UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 8-K

CURRENT REPORT

 

Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934

 

Date of Report (Date of earliest event reported): October 6, 2020 (September 30, 2020)

 

1847 Holdings LLC
(Exact name of registrant as specified in its charter)

 

Delaware   333-193821   38-3922937
(State or other jurisdiction
of incorporation)
  (Commission File Number)   (IRS Employer
Identification No.)

 

590 Madison Avenue, 21st Floor, New York, NY   10022
(Address of principal executive offices)   (Zip Code)

 

(212) 521-4052
(Registrant’s telephone number, including area code)

 

Not Applicable
(Former name or former address, if changed since last report.)

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

Securities registered or to be registered pursuant to Section 12(b) of the Act: None

  

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 or Rule 12b-2 of the Securities Exchange Act of 1934.

Emerging Growth Company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

 

 

 

 

Item 1.01 Entry into a Material Definitive Agreement.

 

Acquisition

 

Addendum to the Stock Purchase Agreement and Closing

 

As previously disclosed, on August 27, 2020, 1847 Holdings LLC (the “Company”) and 1847 Cabinet Inc. (“1847 Cabinet”), a subsidiary of the Company, entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with Kyle’s Custom Wood Shop, Inc. (“KCWS”) and Stephen Mallatt, Jr. and Rita Mallatt (together, the “Seller”), pursuant to which 1847 Cabinet agreed to acquire all of issued and outstanding common stock of KCWS (the “Acquisition”).

 

On September 30, 2020, 1847 Cabinet, KCWS, the Seller and the Company entered into Addendum to the Stock Purchase Agreement (the “Addendum”) to amend certain terms of the Stock Purchase Agreement. Following entry into the Addendum, closing of the Acquisition was completed on the same day (the “Closing Date”).

 

Pursuant to the terms of the Stock Purchase Agreement, as amended by the Addendum, 1847 Cabinet agreed to acquire all of the issued and outstanding common stock of KCWS for an aggregate purchase price of $6,650,000, subject to adjustment as described below. The purchase price consists of (i) $4,200,000 in cash (the “Cash Portion”), (ii) an 8% contingent subordinated note in the aggregate principal amount of $1,050,000, and (iii) 700,000 common shares of the Company, having a mutually agreed upon value of $1,400,000 (the “Buyer Shares”). The Buyer Shares will be issued immediately following the record date set by the Company for the distribution by the Company to its shareholders of common stock held by the Company of its subsidiary 1847 Goedeker Inc. (“Goedeker”). The Sellers will not have any right to receive any shares of common stock of Goedeker as the result of receiving the Buyer Shares.

 

The purchase price is subject to a post-closing working capital adjustment provision. On or before the 75th day following the Closing Date, 1847 Cabinet shall deliver to the Seller an audited balance sheet as of the Closing Date (the “Closing Date Balance Sheet”). If the net working capital reflected on the Closing Date Balance Sheet (the “Closing Working Capital”) exceeds the net working capital reflected on the unaudited balance sheet of KCWS delivered to 1847 Cabinet on the Closing Date (the “Preliminary Working Capital”), 1847 Cabinet shall, within seven (7) days, pay to the Seller an amount in cash that is equal to such excess. If the Preliminary Working Capital exceeds the Closing Working Capital, the Seller shall, within seven (7) days, pay to 1847 Cabinet an amount in cash that is equal to such excess, provided, however, that the Seller may, at their option, in lieu of paying such excess in cash, deliver and transfer to 1847 Cabinet a number of Buyer Shares that is equal to such excess divided by $2.00.

 

In addition to the post-closing net working capital adjustment described above, there is a target working capital adjustment. At the closing, if Preliminary Working Capital exceeds a target working capital of $154,000, then the purchase price will be increased at the closing by the amount of such difference. Accordingly, as a result of the target working capital adjustment, the Cash Portion of the purchase price at the closing was $4,356,162.  

 

1

 

 

Vesting Promissory Note

 

As noted above, a portion of the purchase price under the Stock Purchase Agreement, was paid by the issuance of a vesting promissory note by 1847 Cabinet to the Seller in the principal amount of $1,050,000, which increased to a principal amount of up to $1,260,000 pursuant to the Vested CSN Percentage (as defined below) (the “Seller Note”). Payment of the principal and accrued interest on the Seller Note is subject to vesting. The Seller Note bears interest on the vested portion of principal amount at the rate of eight percent (8%) per annum. To the extent vested, the vested portion of the principal and all accrued but unpaid interest on such vested portion of the principal shall be paid in one lump sum on the last day of the thirty-sixth (36th) month following the date of the Seller Note (the “Maturity Date”).

 

The vested principal of the Seller Note due at the Maturity Date shall be calculated each year based on the average annual consolidated EBITDA of 1847 Cabinet for each of the years ended December 31, 2020, 2021 and 2022. The EBITDA for each year shall be divided by $1.4 million multiplied by 100 to obtain the vested CSN percentage (the “Vested CSN Percentage”). The vested principal for each year shall be equal to the Vested CSN Percentage for that year multiplied by $350,000. To the extent that the Vested CSN Percentage for the subject year is less than 80%, no portion of the Seller Note for that year shall vest. To the extent that the Vested CSN Percentage for the subject year is equal to or greater than 120%, the vested principal shall be equal to $420,000 for that year and no more. For purposes of the Seller Note, “EBITDA” means the earnings before interest, taxes, depreciation and amortization expenses, in accordance with generally accepted accounting principles applied on a basis consistent with the accounting policies, practices and procedures used to prepare 1847 Cabinet’s financial statements as of the Closing Date, which shall include any state and federal tax credits (including any research and development tax credit) received on behalf of 1847 Cabinet and, which shall exclude (i) any management fees or transition expenses payable to the Company or any subsidiary or affiliate of the Company and the salaries, independent contractor payments, transition expenses of any additional management personnel in addition to Seller collectively in excess of $130,000 per annum, and (ii) all fees, charges, commissions, and expenses in any way related to the Acquisition.

 

1847 Cabinet will have the right to redeem all but no less than all of the Seller Note at any time prior to the Maturity Date. If 1847 Cabinet elects to redeem the Seller Note, the redemption price will be payable in cash and is equal to the then outstanding vested portion of the principal plus any remaining unvested principal amount plus accrued but unpaid interest thereon (calculated over 36 months). For purposes of this redemption calculation, the “unvested principal amount” shall be $350,000 per year.

 

The right of the Seller to receive payments under the Seller Note is subordinated to all indebtedness of 1847 Cabinet, whether outstanding as of the Closing Date or thereafter created, to banks, insurance companies and other financial institutions or funds, and federal or state taxation authorities. 

 

The Seller Note contains customary events of default, including in the event of (i) non-payment, (ii) a default by 1847 Cabinet of any of its covenants under the Stock Purchase Agreement, or any other agreement entered into in connection with the Stock Purchase Agreement, or a breach of any of its representations or warranties under such documents, (iii) illegality of the Seller Note, (iv) the bankruptcy of 1847 Cabinet, or (v) a change of control.

 

The foregoing summary of the terms and conditions of the Stock Purchase Agreement, the Addendum and the Seller Note does not purport to be complete and is qualified in its entirety by reference to the full text of the agreements attached hereto as Exhibits 10.1-10.3, which are incorporated herein by reference.

 

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Management Services Agreement

 

On August 21, 2020, 1847 Cabinet entered into a Management Services Agreement (the “Offsetting MSA”) with the Company’s manager, 1847 Partners LLC (the “Manager”). The Offsetting MSA is an “Offsetting Management Services Agreement” as defined in that certain Management Services Agreement, dated April 15, 2013, between the Company and the Manager (the “MSA”).

 

Pursuant to the Offsetting MSA, 1847 Cabinet appointed the Manager to provide certain services to it for a quarterly management fee equal to the greater of $75,000 or 2% of Adjusted Net Assets (as defined in the MSA) (the “Management Fee”); provided, however, that (i) pro-rated payments shall be made in the first quarter and the last quarter of the term, (ii) if the aggregate amount of management fees paid or to be paid by 1847 Cabinet, together with all other management fees paid or to be paid by all other subsidiaries of the Company to the Manager, in each case, with respect to any fiscal year exceeds, or is expected to exceed, 9.5% of the Company’s gross income with respect to such fiscal year, then the Management Fee to be paid by 1847 Cabinet for any remaining fiscal quarters in such fiscal year shall be reduced, on a pro rata basis determined by reference to the management fees to be paid to the Manager by all of the subsidiaries of the Company, until the aggregate amount of the Management Fee paid or to be paid by 1847 Cabinet, together with all other management fees paid or to be paid by all other subsidiaries of the Company to the Manager, in each case, with respect to such fiscal year, does not exceed 9.5% of the Company’s gross income with respect to such fiscal year, and (iii) if the aggregate amount the Management Fee paid or to be paid by 1847 Cabinet, together with all other management fees paid or to be paid by all other subsidiaries of the Company to the Manager, in each case, with respect to any fiscal quarter exceeds, or is expected to exceed, the aggregate amount of the management fee (before any adjustment thereto) calculated and payable under the MSA (the “Parent Management Fee”) with respect to such fiscal quarter, then the Management Fee to be paid by 1847 Cabinet for such fiscal quarter shall be reduced, on a pro rata basis, until the aggregate amount of the Management Fee paid or to be paid by 1847 Cabinet, together with all other management fees paid or to be paid by all other subsidiaries of the Company to the Manager, in each case, with respect to such fiscal quarter, does not exceed the Parent Management Fee calculated and payable with respect to such fiscal quarter.

 

1847 Cabinet shall also reimburse the Manager for all costs and expenses of 1847 Cabinet which are specifically approved by the board of directors of 1847 Cabinet, including all out-of-pocket costs and expenses, that are actually incurred by the Manager or its affiliates on behalf of 1847 Cabinet in connection with performing services under the Offsetting MSA.

 

The services provided by the Manager include: conducting general and administrative supervision and oversight of 1847 Cabinet’s day-to-day business and operations, including, but not limited to, recruiting and hiring of personnel, administration of personnel and personnel benefits, development of administrative policies and procedures, establishment and management of banking services, managing and arranging for the maintaining of liability insurance, arranging for equipment rental, maintenance of all necessary permits and licenses, acquisition of any additional licenses and permits that become necessary, participation in risk management policies and procedures; and overseeing and consulting with respect to 1847 Cabinet’s business and operational strategies, the implementation of such strategies and the evaluation of such strategies, including, but not limited to, strategies with respect to capital expenditure and expansion programs, acquisitions or dispositions and product or service lines.

 

The foregoing summary of the terms and conditions of the Offsetting MSA does not purport to be complete and is qualified in its entirety by reference to the full text of the agreement attached hereto as Exhibit 10.4, which is incorporated herein by reference.

 

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Financing

 

Intercompany Secured Promissory Note

 

In connection with the Acquisition, the Company provided 1847 Cabinet with the funds necessary to pay the Cash Portion of the purchase price and cover Acquisition expenses and 1847 Cabinet issued to the Company a secured promissory note, dated as of September 30, 2020, for an aggregate principal amount of up to $4,525,000 (the ”Company Note”).

 

The Company Note bears interest at the rate of 16% per annum. Interest on the Company Note is cumulative and any unpaid accrued interest will compound on each anniversary date of the Company Note. Interest is due and payable in arrears to the Company on January 15, April 15, July 15 and October 15 commencing January 15, 2021. In the event payment of principal or interest due under the Company Note is not made when due, giving effect to any grace period which may be applicable, or in the event of any other Default (as defined in the Company Note), the outstanding principal balance shall from the date of Default immediately bear interest at the rate of 5% above the then applicable interest rate for so long as such Default continues.

 

The Company may demand payment in full of the Company Note, at any time, even if 1847 Cabinet has complied with all of the terms of the Company Note; and the Company Note shall be due in full, without demand, upon the third party sale of all or substantially all the assets and business of 1847 Cabinet or the third party sale or other disposition of any capital stock of 1847 Cabinet. 1847 Cabinet may prepay the Company Note at any time without penalty.

 

The due and punctual payment, observance, performance and discharge of all of the obligations of 1847 Cabinet under the Company Note are guaranteed by KCWS, which guaranty is secured by all of the assets of KCWS. KCWS shall pay, reimburse and indemnify the Company for any and all reasonable attorneys’ fees arising or resulting from 1847 Cabinet’s failure to perform, satisfy or observe any of the terms of the Company Note. As security for the obligations under the Company Note and the guarantee, each of 1847 Cabinet and KCWS pledged to the Company and granted to the Company a security interest in and to the all of the assets owned by it.

 

The Company Note contains customary events of default, including any of the following events by 1847 cabinet or KCWS, after any applicable cure period: (i) non-payment of amounts due under the Company Note or other indebtedness, (ii) a breach of any of the representation, warranties or covenants under the Company Note, or (iii) commencement of any proceeding in bankruptcy.

 

Unit Offering

 

In connection with the Acquisition and to, in part, fund the Company Note, on September 30, 2020 the Company entered into several securities purchase agreements (the “Unit Purchase Agreements”) with certain purchasers (the “Purchasers”), pursuant to which the Company sold an aggregate of 2,189,835 Units, at a price of $1.90 per Unit, to the Purchasers for an aggregate purchase price of $4,160,684. Each Unit consists of (i) one (1) Series A Senior Convertible Preferred Share of the Company with a stated value (the “Stated Value”) of $2.00 per share (each a “Series A Share” and, collectively, the “Series A Shares”), and (ii) a three-year warrant to purchase one (1) Common Share of the Company at an exercise price of $2.50 per Common Share (subject to adjustment), which may be exercised on a cashless basis under certain circumstances (the “Warrants” and, together with the Series A Shares, “Units”). The sale by the Company of the Units was completed on September 30, 2020.

 

4

 

 

Pursuant to the Unit Purchase Agreements, the Company is required file a registration statement with the Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended, covering the resale of all shares issuable upon conversion of the Series A Shares and exercise of the Warrants with thirty (days) after the closing of the Unit Purchase Agreements and use its commercially reasonable efforts to have the registration statement declared effective by the SEC as soon as practicable, but in no event later than (i) ninety (90) days after the closing in the event that the SEC does not review the registration statement, or (ii) one hundred fifty (150) days after the closing in the event that the SEC reviews the registration statement (but in any event, no later than two (2) business days from the SEC indicating that it has no further comments on the registration statement).

 

The lead investor in the offering and one other purchaser in the offering (the “Participating Purchasers”) received participation rights that permit them, for a period of 12 months after the closing, to participate in an offering of securities by the Company or any of its subsidiaries in an amount up to the aggregate amount that the Participating Purchasers invested in the offering with customary exclusions.

 

In addition to the participation right, and registration rights described above, the Unit Purchase Agreements provided several other covenants in favor of the purchasers and/or the lead investor, including information rights, observer rights, certain restrictive covenants, most favored nations provisions and other covenants customary for similar transactions.

 

The Unit Purchase Agreements also contain customary representations, warranties closing conditions and indemnities.

 

Series A Senior Convertible Preferred Shares

 

The terms of the Series A Shares are governed by a certificate of designation (the “Certificate of Designation”). Pursuant to the Certificate of Designation, the Company designated 3,157,895 of its preferred shares as Series A Shares. Following is a summary of the material terms of the Series A Shares:

 

Dividends. Dividends at the rate per annum of 14.0% of the Stated Value of $2.00 per share, (subject to adjustment) shall accrue on such Series A Shares. Dividends shall accrue from day to day, whether or not declared, and shall be cumulative. Dividends shall be payable quarterly in arrears on each dividend payment date in cash or Common Shares at the Company’s discretion. Dividends payable in Common Shares shall be calculated based on a price equal to eighty percent (80%) of the volume weighted average price (“VWAP”) for the Common Shares on the Company’s principal trading market during the five (5) trading days immediately prior to the applicable dividend payment date. The Common Shares issued in lieu of cash dividends shall be free-trading, and freely transferable, and will not contain a legend (or be subject to stop transfer or similar instructions) restricting the resale or transferability thereof. The Certificate of Designation also provides that the holders of the Series A Shares will not be permitted to participate (upon conversion or otherwise) in the planned distribution by the Company to its shareholders of common stock held by the Company of its subsidiary, Goedeker.

 

Liquidation. Subject to the rights of the Company’s creditors and the holders of any Senior Securities or Parity Securities (in each case, as defined in the Certificate of Designation), upon any liquidation of the Company or its subsidiaries, before any payment or distribution of the assets of the Company (whether capital or surplus) shall be made to or set apart for the holders of securities that are junior to the Series A Shares as to the distribution of assets on any liquidation of the Company, each holder of outstanding Series A Shares shall be entitled to receive an amount of cash equal to 115% of the Stated Value plus an amount of cash equal to all accumulated accrued and unpaid dividends thereon (whether or not declared) to, but not including the date of final distribution to such holders. If, upon any liquidation of the Company, the assets of the Company, or proceeds thereof, distributable among the holders of the Series A Shares shall be insufficient to pay in full the preferential amount payable to the holders of the Series A Shares and liquidating payments on any other shares of any class or series of Parity Securities as to the distribution of assets on any liquidation of the Company, then such assets, or the proceeds thereof, shall be distributed among the holders of Series A Shares and any such other Parity Securities ratably in accordance with the respective amounts that would be payable on such Series A Shares and any such other Parity Securities if all amounts payable thereon were paid in full.

 

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Voting Rights. The Series A Shares shall not have any relative, participating, optional or other voting rights or powers of any type, and the consent of the holders thereof shall not be required for the taking of any corporate action, except as set forth below or as otherwise provided by the Company’s Second Amended and Restated Operating Agreement or the Delaware Limited Liability Company Act. So long as any Series A Shares are outstanding, the affirmative vote of the Requisite Holders (as defined in the Certificate of Designation), voting as a separate class, given in person or by proxy, either in writing without a meeting or by vote at any meeting called for the purpose, shall be necessary for approving, effecting or validating any amendment, alteration or repeal of any of the provisions of the Certificate of Designation. In addition, so long as any Series A Shares are outstanding, the affirmative vote of the holders of the Requisite Holders at the time outstanding, voting as a separate class, shall be required prior to the Company’s (or KCWS’s) creation or issuance of (i) any Parity Securities; (ii) any Senior Securities; and (iii) any new indebtedness other than intercompany indebtedness by KCWS in favor of the Company, except any financing transaction the use of proceeds of which the Company will use to redeem the Series A Shares and the Warrants.

 

Conversion Rights. Each Series A Share, plus all accrued and unpaid dividends thereon, shall be convertible, at the option of the holder thereof, at any time and from time to time into such number of fully paid and nonassessable Common Shares (calculated as to each conversion to the whole share) determined by dividing the Stated Value, plus the value of the accrued, but unpaid, dividends thereon, by the conversion price of $2.00 per share; provided that in no event shall the holder of any Series A Shares be entitled to convert any number of Series A Preferred Shares that upon conversion the sum of (i) the number of Common Shares beneficially owned by the holder and its affiliates and (ii) the number of Common Shares issuable upon the conversion of the Series A Shares with respect to which the determination of this proviso is being made, would result in beneficial ownership by the holder and its affiliates of more than 4.99% of the then outstanding Common Shares of the Company. This limitation may be waived (up to a maximum of 9.99%) by the holder and in its sole discretion, not less than sixty-one (61) days’ prior notice to the Company.

 

Redemption. The Company may redeem in whole (but not in part) the Series A Shares by paying in cash therefore a sum equal to 115% of the Stated Value plus the amount of accrued and unpaid plus any other amounts due pursuant to the terms of the Series A Shares.

 

Warrants

 

Each Warrant to purchase one Common Share of the Company is exercisable within three years at an exercise price of $2.50 per Common Share (subject to adjustment, including a full ratchet antidilution adjustment), which may be exercised on a cashless basis if the underlying warrant shares are not then registered or otherwise freely tradeable. The Warrants contains an ownership limitation, such that the Company shall not effect any exercise of any Warrant, and the Purchaser shall not have the right to exercise any portion of such Warrant, to the extent that after giving effect to issuance of Common Shares upon exercise such Warrant, such Purchaser, together with its affiliates, and any other persons acting as a group together with such Purchaser or any of its affiliates, would beneficially own in excess of 4.99% of the number of Common Shares outstanding immediately after giving effect to the issuance of Common Shares issuable upon exercise of such Warrant.  Upon no fewer than 61 days’ prior notice to the Company, a purchaser may increase or decrease such beneficial ownership limitation provisions and any such increase or decrease will not be effective until the 61st day after such notice is delivered to the Company. 

 

In addition, the Warrant provides that under certain circumstances described below, the Company may force the exercise of the Warrant. The Company may force the exercise of the Warrant at any time after the one year anniversary of the date of the Warrant, if (i) the Company is listed on a national securities exchange or the over-the-counter market, (ii) underlying warrant shares are registered or the holder of the Warrant otherwise has the ability to trade the warrant shares without restriction, (iii) the 30-day volume-weighted daily average price of the Company’s Common Shares exceeds 200% of the Exercise Price, as adjusted and (ii) the average daily trading volume is at least 100,000 Common Shares during such 30-day period.

 

The Company may redeem the Warrants held by any holder in whole (but not in part) by paying in cash to such holder as follows: (i) $0.50 per warrant share then underlying the Warrant if within the first twelve (12) months of issuance; (ii) $1.00 per warrant share then underlying the Warrant if after the first twelve (12) months, but before twenty-four (24) months of issuance; and (iii) $1.50 per warrant share then underlying the Warrant if after twenty-four months, but before thirty-six (36) months.

 

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Issuance of 1847 Cabinet Shares to Lead Investor

 

In connection with the unit financing transaction, the Company also agreed to issue to the lead investor 81 shares of common stock of 1847 Cabinet constituting 7.5% of the issued and outstanding capital stock of 1847 Cabinet on a post-issuance and fully-diluted basis (the “1847 Cabinet Shares”) in consideration for the lead investor’s investment and for its agreement to act as lead investor for the unit offering. The lead investor also received certain anti-dilution protection relating to its ownership in 1847 Cabinet.

 

The foregoing summary of the terms and conditions of the Company Note, the Units Purchase Agreement, the Series A Shares and the Warrants does not purport to be complete and is qualified in its entirety by reference to the full text of each such document attached hereto as Exhibit 10.5, 10.6, 4.1 and 4.2, respectively, - which are incorporated herein by reference.

 

Item 2.01 Completion of Acquisition or Disposition of Assets.

 

The information set forth under Item 1.01 is incorporated by reference into this Item 2.01.

 

Item 2.03 Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant.

 

The information set forth under Item 1.01 is incorporated by reference into this Item 2.03.

 

Item 3.02 Unregistered Sales of Equity Securities.

 

The information set forth under Item 1.01 regarding the issuance of the Buyer Shares and the Units is incorporated by reference into this Item 3.02. The issuance of these securities is being made in reliance upon an exemption from the registration requirements of Section 5 of the Securities Act.

 

Item 9.01 Financial Statements and Exhibits.

 

(a) Financial Statements of Business Acquired

 

The financial statements of KCWS will be filed by an amendment to this Form 8-K within 75 calendar days of the Closing Date.

 

(b) Pro forma financial information

 

Pro forma financial information will also be filed by an amendment to this Form 8-K within 75 calendar days of the Closing Date.

 

(d) Exhibits

 

The following exhibits are filed herewith:

 

Exhibit No.   Description of Exhibit
4.1   Certificate of Designation of Series A Senior Convertible Preferred Shares
4.2   Form of Warrant
10.1   Stock Purchase Agreement, dated as of August 27, 2020, among 1847 Cabinet Inc., Kyle’s Custom Wood Shop, Inc., Stephen Mallatt, Jr. and Rita Mallatt and 1847 Holdings LLC.
10.2   Addendum to Stock Purchase Agreement, dated as of September 30, 2020, among 1847 Cabinet Inc., Kyle’s Custom Wood Shop, Inc., Stephen Mallatt, Jr. and Rita Mallatt, and 1847 Holdings LLC.
10.3   8% Vesting Promissory Note, dated September 30, 2020, issued by 1847 Cabinet Inc. to Stephen Mallatt, Jr. and Rita Mallatt.
10.4   Management Services Agreement, dated August 21, 2020, by and between 1847 Cabinet Inc. and 1847 Partners LLC.
10.5   Secured Promissory Note, dated September 30, 2020, issued by 1847 Holdings LLC to 1847 Cabinet Inc.
10.6   Form of Securities Purchase Agreement

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

  1847 HOLDINGS LLC
   
Date: October 6, 2020 /s/ Ellery W. Roberts
  Name: Ellery W. Roberts
  Title: Chief Executive Officer

 

 

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Exhibit 4.1

 

1847 HOLDINGS LLC

 

SHARE DESIGNATION

OF

SERIES A SENIOR CONVERTIBLE PREFERRED SHARES

(no par value per share)

 

The undersigned, Ellery W. Roberts, being the Chief Executive Officer of 1847 Holdings LLC, a Delaware limited liability company (the “Company”), does hereby certify that:

 

On September 30, 2020, the board of directors of the Company (the “Board”), pursuant to the authority conferred upon the Board by Section 3.3(b) of the Second Amended and Restated Operating Agreement of the Company, dated January 19, 2018 (as such may be amended, modified or restated from time to time, the “Operating Agreement”), duly adopted the following resolutions establishing the terms of the Company’s Series A Senior Convertible Preferred Shares, no par value per share.

 

“RESOLVED, that pursuant to Article III of the Operating Agreement (which in Section 3.3 authorizes the Board to issue an unlimited number of Additional Securities (as defined in the Operating Agreement), in one or more classes or series), the Series A Senior Convertible Preferred Shares, a new series of Additional Securities consisting of 3,157,895 shares, be, and hereby are, created and authorized for issuance by the Company, with the designations, preferences, rights, powers, duties and other terms of such Series A Senior Convertible Preferred Shares as set forth in the attached Exhibit A, and further

 

RESOLVED, that each Series A Senior Convertible Preferred Share shall rank equally in all respects and shall be subject to the provisions set forth in the attached Exhibit A, which is hereby approved.”

 

IN WITNESS WHEREOF, this Share Designation, which shall be made effective pursuant to Article III of the Operating Agreement, is executed by the undersigned this 30th day of September, 2020.

 

1847 Holdings LLC 

 

By: /s/ Ellery W. Roberts  
Name:  Ellery W. Roberts  
Title: Chief Executive Officer  

 

 

 

EXHIBIT A

TO

SHARE DESIGNATION

OF

SERIES A SENIOR CONVERTIBLE PREFERRED SHARES

 

1. Designation and Number of Shares; Admission as Member. 

 

(a) There is hereby created by the board of directors of 1847 Holdings LLC, a Delaware limited liability company (the “Company”) through this Share Designation of Series A Senior Convertible Preferred Shares (this “Designation”) under the authority provided for in Article III and specifically Section 3.3 of the Second Amended and Restated Operating Agreement of the Company, dated January 19, 2018 (as such may be amended, modified or restated from time to time, the “Operating Agreement”) a new series of shares of the Company that are hereby designated as the “Series A Senior Convertible Preferred Shares” (the “Series A Senior Convertible Preferred Shares”). The number of shares constituting such series shall be 3,157,895. Each Series A Senior Convertible Preferred Share shall be identical in all respects to every other Series A Senior Convertible Preferred Share.

 

(b) A person shall be admitted as a Member and shall become bound by the terms of the Operating Agreement, including this Designation, if such person purchases or otherwise lawfully acquires any Series A Senior Convertible Preferred Shares and becomes the record holder of such shares in accordance with the provisions of this Designation and the Operating Agreement. A Person may become a record holder without the consent or approval of any of the Members of the Company. A person may not become a Member without acquiring a Series A Senior Convertible Preferred Share or otherwise acquiring a Common Share or Allocation Share.

 

2. Dividends.

 

(a) From and after the date of the issuance of any Series A Senior Convertible Preferred Share, dividends at the rate per annum of 14.0% of the Stated Value, subject to adjustment as provided herein (the “Stated Dividend Rate”) shall accrue on such Series A Senior Convertible Preferred Share (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Series A Senior Convertible Preferred Shares) (the “Accruing Dividends”). Accruing Dividends shall accrue from day to day, whether or not declared, and shall be cumulative. Accruing Dividends shall be payable quarterly in arrears on each Dividend Payment Date. Any calculation of the amount of Accruing Dividends shall be made based on a 365-day year, the actual number of days elapsed, to the extent permitted by law. Accruing Dividends shall be payable, on each Dividend Payment Date, in cash or Common Shares at the Company’s discretion. Dividends payable in Common Shares shall be calculated based on a price equal to eighty percent (80%) of the volume weighted average price (“VWAP”) for the Common Shares on the Company’s principal trading market during the five (5) trading days immediately prior to the applicable Dividend Payment Date. The Common Shares issued hereunder in lieu of cash dividends shall be free-trading, and freely transferable, and will not contain a legend (or be subject to stop transfer or similar instructions) restricting the resale or transferability thereof.

 

(b) The Company shall not declare, pay or set aside any dividends on Junior Securities unless such dividends are paid out of the Company’s cash flow from operations (as defined in U.S. Generally Accepted Accounting Principles) and the Company shall not declare, pay or set aside any dividends on Junior Securities from and during the continuance of an Event of Default. The holders of Series A Senior Convertible Preferred Shares shall not be entitled to participate in any dividend or other distribution made on the Junior Securities unless and until the Series A Senior Convertible Preferred Shares are converted in accordance with this Designation and then only in connection with dividends or other distributions having a record date that occurs from or after such conversion; provided, however, that the Company shall provide written notice to the holders of Series A Senior Convertible Preferred Shares no less than ten (10) days prior to the record date for any dividend or other distribution made on the Junior Securities. However, in no event, shall the Company declare any dividend on any Junior Security, if such dividend would impair the ability of the Company to pay any dividends due on any Series A Senior Convertible Preferred Shares. For the avoidance of doubt, whether or not any holders of Series A Convertible Preferred Shares convert any Series A Convertible Preferred Shares into Common Shares or otherwise, such holders shall not be entitled to participate in the planned distribution by the Company of shares of its subsidiary, 1847 Goedeker Inc. as a result of their ownership of Series A Senior Convertible Preferred Shares or the Common Shares into which such Series A Senior Convertible Preferred Shares convert.

 

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(c) If and for so long as any Event of Default occurs and is continuing, then the Stated Dividend Rate, as adjusted and in effect at the time of any such Event of Default shall automatically increase by five percent (5%) per annum, commencing as of the date of such Event of Default. The dividend rate shall return to the Stated Dividend Rate in effect immediately preceding the Event of Default (subject to any additional adjustments of the Stated Dividend Rate as provided elsewhere herein) upon any cure of the Event of Default giving rise to the rights set forth in this Section 2(c).

 

3. Liquidation Preference.

 

(a) Subject to the rights of the Company’s creditors and the holders of any Senior Securities or Parity Securities, upon any Liquidation of the Company or its subsidiaries, before any payment or distribution of the assets of the Company (whether capital or surplus) shall be made to or set apart for the holders of Junior Securities as to the distribution of assets on any Liquidation of the Company, each holder of outstanding Series A Senior Convertible Preferred Shares shall be entitled to receive an amount of cash equal to the Redemption Stated Value plus an amount of cash equal to all accumulated accrued and unpaid dividends thereon (whether or not declared) to, but not including the date of final distribution to such holders. If, upon any Liquidation of the Company, the assets of the Company, or proceeds thereof, distributable among the holders of the Series A Senior Convertible Preferred Shares shall be insufficient to pay in full the preferential amount payable to the holders of the Series A Senior Convertible Preferred Shares as described in this Section 3(a) and liquidating payments on any other shares of any class or series of Parity Securities as to the distribution of assets on any Liquidation of the Company, then such assets, or the proceeds thereof, shall be distributed among the holders of Series A Senior Convertible Preferred Shares and any such other Parity Securities ratably in accordance with the respective amounts that would be payable on such Series A Senior Convertible Preferred Shares and any such other Parity Securities if all amounts payable thereon were paid in full.

 

(b) Subject to the rights of the Company’s creditors and the holders of any Senior Securities or Parity Securities, upon any Liquidation of the Company, after payment shall have been made in full to the holders of the Series A Senior Convertible Preferred Shares in accordance with this Section 3, the holders of any other series or class or classes of Junior Securities shall, subject to the respective terms and provisions (if any) applying thereto, be entitled to receive any and all assets remaining to be paid or distributed, and the holders of the Series A Senior Convertible Preferred Shares shall not be entitled to share therein or have any other right or claim to such assets.

 

(c) Written notice of any such Liquidation of the Company, stating the payment date or dates when, and the place or places where, the amounts distributable in such circumstances shall be payable, shall be given by first class mail, postage prepaid, not less than twenty (20) nor more than sixty (60) days prior to the payment date stated therein, to each record holder of the Series A Senior Convertible Preferred Shares at the respective address of such holders as the same shall appear on the stock transfer records of the Company.

 

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4. Redemption.

 

(a) The Company may, on the Redemption Date, redeem in whole (but not in part) the Series A Senior Convertible Preferred Shares by paying in cash therefore a sum equal to the Redemption Stated Value plus the amount of accrued dividends indicated in Section 4(b) hereof plus any amounts due but unpaid under Section 10(f) (the “Redemption Price”).

 

(b) Upon any redemption of Series A Senior Convertible Preferred Shares pursuant to this Section 4, the Company shall pay any accumulated accrued and unpaid dividends in arrears thereon (whether or not declared) to, but not including, the Redemption Date.

 

(c) Notwithstanding the foregoing, if as of any particular date all accrued and unpaid dividends on the Series A Senior Convertible Preferred Shares and any other class or series of Parity Securities of the Company have not been paid or declared and set apart for payment, the Company shall not repurchase, redeem or otherwise acquire, whether under this Section 4 or otherwise, in whole or part any Series A Senior Convertible Preferred Shares or Parity Securities unless (x) all outstanding Series A Senior Convertible Preferred Shares and Parity Securities are simultaneously redeemed or (y) any such repurchase, redemption or acquisition is effected pursuant to a purchase or exchange offer made on the same terms to all holders of Series A Senior Convertible Preferred Shares and any Parity Securities.

 

(d) Written notice of the redemption of any Series A Senior Convertible Preferred Shares under this Section 4 shall be mailed, postage prepaid, to each holder of record of Series A Senior Convertible Preferred Shares to be redeemed at the address of each such holder as shown on the Company’s stock transfer records, not less than fifteen (15) nor more than thirty (30) days prior to the Redemption Date; provided, however, that each holder of Series A Senior Convertible Preferred Shares subject to such redemption notice shall have the right to convert each such holder’s Series A Senior Convertible Preferred Shares into Common Shares in accordance with Section 10 hereof prior to the Redemption Date in lieu of the Redemption Price. Neither the failure to give notice required by this Section 4(d), nor any defect in the notice therein or in the mailing thereof, to any particular holder, shall affect the validity of the redemption proceedings with respect to the other holders. Any notice mailed in the manner herein provided shall be conclusively presumed to have been duly given on the date mailed whether or not the holder receives the notice. Each such mailed notice shall state, as appropriate: (i) the Redemption Date; (ii) the applicable Redemption Price; (iii) the number of Series A Senior Convertible Preferred Shares to be redeemed; (iv) if any shares are represented by certificates, the place or places at which certificates for such shares are to be surrendered for payment; (v) that dividends on the shares to be redeemed shall cease to accrue on such Redemption Date; and (vi) that the shares of Series A Senior Convertible Preferred Shares are being redeemed pursuant to the Company’s redemption right under Section 4(a) hereof. If a notice of redemption is duly mailed as aforesaid, then from and after the Redemption Date, (i) dividends on the Series A Senior Convertible Preferred Shares so called for redemption shall cease to accrue, (ii) such shares shall no longer be deemed to be outstanding, and (iii) all rights of the holders thereof as holders of such Series A Senior Convertible Preferred Shares shall cease (except the right to receive cash payable upon such redemption, without interest thereon, upon surrender and endorsement of their certificates if so required and to receive any dividends payable thereon); provided, however, that no such rights shall terminate if the Company fails to provide funds sufficient to complete the redemption at the time and place specified for payment pursuant to the applicable redemption notice.

 

(e) Notwithstanding anything to the contrary in this Section 4, any redemption under this Section 4 may be affected only out of funds legally available for such purpose.

 

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5. Status of Acquired Shares. Any Series A Senior Convertible Preferred Shares redeemed by the Company in accordance with Section 4 hereof, or otherwise acquired by the Company, shall be restored to the status of authorized but unissued shares of undesignated Additional Securities of the Company.

 

6. Ranking. The Series A Senior Convertible Preferred Shares shall, with respect to the payment of dividends and the distribution of assets upon Liquidation of the Company, be deemed to rank:

 

(a) senior to all Series A Preferred Shares, Common Shares, Allocation Shares, and to each other class or series of membership interests of the Company established after the date on which this Designation is adopted unless expressly made senior to or on parity with the Series A Senior Convertible Preferred Shares as to the payment of dividends and as to the distribution of assets upon Liquidation of the Company (“Junior Securities”);

 

(b) on parity with any other class or series of Additional Securities of the Company that is established in accordance with the Operating Agreement after the date of this Designation and that is not expressly subordinated or (in accordance with Section 7(c)(ii), below) made senior to the Series A Senior Convertible Preferred Shares as to the payment of dividends and as to the distribution of assets upon Liquidation of the Company, whether or not the dividend rates, dividend payment dates or redemption or liquidation prices per share thereof differ from those of the Series A Senior Convertible Preferred Shares (“Parity Securities”); and

 

(c) junior to all of the Company’s indebtedness and other liabilities with respect to assets available to satisfy claims against the Company and each other class or series of capital stock of the Company that (in accordance with Section 7(c)(ii), below) is expressly made senior to the Series A Senior Convertible Preferred Shares as to the payment of dividends and as to the distribution of assets upon Liquidation of the Company (“Senior Securities”).

 

7. Voting Rights.

 

(a) The Series A Senior Convertible Preferred Shares shall not have any relative, participating, optional or other voting rights or powers of any type, and the consent of the holders thereof shall not be required for the taking of any corporate action, except as set forth in this Section 7 or as otherwise provided by the Operating Agreement of the Company or the Delaware Act.

 

(b) So long as any Series A Senior Convertible Preferred Shares are outstanding, the affirmative vote of the Requisite Holders at the time outstanding, voting as a separate class, given in person or by proxy, either in writing without a meeting or by vote at any meeting called for the purpose, shall be necessary for approving, effecting or validating any amendment, alteration or repeal of any of the provisions of this Designation.

 

(c) In addition, so long as any Series A Senior Convertible Preferred Shares are outstanding, the affirmative vote of the holders of the Requisite Holders at the time outstanding, voting as a separate class, shall be required prior to the Company’s (or KCWS’s) creation or issuance of (i) any Parity Securities; (ii) any Senior Securities; and (iii) any new Indebtedness other than intercompany Indebtedness by KCWS in favor of the Company. Notwithstanding the foregoing, this Section 7(c) shall not apply to any financing transaction the use of proceeds of which the Company will use to redeem the Series A Senior Convertible Preferred Shares and the Warrants. For the avoidance of doubt, the consent of the holders of the Requisite Holders shall not be required in connection with the issuance of Parity Securities, Senior Securities or new Indebtedness if, and so long as, the proceeds resulting from the issuance of such securities or Indebtedness are used to redeem in full the outstanding Series A Senior Convertible Preferred Shares.

 

(d) For purposes of this Section 7, with respect to any matter as to which the holders of Series A Senior Convertible Preferred Shares are entitled to vote as a class, such holders shall be entitled to one vote per share.

 

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8. Record Holders. The Company and the Registrar and Transfer Agent shall deem and treat the record holder of any Series A Senior Convertible Preferred Shares as the true and lawful owner thereof for all purposes, and neither the Company nor the Registrar and Transfer Agent shall be affected by any notice to the contrary.

 

9. No Sinking Fund. The holders of Series A Senior Convertible Preferred Shares shall not be entitled to (i) any mandatory redemption rights, (ii) payment of a principal amount at any particular date, (iii) the benefits of any retirement or sinking fund or (iv) require the Company to set aside funds to secure the Company’s obligations under the Series A Senior Convertible Preferred Shares.

 

10. Conversion Rights.

 

(a) Each Series A Senior Convertible Preferred Share, plus all accrued and unpaid dividends thereon, shall be convertible, at the option of the holder thereof, at any time and from time to time after the issuance of such share, into such number of fully paid and nonassessable Common Shares (calculated as to each conversion to the whole share) determined by dividing the Stated Value, plus the value of the accrued, but unpaid, dividends thereon, by the Conversion Price on such Conversion Date (the “Conversion Shares”).

 

(b) The holders of any Series A Senior Convertible Preferred Shares may exercise their conversion rights as to all such shares or any part thereof by delivering to the Company during regular business hours, at the office of any transfer agent of the Company for the Series A Senior Convertible Preferred Shares, or at the principal office of the Company or at such other place as may be designated by the Company, the certificate or certificates for the shares to be converted, duly endorsed for transfer to the Company (if required by the Company), accompanied by written notice stating that the holder elects to convert such shares. Conversion shall be deemed to have been effected on the date when such delivery is made, and such date is referred to herein as the “Conversion Date.” As promptly as practicable after the Conversion Date, but not later than three (3) Business Days thereafter, the Company shall issue and deliver to or upon the written order of such holder, at such office or other place designated by the Company, a certificate or certificates for the number of full Common Shares to which such holder is entitled. The holder shall be deemed to have become a shareholder of record on the Conversion Date. In lieu of delivering physical certificates representing the Common Shares issuable upon conversion, provided the Company is participating in the Depository Trust Company (“DTC”) Fast Automated Securities Transfer (“FAST”) program, upon request of any holder of outstanding Series A Senior Convertible Preferred Shares, the Company shall use its best efforts to cause its transfer agent to electronically transmit the Common Shares issuable upon conversion to such holder by crediting the account of such holder’s Prime Broker with DTC through its Deposit Withdrawal Agent Commission (“DWAC”) system.

 

(c) No fractional Common Shares or scrip shall be issued upon conversion of Series A Senior Convertible Preferred Shares. The number of full Common Shares issuable upon conversion thereof shall be computed on the basis of the aggregate number of Series A Senior Convertible Preferred Shares. Any fractional Common Shares which would otherwise be issuable upon conversion of the Series A Senior Convertible Preferred Shares will be rounded up to the next whole share.

 

(d) The Company shall pay any and all issuance, delivery and transfer taxes in respect of the issuance or delivery of Common Shares on conversion of the Series A Senior Convertible Preferred Shares pursuant hereto.

 

(e) The Company shall at all times reserve and keep available, free from preemptive rights, such number of its authorized but unissued Common Shares as may be required to effect conversions of the Series A Senior Convertible Preferred Shares.

