be specified in notice given in accordance with this Section 9(b)): If to Tandon: Tandon Enterprises, Inc. 2125 – B Madera Road Simi Valley, CA 93065 Facsimile: (805) 582-4431 E-mail: dltandon@tandon.com Attention: Devinder L. Tandon, CEO

 

 
 

 

 

 If to SDJ: SDJ Technologies, Inc. 2125 – B Madera Road Simi Valley, CA 93065 Facsimile: (805) 582-4431 E-mail: jltandon@monsterdigital.com Attention: Jawahar L. Tandon, CEO (c) Headings. The headings in this Agreement are for reference only and shall not affect the interpretation of this Agreement. (d) Severability. If any term or provision of this Agreement is invalid, illegal or unenforceable in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other term or provision of this Agreement or invalidate or render unenforceable such term or provision in any other jurisdiction. (e) Entire Agreement. This Agreement and the documents to be delivered hereunder constitute the sole and entire agreement of the parties to this Agreement with respect to the subject matter contained herein, and supersede all prior and contemporaneous understandings and agreements, both written and oral, with respect to such subject matter. (f) Taxes. Each party hereto shall be responsible for the cost of any sales, use, privilege and other transfer or similar taxes imposed upon that party as a result of the transactions contemplated hereby. (g) Public Announcements. No party to this Agreement shall make, or cause to be made, any press release or public announcement or otherwise communicate with any news media in respect of this Agreement or the transactions contemplated by this Agreement without the prior written consent of the other party hereto unless otherwise required by law, in which case the party making the press release, public announcement or communication shall give the other party reasonable opportunity to review and comment on such and the parties shall cooperate as to the timing and contents of any such press release, public announcement or communication. (h) Assignment. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns. No party hereto may assign either this Agreement or any of its rights, interests or obligations hereunder without the prior written approval of the other party hereto; provided, however, that (i) SDJ may assign this Agreement without the consent of Tandon to any third party that acquires, by any means, including by merger or consolidation, assets of SDJ or the SDJ Affiliates, including equity interests in any SDJ Affiliates, that constitute all or substantially all the consolidated assets of SDJ and the SDJ Affiliates and (ii) Tandon may assign this Agreement without the consent of SDJ to any third party that acquires, by any means, including by merger or consolidation, all or substantially all the consolidated assets of Tandon. (i) Force Majeure. Neither party hereto shall be in default of this Agreement by reason of its delay in the performance of, or failure to perform, any of its obligations hereunder if such delay or failure is caused by strikes, acts of God, acts of the public enemy, acts of terrorism,

 

 
 

 

 

 riots or other events that arise from circumstances beyond the reasonable control of that party. During the pendency of such intervening event, each of the parties hereto shall take all reasonable steps to fulfill its obligations hereunder by other means and, in any event, shall upon termination of such intervening event, promptly resume its obligations under this Agreement. (j) No Third-party Beneficiaries. Except as provided herein, this Agreement is for the sole benefit of the parties hereto and their respective successors and permitted assigns and nothing herein, express or implied, is intended to or shall confer upon any other person or entity any legal or equitable right, benefit or remedy of any nature whatsoever under or by reason of this Agreement. (k) Amendment and Modification. This Agreement may only be amended, modified or supplemented by an agreement in writing signed by each party hereto. (1) Waiver. No waiver by any party of any of the provisions hereof shall be effective unless explicitly set forth in writing and signed by the party so waiving. No waiver by any party shall operate or be construed as a waiver in respect of any failure, breach or default not expressly identified by such written waiver, whether of a similar or different character, and whether occurring before or after that waiver. No failure to exercise, or delay in exercising, any right, remedy, power or privilege arising from this Agreement shall operate or be construed as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. (m) Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of California without giving effect to any choice or conflict of law provision or rule (whether of the State of California or any other jurisdiction) that would cause the application of laws of any jurisdiction other than those of the State of California (n) Submission to Jurisdiction. Any legal suit, action or proceeding arising out of or based upon this Agreement or the transactions contemplated hereby may be instituted in the federal courts of the United States of America or the courts of the State of California in each case located in the city of Los Angeles and county of Los Angeles, and each party irrevocably submits to the exclusive jurisdiction of such courts in any such suit, action or proceeding. (o) Waiver of Jury Trial. Each party acknowledges and agrees that any controversy which may arise under this Agreement is likely to involve complicated and difficult issues and, therefore, each such party irrevocably and unconditionally waives any right it may have to a trial by jury in respect of any legal action arising out of or relating to this Agreement or the transactions contemplated hereby. (p) Specific Performance. The parties agree that irreparable damage would occur if any provision of this Agreement were not performed in accordance with the terms hereof and that the parties shall be entitled to specific performance of the terms hereof, in addition to any other remedy to which they are entitled at law or in equity. (q) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall be deemed to be one and the same

