SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 8-K
 
CURRENT REPORT
 
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
 
Date of Report (Date of earliest event reported): January 29, 2015
 
 
IMAGEWARE SYSTEMS, INC.
(Exact name of Registrant as specified in its Charter)
 
 
     
Delaware
001-15757
33-0224167
(State or other jurisdiction
of incorporation)
(Commission File No.)
(IRS Employer
Identification No.)
 
   
10815 Rancho Bernardo Road, Suite 310, San Diego, California 92127
 
(Address of principal executive offices)
 
   
(619) 673-8600
 
(Registrant’s Telephone Number)
 
   
Not Applicable
 
(Former name or address, if changed since last report)
 
 
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
 
¨
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))

 
 
 
 
Item 1.01     Entry into a Material Definitive Agreement.

See Item 8.01 below.

Item 5.03     Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year.
 
Creation of Series E Convertible Preferred Stock

On January 29, 2015, ImageWare Systems, Inc. (the “ Company ”) filed the Certificate of Designations, Preferences, and Rights of the Series E Convertible Preferred Stock (“ Certificate of Designations ”) with the Delaware Secretary of State, designating 12,000 shares of the Company’s preferred stock, par value $0.01 per share, as Series E Convertible Preferred Stock (“ Series E Preferred ”). Shares of Series E Preferred accrue dividends at a rate of 8% per annum if the Company chooses to pay accrued dividends in cash, and 10% per annum if the Company chooses to pay accrued dividends in shares of Common Stock. Each share of Series E Preferred has a liquidation preference of $1,000 per share (“ Liquidation Preferenc e”), and is convertible, at the option of the holder, into that number of shares of the Company’s common stock, par value $0.01 per share (“ Common Stock ”), equal to the Liquidation Preference, divided by $1.90.

The foregoing description of the Series E Preferred is qualified, in its entirety, by the full text of the Certificate of Designations, attached to this Current Report on Form 8-K as Exhibit 3.1, and incorporated by reference herein.

Elimination of Series C Preferred and Series D Preferred

On January 29, 2015, the Company’s Board of Directors approved the elimination of the Company’s Series C 8% Convertible Preferred Stock (“ Series C Preferred ”) and Series D 8% Convertible Preferred Stock (“ Series D Preferred ”), which eliminations were completed by filing certificates of elimination for both the Series C Preferred and Series D Preferred (the “ Certificates of Elimination ”) with the Delaware Secretary of State on January 30, 2015. No shares of either the Series C Preferred or Series D Preferred were outstanding at the time of the Board’s approval or the filing of the Certificates of Elimination.  Copies of the Certificates of Elimination for the Series C Preferred and Series D Preferred are attached to this Current Report on Form 8-K as exhibits 3.2 and 3.3, respectively.

Item 8.01     Other Events.
 
On January 29, 2015, the Company filed a prospectus supplement (the “ Prospectus Supplement ”) to its previously filed and currently effective shelf registration statement on Form S-3 (File No. 333-201442). Pursuant to the Prospectus Supplement, the Company intends to issue, from time to time, up to 12,000 shares of newly created shares of Series E Preferred (the “ Series E Offering ”).

Of the shares issuable pursuant to the Series E Offering, 2,000 shares will be issued to Neal I. Goldman a director of the Company and the holder of the Company’s existing $5.0 million line of credit (“ Goldman ”) (the “ Line of Credit ”), in exchange for approximately $2.0 million of the $2.35 million outstanding balance under the Line of Credit, plus interest accrued to date, pursuant to the terms and conditions of the Note Exchange Agreement entered into by the Company and Goldman on January 29, 2015 (the “ Note Exchange Agreement ”). The Company intends to satisfy the remaining outstanding balance of the Line of Credit with proceeds from the Series E Offering. The foregoing description of the Note Exchange Agreement is qualified, in its entirety, by the full text of the Note Exchange Agreement, attached to this Current Report on Form 8-K as Exhibit 10.1, and incorporated by reference herein.