 

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(f) If the Company at any time after the date of issue of the Series A Senior Convertible Preferred Shares (i) declares a dividend or makes a distribution on Common Shares payable in Common Shares, (ii) subdivides or splits the outstanding Common Shares, (iii) combines or reclassifies the outstanding Common Shares into a smaller number of shares, (iv) issues any shares of its capital stock in a reclassification of Common Shares (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing corporation), (v) effects any sale of all or substantially all of its assets in one transaction or a series of related transactions, or (vi) consolidates with, merges with or into or is converted into any other Person, the Conversion Price in effect at the time of the record date for such dividend or distribution or of the effective date of such subdivision, split, combination, consolidation, conversion, sale, merger or reclassification shall be adjusted so that the conversion of the Series A Senior Convertible Preferred Shares after such time shall entitle the holder to receive the aggregate number of Common Shares or other securities of the Company (or shares of any security into which such Common Shares have been combined, consolidated, converted, merged or reclassified) which, if the Series A Senior Convertible Preferred Shares had been converted immediately prior to such time, such holder would have owned upon such conversion and been entitled to receive by virtue of such dividend, distribution, subdivision, split, combination, consolidation, conversion, merger or reclassification. Such adjustment shall be made successively whenever any event listed above shall occur.

 

(g) The Company shall not, through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, including amending this Designation, 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 section 10 and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the holders of Series A Senior Convertible Preferred Shares against impairment.

 

(h) All Common Shares which may be issued upon conversion of the Series A Senior Convertible Preferred Shares will upon issuance by the Company be validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issuance thereof.

 

(i) In case any Series A Senior Convertible Preferred Shares shall be converted pursuant to this Section 4, the Series A Senior Convertible Shares so converted shall be canceled and shall not be issuable by the Company.

 

(j) In no event shall the holder of any Series A Senior Convertible Preferred Shares be entitled to convert any number of Series A Senior Convertible Preferred Shares, that upon conversion the sum of (1) the number of Common Shares beneficially owned by the holder and its affiliates (other than Common Shares which may be deemed beneficially owned through the ownership of any unconverted Series A Senior Convertible Preferred Shares, or the unexercised or unconverted portion of any other security of the Company subject to a limitation on conversion or exercise analogous to the limitations contained herein) and (2) the number of Common Shares issuable upon the conversion of the Series A Senior Convertible Preferred Shares with respect to which the determination of this proviso is being made, would result in beneficial ownership by the holder and its affiliates of more than 4.99% of the then outstanding Common Shares of the Company. For purposes of the proviso set forth in the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Exchange Act, and Regulations 13D-G thereunder. However, the limitations on conversion or exercise detailed herein, may be waived (up to a maximum of 9.99%) by the holder and in its sole discretion, not less than sixty-one (61) days’ prior notice to the Company, and the provisions of the limitations herein shall continue to apply until such 61st day (or such later date, as determined by the holder, as may be specified in such notice of waiver).

 

At the time of this Designation, Leonite Capital, LLC is the beneficial owner of more than 4.99% of the outstanding Common Shares of the Company. The provisions of this Section 10(j) shall not apply to Leonite Capital, LLC provided that it maintains beneficial ownership of the then outstanding Common Shares of the Company in excess of 4.99%. If at any time hereafter Leonite Capital, LLC’s beneficial ownership of the Company is less than 4.99% of the then outstanding Common Shares, Leonite Capital, LLC may choose to have the provisions of this Section 10(j) then apply in full. At no time shall Leonite Capital, LLC’s beneficial ownership exceed 9.99% of the then outstanding Common Shares of the Company.

 

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11. Other Adjustments. The Stated Dividend Rate, the Stated Value and the Conversion Price shall automatically adjust as follows:

 

(i) On the first day of the 12th month following the issuance date of any Series A Senior Convertible Preferred Share (the “First Adjustment Date”), the Stated Dividend Rate shall automatically increase by five percent (5.0%) per annum and the Conversion Price shall automatically adjust to the lower of the (i) initial Conversion Price and (ii) the price equal the lowest VWAP of the ten (10) trading days immediately preceding the First Adjustment Date .

 

(ii) On the first day of the 24th month following the issuance date of any Series A Senior Convertible Preferred Share (the “Second Adjustment Date”), the Stated Dividend Rate shall automatically increase by an additional five percent (5.0%) per annum, the Stated Value shall automatically increase by ten percent (10%) and the Conversion Price shall automatically adjust to the lower of the (i) initial Conversion Price and (ii) the price equal the lowest VWAP of the ten (10) trading days immediately preceding the Second Adjustment Date.

 

(iii) On the first day of the 36th month following the issuance date of any Series A Senior Convertible Preferred Share (the “Third Adjustment Date”), the Stated Dividend Rate shall automatically increase by an additional five percent (5.0%) per annum, the Stated Value shall automatically increase by ten percent (10%) and the Conversion Price shall automatically adjust to the lower of the (i) initial Conversion Price and (ii) the price equal the lowest VWAP of the ten (10) trading days immediately preceding the Third Adjustment Date.

 

12. Additional Equity Interest. On the Third Adjustment Date, the Company shall cause the Acquired Company (as defined below) to issue to the holders of Series A Senior Convertible Preferred Shares, on a pro rata basis, a ten percent (10%) equity stake in any company (in the aggregate) (the “Acquired Company”) acquired with the proceeds from the sale of the Series A Senior Convertible Preferred Shares (collectively, the “Additional Equity Interest”). The Company shall cause the Acquired Company to grant to the holders of the Series A Senior Convertible Preferred Shares upon the issuance to them of the Additional Equity Interest a right to receive an additional number of shares of common stock of the Acquired Company if the Acquired Company issues to any third party equity securities at a price below the Acquisition Price (as defined below). Such additional number of shares of common stock of the Acquired Company to be issued in such instance shall be equal to a number of shares of common stock of the Acquired Company which, when added to the number of shares of Common Stock of the Acquired Company constituting the Additional Equity Interest, would be equal to the total number of shares of Common Stock which would have been issued to a holder of Series A Senior Convertible Preferred Shares if the price per share of Common Stock of the Acquired Company was equivalent to the price per equity security paid by such third party in the Acquired Company. For purposes of this provision, “Acquisition Price” means the price per share of the Acquired Company that was paid by the Company upon the acquisition of the Acquired Company.

 

13. Additional Issuances. The Board may only authorize and issue additional Series A Senior Convertible Preferred Shares from time to time in one or more series with the written consent of the Requisite Holders.

 

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14. Definitions. For purposes of the Series A Senior Convertible Preferred Shares and as used in this Designation, the following terms that are not defined elsewhere in this Designation shall have the meanings indicated below:

 

Business Day” means a day on which the New York Stock Exchange is open for trading and which is not a Saturday, Sunday or other day on which banks in New York City are authorized or required by law to close.

 

Allocation Shares” means any of the Company’s Allocation Shares as defined in the Operating Agreement.

 

Common Shares” means any of the Company’s Common Shares as defined in the Operating Agreement.

 

Conversion Price” means $2.00 per share for the Common Shares, subject to adjustment as provided herein.

 

Delaware Act” means the Delaware Limited Liability Company Act, Title 6, Chapter 18, §§ 18-101, et seq, and any successor statute, as it may be amended from time to time.

 

Dividend Payment Date” means January 30, April 30, July 30 and October 30 beginning on January 30, 2021.

 

Dividend Period” means the period commencing on the first day of each calendar month immediately following a Dividend Payment Date (other than the initial Dividend Period, which shall commence on the date the applicable Series A Senior Convertible Preferred Shares are issued) and ending on and including the next Dividend Payment Date; provided, however, that any Dividend Period during which any Series A Senior Convertible Preferred Shares shall be redeemed pursuant to Section 4 hereof shall end on but exclude the Redemption Date only with respect to the Series A Senior Convertible Preferred Shares being redeemed.

 

Event of Default” means the happening of any of the following events:

 

(a) Any representation or warranty made or deemed made by the Company in the Securities Purchase Agreement or by the Company or any of its subsidiaries in any other Related Agreement to which it is a party or any certificate or document delivered by it pursuant hereto or thereto shall prove to have been false or misleading in any material respect when so made or deemed made;

 

(b) The Company shall fail to declare or pay any dividends in accordance with Section 2 hereof or any failure or default shall be made in the payment or distribution on any Series A Senior Convertible Preferred Shares or any other Preferred Shares, when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or by acceleration thereof or otherwise, in each case for any reason whatsoever and, solely with respect to any failure to declare or pay any dividends in accordance with Section 2, such failure shall continue unremedied for a period of five (5) Business Days;

 

(c) Any failure or default shall be made in the due observance or performance by the Company or any of its subsidiaries of any covenant, condition or agreement contained herein or in any other Related Agreement to which it is a party and such failure or default shall continue unremedied for a period of forty five (45) days after the notice thereof;

 

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(d) The Company or any subsidiary of the Company shall make an assignment for the benefit of creditors, or apply for or consent to the appointment of a receiver or trustee for it or for a substantial part of its property or business, or such a receiver or trustee shall otherwise be appointed;

 

(e) (i) Any unpaid money judgment, writ or similar process shall be entered or filed against the Company or any subsidiary of the Company or any of its property or other assets for more than $100,000, and shall remain unvacated, unbonded or unstayed for a period of forty five (45) days unless otherwise consented to by the holders of the Requisite Holders; or (ii) the settlement of any claim or litigation, creating an obligation on the Company in amount over $100,000 that remains unpaid after forty five (45) days;

 

(f) Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings, voluntary or involuntary, for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Company or any subsidiary of the Company. With respect to any such proceedings that are involuntary, the Company shall have a sixty (60) day cure period in which to have such involuntary proceedings dismissed;

 

(g) If at any time on or after the date hereof, the Company shall fail to maintain the listing or quotation of the Common Shares on the OTCQB or a national securities exchange and the Company does not cure such failure within sixty (60) days;

 

(h) Any dissolution, liquidation, or winding up of the Company or any substantial portion of its business;

 

(i) Any cessation of operations by the Company or the Company admits it is otherwise generally unable to pay its debts as such debts become due, provided, however, that any disclosure of the Company’s ability to continue as a “going concern” shall not be an admission that the Company cannot pay its debts as they become due;

 

(j) The failure by the Company to maintain any intellectual property rights, personal, real property or other assets which are necessary to conduct its business (whether now or in the future), to the extent that such failure would result in a material adverse condition or material adverse change in or affecting the business operations, properties or financial condition of the Company or any of its subsidiaries, taken as a whole (a “Material Adverse Effect”);

 

(k) The Company restates any financial statements for any date or period from two years prior to the initial issuance of any Series A Senior Convertible Preferred Shares, if the result of such restatement would, by comparison to the unrestated financial statement, have constituted a Material Adverse Effect on the rights of the holders of Series A Senior Convertible Preferred Shares;

 

(l) The failure of the Company to execute any of the Related Agreements if not cured within fifteen (15) days of receipt by the Company of written notice of such failure from any holder of Series A Senior Convertible Preferred Shares;

 

(m) Any court of competent jurisdiction issues an order declaring this Designation, any of the other Related Agreements or any provision hereunder or thereunder to be illegal, exclusive of the execution of the Related Agreements or the transactions and acts contemplated herein;

 

(n) A breach or default by the Company of any covenant or other term or condition contained in any of the other financial instrument, including but not limited to all promissory notes, currently issued, or hereafter issued, by the Company, to any holder of Series A Senior Convertible Preferred Shares or any other third party (the “Other Agreements”), after the passage of all applicable notice and cure or grace periods, that results in a Material Adverse Effect;

 

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(o) The Company effectuates a reverse split of its Common Shares without twenty (20) days prior written notice to the holders of the Series A Senior Convertible Preferred Shares.

 

(p) In the event that the Company proposes to replace its transfer agent, the Company fails to provide, prior to the effective date of such replacement, a fully executed Irrevocable Transfer Agent Instructions signed by the successor transfer agent to Company and the Company;

 

(q) The DTC places a “chill” (i.e. a restriction placed by DTC on one or more of DTC’s services, such as limiting a DTC participant’s ability to make a deposit or withdrawal of the security at DTC) on any of the Company’s securities;

 

(r) The Common Shares is otherwise not eligible for trading through the DTC’s Fast Automated Securities Transfer or Deposit/Withdrawal at Custodian programs;

 

(s) Following written notice by a holder of Series A Senior Convertible Preferred Shares that it does not desire to receive material non-public information concerning the Company which is not immediately cured by Company’s filing of a Form 8-K pursuant to Regulation FD on that same date, any attempt by the Company or its officers, directors, and/or affiliates to transmit, convey, disclose, or any actual transmittal, conveyance, or disclosure by the Company or its officers, directors, and/or affiliates of, material non-public information concerning the Company, to any holder of Series A Senior Convertible Preferred Shares or its successors and assigns, which is not immediately cured by Company’s filing of a Form 8-K pursuant to Regulation FD on that same date; or

 

(t) If, at any time on or after the date which is six (6) months after the issuance date of any Series A Senior Convertible Preferred Shares, the holder of such shares is unable to (i) obtain a standard “144 legal opinion letter” from an attorney reasonably acceptable to such holder, such holder’s brokerage firm (and respective clearing firm), and the Company’s transfer agent in order to facilitate such holder’s conversion of such Series A Senior Convertible Preferred Shares into free trading Common Shares pursuant to Rule 144, and/or (ii) thereupon deposit such shares into such holder’s brokerage account.

 

Exchange Act” means the United States Securities Exchange Act of 1934, as the same has been and hereafter is amended from time to time.

 

Indebtedness” of any person shall mean, without duplication, (a) all obligations of such person for borrowed money, (b) all obligations of such person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such person upon which interest charges are customarily paid, (d) all obligations of such person under conditional sale or other title retention agreements relating to property or assets purchased by such person, (e) all obligations of such person issued or assumed as the deferred purchase price of property or services (excluding trade accounts payable and accrued obligations incurred in the ordinary course of business), (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any lien on property owned or acquired by such person, whether or not the obligations secured thereby have been assumed, (g) all guarantees by such person of Indebtedness of others, (h) all obligations of such person as an account party in respect of letters of credit, and (i) any merchant cash advance transaction.

 

KCWS” means Kyle’s Custom Wood Shop, Inc. and its applicable subsidiaries and affiliates.

 

Liquidation” means any liquidation, dissolution or winding up of the Company’s affairs, whether voluntary or involuntary; provided, however, that none of (i) a consolidation or merger of the Company with one or more Persons, individually or in a series of transactions, (ii) a sale, lease or transfer of all or substantially all of the Company's assets or (iii) a statutory share exchange shall be deemed to be a Liquidation.

 

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Person” means natural persons, companies, limited liability companies, unlimited liability companies, limited partnerships, general partnerships, limited liability partnerships, joint ventures, trusts, land trusts, business trusts, or other organizations, irrespective of whether they are legal entities, and governments and agencies and political subdivisions thereof.

 

Preferred Shares” means (i) the Series A Senior Convertible Preferred Shares, (ii) the Series A Preferred Shares, and (iii) any other class or series of the Company’s preferred equity, however designated, which entitles the holder thereof to a preference with respect to the payment of dividends, or as to the distribution of assets upon any Liquidation of the Company, over Common Shares.

 

Redemption Date” means the date fixed for redemption of the Series A Senior Convertible Preferred Shares and specified in any notice to holders furnished under Section 4(d) hereof.

 

Redemption Stated Value” means, for purposes of redemptions, an amount equal to one hundred fifteen percent (115%) of the Stated Value for the Series A Senior Convertible Preferred Shares.

 

Related Agreements” shall mean the Designation, the Operating Agreement, the Securities Purchase Agreement, the Warrant and any other documents or instruments executed and delivered in connection with any of the foregoing.

 

Registrar and Transfer Agent” means VStock Transfer LLC, or such other agent or agents of the Company as may be designated from time to time by the Board of Directors of the Company or its duly authorized designee as the transfer agent and registrar for the Series A Senior Convertible Preferred Shares.

 

Requisite Holders” means the holders of a majority of Series A Senior Convertible Preferred Shares, which majority must include Leonite Capital, LLC so long as Leonite Capital, LLC holds any Series A Senior Convertible Preferred Shares.

 

Securities Purchase Agreement” means the Securities Purchase Agreement, dated as of even date herewith, by and between and the Company and any purchaser of Series A Senior Convertible Preferred Shares.

 

Series A Preferred Shares” means any of the Company’s Series A Preferred Shares as defined in the Operating Agreement.

 

Stated Dividend Rate” has the meaning set forth in Section 2 hereof.

 

Stated Value” means, for purposes of conversions and dividends, $2.00 per share for the Series A Senior Convertible Preferred Shares, subject to adjustment as provided herein.

 

Variable Rate Transaction” means a transaction in which the Company or any subsidiary (i) issues or sells any convertible securities either (A) at a conversion, exercise or exchange rate or other price that is based upon and/or varies with the trading prices of, or quotations for, the Common Shares at any time after the initial issuance of such convertible securities, or (B) with a conversion, exercise or exchange price that is subject to being reset at some future date after the initial issuance of such convertible securities or upon the occurrence of specified or contingent events directly or indirectly related to the business of the Company or the subsidiary, as the case may be, or the market for the Common Shares, or (ii) enters into any agreement (including, without limitation, an “equity line of credit” or an “at-the-market offering”) whereby the Company or any subsidiary may sell securities at a future determined price (other than standard and customary “preemptive” or “participation” rights).  

 

Warrant” shall mean, with respect to a purchaser of Series A Senior Convertible Preferred Shares, any Warrant to Purchase Common Shares issued by the Company to a Person in connection with such Person’s purchase of Series A Senior Convertible Preferred Shares.

 

 

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Exhibit 4.2

 

NEITHER THIS SECURITY NOR THE SECURITIES AS TO WHICH THIS SECURITY MAY BE EXERCISED HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.

 

COMMON SHARE PURCHASE WARRANT

 

1847 HOLDINGS LLC

 

Warrant Shares: [●]

Date of Issuance: September [●], 2020 (“Issuance Date”)

 

This COMMON SHARE PURCHASE WARRANT (the “Warrant”) certifies that, for value received (in connection with the issuance of Series A Senior Convertible Preferred Shares to the Holder (as defined below) of even date (the “Preferred Shares”), [●] (including any permitted and registered assigns, each a “Holder”), is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time within three (3) years after the date of issuance hereof, to purchase from 1847 Holdings LLC, an a Delaware limited liability company (the “Company”), up to [●] Common Shares (the “Warrant Shares”) (whereby such number may be adjusted from time to time pursuant to the terms and conditions of this Warrant) at the Exercise Price per share then in effect. This Warrant is issued by the Company as of the date hereof in connection with that certain securities purchase agreement, dated September 30, 2020, by and between the Company and the Holder (the “Purchase Agreement”).

 

Capitalized terms used in this Warrant shall have the meanings set forth in the Purchase Agreement unless otherwise defined in the body of this Warrant or in Section 12 below. For purposes of this Warrant, the term “Exercise Price” shall mean $2.50, subject to adjustment as provided herein (including but not limited to cashless exercise), and the term “Exercise Period” shall mean the period commencing on the Issuance Date and ending on 6:00 p.m. eastern standard time on the three-year anniversary thereof.

 

 

 

 

1. EXERCISE OF WARRANT.

 

(a) Mechanics of Exercise. Subject to the terms and conditions hereof, the rights represented by this Warrant may be exercised in whole or in part at any time or times during the Exercise Period by delivery of a written notice, in the form attached hereto as Exhibit A (the “Exercise Notice”), of the Holder’s election to exercise this Warrant. The Holder shall not be required to deliver the original Warrant in order to effect an exercise hereunder. Partial exercises of this Warrant resulting in purchases of a portion of the total number of Warrant Shares available hereunder shall have the effect of lowering the outstanding number of Warrant Shares purchasable hereunder in an amount equal to the applicable number of Warrant Shares purchased. On or before the third Trading Day (the “Warrant Share Delivery Date”) following the date on which the Company shall have received the Exercise Notice, and upon receipt by the Company of payment of an amount equal to the applicable Exercise Price multiplied by the number of Warrant Shares as to which all or a portion of this Warrant is being exercised (the “Aggregate Exercise Price” and together with the Exercise Notice, the “Exercise Delivery Documents”) in cash or by wire transfer of immediately available funds (or by cashless exercise, in which case there shall be no Aggregate Exercise Price provided), the Company shall cause the Warrant Shares purchased hereunder to be transmitted by its transfer agent to the Holder by crediting the account of the Holder’s or its designee’s balance account with The Depository Trust Company through its Deposit or Withdrawal at Custodian system (“DWAC”) if the Company is then a participant in such system and either (A) there is an effective registration statement permitting the issuance of the Warrant Shares to or resale of the Warrant Shares by Holder, or (B) the Warrant Shares are eligible for resale by the Holder without volume or manner-of-sale limitations pursuant to Rule 144 and, in either case, the Warrant Shares have been sold by the Holder prior to the Warrant Share Delivery Date (as defined below), and otherwise by physical delivery of a certificate, registered in the Company’s share register in the name of the Holder or its designee, for the number of Warrant Shares to which the Holder is entitled pursuant to such exercise to the address specified by the Holder in the Exercise Delivery Documents. If the Warrant Shares must be delivered in certificated form, the Company shall (or direct its transfer agent to) issue and dispatch by overnight courier to the address as specified in the Exercise Notice, a certificate, registered in the Company’s share register in the name of the Holder or its designee, for the number of Common Shares to which the Holder is entitled pursuant to such exercise or, with the written consent of the Holder, such Warrant Shares may be issued in book entry form at the transfer agent. Upon delivery of the Exercise Delivery Documents, the Holder shall be deemed for all corporate purposes to have become the holder of record of the Warrant Shares with respect to which this Warrant has been exercised, irrespective of the date of delivery of the certificates evidencing such Warrant Shares. If this Warrant is submitted in connection with any exercise and the number of Warrant Shares represented by this Warrant submitted for exercise is greater than the number of Warrant Shares being acquired upon an exercise, then the Company shall, at the written request of the Holder, as soon as practicable and in no event later than three (3) Business Days following such request and at the Company’s expense, issue a new Warrant (in accordance with Section 6) representing the right to purchase the number of Warrant Shares purchasable immediately prior to such exercise under this Warrant, less the number of Warrant Shares with respect to which this Warrant is exercised.

 

If the Company fails to cause its transfer agent to transmit to the Holder the respective Common Shares by the respective Warrant Share Delivery Date, then the Holder will have the right to rescind such exercise in Holder’s sole discretion, and such failure shall be deemed an event of default under the Purchase Agreement to the extent any securities issued thereunder remain outstanding and are held by the Holder.

 

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If at any time after the 6-month anniversary of the Issuance Date, the Market Price of one Common Share is greater than the Exercise Price and the Warrant Shares are not registered under an effective non-stale registration statement of the Company, the Holder may elect to receive Warrant Shares pursuant to a cashless exercise, in lieu of a cash exercise, equal to the value of this Warrant determined in the manner described below (or of any portion thereof remaining unexercised) by surrender of this Warrant and a Notice of Exercise, in which event the Company shall issue to Holder a number of Common Shares computed using the following formula:

 

X = Y (A-B)

 

A

 

Where X = the number of Shares to be issued to Holder.

 

Y = the number of Warrant Shares that the Holder elects to purchase under this Warrant (at the date of such calculation).

 

A = the Market Price (at the date of such calculation).

 

B = Exercise Price (as adjusted to the date of such calculation).

 

(b) No Fractional Shares. No fractional shares shall be issued upon the exercise of this Warrant as a consequence of any adjustment pursuant hereto. All Warrant 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 a Warrant Share by such fraction.

 

(c) Holder’s Exercise Limitations. The Company shall not effect any exercise of this Warrant, and a Holder shall not have the right to exercise any portion of this Warrant, to the extent that after giving effect to issuance of Warrant Shares upon exercise as set forth on the applicable Notice of Exercise, the Holder (together with the Holder’s Affiliates, and any other persons acting as a group together with the Holder or any of the Holder’s Affiliates), would beneficially own in excess of the Beneficial Ownership Limitation, as defined below. For purposes of the foregoing sentence, the number of Common Shares beneficially owned by the Holder and its Affiliates shall include the number of Common Shares issuable upon exercise of this Warrant with respect to which such determination is being made, but shall exclude the number of Common Shares which would be issuable upon (i) exercise of the remaining, non-exercised portion of this Warrant beneficially owned by the Holder or any of its Affiliates and (ii) exercise or conversion of the unexercised or non-converted portion of any other securities, including the Preferred Shares, of the Company (including without limitation any other Common Share Equivalents) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its Affiliates. Except as set forth in the preceding sentence, for purposes of this paragraph (c), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act, it being acknowledged by the Holder that the Company is not representing to the Holder that such calculation is in compliance with Section 13(d) of the Exchange Act and the Holder is solely responsible for any schedules required to be filed in accordance therewith. To the extent that the limitation contained in this paragraph applies, the determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any affiliates) and of which portion of this Warrant is exercisable shall be in the sole discretion of the Holder, and the submission of a Notice of Exercise shall be deemed to be the Holder’s determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates) and of which portion of this Warrant is exercisable, in each case subject to the Beneficial Ownership Limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination.

 

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For purposes of this paragraph, in determining the number of outstanding Common Shares, a Holder may rely on the number of outstanding Common Shares as reflected in (A) the Company’s most recent periodic or annual report filed with the Commission, as the case may be, (B) a more recent public announcement by the Company or (C) a more recent written notice by the Company or its transfer agent setting forth the number of Common Shares outstanding. Upon the request of a Holder, the Company shall within two Trading Days confirm to the Holder the number of Common Shares then outstanding. In any case, the number of outstanding Common Shares shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Warrant, by the Holder or its affiliates since the date as of which such number of outstanding Common Shares was reported. The “Beneficial Ownership Limitation” shall be 4.99% of the number of Common Shares outstanding immediately after giving effect to the issuance of Common Shares issuable upon exercise of this Warrant. Upon no fewer than sixty-one (61) days’ prior notice to the Company, a Holder may increase or decrease the Beneficial Ownership Limitation provisions of this paragraph and the provisions of this paragraph shall continue to apply. Any such increase or decrease will not be effective until the sixty-first (61st) day after such notice is delivered to the Company and shall only apply to such Holder and no other Holder. The limitations contained in this paragraph shall apply to a successor Holder of this Warrant.

 

(d) The Holder understands and covenants that if, at any time following the one year anniversary of the date of this Warrant, (i) the Company is listed on a national securities exchange or the over-the-counter market, (ii) Warrant Shares are registered or the Holder otherwise has the ability to trade the Warrant Shares without restriction, (iii) the 30-day volume-weighted daily average price of the Company’s Common Stock exceeds 200% of the Exercise Price, as adjusted and (ii) the average daily trading volume is at least 100,000 Common Shares during such 30-day period, the Holder shall be required to fully exercise the Warrant within ten (10) business days of receiving written notice from the Company following the aforementioned 30th trading day and if the Holder does not so exercise the Warrant, then it shall automatically expire. The Holder shall furnish the Company with a completed and fully executed Notice to Exercise attached to this Warrant and, if exercised for cash, remit the funds pursuant to the Notice to Exercise.

 

2. ADJUSTMENTS. The Exercise Price and the number of Warrant Shares shall be adjusted from time to time as follows:

 

(a) Proportional Adjustments of Outstanding Common Shares and Common Share Dividends. If the Company, at any time while this Warrant is outstanding: (i) pays a share dividend or otherwise makes a distribution or distributions on Common Shares or any other equity or equity equivalent securities payable in Common Shares (which, for avoidance of doubt, shall not include any Common Shares issued by the Company upon exercise of this Warrant), (ii) subdivides outstanding Common Shares into a larger number of shares, (iii) combines (including by way of reverse stock split) outstanding Common Shares into a smaller number of shares, or (iv) issues by reclassification of Common Shares any membership interests of the Company, then in each case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event, and the number of shares issuable upon exercise of this Warrant shall be proportionately adjusted such that the aggregate Exercise Price of this Warrant shall remain unchanged. Any adjustment made pursuant to this Section 2(b) shall become effective immediately after the record date for the determination of shareholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification. For the purposes of clarification, the Exercise Price of this Warrant will not be adjusted in the event that the Company or any subsidiary thereof, as applicable, sells or grants any option to purchase, or sell or grant any right to reprice, or otherwise dispose of or issue (or announce any offer, sale, grant or any option to purchase or other disposition) any Common Shares or Common Share Equivalents, at an effective price per share less than the Exercise Price then in effect.

 

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(b) Anti-dilution Adjustment. If at any time while this Warrant is outstanding, the Company sells or grants (or has sold or granted, as the case may be) any option to purchase or sells or grants any right to reprice, or otherwise disposes of or issues (or has sold or issued, as the case may be, or announces any sale, grant or any option to purchase or other disposition), any Common Share or other securities convertible into, exercisable for or otherwise entitles any person or entity the right to acquire Common Shares at an effective price per share that is lower than the then Exercise Price (such lower price, the “Base Exercise Price” and such issuances, collectively, a “Dilutive Issuance”) (it being agreed that if the holder of the Common Share or other securities so issued shall at any time, whether by operation of purchase price adjustments, reset provisions, floating conversion, exercise or exchange prices or otherwise, or due to warrants, options or rights per share which are issued in connection with such issuance, be entitled to receive Common Shares at an effective price per share that is lower than the Exercise Price, such issuance shall be deemed to have occurred for less than the Exercise Price on such date of the Dilutive Issuance), then the Exercise Price shall be reduced to a price equal to the Base Exercise Price, and the number of Warrant Shares issuable hereunder shall be increased such that the aggregate Exercise Price payable hereunder, after taking into account the decrease in the Exercise Price, shall be equal to the aggregate Exercise Price prior to such adjustment. Such adjustment shall be made whenever such Common Share or other securities are issued, provided however, that no adjustment will be made under this Section 2(b) in respect of an Excluded Issuance. For purposes of this Section 2(b), an “Excluded Issuance” shall have the meaning ascribed to such term in the Purchase Agreement. In the event of an issuance of securities involving multiple tranches or closings, any adjustment pursuant to this Section 2(b) shall be calculated as if all such securities were issued at the initial closing.

 

(c) Full Ratchet Increase in Warrant Shares. Until the Warrants are no longer outstanding, whenever the Exercise Price is adjusted under this Section 2, the number of Warrant Shares shall be increased on a full ratchet basis to the number of shares of Common Stock determined by multiplying the Exercise Price then in effect immediately prior to such adjustment by the number of Warrant Shares issuable upon exercise of this Warrant immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment. By way of example, if E is the total number of Warrant Shares in effect immediately prior to such Dilutive Issuance, F is the Exercise Price in effect immediately prior to such Dilutive Issuance, and G is the Dilutive Issuance Price, the adjustment to the number of Warrant Shares can be expressed in the following formula: Total number of Warrant Shares after such Dilutive Issuance = the number obtained from dividing [E x F] by G. For the avoidance of doubt, the price protection provided for under this Agreement shall survive so long as any of the Warrants remain outstanding.

 

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3. REDEMPTION OF WARRANTS.

 

(a) The Company may redeem the Warrants held by the Holder in whole (but not in part) by paying in cash (the “Redemption Price”) to the Holder as follows: (i) $0.50 per Warrant Share then underlying this Warrant if within the first twelve (12) months; (ii) $1.00 per Warrant Share then underlying this Warrant if after the first twelve (12) months, but before twenty-four (24) months; and (iii) $1.50 per Warrant Share then underlying this Warrant if after twenty-four months, but before thirty-six (36) months.

 

(b) The Company shall mail written notice of the redemption (the “Redemption Notice”) of any of the Warrant under this Section 3, postage prepaid, to the Holder of the Warrant to be redeemed at the address of Holder as shown on the Company’s stock transfer records, not less than fifteen (15) nor more than thirty (30) days prior to the Redemption Date as set forth in the Redemption Notice; provided, however, that Holder subject to such Redemption Notice shall have the right to exercise Holder’s Warrant into Warrant Shares in accordance with Section 1 hereof prior to the Redemption Date in lieu of the Redemption Price. Neither the failure to give notice required by this Section 3(b), nor any defect in the notice therein or in the mailing thereof, to any particular holder, shall affect the validity of the redemption proceedings with respect to the other holders. Any notice mailed in the manner herein provided shall be conclusively presumed to have been duly given on the date mailed whether or not Holder receives the notice. Each such mailed notice shall state, as appropriate: (i) the Redemption Date; (ii) the applicable Redemption Price; (iii) the number of underlying Warrant Shares to be redeemed; and (iii) that the Warrants are being redeemed pursuant to the Company’s redemption right under Section 3(a) hereof. If a notice of redemption is duly mailed as aforesaid, then from and after the Redemption Date, all rights of the Holder thereof as a holder of the Warrant shall cease (except the right to receive cash payable upon such redemption, without interest thereon, upon surrender and endorsement of their certificates if so required and to receive any dividends payable thereon); provided, however, that no such rights shall terminate if the Company fails to provide funds sufficient to complete the redemption at the time and place specified for payment pursuant to the applicable redemption notice.

 

4. FUNDAMENTAL TRANSACTIONS. If, at any time while this Warrant is outstanding, (i) the Company effects any merger of the Company with or into another entity and the Company is not the surviving entity (such surviving entity, the “Successor Entity”), (ii) the Company effects any sale of all or substantially all of its assets in one or a series of related transactions, (iii) any tender offer or exchange offer (whether by the Company or by another individual or entity, and approved by the Company) is completed pursuant to which holders of Common Shares are permitted to tender or exchange their Common Shares for other securities, cash or property and the holders of at least fifty percent (50%) of the Common Shares accept such offer, or (iv) the Company effects any reclassification of the Common Shares or any compulsory share exchange pursuant to which the Common Shares are effectively converted into or exchanged for other securities, cash or property (other than as a result of a subdivision or combination of Common Shares) (in any such case, a “Fundamental Transaction”), then, upon any subsequent exercise of this Warrant, the Holder shall have the right to receive the number of Common Shares of the Successor Entity or of the Company and any additional consideration (the “Alternate Consideration”) receivable upon, or as a result of, such reorganization, reclassification, merger, consolidation, or disposition of assets by a holder of the number of Common Shares for which this Warrant is exercisable immediately prior to such event (disregarding any limitation on exercise contained herein solely for the purpose of such determination). For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one Common Share in such Fundamental Transaction, and the Company shall apportion the Exercise Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Shares are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any exercise of this Warrant following such Fundamental Transaction. To the extent necessary to effectuate the foregoing provisions, any Successor Entity in such Fundamental Transaction shall issue to the Holder a new warrant consistent with the foregoing provisions and evidencing the Holder’s right to exercise such warrant into Alternate Consideration.

 

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5. NON-CIRCUMVENTION. The Company covenants and agrees that it will not, by amendment of its certificate of formation, operating agreement or through any reorganization, transfer of assets, consolidation, merger, scheme of arrangement, 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 of this Warrant, and will at all times in good faith carry out all the provisions of this Warrant and take all action as may be required to protect the rights of the Holder. Without limiting the generality of the foregoing, the Company (i) shall not increase the par value of any Common Shares receivable upon the exercise of this Warrant above the Exercise Price then in effect, (ii) shall take all such actions as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and non-assessable Common Shares upon the exercise of this Warrant, and (iii) shall, for so long as this Warrant is outstanding, have authorized and reserved, free from preemptive rights, a sufficient number of Common Shares to provide for the exercise of the rights represented by this Warrant (without regard to any limitations on exercise).

 

6. WARRANT HOLDER NOT DEEMED A SHAREHOLDER. Except as otherwise specifically provided herein, this Warrant, in and of itself, shall not entitle the Holder to any voting rights or other rights as a shareholder of the Company. In addition, nothing contained in this Warrant shall be construed as imposing any liabilities on the Holder to purchase any securities (upon exercise of this Warrant or otherwise) or as a shareholder of the Company, whether such liabilities are asserted by the Company or by creditors of the Company.

 

7. REISSUANCE.

 

(a) Lost, Stolen or Mutilated Warrant. If this Warrant is lost, stolen, mutilated or destroyed, the Company will, 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 this Warrant so lost, stolen, mutilated or destroyed.

 

(b) Issuance of New Warrants. Whenever the Company is required to issue a new Warrant pursuant to the terms of this Warrant, such new Warrant shall be of like tenor with this Warrant, and shall have an issuance date, as indicated on the face of such new Warrant which is the same as the Issuance Date.

 

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8. TRANSFER.

 

(a) Notice of Transfer. The Holder agrees that, if practicable, but without any obligation to do so, it will give written notice to the Company of its intent to transfer this Warrant or any Warrant Shares, describing briefly the manner of any proposed transfer. Promptly upon receiving such written notice, the Company shall present copies thereof to the Company’s counsel. If the proposed transfer may be effected without registration or qualification (under any federal or state securities laws), the Company, as promptly as practicable, shall notify the Holder thereof, whereupon the Holder shall be entitled to transfer this Warrant or to dispose of Warrant Shares received upon the previous exercise of this Warrant, all in accordance with the terms of the notice delivered by the Holder to the Company; provided, however, that an appropriate legend may be endorsed on this Warrant or the certificates for such Warrant Shares respecting restrictions upon transfer thereof necessary or advisable in the opinion of counsel and satisfactory to the Company to prevent further transfers which would be in violation of Section 5 of the Securities Act and applicable state securities laws; and provided further that the prospective transferee or purchaser shall execute the Assignment of Warrant attached hereto as Exhibit B and such other documents and make such representations, warranties, and agreements as may be required solely to comply with the exemptions relied upon by the Company for the transfer or disposition of the Warrant or Warrant Shares.

 

(b) If the proposed transfer or disposition of this Warrant or such Warrant Shares described in the written notice given pursuant to this Section 7 may not be effected without registration, qualification, or other available exemption of or for this Warrant or such Warrant Shares, the Holder will limit its activities in respect to such transfer or disposition as are permitted by law.

 

(c) Any transferee of all or a portion of this Warrant shall succeed to the rights and benefits of the initial Holder of this Warrant under the terms of the Purchase Agreement.

 

9. NOTICES. Whenever notice is required to be given under this Warrant, unless otherwise provided herein, such notice shall be given in accordance with the notice provisions contained in the Purchase Agreement. The Company shall provide the Holder with prompt written notice (i) immediately upon any adjustment of the Exercise Price, setting forth in reasonable detail, the calculation of such adjustment and (ii) at least 20 days prior to the date on which the Company closes its books or takes a record (A) with respect to any dividend or distribution upon the Common Shares, (B) with respect to any grants, issuances or sales of any shares or other securities directly or indirectly convertible into or exercisable or exchangeable for Common Shares or other property, pro rata to the holders of Common Shares or (C) for determining rights to vote with respect to any Fundamental Transaction, dissolution or liquidation, provided in each case that such information shall be made known to the public prior to or in conjunction with such notice being provided to the Holder.

 

10. AMENDMENT AND WAIVER. The terms of this Warrant may be amended or waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of each of the Company and the Holder.

 

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11. GOVERNING LAW. This Warrant shall be governed by and construed in accordance with the laws of the State of New York without regard to principles of conflicts of laws. Any action brought by either party against the other concerning the transactions contemplated by this Warrant shall be brought only in the state courts or federal courts located in Rockland County, New York. The parties to this Warrant hereby irrevocably waive any objection to jurisdiction and venue of any action instituted hereunder and shall not assert any defense based on lack of jurisdiction or venue or based upon forum non conveniens. THE COMPANY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE TO, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF THIS WARRANT OR ANY TRANSACTION CONTEMPLATED HEREBY. The prevailing party shall be entitled to recover from the other party its reasonable attorney's fees and costs. In the event that any provision of this Warrant or any other agreement delivered in connection herewith is declared invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision of any agreement. Each party hereby irrevocably waives personal service of process and consents to process being served in any suit, action or proceeding in connection with this Warrant or any other Transaction Document by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under the Purchase Agreement, or otherwise provided, and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by law.

 

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. CERTAIN DEFINITIONS. For purposes of this Warrant, the following terms shall have the following meanings:

 

(a) “Nasdaq” means The Nasdaq Stock Market (www.Nasdaq.com).

 

(c) “Common Share” means the Common Shares of the Company and any other class of securities into which such securities may hereafter be reclassified or changed.

 

(d) “Common Share Equivalents” means any securities of the Company that would entitle the holder thereof to acquire at any time Common Shares, including without limitation any debt, preferred shares, rights, options, warrants or other instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, Common Shares.

 

(e) “Principal Market” means the primary National Securities Exchange or over the counter market on which the Common Shares are then traded.

 

(f) “Market Price” means the highest traded price of the Common Shares during the thirty (30) Trading Days prior to the date of the respective Exercise Notice.

 

(g) “Trading Day” means (i) any day on which the Common Shares are listed or quoted and traded on its Principal Market, (ii) if the Common Shares are not then listed or quoted and traded on any National Securities Exchange, then a day on which trading occurs on any over-the-counter markets, or (iii) if trading does not occur on the over-the-counter markets, any Business Day.

 

(h) “National Securities Exchange” means a securities exchange that has registered with the Securities and Exchange Commission under Section 6 of the Securities Exchange Act of 1934.

 

9

 

 

IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed as of the Issuance Date set forth above.

 

  1847 HOLDINGS LLC
     
  By:  
  Name:  Ellery W. Roberts
  Title: CEO

 

 

 

 

EXHIBIT A

 

EXERCISE NOTICE

 

(To be executed by the registered holder to exercise this Common Share Purchase Warrant)

 

The Undersigned holder hereby exercises the right to purchase _________________ of the Common Shares (“Warrant Shares”) of 1847 HOLDINGS LLC, a Delaware limited liability company (the “Company”), evidenced by the attached copy of the Common Share Purchase Warrant (the “Warrant”). Capitalized terms used herein and not otherwise defined shall have the respective meanings set forth in the Warrant.

 

1. Form of Exercise Price. The Holder intends that payment of the Exercise Price shall be made as (check one):

 

a cash exercise with respect to _________________ Warrant Shares; or
by cashless exercise pursuant to the Warrant.

 

2. Payment of Exercise Price. If cash exercise is selected above, the holder shall pay the applicable Aggregate Exercise Price in the sum of $___________________ to the Company in accordance with the terms of the Warrant.

 

3. Delivery of Warrant Shares. The Company shall deliver to the holder __________________ Warrant Shares in accordance with the terms of the Warrant.