 

 
 

 

 

 agreement. A signed copy of this Agreement delivered by facsimile, e-mail or other means of electronic transmission shall be deemed to have the same legal effect as delivery of an original signed copy of this Agreement.

 

 
 

 

 

 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first written above by their respective officers thereunto duly authorized. Tandon Enterprises, Inc. By: Name: Title: SDJ Technologies, lnc:. By: Name: Title:

 

 
 

 

 

 SCHEDULE A Service Service Period (months) General Accounting General accounting assistance in the areas of federal and state tax planning and compliance, management of open audits, tax accounting, audit dispute resolution, calculation of estimated tax payments, tax compliance software selection, and preparation, review and filing of the federal and state income tax returns. Maintain accounting records and the general ledger in auditable condition. Process accounts payable transactions and make vendor payments. 12 Billing General billing, payroll and invoicing assistance. General assistance in the areas of cash management, management of bank lines, and management of cash investments. 12 Human Resources General assistance in the areas of health and welfare benefit consultant/broker selection, review of bids, selection and monitoring of vendors, communications with consultants and vendors, claims management and reporting and interpretation of reports. General assistance in the areas of pension and 401(k), plan design, ERISA guidance, vendor management, communication plans, and associated auditing and compliance reporting. 12 Purchasing, receiving, and shipping General assistance in issuing purchase orders, receiving materials, stocking materials, and maintaining inventory records as required. 12 General Insurance Assistance in the selection of coverage for D&O, Cargo, Liability, Inventory, Property, Workers Compensation and Fiduciary insurance. 12 Fixed Asset acquisitions General assistance in securing bids for the purchase of computer equipment, computer software, office furniture and equipment, and related matters. 12 Administration General administration assistance including rental space, secretarial support, utilities, business licenses and DBA filings. 12

 

 

 

Exhibit 10.15

 

EXECUTIVE EMPLOYMENT AGREEMENT

 

This EXECUTIVE EMPLOYMENT AGREEMENT (“ Agreement ”) is made and entered into as of this 1st day of June 2012 (the “ Effective Date ”), by and between Tandon Digital, Inc., a Delaware corporation (the “ Company ”), and, Jawahar L. Tandon, an individual (the “ Executive ”). Company or Executive are sometimes referred to herein as “party” or collectively “parties”.

 

RECITALS

 

WHEREAS, by unanimous consent of its Board of Directors, Company named Executive to serve as Chief Executive Officer to manage the Company and its day-to-day operations;

 

WHEREAS, Company desires to enter into an written employment agreement for Executive to continue to serve as Chief Executive Officer of the Company;

 

WHEREAS, Executive is willing to be employed by the Company and provide services to the Company under the terms and conditions stated herein, as of the Effective Date; and

 

WHEREAS, Company and Executive now mutually desire to enter into this Agreement as approved by the Board of Directors.

 

NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter contained, and for other good and valuable consideration, it is hereby agreed by and between the parties hereto as follows:

 

1.            Duties and Responsibilities

 

1.1            Employment . The Company hereby employs Executive as the Chief Executive Officer of the Company and Executive hereby accepts such employment as of the Effective Date pursuant to the terms, covenants and conditions set forth herein. Executive shall also serve as the Chief Executive Officer of the principal operating subsidiaries of the Company. Executive shall report directly to the Board of Directors of the Company (the “ Board ”).