The Company has received subscriptions from certain investors to purchase the remaining 10,000 shares not subject to the Note Exchange Agreement, and currently anticipates closing the Series E Offering on or before February 4, 20115.  A copy of the press release issued by the Company in connection with foregoing events is attached to this Current Report on Form 8-K as Exhibit 99.1.

The above disclosure shall not constitute an offer to sell or the solicitation of an offer to buy the securities discussed herein, nor shall there be any offer, solicitation, or sale of the securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction.
 
Item 9.01     Financial Statements and Exhibits.

See Exhibit Index.

 
 
 

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.
 

       
   
IMAGEWARE SYSTEMS, INC.
       
Date: January 30, 2015
 
By:
 /s/ Wayne Wetherell
     
Wayne Wetherell
     
Chief Financial Officer
       


 
 
 

EXHIBIT INDEX

     
Exhibit Number
 
Description
3.1
 
Certificate of Designations, Preferences, and Rights of the Series E Convertible Preferred Stock, dated January 29, 2015
3.2
 
Certificate of Elimination for the Series C 8% Convertible Preferred Stock of ImageWare Systems, Inc., dated January 30, 2015
3.3
 
Certificate of Elimination for the Series D 8% Convertible Preferred Stock of ImageWare Systems, Inc., dated January 30, 2015
10.1
 
Note Exchange Agreement, by and between ImageWare Systems, Inc. and Neal Goldman, dated January 29, 2015
99.1
 
Press release, dated January 30, 2015.

Exhibit 3.1
 
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS OF
 
SERIES E CONVERTIBLE PREFERRED STOCK
 
OF
 
IMAGEWARE SYSTEMS, INC.
 
The undersigned, the Chief Executive Officer of ImageWare Systems, Inc., a Delaware corporation (the “ Company ”), does hereby certify that, pursuant to the authority conferred upon the Board of Directors by the Certificate of Incorporation of the Company, the following resolution creating a series of Series E Convertible Preferred Stock, was duly adopted on January 29, 2015.
 
RESOLVED , that pursuant to the authority expressly granted to and vested in the Board of Directors of the Company by provisions of the Certificate of Incorporation of the Company, as amended (the “ Certificate of Incorporation ”), there hereby is created out of the shares of Preferred Stock, par value $0.01 per share (the “ Preferred Stock ”), of the Company, as authorized in Section 4(a) of the Company’s Certificate of Incorporation, a series of Preferred Stock of the Company, to be named “Series E Convertible Preferred Stock,” consisting of Twelve Thousand (12,000) shares, which series shall have the following designations, powers, preferences and relative and other special rights and the following qualifications, limitations and restrictions:
 
1.            Designation and Rank .
 
(a)           The designation of such series of the Preferred Stock shall be the Series E Convertible Preferred Stock, par value $0.01 per share (the “ Series E Preferred ”). The maximum number of shares of Series E Preferred shall be Twelve Thousand (12,000) shares. Except as provided in Section 1(b) below, the Series E Preferred shall rank senior to the Company’s common stock, par value $0.01 per share (the “ Common Stock ”), and to all other classes and series of equity securities of the Company which by their terms rank junior to the Series E Preferred (“ Junior Stock ”).
 
(b)           The Series E Preferred shall be subordinate to and rank junior to the Company’s Series B Preferred Stock (“ Series B Preferred ”) and all indebtedness of the Company now or hereafter outstanding.  The date of original issuance of the Series E Preferred is referred to herein as the “ Issuance Date ”.
 
2.            Dividends .
 
(a)            Payment of Dividends .