 

Date:     

 

   
  (Print Name of Registered Holder)
                 
  By:  
  Name:   
  Title:  

 

 

 

 

EXHIBIT B

 

ASSIGNMENT OF WARRANT

 

(To be signed only upon authorized transfer of the Warrant)

 

For Value Received, the undersigned hereby sells, assigns, and transfers unto ____________________ the right to purchase _______________ Common Shares of 1847 HOLDINGS LLC, a Delaware limited liability company, to which the within Common Share Purchase Warrant relates and appoints ____________________, as attorney-in-fact, to transfer said right on the books of 1847 Holdings LLC with full power of substitution and re-substitution in the premises. By accepting such transfer, the transferee has agreed to be bound in all respects by the terms and conditions of the within Warrant.

 

Dated:     

 

   
  (Signature) *
   
   
  (Name)
   
   
  (Address)
   
   
  (Social Security or Tax Identification No.)

 

* The signature on this Assignment of Warrant must correspond to the name as written upon the face of the Common Share Purchase Warrant in every particular without alteration or enlargement or any change whatsoever. When signing on behalf of a corporation, partnership, trust or other entity, please indicate your position(s) and title(s) with such entity.

 

 

 

 

 

Exhibit 10.1

 

STOCK PURCHASE AGREEMENT

 

dated as of August 27, 2020

 

among

 

1847 CABINETS INC.,

 

KYLE’S CUSTOM WOOD SHOP, INC.,

 

1847 HOLDINGS LLC

 

AND

 

THE OTHER PARTIES SET FORTH ON EXHIBIT A HERETO

 

 

 

 

TABLE OF CONTENTS

 

    Page
     
ARTICLE I DEFINITIONS 1
1.1 Certain Definitions. 1
ARTICLE II PURCHASE AND SALE OF THE SHARES 5
2.1 Purchase and Sale of the Shares. 5
2.2 Adjustments to Purchase Price. 6
2.3 Closing. 7
2.4 Transactions to be Effected at the Closing. 7
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE SELLERS 8
3.1 Authority and Enforceability. 8
3.2 Noncontravention. 8
3.3 The Shares. 8
3.4 Brokers’ Fees. 9
ARTICLE IV REPRESENTATIONS AND WARRANTIES CONCERNING THE COMPANY 9
4.1 Organization, Qualification and Corporate Power; Authority and Enforceability. 9
4.2 Subsidiaries. 10
4.3 Capitalization. 10
4.4 Noncontravention. 11
4.5 Financial Statements. 11
4.6 Taxes. 11
4.7 Compliance with Laws and Orders; Permits. 12
4.9 Tangible Personal Assets. 12
4.10 Real Property. 13
4.11 Intellectual Property. 14
4.12 Absence of Certain Changes or Events. 15
4.13 Contracts. 16
4.14 Litigation. 16
4.15 Employee Benefits. 17
4.16 Labor and Employment Matters. 17
4.17 Environmental. 17
4.18 Insurance. 18
4.19 Inventory. 18
4.20 Notes and Accounts Receivable. 18
4.21 Powers of Attorney. 18
4.22 Product Warranty. 18
4.23 Product Liability. 18
4.24 Brokers’ Fees. 18
4.25 Certain Business Relationships with the Company. 19
4.26 Disclosure. 19
ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE BUYER 19
5.1 Organization. 19
5.2 Authorization. 19
5.3 Noncontravention. 19

 

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TABLE OF CONTENTS

 

    Page
     
ARTICLE VI REPRESENTATIONS AND WARRANTIES OF THE BUYER PARENT 20
6.1 Organization. 20
6.2 Authorization. 20
6.3 Noncontravention 20
6.4 Capitalization. 21
6.5 Brokers’ Fees. 21
ARTICLE VII COVENANTS 21
7.1 Consents. 21
7.2 Operation of the Company’s Business. 21
7.3 Access. 22
7.4 Transfer of Cash and Cash Equivalents. 22
7.5 Notice of Developments. 23
7.6 No Solicitation. 23
7.7 Confidentiality 23
7.8 Taking of Necessary Action; Further Action; Taxes. 23
7.9 Payroll Protection Plan Loan. 24
7.10 Covenant not to Compete. 24
7.12 Financial Information. 25
7.13 Disclosure Schedule. 25
ARTICLE VIII CONDITIONS TO OBLIGATIONS TO CLOSE 25
8.1 Conditions to Obligation of the Buyer. 25
8.2 Conditions to Obligation of the Sellers. 27
ARTICLE IX TERMINATION; AMENDMENT; WAIVER 28
9.1 Termination of Agreement. 28
9.2 Effect of Termination. 28
9.3 Amendments. 28
9.4 Waiver. 28
ARTICLE X INDEMNIFICATION 29
10.1 Survival. 29
10.2 Indemnification by Sellers. 29
10.3 Indemnification by Buyer. 29
10.4 Indemnification Procedure. 30
10.5 Failure to Give Timely Notice. 30
10.6 Limited on Indemnification Obligation. 31
10.7 Payments. 31
ARTICLE XI MISCELLANEOUS 31
11.1 Press Releases and Public Announcement. 31
11.2 No Third-Party Beneficiaries. 31
11.3 Entire Agreement. 31
11.4 Succession and Assignment. 31
11.5 Construction. 32
11.6 Notices. 32
11.7 Governing Law. 33

 

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TABLE OF CONTENTS

 

    Page
     
11.8 Consent to Jurisdiction and Service of Process. 33
11.9 Headings. 34
11.10 Severability. 34
11.11 Expenses. 34
11.12 Incorporation of Exhibits and Schedules. 34
11.13 Specific Performance. 34
11.14 Counterparts. 34

 

Exhibit A – List of Sellers
Exhibit B - Example of Net Working Capital Calculation
Exhibit C – Form of Seller Note
Exhibit D – Employment Agreement Terms
Disclosure Schedule

 

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STOCK PURCHASE AGREEMENT

 

STOCK PURCHASE AGREEMENT, dated as of August 27, 2020 (the “Agreement”), among 1847 Cabinets Inc., a Delaware corporation (the “Buyer”), Kyle’s Custom Wood Shop, Inc., an Idaho corporation (the “Company”), Stephen Mallatt, Jr., an individual, and Rita Mallatt, an individual (each, a “Seller,” and collectively, the “Sellers”), and 1847 Holdings LLC, a Delaware limited liability company (“Buyer Parent”).

 

BACKGROUND

 

Each Seller is the record and beneficial owner of the number of shares (the “Shares”) of Common Stock, no par value, of the Company (the “Common Stock”), set forth opposite each Seller’s name on Exhibit A. The Sellers collectively own 100% of the issued and outstanding shares of Common Stock. The Sellers desire to sell all of the Shares to the Buyer, and the Buyer desires to purchase all of the Shares from the Sellers, upon the terms and subject to the conditions set forth in this Agreement (such sale and purchase of the Shares, the “Acquisition”).

 

AGREEMENT

 

NOW, THEREFORE, in consideration of the foregoing premises and the respective representations and warranties, covenants and agreements contained herein, the parties hereto agree as follows:

 

ARTICLE I
DEFINITIONS

 

1.1 Certain Definitions.

 

(a) When used in this Agreement, the following terms will have the meanings assigned to them in this Section 1.1(a):

 

Action” means any claim, action, suit, inquiry, hearing, proceeding or other investigation.

 

Affiliate” means, with respect to a Person, any other Person that, directly or indirectly, through one or more intermediaries, Controls, is Controlled by or is under common Control with, such Person. For purposes of this definition, “Control” (including the terms “Controlled by” and “under common Control with”) means possession of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of stock, as trustee or executor, by Contract or otherwise.

 

Benefit Plan” means any “employee benefit plan” as defined in ERISA Section 3(3), including any (a) nonqualified deferred compensation or retirement plan or arrangement which is an Employee Pension Benefit Plan (as defined in ERISA Section 3(2)), (b) qualified defined contribution retirement plan or arrangement which is an Employee Pension Benefit Plan, (c) qualified defined benefit retirement plan or arrangement which is an Employee Pension Benefit Plan (including any Multiemployer Plan (as defined in ERISA Section 3(37)), (d) Employee Welfare Benefit Plan (as defined in ERISA Section 3(1)) or material fringe benefit plan or program, or (e) stock purchase, stock option, severance pay, employment, change-in-control, vacation pay, company award, salary continuation, sick leave, excess benefit, bonus or other incentive compensation, life insurance, or other employee benefit plan, contract, program, policy or other arrangement, whether or not subject to ERISA, under which any present or former employee of the Company has any present or future right to benefits sponsored or maintained by the Company or any ERISA Affiliate.

 

 

 

 

Business Day” means a day other than a Saturday, Sunday or other day on which banks located in New York, NY are authorized or required by Law to close.

 

Closing Working Capital” means the Net Working Capital as reflected on the Closing Date Balance Sheet determined in accordance with GAAP.

 

Code” means the Internal Revenue Code of 1986, as amended.

 

Contract” means any written agreement, contract, commitment, arrangement or understanding.

 

ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

 

ERISA Affiliate” means any Person who is, or at any time was, a member of a “controlled group of corporations” within the meaning of Section 414(b) or (c) of the Code and, for the purpose of Section 302 of ERISA and/or Section 412, 4971, 4977, 4980D, 4980E and/or each “applicable section” under Section 414(f)(2) of the Code, within the meaning of Section 412(n)(6) of the Code that includes, or at any time included, the Company or any Affiliate thereof, or any predecessor of any of the foregoing.

 

Exchange Act” means the Securities Exchange Act of 1934, as amended.

 

GAAP” means United States generally accepted accounting principles.

 

Governmental Entity” means any entity or body exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to United States federal, state or local government or foreign, international, multinational or other government, including any department, commission, board, agency, bureau, official or other regulatory, administrative or judicial authority thereof.

 

Independent Accounting Firm” means any nationally recognized independent registered public accounting firm which has not represented the Company or the Sellers or any of their Affiliates for the past five years as will be agreed by the Company and the Buyer in writing.

 

IRS” means the Internal Revenue Service.

 

Knowledge of the Sellers” or any similar phrase means the actual knowledge of each or either Seller, in each case without obligation of inquiry.

 

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Law” means any statute, law, ordinance, rule, regulation of any Governmental Entity.

 

Liability” means all indebtedness, obligations and other liabilities and contingencies of a Person, whether absolute, accrued, contingent, fixed or otherwise, or whether due or to become due except for the Payroll Protection Plan Loan.

 

Lien” means, with respect to any property or asset, any mortgage, lien, pledge, charge, security interest, hypothecation or other encumbrance in respect of such property or asset.

 

Material Adverse Effect” means any material adverse effect on the assets, properties, condition (financial or otherwise), operations of the Company and any of its Subsidiaries, taken as a whole.

 

Net Working Capital” means (i) good and collectible accounts receivable; plus (ii) good and merchantable inventory; plus (iii) prepaid expenses and other current assets that have an economic benefit to the Company post-Closing, including the $91,000.00 in cash as provided in Section 7.4; less (iv) current accounts payable, accrued Liabilities and outstanding checks and other current Liabilities. For the avoidance of doubt, attached as Exhibit B is an example of the calculation of Net Working Capital.

 

Net Working Capital Target” is equal to $154,000.

 

Order” means any award, injunction, judgment, decree, order, ruling, subpoena or verdict or other decision issued, promulgated or entered by or with any Governmental Entity of competent jurisdiction.

 

“Payroll Protection Plan Loan” means the loan (including principal and any accrued interest) obtain by the Company in the principal amount of $281,125.00 funded on or about April 4, 2020, with JP Morgan Chase, as Lender.

 

Permit” means any authorization, approval, consent, certificate, license, permit or franchise of or from any Governmental Entity of competent jurisdiction or pursuant to any Law.

 

Person” means an individual, a corporation, a partnership, a limited liability company, a trust, an unincorporated association, a Governmental Entity or any agency, instrumentality or political subdivision of a Governmental Entity, or any other entity or body.

 

Preliminary Working Capital” means the Net Working Capital as reflected on the Preliminary Balance Sheet, determined in accordance with GAAP.

 

Representatives” means, with respect to any Person, the respective directors, officers, employees, counsel, accountants and other representatives of such Person.

 

Subsidiary” means, with respect to any Person, any corporation, partnership, joint venture or other legal entity of which such Person (either alone or through or together with any other Subsidiary), owns, directly or indirectly, more than 50% of the stock or other equity interests, the holders of which are generally entitled to vote for the election of the board of directors or other governing body of a non-corporate Person.

 

3

 

 

Taxes” means all federal, state, local and foreign income, profits, franchise, gross receipts, environmental, customs duty, capital stock, severance, stamp, payroll, sales, transfer, employment, unemployment, disability, use, property, withholding, excise, production, value added, occupancy and other taxes, duties or assessments of any nature whatsoever.

 

Taxing Authority” means any Governmental Entity having or purporting to exercise jurisdiction with respect to any Tax.

 

Tax Returns” means any return, declaration, report, claim for refund, or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof.

 

Transaction Proposal” means any unsolicited written bona fide proposal made by a third party relating to (i) any direct or indirect acquisition or purchase of all or substantially all assets of the Company, (ii) any direct or indirect acquisition or purchase of a majority of the combined voting power of the Shares, (iii) any merger, consolidation, business combination, recapitalization, liquidation, dissolution or similar transaction involving the Company in which the other party thereto or its stockholders will own 51% or more of the combined voting power of the parent entity resulting from any such transaction, or (iv) any other transaction that is inconsistent with the intent and purpose of this Agreement.

 

Transfer Taxes” means sales, use, transfer, recording, documentary, stamp, registration and stock transfer Taxes and any similar Taxes.

 

$” means United States dollars.

 

(b) For purposes of this Agreement, except as otherwise expressly provided herein or unless the context otherwise requires: (i) the meaning assigned to each term defined herein will be equally applicable to both the singular and the plural forms of such term and vice versa, and words denoting any gender will include all genders as the context requires; (ii) where a word or phrase is defined herein, each of its other grammatical forms will have a corresponding meaning; (iii) the terms “hereof”, “herein”, “hereunder”, “hereby” and “herewith” and words of similar import will, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement; (iv) when a reference is made in this Agreement to an Article, Section, paragraph, Exhibit or Schedule without reference to a document, such reference is to an Article, Section, paragraph, Exhibit or Schedule to this Agreement; (v) a reference to a subsection without further reference to a Section is a reference to such subsection as contained in the same Section in which the reference appears, and this rule will also apply to paragraphs and other subdivisions; (vi) the word “include”, “includes” or “including” when used in this Agreement will be deemed to include the words “without limitation”, unless otherwise specified; (vii) a reference to any party to this Agreement or any other agreement or document will include such party’s predecessors, successors and permitted assigns; (viii) a reference to any Law means such Law as amended, modified, codified, replaced or reenacted as of the date hereof, and all rules and regulations promulgated thereunder as of the date hereof; and (ix) all accounting terms used and not defined herein have the respective meanings given to them under GAAP.

 

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ARTICLE II
PURCHASE AND SALE OF THE SHARES

 

2.1 Purchase and Sale of the Shares. Upon the terms and subject to the conditions set forth in this Agreement, at the Closing each Seller will sell, transfer and deliver, and the Buyer will purchase from each Seller, all of the Shares set forth opposite such Seller’s name on Exhibit A, for an aggregate purchase price, subject to adjustment as described in Section 2.2, of Six Million, Six Hundred Fifty Thousand Dollars ($6,650,000) (the “Purchase Price”), consisting of: (i) Four Million, Two Hundred Thousand Dollars ($4,200,000) in cash (the “Cash Portion”), (ii) the Buyer Shares (as defined below), and (iii) the Seller Note (as defined below). The Purchase Price shall be allocated between the Sellers as set forth in Exhibit A. The Purchase Price assumes that the Buyer will be able to verify through its accounting due diligence that the Company has at least $1.4 million of annual earnings before interest, taxes, depreciation and amortization with adjustments as mutually agreed upon.

 

(a) At the Closing, the Buyer will deliver to the Sellers the Cash Portion in immediately available funds to an account designated by each Seller prior to the Closing.

 

(b) Immediately following the record date set by Buyer Parent for the distribution by Buyer Parent to its shareholders of the common stock held by Buyer Parent of its subsidiary, 1847 Goedeker Inc. (“Goedeker”), Buyer Parent will cause its transfer agent to issue to the Sellers an aggregate of 700,000 common shares of the Buyer Parent that, in aggregate, have a value as mutually agreed upon by the parties that is equal to One Million, Four Hundred Thousand Dollars ($1,400,000) (the “Buyer Shares”). For the avoidance of doubt, the Sellers shall have no right to receive any shares of common stock or other securities of Goedeker. As soon as practicable following the date that the working capital adjustment under Section 2.2(a) is finally determined, the Buyer Parent will file a registration statement on Form S-1 for the purpose of registering for resale under the Securities Act of 1933, as amended, the Buyer Shares and will use commercially reasonable efforts to cause such registration statement to be declared effective by the Securities and Exchange Commission as soon as reasonably practicable. The Sellers will cooperate with the Buyer Parent and provide any requested information and complete any necessary selling security holder questionnaires as Buyer Parent may require in order to register the Buyer Shares in accordance with this Section 2.1(b). In addition, upon the request of the Sellers from to time to time, Buyer Parent shall be responsible (at its cost) for promptly supplying to Buyer Parent’s transfer agent and the Sellers a customary legal opinion letter of its counsel to the effect that the resale of the Buyer Shares by the Sellers or their respective affiliates, successors and assigns is exempt from the registration requirements of the Securities Act pursuant to Rule 144 (provided the requirements of Rule 144 are satisfied and provided the Buyer Shares are not then registered under the Securities Act for resale pursuant to an effective registration statement). Notwithstanding the foregoing, if the Buyer Shares are eligible for resale pursuant to Rule 144 without restriction as to volume, then the obligation to file a registration statement as set forth in this Section 2.1(b) shall terminate.

 

5

 

 

(c) At the Closing, the Sellers will deliver to the Buyer a certificate or certificates representing the Shares, if certificated, duly endorsed or accompanied by stock powers duly endorsed in blank.

 

(d) At the Closing, the Buyer will issue to the Sellers an 8% contingent subordinated note in the aggregate principal amount of One Million, Fifty Thousand Dollars ($1,050,000) in the form set forth on Exhibit C (each a “Seller Note” and collectively, the “Seller Notes”).

 

2.2 Adjustments to Purchase Price.

 

(a) Working Capital Adjustment.

 

(i) At the Closing, the Sellers shall deliver to the Buyer an unaudited balance sheet of the Company, subject to all qualifications and estimates as set forth in the notes or addenda thereto (the “Preliminary Balance Sheet”), as at the Closing so as to present fairly in all material respects the financial condition of Company as of such date.

 

(ii) As soon as practicable following the Closing Date (but not later than seventy-five (75) days after the Closing Date), the Buyer shall cause its auditor to prepare and deliver to the Sellers an audited balance sheet of the Company (the “Closing Date Balance Sheet”) as of the Closing Date. The Closing Date Balance Sheet shall be prepared in accordance with GAAP in a manner consistent with the Preliminary Balance Sheet so as to present fairly in all material respects the financial condition of the Company.

 

(iii) If the Closing Working Capital exceeds the Preliminary Working Capital, then the Buyer (or, at the Buyer’s direction, the Company) shall pay promptly (and, in any event, within seven (7) days) to the Sellers (on a pro rata basis based upon their relative ownership interests in the Company) an amount in cash that is equal to the excess. If the Preliminary Working Capital exceeds the Closing Working Capital, then the Sellers shall pay promptly (and, in any event, within seven (7) days) to the Buyer an amount in cash that is equal to such excess (on a pro rata basis based upon their relative ownership interests in the Company); provided, however, that the Sellers may, at their option, in lieu of paying such excess in cash, deliver and transfer to the Buyer a number of Buyer Shares that is equal to their respective share of such excess divided by $2.00. Any such adjustment shall be treated as an adjustment to the Purchase Price.

 

(iv) In the event the Sellers do not agree with the Closing Working Capital as reflected on the Closing Date Balance Sheet, the Sellers shall so inform the Buyer in writing within fifteen (15) days of the Seller’s receipt thereof, such writing to set forth the objections of the Sellers in reasonable detail. If the Sellers and the Buyer cannot reach agreement as to any disputed matter relating to the Closing Working Capital within fifteen (15) days after notification by the Sellers to the Buyer of a dispute, they shall forthwith refer the dispute to an Independent Accounting Firm mutually agreeable to the Sellers and the Buyer for resolution, with the understanding that such firm shall resolve all disputed items within twenty (20) days after such disputed items are referred to it. If the Buyer and the Sellers are unable to agree on the choice of an Independent Accounting Firm, they shall select an Independent Accounting Firm by lot (after excluding their respective regular outside accounting firms). The Sellers, on the one hand, and the Buyer, on the other hand, shall bear one-half of the costs of such accounting firm. The decision of the accounting firm with respect to all disputed matters relating to the Closing Working Capital shall be deemed final and conclusive and shall be binding upon the Sellers and the Buyer. In addition, if the Sellers do not object to the Closing Working Capital within the 15-day period referred to above, the Closing Working Capital, as reflected on the Closing Date Balance Sheet as so prepared, shall be deemed final and conclusive and binding upon the Sellers and the Buyer.

 

6

 

 

(v) The Sellers shall be entitled to have access to the books and records of the Company and the Buyer’s work papers prepared in connection with the Closing Date Balance Sheet and shall be entitled to discuss such books and records and work papers with the Buyer and those persons responsible for the preparation thereof.

 

(b) Target Working Capital Adjustment. If the Net Working Capital Target exceeds the Net Working Capital as set forth on the Preliminary Balance Sheet, then the Purchase Price shall be reduced at the Closing by an amount equal to such difference. If the Net Working Capital as set forth on the Preliminary Balance Sheet exceeds the Net Working Capital Target at Closing, the Purchase Price shall be increased at the Closing by an amount equal to such difference.

 

(c) Adjustment for Outstanding Indebtedness. The Purchase Price shall be decreased by the amount of any outstanding indebtedness of the Company existing as of the Closing Date and the deducted amount shall be utilized to pay off such outstanding indebtedness. Indebtedness of the Company shall not include the Payroll Protection Plan Loan.

 

2.3 Closing. The consummation of the Acquisition (the “Closing”) will take place by the reciprocal delivery of closing documents by electronic mail, regular mail, fax or any other means mutually agreed upon by the parties hereto on a date that is no later than two (2) Business Days immediately following the day on which the last of the conditions to closing contained in Article VIII (other than any conditions that by their nature are to be satisfied at the Closing) is satisfied or waived in accordance with this Agreement or at such other location or on such other date as the Buyer and the Company may mutually determine (the date on which the Closing actually occurs is referred to as the “Closing Date”).

 

2.4 Transactions to be Effected at the Closing.

 

(a) At the Closing, the Buyer will (i) pay to each of the Sellers his or her pro portion of the Cash Portion of the Purchase Price, adjusted in accordance with subsection 2.2(b) above and less the amounts paid pursuant to subsection 2.2(c) above by paying such sum to each Seller by transfer of immediately available funds in accordance with instructions provided by each Seller, (ii) issue to each Seller a certificate or certificates representing the number of Buyer Shares set forth for such Seller on Exhibit A, duly endorsed or accompanied by stock powers duly endorsed in blank, (iii) issue to each of the Sellers his or her pro rata portion of the Seller Notes representing the principal amount of Seller Note set forth for such Seller on Exhibit A, and (iv) deliver to the Sellers all other documents, instruments or certificates required to be delivered by the Buyer at or prior to the Closing pursuant to Section 8.2 of this Agreement.

 

(b) At the Closing, each Seller will deliver to the Buyer (i) a certificate or certificates representing his or her Shares duly endorsed or accompanied by stock powers duly endorsed in blank and (ii) all other documents, instruments or certificates required to be delivered by the Sellers at or prior to the Closing pursuant to Section 8.1 of this Agreement.

 

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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE SELLERS

 

Each of the Sellers, for himself or herself, as the case may be, represents and warrants to the Buyer that, with respect to such Seller, each statement contained in this Article III is true and correct as of the date hereof, except as set forth in the disclosure schedule to be delivered to the Buyer in accordance with Section 7.13 hereof (the “Disclosure Schedule”). The Disclosure Schedule has been arranged for purposes of convenience only, in sections corresponding to the Sections of this Article III and Article IV. Each section of the Disclosure Schedule will be deemed to incorporate by reference all information disclosed in any other section of the Disclosure Schedule.

 

3.1 Authority and Enforceability. The Seller has the requisite legal capacity to execute and deliver this Agreement, to perform the Seller’s obligations hereunder and to consummate the Acquisition and the other transactions contemplated hereby. This Agreement has been duly executed and delivered by the Seller and, assuming the due authorization, execution and delivery by each other party hereto, constitutes a legal, valid and binding obligation of the Seller, enforceable against the Seller in accordance with its terms, except as limited by (a) bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar Laws relating to creditors’ rights generally and (b) general principles of equity, whether such enforceability is considered in a proceeding in equity or at Law.

 

3.2 Noncontravention.

 

(a) Neither the execution and the delivery of this Agreement nor the consummation of the Acquisition or the other transactions contemplated by this Agreement will, with or without the giving of notice or the lapse of time or both, (i) to the Knowledge of the Sellers and assuming compliance with the filing and notice requirements set forth in Section 3.2(b)(i), violate any Law applicable to the Seller or (ii) violate any Contract to which the Seller is a party, except to the extent that any such violation would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.

 

(b) The execution and delivery of this Agreement by the Seller does not, and the performance of this Agreement by the Seller will not, require any consent, approval, authorization or Permit of, or filing with or notification to, any Governmental Entity, except for (i) the filings set forth in Section 3.2(b) of the Disclosure Schedule or (ii) where the failure to take such action would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.

 

3.3 The Shares.

 

(a) The Seller holds of record and owns beneficially all of the issued and outstanding shares of capital stock of the Company set forth opposite such Seller’s name on Exhibit A, free and clear of all Liens, other than (a) Liens for current real or personal property Taxes that are not yet due and payable or that may hereafter be paid without material penalty or that are being contested in good faith, (b) statutory Liens of landlords and workers’, carriers’ and mechanics’ or other like Liens incurred in the ordinary course of business or that are being contested in good faith, (c) Liens and encroachments which do not materially interfere with the present or proposed use of the properties or assets they affect, (d) Liens that will be released prior to or as of the Closing, (e) Liens arising under this Agreement, (f) Liens created by or through the Buyer, and (g) Liens set forth on Section 3.3(a) of the Disclosure Schedule (the “Permitted Liens”).

 

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(b) The number of Shares set forth opposite the Seller’s name on Exhibit A correctly sets forth all of the capital stock of the Company owned of record or beneficially by the Seller.

 

(c) Except as set forth in this Agreement, the Seller is not a party to any Contract obligating the Seller to vote or dispose of any shares of the capital stock of, or other equity or voting interests in, the Company.

 

3.4 Brokers’ Fees. Except as set forth in Section 3.4 of the Disclosure Schedule, the Seller does not have any Liability to pay any fees or commissions to any broker, finder or agent with respect to this Agreement, the Acquisition or the transactions contemplated by this Agreement.

 

ARTICLE IV
REPRESENTATIONS AND WARRANTIES CONCERNING THE COMPANY

 

Each Seller, jointly and severally, represents and warrants to the Buyer that each statement contained in this Article IV is true and correct as of the date hereof, except as set forth in the Disclosure Schedule.

 

4.1 Organization, Qualification and Corporate Power; Authority and Enforceability.

 

(a) The Company is a corporation duly organized, validly existing and in good standing under the Laws of Idaho, and has all requisite corporate power and authority, directly or indirectly, to own, lease and operate its properties and assets and to carry on its business as it is now being conducted. The Company is duly qualified or licensed as a foreign corporation to do business, and is in good standing, in each jurisdiction where the character of its properties or assets owned, leased or operated by it or the nature of its activities makes such qualification or licensing necessary, except where the failure to be so qualified or licensed would not be reasonably expected to have, individually or in the aggregate, a Material Adverse Effect.

 

(b) The Company has the requisite power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution, delivery and performance by the Company of this Agreement and the consummation by the Company of the transactions contemplated hereby have been duly authorized by all necessary action on the part of the Company, and no other action is necessary on the part of the Company to authorize this Agreement or to consummate the Acquisition or the other transactions contemplated hereby. This Agreement has been duly executed and delivered by the Company and, assuming the due authorization, execution and delivery by each other party hereto, constitutes a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as limited by (a) bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar Laws relating to creditors’ rights generally and (b) general principles of equity, whether such enforceability is considered in a proceeding in equity or at Law.

 

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4.2 Subsidiaries. The Company does not have any Subsidiaries.

 

4.3 Capitalization.

 

(a) The authorized capital stock of the Company is as set forth in Section 4.3(a) of the Disclosure Schedule, of which 1,000 shares of Common Stock are issued and outstanding. No other capital stock of the Company is authorized, issued or outstanding.

 

(b) There are no outstanding options, warrants or other securities or subscription, preemptive or other rights convertible into or exchangeable or exercisable for any shares of capital stock or other equity or voting interests of the Company and there are no “phantom stock” rights, stock appreciation rights or other similar rights with respect to the Company. There are no Contracts of any kind to which the Company is a party or by which the Company is bound, obligating the Company to issue, deliver, grant or sell, or cause to be issued, delivered, granted or sold, additional shares of capital stock of, or other equity or voting interests in, or options, warrants or other securities or subscription, preemptive or other rights convertible into, or exchangeable or exercisable for, shares of capital stock of, or other equity or voting interests in, the Company, or any “phantom stock” right, stock appreciation right or other similar right with respect to the Company, or obligating the Company to enter into any such Contract.

 

(c) There are no securities or other instruments or obligations of the Company, the value of which is in any way based upon or derived from any capital or voting stock of the Company or having the right to vote (or convertible into, or exchangeable or exercisable for, securities having the right to vote) on any matters on which the Company’s stockholders may vote.

 

(d) There are no Contracts, contingent or otherwise, obligating the Company to repurchase, redeem or otherwise acquire any shares of capital stock of, or other equity or voting interests in, the Company. There are no voting trusts, registration rights agreements or stockholder agreements to which the Company is a party with respect to the voting of the capital stock of the Company or with respect to the granting of registration rights for any of the capital stock of the Company. There are no rights plans affecting the Company.

 

(e) Except as set forth in Section 4.3(e) of the Disclosure Schedule, there are no bonds, debentures, notes or other indebtedness of the Company.

 

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4.4 Noncontravention.

 

(a) Neither the execution and delivery of this Agreement nor the consummation of the Acquisition and the other transactions contemplated by this Agreement will, with or without the giving of notice or the lapse of time or both, (i) violate any provision of the articles of incorporation or bylaws (or comparable organization documents, as applicable) of the Company, (ii) to the Knowledge of the Sellers and assuming compliance with the filing and notice requirements set forth in Section 4.4(b)(i), violate any Law applicable to the Company on the date hereof or (iii) except as set forth in Section 4.4(a) of the Disclosure Schedule, violate any Contract to which the Company is a party, except in the case of clauses (ii) and (iii) to the extent that any such violation would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.

 

(b) The execution and delivery of this Agreement by the Company does not, and the performance of this Agreement by the Company will not, require any consent, approval, authorization or Permit of, or filing with or notification to, any Governmental Entity, except for (i) the filings set forth in Section 4.4(b) of the Disclosure Schedule or (ii) where the failure to take such action would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.

 

4.5 Financial StatementsSection 4.5 of the Disclosure Schedule contains true and complete copies of (i) the unaudited balance sheet of the Company as of December 31, 2019 and December 31, 2018 and the related unaudited statements of income and cash flows for the two years ended December 31, 2019 and December 31, 2018 (the “Annual Financial Statements”) and (ii) the unaudited balance sheet of the Company as of June 30, 2020 and the related statements of income and cash flows for the six-month period ended June 30, 2020 (the “Interim Financial Statements” and, together with the Annual Financial Statements, the “Financial Statements”). Except as set forth in, and subject to, Section 4.5 of the Disclosure Schedule, the Financial Statements have been prepared in accordance with accounting principles of Company applied on a consistent basis throughout the periods involved (except as may be indicated in the notes thereto) and, on that basis, fairly present, in all material respects, the financial condition and results of operations of the Company as of the indicated dates and for the indicated periods (subject to normal year-end adjustments and notes).  

 

4.6 Taxes.

 

(a) All material Tax Returns required to have been filed by the Company have been filed, and each such Tax Return reflects the liability for Taxes in all material respects. All Taxes shown on such Tax Returns as due have been paid or accrued.

 

(b) To the Knowledge of the Sellers, there is no audit pending against the Company in respect of any Taxes. There are no Liens on any of the assets of the Company that arose in connection with any failure (or alleged failure) to pay any Tax, other than Liens for Taxes not yet due and payable.

 

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(c) The Company has withheld and paid or accrued for all material Taxes required to have been withheld and paid or accrued for in connection with amounts paid or owing to any third party.

 

(d) The Company has not waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency.

 

(e) The Company is not a party to any Tax allocation or sharing agreement.

 

4.7 Compliance with Laws and Orders; Permits.

 

(a) The Company is in compliance with all Laws and Orders to which the business of the Company is subject, except where such failure to comply would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.

 

(b) The Company owns, holds, possesses or lawfully uses in the operation of its business all Permits that are necessary for it to conduct its business as now conducted, except where such failure to own, hold, possess or lawfully use such Permit would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.

 

4.8 No Undisclosed Liabilities. The Company does not have any Liability, except for (i) Liabilities set forth on the Interim Financial Statements (rather than in any notes thereto) and (ii) Liabilities which have arisen since the date of the Interim Financial Statements in the ordinary course of business (none of which results from, arises out of, relates to, is in the nature of, or was caused by any breach of contract, breach of warranty, tort, infringement, or violation of law).

 

4.9 Tangible Personal Assets.

 

(a) The Company has good title to, or a valid interest in, all of its tangible personal assets, free and clear of all Liens, other than (i) Permitted Liens or (ii) Liens that, individually or in the aggregate, do not materially interfere with the ability of the Company thereof to conduct its business as currently conducted and do not adversely affect the value of, or the ability to sell, such personal properties and assets. Certain assets described in the Section 4.9 of the Disclosure Schedule although used in the business of the Company are excluded from this transaction and shall remain the separate property of the Sellers, provided that any and all associated debt relating to such excluded assets shall be assumed by the Sellers. The exclusion of such assets from the business does not adversely affect the operations of the Company.

 

(b) The Company’s tangible personal assets are in good operating condition, working order and repair, subject to ordinary wear and tear, free from defects (other than defects that do not interfere with the continued use thereof in the conduct of normal operations) and are suitable for the purposes for which they are currently being used.

 

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4.10 Real Property.

 

(a) Owned Real Property. Section 4.10(a)(i) of the Disclosure Schedule lists and describes briefly all real property that the Company owns. Except as disclosed in Section 4.10(a)(i) of the Disclosure Schedules, with respect to each such parcel of owned real property:

 

(i) the Company has good and marketable title to the parcel of real property, free and clear of any Lien or other restriction, except for installments of special assessments not yet delinquent and recorded easements, covenants, and other restrictions which do not impair the current use, occupancy, or value, or the marketability of title, of the property subject thereto;

 

(ii) there are no pending or, to the Knowledge of the Sellers, threatened condemnation proceedings, lawsuits, or administrative actions relating to the property or other matters affecting adversely the current use, occupancy, or value thereof;

 

(iii) the legal description for the parcel contained in the deed thereof describes such parcel fully and adequately, the buildings and improvements are located within the boundary lines of the described parcels of land, are not in violation of applicable setback requirements, zoning laws, and ordinances (and none of the properties or buildings or improvements thereon are subject to “permitted non-conforming use” or “permitted non-conforming structure” classifications), and do not encroach on any easement which may burden the land, and the land does not serve any adjoining property for any purpose inconsistent with the use of the land, and the property is not located within any flood plain or subject to any similar type restriction for which any permits or licenses necessary to the use thereof have not been obtained;

 

(iv) all facilities have received all approvals of governmental authorities (including licenses and permits) required in connection with the ownership or operation thereof and have been operated and maintained in accordance with applicable laws, rules, and regulations;

 

(v) there are no leases, subleases, licenses, concessions, or other agreements, written or oral, granting to any party or parties the right of use or occupancy of any portion of the parcel of real property;

 

(vi) there are no outstanding options or rights of first refusal to purchase the parcel of real property, or any portion thereof or interest therein;

 

(vii) there are no parties (other than the Company) in possession of the parcel of real property, other than tenants under any leases disclosed in Section 4.10(b) of the Disclosure Schedule who are in possession of space to which they are entitled;

 

(viii) all facilities located on the parcel of real property are supplied with utilities and other services necessary for the operation of such facilities, including gas, electricity, water, telephone, sanitary sewer, and storm sewer, all of which services are adequate in accordance with all applicable laws, ordinances, rules, and regulations and are provided via public roads or via permanent, irrevocable, appurtenant easements benefitting the parcel of real property; and

 

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(ix) each parcel of real property abuts on and has direct vehicular access to a public road, or has access to a public road via a permanent, irrevocable, appurtenant easement benefitting the parcel of real property, and access to the property is provided by paved public right of way with adequate curb cuts available.

 

(b) Leased Real Property. Section 4.10(b) of the Disclosure Schedule contains a list of all leases and subleases (collectively, the “Real Property Leases”) under which the Company is either lessor or lessee (the “Real Property”). The Sellers have heretofore made available to the Buyer true and complete copies of each Real Property Lease. To the Knowledge of the Sellers, (i) all Real Property Leases are valid and binding Contracts of the Company and are in full force and effect (except for those that have terminated or will terminate by their own terms), and (ii) neither the Company or any other party thereto, is in violation or breach of or default (or with notice or lapse of time, or both, would be in violation or breach of or default) under the terms of any such Contract, in each case, except where such default would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.

 

4.11 Intellectual Property.

 

(a) “Intellectual Property” means (i) trade secrets, inventions, confidential and proprietary information, know-how, formulae and processes, (ii) patents (including all provisionals, reissues, divisions, continuations and extensions thereof) and patent applications, (iii) trademarks, trade names, trade dress, brand names, domain names, trademark registrations, trademark applications, service marks, service mark registrations and service mark applications (whether registered, unregistered or existing at common law, including all goodwill attaching thereto), (iv) copyrights, including copyright registrations, copyright applications and unregistered common law copyrights; (v) and all licenses for the Intellectual Property listed in items (i) – (iv) above.

 

(b) Section 4.11(b) of the Disclosure Schedule sets forth a list that includes all material Intellectual Property owned by the Company (the “Company-Owned Intellectual Property”) that is registered or subject to an application for registration (including the jurisdictions where such Company-Owned Intellectual Property is registered or where applications have been filed, and all registration or application numbers, as appropriate).

 

(c) All necessary registration, maintenance and renewal fees have been paid and all necessary documents have been filed with the United States Patent and Trademark Office or foreign patent and trademark office in the relevant foreign jurisdiction for the purposes of maintaining the registered Company-Owned Intellectual Property.

 

(d) Except as set forth on Section 4.11(d) of the Disclosure Schedule, (i) the Company is the exclusive owner of the Company-Owned Intellectual Property free and clear of all Liens (other than Permitted Liens); (ii) to the Knowledge of the Sellers no proceedings have been instituted, are pending or are threatened that challenge the rights of the Company in or the validity or enforceability of the Company-Owned Intellectual Property; (iii) to the Knowledge of the Sellers, neither the use of the Company-Owned Intellectual Property as currently used by the Company in the conduct of the Company’s business, nor the conduct of the business as presently conducted by the Company infringes, dilutes, misappropriates or otherwise violates in any material respect the Intellectual Property rights of any Person; and (iv) as of the date of this Agreement, the Company has made no claim of a violation, infringement, misuse or misappropriation by any Person, of their rights to, or in connection with, the Company-Owned Intellectual Property.

 

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(e) Except as set forth in Section 4.11(e) of the Disclosure Schedule, the Company has not permitted or licensed any Person to use any Company-Owned Intellectual Property.

 

(f) Section 4.11(f) of the Disclosure Schedule sets forth a complete and accurate list of all licenses, other than “off the shelf” commercially available software programs, pursuant to which the Company licenses from any Person Intellectual Property that is material to and used in the conduct of the business by the Company.

 

(g) To the Knowledge of the Sellers, the Company is not in default in the performance, observance or fulfillment of any obligation, covenant or condition contained in any Contract pursuant to which any third party is authorized to use any Company-Owned Intellectual Property or pursuant to which the Company is licensed to use Intellectual Property owned by a third party, except where such default would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.

 

4.12 Absence of Certain Changes or Events. Since the date of the Interim Financial Statements, no event has occurred that has had, individually or in the aggregate, a Material Adverse Effect. Without limiting the generality of the foregoing, since that date:

 

(a) the Company has not sold, leased, transferred, or assigned any of its assets, tangible or intangible, other than for a fair consideration in the ordinary course of business;

 

(b) the Company has not entered into any agreement, contract, lease, or license (or series of related agreements, contracts, leases, and licenses) either involving more than $50,000 or outside the ordinary course of business;

 

(c) no party (including the Company) has accelerated, terminated, modified, or cancelled any agreement, contract, lease, or license (or series of related agreements, contracts, leases, and licenses) involving more than $50,000 to which the Company is a party or by which any of them is bound;

 

(d) the Company has not imposed any Liens upon any of its assets, tangible or intangible;

 

(e) the Company has not made any capital expenditure (or series of related capital expenditures) either involving more than $50,000 or outside the ordinary course of business;

 

(f) the Company has not made any capital investment in, any loan to, or any acquisition of the securities or assets of, any other Person (or series of related capital investments, loans, and acquisitions) either involving more than $50,000 or outside the ordinary course of business;

 

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(g) the Company has not transferred, assigned, or granted any license or sublicense of any rights under or with respect to any Intellectual Property;

 

(h) there has been no change made or authorized in the certificate of incorporation or bylaws of the Company;

 

(i) the Company has not issued, sold, or otherwise disposed of any of its capital stock, or granted any options, warrants, or other rights to purchase or obtain (including upon conversion, exchange, or exercise) any of its capital stock;

 

(j) the Company has not made any loan to, or entered into any other transaction with, any of its directors, officers, and employees outside the ordinary course of business;

 

(k) the Company has not entered into any employment contract or modified the terms of any existing such contract or agreement;

 

(l) the Company has not granted any increase in the base compensation of any of its directors, officers, and employees outside the ordinary course of business;

 

(m) the Company has not committed to any of the foregoing.