 

1.2            Duties . Executive shall have the overall responsibility as Chief Executive Officer for the management and operation of the Company and its subsidiaries, and shall perform all duties and responsibilities and have such powers which are commonly incident to the position of Chief Executive Officer, as well as any additional responsibilities and authority as may be from time to time assigned or delegated to him by the Board of Directors. Executive shall perform the duties assigned to him to the best of his ability and in a manner satisfactory to the Company.

 

1.3            Time and Efforts . Executive shall devote his full business time, efforts, attention, and energies to the business of the Company and to the performance of his duties hereunder during the Term.

 

 

 

 

1.4            Confidential Information and Trade Secrets . Executive acknowledges that, as a condition of his employment hereunder, Executive agrees to execute and abide by the Company’s confidentiality, non-disclosure, invention assignment, and similar agreements that are presented to Executive to protect the Company’s trade secret, proprietary and business interests. Executive hereby acknowledges and agrees that such agreements shall survive termination of employment and this Agreement and shall remain in force following such termination regardless of the reason for the termination.

 

1.5            Compliance with Law . Executive agrees to comply with any and all governmental laws, regulations, and policies in connection with his actions as an employee of the Company. Executive shall conduct himself in accordance with the highest business standards as are reasonably and customarily expected of such position.

 

2.            Term

 

The term of employment under this Agreement shall be for a period of three (3) years commencing on the Effective Date (the “ Initial Term ”), and this Agreement will then be renewed automatically for additional one (1) year periods commencing on the last date of the Initial Term, and on each one (1) year anniversary date thereafter (each subsequent one year period together with the Initial Term, hereinafter collectively the “ Term ”), unless either the Company or Executive provides the other party with written notice at least sixty (60) days prior to the last date of the Initial Term or any subsequent Term stating that the Agreement will not be renewed. In connection with any notice of non-renewal pursuant to this Section 2, the Executive’s termination date of employment will be the last date of the applicable Term and Executive will not be eligible or entitled to receive any severance pay or post-termination benefits that may otherwise be provided under this Agreement. Notwithstanding the above, either party may terminate this Agreement at any time during the Term pursuant to the applicable provisions of Section 5 of this Agreement.

 

3.            Compensation and Benefits

 

As the total consideration for Executive’s services rendered hereunder, Executive shall be entitled to the following:

 

3.1            Base Salary . Executive shall be paid an initial annual base salary of Two Hundred Fifty Thousand Dollars ($250,000.00) per year (“ Base Salary ”) beginning on the Effective Date of the Agreement and payable in regular installments in accordance with the customary payroll practices of the Company. Executive’s Base Salary will be reviewed at least annually by the Company and may be increased at the discretion of the Company. The Base Salary may not be decreased, except upon a mutual written agreement between the parties.

 

3.2            Annual Performance Bonus . In addition to Base Salary, Executive shall be eligible to receive an annual bonus based upon Executive’s performance for the preceding year as determined by the Board of Directors or the Compensation Committee of the Company, in their sole discretion, the determination of which shall be based upon such standards, guidelines and factual circumstances as the Board of Directors or its Compensation Committee deems relevant, including, without limitation, the operating results for the Company during such calendar year, the importance of the efforts of Executive in achieving such operating results and the achievement by the Company and/or Executive of performance goals previously established by the Board of Directors for such contract year. The performance bonus review for Executive shall occur at such times consistent with the Company’s compensation policy and procedures for executive officers. The annual performance bonus shall be up to thirty (30%) of the Base Salary.

 

2  

 

 

3.5            Reimbursement of Expenses . Executive shall be reimbursed for reasonable travel, hotel, entertainment, and other business related expenses. All reimbursement of expenses are subject to the Company’s policies in effect at the time on pre-approval of certain business expenses and reimbursement procedures. Executive shall produce satisfactory supporting receipts and other documentation in connection with such expenses before such reimbursement is made in accordance with applicable Company policy.

 

3.6            Company Automobile . The Company shall make available to the Executive a mutually agreeable company automobile (the lease amount of which is not to exceed $2,000.00 per month) for the use by the Executive in the performance of his duties and the Company shall pay directly or, upon presentation of itemized receipts, reimburse the Executive, for all expenses reasonably incurred by the Executive in the operation of such automobile, including but not limited to insurance, maintenance, repairs, fuel, registration, mileage overages and other operating costs.