 

4.13 Contracts.

 

(a) Except as set forth in Section 4.13(a) of the Disclosure Schedule, as of the date hereof, the Company is not a party to or bound by any: (i) Contract not contemplated by this Agreement that materially limits the ability of the Company to engage or compete in any manner of the business presently conducted by the Company; (ii) Contract that creates a partnership or joint venture or similar arrangement with respect to any material business of the Company; (iii) indenture, credit agreement, loan agreement, security agreement, guarantee, note, mortgage or other evidence of indebtedness or agreement providing for indebtedness in excess of $50,000; (iv) Contract that relates to the acquisition or disposition of any material business (whether by merger, sale of stock, sale of assets or otherwise) other than this Agreement; and (v) Contract that involves performance of services or delivery of goods or materials by or to the Company in an amount or with a value in excess of $50,000 in any 12-month period (which period may extend past the Closing).

 

(b) The Sellers have heretofore made available to the Buyer true and complete copies of each of the Contracts set forth in Section 4.13(a) of the Disclosure Schedule. To the Knowledge of the Sellers, (i) all such Contracts are valid and binding, (ii) all such Contracts are in full force and effect (except for those that have terminated or will terminate by their own terms), and (iii) neither the Company nor any other party thereto, is in violation or breach of or default under (or with notice or lapse of time, or both, would be in violation or breach of or default under) the terms of any such Contract, in each case, except where such default would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.

 

4.14 Litigation. Except as set forth in Section 4.14 of the Disclosure Schedule, there is no Action pending or, to the Knowledge of the Sellers, threatened against the Company that (a) challenges or seeks to enjoin, alter or materially delay the Acquisition or (b) would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.

 

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4.15 Employee Benefits.

 

(a) Section 4.15(a) of the Disclosure Schedule includes a list of all Benefit Plans maintained or contributed to by the Company (the “Company Benefit Plans”). The Sellers have delivered or made available to the Buyer copies of (i) each Company Benefit Plan, (ii) the most recent summary plan description for each Company Benefit Plan for which such a summary plan description is required and (iii) the most recent favorable determination letters from the IRS with respect to each Company Benefit Plan intended to qualify under Section 401(a) of the Code.

 

(b) Except as set forth in Section 4.15(b) of the Disclosure Schedule, (i) none of the Company Benefit Plans is subject to Title IV of ERISA; (ii) each Company Benefit Plan that is intended to be qualified under Section 401(a) of the Code is subject to a favorable determination letter from the IRS and, to the Knowledge of the Sellers, no event has occurred and no condition exists that is reasonably likely to result in the revocation of any such determination; and (iii) each Company Benefit Plan is in compliance with all applicable provisions of ERISA and the Code, except for instances of noncompliance that would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.

 

4.16 Labor and Employment Matters. Section 4.16 of the Disclosure Schedule sets forth a list of all written employment agreements that obligate the Company to pay an annual salary of $50,000 or more and to which the Company is a party. To the Knowledge of the Sellers, there are no pending labor disputes, work stoppages, requests for representation, pickets, work slow-downs due to labor disagreements or any actions or arbitrations that involve the labor or employment relations of the Company. The Company is not party to any collective bargaining agreement.

 

4.17 Environmental. Except (i) as set forth in Section 4.17 of the Disclosure Schedule or (ii) for any matter that would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect, (a) the Company is in compliance with all applicable Laws relating to protection of the environment (“Environmental Laws”), (b) the Company possesses and is in compliance with all Permits required under any Environmental Law for the conduct of its operations and (c) there are no Actions pending against the Company alleging a violation of any Environmental Law. No property currently or formerly owned or operated by the Company or has been contaminated with any Hazardous Substance in a manner that could reasonably be expected to require remediation or other action pursuant to any Environmental Law. Neither the Sellers, nor the Company has received any written notice, demand, letter, claim or request for information alleging that the Company or the Sellers are in violation of or liable under any Environmental Law. For purposes of this Agreement, “Hazardous Substance” means any substance that is: (i) listed, classified, regulated or defined pursuant to any Environmental Law or (ii) any petroleum product or by-product, asbestos-containing material, polychlorinated biphenyls or radioactive material.

 

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4.18 Insurance. Section 4.18 of the Disclosure Schedule sets forth a list of each insurance policy that covers the Company or its businesses, properties, assets, directors, officers or employees (the “Policies”). Such Policies are in full force and effect in all material respects and the Company is not in violation or breach of or default under any of its obligations under any such Policy, except where such default would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.

 

4.19 Inventory. The inventory of the Company consists of raw materials and supplies, manufactured and purchased parts, goods in process, and finished goods, all of which is merchantable and fit for the purpose for which it was procured or manufactured, and none of which is slow moving, obsolete, damaged, or defective, subject only to the reserve for inventory write down set forth on the face of the balance sheet included in the Interim Financial Statements (rather than in any notes thereto) as adjusted for the passage of time through the Closing Date in accordance with the past custom and practice of the Company.

 

4.20 Notes and Accounts Receivable. All notes and accounts receivable of the Company are reflected properly on their books and records, are valid receivables subject to no setoffs or counterclaims, are current and collectible, and will be collected in accordance with their terms at their recorded amounts, subject only to the reserve for bad debts set forth on the face of the balance sheet included in the Interim Financial Statements (rather than in any notes thereto) as adjusted for the passage of time through the Closing Date in accordance with the past custom and practice of the Company.

 

4.21 Powers of Attorney. There are no outstanding powers of attorney executed on behalf of any of the Company.

 

4.22 Product Warranty. Each product manufactured, sold, leased, or delivered by the Company has been in conformity with all applicable contractual commitments and all express and implied warranties, and the Company has no Liability (and there is no basis for any present or future action, suit, proceeding, hearing, investigation, charge, complaint, claim, or demand against any of them giving rise to any Liability) for replacement or repair thereof or other damages in connection therewith, subject only to the reserve for product warranty claims set forth on the face of the balance sheet included in the Interim Financial Statements (rather than in any notes thereto) as adjusted for the passage of time through the Closing Date in accordance with the past custom and practice of the Company. No product manufactured, sold, leased, or delivered by the Company is subject to any guaranty, warranty, or other indemnity beyond the applicable standard terms and conditions of sale or lease. Section 4.22 of the Disclosure Schedule includes copies of the standard terms and conditions of sale or lease for the Company (containing applicable guaranty, warranty, and indemnity provisions).

 

4.23 Product Liability. The Company has no Liability (and there is no basis for any present or future action, suit, proceeding, hearing, investigation, charge, complaint, claim, or demand against any of them giving rise to any Liability) arising out of any injury to individuals or property as a result of the ownership, possession, or use of any product manufactured, sold, leased, or delivered by the Company.

 

4.24 Brokers’ Fees. Except as set forth in Section 4.24 of the Disclosure Schedule, which such fees shall be paid prior to or at Closing with the Company’s cash, the Company has no Liability to pay any fees or commissions to any broker, finder or agent with respect to this Agreement, the Acquisition or the transactions contemplated by this Agreement.

 

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4.25 Certain Business Relationships with the Company. Except as set forth in Section 4.25 of the Disclosure Schedule, neither the Sellers, nor any Affiliate of the Sellers, has been involved in any business arrangement or relationship with the Company within the past 12 months, and neither the Sellers, nor any Affiliate of the Sellers, owns any asset, tangible or intangible, which is used in the Business.

 

4.26 Disclosure. The representations and warranties contained in this Article IV do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements and information contained in this Article IV not misleading.

 

ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE BUYER

 

The Buyer represents and warrants to the Sellers that each statement contained in this Article V is true and correct as of the date hereof.

 

5.1 Organization. The Buyer is a corporation, duly organized, validly existing and in good standing under the laws of the state of Delaware.

 

5.2 Authorization. The Buyer has the requisite power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution, delivery and performance by the Buyer of this Agreement, and the consummation of the transactions contemplated hereby, have been duly authorized by all necessary action, and no other action on the part of the Buyer is necessary to authorize this Agreement or to consummate the transactions contemplated hereby (other than compliance with the filing and notice requirements set forth in Section 5.3(b)(i)). This Agreement has been duly executed and delivered by the Buyer and, assuming the due authorization, execution and delivery by each of the other parties hereto, constitutes a legal, valid and binding obligation of the Buyer enforceable against the Buyer in accordance with its terms, except as limited by (a) bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar Laws relating to creditors’ rights generally and (b) general principles of equity, whether such enforceability is considered in a proceeding in equity or at Law.

 

5.3 Noncontravention.

 

(a) Neither the execution and the delivery of this Agreement, nor the consummation of the Acquisition and the other transactions contemplated by this Agreement, will, with or without the giving of notice or the lapse of time or both, (i) violate any provision of the certificate of incorporation or bylaws (or comparable organization documents, as applicable) of the Buyer, (ii) violate any Law applicable to the Buyer on the date hereof or (iii) violate any Contract to which the Buyer is a party, except in the case of clauses (ii) and (iii) to the extent that any such violation would not reasonably be expected to prevent or materially delay the consummation of the Acquisition and the other transactions contemplated by this Agreement.

 

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(b) The execution and delivery of this Agreement by the Buyer does not, and the performance of this Agreement by the Buyer will not, require any consent, approval, authorization or Permit of, or filing with or notification to, any Governmental Entity, except for (i) the filings set forth in Section 5.3(b)(i) or (ii) where the failure to take such action would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.

 

(c) Brokers’ Fees. The Buyer has no Liability to pay any fees or commissions to any broker, finder or agent with respect to this Agreement, the Acquisition or the transactions contemplated by this Agreement that could result in any Liability being imposed on the Sellers or the Company.

 

ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF THE BUYER PARENT

 

6.1 Organization. The Buyer Parent is a limited liability company, duly organized, validly existing and in good standing under the laws of the State of Delaware.

 

6.2 Authorization. The Buyer Parent has the requisite power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution, delivery and performance by the Buyer Parent of this Agreement, and the consummation of the transactions contemplated hereby, have been duly authorized by all necessary action, and no other action on the part of the Buyer Parent is necessary to authorize this Agreement or to consummate the transactions contemplated hereby (other than compliance with the filing and notice requirements set forth in Section 6.3(b)(i)). This Agreement has been duly executed and delivered by the Buyer Parent and, assuming the due authorization, execution and delivery by each of the other parties hereto, constitutes a legal, valid and binding obligation of the Buyer Parent enforceable against the Buyer Parent in accordance with its terms, except as limited by (a) bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar Laws relating to creditors’ rights generally and (b) general principles of equity, whether such enforceability is considered in a proceeding in equity or at Law.

 

6.3 Noncontravention.

 

(a) Neither the execution and the delivery of this Agreement, nor the consummation of the Acquisition and the other transactions contemplated by this Agreement, will, with or without the giving of notice or the lapse of time or both, (i) violate any provision of the certificate of incorporation or bylaws (or comparable organization documents, as applicable) of the Buyer Parent, (ii) violate any Law applicable to the Buyer Parent on the date hereof or (iii) violate any Contract to which the Buyer Parent is a party, except in the case of clauses (ii) and (iii) to the extent that any such violation would not reasonably be expected to prevent or materially delay the consummation of the Acquisition and the other transactions contemplated by this Agreement.

 

(b) The execution and delivery of this Agreement by the Buyer Parent does not, and the performance of this Agreement by the Buyer Parent will not, require any consent, approval, authorization or Permit of, or filing with or notification to, any Governmental Entity, except for (i) the filings set forth in Section 5.3(b) (i) or (ii) where the failure to take such action would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.

 

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6.4 Capitalization. The authorized capital of Buyer Parent consists, immediately prior to the Closing of Five Hundred Million (500,000,000) common shares of the Buyer Parent, 3,830,625 shares of which are issued and outstanding immediately prior to the Closing. All of the outstanding common shares of the Buyer Parent have been duly authorized, are fully paid and nonassessable and were issued in compliance with all applicable federal and state securities laws. Upon issuance pursuant to this Agreement, the Buyer Shares will be duly authorized, fully paid and nonassessable and issued in compliance with all applicable federal and state securities laws. Buyer Parent holds no common shares in its treasury. The rights, privileges and preferences of the common shares of Buyer Parent are as stated in Buyer Parent’s Second Amended and Restated Operating Agreement and as provided by the Delaware Limited Liability Company Act.

 

6.5 Brokers’ Fees. The Buyer Parent has no Liability to pay any fees or commissions to any broker, finder or agent with respect to this Agreement, the Acquisition or the transactions contemplated by this Agreement that could result in any Liability being imposed on the Sellers or the Company.

 

ARTICLE VII
COVENANTS

 

7.1 Consents. The Company will use its commercially reasonable efforts to obtain any required third-party consents to the Acquisition and the other transactions contemplated by this Agreement in writing from each Person.

 

7.2 Operation of the Company’s Business. During the period commencing on the date hereof and ending at the earlier of the Closing and the termination of this Agreement in accordance with Article IX, the Company, except (i) as otherwise contemplated by this Agreement, (ii) as required by applicable Law or (iii) with the prior written consent of the Buyer (which consent will not be unreasonably withheld or delayed), will use commercially reasonable efforts to carry on its business in a manner consistent with past practice and not take any action or enter into any transaction that would result in the following:

 

(a) any change in the articles of incorporation, as amended or bylaws, as amended, of the Company or any amendment of any material term of any outstanding security of the Company;

 

(b) any issuance or sale of any additional shares of, or rights of any kind to acquire any shares of, any capital stock of any class of the Company (whether through the issuance or granting of options or otherwise);

 

(c) any incurrence, guarantee or assumption by the Company of any indebtedness for borrowed money other than in the ordinary course of business in amounts and on terms consistent with past practice;

 

(d) any distributions to the Sellers, other than expense reimbursements consistent with past practice;

 

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(e) any change in any method of accounting, accounting principle or accounting practice by the Company which would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect;

 

(f) except in the ordinary course of business (i) any adoption or material amendment of any Company Benefit Plan, (ii) any entry into any collective bargaining agreement with any labor organization or union, (iii) any entry into an employment agreement or (iv) any increase in the rate of compensation to any employee in an amount that exceeds 10% of such employee’s current compensation; provided, that the Company may (A) take any such action for employees in the ordinary course of business or pursuant to any existing Contracts or Company Benefit Plans and (B) adopt or amend any Company Benefit Plan if the cost to such Person of providing benefits thereunder is not materially increased;

 

(g) except in the ordinary course of business, any cancellation, modification, termination or grant of waiver of any material Permits or Contracts to which the Company is a party, which cancellation, modification, termination or grant of waiver would, individually or in the aggregate, have a Material Adverse Effect;

 

(h) any change in the Tax elections made by the Company or in any accounting method used by the Company for Tax purposes, where such Tax election or change in accounting method may have a material effect upon the Tax Liability of the Company for any period or set of periods, or the settlement or compromise of any material income Tax Liability of the Company;

 

(i) except in the ordinary course of business, any acquisition or disposition of any business or any material property or asset of any Person (whether by merger, consolidation or otherwise) by the Company;

 

(j) any grant of a Lien on any properties and assets of the Company that would have, individually or in the aggregate, a Material Adverse Effect;

 

(k) any entry into any agreement or commitment to do any of the foregoing.

 

7.3 Access. The Company will permit the Buyer and its Representatives to have reasonable access at all reasonable times, and in a manner so as not to interfere with the normal business operations of the Company, to the premises, properties, personnel, books, records (including Tax records), Contracts and documents of or pertaining to the Company.

 

7.4 Transfer of Cash and Cash Equivalents. On or prior to the Closing, the Company and Sellers will transfer, or cause to be distributed all cash and cash equivalents of the Company to, among other things, pay any fees owed by Company to brokers or advisors (including termination fees under any advisory agreement) and any indebtedness for borrowed money; provided, however, that the Company shall have an amount in cash in its corporate bank account and on hand at its store locations at the Closing that is equal to $91,000 in the aggregate.

 

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7.5 Notice of Developments. The Sellers and the Company will give prompt written notice to the Buyer of any event that would reasonably be expected to give rise to, individually or in the aggregate, a Material Adverse Effect or would reasonably be expected to cause a breach of any of its respective representations, warranties, covenants or other agreements contained herein. The Buyer will give prompt written notice to the Sellers and the Company of any event that could reasonably be expected to cause a breach of any of its representations, warranties, covenants or other agreements contained herein or could reasonably be expected to, individually or in the aggregate, prevent or materially delay the consummation of the Acquisition and the other transactions contemplated by this Agreement. The delivery of any notice pursuant to this Section 7.5 will not limit, expand or otherwise affect the remedies available hereunder (if any) to the party receiving such notice.

 

7.6 No Solicitation.

 

(a) The Sellers and the Company will, and will cause each of their Representatives to, cease immediately any existing discussions regarding a Transaction Proposal.

 

(b) From and after the date of this Agreement, without the prior consent of the Buyer, none of the Sellers nor the Company will, nor will they authorize or permit any of their respective Representatives to, directly or indirectly through another Person to, (i) solicit, initiate or encourage (including by way of furnishing information), or take any other action designed to facilitate any inquiries, proposals or offers from any Person that constitute, or would reasonably be expected to constitute, a Transaction Proposal, (ii) participate in any discussions or negotiations (including by way of furnishing information) regarding any Transaction Proposal or (iii) otherwise cooperate in any way with, or assist or participate in, facilitate or encourage, any effort or attempt by any other Person to do or seek any of the foregoing.

 

(c) In addition, the Sellers shall immediately communicate to the Buyer the terms of any Transaction Proposal received by any of the Sellers or the Company, or any of their Representatives.

 

7.7 Confidentiality. Reference is made to that certain Non-Disclosure Agreement, executed by Buyer on April 8, 2020, in connection with this transaction (the “Confidentiality Agreement”).  Buyer acknowledges and agrees that the Confidentiality Agreement remains and shall remain in full force and effect and, in addition, covenants and agrees to keep confidential, in accordance with the provisions of the Confidentiality Agreement, information provided to Buyer pursuant to this Agreement provided; however, that prior to the Closing, in addition to any exclusions set forth in the Confidentiality Agreement, “Confidential Information” as defined in the Confidentiality Agreement shall not include information which is disclosed pursuant to Applicable Law, the Securities Exchange Act of 1934, as amended, and applicable rules and regulations promulgated thereunder.  If this Agreement is, for any reason, terminated prior to the Closing, the Confidentiality Agreement and the provisions of this Section 7.7 shall nonetheless continue in full force and effect.

 

7.8 Taking of Necessary Action; Further Action; Taxes.

 

(a) Subject to the terms and conditions of this Agreement, each of the Sellers, the Company and the Buyer will take all such reasonable and lawful action as may be necessary or appropriate in order to effectuate the Acquisition in accordance with this Agreement as promptly as practicable.

 

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(b) The Parties shall cooperate fully, as and to the extent reasonably requested by the other Party, in connection with the filing of any tax returns by or on behalf of the Company and any audit, examination, litigation or other proceeding with respect to the taxes of either Company. Such cooperation shall include the retention and (upon the other party’s request) the provision of records and information which are reasonably relevant to any such tax return, audit, litigation or other proceeding.

 

(c) Seller shall prepare and file or cause to be prepared and filed all income tax returns of the Company for taxable periods ending on the Closing Date. Buyer shall prepare and file or cause to be prepared and filed all tax returns of the Company, following the Closing Date.

 

(d) Buyer shall not, and shall not permit the Company to, (i) amend any tax return filed with respect to any tax year ending on or before the Closing Date or (ii) make any tax election (including under Internal Revenue Code Section 336(e) and 338(h)(10)) that may have a retroactive effect to any such year, in each such case without the written consent of the Sellers.

 

(e) The Sellers shall have reasonable access to the books and records of the Company and shall be entitled to discuss such books and records with the Buyer and those persons responsible for the preparation thereof post-Closing for the purpose of, without limitation, claiming any tax credit (including Idaho’s R&D Tax Credit) that may be applicable with respect to any tax year ending on or before the Closing Date.

 

7.9 Payroll Protection Plan Loan. Company and Sellers will take all actions necessary to obtain forgiveness of the Payroll Protection Plan Loan. If the Payroll Protection Plan Loan is not forgiven by the Small Business Administration, Sellers will promptly payoff the Loan and will indemnify and hold the Buyer harmless of any claims by the Small Business Administration arising out of the loan to the Company. Buyer agrees to cooperate with Sellers and shall provide all reasonable information regarding the Company as necessary for Sellers to seek forgiveness of the Payroll Protection Plan Loan.

 

7.10 Covenant not to Compete. For a period of three years from and after the Closing (the “Noncompetition Period”), the Sellers shall not engage directly or indirectly in any business that is competitive with the current business of the Company (the “Business”) within an area of one hundred miles of any geographic area in which the Business is conducted or in which the Buyer plans to conduct the Business as of the Closing Date; provided, however, that no owner of less than 1% of the outstanding stock of any publicly-traded corporation shall be deemed to engage solely by reason thereof in any of its businesses. During the Noncompetition Period, the Sellers shall not induce or attempt to induce any customer, or supplier of the Buyer or any affiliate of the Buyer to terminate its relationship with the Buyer or any Affiliate of the Buyer or to enter into any business relationship to provide or purchase the same or substantially the same services as are provided to or purchased from the Business which might harm the Buyer or any Affiliate of the Buyer. During the Noncompetition Period, the Sellers shall not, on behalf of any entity other than the Buyer or an Affiliate of the Buyer, hire or retain, or attempt to hire or retain, in any capacity any Person who is, or was at any time during the preceding twelve (12) months, an employee or officer of the Buyer or an Affiliate of the Buyer. If the final judgment of a court of competent jurisdiction declares that any term or provision of this Section 7.10 is invalid or unenforceable, the parties agree that the court making the determination of invalidity or unenforceability shall have the power to reduce the scope, duration, or area of the term or provision, to delete specific words or phrases, or to replace any invalid or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this Agreement shall be enforceable as so modified after the expiration of the time within which the judgment may be appealed.

 

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7.12 Financial Information. The Sellers shall cooperate with the Buyer and the Buyer’s independent certified public accounting firm in order to enable the Buyer to create audited financial statements prepared in accordance with the GAAP for the two full fiscal years preceding the Closing Date, by making available the Sellers’ records as they are maintained in the ordinary course of business and answering reasonable questions.

 

7.13 Disclosure Schedule. The parties acknowledge and agree that (i) the Sellers and the Company have not yet delivered a definitive Disclosure Schedule to this Agreement to the Buyer, and (ii) the Buyer has not been provided with copies of, nor had an opportunity to review, the items to be referred to on the Disclosure Schedule. The Sellers shall deliver (and shall cause the Company to deliver) to the Buyer all of the schedules, including a definitive Disclosure Schedule to the Agreement, and documents referred to thereon, in final form within 20 days of the date hereof.  The Buyer shall have 20 days following delivery of such schedules and such documents in which to terminate this Agreement if the Buyer objects to any information contained in such schedules or the contents of any such document and Buyer and Sellers cannot agree on mutually satisfactory modifications thereto.

 

ARTICLE VIII
CONDITIONS TO OBLIGATIONS TO CLOSE

 

8.1 Conditions to Obligation of the Buyer. The obligation of the Buyer to consummate the Acquisition is subject to the satisfaction or waiver by the Buyer of the following conditions:

 

(a) The representations and warranties of the Sellers set forth in this Agreement will be true and correct in all respects as of the date of this Agreement and as of the Closing Date (except to the extent such representations and warranties speak as of another date, in which case such representations and warranties will be true and correct as of such other date), except where the failure of such representations and warranties to be so true and correct (without giving effect to any limitation as to “materiality” or “Material Adverse Effect” set forth therein) does not have, and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. The Buyer will have received a certificate signed by the Sellers to such effect.

 

(b) Each of the Sellers and the Company will have performed all of the covenants required to be performed by it under this Agreement at or prior to the Closing, except where the failure to perform does not have, and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect or materially adversely affect the ability of each of the Sellers and the Company to consummate the Acquisition or perform its other obligations hereunder. The Buyer will have received a certificate signed by the Sellers to such effect.

 

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(c) The Buyer shall have completed its business, accounting and legal due diligence review of the Company and the Business, its assets and liabilities, and the results thereof shall be reasonably satisfactory to the Buyer.

 

(d) There shall not have been any occurrence, event, incident, action, failure to act, or transaction since the date of the Interim Financial Statements which has had or is reasonably likely to cause a Material Adverse Effect.

 

(e) All applicable waiting periods (and any extensions thereof) will have expired or otherwise been terminated, and the parties hereto will have received all other authorizations, consents and approvals of all Governmental Entities in connection with the execution, delivery and performance of this Agreement and the transactions contemplated hereby.

 

(f) No temporary, preliminary or permanent restraining Order preventing the consummation of the Acquisition will be in effect.

 

(g) Each party, as appropriate, shall have obtained any required consents, permits, licenses, approvals or notifications of any lenders, lessors, suppliers, customers or other third parties for which the Buyer will assume responsibility for properly completing any and all necessary forms required when applying for and securing any necessary transfers.

 

(h) The Sellers shall have obtained releases of any liens, charges or encumbrances against any of the assets of the Company, at the Sellers’ expense.

 

(i) The Buyer shall have received such pay-off letters and releases relating to the indebtedness as it shall have requested, and such pay-off letters shall be in form and substance satisfactory to it.

 

(j) The Buyer shall have received from counsel to the Sellers an opinion in form and substance reasonably satisfactory to the Buyer, addressed to the Buyer and dated as of the Closing Date.

 

(k) The Company shall have delivered evidence reasonably satisfactory to the Buyer of the Company’s corporate organization and proceedings and its existence in the jurisdiction in which it is incorporated, including evidence of such existence as of the Closing.

 

(l) The Buyer shall have obtained on terms and conditions satisfactory to it all of the financing it needs in order to consummate the transactions contemplated hereby and fund the working capital requirements of the Company after the Closing.

 

(m) The Buyer shall have entered into an employment agreement with each of the Sellers. The employment agreements will contain such material terms and conditions as set forth in Exhibit D attached hereto and incorporated herein by this reference, together with any other terms and conditions as may be mutually agreed by the Parties.

 

(n) All actions to be taken by the Sellers in connection with consummation of the transactions contemplated hereby and all certificates, opinions, instruments, and other documents required to effect the transactions contemplated hereby will be satisfactory in form and substance to the Buyer.

 

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8.2 Conditions to Obligation of the Sellers. The obligation of the Sellers to consummate the Acquisition is subject to the satisfaction or waiver by the Sellers of the following conditions:

 

(a) The representations and warranties of the Buyer set forth in this Agreement will be true and correct in all respects as of the date of this Agreement and as of the Closing Date (except to the extent such representations and warranties speak as of another date, in which case such representations and warranties will be true and correct as of such other date), except where the failure of such representations and warranties to be so true and correct does not adversely affect the ability of the Buyer to consummate the Acquisition and the other transactions contemplated by this Agreement. The Sellers will have received a certificate signed on behalf of the Buyer by a duly authorized officer of the Buyer to such effect.

 

(b) The Buyer will have performed in all material respects all of the covenants required to be performed by it under this Agreement at or prior to the Closing except such failures to perform as do not materially adversely affect the ability of the Buyer to consummate the Acquisition and the other transactions contemplated by this Agreement. The Sellers will have received a certificate signed on behalf of the Buyer by a duly authorized officer of the Buyer to such effect.

 

(c) All applicable waiting periods (and any extensions thereof) will have expired or otherwise been terminated and the parties hereto will have received all other authorizations, consents and approvals of all Governmental Entities in connection with the execution, delivery and performance of this Agreement and the transactions contemplated hereby.

 

(d) No temporary, preliminary or permanent restraining Order preventing the consummation of the Acquisition will be in effect.

 

(e) Each party, as appropriate, shall have obtained any required consents, permits, licenses, approvals or notifications of any Governmental Entities, lenders, lessors, suppliers, customers or other third parties for which the Buyer will assume responsibility for properly completing any and all necessary forms required when applying for and securing any necessary transfers.

 

(f) Each of the Sellers shall have entered into an employment agreement with the Buyer. The employment agreements will contain such material terms and conditions as set forth in Exhibit D attached hereto and incorporated herein by this reference, together with any other terms and conditions as may be mutually agreed by the Parties.

 

(g) All actions to be taken by the Buyer in connection with consummation of the transactions contemplated hereby and all certificates, opinions, instruments, and other documents required to effect the transactions contemplated hereby will be satisfactory in form and substance to the Sellers.

 

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ARTICLE IX
TERMINATION; AMENDMENT; WAIVER

 

9.1 Termination of Agreement. This Agreement may be terminated as follows:

 

(a) by mutual written consent of the Buyer and the Sellers at any time prior to the Closing;

 

(b) by either the Buyer or the Sellers if any Governmental Entity will have issued an Order or taken any other action permanently enjoining, restraining or otherwise prohibiting the transactions contemplated by this Agreement;

 

(c) by either the Buyer or the Sellers if the Closing does not occur on or before the date that is the ninetieth (90th) day following the date that the Sellers deliver to the Buyer the Disclosure Schedule as required by Section 7.13; provided that the right to terminate this Agreement under this Section 9.1(c) will not be available to any party whose breach of any provision of this Agreement results in the failure of the Closing to occur by such time;

 

(d) by the Buyer if the Sellers or the Company have breached their respective representations and warranties or any covenant or other agreement to be performed by it in a manner such that the Closing conditions set forth in Section 8.1(a) or 8.1(b) would not be satisfied; or

 

(e) by the Sellers if the Buyer has breached its representations and warranties or any covenant or other agreement to be performed by it in a manner such that the Closing conditions set forth in Section 8.2(a) or 8.2(b) would not be satisfied.

 

9.2 Effect of Termination. In the event of termination of this Agreement by either the Sellers or the Buyer as provided in Section 9.1, this Agreement will forthwith become void and have no effect, without any Liability (other than with respect to any suit for breach of this Agreement) on the part of the Buyer, the Buyer Parent, the Company or the Sellers (or any stockholder, agent, consultant or Representative of any such party); provided, that the provisions of Sections 11.1, 11.6, 11.7, 11.8, 11.11, 11.13 and this Section 9.2 will survive any termination hereof pursuant to Section 9.1.

 

9.3 Amendments. This Agreement may not be amended except by an instrument in writing signed on behalf of the Buyer, the Company and the Sellers.

 

9.4 Waiver. At any time prior to the Closing, the Buyer may (a) extend the time for the performance of any of the covenants, obligations or other acts of the Sellers and the Company or (b) waive any inaccuracy of any representations or warranties or compliance with any of the agreements, covenants or conditions of the Sellers or any conditions to its own obligations. Any agreement on the part of the Buyer to any such extension or waiver will be valid only if such waiver is set forth in an instrument in writing signed on its behalf by its duly authorized officer. At any time prior to the Closing, the Sellers and the Company, may (a) extend the time for the performance of any of the covenants, obligations or other acts of the Buyer or (b) waive any inaccuracy of any representations or warranties or compliance with any of the agreements, covenants or conditions of the Buyer or any conditions to their own obligations. Any agreement on the part of the Sellers and the Company to any such extension or waiver will be valid only if such waiver is set forth in an instrument in writing signed by the Sellers and the Company. The failure of any party to this Agreement to assert any of its rights under this Agreement or otherwise will not constitute a waiver of such rights. The waiver of any such right with respect to particular facts and other circumstances will not be deemed a waiver with respect to any other facts and circumstances, and each such right will be deemed an ongoing right that may be asserted at any time and from time to time.

 

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ARTICLE X
INDEMNIFICATION

 

10.1 Survival. The representations and warranties made herein and in any certificate delivered in connection herewith shall survive for a period of twenty-four (24) months following the Closing Date, at which time they shall expire; provided, however, that (i) the representations and warranties set forth in Sections  3.1 (Authority and Enforceability), 3.3 (The Shares), 3.4 (Broker’s Fees), 4.1 (Organization, Qualification and Corporate Power; Authority and Enforceability), 4.3 (Capitalization), 4.17 (Environmental), 5.1 (Organization), 5.2 (Authorization), 5.3 (Noncontravention), 6.1 (Organization), 6.2 (Authorization), 6.3 (Noncontravention) and 6.4 (Capitalization) of this Agreement (the “Fundamental Representations”) shall survive indefinitely and (ii) the representations and warranties in Section 4.6 (Taxes) of this Agreement shall survive until the expiration of the applicable statute of limitations. If written notice of a claim has been given prior to the expiration of the applicable representations and warranties, then notwithstanding any statement herein to the contrary, the relevant representations and warranties shall survive as to such claim, until such claim is finally resolved. Unless a specified period is set forth in this Agreement (in which event such specified period will control), all agreements and covenants contained in this Agreement will survive the Closing and remain in effect indefinitely.

 

10.2 Indemnification by Sellers. From and after the Closing, the Sellers agree, severally and not jointly, to indemnify, defend and save Buyer and its Affiliates, stockholders, officers, directors, employees, agents and representatives (each, a “Buyer Indemnified Party” and collectively, the “Buyer Indemnified Parties”) harmless from and against any and all liabilities, deficiencies, demands, claims, Actions, assessments, losses, costs, expenses, interest, fines, penalties and damages (including fees and expenses of attorneys and accountants and costs of investigation) (individually and collectively, the “Losses”) suffered, sustained or incurred by any Buyer Indemnified Party arising out of or otherwise by virtue of: (a) any breach of any of the representations or warranties of the Sellers or the Company contained in Article III or IV of this Agreement or (b) the failure of the Sellers to perform any of his or her covenants or obligations contained in this Agreement.

 

10.3 Indemnification by Buyer. From and after the Closing, the Buyer agrees to indemnify, defend and save the Sellers and to the extent applicable, the Sellers’ Affiliates, employees, agents and representatives (each, a “Seller Indemnified Party” and collectively the “Seller Indemnified Parties”) harmless from and against any and all Losses sustained or incurred by any Seller Indemnified Party arising out of or otherwise by virtue of: (a) any breach of any of the representations and warranties of Buyer contained in Article V and VI of this Agreement or (b) the failure of Buyer to perform any of its covenants or obligations contained in this Agreement.

 

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10.4 Indemnification Procedure.

 

(a) If a Buyer Indemnified Party or a Seller Indemnified Party seeks indemnification under this Article X, such party (the “Indemnified Party”) shall give written notice to the other party (the “Indemnifying Party”) of the facts and circumstances giving rise to the claim. In that regard, if any Action, Liability or obligation shall be brought or asserted by any third party which, if adversely determined, would entitle the Indemnified Party to indemnity pursuant to this Article X (a “Third-Party Claim”), the Indemnified Party shall promptly notify the Indemnifying Party of such Third-Party Claim in writing, specifying the basis of such claim and the facts pertaining thereto, and the Indemnifying Party, if the Indemnifying Party so elects, shall assume and control the defense thereof (and shall consult with the Indemnified Party with respect thereto), including the employment of counsel reasonably satisfactory to the Indemnified Party and the payment of all necessary expenses. If the Indemnifying Party elects to assume control of the defense of a Third-Party Claim, the Indemnified Party shall have the right to employ counsel separate from counsel employed by the Indemnifying Party in any such action and to participate in the defense thereof, but the fees and expenses of such counsel employed by the Indemnified Party shall be at the expense of the Indemnified Party unless (i) the Indemnifying Party has been advised by the Indemnifying Party’s counsel that a reasonable likelihood exists of a conflict of interest between the Indemnifying Party and the Indemnified Party, or (ii) the Indemnifying Party has failed to assume the defense and employ counsel; in which case the fees and expenses of the Indemnified Party’s counsel shall be paid by the Indemnifying Party. All claims other than Third-Party Claims (a “Direct Claim”) may be asserted by the Indemnified Party giving notice to the Indemnifying Party. Absent an emergency or other extenuating circumstance, the Indemnified Party shall give written notice to the Indemnifying Party of such Direct Claim prior to taking any material actions to remedy such Direct Claim.

 

(b) In no event shall the Indemnified Party pay or enter into any settlement of any claim or consent to any judgment with respect to any Third-Party Claim without the prior written consent of the Indemnifying Party (which consent shall not be unreasonably withheld, conditioned or delayed) if such settlement or judgment would require the Indemnifying Party to pay any amount. The Indemnifying Party may enter into a settlement or consent to any judgment without the consent of the Indemnified Party so long as (i) such settlement or judgment involves monetary damages only and (ii) a term of the settlement or judgment is that the Person or Persons asserting such Third-Party Claim unconditionally release all Indemnified Parties from all liability with respect to such claim; otherwise the consent of the Indemnified Party shall be required in order to enter into any settlement of, or consent to the entry of a judgment with respect to, any Third-Party Claim, which consent shall not be unreasonably withheld, conditioned or delayed.

 

10.5 Failure to Give Timely Notice. A failure by an Indemnified Party to provide notice as provided in Section 10.4 will not affect the rights or obligations of any Person except and only to the extent that, as a result of such failure, any Person entitled to receive such notice was damaged as a result of such failure to give timely notice. Nothing contained in this Section 10.4 shall be deemed to extend the period for which Sellers’ representations and warranties will survive Closing as set forth in Section 10.1 above.

 

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10.6 Limited on Indemnification Obligation. Notwithstanding anything in this Agreement to the contrary, the liability of the Sellers to the Buyer Indemnified Parties with respect to claims for indemnification pursuant to Section 10.2(a) (but not with respect to the Fundamental Representations for which recovery shall not be so limited) is subject to the following limitations:

 

(a) The Sellers shall not, in the aggregate, be liable to the Buyer Indemnified Parties for Losses arising under Section 10.2(a) (other than with respect to acts of fraud or the Fundamental Representations for which recovery shall not be so limited) to the extent that the amounts otherwise indemnifiable for such breaches exceeds the Purchase Price.

 

(b) The Sellers shall not be liable to the Buyer Indemnified Parties for Losses arising under Section 10.2(a) (other than with respect to acts of fraud or Fundamental Representations for which recovery shall not be so limited) until and unless the aggregate amounts indemnifiable for such breaches exceeds $25,000. In the event the Buyer Indemnified Parties’ claim for Losses, in the aggregate, exceed $25,000, the Buyer Indemnified Parties shall be entitled to the entire amount of such Losses back to the first dollar.

 

(c) The Sellers shall not be liable to the Buyer Indemnified Parties for Losses arising under Section 10.2 unless the claim therefor is asserted in writing on or prior to the expiration of the applicable representations and warranties.

 

(d) Losses otherwise subject to indemnity hereunder will be calculated after application of any received insurance proceeds actually received by the Indemnitee (net of costs of recovery).

 

10.7 Payments. Payments of all amounts owing by an Indemnifying Party under this Article X shall be made promptly upon the determination in accordance with this Article X that an indemnification obligation is owing by the Indemnifying Party to the Indemnified Party.

 

ARTICLE XI
MISCELLANEOUS

 

11.1 Press Releases and Public Announcement. Neither the Buyer on the one hand, nor the Sellers or the Company on the other, will issue any press release or make any public announcement relating to this Agreement, the Acquisition or the other transactions contemplated by this Agreement without the prior written approval of the other party; provided, however, that the Buyer may make regulatory filings referring to this Agreement or attaching a copy hereof as may be required by applicable law.

 

11.2 No Third-Party Beneficiaries. This Agreement will not confer any rights or remedies upon any Person other than the parties hereto and their respective successors and permitted assigns.

 

11.3 Entire Agreement. This Agreement (including the Exhibits and the Schedules hereto) constitutes the entire agreement among the parties hereto and supersedes any prior understandings, agreements or representations by or among the parties hereto, written or oral, to the extent they related in any way to the subject matter hereof.

 

11.4 Succession and Assignment. This Agreement will be binding upon and inure to the benefit of the parties named herein 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, in the case of assignment by the Buyer, by the Sellers, and, in the case of assignment by the Sellers or the Company, the Buyer.

 

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11.5 Construction. The parties have participated jointly in the negotiation and drafting of this Agreement, and, in the event an ambiguity or question of intent or interpretation arises, this Agreement will be construed as if drafted jointly by the parties, and no presumption or burden of proof will arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement.

 

11.6 Notices. All notices and other communications that are required or permitted to be given to the parties under this Agreement shall be sufficient in all respects if given in writing and delivered in person, by electronic mail, by telecopy, by overnight courier, or by certified mail, postage prepaid, return receipt requested, to the receiving party at the address specified below or to such other address as such party may have given to the other by notice pursuant to this Section. Notice shall be deemed given on the date of delivery, in the case of personal delivery, electronic mail, or telecopy, or on the delivery or refusal date, as specified on the return receipt in the case of certified mail or on the tracking report in the case of overnight courier.

 

If to the Buyer: 1847 Cabinets Inc.

c/o 1847 Holdings LLC

590 Madison Avenue, 21st Floor

New York, NY 10022

Attn: Ken Yuan, CEO

Email: kyyuan@gmail.com

 

If to the Buyer Parent: 1847 Holdings LLC

590 Madison Avenue, 21st Floor

New York, NY 10022

Attn: Ellery W. Roberts, CEO

Email: eroberts@1847holdings.com

 

with a copy to: Bevilacqua PLLC

1050 Connecticut Avenue, NW

Suite 500

Washington, DC 20036

Attn: Louis A. Bevilacqua

Email: lou@bevilacquapllc.com

Facsimile: 202-869-0889

 

If to the Company: Kyle’s Custom Wood Shop, Inc.

2950 E. Lucca Dr.

Meridian, Id 83642

Attn: Stephen Mallatt, Jr.

Email: steve@kylescabinets.com

 

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with a copy to: Hawley Troxell

877 W. Main Street, 10th Floor

Boise, ID 83702

Attn: Paul Street

Email: pstreet@hawleytroxell.com

Facsimile: 208-954-5938

 

If to the Sellers: Stephen Mallatt, Jr.

2950 E. Lucca Dr.

Meridian, Id 83642

Email: steve@kylescabinets.com

 

with a copy to: Hawley Troxell

877 W. Main Street, 10th Floor

Boise, ID 83702

Attn: Paul Street

Email: pstreet@hawleytroxell.com

Facsimile: 208-954-5938

 

Any party may change the address to which notices, requests, demands, claims and other communications hereunder are to be delivered by giving the other parties notice in the manner set forth herein.

 

11.7 Governing Law. This Agreement will be governed by, and construed in accordance with, the Laws of the State of Idaho without giving effect to any choice of Law or conflict of Law provision or rule that would cause the application of the Laws of any jurisdiction other than the State of Idaho.