 

3.7            Vacation . Executive shall be entitled to accrue six (6) weeks of paid vacation each year pursuant to the terms and provisions of the Company’s vacation leave policies as in effect from time to time.

 

3.8            Country Club Membership . The Company agrees to pay for the monthly dues for a personal membership at a mutually agreeable country club (not to exceed $1,500) and to reimburse Executive for any reasonable business-related costs associated therewith. Personal expenses will not be reimbursed.

 

3.9            Benefits . Executive shall be entitled to participate in and receive all benefits made available by the Company to its Executives, including without limitation, medical, dental, vision, life and disability insurance plans and coverage, and defined benefit, defined contribution or other 401K program, including all company matching provisions, as applicable. The Company shall pay 100% of the insurance premiums for the medical/dental/vision coverage for Executive and his dependents.

 

4.            Indemnification

 

Company agrees to hold harmless and indemnify the Executive to the fullest extent permitted by law, as such may be amended from time to time, with respect to any acts or nonaction the Executive may have committed during his employment in his capacity as the Chief Executive Officer and President of the Company. Additional terms of the indemnification shall be set in an indemnification agreement to be executed by the Company and the Executive.

 

5.            Termination

 

Executive’s employment shall terminate upon the happening of the following:

 

3  

 

 

5.1            Termination For Cause . The Company may terminate this Agreement for Cause if the Board of Directors determines that Cause exists. For purposes of this Agreement, “Cause” shall mean:

 

(a)          A proven act of dishonesty, fraud, embezzlement, or misappropriation of proprietary information in connection with the Executive’s responsibilities as an Executive;

 

(b)          Executive’s conviction of, or plea of nolo contendere to, a felony or a crime involving moral turpitude;

 

(c)          Executive’s willful misconduct in connection with his employment duties that is detrimental to the Company and which cannot be cured on reasonable notice to Executive; or

 

(d)          Executive’s habitual failure or refusal to perform his employment duties under this Agreement if such failure or refusal is not cured by Executive within twenty (20) days after receiving written notice thereof from the Board of Directors.

 

For purposes hereof, no act or failure to act by the Executive shall be considered “willful” unless done or omitted to be done by him not in good faith or without reasonable belief that his action or omission was in the best interest of the Employer or contrary to a formal resolution of the Board.

 

5.2            Termination Without Cause .

 

(a)          The Company may terminate this Agreement Without Cause. For purposes of this Agreement, “Without Cause” shall mean termination by the Company of Executive’s employment for any reason, other than as specified in Sections 5.1 or 5.3 hereof.

 

(b)          The Company may terminate the employment of Executive and all of the Company’s obligations hereunder at any time during the Term of Employment “Without Cause” by giving Executive written notice of such termination, to be effective thirty (30) days following the giving of such written notice, in which case Executive shall receive the compensation, severance and benefit continuation required by Section 6.3 below.

 

5.3            Termination Due to Disability or Death . Executive’s employment hereunder may be terminated by the Company as follows:

 

(a)          To the extent permitted by law, upon thirty (30) days’ notice to Executive in the event that Executive has been unable to perform substantially all of his duties under this Agreement for an aggregate of 120 days (inclusive of weekends and holidays) within any 12-month period, as the result of Executive’s incapacity to perform the essential functions of his job due to a physical or mental disability and after reasonable accommodation made by the Company, and within thirty (30) days of receipt of such notice, Executive shall not have returned to the full-time, continuing performance of his duties hereunder, or

 

(b)          Immediately upon the death of Executive.

 

4  

 

 

5.4            Termination by Executive for Good Reason . Executive may terminate the Agreement for “Good Reason”. Executive’s termination shall be for “Good Reason” if Executive provides written notice to the Company of the Good Reason within ninety (90) days of the event constituting Good Reason, and provides the Company with a period of thirty (30) days to cure the Good Reason and the Company fails to cure the Good Reason within that period. For purposes of this Agreement, “Good Reason” shall mean any of the following events if the event is effected by the Company or third-parties without Executive’s consent: (i) a reduction of more than 10% in Executive’s Base Salary or other component of compensation and benefits, except for changes to the Company’s generally applicable benefit plans and policies; (ii) a change in the location of the business requiring Executive to move or drive to work more than 50 miles from the current location; (iii) any material diminution of Executive’s authority, responsibilities, reporting or job duties (except for any reduction for Cause as defined above); or (iv) any other material breach by the Company of this Agreement. Executive may terminate his employment at any time for Good Reason as provided in this Section 5.4, in which case Executive shall receive the compensation, severance and benefit continuation required by Section 6.3 below.