 

11.8 Consent to Jurisdiction and Service of Process. EACH OF THE PARTIES HERETO CONSENTS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE STATE OF IDAHO AND IRREVOCABLY AGREES THAT ALL ACTIONS OR PROCEEDINGS RELATING TO THIS AGREEMENT, THE ACQUISITION OR THE OTHER TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT MAY BE LITIGATED IN SUCH COURTS. EACH OF THE PARTIES HERETO ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS RESPECTIVE PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE EXCLUSIVE JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENS, AND IRREVOCABLY AGREES TO BE BOUND BY ANY FINAL AND NONAPPEALABLE JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT, THE ACQUISITION OR THE OTHER TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH OF THE PARTIES HERETO FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO SUCH PARTY AT THE ADDRESS SPECIFIED IN THIS AGREEMENT, SUCH SERVICE TO BECOME EFFECTIVE 15 CALENDAR DAYS AFTER SUCH MAILING. NOTHING HEREIN WILL IN ANY WAY BE DEEMED TO LIMIT THE ABILITY OF ANY PARTY HERETO TO SERVE ANY SUCH LEGAL PROCESS, SUMMONS, NOTICES AND DOCUMENTS IN ANY OTHER MANNER PERMITTED BY APPLICABLE LAW OR TO OBTAIN JURISDICTION OVER OR TO BRING ACTIONS, SUITS OR PROCEEDINGS AGAINST ANY OTHER PARTY HERETO IN SUCH OTHER JURISDICTIONS, AND IN SUCH MANNER, AS MAY BE PERMITTED BY ANY APPLICABLE LAW.

 

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11.9 Headings. The descriptive headings contained in this Agreement are included for convenience of reference only and will not affect in any way the meaning or interpretation of this Agreement.

 

11.10 Severability. If any provision of this Agreement is held to be illegal, invalid or unenforceable under any present or future Law (a) such provision will be fully severable, (b) this Agreement will be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part hereof, (c) the remaining provisions of this Agreement will remain in full force and effect and will not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom and (d) in lieu of such illegal, invalid or unenforceable provision, there will be added automatically as a part of this Agreement a legal, valid and enforceable provision as similar in terms of such illegal, invalid or unenforceable provision as may be possible.

 

11.11 Expenses. Except as otherwise provided in this Agreement, whether or not the Acquisition is consummated, all expenses incurred in connection with this Agreement and the transactions contemplated hereby will be paid by the party incurring such expenses. As used in this Agreement, “expenses” means the out-of-pocket fees and expenses of the financial advisor, counsel and accountants incurred in connection with this Agreement and the transactions contemplated hereby.

 

11.12 Incorporation of Exhibits and Schedules. The Exhibits and Schedules identified in this Agreement are incorporated herein by reference and made a part hereof.

 

11.13 Specific Performance. The parties hereto agree that irreparable damage would occur in the event that any provision of this Agreement was not performed in accordance with the terms hereof and that the parties will be entitled to specific performance of the terms hereof in addition to any other remedy at Law or equity.

 

11.14 Counterparts. This Agreement may be executed in two (2) or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Counterparts may be delivered via facsimile, electronic mail (including pdf or any electronic signature complying with the U.S. federal ESIGN Act of 2000, e.g., www.docusign.com) or other transmission method and any counterpart so delivered shall be deemed to have been duly and validly delivered and be valid and effective for all purposes.

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

 

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

 

  BUYER:
   
  1847 Cabinets Inc.

 

  By: /s/ Ken Yaun
  Name:  Ken Yuan
  Title: CEO

 

  BUYER PARENT:
   
  1847 Holdings LLC

 

  By: /s/ Ellery W. Roberts
  Name:  Ellery W. Roberts
  Title: CEO

 

  COMPANY:
   
  Kyle’s Custom Wood Shop, Inc.

 

  By: /s/ Stephen Mallatt, Jr.
  Name:  Stephen Mallatt, Jr.
  Title: President and CEO

 

  SELLERS:

 

  /s/ Stephen Mallatt, Jr.
  Name: Stephen Mallatt, Jr.

 

  /s/ Rita Mallatt
  Name: Rita Mallatt

 

 

 

 

Exhibit A

List of Sellers

 

Name of Seller   Number of Shares     Percent Ownership     Number of Buyer Shares to be Received     Principal Amount of Seller Note to be Received  
Stephen Mallatt, Jr. and Rita Mallatt, husband and wife     1000       100 %     700,000     $ 1,050,000  
                                 
Totals     1000       100 %     700,000     $ 1,050,000  

 

 

 

 

Exhibit B

Example of Net Working Capital Calculation

 

Working Capital Adjustment (Example)

All Balance Sheet Balances are after Final GAAP Adjustments

 

    Balance as
of 8/31/20
    Cash
Adjustment
    Adjusted
Balance as
of 8/31/20
 
Cash     542,758       (451,758 )(1)     91,000  
Accounts Receivable     380,892               380,892  
Prepaid Expenses     7,464               7,464  
inventory     4,763               4,763  
Contact: Costs In Excess of Billings     117,705               117,705  
                         
Total Current Assets     1,053,582               601,824  
                         
Accounts Payable     186,082               186,082  
Credit Cards     2,288               2,288  
Deferred Revenue     2,500               2,500  
Accrued Payroll     16,200               16,200  
Accrued Payroll Liabilities     12,348               12,348  
Contact: Billings in Excess of Costs     59,921               59,921  
Line of Credit (Outstanding)     -               -  
                         
Total Current Liabilities     279,339               279,339  
                         
Net Working Capital     774,243       (451,758 )(1)     322,485  

 

(1) - Adjustment to pay excess cash to Sellers and leave minimum of $91,000 on hand to cover initial expenses after closing. Seller will pay their portion of the transactional costs of the Acquisition thru the Company effective on or before the closing date.

 

Final Working Cabinet Adjustment Calculation

 

Adjusted Working Capital Balance (after Cash Adjustment)     322,485  
Net Working Capital Target per Stock Purchase Agreement     (154,000 )
Excess (Deficit) of Closing Working Cabinet to Target Working Capital     168,485  

 

 

 

 

Exhibit C

Form of Seller Note

 

(See Attached)

 

 

 

 

 

Exhibit D

Employment Agreement Terms

 

1. The employment agreements between the Company and each of the Sellers shall be for a one-year term (weekly/monthly time commitment by each Seller to be mutually agreed to by the parties). Each of the Sellers shall be entitled to three weeks paid time off.

 

2. Compensation:

 

a. Steve Mallatt - $1900 / week plus discretionary bonus.

 

b. Rita Mallatt - $1500 / week plus discretionary bonus.

 

3. The Company shall pay or reimburse the Sellers during such period of employment for the following items:

 

a. Terrace lakes marketing ($300/month).

 

b. Steve Mallatt’s CPA license fees.

 

c. Steve Mallatt’s auto insurance for one automobile.

 

d. Cell phone service plan Steve and Rita Mallatt. Sellers’ three children may remain on the such plan, subject to reimbursement to the Company by the Sellers.

 

e. Sellers’ home internet service (for remote access to the Company).

 

4. Other benefits during such period of employment:

 

a. Each of Steve and Rita Mallat will shall remain on the Company’s Costco business account, provided that such account is used for business purposes and not for personal use.

 

b. Allow monthly credit card bills to continue to be paid on INK / AMEX business credit cards, provided that such account is used for business purposes and not for personal use.

 

c. Steve and Rita Mallatt shall be eligible to participate in the Company’s offered health insurance and afforded the same opportunities for participation as other employees.

 

 

 

 

 

Exhibit 10.2

 

ADDENDUM TO STOCK PURCHASE AGREEMENT

 

This Addendum to Stock Purchase Agreement (“Addendum”) dated as of September 30, 2020, in entered into by and between 1847 Cabinet Inc., a Delaware corporation (the “Buyer”), Kyle’s Custom Wood Shop, Inc., an Idaho corporation (the “Company”), Stephen Mallatt, Jr., an individual, and Rita Mallatt, an individual (each, a “Seller,” and collectively, the “Sellers”), and 1847 Holdings LLC, a Delaware limited liability company (“Buyer Parent”).

 

This Addendum is made as an addendum to that certain Stock Purchase Agreement dated August 27, 2020, by and between Buyer (aka 1847 Cabinets Inc., a Delaware corporation), the Company, Sellers, and Buyer Parent (“Stock Purchase Agreement”).

 

The parties desire to enter into this Addendum to clarify and corrected the true legal name of the Buyer (as defined in the Stock Purchase Agreement), and certain other provisions of the Stock Purchase Agreement as provided herein. Any terms not otherwise defined in the Addendum shall have the meaning ascribed to it in the Stock Purchase Agreement.

 

NOW THEREFORE, for good and valuable consideration, the sufficiency of which is hereby acknowledged, the undersigned agree as follows:

 

1. Correction to Buyer Name. The Stock Purchase Agreement erroneously provides the legal name of Buyer (as defined in the Stock Purchase Agreement) as 1847 Cabinets Inc., a Delaware corporation. The entity 1847 Cabinets Inc. does not exist. The true and correct name of Buyer (as defined in the Stock Purchase Agreement) is 1847 Cabinet Inc. As such, all references to 1847 Cabinets Inc. are intended and shall be to 1847 Cabinet Inc. for purposes of the Stock Purchase Agreement and all other agreements, documents, and instruments to be executed and delivered in connection therewith.

 

2. Confirmation of Buyer Shares. Asset Purchase Agreement Section 2.1(b), provides, in part, that “Buyer Parent will cause its transfer agent to issue to the Sellers an aggregate of 700,000 common shares of the Buyer Parent that, in aggregate, have a value as mutually agreed upon by the parties that is equal to One Million, Four Hundred Thousand Dollars ($1,400,000) (the “Buyer Shares”).” The parties hereby agree that the number of Buyer Shares that shall issue to the Sellers in accordance with the terms of the Stock Purchase Agreement shall be 700,000 Buyer Shares.

 

The undersigned, and their respective its successors and assigns, shall perform every act that may be reasonably required to effectuate the provisions of Addendum. This Addendum shall be binding on the undersigned and their representatives and assigns. 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. Delivery of an executed counterpart signature page by facsimile, electronic mail in portable document format (.pdf), or by any other electronic means intended to preserve the original graphic and pictorial appearance of a document, has the same effect as delivery of an executed original of this Agreement.

 

[Signature Page Follows]

 

 

 

 

IN WITNESS WHEREOF, the undersigned hereto have caused this Addendum to be duly executed as of the date first above written.

 

  BUYER:
     
  1847 Cabinet Inc.
     
  By: /s/ Ken Yaun
  Name:  Ken Yuan 
  Title: CEO 
     
  BUYER PARENT:
     
  1847 Holdings LLC
     
  By: /s/ Ellery W. Roberts
  Name:  Ellery W. Roberts
  Title: CEO
     
  COMPANY:
     
  Kyle’s Custom Wood Shop, Inc.
     
  By: /s/ Stephen Mallatt, Jr.
  Name: Stephen Mallatt, Jr. 
  Title: President and CEO 
     
  SELLERS:
     
  /s/ Stephen Mallatt, Jr. 
  Name: Stephen Mallatt, Jr.
     
  s/ Rita Mallatt 
  Name: Rita Mallatt

 

SIGNATURES - ADDENDUM TO STOCK PURCHASE AGREEMENT

 

 

 

 

 

 

 

Exhibit 10.3

 

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL, IN A FORM REASONABLY ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT.

 

1847 CABINETS INC.

 

8% VESTING PROMISSORY NOTE

 

Up to $1,260,000 September 30, 2020

 

FOR VALUE RECEIVED, 1847 Cabinets Inc., a Delaware corporation (the “Company”), promises to pay to Stephen Mallatt, Jr. and Rita Mallatt, each in his and her capacity as a Seller (collectively, the “Holder”), subject to Section 4 below, the principal sum of One Million, Fifty Thousand Dollars ($1,050,000.00), as adjusted as set forth herein (the “Principal”) in lawful money of the United States of America, with interest payable on the Vested portion of Principal at the rate of eight percent (8%) per annum. To the extent Vested, the unpaid Principal and all accrued but unpaid interest on such Vested portion of Principal shall be paid in full to the Holder on the last day of the thirty-sixth (36th) month following the date of this Note (the “Maturity Date”).

 

Capitalized terms used herein but not defined herein shall have the meaning ascribed to them in that certain Stock Purchase Agreement, dated August 27, 2020, (the “Purchase Agreement”), among the Company, the Holder and Kyle’s Custom Wood Shop, Inc., an Idaho corporation (“Kyle’s”), and 1847 Holdings LLC, a Delaware limited liability company (“Buyer Parent”), pursuant to which the Company is acquiring the Shares from the Holder.

 

The following is a statement of the rights of the Holder of this Note and the terms and conditions to which this Note is subject, and to which the Holder, by acceptance of this Note, agrees:

 

1. Principal Repayment. If, and to the extent, that the Principal is Vested, the Vested portion of the Principal along with all accrued, but unpaid interest on the Vested portion of the Principal, shall be paid in one lump sum on the Maturity Date.

 

2. Interest. Interest (the “Interest”) shall accrue on the unpaid Vested portion of Principal from the date of issuance of this Note until such Vested portion of Principal is repaid in full at the simple rate of eight percent (8%) per annum. The portion of accrued, but unpaid, Interest on the Vested portion of the Principal is payable at Maturity. All computations of the Interest rate hereunder shall be made on the basis of a 360-day year of twelve 30-day months. In the event that any Interest rate provided for herein shall be determined to be unlawful, such Interest rate shall be computed at the highest rate permitted by applicable law. Any payment by the Company of any Interest amount in excess of that permitted by law shall be considered a mistake, with the excess being applied to the Principal of this Note without prepayment premium or penalty.

 

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3. Redemption. The Company will have the right to redeem all but no less than all of the Note at any time prior to the Maturity Date pursuant to the terms of this Note. Notwithstanding anything to contrary in this Note, if the Company elects to redeem, the redemption price will be payable in cash and is equal to the then outstanding Vested portion of the Principal plus any remaining unvested Principal amount of this Note plus accrued but unpaid Interest thereon (calculated over 36 months). For purposes of this Section 3, the “unvested Principal amount” shall be $350,000.00 per year. By way of example: if the Company elects to redeem this Note on January 25, 2021, the Company shall pay the Vested Principal amount for year 2020, calculated as of December 31, 2020 pursuant to Section 4 below, plus $700,000 ($350,000 x 2), plus all accrued but unpaid interest on the sum total (calculated over 36 months).

 

4. Vesting.

 

(a) General. The payment of the Principal and accrued Interest thereon is subject to vesting in accordance with this Section 4. The Company shall only be required to pay the Vested portion of the Principal and Interest on the Vested portion of the Principal on the Maturity Date. For purposes of this Note, “Vested” means the percentage of the Principal that has vested (i.e., has become payable to the Holder) in accordance with this Section 4.

 

(b) Calculation. The Vested Principal of the Note due at the Maturity Date shall be calculated each year based on the average annual consolidated EBITDA of the Company for each of the years ended December 31, 2020, 2021 and 2022. The EBITDA for each year shall be divided by $1.4 million multiplied by 100 to obtain the vested CSN percentage (the “Vested CSN Percentage”). The Vested Principal for each year shall be equal to the Vested CSN Percentage for that year multiplied by $350,000.00. To the extent that the Vested CSN Percentage for the subject year is less than 80%, no portion of the Note for that year shall vest. To the extent that the Vested CSN Percentage for the subject year is equal to or greater than 120%, the Vested Principal shall be equal to $420,000.00 for that year and no more. For the avoidance of doubt and for purposes of illustration an example vesting calculation is attached hereto as Exhibit A.

 

(c) For purposes of this Section 4, “EBITDA” means the earnings before interest, taxes, depreciation and amortization expenses, in accordance with generally accepted accounting principles applied on a basis consistent with the accounting policies, practices and procedures used to prepare the Company’s financial statements as of the Closing Date, which shall include any state and federal tax credits (including any research and development tax credit) received on behalf of the Company and, which shall exclude i) any management fees or transition expenses payable to Buyer Parent or any subsidiary or affiliate of Buyer Parent and the salaries, independent contractor payments, transition expenses of any additional management personnel in addition to Seller collectively in excess of $130,000 per annum, and ii) all fees, charges, commissions, and expenses in any way related to the Acquisition.

 

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5. Events of Default. In the event that any of the following (each, an “Event of Default”) shall occur:

 

(a) Non-Payment. The Company shall default in the payment of the Vested portion of the Principal of, or accrued Interest on the Vested portion of Principal of, this Note as and when the same shall become due and payable, whether by acceleration or otherwise; or

 

(b) Default in Covenants. The Company shall default in any material manner in the observance or performance of any covenants or agreements set forth in the Purchase Agreement, this Note, or any other agreement entered into on connection with the transactions contemplated by the Purchase Agreement (collectively, the “Transaction Documents”); or

 

(c) Breach of Representations and Warranties. The Company materially breaches any representation or warranty contained in the Transaction Documents; or

 

(d) Illegality of Note. Any court of competent jurisdiction issues an order declaring the Note or any provision thereunder to be illegal; or

 

(e) Bankruptcy. The Company shall: (i) admit in writing its inability to pay its debts as they become due; (ii) apply for, consent to, or acquiesce in, the appointment of a trustee, receiver, sequestrator or other custodian for the Company or any of its property, or make a general assignment for the benefit of creditors; (iii) in the absence of such application, consent or acquiesce in, permit or suffer to exist the appointment of a trustee, receiver, sequestrator or other custodian for the Company or for any part of its property; or (iv) permit or suffer to exist the commencement of any bankruptcy, reorganization, debt arrangement or other case or proceeding under any bankruptcy or insolvency law, or any dissolution, winding up or liquidation proceeding, in respect of the Company, and, if such case or proceeding is not commenced by the Company or converted to a voluntary case, such case or proceeding shall be consented to or acquiesced in by the Company or shall result in the entry of an order for relief; or

 

(f) Change of Control. There is a change of control of the Company by reason of the sale of 51% or more of the stock of the Company or a sale of substantially all the assets of the Company

 

then, and so long as such Event of Default is continuing for a period of two (2) business days in the case of non-payment under Section 5(a) or for a period of thirty (30) calendar days in the case of events under Sections 5(b) through 5(d) (and the event which would constitute such Event of Default, if curable, has not been cured), by written notice to the Company from the Holder, all obligations of the Company under this Note shall be immediately due and payable without presentment, demand, protest or any other action nor obligation of the Holder of any kind, all of which are hereby expressly waived, and Holder may exercise any other remedies the Holder may have at law or in equity. If an Event of Default specified in Section 5(e) above occurs, the Vest portion of the Principal of, and accrued Interest thereon, shall automatically, and without any declaration or other action on the part of any Holder, become immediately due and payable.

 

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6. Affirmative Covenants of the Company. The Company hereby agrees that, so long as the Note remains outstanding and unpaid, or any other amount is owing to the Holder hereunder, the Company will:

 

(a) Corporate Existence and Qualification. Take the necessary steps to preserve its corporate existence and its right to conduct business in all states in which the nature of its business requires qualification to do business;

 

(b) Compliance with Law. Comply with the charter and bylaws or other organizational or governing documents of the Company, and any law, treaty, rule or regulation, or determination of an arbitrator or a court or other governmental authority, in each case applicable to or binding upon the Company or any of its property or to which each of the Company or any of its properties is subject;

 

(c) Taxes. Duly pay and discharge all taxes or other claims, which might become a lien upon any of its property except to the extent that any thereof are being in good faith appropriately contested with adequate reserves provided therefor;

 

(d) Further Assurances. The Company shall execute and deliver any and all such further documents and take any and all such other actions as may be reasonably necessary or appropriate to carry out the intent and purposes of this Note and to consummate the transactions contemplated herein.

 

7. Subordination.

 

(a) All claims of the Holder to the Principal, Interest, and any other amounts at any time owed under this Note (collectively, “Junior Indebtedness”) is hereby expressly subordinated in right of payment, as herein set forth, to the prior payment in full of all Senior Indebtedness (as defined below). No payment under Junior Indebtedness shall be made by the Company, nor shall the Holder exercise any remedies under the Junior Indebtedness (including taking any legal action (whether judicial or otherwise) to collect the Junior Indebtedness), if, at the time of such payment, exercise or immediately after giving effect thereto, (i) there shall exist any “Default” or “Event of Default” under any agreements governing any of the Senior Indebtedness or (ii) the maturity of any of the Senior Indebtedness has been accelerated and such acceleration has not been waived or such Senior Indebtedness has not been paid in full; provided, however, that (x) in the event that the holder of any Senior Indebtedness accelerates such Senior Indebtedness, then the Holder may accelerate the indebtedness evidenced by this Note, and (y) if the Company is permitted under the terms of the Senior Indebtedness to pay an amount due and owing under this Note and fails to make such payment, then so long as the terms of the Senior Indebtedness do not prohibit such action, the Holder may exercise its rights to be paid such amount, but only such amount (and Holder shall not be permitted to accelerate hereunder).

 

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(b) Upon any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to creditors upon any dissolution or winding up or total or partial liquidation or reorganization of the Company, whether voluntary or involuntary or in bankruptcy, insolvency, receivership or other proceedings, all Senior Indebtedness of the Company shall first be paid in full, or payment thereof provided for in money, before any payment is made under Junior Indebtedness; and upon any such dissolution or winding up or liquidation or reorganization, any distribution of assets of the Company of any kind or character, whether in cash, property or securities, to which the Holder as holder of the Junior Indebtedness would be entitled except for the provisions hereof, shall be paid by the Company or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other person making such payment or distribution, or by the Holder if received by Holder, directly to the holder of the Senior Indebtedness, or its representatives, to the extent necessary to pay all such Senior Indebtedness in full, in money, after giving effect to any concurrent prepayment or distribution to or for the benefit of the holders of such Senior Indebtedness, before any payment or distribution is made to the Holder with respect to the Junior Indebtedness.

 

(c) If the holders of the Senior Indebtedness in good faith believe Holder may fail to timely file a proof of claim in any such proceeding, the holder(s) of the Senior Indebtedness may do so for Holder.

 

(d) In the event that any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, prohibited by the foregoing shall be received by the Holder before all the Senior Indebtedness is paid in full, or provisions made for such payment, in accordance with its terms, such payment or distribution shall be held for the benefit of, and shall be paid over or delivered to, the holders of the Senior Indebtedness or their representative or representatives, as their respective interests may appear, for application to the payment of all the Senior Indebtedness remaining unpaid to the extent necessary to pay all such Senior Indebtedness in full, in money, in accordance with its terms, after giving effect to any concurrent payment or distribution to or for the holders of such Senior Indebtedness.

 

(e) The provisions hereof are solely for the purpose of defining the relative rights of the holders of the Senior Indebtedness on the one hand and the Holder as holder of the Junior Indebtedness on the other hand, and nothing herein shall impair, as between the Company and the Holder, the obligations of the Company under the Junior Indebtedness, which are unconditional and absolute. With this in mind, notwithstanding the other provisions of this Section 7, if and so long as all documents governing the Senior Indebtedness permit one of the actions restricted by this Section 7, the restriction shall be waived and the restricted action permitted hereunder.

 

(f) No right of any present or future holder of any Senior Indebtedness to enforce the subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or any act or failure to act, in good faith, by any such holder of the Senior Indebtedness, or any noncompliance by the Company with the terms, provisions and covenants hereof, regardless of any knowledge thereof any holder of the Senior Indebtedness may have or be otherwise charged with. Without in any way limiting the generality of the foregoing, the holders of the Senior Indebtedness may, at any time and from time to time, without the consent of or notice to the Holder, without incurring responsibility to the Holder and without impairing or releasing the subordination provided in this Note or the obligations hereunder of the Holder to the holders of the Senior Indebtedness, do any one or more of the following: (i) change the manner, place or terms of payment or extend the time of payment of, or create, renew or alter, the Senior Indebtedness, or otherwise amend or supplement in any manner the Senior Indebtedness or any instrument evidencing the same or any agreement under which the Senior Indebtedness is outstanding; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing the Senior Indebtedness; (iii) release any person liable or contingently liable in any manner for the payment or collection of the Senior Indebtedness; and/or (iv) exercise or refrain from exercising any rights against the Company or any other person.

 

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(g) Each holder of any Senior Indebtedness, whether such Senior Indebtedness was created or acquired before or after the issuance of this Note, shall be entitled to rely on the subordination provisions set forth in this Note.

 

(h) Notwithstanding the provisions of this Section 7, the Holder shall not be charged with knowledge of the existence of facts which would prohibit the making of any payments on the Junior Indebtedness unless and until the holder(s) of the Senior Indebtedness or their representatives send written notice to Holder of same.

 

(i) Subject to the payment in full of all the Senior Indebtedness, Holder as holder of the Junior Indebtedness shall be subrogated to the rights of the holders of the Senior Indebtedness to receive payments or distributions of assets of the Company applicable to the Senior Indebtedness until the Senior Indebtedness shall be paid in full.

 

(j) The Holder shall confirm (in writing) the above subordination provisions if requested by any holder of the Senior Indebtedness, and shall execute and deliver such additional subordination agreements, consistent with the foregoing as any holder of Senior Indebtedness may require.

 

(k) For purposes hereof, “Senior Indebtedness” means, with respect to the Company, all indebtedness of the Company, whether outstanding on the date of the execution of this Note or thereafter created, to banks, insurance companies, other financial institutions, private equity funds, hedge funds or other similar funds, unless in the instrument creating or evidencing such indebtedness it is provided that such indebtedness is not senior in right of payment to this Note. Senior Indebtedness shall also include indebtedness for taxes owed to federal or state agencies and other indebtedness of the Company, as the case may be, that by operation of law has a right that is senior to the Junior Indebtedness.

 

8. Mutilated, Destroyed, Lost or Stolen Note. If this Note shall become mutilated or defaced, or be destroyed, lost or stolen, the Company shall execute and deliver a new note of like Principal amount in exchange and substitution for the mutilated or defaced Note, or in lieu of and in substitution for the destroyed, lost or stolen Note. In the case of a mutilated or defaced Note, the Holder shall surrender such Note to the Company. In the case of any destroyed, lost or stolen Note, the Holder shall furnish to the Company: (i) evidence to its satisfaction of the destruction, loss or theft of such Note and (ii) such security or indemnity (which shall not include the posting of any bond) as may be reasonably required by the Company to hold the Company harmless.

 

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9. Waiver of Demand, Presentment, etc. The Company hereby expressly waives demand and presentment for payment, notice of nonpayment, protest, notice of protest, notice of dishonor, notice of acceleration or intent to accelerate, bringing of suit and diligence in taking any action to collect amounts called for hereunder and shall be directly and primarily liable for the payment of all sums owing and to be owing hereunder, regardless of and without any notice, diligence, act or omission as or with respect to the collection of any amount called for hereunder. The Company agrees that, in the event of an Event of Default, to reimburse the Holder for all reasonable costs and expenses (including reasonable legal fees of one counsel) incurred in connection with the enforcement and collection of this Note.

 

10. Payment. All payments with respect to this Note shall be made in lawful money of the United States of America, at the address of the Holder as of the date hereof or as designated in writing by the Holder from time to time. The receipt by the Holder of immediately available funds shall constitute a payment of the Principal and Interest hereunder and shall satisfy and discharge the liability for Principal and Interest on this Note to the extent of the sum represented by such payment. Payment shall be credited first to the accrued Interest then due and payable and the remainder applied to Principal.

 

11. Assignment. The rights and obligations of the Company and the Holder of this Note shall be binding upon, and inure to the benefit of, the successors and permitted assigns of the parties hereto. To complete an assignment or transfer this Note, the Holder shall deliver a completed and executed Form of Assignment attached hereto as Exhibit B and surrender and deliver this Note, duly endorsed, to the Company’s office or such other address which the Company shall designate, upon receipt of which a new Note, in substantially the form of this Note (any such new Note, a “New Note”), evidencing the portion of this Note so transferred shall be issued to the transferee and a New Note evidencing the remaining portion of this Note not so transferred, if any, shall be issued to the transferring Holder. The acceptance of the New Note by the transferee thereof shall be deemed the acceptance by such transferee of all of the rights and obligations in respect of the New Note that the Holder has in respect of this Note. Interest and Principal are payable only to the registered Holder of this Note set forth on the books and records of the Company. Any assignment pursuant to this Section 11 remains subject to the occurrence of the Contingency Event.

 

12. Waiver and Amendment. Any provision of this Note, including, without limitation, the due date hereof, and the observance of any term hereof, may be amended, waived or modified (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the Company and the Holder.

 

13. Notices. Any notice, request or other communication required or permitted hereunder shall be in writing and shall be deemed to have been duly given if given in accordance with the provisions of the Purchase Agreement.

 

14. Governing Law. This Note shall be governed in all respects, including validity, interpretation and effect, by the internal laws of the State of Idaho.

 

15. Headings. The descriptive headings contained in this Note are included for convenience of reference only and will not affect in any way the meaning or interpretation of this Note.

 

16. Severability. If one or more provisions of this Note are held to be unenforceable under applicable law, such provisions shall be excluded from this Note, and the balance of this Note shall be interpreted as if such provisions were so excluded and shall be enforceable in accordance with its terms.

 

[Signature Page Follows]

 

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IN WITNESS WHEREOF, the undersigned have caused this Note to be issued as of the date first above written.

 

  1847 Cabinets Inc.
     
  By: /s/ Kenneth Yuan
  Name:  Kenneth Yuan
  Title: Chief Executive Officer

 

 

 

 

EXHIBIT A

 

Note Vesting Example

 

Year 1:

 

  Average annual consolidated EBITDA of the Company for the year ending December 31, 2020 equals $1,500,000.

 

  Then the Vested CSN Percentage for year 2020 equals 107.14% (1,500,000/1,400,000 * 100). The CNS Percentage for year ending 2020 falls within the range of 80% to 120%.

 

  Therefore, the Principal will Vest for year 2020 in the amount of $374,990 ($350,000 * 1.0714).

 

Year 2:

 

  Average annual consolidated EBITDA of the Company for the year ending December 31, 2021 equals $600,000.

 

  Then the Vested CSN Percentage for year 2020 equals 42.86% (600,000/1,400,000 * 100).

 

  The CNS Percentage for year ending 2021 falls below the range of 80% to 120%.

 

  Therefore, the Principal will Vest for year 2021 in the amount of $0.00.

 

Year 3:

 

  Average annual consolidated EBITDA of the Company for the year ending December 31, 2022 equals $2,000,000.

 

  Then the Vested CSN Percentage for year 2020 equals 142.86% (2,000,000/1,400,000 * 100).

 

  The CNS Percentage for year ending 2021 falls above the range of 80% to 120%.

 

  Therefore, the Principal will Vest for year 2022 in the amount of $420,000 (cap).

 

Total Vested principal amount over Term equals $794,990 (374,990 + 420,000). Interest will be calculated based on the forgoing Vested principal amount as accrued at the rate of 8% per annum from the date of issuance of the Note until such Vested portion is repaid in full on the Maturity Date.

 

 

 

 

EXHIBIT B

 

Form of Assignment

 

TO: 1847 Cabinets Inc.,

 

FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ___________________ (name), __________________________________________ (address), US$____________ of 8% Vesting Promissory Note (“Note”) of 1847 Cabinets Inc. (the “Company”), including any and all accrued and unpaid interest owing thereon, registered in the name of the undersigned on the records of the Company represented by the within certificate, and irrevocably appoints ___________________ the attorney of the undersigned to transfer the said securities on the books or register with full power of substitution.

 

DATED this ________ day of, __________________, 20 ____.

 

 

_______________________________
(Signature of Registered Note Holder)

 

 

________________________________
(Print name of Registered Note Holder)

 

Instructions:

 

1. Signature of Holder must be the signature of the person appearing on the face of the Note.

 

2. If the transfer of Note is signed by a trustee, executor, administrator, curator, guardian, attorney, officer of a corporation or any person acting in a fiduciary or representative capacity, the certificate must be accompanied by evidence of authority to sign satisfactory to the Company.

 

 

 

 

Exhibit 10.4

 

MANAGEMENT SERVICES AGREEMENT

 

BY AND BETWEEN

 

1847 CABINET INC.

 

AND

 

1847 PARTNERS LLC

 

Dated as of August 21, 2020

 

 

 

 

MANAGEMENT SERVICES AGREEMENT

 

MANAGEMENT SERVICES AGREEMENT (as amended, revised, supplemented or otherwise modified from time to time, this “Agreement”), dated as of August 21, 2020, by and between 1847 CABINET INC., a Delaware corporation (the “Company”), and 1847 PARTNERS LLC, a Delaware limited liability company (the “Manager”). Each party hereto shall be referred to as, individually, a “Party” and, collectively, the “Parties.”

 

BACKGROUND

 

The Board of Directors of the Company has determined that it would be in the best interests of the Company to appoint the Manager to perform the Services (as such term is defined herein) and, therefore, the Company has agreed to appoint the Manager to perform the Services on the terms and subject to the conditions set forth herein. The Manager has agreed to act as Manager and to perform the Services on the terms and subject to the conditions set forth herein.

 

The Manager also acts as an external manager for 1847 Holdings LLC (the “Parent”), the Company’s parent entity, pursuant to the Management Services Agreement by and between the Manager and the Parent, dated as of April 15, 2013, as amended (the “Parent MSA”). This Agreement is an Offsetting Management Services Agreement as defined and referenced in the Parent MSA.

 

AGREEMENT

 

NOW, THEREFORE, in consideration of the mutual covenants, representations, warranties and agreements contained herein, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the Parties hereto agree as follows:

 

ARTICLE I

 

DEFINITIONS

 

For all purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires: the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular; any reference to an “Article,” “Section” or an “Exhibit” refers to an Article, Section or an Exhibit, as the case may be, of this Agreement; and the words “herein,” “hereinafter,” “hereof,” “hereto” and “hereunder” and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section or other subdivision:

 

Affiliate” means, with respect to any Person, (i) any Person directly or indirectly controlling, controlled by or under common control with such Person or (ii) any officer, director, general member, member or trustee of such Person. For purposes of this definition, the terms “controlling,” “controlled by” or “under common control with” shall mean, with respect to any Persons, the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise, or the power to elect at least 50% of the directors, managers, general members, or Persons exercising similar authority with respect to such Person.

 

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Agreement” has the meaning set forth in the preamble of this Agreement.

 

Board of Directors” means the Board of Directors of the Company or any committee thereof that has been duly authorized by the Board of Directors to make a decision on the matter in question or bind the Company as to the matter in question.

 

Business Day” means any day other than a Saturday, a Sunday or a day on which banks in the City of New York are required, permitted or authorized, by applicable law or executive order, to be closed for regular banking business.

 

Commencement Date” means the date of this Agreement.

 

Company” has the meaning set forth in the preamble of this Agreement.

 

Company Information” means any information concerning the Company or any of the Subsidiaries of the Company and their respective financial condition, business or operations that (i) relates to earnings, (ii) is competitively sensitive, (iii) relates to trade secrets, (iv) is proprietary or (v) is similar to any of the foregoing information.

 

Exchange Act” means the Securities Exchange Act of 1934, as amended.

 

Federal Securities Laws” means, collectively, the Securities Act, the Exchange Act and the rules and regulations promulgated thereunder.

 

Fiscal Quarter” means each fiscal quarter of the Company for purposes of the Parent’s reporting obligations under the Exchange Act.

 

Fiscal Year” means each fiscal year of the Company for purposes of the Parent’s reporting obligations under the Exchange Act.

 

GAAP” means generally accepted accounting principles in effect in the United States, consistently applied.

 

Gross Income” has the meaning set forth in Section 61(a) of the Internal Revenue Code of 1986, as amended.

 

Incur” means, with respect to any Indebtedness or other obligation of a Person, to create, issue, acquire (by conversion, exchange or otherwise), assume, suffer, guarantee or otherwise become liable in respect of such Indebtedness or other obligation.

 

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Indebtedness” means, with respect to any Person, (i) any liability for borrowed money, or under any reimbursement obligation relating to a letter of credit, (ii) all indebtedness (including bond, note, debenture, purchase money obligation or similar instrument) for the acquisition of any businesses, properties or assets of any kind (other than property, including inventory, and services purchased, trade payables, other expenses accruals and deferred compensation items arising in the Ordinary Course of Business), (iii) all obligations under leases that have been or should be, in accordance with GAAP, recorded as capital leases, (iv) any liabilities of others described in the preceding clauses (i) to (iii) (inclusive) that such Person has guaranteed or for which such Person is otherwise legally obligated, and (without duplication) any amendment, supplement, modification, deferral, renewal, extension or refunding of any liability of the types referred to in clauses (i) through (iv) above.

 

Indemnified Parties” has the meaning set forth in Article IX hereof.

 

Losses” has the meaning set forth in Article IX hereof.

 

Management Fee” has the meaning set forth in Section 7.1(a) hereof.

 

Management Fee Payment Date” means the first Business Day of each Fiscal Quarter or, in the case of the Fiscal Quarter in which this Agreement is terminated, the Termination Date.

 

Manager” has the meaning set forth in the preamble of this Agreement.

 

Non-Critical Services” means any Services other than the Services for which the Manager was engaged by the Company in light of the experience and expertise of the employees of the Manager.

 

Ordinary Course of Business” means, with respect to any Person, an action taken by such Person if such action is (i) consistent with the past practices of such Person and is taken in the normal day-to-day business or operations of such Person and (ii) which is not required to be specifically authorized or approved by the board of directors of such Person.

 

Parent” has the meaning set forth in the recitals to this Agreement.

 

Parent Management Fee” has the meaning set forth in Section 7.1(a) hereof.

 

Parent MSA” has the meaning set forth in the recitals to this Agreement.

 

Party” and “Parties” have the meaning set forth in the preamble of this Agreement.

 

Person” means any individual, company (whether general or limited), limited liability company, corporation, trust, estate, association, nominee or other entity.

 

Securities Act” means the Securities Act of 1933, as amended.

 

Services” has the meaning set forth in Section 3.1(b) hereof.

 

Subsidiary” means, with respect to any Person, any corporation, company, joint venture, limited liability company, association or other entity in which such Person owns, directly or indirectly, more than 50% of the outstanding voting equity securities or interests, the holders of which are generally entitled to vote for the election of the board of directors or other governing body of such entity.

 

Termination Date” means the date upon which this Agreement is terminated pursuant Article VIII hereof.

 

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ARTICLE II

 

APPOINTMENT OF THE MANAGER

 

Section 2.1 Appointment

 

The Company hereby agrees to, and hereby does, appoint the Manager to perform the Services as set forth in Section 3.1 herein and in accordance with the terms and conditions of this Agreement.

 

Section 2.2 Term

 

The Manager shall provide Services to the Company from the Commencement Date until the termination of this Agreement in accordance with Article VIII hereof.

 

ARTICLE III

 

OBLIGATIONS OF THE PARTIES

 

Section 3.1 Obligations of the Manager

 

(a) Subject always to the oversight and supervision of the Board of Directors and the terms and conditions of this Agreement, the Manager shall during the term of this Agreement perform the Services as set forth in Section 3.1(b) below and comply with the operational objectives and business plans of the Company in existence from time to time. The Company shall promptly provide the Manager with all stated operational objectives and business plans of the Company approved by the Board of Directors and any other available information reasonably requested by the Manager.

 

(b) The Manager agrees and covenants that it shall perform, or cause to be performed, the following services hereunder (as may be modified from time to time pursuant to Section 3.3 hereof, the “Services”):

 

(i) conduct general and administrative supervision and oversight of the Company’s day-to-day business and operations, including, but not limited to, recruiting and hiring of personnel, administration of personnel and personnel benefits, development of administrative policies and procedures, establishment and management of banking services, managing and arranging for the maintaining of liability insurance, arranging for equipment rental, maintenance of all necessary permits and licenses, acquisition of any additional licenses and permits that become necessary, participation in risk management policies and procedures; and

 

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(ii) oversee and consult with respect to the Company’s business and operational strategies, the implementation of such strategies and the evaluation of such strategies, including, but not limited to, strategies with respect to capital expenditure and expansion programs, acquisitions or dispositions and product or service lines.

 

(c) In connection with the performance of the Services under this Agreement, the Manager shall have all necessary power and authority to perform, or cause to be performed, such Services on behalf of the Company.

 

(d) In connection with the performance of its obligations under this Agreement, the Manager is not permitted to engage in any activities that would cause it to become an “investment adviser” as defined in Section 202(a)(11) of the Investment Advisers Act of 1940, as amended, or any successor provision thereto.

 

(e) While the Manager is providing the Services under this Agreement, the Manager shall also be permitted to provide services, including services similar to the Services covered hereby, to other Persons, including Affiliates of the Manager. This Agreement and the Manager's obligation to provide the Services under this Agreement shall not create an exclusive relationship between the Manager and its Affiliates, on the one hand, and the Company and its Subsidiaries, on the other.

 

Section 3.2 Obligations of the Company

 

(a) The Company shall, and the Company shall cause its Subsidiaries to, do all things reasonably necessary on their part as requested by the Manager consistent with the terms of this Agreement to enable the Company to fulfill its obligations under this Agreement.

 

(b) The Company shall, and the Company shall cause its Subsidiaries to, take reasonable steps to ensure that:

 

(i) the officers and employees of the Company and its Subsidiaries, as the case may be, act in accordance with the terms of this Agreement and the reasonable directions of the Manager in fulfilling the Manager’s obligations hereunder and allowing the Manager to exercise its powers and rights hereunder; and

 

(ii) the Company and its Subsidiaries provide to the Manager alt reports (including monthly management reports and all other relevant reports) that the Manager may reasonably require and on such dates as the Manager may reasonably require.

 

Section 3.3 Change of Services

 

(a) The Company and the Manager shall have the right at any time during the term of this Agreement to change the Services provided by the Manager and such changes shall in no way otherwise affect the rights or obligations of any Party hereunder.

 

(b) Any change in the Services shall be authorized in writing and evidenced by an amendment to this Agreement, as provided in Section 12.9 hereof. Unless otherwise agreed in writing, the provisions of this Agreement shall apply to all changes in the Services.

 

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ARTICLE IV

 

POWERS OF THE MANAGER

 

Section 4.1 Powers of the Manager

 

(a) The Manager shall have no power to enter into any contract for or on behalf of the Company or otherwise subject it to any obligation, such power to be the sole right and obligation of the Company, acting through its Board of Directors and/or the Company’s officers.

 

(b) Subject to Section 4.2 and for purposes other than to delegate its duties and powers to perform the Services hereunder, the Manager shall have the power to engage any agents (including real estate agents and managing agents), valuers, contractors and advisors (including operational, accounting, financial, tax and legal advisors) that it deems necessary or desirable in connection with the performance of its obligations hereunder, which costs therefor shall be subject to reimbursement in accordance with Section 7.2 hereto.

 

Section 4.2 Delegation

 

The Manager may delegate or appoint:

 

(a) Any of its Affiliates as its agent, at its own cost and expense, to perform any or all of the Services hereunder; or

 

(b) Any Person, whether or not an Affiliate of the Manager, as its agent, at its own cost and expense, to perform those Services hereunder which, in the sole discretion of the Manager, are Non-Critical Services; provided, however, that, in each case, the Manager shall not be relieved of any of its obligations or duties owed to the Company hereunder as a result of such delegation. The Manager shall be permitted to share Company Infom1ation with its appointed agents subject to appropriate, reasonable and customary confidentiality arrangements. For the avoidance of doubt, any reference to Manager herein shall include its delegates or appointees pursuant to this Section 4.2.

 

Section 4.3 Manager’s Obligations, Duties and Powers Exclusive

 

The Company agrees that during the term of this Agreement, the obligations, duties and powers imposed on and granted to the Manager under Article III and this Article IV are to be performed or held exclusively by the Manager, subject to Section 4.2 hereof, and the Company shall not, either directly or indirectly, through its employees, Board of Directors or any other Person, as the case may be, perfo1m any of the Services except in circumstances where it is necessary to do so to comply with applicable law or as otherwise agreed by the Manager.

 

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ARTICLE V

 

INSPECTION OF RECORDS

 

Section 5.1 Books and Records of the Company

 

At all reasonable times and on reasonable notice, the Manager and any Person authorized by the Manager shall have access to, and the right to inspect, for any reasonable purpose, during the term of this Agreement and for a period of five (5) years after termination hereof, the books, records and data stored in computers and all documentation of the Company pertaining to all Services performed, or to be performed, by the Manager or the Management Fee paid, or to be paid, by the Company to the Manager, in each case, hereunder. There shall be no cost or expense charged by any Party to another Party pursuant to the exercise of any right under this Section 5.1.

 

Section 5.2 Books and Records of the Manager

 

At all reasonable times and on reasonable notice, the Company and any Person authorized by the Company shall have access to, and the right to inspect the books, records and data stored in computers and all documentation of the Manager pertaining to all Services performed, or to be performed, by the Manager or the Management Fee paid, or to be paid, by the Company to the Manager, in each case, hereunder. There shall be no cost or expense charged by any Party to another Party pursuant to the exercise of any right under this Section 5.2.

 

ARTICLE VI

 

AUTHORITY OF THE COMPANY AND THE MANAGER

 

Each Party represents and warrants to the other that it is duly authorized with full power and authority to execute, deliver and perform its obligations and duties under this Agreement. The Company represents and warrants that the engagement of the Manager has been duly authorized by the Board of Directors and is in accordance with all governing documents of the Company.

 

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ARTICLE VII

 

MANAGEMENT FEE; EXPENSES

 

Section 7.1 Management Fee

 

(a) Subject to the terms and conditions set forth in this Section 7.1, for the term of this Agreement, as payment to the Manager for performing Services hereunder during any Fiscal Quarter or any part thereof, the Company shall pay a quarterly management fee (the “Management Fee”) to the Manager on each Management Fee Payment Date equal to the greater of $75,000 or 2% of Adjusted Net Assets (as defined in the Parent MSA) of the Company; provided, however, that (i) with respect to the Fiscal Quarter in which the Commencement Date occurs, the Management Fee with respect to such Fiscal Quarter or part thereof shall be equal to the product of (x) the Management Fee, multiplied by (y) a fraction, the numerator of which is the number of days from and including the Commencement Date to and including the last day of such Fiscal Quarter and the denominator of which is the number of days in such Fiscal Quarter, (ii) with respect to the Fiscal Quarter in which this Agreement is terminated, the Management Fee with respect to such Fiscal Quarter or part thereof shall be equal to the product of (x) the Management Fee, multiplied by (y) a fraction, the numerator of which is the number of days from and including the first day of such Fiscal Quarter to but excluding the date upon which this Agreement is terminated and the denominator of which is the number of days in such Fiscal Quarter, (iii) if the aggregate amount of Management Fees paid or to be paid by the Company, together with all other management fees paid or to be paid by all other Subsidiaries of the Parent to the Manager, in each case, with respect to any Fiscal Year exceeds, or is expected to exceed, 9.5% of the Parent’s Gross Income with respect to such Fiscal Year, then the Manager agrees that the Management Fee to be paid by the Company for any remaining Fiscal Quarters in such Fiscal Year shall be reduced, on a pro rata basis determined by reference to the management fees to be paid to the Manager by all of the Subsidiaries of the Parent, until the aggregate amount of the Management Fee paid or to be paid by the Company, together with all other management fees paid or to be paid by all other Subsidiaries of the Parent to the Manager, in each case, with respect to such Fiscal Year, does not exceed 9.5% of the Parent’s Gross Income with respect to such Fiscal Year, and (iv) if the aggregate amount the Management Fee paid or to be paid by the Company, together with all other management fees paid or to be paid by all other Subsidiaries of the Parent to the Manager, in each case, with respect to any Fiscal Quarter exceeds, or is expected to exceed, the aggregate amount of the management fee (before any adjustment thereto) calculated and payable under the Parent MSA (the “Parent Management Fee”) with respect to such Fiscal Quarter, then the Manager agrees that the Management Fee to be paid by the Company for such Fiscal Quarter shall be reduced, on a pro rata basis, until the aggregate amount of the Management Fee paid or to be paid by the Company, together with all other management fees paid or to be paid by all other Subsidiaries of the Parent to the Manager, in each case, with respect to such Fiscal Quarter, does not exceed the Parent Management Fee calculated and payable with respect to such Fiscal Quarter. The Management Fee shall be paid in U.S. dollars by wire transfer in immediately available funds to an account or accounts designated by the Manager from time to time.

 

(b) If the Company does not have sufficient liquid assets to timely pay the entire amount of the Management Fee due on any Management Fee Payment Date, the Company shall liquidate assets or Incur Indebtedness in order to pay such Management Fee in full on such Management Fee Payment Date; provided, however, that if the Management Fee due on any Management Fee Payment Date cannot be paid by the Company as the result of subordination provisions or other restrictions contained in financing or other agreements between the Company and its senior lenders or the senior lenders of any of its affiliates, then the Management Fee shall accrue and be paid as soon as the Company is able to pay the Management Fee without violation such subordination provision or other restrictions.

 

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Section 7.2 Reimbursement of Expenses

 

(a) Subject to Section 7.2(b), the Company shall reimburse the Manager for all costs and expenses of the Company, including all out-of-pocket costs and expenses, that are actually Incurred by the Manager or its Affiliates on behalf of the Company in connection with performing Services hereunder, and all costs and expenses the reimbursement of which is specifically approved by the Board of Directors.

 

(b) Notwithstanding the foregoing or anything else to the contrary herein, neither the Company nor any Subsidiary of the Company shall be obligated or responsible for reimbursing or otherwise paying for any costs or expenses relating to the Manager's overhead or to the Manager’s conduct or maintenance of its business and operations as a provider of management services.

 

(c) Any such reimbursement shall be made upon demand by the Manager in U.S. dollars by wire transfer in immediately available funds to an account or accounts designated by the Manager from time to time.

 

ARTICLE VIII

 

TERMINATION; RESIGNATION AND REMOVAL OF THE MANAGER

 

Section 8.1 Resignation by the Manager

 

The Manager may resign at any time upon sixty (60) days’ prior written notice to the Company, which right shall not be contingent upon the finding of a replacement manager. However, if the Manager resigns, until the date on which the resignation becomes effective, the Manager shall, upon request of the Board of Directors, use reasonable efforts to assist the Board of Directors to find a replacement manager at no cost and expense to the Company.

 

Section 8.2 Removal of the Manager

 

The Manager may be removed by the Company at any time upon sixty (60) days’ prior written notice to the Manager, which right shall not be contingent upon the finding of a replacement manager.

 

Section 8.3 Termination

 

Subject to Section 12.4, this Agreement shall terminate upon the effective date of the resignation or removal of the Manager in accordance with Section 8.1 or Section 8.2 hereof.

 

Section 8.4 Directions

 

After a written notice of termination has been given under this Article VIII, the Company may direct the Manager to undertake any actions necessary to transfer any aspect of the ownership or control of the assets of the Company to the Company or to any nominee of the Company and to do all other things necessary to bring the appointment of the Manager to an end, and the Manager shall comply with all such reasonable directions. 1n addition, the Manager shall, at the Company’s expense, deliver to any new manager or the Company any books or records held by the Manager under this Agreement and shall execute and deliver such instruments and do such things as may reasonably be required to permit new management of the Company to effectively assume its responsibilities.

 

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Section 8.5 Payments Upon Termination

 

Notwithstanding anything in this Agreement to the contrary, the fees, costs and expenses payable to the Manager pursuant to Article VII hereof shall be payable to the Manager upon, and with respect to, the termination of this Agreement pursuant to this Article VIII. All payments made pursuant to this Section 8.5 shall be made in accordance with Article VII hereof.

 

ARTICLE IX

 

INDEMNITY

 

The Company shall indemnify, reimburse, defend and hold harmless the Manager and its Affiliates and their respective successors and permitted assigns, together with their respective employees, officers, members, managers, directors, agents and representatives (collectively the “Indemnified Parties”), from and against all losses (including lost profits), costs, damages, injuries, taxes, penalties, interests, expenses, obligations, claims and liabilities joint or severable) of any kind or nature whatsoever (collectively “Losses”) that are Incurred by such Indemnified Parties in connection with, relating to or arising out of (i) the breach of any term or condition of this Agreement, or (ii) the performance of any Services hereunder; provided, however, that the Company shall not be obligated to indemnify, reimburse, defend or hold harmless any Indemnified Party for any Losses Incurred, by such Indemnified Party in connection with, relating to or arising out of:

 

(a) a breach by such Indemnified Party of this Agreement;

 

(b) the gross negligence, willful misconduct, bad faith or reckless disregard of such Indemnified Party in the performance of any Services hereunder; or

 

(c) fraudulent or dishonest acts of such Indemnified Party with respect to the Company or any of its Subsidiaries.

 

The rights of any Indemnified Party referred to above shall be in addition to any rights that such Indemnified Party shall otherwise have at law or in equity.

 

Without the prior written consent of the Company, no Indemnified Party shall settle, compromise or consent to the entry of any judgment in, or otherwise seek to terminate any, claim, action, proceeding or investigation in respect of which indemnification could be sought hereunder unless (a) such Indemnified Party indemnifies the Company from any liabilities arising out of such claim, action, proceeding or investigation, (b) such settlement, compromise or consent includes an unconditional release of the Company and Indemnified Party from all liability arising out of such claim, action, proceeding or investigation and (c) the parties involved agree that the terms of such settlement, compromise or consent shall remain confidential.

 

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ARTICLE X

 

LIMITATION OF LIABILITY OF THE MANAGER

 

Section 10.1 Limitation of Liability

 

The Manager shall not be liable for, and the Company shall not take, or permit to be taken, any action against the Manager to hold the Manager liable for, any error of judgment or mistake of law or for any loss suffered by the Company or its Subsidiaries (including, without limitation, by reason of the purchase, sale or retention of any security or assets) in connection with the performance of the Manager’s duties under this Agreement, except for a loss resulting from gross negligence, willful misconduct, bad faith or reckless disregard on the part of the Manager in the performance of its duties and obligations under this Agreement, or its fraudulent or dishonest acts with respect to the Company or any of its Subsidiaries.

 

Section 10.2 Reliance of Manager

 

The Manager may take and may act and rely upon:

 

(a) the opinion or advice of legal counsel, which may be in-house counsel to the Company or the Manager, any U.S.-based law firm, or other legal counsel reasonably acceptable to the Board of Directors, in relation to the interpretation of this Agreement or any other document (whether statutory or otherwise) or generally in connection with the Company;

 

(b) advice, opinions, statements or information from bankers, accountants, auditors,

 

(c) valuation consultants and other Persons consulted by the Manager who are in each case believed by the Manager in good faith to be expert in relation to the matters upon which they are consulted; and

 

(d) any other document provided to the Manager in connection with the Company upon which it is reasonable for the Manager to rely.

 

The Manager shall not be liable for anything done, suffered or omitted by it in good faith in reliance upon such opinion, advice, statement, information or document.

 

ARTICLE XI

 

LEGAL ACTIONS

 

The Manager shall notify the Company promptly of any claim made by any third party in relation to the assets of the Company ai1d shall send to the Company any notice, claim, summons or writ served on the Manager concerning the Company.

 

The Manager shall not, without the prior written consent of the Board of Directors, purport to accept or admit any claims or liabilities of which it receives notification on behalf of the Company or make any settlement or compromise with any third party in respect of the Company.

 

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ARTICLE XII

 

MISCELLANEOUS

 

Section 12.1 Obligation of Good Faith; No Fiduciary Duties

 

The Manager shall perform its duties under this Agreement in good faith and for the benefit of the Company. The relationship of the Manager to the Company is as an independent contractor and nothing in this Agreement shall be construed to impose on the Manager any express or implied fiduciary duties.

 

Section 12.2 Binding Effect

 

This Agreement shall be binding upon, shall inure to the benefit of and be enforceable by the Parties hereto and their respective successors and permitted assigns.

 

Section 12.3 Compliance

 

(a) The Manager shall (and must ensure that each of its officers, agents and employees) comply with any law, including the Federal Securities Laws and the securities laws of any applicable jurisdiction, in each case, as in effect from time to time, to the extent that it concerns the functions of the Manager under this Agreement.

 

(b) The Manager shall maintain management systems, policies and internal controls and procedures that reasonably ensure that the Manager and its employees comply with the terms and conditions of this Agreement, as well as comply with the internal policies, controls and procedures established by the Company from time to time, including, without limitation, those relating to trading policies, conflicts of interest and similar corporate governance measures.

 

Section 12.4 Effect of Termination; Survival

 

This Agreement shall be effective as of the date first above written and shall continue in full force and effect thereafter until termination hereof in accordance with Article VIII. The obligations of the Company set forth in Articles VII, VIII and IX and Sections 10.1, 12.5, 12.7, 12.8, 12.9, 12.17 and 12.20 hereof shall survive such termination of this Agreement, subject to applicable law.

 

Section 12.5 Notices

 

Any notice or other communication required or permitted under this Agreement shall be deemed to have been duly given (a) five (5) Business Days following deposit in the mails if sent by registered or certified mail, postage prepaid, (b) when sent, if sent by facsimile transmission, if receipt thereof is confirmed by telephone, (c) when delivered, if delivered personally to the intended recipient and (d) two Business Days following deposit with a nationally recognized overnight courier service, in each case addressed as follows:

 

If to the Company, to:

 

2950 E. Lucca Dr.

Meridian, ID 83642

Attn: Kenneth Yuan

Facsimile:

 

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If to the Manager, to:

 

c/o The 1847 Companies LLC

590 Madison Avenue, 21st Floor

New York, NY 10022

Attn: Ellery W. Roberts

Facsimile: 917-793-5950

 

with a copy (which shall not constitute notice) to:

 

Bevilacqua PLLC

1050 Connecticut Ave., Suite 500

Washington, DC 20036

Attn: Louis A. Bevilacqua

Email: lou@bevilacquapllc.com

Facsimile: 202-869-0889

 

or to such other address or facsimile number as any such Party may, from time to time, designate in writing to all other Parties hereto, and any such communication shall be deemed to be given, made or served as of the date so delivered or, in the case of any communication delivered by mail, as of the date so received.

 

Section 12.6 Headings

 

The headings in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect.

 

Section 12.7 Applicable Law

 

This Agreement, the legal relations between and among the Parties and the adjudication and the enforcement thereof shall be governed by and interpreted and construed in accordance with the laws of the State of New York, without regard to the conflicts of law provisions thereof to the extent such principles or rules would require or permit the application of the laws of another jurisdiction.

 

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Section 12.8 Submission to Jurisdiction; Waiver of Jury Trial

 

Subject to Section 12.20 hereof, each of the Parties hereby irrevocably acknowledges and agrees that any legal action or proceeding brought with respect to any of the obligations arising under or relating to this Agreement shall be brought only in the courts of the State of New York, County of New York or in the United States District Court for the Southern District of New York and each of the Parties hereby irrevocably submits to and accepts with regard to any such action or proceeding, for itself and in respect of its property, generally and unconditionally, the non-exclusive jurisdiction of the aforesaid courts. Each Party hereby further irrevocably waives any claim that any such courts lack jurisdiction over such Party, and agrees not to plead or claim, in any legal action or proceeding with respect to this Agreement or the transactions contemplated hereby brought in any of the aforesaid courts, that any such court lacks jurisdiction over such Party. Each Party irrevocably consents to the service of process in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party, at its address for notices set forth in Section 12.5 hereof, such service to become effective ten (10) days after such mailing. Each Party hereby irrevocably waives any objection to such service of process and further irrevocably waives and agrees not to plead or claim in any action or proceeding commenced hereunder or under any other documents contemplated hereby that service of process was in any way invalid or ineffective. The foregoing shall not limit the rights of any Party to serve process in any other manner permitted by applicable law. The foregoing consents to jurisdiction shall not constitute general consents to service of process in the State of New York for any purpose except as provided above and shall not be deemed to confer rights on any Person other than the respective Parties.

 

Each of the Parties hereby waives any right it may have under the laws of any jurisdiction to commence by publication any legal action or proceeding with respect this Agreement. To the fullest extent permitted by applicable law, each of the Parties hereby irrevocably waives the objection which it may now or hereafter have to the laying of the venue of any suit, action or proceeding arising out of or relating to this Agreement in any of the courts referred to in this Section 12.8 and hereby further irrevocably waives and agrees not to plead or claim that any such court is not a convenient forum for any such suit, action or proceeding.

 

The Parties agree that any judgment obtained by any Party or its successors or assigns in any action, suit or proceeding referred to above may, in the discretion of such Party (or its successors or assigns), be enforced in any jurisdiction, to the extent permitted by applicable law.

 

The Parties agree that the remedy at law for any breach of this Agreement may be inadequate and that should any dispute arise concerning any matter hereunder, this Agreement shall be enforceable in a court of equity by an injunction or a decree of specific performance. Such remedies shall, however, be cumulative and nonexclusive, and shall be in addition to any other remedies which the Parties may have.

 

Each Party hereby waives, to the fullest extent permitted by applicable law, any right it may have to a trial by jury in respect of any litigation as between the Parties directly or indirectly arising out of, under or in connection with this Agreement or the transactions contemplated hereby or disputes relating hereto. Each Party (a) certifies that no representative, agent or attorney of any other Party has represented, expressly or otherwise, that such other Party would not, in the event of litigation, seek to enforce the foregoing waiver and (b) acknowledges that it and the other Parties have been induced to enter into this Agreement by, among other things, the mutual waivers and certifications in this Section 12.8.

 

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Section 12.9 Amendment; Waivers

 

No term or condition of this Agreement may be amended, modified or waived without the prior written consent of the Party against whom such amendment, modification or waiver will be enforced.

 

Any waiver granted hereunder shall be deemed a specific waiver relating only to the specific event giving rise to such waiver and not as a general waiver of any term or condition hereof.

 

Section 12.10 Remedies to Prevailing Party

 

If any action at law or equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys’ fees, costs, and necessary disbursements in addition to any other relief to which such party may be entitled.

 

Section 12.11 Severability

 

Each provision of this Agreement is intended to be severable from the others so that if, any provision or term hereof is illegal, invalid or unenforceable for any reason whatsoever, such illegality, invalidity or unenforceability shall not affect or impair the validity of the remaining provisions and terms hereof; provided, however, that the provisions governing payment of the Management Fee described in Article VII hereof are not severable.

 

Section 12.12 Benefits Only to Parties

 

Nothing expressed by or mentioned in this Agreement is intended or shall be construed to give any Person, other than the Parties and their respective successors or permitted assigns and the Indemnified Parties, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained, terms Agreement and all conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of the Parties and their respective successors and permitted assigns, and for the benefit of no other Person.

 

Section 12.13 Further Assurances

 

Each Party hereto shall take any and all such actions, and execute and deliver such further agreements, consents, instruments and any other documents as may be necessary from time to time to give effect to the provisions and purposes of this Agreement.

 

Section 12.14 No Strict Construction

 

The Parties have participated jointly in the negotiation and drafting of this Agreement. In the event any ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by all Parties, and no presumption or burden of proof shall arise favoring or disfavoring any Party by virtue of the authorship of any provision of this Agreement.

 

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Section 12.15 Entire Agreement

 

This Agreement constitutes the sole and entire agreement of the Parties with regards to the subject matter of this Agreement. Any written or oral agreements, statements, promises, negotiations or representations not expressly set fo1ih in this Agreement are of no force and effect.

 

Section 12.16 Assignment

 

This Agreement shall not be assignable by either party except by the Manager to any Person with which the Manager may merge or consolidate or to which the Manager transfers substantially all of its assets, and then only in the event that such assignee assumes all of the obligations to the Company and the Subsidiaries of the Company hereunder.

 

Section 12.17 Confidentiality

 

(a) The Manager shall not, and the Manager shall cause its Affiliates and their respective agents and representatives not to, at any time from and after the date of this Agreement, directly or indirectly, disclose or use any confidential or proprietary information, including Company Information, involving or relating to (x) the Company, including any information contained in the books and records of the Company and (y) the Subsidiaries of the Company, including any information contained in the books and records of any such Subsidiaries; provided, however, that disclosure and use of any information shall be permitted (i) with the prior written consent of the Company, (ii) as, and to the extent, expressly permitted by this Agreement or any other agreement between the Manager and the Company or any of the Company’s Subsidiaries (but only to the extent that such information relates to such Subsidiaries), (iii) as, and solely to the extent, necessary or required for the performance by the Manager, any of its Affiliates or its delegates, of any of their respective obligations under this Agreement, (iv) as, and to the extent, necessary or required in the operation of the Company's business or operations in the Ordinary Course of Business, (v) to the extent such information is generally available to, or known by, the public or otherwise has entered the public domain (other than as a result of disclosure in violation of this Section 12.17 by the Manager or any of its Affiliates), (vi) as, and to the extent, necessary or required by any governmental order, applicable law or any governmental authority, subject to Section 12.17(d), and (vii) as, and to the extent, necessary or required or reasonably appropriate in connection with the enforcement of any right or remedy relating to this Agreement or any other agreement between the Manager and the Company or any of the Company’s Subsidiaries.

 

(b) The Manager shall produce and implement policies and procedures that are reasonably designed to ensure compliance by the Manager’s directors, officers, employees, agents and representatives with the requirements of this Section 12.17.

 

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(c) For the avoidance of doubt, confidential information includes business plans, financial information, operational information, strategic information, legal strategies or legal analysis, formulas, production processes, lists, names, research, marketing, sales information and any other information similar to any of the foregoing or serving a purpose similar to any of the foregoing with respect to the business or operations of the Company or any of its Subsidiaries. However, the Parties are not required to mark or otherwise designate information as “confidential or proprietary information,” “confidential” or “proprietary” in order to receive the benefits of this Section 12.17.

 

(d) In the event that the Manager is required by governmental order, applicable law or any governmental authority to disclose any confidential information of the Company or any of its Subsidiaries that is subject to the restrictions of this Section 12.17, the Manager shall (i) notify the Company or any of its Subsidiaries in writing as soon as possible, unless it is otherwise affirmatively prohibited by such governmental order, applicable law or such governmental authority from notifying the Company or any such Subsidiaries, as the case may be, (ii) cooperate with the Company or any such Subsidiaries to preserve the confidentiality of such confidential information consistent with the requirements of such governmental order, applicable law or such governmental authority and (iii) use its reasonable best efforts to limit any such disclosure to the minimum disclosure necessary or required to comply with such governmental order, applicable law or such governmental authority, in each case, at the cost and expense of the Company.

 

(e) Nothing in this Section 12.17 shall prohibit the Manager from keeping or maintaining any copies of any records, documents or other information that may contain information that is otherwise subject to the requirements of this Section 12.17, subject to its compliance with this Section 12.17.

 

(f) The Manager shall be responsible for any breach or violation of the requirements of this Section 12.17 by any of its agents or representatives.

 

Section 12.18 Counterparts

 

This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which together shall constitute but one and the same instrument.

 

Section 12.19 Designation

 

This Agreement is an “Offsetting Management Services Agreement” as such term is defined and used pursuant to the Parent MSA, and the Management Fee is an “Offsetting Management Fee” as such term is defined and used pursuant to the Parent MSA.

 

Section 12.20 Dispute Resolution

 

All disputes arising out of this Agreement or relating to the performance of either Party of its obligations hereunder, which disputes the Parties are unable to resolve directly between themselves, shall be settled by arbitration in New York, New York (unless the Company and the Manager agree upon another location) before three arbitrators in accordance with the rules then in effect of the American Arbitration Association.

 

*       *       *

 

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IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date first set forth above.

 

  1847 CABINET INC.

 

  By: /s/ Kenneth Yuan:
  Name: Kenneth Yuan
  Title: Chief Executive Officer

 

  1847 PARTNERS LLC

 

  By: /s/ Ellery W. Roberts
  Name: Ellery W. Roberts
  Title: Manager

 

[Signature Page to Management Services Agreement]

 

 

 

 

 

Exhibit 10.5

 

SECURED PROMISSORY NOTE

 

Up to $4,525,000 As of September 30, 2020

 

1. Principal and Interest.

 

FOR VALUE RECEIVED, 1847 Cabinet Inc., a Delaware corporation (“Borrower”), hereby unconditionally promises to pay to the order of 1847 Holdings LLC, a Delaware limited liability company (together with its permitted successors and assigns, “Lender”), at Lender’s address as designated in writing by the holder of this Secured Promissory Note (“Note”), the sum of the principal amount of up to Four Million, Five Hundred Twenty Five Thousand and No/100 U.S. DOLLARS ($4,525,000), with interest thereon, pursuant to the terms of this Note.

 

In the event Borrower requests funds from Lender in excess of the Commitment (as hereinafter defined), and Lender advances such funds to Borrower, the amounts funded in excess of the Commitment shall be deemed, as of the date such funds are advanced, part of the outstanding principal balance of this Note, repayable hereunder, until repaid for all purposes hereunder.

 

The “Obligations” (as hereinafter defined) are being guaranteed by Borrower’s wholly-owned subsidiary, Kyle’s Custom Wood Shop, Inc. (the “Guarantor”), which guaranty is secured by all of the assets of Guarantor, all as provided in Section 3 below.

 

(a) Defined Terms. Unless otherwise defined herein, capitalized terms used herein that are defined in the UCC shall have the meanings assigned to them in the UCC, however, if a term is defined in Article 9 of the UCC differently than in another Article of the UCC, the term has the meaning specified in Article 9. In addition, the following terms shall have the following meanings:

 

(i) “Business Day” means (a) with respect to any borrowing or payment or interest rate provision related to an Advance (as hereinafter defined) or the Note, a day (other than a Saturday or Sunday) on which banks generally are open in New York, New York and for the conduct of substantially all of their commercial lending activities and (b) for all other purposes, a day other than a Saturday, Sunday or any other day on which national banking associations are authorized to be closed.

 

(ii) “Collateral” means, with respect to Borrower and the Guarantor, all of Borrower’s and Guarantor’s present and future right, title and interest in and to any and all of the personal property of Borrower and Guarantor whether such property is now existing or hereafter created, acquired or arising and wherever located from time to time, including without limitation: (1) accounts; (2) chattel paper; (3) goods; (4) inventory; (5) equipment; (6) fixtures; (7) instruments; (8) investment property; (9) documents; (10) commercial tort claims; (11) deposit accounts; (12) letter-of-credit rights; (13) general intangibles; (14) supporting obligations; and (15) all proceeds and products of the foregoing.

 

(iii) “Commitment” means the maximum unpaid principal amount of Advances which may from time to time be outstanding hereunder, being Four Million, Five Hundred Twenty Five Thousand and No/100 U.S. DOLLARS ($4,525,000) and, as the context may require, the agreement of Lender to make Advances to Borrower subject to the terms and conditions of this Note.

 

 

 

 

(iv) “Termination Date” means the earliest of (i) the Maturity Date (as hereinafter defined), or (ii) the date on which the Commitment is terminated pursuant to Section 3(j)(i) hereof.

 

(b) The Commitment; Advances; Use of Proceeds.

 

(i) Subject to the terms and conditions hereof and in reliance upon the representations, covenants and warranties of Borrower herein, Lender agrees to make advances of funds (each an “Advance” and, collectively, the “Advances”) to Borrower from time to time from the date hereof until the Termination Date, in an aggregate principal amount at any one time outstanding not to exceed the Commitment. Borrower acknowledges that Advances, once advanced pursuant to this Section 1 and repaid pursuant to this Note are not eligible to be subsequently re-borrowed by Borrower.

 

(ii) Notwithstanding anything to the contrary in this Note, upon Borrower’s request, Lender may, in its sole discretion, advance funds under this Note in excess of the Commitment, and the amounts funded in excess of the Commitment shall be deemed, as of the date such funds are advanced, part of the outstanding principal balance of this Note for all purposes hereunder and due hereunder until repaid.

 

(iii) Borrower shall use the loan proceeds available under the Commitment to pay the cash portion of the purchase price for the acquisition of Guarantor and otherwise solely for proper business purposes of Borrower, including acquisition expenses, working capital and general corporate purposes.

 

(c) Borrowing Procedures.

 

(i) Borrower’s Request. Any request by Borrower for an Advance shall be in writing, or by telephone promptly confirmed in writing, and must be given so as to be received by Lender no later than 11:00 a.m., New York City time three (3) Business Days before the date of the requested Advance. Subject to the foregoing, any request by Borrower for an Advance that is received by Lender after 11:00 a.m., New York City time will be deemed to be made as of the following Business Day. Each request for an Advance shall specify the borrowing date (which shall be a Business Day), Borrower’s instructions (if any) regarding the Advance, the purpose for the Advance, and supporting documentation. Unless Lender determines that any applicable condition specified in Section 1(c)(iv) has not been satisfied, Lender will make the amount of the requested Advance available to Borrower as provided in Section 1(c)(ii).

 

(ii) Payments of Advances. Lender shall pay amounts, in whole or part, under any Advance requested by Borrower either directly to Borrower, or, on behalf of Borrower, to any third party due such funds from Borrower as specified in Borrower’s written request to Lender for such Advance, as Lender shall determine in its sole discretion, and any such direct third party payment shall be deemed made hereunder to Borrower and shall constitute outstanding principal hereunder.

 

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(iii) Recordation. The date (the “Funding Date”) and amount of each Advance and each repayment and prepayment of principal thereof shall be endorsed by Lender on the Schedule of Advances attached hereto. Lender may provide Borrower with statements of account with respect to this Note on a quarterly basis, or such other periodic basis Lender deems appropriate from time to time. The aggregate unpaid principal amount so recorded shall be prima facie evidence of the principal amount owing and unpaid on the Note.

 

(iv) Conditions Precedent to Advances. The obligation of Lender to make any Advance hereunder shall be subject to the satisfaction of the following conditions precedent:

 

(1) Lender shall have received Borrower’s request for such Advance as required by Section 1(c)(i) hereof, and said request shall be for a proper business purpose of Borrower consistent with the use of proceeds provisions of this Note; and

 

(2) As of the date of such Advance, and after giving effect thereto:

 

(A) no Event of Default (as hereinafter defined) exists, and no event or condition exists which with notice, lapse of time and/or the making of the Advance would constitute an Event of Default;

 

(B) the representations and warranties of Borrower and Guarantor contained herein are true and correct on, and as of, such date; and

 

(C) all of the covenants, conditions and agreements of Borrower and Guarantor in this Note, and all of the requirements of this Note with respect to the Advance, have been complied with.

 

(d) The unpaid principal balance of this Note shall bear interest at the rate of sixteen percent (16%) per annum. Interest shall accrue for each and every date on which any indebtedness remains outstanding hereunder and shall be computed on the daily outstanding principal balance hereunder based on a three hundred sixty-five (365) day year. Interest shall be cumulative and any unpaid accrued interest will compound on each anniversary date of this Note. Interest shall be due and payable in accordance with the terms of Section 1(e) below. All payments of interest and principal shall be made in lawful money of the United States of America no later than 12:00 PM on the date on which such payment is due by cashier’s check, certified check or by wire transfer of immediately available funds to Lender’s account at a bank specified by Lender in writing to Borrower from time to time. All payments made hereunder shall be applied: first, to the payment of any fees or charges outstanding hereunder; second, to accrued interest; and third, to the payment of the principal amount outstanding under this Note.

 

(e) Interest shall be due and payable in arrears to Lender on January 15, April 15, July 15 and October 15 (each, a “Quarterly Payment Date”), commencing January 15, 2021.

 

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(f) Borrower shall pay to Lender the principal balance of the outstanding amount due hereunder together with any accrued and unpaid interest and other amounts, if any, owed hereunder ON DEMAND, as herein provided. Lender may demand payment in full of this Note, at any time, even if Borrower has complied with all of the terms of this Note; and this Note shall be due in full, without demand, upon the third party sale of all or substantially all the assets and business of Borrower or the third party sale or other disposition of any capital stock of Borrower. The date on which Lender declares this Note to be, or this Note otherwise becomes, due shall be the Maturity Date (the “Maturity Date”). In the event payment of principal or interest due under this Note is not made when due, giving effect to any grace period which may be applicable, or in the event of any other Default (as hereinafter defined), the outstanding principal balance hereof shall from the date of Default immediately bear interest at the rate of five percent (5%) above the then applicable interest rate for so long as such Default continues.

 

(g) This Note may be prepaid at any time without penalty. All amounts paid toward the satisfaction of this Note shall be applied: first, to the payment of amounts, if any, owed hereunder, other than interest and principal; second, to the payment of accrued and unpaid interest hereunder; and third, to the payment of principal hereunder.

 

(h) Whenever any payment on this Note shall be stated to be due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and such extension will be taken into account in calculating the amount of interest payable under this Note.

 

(i) If at any time and for any reason whatsoever, the interest rate payable on this Note shall exceed the maximum rate of interest permitted to be charged by Lender to Borrower under applicable law, such interest rate shall be reduced automatically to the maximum rate of interest permitted to be charged under applicable law.

 

(j) Upon payment in full of all principal and interest payable hereunder, this Note shall be surrendered to Borrower for cancellation.

 

(k) For purposes of this Note, “Obligations” means and includes all loans, advances, debts, liabilities and obligations, howsoever arising, owed by Borrower to Lender and evidenced by this Note, including, all principal, interest, fees, charges, expenses, attorneys’ fees and costs and accountants’ fees and costs chargeable to and payable by Borrower hereunder, whether direct or indirect, absolute or contingent, due or to become due, and whether or not arising after the commencement of a proceeding under Title 11 of the United States Code (11 U.S.C. Section 101 et seq.), as amended from time to time (including post-petition interest) and whether or not allowed or allowable as a claim in any such proceeding.

 

2. Covenants. Without the prior written consent of Lender, Borrower shall not incur indebtedness other than (i) indebtedness incurred in connection with the acquisition of Guarantor, (ii) trade accounts payable incurred in the ordinary course of business or (iii) other indebtedness either reflected in Borrower’s latest balance sheet delivered to Lender prior to the date hereof or otherwise disclosed to Lender in writing prior to the date hereof.

 

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3. Guaranty, Security and Related Matters.

 

(a) To induce Lender to make the loan to Borrower under this Note, Guarantor hereby absolutely, unconditionally and irrevocably guarantees to Lender the due and punctual payment, observance, performance and discharge of all of the Obligations of Borrower under this Note if and when due. Guarantor agrees that Lender may proceed against Guarantor separately or collectively with Borrower without prejudicing or waiving any of Lender’s rights under any other obligations or under this Note. In the event Borrower fails to perform, satisfy or observe the terms of this Note required to be performed, satisfied or observed by Borrower, Guarantor will promptly and fully perform, satisfy and observe such obligations in the place of Borrower. Guarantor shall pay, reimburse and indemnify Lender for any and all reasonable attorneys’ fees arising or resulting from the failure of Borrower to perform, satisfy or observe any of the terms of this Note. The guarantee described in this Section 3(a) (the “Guarantee”) is binding upon Guarantor and Guarantor’s successors in interest and assigns of Guarantor and inures to the benefit of Lender and it successors and assigns.

 

(b) As security for the Obligation and the Guarantee, each of Borrower and Guarantor hereby pledges to Lender, and grants to Lender, a security interest in and to the Collateral owned by it. Each of Borrower and Guarantor hereby agrees not to transfer or assign any of the Collateral as long as any Obligations remain unpaid. Lender shall have all of the rights, powers and privileges of a secured party under the Delaware Uniform Commercial Codes in force and effect from time to time with respect to the security interest granted hereunder.

 

(c) Each of Borrower and Guarantor hereby irrevocably authorizes Lender at any time and from time to time to file in any relevant jurisdiction any financing statements (including fixture filings) and amendments thereto that contain the information required by Article 9 of the UCC of each applicable jurisdiction for the filing of any financing statement or amendment relating to the Collateral.

 

(d) Each of Borrower and Guarantor represents and warrants to Lender that, on the date hereof, any and all financing statements, agreements, instruments and other documents necessary to perfect the security interests granted by Borrower and Guarantor to Lender in respect of the Collateral and, to the extent necessary or appropriate, to the extent requested and delivered to Borrower or Guarantor by Lender, have been duly executed and delivered to Lender. Each of Borrower and Guarantor agrees that they will maintain the security interests created by this Note in the Collateral as a perfected security interest.

 

(e) Each of Borrower and Guarantor shall take such further actions, and execute and/or deliver to Lender such additional financing statements, amendments, assignments, agreements, supplements, powers and instruments, as Lender may in its judgment deem necessary or appropriate in order to perfect, preserve and protect the security interests in the Collateral as provided herein and the rights and interests granted to Lender hereunder, and enable Lender to exercise and enforce its rights, powers and remedies hereunder with respect to any Collateral. If a Default has occurred and is continuing, Lender may institute and maintain, in its own name, such suits and proceedings as Lender may deem to be necessary or expedient to prevent any impairment of the security interests in or the perfection thereof in the Collateral. Each of Borrower and Guarantor shall cooperate with all of the foregoing at their sole cost and expense.

 

-5-

 

 

(f) Each of Borrower and Guarantor represents and warrants that he or it has good title to all of its or his Collateral, and none of such property is subject to any lien, claim, option or right of others, except for those liens identified on Exhibit A hereto and the security interest granted to Lender hereunder. This Section 3 is effective to create in favor of Lender, a legal, valid and enforceable security interest in the Collateral and the proceeds thereof.

 

(g) Each of Borrower and Guarantor shall, jointly and severally, at their sole cost and expense, defend title to the Collateral and the security interest and lien granted to Lender with respect thereto against all claims and demands of all persons at any time claiming any interest therein adverse to Lender.

 

(h) Neither Borrower nor Guarantor, as applicable, shall change (i) his or its legal name, identity, type of organization or corporate structure; (ii) the location of Borrower’s chief executive office or Borrower’s principal place of business, except with not less than thirty (30) days written notice to Lender; (iii) Borrower’s organizational identification number (if any); or (iv) Borrower’s jurisdiction of organization, with not less than thirty (30) days written notice to Leader, (in each case, including by merging with or into any other entity, reorganizing, organizing, dissolving, liquidating, reincorporating or incorporating in any other jurisdiction).

 

(i) In the event that the proceeds of any casualty insurance claim are paid to Borrower or Guarantor in respect of the Collateral, such net cash proceeds shall be used to repair or replace Borrower’s damaged or lost property within 180 days of such damage or loss, or in the event that such repair or replacement is not feasible following the casualty, such net cash proceeds shall instead be held in trust for the benefit of Lender and immediately after receipt thereof shall be paid to Lender for application in accordance with this Note.

 

(j) If any Default shall have occurred and be continuing:

 

(i) Lender shall have no further obligation to and may then forthwith cease advancing monies or extending credit to or for the benefit of Borrower under this Note and shall not be obligated to extend any advance monies or extend credit to or for the benefit of Lender under the Commitment.

 

(ii) Lender may exercise, without any other notice to or demand upon Borrower and/or Guarantor, in addition to the other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party upon default under the UCC (whether or not the UCC applies to the affected Collateral) and also may, in compliance with applicable law:

 

(A) with written notice specified below, sell, resell, assign and deliver or grant a license to use or otherwise dispose of the Collateral or any part thereof, in one or more parcels at public or private sale (in which Borrower and/or Guarantor and/or any of their stockholders, creditors or designees shall be entitled to participate), for cash, on credit or for future delivery, and upon such other terms as are commercially reasonable; and

 

(B) exercise any and all rights and remedies of Lender under or in connection with the Collateral, or otherwise in respect of the Collateral.

 

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(k) Lender shall give at least 10 days’ written notice (which notice can run concurrently with any required notice periods as to default set forth herein) to Borrower and/or Guarantor, as the case may be, of the time and place of any public or private sale of Collateral. At any sale of the Collateral, if permitted by applicable law, Lender may be the purchaser, licensee, assignee or recipient of the Collateral or any part thereof and shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold, assigned or licensed at such sale, to use and apply any of the obligations under this Note as a credit on account of the purchase price of the Collateral or any part thereof payable at such sale. To the extent permitted by applicable law, each of Borrower and Guarantor waives all claims, damages and demands it may acquire against Lender arising out of the exercise by it of any rights hereunder. Each of Borrower and Guarantor hereby waives and releases to the fullest extent permitted by law any right or equity of redemption with respect to the Collateral after any sale hereunder, and all rights, if any, of marshaling the Collateral and any other security for the obligations under the Note or otherwise, in accordance with applicable law. Lender shall not be liable for failure to collect or realize upon any or all of the Collateral or for any delay in so doing, nor shall it be under any obligation to take any action with regard thereto. Lender shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Lender may adjourn any public or private sale from time to time by announcement at the time and place fixed therefore, and such sale, may, without further notice, be made at the time and place to which it was so adjourned. Lender shall not be obligated to clean-up or otherwise prepare the Collateral for sale.

 

(l) Upon the exercise by Lender of its remedies hereunder, any proceeds received by Lender in respect of any realization upon any Collateral shall be applied pursuant to this Note. Guarantor and Borrower shall remain liable hereunder for any deficiency if the proceeds of any sale or other disposition of the Collateral are insufficient to pay the obligations under this Note and the fees and other charges of any attorneys employed by Lender to collect such deficiency.

 

(m) Upon payment in full of all Obligations, the security interest in the Collateral shall be terminated and Lender will, at Borrower’s or Guarantor’s request and expense, take all necessary action and make such appropriate filings as required to terminate the security interest.

 

4. Attorney Fees, Expenses and Costs of Collection. If this Note or any installment of principal or interest is not paid when due, Borrower agrees to pay all costs and expenses of collection, including without limitation, reasonable attorneys’ fees, court costs, and all costs and expenses in connection with the protection or realization of the Collateral and the payment and performance of each of the Obligations, whether or not suit is filed hereon or thereon. Such costs and expenses shall include, without limitation, (i) all costs, expenses and reasonable attorneys’ fees incurred by Lender in connection with any insolvency, bankruptcy, receivership or other similar proceedings involving Borrower, and (ii) all costs, expenses and reasonable attorney’s fees incurred by Lender in connection with all negotiations, documentation and other actions relating to any work-out, compromise, settlement or resolution of Lender’s claim. In addition thereto, Borrower agrees that it shall reimburse the Lender on demand for all reasonable out-of-pocket costs, expenses and fees (including reasonable expenses and fees of its outside counsel) incurred by Lender in connection with the transactions contemplated hereby including the negotiation, documentation and execution of this Note.