 

5.5            Voluntary Termination . Executive’s employment hereunder may be terminated by Executive for any reason (other than by Termination Due to Disability or Death or for Good Reason) upon Executive providing Company with thirty (30) days’ notice of Executive’s voluntary termination.

 

6.           Effect of Termination

 

6.1            Termination For Cause or Voluntary Termination . In the event that Executive’s employment is terminated pursuant to Sections 5.1 or 5.5 above:

 

(a)          The Company shall pay to Executive, or his representatives, on the date of termination of employment (the “ Termination Date ”) only that portion of the Base Salary provided in Section 3.1 that has been earned to the Termination Date, and any accrued but unpaid Vacation pay provided in Section 3.7, and any expense reimbursements due and owing to Executive as of the Termination Date; and

 

(b)          Executive shall not be entitled to (i) any other salary or compensation, (ii) the Annual Performance Bonus pursuant to Section 3.2, nor (iii) any Benefits pursuant to Sections 3.6, 3.8, or 3.9, except for benefit continuation under COBRA or similar state or federal legislation.

 

6.2            Termination Due to Disability or Death . In the event Executive’s employment is terminated pursuant to Section 5.3 above, the Company shall pay to Executive, or his representatives, all of the following:

 

(a)          The payments, if any, referred to in Section 6.1(a) above as of the Termination Date;

 

(b)          An amount equal to the full year targeted Annual Performance Bonus referenced in Section 3.2 above for the calendar year in which the Termination Date occurs, less applicable statutory deductions and tax withholdings, to be paid within thirty (30) days of the Termination Date; and

 

5  

 

 

(c)          If Executive elects benefit continuation under COBRA or similar state or federal legislation for the available Benefits provided in Section 3.9, Company shall pay or reimburse the COBRA premiums for a period of up to six (6) months commencing on the Termination Date, provided that Executive remains eligible for COBRA continuation coverage.

 

6.3            Termination Without Cause or for Good Reason . In the event Executive’s employment is terminated pursuant to Sections 5.2 or 5.4 above, the Company shall pay Executive on the date of Termination the payments referred to in Section 6.1(a) above, and provided that, within sixty (60) days of the Termination Date, Executive signs a binding release of all claims relating to his employment in the standard form then being used by the Company, substantially in the form attached hereto as Exhibit A , Executive shall also receive all of the following:

 

(a)          A severance payment equal to the unpaid portion of Executive’s Base Salary for the remainder of the Term of this Agreement, with such payment being made in a single lump sum immediately upon the release becoming effective; and

 

(b)          If Executive elects benefit continuation under COBRA or similar state or federal legislation for the available Benefits provided in Section 3.6, Company shall pay or reimburse the COBRA premiums for a period of up to six (6) months commencing on the Termination Date, provided that Executive remains eligible for COBRA continuation.

 

7.            Assignment

 

This Agreement is personal in nature, and neither this Agreement nor any part of any obligation herein shall be assignable by Executive. The Company shall be entitled to assign this Agreement to any affiliate of the Company or any person or entity that assumes the ownership and control of the business of the Company. This Agreement shall inure to the benefit of and shall be binding upon the Company, its successors and assigns.

 

8.            Severability

 

Should any term, provision, covenant or condition of this Agreement be held to be void or invalid, the same shall not affect any other term, provision, covenant or condition of this Agreement, but such remainder shall continue in full force and effect as though each such voided term, provision, covenant or condition is not contained herein.