 

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5. Notices. All notices and other communications given or made pursuant to this Note shall be in writing and shall be deemed effectively given upon the earlier of actual receipt or (a) personal delivery to the party to be notified, (b) when sent, if sent by electronic mail or facsimile during normal business hours of the recipient, and if not sent during normal business hours, then on the recipient’s next business day, (c) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (d) one (1) business day after deposit with a nationally recognized overnight courier, freight prepaid, specifying next business day delivery, with written verification of receipt. All communications shall be sent to the respective parties at their address as set forth on the signature page of this Note.

 

6. Default. Upon the occurrence of any of the following events (each, a “Default”) and at any time thereafter during the continuance of such Default, Lender may at its option, by written notice to Borrower (x) declare the entire principal amount of this Note, together with all accrued interest thereon and all other amounts payable hereunder, immediately due and payable and/or (y) exercise any or all of its rights, powers or remedies under this Note or under applicable law; provided, however that, if an event of Default described in clause (a) below shall occur, the principal of and accrued interest on this Note shall become immediately due and payable without any notice, declaration or other act on the part of Lender:

 

(a) (i) Borrower or Guarantor commences any proceeding in bankruptcy or for dissolution, liquidation, winding-up, composition or other relief under state or federal bankruptcy laws; (ii) such proceedings are commenced against Borrower or Guarantor, or a receiver or trustee is appointed for Borrower or Guarantor or a substantial part of its or his property, and such proceeding or appointment is not dismissed or discharged within thirty (30) days after its commencement; provided, that all interest shall continue to accrue as set forth above until all amounts owed under this Note are paid in cash in full; (iii) any assignment for the benefit of the creditors of Borrower or Guarantor;

 

(b) Borrower or Guarantor fails to pay when due any principal, interest or other amounts owing under this Note, which failure to pay is not cured within five (5) days from the delivery of notice thereof by the Lender;

 

(c) Any representation or warranty made by Borrower or Guarantor in this Note is incorrect in any material respect on the date as of which such representation or warranty was made and is not cured, to the extent curable, within ten (10) days from the delivery of notice thereof by the Lender;

 

(d) Borrower or Guarantor shall default in the observance or performance of any covenant or agreement contained in this Note (other than as provided in clause (b) of this Section), and such default shall continue unremedied for a period of ten (10) days from the delivery of notice thereof by Lender;

 

(e) Borrower or Guarantor fails to pay when due any of its or his indebtedness (other than indebtedness under this Note) or any interest or premium thereon when due (whether by scheduled payment hereunder, demand or otherwise) and such failure continues after the applicable grace period, if any, specified in the agreement or instrument relating to such indebtedness, it being understood that for purposes of this subsection “indebtedness” shall mean financial indebtedness and not ordinary course accounts payable; or

 

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(f) A judgment or decree is entered against Borrower or Guarantor and such judgment or decree has not been vacated, discharged, stayed or bonded pending appeal within thirty (30) days from the entry thereof.

 

7. Waivers. Each of Borrower and Guarantor hereby irrevocably and unconditionally (a) except with respect to notices required under Section 6(b), waives presentment, demand for performance, diligence in enforcement, notice of non-performance, protest, notice of protest and notice of dishonor and all other protests or notices to the full extent permitted by applicable laws or regulations; and (b) waives any right Borrower or Guarantor may have to require Lender to exhaust any of the Collateral, or pursue a particular remedy to the exclusion of others. No delay on the part of Lender in exercising any right hereunder shall operate as a waiver of such right or any other right 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.

 

8. Confidentiality. Borrower and Guarantor shall, and shall cause its or his affiliates, employees, officers, directors, and other agents (the “Representatives”) to hold in confidence any and all information, whether written or oral, concerning the terms of this Note (including the existence of this Note), the discussions and negotiations between the parties contemplating this Note, or any information regarding the Lender obtained during the discussions and negotiations of this Note; provided, however, nothing in this Section 8 shall prohibit Borrower, Guarantor or any of their Representatives from disclosing or sharing any information regarding the terms of this Note with Borrower’s investors and potential investors, existing lenders, and professional advisors, including without limitation its accountants and attorneys, or from enforcing or defending Borrower’s or Guarantor’s rights pursuant to this Note.

 

9. Choice of Law; Jurisdiction; Venue; Waiver or Jury Trial. This Note is being delivered in and shall be construed in accordance with the laws of the State of New York, without regard to the conflicts of law provisions thereof. Each of Borrower and Guarantor, by its or his execution hereof, hereby irrevocably submits to the in personam jurisdiction of the state courts of the State of New York and of the United States District Court for the Southern District of New York, for the purpose of any suit, action or other proceeding arising out of or based upon this Note, and such courts shall be the exclusive venue for resolution of any disputes arising from or relating to this Note, the loan made hereunder, or security interest granted herein. EACH OF BORROWER AND GUARANTOR HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT OR HE MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY RELATING TO THIS NOTE OR THE TRANSACTIONS CONTEMPLATED HEREBY WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY.

 

10. Amendment and Waiver. The provisions of this Note may be modified or amended only in a writing executed by Borrower, Guarantor and Lender. Any waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given.

 

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11. Rights and Remedies. The rights and remedies herein expressly provided are cumulative and not exclusive of any rights or remedies that Lender may otherwise have.

 

12. Severability; Effectiveness. If one or more provisions of this Note are held to be unenforceable under applicable law, such provision(s) shall be excluded from this Note, and the balance of this Note shall be interpreted as if such provision(s) were so excluded and shall be enforceable in accordance with its terms. This Note may be signed in any number of counterparts, each of which is an original and all of which taken together form one single document. Delivery of an executed counterpart of a signature page to this Note by facsimile or in electronic (i.e., “pdf” or “tif”) format shall be effective as delivery of a manually executed counterpart of this Note.

 

13. Successors and Assigns. This Note may be assigned, transferred or negotiated by Lender at any time to any third party without notice to or consent by Borrower. Neither Borrower nor Guarantor may assign or transfer this Note or any of its rights hereunder without the prior written consent of Lender, which consent may be withheld for any or no reason whatsoever. This Note shall inure to the benefit of and be binding upon the parties hereto and their permitted assigns.

 

[Signature Page Follows]

 

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IN WITNESS WHEREOF, the undersigned have caused this Secured Promissory Note to be executed as of the date first set forth above.

 

  LENDER:
   
  1847 Holdings LLC
   
  By: /s/ Ellery W. Roberts
    Name: Ellery W. Roberts
    Title: Chief Executive Officer
     
  BORROWER:
   
  1847 Cabinet Inc.
   
  By: /s/ Kenneth Yuan
    Name: Kenneth Yuan
    Title: Chief Executive Officer
     
  GUARANTOR:
   
  Kyle’s Custom Wood Shop, Inc.
     
  By:   /s/ Kenneth Yuan
    Name: Kenneth Yuan
    Title: Chief Executive Officer

  

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EXHIBIT A

 

EXISTING LIENS

 

None

  

 

   

 

 

Exhibit 10.6

 

SECURITIES PURCHASE AGREEMENT

 

This SECURITIES PURCHASE AGREEMENT (this “Agreement”) is made and entered into as of September 30, 2020, by and between 1847 Holdings LLC, a Delaware limited liability company (the “Company”), and the undersigned subscribing investor (the “Purchaser”).

 

RecitalS

 

A. The Company is seeking investors to invest up to Six Million Dollars ($6,000,000) (the “Offering”), in units of One Dollar and Ninety Cents ($1.90) each (each a “Unit” and collectively the “Units”). This Agreement is one of a series of similar agreements being executed by other investors in this Offering (each an “Investor” and, collectively, the “Investors”). The Preferred Shares (as defined below) being issued to the Purchaser shall rank equally without preference or priority of any kind over Preferred Shares being issued to other Investors and all payments on account of dividends or redemption with respect to any of the Preferred Shares or the Warrants shall be applied ratably and proportionately on the basis of the Stated Value (as defined in the Designation) of the outstanding Preferred Shares or the number of Warrant Shares (as defined in the Warrant), as applicable, represented thereby.

 

B. Each Unit consists of one (1) Series A Senior Convertible Preferred Share (the “Preferred Share”), the certificate of designation of which is attached hereto as Exhibit A (the “Designation”), and one (1) warrant to purchase one (1) Common Share, the form of which is attached hereto as Exhibit B (the “Warrant” and, together with the Preferred Share and the Common Shares to be acquired upon the conversion of the Preferred Share and/or exercise of the Warrant, the “Securities”).

 

C. The Warrant is exercisable for a period of three (3) years at $2.50 per Common Share.

 

D. The Company desires to sell, and the Purchaser desires to purchase, the number of Units set forth below on the terms and conditions set forth herein.

 

E. The Company and the Purchaser are executing and delivering this Agreement in reliance upon the exemption from securities registration afforded by Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), and Rule 506(b) promulgated by the United States Securities and Exchange Commission (the “SEC”) under the Securities Act.

 

F. __________ is the lead investor (the “Lead Investor”) and is investing $1,250,000 in this Offering.

 

Now Therefore, in consideration of the foregoing, and the representations, warranties, covenants and conditions set forth below, the Company and the Purchaser, intending to be legally bound, hereby agree as follows:

 

1. Purchase Of Units

 

On the Closing Date (as hereinafter defined), subject to the terms and conditions set forth in this Agreement, the Purchaser hereby agrees to purchase, and the Company hereby agrees to sell, the number of Units of the Company indicated on the signature page below, at a per-unit purchase price of One Dollar and Ninety Cents ($1.90) per Unit, for the total purchase price set forth on the signature page below (the “Purchase Price”).

 

 

 

2. Closing and Delivery

 

2.1 Closing Date. Subject to the satisfaction (or written waiver) of the conditions thereto set forth in Section 6 and Section 7 below, the date and time of the issuance and sale of the Units pursuant to this Agreement (the “Closing Date”) shall be 4:00 PM, Eastern Time on the date first written above, or such other mutually agreed upon time.

 

2.2 Closing. The closing of the transactions contemplated by this Agreement (the “Closing”) shall occur on the Closing Date at such location as may be agreed to by the parties (including via exchange of electronic signatures).

 

2.3 Delivery. At the Closing, or as promptly as commercially reasonable thereafter, the Purchaser shall deliver the Purchase Price to the Company and the Company shall deliver to the Purchaser the Preferred Shares, the Warrants and such other customary instruments of transfer, assumption, filings or documents, in form and substance reasonably satisfactory to the Purchaser, as may be required to give effect to this Agreement.

 

3. Representations and Warranties of the Company

 

Except as set forth in the corresponding section of the Disclosure Schedule delivered to the Purchaser concurrently herewith and attached hereto as Schedule I (the “Disclosure Schedule”) or as disclosed in the Disclosure Materials (as defined below), the Company hereby makes the following representations and warranties as of the date hereof and as of the Closing Date to the Purchaser:

 

3.1 Organization, Good Standing and Qualification. The Company and each of its Subsidiaries (as defined below) is a corporation or limited liability company duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation or organization. Each of the Company and its Subsidiaries has the requisite corporate or limited liability company power to own and operate its properties and assets and to carry on its business as now conducted and as proposed to be conducted. The Company and each of its Subsidiaries is duly qualified and is authorized to do business and is in good standing as a foreign corporation or limited liability company in all jurisdictions in which the nature of its activities and of its properties (both owned and leased) makes such qualification necessary, except where the failure to be so qualified or in good standing, as the case may be, would not have or reasonably be expected to result in (i) a material adverse effect on the legality, validity or enforceability of any Subscription Document, (ii) a material adverse effect on the results of operations, assets, business or financial condition of Company and the Subsidiaries, taken as a whole, or (iii) adversely impair the Company’s ability to perform in any material respect on a timely basis its obligations under any Subscription Document (any of (i), (ii) or (iii), a “Material Adverse Effect”) provided, however, that none of the following, either alone or taken together with other changes, events, results, occurrences, developments or effects, will constitute, or be taken into account in determining whether there has been or will be, a Material Adverse Effect: (a) changes, events, occurrences or developments in, or effects or results arising from or relating to, general business or economic conditions affecting the industry in which the Company and its Subsidiaries operate, (b) changes, events, occurrences or developments in, or effects or results arising from or relating to, national or international political or social conditions, including the engagement by the United States in hostilities or the escalation thereof, whether or not pursuant to the declaration of a national emergency or war, or the occurrence or the escalation of any military, cyber or terrorist attack upon the United States, or any of its territories, possessions, or diplomatic or consular offices or upon any military installation, asset, equipment or personnel of the United States, (c) changes, events, occurrences or developments in, or effects or results arising from or relating to, financial, banking, or securities markets (including (w) any disruption of any of the foregoing markets, (x) any change in currency exchange rates, (y) any decline or rise in the price of any security, commodity, contract or index and (z) any increased cost, or decreased availability, of capital or pricing or terms related to any financing for the Acquisition), (d) changes in, or effects arising from or relating to, any earthquake, hurricane, tsunami, tornado, flood, mudslide or other natural disaster, pandemic (including COVID-19), weather condition, explosion or fire or other force majeure event or act of God or (e) any change in, or effect arising from or related to changes in, GAAP or other accounting requirements or principles or the interpretation thereof.

 

2

 

 

3.2 Power. The Company has all requisite limited liability company power to issue the Preferred Shares and Warrants and to execute and deliver this Agreement, the Designation, the Warrants and the other instruments, documents and agreements being entered into at the Closing (each a “Subscription Document” and collectively, the “Subscription Documents”) and to carry out and perform its obligations under the terms of the Subscription Documents.

 

3.3 Subsidiaries. Section 3.3 of the Disclosure Schedule sets forth a true and correct description of all of the Company’s Subsidiaries and the capitalization thereof (including options, warrants and other such equity), pro forma as of the date hereof reflecting all pending acquisitions. For purposes of this Agreement, the term “Subsidiary” means, with respect to the Company, any corporation or other entity of which at least a majority of the outstanding shares of stock or other ownership interests having by the terms thereof ordinary voting power to elect a majority of the board of directors (or persons performing similar functions) of such corporation or entity (regardless of whether or not at the time, in the case of a corporation, stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by the Company or one or more of its Affiliates and the term “Affiliate” means, as to any person (the “Subject Person”), any other person that directly or indirectly through one or more intermediaries controls or is controlled by, or is under direct or indirect common control with, the Subject Person. For the purposes of this definition, “control” when used with respect to any person means the power to direct the management and policies of such person, directly or indirectly, whether through the ownership of voting securities, through representation on such person’s board of directors or other management committee or group, by contract or otherwise. All references contained herein to the terms Subsidiary or Affiliate, shall be applicable to all Subsidiaries and Affiliates whether they existed as of the date hereof or were created, acquired, or otherwise came to be included in the foregoing terms subsequent to the date hereof.

 

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3.4 Authorization. All limited liability company action on the part of the Company, its directors and its shareholders necessary for the authorization of the Subscription Documents and the execution, delivery and performance of all obligations of the Company under the Subscription Documents, including the issuance and delivery of the Preferred Shares, the Warrants, and the reservation of the Common Shares issuable upon conversion of the Preferred Shares and upon exercise of the Warrant (collectively, the “Underlying Securities”) has been taken or will be taken prior to the issuance of such Underlying Securities. The Subscription Documents, when executed and delivered by the Company, shall constitute valid and binding obligations of the Company enforceable in accordance with their terms, subject to laws of general application relating to bankruptcy, insolvency, the relief of debtors and, with respect to rights to indemnity, subject to federal and state securities laws. The Underlying Securities, when issued in compliance with the provisions of the Subscription Documents, will be validly issued, fully paid and non-assessable and free of any lien, pledge, mortgage, deed of trust, security interest, charge, claim, easement, encroachment or other similar encumbrance (“Lien”) and issued in compliance with all applicable federal and securities laws.

 

3.5 Governmental Consents. Neither Company nor any Subsidiary is required to obtain any consent, waiver, authorization or order of, give any notice to, or make any filing or registration with, any court or other foreign, federal, state, local or other governmental authority or other person in connection with the execution, delivery and performance by the Company of the Subscription Documents, other than (a) applicable Blue Sky filings, (b) such as have already been obtained or such exemptive filings as are required to be made under applicable securities laws, (c) such other filings that have been made pursuant to applicable state securities laws and post-sale filings pursuant to applicable state and federal securities laws which the Company undertakes to file within the applicable time periods. Subject to the accuracy of the representations and warranties of the Purchaser set forth in Section 4 hereof, the Company has taken all action necessary to exempt: (i) the issuance and sale of the Units, (ii) the issuance of the Underlying Securities upon due conversion of the Preferred Shares and due exercise of the Warrant, and (iii) the other transactions contemplated by the Subscription Documents from the provisions of any preemptive rights, stockholder rights plan or other “poison pill” arrangement, any anti-takeover, business combination or control share law or statute binding on the Company or to which the Company or any of its assets and properties may be subject and any provision of the Company’s certificate of formation, operating agreement, or other organizational documentation, as the case may be, that is or could reasonably be expected to become applicable to the Purchaser as a result of the transactions contemplated hereby, including without limitation, the issuance of the Preferred Shares and Warrants and the Underlying Securities (collectively, the “Securities”) and the ownership, disposition or voting of the Securities by the Purchaser or the exercise of any right granted to the Purchaser pursuant to this Agreement or the other Subscription Documents.

 

3.6 Compliance with Laws. Neither Company nor any Subsidiary is in violation of any applicable statute, rule, regulation, order or restriction of any domestic or foreign government or any instrumentality or agency thereof in respect of the conduct of its business or the ownership of its properties, which violation would have a Material Adverse Effect on the Company.

 

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3.7 Compliance with Other Instruments. Neither Company nor any of its Subsidiaries is in violation or default of any term of its organizational documents, or of any provision of any mortgage, indenture or contract to which it is a party and by which it is bound or of any judgment, decree, order or writ, other than such violations that would not individually or in the aggregate have a Material Adverse Effect on the Company. The execution, delivery and performance of the Subscription Documents, and the consummation of the transactions contemplated by the Subscription Documents will not result in any such violation or be in conflict with, or constitute, with or without the passage of time and giving of notice, either a default under any such provision, instrument, judgment, decree, order or writ or an event that results in the creation of any Lien upon any assets of the Company or the suspension, revocation, impairment, forfeiture, or nonrenewal of any material permit, license, authorization or approval applicable to the Company or any of its Subsidiaries, its business or operations or any of its assets or properties. The sale of the Preferred Shares, the issuance of the Warrant and the subsequent issuance of the Underlying Securities are not and will not be subject to any preemptive rights or rights of first refusal that have not been properly waived or complied with. 

 

3.8 Offering. Assuming the accuracy of the representations and warranties of the Purchaser contained in Section 4 hereof, the offer, issue, and sale of Securities are and will be exempt from the registration and prospectus delivery requirements of the Securities Act, and have been registered or qualified (or are exempt from registration and qualification) under the registration, permit, or qualification requirements of all applicable state securities laws. No “bad actor” disqualifying event described in Rule 506(d)(1)(i)-(viii) of the Securities Act (a “Disqualification Event”) is applicable to the Company or, to the Company’s knowledge, any person listed in the first paragraph of Rule 506(d)(1) of the Securities Act, except for a Disqualification Event as to which Rule 506(d)(2)(ii–iv) or (d)(3), is applicable.

 

3.9 Capitalization. Company has authorized shares as set forth in Section 3.9 of the Disclosure Schedule. All outstanding shares of capital stock are duly authorized, validly issued, fully paid and non-assessable and have been issued in compliance with all applicable securities laws. Except for the Preferred Shares, Warrants and the Underlying Securities or as otherwise listed in Section 3.9 of the Disclosure Schedule, there are no outstanding options, warrants, script rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities, rights or obligations convertible into or exercisable or exchangeable for, or giving any person any right to subscribe for or acquire, any Common Shares, or contracts, commitments, understandings or arrangements by which Company or any Subsidiary is or may become bound to issue additional Common Shares, or securities or rights convertible or exchangeable into shares of common stock. There are no price based anti-dilution or price adjustment provisions contained in any security issued by Company (or in any agreement providing rights to security holders) and the issue and sale of the Securities will not obligate Company to issue shares of common stock or other securities to any person (other than the Purchaser) and will not result in a right of any holder of Company’s securities to adjust the exercise, conversion, exchange or reset price under such securities. Except as set forth in Section 3.9 of the Disclosure Schedule, Company owns, directly or indirectly, all of the capital stock of each Subsidiary free and clear of any Liens, and all the issued and outstanding shares of capital stock of each Subsidiary are validly issued and are fully paid, non-assessable and free of preemptive and similar rights.

 

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3.10 SEC Reports; Financial Statements. The Company has filed all reports and registration statements required to be filed by it under (i) the Securities Act and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including pursuant to Section 13(a) or 15(d) of the Exchange Act, or (ii) under the Alternative Reporting Standard as offered by OTC Markets Group, for the two years preceding the date hereof (or such shorter period as the Company was required by law to file such material) (the foregoing materials, including the exhibits thereto, being collectively referred to herein as the “SEC Reports” and, together with the Disclosure Schedule to this Agreement, the “Disclosure Materials”). As of their respective dates, the SEC Reports complied in all material respects with the requirements of the Securities Act and the Exchange Act and the rules and regulations of the SEC promulgated thereunder, and none of the SEC Reports, when filed, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. Except as indicated in Section 3.10 of the Disclosure Schedule, the financial statements of the Company included in the SEC Reports comply in all material respects with applicable accounting requirements and the rules and regulations of the SEC or OTC Markets as applicable, with respect thereto as in effect at the time of filing. Such financial statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved (“GAAP”), except as may be otherwise specified in such financial statements or the notes thereto and except that unaudited financial statements may not contain all footnotes required by GAAP, and fairly present in all material respects the financial position of the Company and its consolidated subsidiaries as of and for the dates thereof and the results of operations and cash flows for the periods then ended, subject, in the case of unaudited statements, to normal, immaterial, year-end audit adjustments. 

 

3.11 Material Changes. Since the date of the latest financial statements, (i) there has been no event, occurrence or development that, individually or in the aggregate, has had or that could result in a Material Adverse Effect, (ii) the Company has not incurred any liabilities (contingent or otherwise) other than (A) trade payables, accrued expenses and other liabilities incurred in the ordinary course of business consistent with past practice and (B) liabilities not required to be reflected in the Company’s financial statements pursuant to GAAP or required to be disclosed in filings made with the SEC, (iii) the Company has not altered its method of accounting or the identity of its auditors, (iv) the Company has not declared or made any dividend or distribution of cash or other property to its stockholders or purchased, redeemed or made any agreements to purchase or redeem any shares of its capital stock, and (v) the Company has not issued any equity securities to any officer, director or affiliate, except pursuant to existing Company stock-based plans or agreements.

 

3.12 Litigation. There is no action, suit, inquiry, notice of violation, proceeding or investigation pending or, to the knowledge of the Company, threatened against or affecting the Company, any Subsidiary or any of their respective properties before or by any court, arbitrator, governmental or administrative agency or regulatory authority (federal, state, county, local or foreign) (collectively, an “Action”) which: (i) adversely affects or challenges the legality, validity or enforceability of any of the Subscription Documents or the Securities or (ii) could, if there were an unfavorable decision, have or reasonably be expected to result in a Material Adverse Effect. Neither the Company nor any Subsidiary, nor any director or officer thereof, is or has been the subject of any Action involving a claim of violation of or liability under federal or state securities laws or a claim of breach of fiduciary duty. There has not been, and to the knowledge of the Company, there is not pending or contemplated, any investigation by governmental authority, or any litigation civil or otherwise, involving the Company or any current or former director or officer of the Company or its Subsidiaries.

 

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3.13 Labor Relations. Neither Company nor any Subsidiary is a party to or bound by any collective bargaining agreements or other agreements with labor organizations. Neither Company nor any Subsidiary has violated in any material respect any laws, regulations, orders or contract terms, affecting the collective bargaining rights of employees, labor organizations or any laws, regulations or orders affecting employment discrimination, equal opportunity employment, or employees’ health, safety, welfare, wages and hours. No material labor dispute exists or, to the knowledge of the Company, is imminent with respect to any of the employees of the Company which could reasonably be expected to result in a Material Adverse Effect.

 

3.14 Regulatory Permits. Company and the Subsidiaries possess all certificates, authorizations and permits issued by the appropriate federal, state, local or foreign regulatory authorities necessary to conduct their respective businesses, except where the failure to possess such permits would not have or reasonably be expected to result in a Material Adverse Effect (“Material Permits”), and neither Company nor any Subsidiary has received any notice of proceedings relating to the revocation or modification of any Material Permit.

 

3.15 Title to Assets. Except as set forth in Section 3.15 of the Disclosure Schedule, Company and the Subsidiaries have good and marketable title in fee simple to all real property owned by them that is material to the business of Company and the Subsidiaries and good and marketable title in all personal property owned by them that is material to the business of Company and the Subsidiaries, in each case free and clear of all Liens, except for Liens as do not materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by Company and the Subsidiaries and Liens for the payment of federal, state or other taxes, the payment of which is neither delinquent nor subject to penalties. Any real property and facilities held under lease by Company and the Subsidiaries are held by them under valid, subsisting and enforceable leases of which Company and the Subsidiaries are in compliance.

 

3.16 Taxes.

 

(a) Except as otherwise itemized in Section 3.16 of the Disclosure Schedule, Company and its Subsidiaries have timely and properly filed all tax returns required to be filed by them for all years and periods (and portions thereof) for which any such tax returns were due, except where the failure to so file would not have a Material Adverse Effect; all such filed tax returns are accurate in all material respects; the Company has timely paid all taxes due and payable (whether or not shown on filed tax returns), except where the failure to so pay would not have a Material Adverse Effect; there are no pending assessments, asserted deficiencies or claims for additional taxes that have not been paid; the reserves for taxes, if any, reflected in the financial statements are adequate, and there are no Liens for taxes on any property or assets of the Company and any of its Subsidiaries (other than Liens for taxes not yet due and payable); there have been no audits or examinations of any tax returns by any (a) nation, state, commonwealth, province, territory, county, municipality, district or other jurisdiction of any nature; (b) federal, state, local, municipal, foreign or other government; or (c) governmental or quasi-governmental authority of any nature (including any governmental or administrative division, department, agency, commission, instrumentality, official, organization, unit, body or entity) and any court or other tribunal (a “Governmental Body”), and the Company or its Subsidiaries have not received any notice that such audit or examination is pending or contemplated; no claim has been made by any Governmental Body in a jurisdiction where the Company or any of its Subsidiaries does not file tax returns that it is or may be subject to taxation by that jurisdiction; to the knowledge of the Company, no state of facts exists or has existed which would constitute grounds for the assessment of any penalty or any further tax liability beyond that shown on the respective tax returns; and there are no outstanding agreements or waivers extending the statutory period of limitation for the assessment or collection of any tax.

 

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(b) Neither the Company nor any of its Subsidiaries is a party to any tax-sharing agreement or similar arrangement with any other Person.

 

(c) The Company has made all necessary disclosures required by Treasury Regulation Section 1.6011-4. The Company has not been a participant in a “reportable transaction” within the meaning of Treasury Regulation Section 1.6011-4(b).

 

(d) No payment or benefit paid or provided, or to be paid or provided, to current or former employees, directors or other service providers of the Company will fail to be deductible for federal income tax purposes under Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”).

 

3.17 Patents and Trademarks. Company and the Subsidiaries have, or have rights to use, all patents, patent applications, trademarks, trademark applications, service marks, trade names, copyrights, licenses and other similar rights that are necessary or material for use in connection with their respective businesses and which the failure to so have could have or reasonably be expected to result in a Material Adverse Effect (collectively, the “Intellectual Property Rights”). Neither Company nor any Subsidiary has received a written notice that the Intellectual Property Rights used by Company or any Subsidiary violates or infringes upon the rights of any Person. All such Intellectual Property Rights are enforceable. Company and its Subsidiaries have taken reasonable steps to protect Company’s and its Subsidiaries’ rights in their Intellectual Property Rights and confidential information (the “Confidential Information”). Each employee, consultant and contractor who has had access to Confidential Information which is necessary for the conduct of Company’s and each of its Subsidiaries’ respective businesses as currently conducted or as currently proposed to be conducted has executed an agreement to maintain the confidentiality of such Confidential Information and has executed appropriate agreements that are substantially consistent with the Company’s standard forms thereof. Except under confidentiality obligations, there has been no material disclosure of any of Company’s or its Subsidiaries’ Confidential Information to any third party.

 

3.18 Environmental Matters. Neither Company nor any Subsidiary is in violation of any statute, rule, regulation, decision or order of any Governmental Body relating to the use, disposal or release of hazardous or toxic substances or relating to the protection or restoration of the environment or human exposure to hazardous or toxic substances (collectively, “Environmental Laws”), owns or operates any real property contaminated with any substance that is subject to any Environmental Laws, is liable for any off-site disposal or contamination pursuant to any Environmental Laws, or is subject to any claim relating to any Environmental Laws, which violation, contamination, liability or claim has had or could reasonably be expected to have a Material Adverse Effect, individually or in the aggregate; and there is no pending or, to the Company’s knowledge, threatened investigation that might lead to such a claim.

 

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3.19 Insurance. Company and the Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which Company and the Subsidiaries are engaged. Neither Company nor any Subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business without a significant increase in cost.

 

3.20 Transactions with Affiliates and Employees. Except as disclosed in the Company’s audited financial statements or the Disclosure Materials, none of the officers or directors of the Company and, to the knowledge of the Company, none of the employees of the Company is presently a party to any transaction with Company or any Subsidiary (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner, other than (a) for payment of salary or consulting fees for services rendered, (b) reimbursement for expenses incurred on behalf of the Company and (c) for other employee benefits, including stock option agreements under any stock option plan of Company.

 

3.21 Brokers and Finders. Except as otherwise itemized in Section 3.21 of the Disclosure Schedule, no person will have, as a result of the transactions contemplated by the Subscription Documents, any valid right, interest or claim against or upon Company, any Subsidiary or the Purchaser for any commission, fee or other compensation pursuant to any agreement, arrangement or understanding entered into by or on behalf of the Company.

 

3.22 Questionable Payments. Neither Company nor any of its Subsidiaries nor, to the Company’s knowledge, any of their respective current or former stockholders, directors, officers, employees, agents or other persons acting on behalf of Company or any Subsidiary, has on behalf of Company or any Subsidiary or in connection with their respective businesses: (a) used any corporate funds for unlawful contributions, gifts, entertainment or other unlawful expenses relating to political activity; (b) made any direct or indirect unlawful payments to any governmental officials or employees from corporate funds; (c) established or maintained any unlawful or unrecorded fund of corporate monies or other assets; (d) made any false or fictitious entries on the books and records of Company or any Subsidiary; or (e) made any unlawful bribe, rebate, payoff, influence payment, kickback or other unlawful payment of any nature.

 

3.23 Solvency. The Company has not (a) made a general assignment for the benefit of creditors; (b) filed any voluntary petition in bankruptcy or suffered the filing of any involuntary petition by its creditors; (c) suffered the appointment of a receiver to take possession of all, or substantially all, of its assets; (d) suffered the attachment or other judicial seizure of all, or substantially all, of its assets; (e) admitted in writing its inability to pay its debts as they come due; or (f) made an offer of settlement, extension or composition to its creditors generally.

 

3.24 Foreign Corrupt Practices Act. None of Company or any of its Subsidiaries, nor to the knowledge of the Company, any agent or other person acting on behalf of the Company or any of its Subsidiaries, has, directly or indirectly: (a) used any funds, or will use any proceeds from the sale of the Securities, for unlawful contributions, gifts, entertainment or other unlawful expenses related to foreign or domestic political activity, (b) made any unlawful payment to foreign or domestic government officials or employees or to any foreign or domestic political parties or campaigns from corporate funds, (c) failed to disclose fully any contribution made by Company or any of its Subsidiaries (or made by any person acting on their behalf of which the Company is aware) or any members of their respective management which is in violation of any legal requirement, or (d) has violated in any material respect any provision of the Foreign Corrupt Practices Act of 1977, as amended, and the rules and regulations thereunder which was applicable to Company or any of its Subsidiaries.

 

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3.25 Disclosures. Neither the Company nor any person acting on its behalf has provided the Purchaser or its agents or counsel with any information that constitutes or might constitute material, non-public information, other than the terms of the transactions contemplated hereby. The written materials delivered to the Purchaser in connection with the transactions contemplated by the Subscription Documents do not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained therein, in light of the circumstances under which they were made, not misleading.

 

3.26 Transfer Agent. Company represents and warrants that it will not replace its transfer agent without Purchaser’s permission so long as any of the Preferred Shares are outstanding. The Company acknowledges that any failure to comply with this Section shall constitute a material breach of this Agreement.

 

3.27 Shell Company Status. Set forth in Schedule 3.27 of the Disclosure Schedule is the Company’s representation as to its “Shell Company” status under Rule 144.

 

3.28 The Company agrees and acknowledges that so long as any obligations of the Company under any of the Subscription Documents shall exist, it shall be obligated to provide Notice to the Purchaser in the event of a material change to any representation or disclosure in any of the Subscription Documents, including but not limited to, the disclosures on the Disclosure Schedule, and failure to provide such notice shall constitute a material breach of this Agreement and an Event of Default under the Designation.

 

4. Representations and Warranties of the Purchaser

 

4.1 Purchase for Own Account. The Purchaser represents that it is acquiring the Units for its own account and not with the view to transfer the Units or otherwise distribute them except in compliance with the Securities Act.

 

4.2 Information and Sophistication. Without lessening or obviating the representations and warranties of the Company set forth in Section 3, the Purchaser hereby: (a) acknowledges that it has received all the information it has requested from the Company that it considers necessary or appropriate for deciding whether to acquire the Units, (b) represents that it has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Units and to obtain any additional information necessary to verify the accuracy of the information given the Purchaser and (c) further represents that it has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risk of this investment.

 

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4.3 Ability to Bear Economic Risk. The Purchaser acknowledges that investment in the Units involves a high degree of risk, and represents that it is able, without materially impairing its financial condition, to hold the Units for an indefinite period of time and to suffer a complete loss of its investment.

 

4.4 Accredited Investor Status. The Purchaser is an “accredited investor” as such term is defined in Rule 501 under the Securities Act.

 

4.5 Existence; Authorization. The Purchaser is an individual, corporation, partnership or limited liability company duly organized, validly existing and in good standing under the laws of the state of its organization, having full power and authority to own its properties and to carry on its business as conducted. The principal place of business of the Purchaser is as shown on the Accredited Investor Questionnaire. The Purchaser has the requisite power and authority to deliver this Agreement, perform its obligations set forth herein, and consummate the transactions contemplated hereby. The Purchaser has duly executed and delivered this Agreement and has obtained the necessary authorization to execute and deliver this Agreement and to perform his, her or its obligations herein and to consummate the transactions contemplated hereby. This Agreement, assuming the due execution and delivery hereof by the Company, is a legal, valid and binding obligation of the Purchaser enforceable against the Purchaser in accordance with its terms.

 

4.6 No Regulatory Approval. The Purchaser understands that no state or federal authority has scrutinized this Agreement or the Units offered pursuant hereto, has made any finding or determination relating to the fairness for investment in the Units, or has recommended or endorsed the Units, and that the Units have not been registered or qualified under the Securities Act or any state securities laws, in reliance upon exemptions from registration thereunder. The Units may not, in whole or in part, be resold, transferred, assigned or otherwise disposed of unless they are registered under the Securities Act or an exemption from registration is available, and unless the proposed disposition is in compliance with the restrictions on transferability under federal and state securities laws.

 

4.7 Purchaser Received Independent Advice. The Purchaser confirms that the Purchaser has been advised to consult with the Purchaser’s independent attorney regarding legal matters concerning the Company and to consult with independent tax advisers regarding the tax consequences of investing in the Company. The Purchaser acknowledges that Purchaser understands that any anticipated United States federal or state income tax benefits may not be available and, further, may be adversely affected through adoption of new laws or regulations or amendments to existing laws or regulations. The Purchaser acknowledges and agrees that the Company is providing no warranty or assurance regarding the ultimate availability of any tax benefits to the Purchaser by reason of the subscription.

 

4.8 Agreement to be Bound by Operating Agreement. The Purchaser acknowledges receipt of a true and correct copy of the Second Amended and Restated Operating Agreement of the Company, dated January 19, 2018 (as such may be amended, modified or restated from time to time, the “Operating Agreement”), a copy of which is available on EDGAR at https://www.sec.gov/Archives/edgar/data/1599407/000147793218000387/efsh_ex31.htm, and further acknowledges that Purchaser has read the Operating Agreement and understands and agrees to abide by all terms, covenants, conditions, limitations, restrictions and provisions contained in the Operating Agreement. By execution of this Agreement, the Purchaser agrees to be bound by the Operating Agreement and agrees that the Operating Agreement is binding upon and inures to the benefit of the heirs, legatees, devisees, legal representatives, successors and permitted assigns of the Purchaser. The Purchaser has executed the Joinder Agreement attached hereto as Exhibit C.

 

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4.9 Legends. The Purchaser understands that until such time as the Preferred Shares, Warrants, and, upon the conversion of the Preferred Shares and the exercise of the Warrants in accordance with its respective terms, the Underlying Securities, have been registered under the Securities Act or may be sold pursuant to Rule 144, Rule 144A under the Securities Act or Regulation S without any restriction as to the number of securities as of a particular date that can then be immediately sold, the Securities may bear a restrictive legend in substantially the following form (and a stop- transfer order may be placed against transfer of the certificates for such Securities):

 

“NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE OR EXERCISABLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL (WHICH COUNSEL SHALL BE SELECTED BY THE PURCHASER), IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144, RULE 144A OR REGULATION S UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.”

 

5. Further Agreements; Post-Closing Covenants

 

5.1 Use of Proceeds. Assuming that the full $6,000,000 is raised in the Offering, the Company shall use the proceeds from the Offering solely for the following purposes: (i) $4,525,000 for the acquisition of all of the equity interests or substantially all of the assets of Kyle’s Custom Wood Shop, Inc., an Idaho corporation (“KCWS”) and related expenses, (ii) $1,450,000 for general working capital purposes, and (iii) $25,000 to cover the Lead Investor’s legal fees incurred in connection with the Offering.

 

5.2 Form D; Blue Sky Laws. Company agrees to file a Form D with respect to the Units as required under Regulation D and to provide a copy thereof to the Purchaser promptly after such filing. Company shall take such action as Company shall reasonably determine is necessary to qualify the Securities for sale to the Purchaser at the applicable closing pursuant to this Agreement under applicable securities or “blue sky” laws of the states of the United States (or to obtain an exemption from such qualification), and shall provide evidence of any such action so taken to the Purchaser on or prior to the initial closing.

 

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5.3 Registration Rights.

 

(a) Mandatory Registration. The Company shall prepare, and, as soon as practicable but in no event later than thirty (30) days after the Closing Date (the “Filing Deadline”), file with the SEC a Registration Statement under the Securities Act on appropriate form covering the resale of the full amount of the Underlying Securities (collectively, the “Registrable Securities”). The Company shall use its commercially reasonable efforts to have the Registration Statement declared effective by the SEC as soon as practicable, but in no event later than the date (the “Effectiveness Deadline”), which shall be either (i) in the event that the SEC does not review the Registration Statement, ninety (90) days after the Closing Date, or (ii) in the event that the SEC reviews the Registration Statement, one hundred fifty (150) days after the Closing Date (but in any event, no later than two (2) Business Days from the SEC indicating that it has no further comments on the Registration Statement).

 

(b) Limitation on Registrable Securities. In the event that the staff of the SEC (the “Staff”) determines that the full amount of the Registrable Securities cannot be registered on the Registration Statement due to limitations under Rule 415 of the Securities Act, then Company shall: (i) register the resale of that portion of the Registrable Securities as the Staff may permit under its interpretations of Rule 415, and (ii) undertake to register the remaining portion of the Registrable Securities as soon as registration would be permitted under Rule 415, as determined by the Company in good faith based on the Staff’s publicly available interpretations of Rule 415.

 

(c) Related Obligations. At such time as the Company is obligated to file a Registration Statement with the SEC pursuant to Section 5.3(a) hereof, the Company will use commercially reasonable efforts to effect the registration of the Registrable Securities in accordance with the intended method of disposition thereof and, pursuant thereto, the Company shall have the following obligations:

 

(i) The Company shall submit to the SEC, within two (2) Business Days after the Company learns that no review of a particular Registration Statement will be made by the staff of the SEC or that the staff has no further comments on a particular Registration Statement, as the case may be, a request for acceleration of effectiveness of such Registration Statement to a time and date not later than two (2) Business Days after the submission of such request. The Company shall keep each Registration Statement effective pursuant to Rule 415 at all times until the earlier of (i) the date as of which the Purchaser may sell all of the Registrable Securities covered by such Registration Statement without restriction or limitation pursuant to Rule 144 and without the requirement to be in compliance with Rule 144(c)(1) (or any successor thereto) promulgated under the Securities Act or (ii) the date on which the Purchaser shall have sold all of the Registrable Securities covered by such Registration Statement (the “Registration Period”). The Company shall ensure that each Registration Statement (including any amendments or supplements thereto and prospectuses contained therein) shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein, or necessary to make the statements therein (in the case of prospectuses, in the light of the circumstances in which they were made) not misleading.

 

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(ii) The Company shall prepare and file with the SEC such amendments (including post-effective amendments) and supplements to a Registration Statement and the prospectus used in connection with such Registration Statement, which prospectus is to be filed pursuant to Rule 424 promulgated under the Securities Act, as may be necessary to keep such Registration Statement effective at all times during the Registration Period, and, during such period, comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities of the Company covered by such Registration Statement until such time as all of such Registrable Securities shall have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof as set forth in such Registration Statement.

 

(iii) The Company shall furnish to the Purchaser without charge, (i) promptly after the Registration Statement including the Purchaser’s Registrable Securities is prepared and filed with the SEC, at least one copy of such Registration Statement and any amendment(s) thereto, including financial statements and schedules, all documents incorporated therein by reference, if requested by the Purchaser, all exhibits and each preliminary prospectus, (ii) upon the effectiveness of any Registration Statement, ten (10) copies of the prospectus included in such Registration Statement and all amendments and supplements thereto (or such other number of copies as the Purchaser may reasonably request) and (iii) such other documents, including copies of any preliminary or final prospectus, as the Purchaser may reasonably request from time to time in order to facilitate the disposition of the Registrable Securities.

 

(iv) The Company shall notify the Purchaser in writing of the happening of any event, as promptly as practicable after becoming aware of such event, as a result of which the prospectus included in a Registration Statement, as then in effect, includes an untrue statement of a material fact or omission to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading (provided that in no event shall such notice contain any material, nonpublic information), and, promptly prepare a supplement or amendment to such Registration Statement to correct such untrue statement or omission, and deliver ten (10) copies of such supplement or amendment to the Purchaser (or such other number of copies as the Purchaser may reasonably request). The Company shall also promptly notify the Purchaser in writing (i) when a prospectus or any prospectus supplement or post-effective amendment has been filed, and when a Registration Statement or any post-effective amendment has become effective (notification of such effectiveness shall be delivered to the Purchaser by facsimile on the same day of such effectiveness and by overnight mail), (ii) of any request by the SEC for amendments or supplements to a Registration Statement or related prospectus or related information, and (iii) of the Company’s reasonable determination that a post-effective amendment to a Registration Statement would be appropriate.

 

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(v) The Company shall use commercially reasonable efforts to prevent the issuance of any stop order or other suspension of effectiveness of a Registration Statement, or the suspension of the qualification of any of the Registrable Securities for sale in any jurisdiction and, if such an order or suspension is issued, to obtain the withdrawal of such order or suspension at the earliest possible moment and to notify the Purchaser who holds Registrable Securities being sold of the issuance of such order and the resolution thereof or its receipt of notice of the initiation or threat of any proceeding for such purpose.

 

(vi) If the Purchaser is required under applicable securities law to be described in the Registration Statement as an underwriter, at the reasonable request of the Purchaser, the Company shall furnish to the Purchaser, on the date of the effectiveness of the Registration Statement and thereafter from time to time on such dates as the Purchaser may reasonably request (i) a letter, dated such date, from the Company’s independent certified public accountants in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the Purchaser, and (ii) an opinion, dated as of such date, of counsel representing the Company for purposes of such Registration Statement, in form, scope and substance as is customarily given in an underwritten public offering, addressed to the Purchaser.

 

(vii) If the Purchaser is required under applicable securities law to be described in the Registration Statement as an underwriter, upon the written request of the Purchaser in connection with the Purchaser’s due diligence requirements, if any, the Company shall make available for inspection by (i) the Purchaser and its legal counsel and (ii) one firm of accountants or other agents retained by the Purchaser (collectively, the “Inspectors”), all pertinent financial and other records, and pertinent corporate documents and properties of the Company (collectively, the “Records”), as shall be reasonably deemed necessary by each Inspector solely for the purpose of establishing a due diligence defense under underwriter liability under the Securities Act, and cause the Company’s officers, directors and employees to supply all information which any Inspector may reasonably request; provided, however, that each Inspector shall agree to hold in strict confidence and shall not make any disclosure (except to the Purchaser) or use of any Record or other information which the Company determines in good faith to be confidential, and of which determination the Inspectors are so notified, unless (a) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in any Registration Statement or is otherwise required under the Securities Act, (b) the release of such Records is ordered pursuant to a final, non-appealable subpoena or order from a court or government body of competent jurisdiction, or (c) the information in such Records has been made generally available to the public other than by disclosure in violation of this or any other Transaction Document. The Purchaser agrees that it shall, upon learning that disclosure of such Records is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt notice to the Company and allow the Company, at its expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, the Records deemed confidential. Nothing herein (or in any other confidentiality agreement between the Company and the Purchaser) shall be deemed to limit the Purchaser’s ability to sell Registrable Securities in a manner which is otherwise consistent with applicable laws and regulations.

 

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(viii) The Company shall hold in confidence and not make any disclosure of information concerning the Purchaser provided to the Company unless (i) disclosure of such information is necessary to comply with federal or state securities laws, (ii) the disclosure of such information is necessary to avoid or correct a misstatement or omission in any Registration Statement, (iii) the release of such information is ordered pursuant to a subpoena or other final, non-appealable order from a court or governmental body of competent jurisdiction or (iv) such information has been made generally available to the public other than by disclosure in violation of this Agreement or any other agreement. The Company agrees that it shall, upon learning that disclosure of such information concerning the Purchaser is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt written notice to the Purchaser and allow the Purchaser, at the Purchaser’s expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, such information.

 

(ix) The Company shall cooperate with the Purchaser and, to the extent applicable, facilitate the timely preparation and delivery of certificates (not bearing any restrictive legend) representing the Registrable Securities to be offered pursuant to a Registration Statement and enable such certificates to be in such denominations or amounts, as the case may be, as the Purchaser may reasonably request and registered in such name as the Purchaser may request.

 

(x) If requested by the Purchaser, the Company shall (i) as soon as practicable incorporate in a prospectus supplement or post-effective amendment such information as the Purchaser reasonably requests to be included therein relating to the sale and distribution of Registrable Securities, including, without limitation, information with respect to the number of Registrable Securities being offered or sold, the purchase price being paid therefor and any other terms of the offering of the Registrable Securities to be sold in such offering; (ii) as soon as practicable make all required filings of such prospectus supplement or post-effective amendment after being notified of the matters to be incorporated in such prospectus supplement or post-effective amendment; and (iii) as soon as practicable, supplement or make amendments to any Registration Statement if reasonably requested by the Purchaser.

 

(xi) The Company shall use commercially reasonable efforts to cause the Registrable Securities covered by a Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to consummate the disposition of such Registrable Securities.

 

(xii) The Company shall otherwise use commercially reasonable efforts to comply with all applicable rules and regulations of the SEC in connection with any registration hereunder.

 

(xiii) Within two (2) Business Days after a Registration Statement that covers Registrable Securities is ordered effective by the SEC, the Company shall deliver to the transfer agent for such Registrable Securities (with copies to the Purchaser) confirmation that such Registration Statement has been declared effective by the SEC.

 

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(xiv) Notwithstanding anything to the contrary herein, at any time after the Effective Date, the Company may delay the disclosure of material, non-public information concerning the Company the disclosure of which at the time is not, in the good faith opinion of the Board of Directors and its counsel, in the best interest of the Company and, in the opinion of counsel to the Company, otherwise required (a “Grace Period”); provided, that the Company shall promptly (i) notify the Purchaser in writing of the existence of material, non-public information giving rise to a Grace Period (provided that in each notice the Company will not disclose the content of such material, non-public information to the Purchaser) and the date on which the Grace Period will begin, and (ii) notify the Purchaser in writing of the date on which the Grace Period ends; and, provided further, that the Grace Periods shall not exceed an aggregate of 30 Trading Days during any 365-day period and the first day of any Grace Period must be at least 15 days after the last day of any prior Grace Period (each, an “Allowable Grace Period”). For purposes of determining the length of a Grace Period above, the Grace Period shall begin on and include the date the Purchaser receives the notice referred to in clause (i) and shall end on and include the later of the date the Purchaser receives the notice referred to in clause (ii) and the date referred to in such notice. The provisions of Section 5.3(d)(v) hereof shall not be applicable during the period of any Allowable Grace Period. Upon expiration of the Grace Period, the Company shall again be bound by the first sentence of Section 5.3(d)(iv) with respect to the information giving rise thereto unless such material, non-public information is no longer applicable. Notwithstanding anything to the contrary, the Company shall cause its transfer agent to deliver unlegended Common Shares to a transferee of any Purchaser in accordance with the terms of this Agreement in connection with any sale of Registrable Securities with respect to which a Purchaser has entered into a contract for sale, and delivered a copy of the prospectus included as part of the applicable Registration Statement (unless an exemption from such prospectus delivery requirement exists), prior to the Purchaser’s receipt of the notice of a Grace Period and for which the Purchaser has not yet settled.

 

(xv) Neither the Company nor any Subsidiary or affiliate thereof shall identify the Purchaser as an underwriter in any public disclosure or filing with the SEC or any applicable Trading Market and the Purchaser being deemed an underwriter by the SEC shall not relieve the Company of any obligations it has under this Agreement and any other documents or instruments executed and delivered in connection with the Agreement.

 

(d) Obligations of the Purchaser.

 

(i) At least five (5) Business Days prior to the first anticipated filing date of a Registration Statement, the Company shall notify the Purchaser in writing of the information the Company requires from the Purchaser in order to have that Purchaser’s Registrable Securities included in such Registration Statement. It shall be a condition precedent to the obligations of the Company to complete the registration pursuant to this Agreement with respect to the Registrable Securities of a particular Purchaser that the Purchaser shall furnish to the Company such information regarding itself, the Registrable Securities held by it and the intended method of disposition of the Registrable Securities held by it as shall be reasonably required to effect the effectiveness of the registration of such Registrable Securities and shall execute such documents in connection with such registration as the Company may reasonably request.

 

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(ii) Each Purchaser, by its acceptance of the Registrable Securities, agrees to cooperate with the Company as reasonably requested by the Company in connection with the preparation and filing of any Registration Statement hereunder, unless the Purchaser has notified the Company in writing of the Purchaser’s election to exclude all of the Purchaser’s Registrable Securities from such Registration Statement.

 

(iii) Each Purchaser agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 5.3(d)(v) or the first sentence of 5.3(d)(iv), the Purchaser will immediately discontinue disposition of Registrable Securities pursuant to any Registration Statement(s) covering such Registrable Securities until the Purchaser’s receipt of the copies of the supplemented or amended prospectus contemplated by Section 5.3(d)(v) or the first sentence of 5.3(d)(iv) or receipt of notice that no supplement or amendment is required. Notwithstanding anything to the contrary, the Company shall cause its transfer agent to deliver unlegended Common Shares to a transferee of the Purchaser in accordance with the terms of this Agreement in connection with any sale of Registrable Securities with respect to which the Purchaser has entered into a contract for sale prior to the Purchaser’s receipt of a notice from the Company of the happening of any event of the kind described in Section 5.3(d)(v) or the first sentence of 5.3(d)(iv) and for which the Purchaser has not yet settled.

 

(iv) Each Purchaser covenants and agrees that it will comply with the prospectus delivery requirements of the Securities Act as applicable to it or an exemption therefrom in connection with sales of Registrable Securities pursuant to the Registration Statement

 

(e) Expenses of Registration. All reasonable expenses, other than underwriting discounts and commissions incurred in connection with registrations, filings or qualifications pursuant to Section 5.3, including, without limitation, all registration, listing and qualifications fees, printers and accounting fees, and fees and disbursements of counsel for the Company, shall be paid by the Company.

 

(f) Reports under the Exchange Act. With a view to making available to the Purchaser the benefits of Rule 144 promulgated under the Securities Act or any other similar rule or regulation of the SEC that may at any time permit the Purchaser to sell securities of the Company to the public without registration (“Rule 144”), the Company agrees to:

 

(i) make and keep public information available, as those terms are understood and defined in Rule 144, during the Reporting Period;

 

(ii) file with the SEC in a timely manner all reports and other documents required of the Company under the Exchange Act; and

 

(iii) furnish to the Purchaser so long as the Purchaser owns Registrable Securities, promptly upon request during the Reporting Period, (i) a written statement by the Company, if true, that it has complied with the reporting requirements of Rule 144, the Securities Act and the Exchange Act, (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company and (iii) such other information as may be reasonably requested to permit the Purchaser to sell such securities pursuant to Rule 144 without registration.

 

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(g) Assignment of Registration Rights. The rights under Section 5.3 shall be automatically assignable by a Purchaser to any transferee of all or any portion of the Purchaser’s Registrable Securities if: (i) the Purchaser agrees in writing with the transferee or assignee to assign such rights and a copy of such agreement is furnished to the Company within a reasonable time after such assignment; (ii) the Company is, within a reasonable time after such transfer or assignment, furnished with written notice of (a) the name and address of such transferee or assignee and (b) the securities with respect to which such registration rights are being transferred or assigned; (iii) immediately following such transfer or assignment the further disposition of such securities by the transferee or assignee is restricted under the Securities Act or applicable state securities laws; (iv) at or before the time the Company receives the written notice contemplated by clause (ii) of this sentence the transferee or assignee agrees in writing with the Company to be bound by all of the provisions contained herein; and (v) such transfer shall have been made in accordance with the applicable requirements of this Agreement.

 

(h) Indemnification.

 

(i) Company Indemnification. The Company will indemnify the Purchaser (if Registrable Securities held by the Purchaser are included in the securities as to which such registration is being effected), each of its officers and directors, partners, members and each person controlling the Purchaser within the meaning of Section 15 of the Securities Act, against all expenses, claims, losses, damages or liabilities (or actions in respect thereof), including any of the foregoing incurred in settlement of any litigation, commenced or threatened, arising out of or based on (A) any untrue statement (or alleged untrue statement) of a material fact contained in any Registration Statement, prospectus, offering circular or other document, or any amendment or supplement thereto, incident to any such Registration Statement, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, or (B) any violation by the Company of the Securities Act, the Exchange Act, state securities laws or any rule or regulation promulgated under such laws applicable to the Company in connection with any such registration, and in each case, the Company will reimburse the Purchaser, each of its officers and directors, partners, members and each person controlling the Purchaser, for any legal and any other expenses reasonably incurred, as such expenses are incurred, in connection with investigating, preparing or defending any such claim, loss, damage, liability or action, provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on (X) any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by the Purchaser or controlling person, and stated to be specifically for use therein, (Y) the use by a Purchaser of an outdated or defective prospectus after the Company has notified the Purchaser in writing that the prospectus is outdated or defective or (Z) a Purchaser’s (or any other indemnified person’s) failure to send or give a copy of the prospectus or supplement (as then amended or supplemented), if required, pursuant to Rule 172 under the Securities Act (or any successor rule) to the Persons asserting an untrue statement or alleged untrue statement or alleged untrue statement or omission or alleged omission at or prior to the written confirmation of the sale of Registrable Securities to such person if such statement or omission was corrected in such prospectus or supplement; provided, further, that the indemnity agreement contained in this Section 5.3(i)(i) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld).

 

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(ii) Purchaser Indemnification. The Purchaser will, if Registrable Securities held by the Purchaser are included in the securities as to which such registration is being effected, indemnify the Company, each of its directors and officers, other holders of the Company’s securities covered by such Registration Statement, each person who controls the Company within the meaning of Section 15 of the Securities Act, and each such holder, each of its officers and directors and each person controlling such holder within the meaning of Section 15 of the Securities Act, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on: (A) any untrue statement (or alleged untrue statement) of a material fact contained in any such Registration Statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, to the extent, and only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such Registration Statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by the Purchaser and stated to be specifically for use therein, or (B) any violation by the Purchaser of the Securities Act, the Exchange Act, state securities laws or any rule or regulation promulgated under such laws applicable to the Purchaser, and in each case, the Purchaser will reimburse the Company, each other holder, and directors, officers, persons, underwriters or control persons of the Company and the other holders for any legal or any other expenses reasonably incurred, as such expenses are incurred, in connection with investigating or defending any such claim, loss, damage, liability or action; provided, that the indemnity agreement contained in this Subsection 5.3(i)(ii) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of such indemnifying Purchaser (which consent shall not be unreasonably withheld or delayed). The liability of any Purchaser for indemnification under this Section 5.3(i)(ii) in its capacity as a seller of Registrable Securities shall not exceed the amount of net proceeds to the Purchaser of the securities sold in any such registration.

 

(iii) Notice and Procedure. Each party entitled to indemnification under this Section 5.3(i) (the “Indemnified Party”) shall give written notice to the party required to provide indemnification (the “Indemnifying Party”) promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld), and the Indemnified Party may participate in such defense at such party’s expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Agreement unless the failure to give such notice is materially prejudicial to an Indemnifying Party’s ability to defend such action and provided further, that the Indemnifying Party shall not assume the defense for matters as to which there is a conflict of interest or there are separate and different defenses. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party (whose consent shall not be unreasonably withheld), consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation.

 

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(iv) Contribution. If the indemnification provided for in this Section 5.3(i) is held by a court of competent jurisdiction to be unavailable to an Indemnified Party with respect to any losses, claims, damages or liabilities referred to herein, the Indemnifying Party, in lieu of indemnifying such Indemnified Party thereunder, shall to the extent permitted by applicable law contribute to the amount paid or payable by such Indemnified Party as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party on the one hand and of the Indemnified Party on the other in connection with the untrue statement or omission that resulted in such loss, claim, damage or liability, as well as any other relevant equitable considerations. The relative fault of the Indemnifying Party and of the Indemnified Party shall be determined by a court of law by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the Indemnifying Party or by the Indemnified Party and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission; provided, that in no event shall any contribution by a Purchaser hereunder exceed the proceeds from the offering received by the Purchaser. The amount paid or payable by a party as a result of any loss, claim, damage or liability shall be deemed to include, subject to the limitations set forth in this Agreement, any reasonable attorneys’ or other reasonable fees or expenses incurred by such party in connection with any proceeding to the extent such party would have been indemnified for such fees or expenses if the indemnification provided for in this Section 5.3(i) was available to such party in accordance with its terms.

 

(v) Survival. The obligations of the Company and the Purchaser under this Section 5.3(i) shall survive completion of any offering of Registrable Securities in a Registration Statement and the termination of this Agreement. The indemnity and contribution agreements contained in this Section 5.3(i) are in addition to any liability that the Indemnifying Parties may have to the Indemnified Parties and are not in diminution or limitation of other remedies or causes of action that the parties may have under the this Agreement and any other documents or instruments executed and delivered in connection with the Agreement.

 

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5.4 Legal Counsel Opinions.

 

Upon the request of the Purchaser from time to time, Company shall be responsible (at its cost) for promptly supplying to Company’s transfer agent and the Purchaser a customary legal opinion letter of its counsel (the “Legal Counsel Opinion”) to the effect that the resale of the Underlying Securities by the Purchaser or its affiliates, successors and assigns is exempt from the registration requirements of the Securities Act pursuant to Rule 144 (provided the requirements of Rule 144 are satisfied and provided the Underlying Securities are not then registered under the Securities Act for resale pursuant to an effective registration statement). Should Company’s legal counsel fail for any reason to issue the Legal Counsel Opinion, the Lead Purchaser may (at Company’s cost) secure another legal counsel to issue the Legal Counsel Opinion, and Company will instruct its transfer agent to accept such opinion. Company shall not impede the removal by its stock transfer agent of the restricted legend from any common stock certificate upon receipt by the transfer agent of a Rule 144 Opinion Letter. COMPANY HEREBY AGREES THAT IT MAY NEVER TAKE THE POSITION THAT IT IS A “SHELL COMPANY” IN CONNECTION WITH ITS OBLIGATIONS UNDER THIS AGREEMENT OR OTHERWISE UNLESS THE COMPANY HAS SOUGHT THE ADVICE OF ITS COUNSEL AND ITS COUNSEL HAS INDICATED THAT IT MUST TAKE SUCH POSITION AS A MATTER OF APPLICABLE LAW.

 

5.5 Listing. Company will, so long as the Purchaser owns any of the Securities, maintain the listing and trading of its Common Shares on the OTCQB or any equivalent exchange or electronic quotation system or a national securities exchange and will comply in all respects with Company’s reporting, filing and other obligations under the bylaws or rules of the Financial Industry Regulatory Authority, or FINRA, and such exchanges, as applicable, as well as with the SEC. Company shall promptly provide to the Purchaser copies of any notices it receives from the OTCQB and any other exchanges or electronic quotation systems on which the Common Shares are then traded regarding the continued eligibility of the common stock for listing on such exchanges and quotation systems.

 

5.6 Information and Observer Rights.

 

(a) As long as the Purchaser owns at least five percent (5%) of the Securities originally purchased hereunder, Company covenants to timely file (or obtain extensions in respect thereof and file within the applicable grace period) all reports required to be filed by Company pursuant to the Exchange Act. As long as the Purchaser owns at least five percent (5%) of the Securities originally purchased hereunder, if Company is not required to file reports pursuant to such laws, it will prepare and furnish to the Purchaser and simultaneously make publicly available in accordance with Rule 144(c) such information as is required for the Purchaser to sell the Securities under Rule 144. Company further covenants that it will take such further action as any holder of Securities may reasonably request, all to the extent required from time to time to enable the Purchaser to sell the Securities without registration under the Securities Act within the limitation of the exemptions provided by Rule 144.

 

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(b) As long as the Lead Investor owns at least five percent (5%) of the Securities originally purchased by the Lead Investor, if the Lead Investor notifies Company in writing (including by electronic mail) that it wishes to attend meetings of Company’s Board of Directors and that it acknowledges that it will receive material nonpublic information and consents to the same, Company shall invite a designated representative of the Lead Investor to attend all meetings of Company’s Board of Directors in a nonvoting observer capacity and, in this respect, and subject to the Lead Investor having informed Company that it wishes to attend, Company shall give such representative copies of all notices, minutes, consents, and other materials that it provides to its directors at the same time and in the same manner as provided to such directors; provided, however, that such representative shall agree to hold in confidence and trust and to act in a fiduciary manner with respect to all information so provided; and provided further, that Company reserves the right to withhold any information and to exclude such representative from any meeting or portion thereof if access to such information or attendance at such meeting could adversely affect the attorney-client privilege between Company and its counsel or result in disclosure of trade secrets or a conflict of interest. For avoidance of doubt, the Company shall not provide Lead Investor any material non-public information unless specifically requested by Lead Investor.

 

5.7 Confidentiality. The Purchaser agrees that the it will keep confidential and will not disclose, divulge, or use for any purpose (other than to monitor its investment in the Company) the terms and conditions of this Agreement or any confidential information obtained from the Company pursuant to the terms of this Agreement (including notice of Company’s intention to file a registration statement), unless such confidential information (a) is known or becomes known to the public in general (other than as a result of a breach of this Section 5.7 by the Purchaser), (b) is or has been independently developed or conceived by the Purchaser without use of the Company’s confidential information, or (c) is or has been made known or disclosed to the Purchaser by a third party without a breach of any obligation of confidentiality such third party may have to the Company; provided, however, that the Purchaser may disclose confidential information (i) to its attorneys, accountants, consultants, and other professionals to the extent necessary to obtain their services in connection with monitoring its investment in the Company; (ii) to any prospective purchaser of any Securities from the Purchaser, if such prospective purchaser agrees to be bound by the provisions of this Section 5.7; (iii) to any existing or prospective affiliate, partner, member, stockholder, or wholly owned subsidiary of the Purchaser in the ordinary course of business, provided that the Purchaser informs such person that such information is confidential and directs such person to maintain the confidentiality of such information; or (iv) as may otherwise be required by law, provided that the Purchaser notifies the Company within three (3) Business Days of such disclosure and takes reasonable steps to minimize the extent of any such required disclosure.

 

5.8 Restrictions on Activities. Commencing as of the date first above written, and so long as Preferred Shares remain outstanding, the Company shall not, directly or indirectly, without the Lead Purchaser’s prior written consent, which consent shall not be unreasonably withheld: (a) change the nature of its business; (b) sell, divest, change the structure of any material assets other than in the ordinary course of business unless as a result of such sale, divestiture or change, the use of proceeds is to redeem the Securities; (c) solicit any offers for, respond to any unsolicited offers for, or conduct any negotiations with any other person or entity in respect of any variable rate debt transactions (i.e., transactions where the conversion or exercise price of the security issued by the Company varies based on the market price of the common stock); or (d) accept a Merchant-Cash-Advance in which it sells future receivables at a discount or any other factoring transactions, or similar financing instruments or financing transactions, whether a transaction similar to the one contemplated hereby or any other investment.

 

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5.9 Other Restrictions. Unless approved in writing by the Lead Purchaser, Company and each Subsidiary shall not enter into an agreement or amend an existing agreement to effect any sale of securities involving, or convert any securities previously issued under, a Variable Rate Transaction or a merchant cash advance transaction in which it sells future receivables at a discount, or a substantially similar transaction. The term “Variable Rate Transaction” means a transaction in which Company or any Subsidiary (i) issues or sells any convertible securities either (A) at a conversion, exercise or exchange rate or other price that is based upon and/or varies with the trading prices of, or quotations for, the shares of common stock at any time after the initial issuance of such convertible securities, or (B) with a conversion, exercise or exchange price that is subject to being reset at some future date after the initial issuance of such convertible securities or upon the occurrence of specified or contingent events directly or indirectly related to the business of Company or the Subsidiary, as the case may be, or the market for the common stock, other than pursuant to a customary “weighted average” or “full-ratchet” anti-dilution provision, or (ii) enters into any agreement (including, without limitation, an “equity line of credit” or an “at-the-market offering”) whereby Company or any Subsidiary may sell securities at a future determined price (other than standard and customary “preemptive” or “participation” rights). The Purchaser shall be entitled to obtain injunctive relief against Company and its Subsidiaries to preclude any such issuance, which remedy shall be in addition to any right to collect damages.

 

5.10 Sale of Assets; Issuance of Equity or Debt. The Company shall not sell any material assets or any securities of the following Subsidiaries: 1847 Neese Inc., 1847 Asien Inc. and KCWS following its acquisition by the Company, in each case, unless all of the proceeds of such sale are first used to redeem the Preferred Shares then outstanding.

 

5.11 Participation Rights. For a period of twelve (12) months from the date hereof, in the event Company, KCWS or any other Subsidiary of the Company existing on the date hereof, proposes to offer and sell any of its securities (“New Securities”), whether in the form of debt, Equity Financing (defined below), or any other financing transaction (each a “Future Offering”), the Lead Purchaser (but not any other Purchaser) shall have the right, but not the obligation, to participate in the Future Offering in an amount up to the aggregate amount of the Lead Purchaser’s investment in the Securities hereunder (the “Participation Right”). For the avoidance of doubt, an “Equity Financing” shall mean Company’s sale of its Common Shares or any securities conferring the right to purchase Company’s Common Shares or securities convertible into, or exchangeable for (with or without additional consideration), Common Shares. The Participation Right shall not apply to Excluded Issuances (as defined below). In connection with each Participation Right, Company shall provide written notice to the Lead Purchaser of the terms and conditions of the Future Financing at least ten (10) Business Days prior to the anticipated first closing of such Future Financing (the “FF Notice”). If the Lead Purchaser shall elect to exercise its Participation Right, it shall notify Company, in writing, of such election within five days (the “Participation Notice”). In the event the Lead Purchaser does not return a Participation Notice to Company within such five day period, the Participation Right granted hereunder shall terminate and be of no further force and effect; provided, however, that such Participation Right shall be reinstated if the anticipated closing referenced in the FF Notice does not occur within sixty days of the Lead Purchaser’s receipt of the FF Notice. For purposes of this Agreement, “Excluded Issuance” means (i) New Securities issuable under the Company’s equity incentive plans or other compensation arrangements; (ii) New Securities issuable upon a stock split, stock dividend, or any subdivision of the Company’s Common Stock; (iii) New Securities issued to banks, equipment lessors or other financial institutions, or to real property lessors, pursuant to a debt financing, equipment leasing or real property leasing or similar transaction; (iv) New Securities issued to suppliers or third party service providers in connection with the provision of goods or services; (v) New Securities issued pursuant to the acquisition of another person by the Company by merger, purchase of substantially all of the assets or other reorganization or to a joint venture agreement; and (vi) New Securities issued in connection with collaboration, technology license, development, marketing or other similar agreements or strategic partnerships.

 

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5.12 Terms of Future Financings. Unless otherwise agreed to by the Lead Purchaser, so long as the Purchaser holds any of the Preferred Shares, upon any issuance of (or announcement of intent to effect an issuance of) any security, or amendment to (or announcement of intent to effect an amendment to) any security that was originally issued before the issue date, by the Company, with any term that the Purchaser reasonably believes is more favorable to the holder of such security than, or with a term in favor of the holder of such security that the Purchaser reasonably believes was not similarly provided, to the Purchaser in the Subscription Documents, then (i) the Company shall notify the Purchaser of such additional or more favorable term within five (5) Business Days of the new issuance and/or amendment (as applicable) of the respective security, which notice may include the filing of a current report on Form 8-K that discloses the issuance of such new security, and (ii) such term, at Purchaser’s option, shall become a part of the transaction documents with the Purchaser (regardless of whether the Company complied with the notification provision of this Section 5.12). The types of terms contained in another security that may be more favorable to the purchaser of such security include, but are not limited to, terms addressing conversion discounts, prepayment rate, conversion lookback periods, interest rates, original issue discounts, stock sale price, private placement price per share, and warrant coverage. If Purchaser elects to have the term become a part of the transaction documents with the Purchaser, then the Company shall immediately deliver to the Purchaser acknowledgment of such adjustment and/or shall take such further action as the Purchaser may reasonably require (including executing and delivering amendments to applicable transaction documents) to implement such adjustments in form and substance reasonably satisfactory to the Purchaser (the “Acknowledgment”) within five (5) Business Days of Company’s receipt of request from Purchaser (the “Adjustment Deadline”), provided that Company’s failure to timely provide the Acknowledgement shall not affect the automatic amendments contemplated hereby.

 

5.13 Breach of Covenants. The Company acknowledges and agrees that if the Company breaches any covenants set forth in this Section 5, in addition to any other remedies available to the Purchaser pursuant to this Agreement, it will be considered an Event of Default under the Designation.

 

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5.14 Transfer Agent Instructions. Company shall issue irrevocable instructions to Company’s transfer agent to issue certificates, registered in the name of the Purchaser or its nominee, upon conversion of the Preferred Shares and exercise of the Warrants, in such amounts as specified from time to time by the Purchaser to Company in accordance with the terms thereof (the “Irrevocable Transfer Agent Instructions”). In the event that Company proposes to replace its transfer agent, Company shall provide, prior to the effective date of such replacement, fully executed Irrevocable Transfer Agent Instructions in a form as initially delivered pursuant to this Agreement (including but not limited to the provision to irrevocably reserve sufficient Common Shares conversion of the Preferred Shares and exercise of the Warrants) signed by the successor transfer agent to the Company and the Purchaser. Prior to registration of the Underlying Securities under the Securities Act or the date on which the Underlying Securities may be sold pursuant to Rule 144 without any restriction as to the number of Securities as of a particular date that can then be immediately sold, all such certificates shall bear the restrictive legend specified in Section 4.8 of this Agreement or a similar legend prescribed by the Company’s transfer agent. The Company warrants that: (i) no instruction other than the Irrevocable Transfer Agent Instructions referred to in this Section 5.14 will be given by Company to its transfer agent and that the Securities shall otherwise be freely transferable on the books and records of Company as and to the extent provided in this Agreement and the Units; (ii) it will not direct its transfer agent not to transfer or delay, impair, and/or hinder its transfer agent in transferring (or issuing) (electronically or in certificated form) any certificate for Common Shares to be issued to the Purchaser upon exercise of the Warrants or conversion of or otherwise pursuant to the Preferred Shares as and when required by the Designation and this Agreement ; (iii) it will not fail to remove (or direct its transfer agent not to remove or impair, delay, and/or hinder its transfer agent from removing) any restrictive legend (or to withdraw any stop transfer instructions in respect thereof) on any certificate for any Common Shares issued to the Purchaser upon exercise of the Warrants or conversion of or otherwise pursuant to the Preferred Shares as and when required by the Designation and this Agreement and (iv) it will provide any required corporate resolutions and issuance approvals to its transfer agent within one (1) Business Day of each conversion of the Preferred Shares or exercise of the Warrants. Nothing in this Section shall affect in any way the Purchaser’s obligations and agreement set forth in Section 5.3 hereof to comply with all applicable prospectus delivery requirements, if any, upon re-sale of the Securities. If the Purchaser provides Company, at the cost of Company, with (i) an opinion of counsel in form, substance and scope customary for opinions in comparable transactions, to the effect that a public sale or transfer of such Securities may be made without registration under the Securities Act and such sale or transfer is effected or (ii) the Purchaser provides reasonable assurances that the Securities can be sold pursuant to Rule 144, Company shall permit the transfer, and, in the case of the Securities, promptly instruct its transfer agent to issue one or more certificates, free from restrictive legend, in such name and in such denominations as specified by the Purchaser. Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Purchaser, by vitiating the intent and purpose of the transactions contemplated hereby. Accordingly, Company acknowledges that the remedy at law for a breach of its obligations under this Section 5.14 may be inadequate and agrees, in the event of a breach or threatened breach by Company of the provisions of this Section, that the Purchaser shall be entitled, in addition to all other available remedies, to an injunction restraining any breach and requiring immediate transfer, without the necessity of showing economic loss and without any bond or other security being required.

 

5.15 Monitoring Fee. Upon the occurrence and during the continuation of an Event of Default (as defined in the Designation) or a material breach of this Agreement, the Company shall pay the Lead Purchaser a monthly monitoring fee (the “Monitoring Fee”) in the amount of Five Thousand Dollars ($5,000) per month commencing in the month in which the Event of Default or material breach of this Agreement occurs and continuing until the Event of Default or material breach of this Agreement is cured.

 

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5.16 Compliance with 1934 Act; Public Information Failures. For so long as the Purchaser beneficially owns any of the Securities, the Company shall comply with the reporting requirements of the 1934 Act; and the Company shall continue to be subject to the reporting requirements of the 1934 Act. During the period that the Purchaser beneficially owns the Securities, if the Company shall (i) fail for any reason to satisfy the requirements of Rule 144(c)(1), including, without limitation, the failure to satisfy the current public information requirements under Rule 144(c) or (ii) if the Company has ever been an issuer described in Rule 144(i)(1)(i) or becomes such an issuer in the future, and the Company shall fail to satisfy any condition set forth in Rule 144(i)(2), and, in either such case, the Purchaser is otherwise unable to sell any of the Securities owned by the Purchaser because such shares are not otherwise freely transferrable (each, a “Public Information Failure”) then, as partial relief for the damages to the Purchaser by reason of any such delay in or reduction of its ability to sell the Securities (which remedy shall not be exclusive of any other remedies available pursuant to this Agreement, the Units, or at law or in equity), the Company shall pay to the Purchaser an amount in cash equal to three percent (3%) of the Purchase Price on each day of a Public Information Failure and on every thirtieth day (pro-rated for periods totaling less than thirty days) thereafter until the date such Public Information Failure is cured, but subject to a cap of ten percent (10%). The payments to which the Purchaser shall be entitled pursuant to this Section 5.16 are referred to herein as “Public Information Failure Payments.” Public Information Failure Payments shall be paid on the earlier of (i) the last day of the calendar month during which such Public Information Failure Payments are incurred and (ii) the third Business Day after the event or failure giving rise to the Public Information Failure Payments is cured.

 

5.17 CUSIP. The Company shall obtain a CUSIP for the Series A Senior Convertible Preferred Shares as soon as reasonably practicable after the Closing Date, but in no event later than seven (7) days after the Closing Date.

 

5.18 Further Assurances. Each of the Purchaser and the Company agrees and covenants that at any time and from time to time it will execute and deliver to the other party such further instruments and documents and take such further action as the other party may reasonably require within three (3) Business Days of any such request in order to carry out the full intent and purpose of this Agreement and to comply with state or federal securities laws or other regulatory approvals.

 

6. Conditions to the Company’s Obligation to Sell

 

The obligation of the Company hereunder to issue and sell the Units to the Purchaser at the Closing is subject to the satisfaction, at or before the Closing Date, of each of the following conditions, provided that these conditions are for the Company’s sole benefit and may be waived by the Company at any time in its sole discretion:

 

(a) The Purchaser shall have executed this Agreement and delivered the same to the Company.

 

(b) The Purchaser shall have delivered the Purchase Price in accordance with Section 1 above.

 

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(c) The representations and warranties of the Purchaser shall be true and correct in all material respects as of the date when made and as of the Closing Date, as though made at that time (except for representations and warranties that speak as of a specific date), and the Purchaser shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Purchaser at or prior to the Closing Date.

 

(d) No litigation, statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by or in any court or governmental authority of competent jurisdiction or any self-regulatory organization having authority over the matters contemplated hereby which prohibits the consummation of any of the transactions contemplated by this Agreement.

 

7. Conditions to The Purchaser’s Obligation to Purchase

 

The obligation of the Purchaser hereunder to purchase the Units, on the Closing Date, is subject to the satisfaction, at or before the Closing Date, of each of the following conditions, provided that these conditions are for the Purchaser’s sole benefit and may be waived by the Purchaser at any time in its sole discretion:

 

(a) The Company shall have executed this Agreement and delivered the same to the Purchaser.

 

(b) The Company shall have delivered to the Purchaser the Units in accordance with Section 1 above.

 

(c) Company shall have delivered to the Purchaser the Warrant.

 

(d) Company shall have delivered executed Subscription Documents, or such other instruments as contemplated by this Agreement.

 

(e) The Company has provided the Purchaser with a current schedule of liabilities and the results of a current certified UCC search that is of a date within ten (10) days of the Closing Date.

 

(f) The Irrevocable Transfer Agent Instructions, in form and substance satisfactory to the Purchaser, shall have been delivered to and acknowledged in writing by Company’s Transfer Agent.

 

(g) The representations and warranties of the Company shall be true and correct in all material respects as of the date when made and as of Closing Date, as though made at such time (except for representations and warranties that speak as of a specific date) and the Company shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Company at or prior to the Closing Date.

 

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(h) No litigation, statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by or in any court or governmental authority of competent jurisdiction or any self-regulatory organization having authority over the matters contemplated hereby which prohibits the consummation of any of the transactions contemplated by this Agreement.

 

(i) No event shall have occurred which could reasonably be expected to have a Material Adverse Effect on the Company including but not limited to a change in the Exchange Act reporting status of the Company or the failure of the Company to be timely in its Exchange Act reporting obligations.

 

(j) Company shall have delivered to the Purchaser (i) a certificate evidencing the formation and good standing of Company and each of its Subsidiaries in such entity’s jurisdiction of formation issued by the Secretary of State (or comparable office) of such jurisdiction, as of a date within ten (10) days of the Closing Date; (ii) resolutions adopted by the Company’s Board of Directors at a duly called meeting or by unanimous written consent authorizing this Agreement and all other documents, instruments and transactions contemplated hereby.

 

8. Miscellaneous

 

8.1 Binding Agreement. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties. Nothing in this Agreement, expressed or implied, is intended to confer upon any third party any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement.

 

8.2 Governing Law; Consent to Jurisdiction. This Agreement shall be governed by and construed under the laws of the State of New York, without giving effect to conflicts of laws principles. Each party to this Agreement hereby irrevocably submits to the non-exclusive jurisdiction of the state and federal courts sitting in Rockland County, New York for the adjudication of any dispute hereunder or in connection with any transaction contemplated hereby, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof (certified or registered mail, return receipt requested) to such party at the address in effect for notices to it under this agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law.

 

8.3 Counterparts. This Agreement may be executed in two (2) or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Counterparts may be delivered via facsimile, electronic mail (including pdf or any electronic signature) or other transmission method and any counterpart so delivered shall be deemed to have been duly and validly delivered and be valid and effective for all purposes.

 

8.4 Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement.

 

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8.5 Notices. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified, (b) when sent by confirmed electronic mail or facsimile if sent during normal business hours of the recipient, if not, then on the next Business Day, (c) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (d) 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 and to the Purchaser at the addresses set forth on the signature page to this Agreement or at such other addresses as the Company or Purchaser may designate by 10 days’ advance written notice to the other parties hereto.

 

8.6 Modification; Waiver. No modification or waiver of any provision of this Agreement or consent to departure therefrom shall be effective only upon the written consent of the Company and Investors holding a majority of the then outstanding Preferred Shares, which majority must include the Lead Investor.

 

8.7 Expenses. The Company and the Purchaser shall each bear its respective expenses and legal fees incurred with respect to this Agreement and the transactions contemplated herein; provided, however, that the Purchaser may retain $25,000 of the Purchase Price to cover its expenses incurred in connection with this Agreement and the transactions contemplated hereby.

 

8.8 Delays or Omissions. It is agreed that no delay or omission to exercise any right, power or remedy accruing to the Purchaser, upon any breach or default of the Company under the Subscription Documents shall impair any such right, power or remedy, nor shall it be construed to be a waiver of any such breach or default, or any acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. It is further agreed that any waiver, permit, consent or approval of any kind or character by Purchaser of any breach or default under this Agreement, or any waiver by any Purchaser of any provisions or conditions of this Agreement must be in writing and shall be effective only to the extent specifically set forth in writing and that all remedies, either under this Agreement, or by law or otherwise afforded to the Purchaser, shall be cumulative and not alternative.

 

8.9 Remedies Cumulative. No remedy herein conferred upon any party is intended to be exclusive of any other remedy and each and every such remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute or otherwise.

 

8.10 Attorneys’ Fees.  In the event that any party hereto institutes any legal suit, action, or proceeding, including arbitration, against another party in respect of a matter arising out of or relating to this Agreement, the prevailing party in the suit, action, or proceeding shall be entitled to receive, in addition to all other damages to which it may be entitled, the costs incurred by such party in conducting the suit, action or proceeding, including reasonable attorneys’ fees and expenses, and court costs..

 

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8.11 Equitable Remedies. Each party hereto acknowledges that a breach or threatened breach by such party of any of its obligations under this Agreement would give rise to irreparable harm to the other parties, for which monetary damages would not be an adequate remedy, and hereby agrees that in the event of a breach or a threatened breach by such party of any such obligations, each of the other parties hereto shall, in addition to any and all other rights and remedies that may be available to them in respect of such breach, be entitled to equitable relief, including a temporary restraining order, an injunction, specific performance and any other relief that may be available from a court of competent jurisdiction (without any requirement to post bond).

 

8.12 Entire Agreement. This Agreement and the Exhibits hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and no party shall be liable or bound to any other party in any manner by any representations, warranties, covenants and agreements except as specifically set forth herein.

 

[Signature Page Follows]

 

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In Witness Whereof, the parties have executed this Agreement as of the date first written above.

 

COMPANY:

 

PURCHASER:

     
1847 Holdings LLC    
   
  Print Name Above

 

By:    
Name:  Ellery W. Roberts   Sign Above
Title: Chief Executive Officer    

Address: 590 Madison Avenue   If signer is an entity, specify name and title of authorized signer below:

  21st Floor      
  New York, NY 10022   Name:   
      Title:  

 

    Address:  
       

 

  Number of Units:  
     
  Purchase Price: $  

 

[Signature Page to Securities Purchase Agreement]

 

 

 

SCHEDULE I

Disclosure Schedule

 

 

 

 

Exhibit A

 

Share Designation of Series A Senior Convertible Preferred Shares

 

(See Attached)

 

 

 

Exhibit B

 

Form of Warrant

 

(See Attached)

 

 

 

Exhibit C

 

Form of Joinder

 

(See Attached)