 

6  

 

 

9.            Governing Law and Submission to Jurisdiction

 

This Agreement shall be governed by and construed in accordance with the laws of the State of California applicable to contracts made and to be carried out in California. Subject to the Binding Arbitration provision of this Agreement as set forth below, and without in any way limiting the applicability of binding arbitration, each of the parties submits to the exclusive jurisdiction of any state or federal court sitting in Los Angeles County, California in any action or proceeding arising out of or relating to this Agreement and further agrees that all claims in respect of the action or proceeding may be heard and determined in any such court to the extent that any court proceeding is necessary in connection with the Binding Arbitration provision below, and further agrees not to bring any action or proceeding arising out of or relating to this Agreement in any other court. Each of the parties agrees that a final judgment in any action or proceeding so brought shall be conclusive and may be enforced by suit on the judgment or in any other manner so provided by law.

 

10.          Binding Arbitration

 

Any and all disputes which involve or relate in any way to this Agreement and/or to Executive’s employment or termination of employment with the Company, whether initiated by Executive or by the Company and whether based on contract, tort, statute, or common law, shall be submitted to and resolved by final and binding arbitration as the exclusive method for resolving all such disputes. The arbitration shall be private and confidential and conducted in Los Angeles, California pursuant to the Federal Arbitration Act and applicable California law, and pursuant to the applicable rules of the American Arbitration Association (“ AAA ”) relating to employment disputes, unless the parties otherwise mutually agree to modify the AAA Rules. A copy of the AAA Employment Rules are available for review at www.adr.org/employment and are incorporated herein by reference.

 

The party demanding arbitration shall submit a written claim to the other party, setting out the basis of the claim or claims, within the time period of any applicable statute of limitations relating to such claim(s). If the parties cannot mutually agree upon an Arbitrator, then the parties shall select a neutral Arbitrator through the procedures established by the AAA. The Arbitrator shall have the powers provided under the California Code of Civil Procedure relating to the arbitration of disputes, except as expressly limited or otherwise provided in this Agreement. The parties shall have the right to reasonable discovery as mutually agreed or as determined by the Arbitrator, including at least one deposition each, it being the goal of the parties to resolve any disputes as expeditiously and economically as reasonably practicable. The parties agree to equally share in the payment of the administration costs of the AAA arbitration, including payment of the fees for the Arbitrator, and any other costs directly related to the administration of the arbitration. The parties shall otherwise be responsible for their own respective costs and attorneys fees relating to the dispute, such as deposition costs, expert witnesses and similar expenses, except as otherwise provided in this Agreement to the prevailing party.

 

The Arbitrator may award, if properly proven, any damages or remedy that a party could recover in a civil litigation, and shall award costs and reasonable attorneys fees to the prevailing party as provided by law. The award of the Arbitrator shall be issued in writing, setting forth the basis for the decision, and shall be binding on the parties to the fullest extent permitted by law, subject to any limited statutory right to appeal as provided by law. Judgment upon the award of the Arbitrator may be entered in any court having proper jurisdiction and enforced as provided by law.

 

This agreement to arbitrate is freely negotiated between Executive and the Company and is mutually entered into between the parties. Each party understands and agrees that they are giving up certain rights otherwise afforded to them by civil court actions, including but not limited to the right to a jury trial; provided, however, that either party may seek provisional remedies in a court of competent jurisdiction as provided pursuant to applicable law.

 

7  

 

 

11.          Captions

 

The Section captions herein are inserted only as a matter of convenience and reference and in no way define, limit or describe the scope of this Agreement or the intent of any provisions hereof.

 

12.          Compliance with IRC Section 409A

 

Notwithstanding anything herein to the contrary, (i) if at the time of Executive’s termination of employment with the Company Executive is a “specified employee” as defined in Section 409A of the Code, and the deferral of the commencement of any payments or benefits otherwise payable hereunder as a result of such termination of employment is necessary in order to prevent any accelerated or additional tax under Section 409A of the Code, then the Company will defer the commencement of the payment of any such payments or benefits hereunder (without any reduction in such payments or benefits ultimately paid or provided to Executive) until the date that is six (6) months following Executive’s termination of employment with the Company (or the earliest date as is permitted under Section 409A of the Code) and (ii) if any other payments of money or other benefits due to Executive hereunder could cause the application of an accelerated or additional tax under Section 409A of the Code, such payments or other benefits shall be deferred if deferral will make such payment or other benefits compliant under Section 409A of the Code, or otherwise such payment or other benefits shall be restructured, to the extent possible, in a manner, determined by the Board, that does not cause such an accelerated or additional tax. In the event that payments under this Agreement are deferred pursuant to this Section 12 in order to prevent any accelerated tax or additional tax under Section 409A of the Code, then such payments shall be paid at the time specified under this Section 12 without any interest thereon. The Company shall consult with Executive in good faith regarding the implementation of this Section 12; provided that neither the Company nor any of its employees or representatives shall have any liability to Executive with respect thereto. Notwithstanding anything to the contrary herein, a termination of employment shall not be deemed to have occurred for purposes of any provision of this Agreement providing for the payment of amounts or benefits upon or following a termination of employment unless such termination is also a “Separation from Service” within the meaning of Section 409A of the Code and, for purposes of any such provision of this Agreement, references to a “resignation,” “termination,” “termination of employment” or like terms shall mean Separation from Service. For purposes of Section 409A of the Code, each payment made under this Agreement shall be designated as a “separate payment” within the meaning of the Section 409A of the Code. Notwithstanding anything to the contrary herein, except to the extent any expense, reimbursement or in-kind benefit provided pursuant to this Agreement does not constitute a “deferral of compensation” within the meaning of Section 409A of the Code: (x) the amount of expenses eligible for reimbursement or in-kind benefits provided to Executive during any calendar year will not affect the amount of expenses eligible for reimbursement or in-kind benefits provided to Executive in any other calendar year, (y) the reimbursements for expenses for which Executive is entitled to be reimbursed shall be made on or before the last day of the calendar year following the calendar year in which the applicable expense is incurred, and (z) the right to payment or reimbursement or in-kind benefits hereunder may not be liquidated or exchanged for any other benefit

 

8  

 

 

13.         Entire Agreement

 

This Agreement contains the entire agreement of the parties relating to the subject matter hereof, and the parties hereto have made no agreements, representations or warranties relating to the subject matter of this Agreement that are not set forth otherwise herein. In this regard, each of the parties represents and warrants to the other party that such party is not relying on any promises or representations that do not appear in writing herein. This Agreement supersedes and replaces any prior agreements that Executive had with the Company. Each of the parties further agrees and understands that this Agreement can be amended or modified only by a written agreement signed by all parties.

 

14.         Notice

 

All notices and other communications under this Agreement shall be in writing and mailed, telegraphed, telecopied, or delivered by hand (by a party or a recognized courier service) to the other party at the following address (or to such other address as such party may have specified by notice given to the other party pursuant to this provision):

 

If to the Company:

 

Tandon Digital, Inc.

Chief Financial Officer
2125 B Madera Road
Simi Valley, CA 93065
Attn: 2125 B Madera Road
Simi Valley, CA 93065

 

with copy to

 

K&L Gates LLP

10100 Santa Monica Blvd., 7th Floor

Los Angeles, California 90067

Attn: Thomas J. Poletti, Esq.

 

If to Executive:

 

At current home address on file with the Company

 

15.         Attorney’s Fees

 

In the event that any party shall bring an action or proceeding in connection with the performance, breach or interpretation of this Agreement, then the prevailing party in any such action or proceeding, as determined by the arbitrator, court or other body having jurisdiction, shall be entitled to recover from the losing party all reasonable costs and expenses of such action or proceeding, including reasonable attorneys’ fees, court costs, costs of investigation, expert witness fees and other costs reasonably related to such action or proceeding.

 

[Signatures to follow]

 

9  

 

 

IN WITNESS WHEREOF, this Agreement is executed as of the day and year first above written.

 

  “COMPANY”
   
  Tandon Digital, Inc.
   
By:   /s/ Devinder L. Tandon
   
Name:   Devinder L. Tandon
   
Its:   Director

 

  “EXECUTIVE”
   
By:   /s/ Jawahar L. Tandon
  Jawahar L. Tandon

 

10  

 

Exhibit 21.1

 

Subsidiaries of the Registrant

 

1. The Company’s wholly owned subsidiary, SDJ Technologies, Inc., a Delaware corporation.

 

 

 

Exhibit 23.2

Consent of Independent Registered
Public Accounting Firm

 

We consent to the inclusion in this Registration Statement on Form S-1 of Monster Digital, Inc. and Subsidiary of our report, which includes an explanatory paragraph related to Monster Digital, Inc.’s ability to continue as a going concern, dated August 12, 2015, except for the effects of the matters discussed in the fourth, eighth and ninth paragraphs of Note 10 which are as of September 30, 2015, on our audits of the consolidated financial statements of Monster Digital, Inc. and Subsidiary as of December 31, 2014 and 2013 and for the years then ended. We also consent to the reference to our firm under the caption “Experts”.

 

 

/s/ CohnReznick LLP
Roseland, New Jersey
November 10, 2015

 

 

 

Exhibit 99.1

Consent of Director Nominee

 

Pursuant to Rule 438 of Regulation C promulgated under the Securities Act of 1933, as amended (the ‘‘ Securities Act ’’), in connection with the Registration Statement on Form S-1 (the ‘‘ Registration Statement ’’) of Monster Digital, Inc., the undersigned hereby consents to being named and described as a director nominee in the Registration Statement and any amendment or supplement to any prospectus included in such Registration Statement, any amendment to such Registration Statement or any subsequent Registration Statement filed pursuant to Rule 462(b) under the Securities Act and to the filing or attachment of this consent with such Registration Statement and any amendment or supplement thereto.

 

IN WITNESS WHEREOF, the undersigned has executed this consent as of the 30th day of October, 2015.

 

/s/ Jonathan Clark

Jonathan Clark

 

 

 

Exhibit 99.2

Consent of Director Nominee

 

Pursuant to Rule 438 of Regulation C promulgated under the Securities Act of 1933, as amended (the ‘‘ Securities Act ’’), in connection with the Registration Statement on Form S-1 (the ‘‘ Registration Statement ’’) of Monster Digital, Inc., the undersigned hereby consents to being named and described as a director nominee in the Registration Statement and any amendment or supplement to any prospectus included in such Registration Statement, any amendment to such Registration Statement or any subsequent Registration Statement filed pursuant to Rule 462(b) under the Securities Act and to the filing or attachment of this consent with such Registration Statement and any amendment or supplement thereto.

 

IN WITNESS WHEREOF, the undersigned has executed this consent as of the 30th day of October, 2015.

 

/s/ Robert B. Machinist

Robert B Machinist

 

 

 

Exhibit 99.3

Consent of Director Nominee

 

Pursuant to Rule 438 of Regulation C promulgated under the Securities Act of 1933, as amended (the ‘‘ Securities Act ’’), in connection with the Registration Statement on Form S-1 (the ‘‘ Registration Statement ’’) of Monster Digital, Inc., the undersigned hereby consents to being named and described as a director nominee in the Registration Statement and any amendment or supplement to any prospectus included in such Registration Statement, any amendment to such Registration Statement or any subsequent Registration Statement filed pursuant to Rule 462(b) under the Securities Act and to the filing or attachment of this consent with such Registration Statement and any amendment or supplement thereto.

 

IN WITNESS WHEREOF, the undersigned has executed this consent as of the 30th day of October, 2015.

 

/s/ Christopher M. Miner

Christopher M. Miner

 

 

 

Exhibit 99.4

Consent of Director Nominee

 

Pursuant to Rule 438 of Regulation C promulgated under the Securities Act of 1933, as amended (the ‘‘ Securities Act ’’), in connection with the Registration Statement on Form S-1 (the ‘‘ Registration Statement ’’) of Monster Digital, Inc., the undersigned hereby consents to being named and described as a director nominee in the Registration Statement and any amendment or supplement to any prospectus included in such Registration Statement, any amendment to such Registration Statement or any subsequent Registration Statement filed pursuant to Rule 462(b) under the Securities Act and to the filing or attachment of this consent with such Registration Statement and any amendment or supplement thereto.

 

IN WITNESS WHEREOF, the undersigned has executed this consent as of the 30th day of October, 2015.

 

/s/ Jonathan S. Orban

Jonathan S. Orban