(i)           The holders of record of shares of Series E Preferred shall be entitled to receive, out of any assets at the time legally available therefore, cumulative dividends at the rate of eight percent (8%) of the stated Liquidation Preference Amount (as defined in Section 4 hereof) per share per annum, commencing on the Issuance Date and payable quarterly in arrears on each of March 31, June 30, September 30 and December 31 (each, a “ Dividend Payment Date ”), at the option of the Company in cash or through the issuance of shares of Common Stock.    In the event that the Company elects to pay dividends in shares of Common Stock, the number of shares of Common Stock to be issued to each applicable holder shall be determined by dividing the total dividend then being paid to such holder in shares of Common Stock by the Price Per Share (as defined below) as of the applicable Dividend Payment Date, and rounding up to the nearest whole share.  As used herein, “ Price Per Share ” means, with respect to a share of Common Stock, (a) if such Common Stock is listed on a national securities exchange in the United States, the three (3) consecutive trading day average of the daily average of the high and low sale prices per share of the Common Stock on such national securities exchange in the United States immediately preceding the relevant date, as published by the  Wall Street Journal  or other reliable publication, (b) if a public market exists for such shares of Common Stock but such shares are not listed on a national securities exchange in the United States, the three (3) consecutive trading day average of the daily mean between the closing bid and asked quotations in the over-the-counter market for a share of such Common Stock in the United States immediately preceding the relevant Dividend Payment Date, or (c) if such Common Stock is not then listed on a national securities exchange and not traded in the over-the-counter market, the price per share of Common Stock determined in good faith by the Board of Directors of the Company in consultation with the holders of Series E Preferred (the “ Dividend Shares ”); provided , however , that in the event the Company elects to pay any dividend payable on any such Dividend Payment Date in Dividend Shares, the cumulative dividend rate shall be ten percent (10%) of the stated Liquidation Preference Amount per annum.

 
 
 


(ii)           In the event the Company elects to pay any dividends hereunder in Dividend Shares, it shall use its best efforts to register the Dividend Shares pursuant to an effective registration statement under the Securities Act of 1933, as amended (the “ Securities Act ”), which is then available for the immediate resale of the Dividend Shares being issued by the recipients thereof.  A registration statement shall not be required in the event the Dividend Shares shall be freely tradable without restriction under Rule 144 of the Securities Act without volume or manner-of-sale restrictions or current public information requirements, as determined by counsel to the Company as set forth in a written opinion letter to such effect, addressed and acceptable to the Company’s transfer agent.

(iii)           In the event the Company elects to pay dividends hereunder in Dividend Shares for four consecutive quarterly periods, holders of more than fifty percent (50%) of the issued and outstanding shares of Series E Preferred shall have the right to appoint one (1) director (the “ Purchaser Designee ”) to the Company’s Board of Directors, subject to approval by the Company’s Board of Directors, which approval shall not be unreasonably withheld. The Company shall use its best efforts to ensure that the Purchaser Designee continues to be elected to the Board of Directors for so long as the holders exercising the right under this Section 2(a)(iii) beneficially own at least fifty percent (50%) of the Company’s issued and outstanding shares of Series E Preferred calculated as of the Issuance Date.

(b)           In the event of a Voluntary Conversion (as defined in Section 5(a) hereof) pursuant to Section 5(a), all accrued but unpaid dividends on the Series E Preferred being converted shall be payable in cash within five (5) business days of such Voluntary Conversion Date (as defined in Section 5(b)(i) hereof).  Dividends on the Series E Preferred are prior and in preference to any declaration or payment of any distribution (as defined below) on any outstanding shares of Junior Stock. Such dividends shall accrue on each share of Series E Preferred from day to day whether or not earned or declared so that if such dividends with respect to any previous dividend period at the rate provided for herein have not been paid on, or declared and set apart for, all shares of Series E Preferred at the time outstanding, the deficiency shall be fully paid on, or declared and set apart for, such shares on a pro rata basis with all other equity securities of the Company ranking on a parity with the Series E Preferred as to the payment of dividends before any distribution shall be paid on, or declared and set apart for Junior Stock.

(c)           So long as any shares of Series E Preferred are outstanding, the Company shall not declare, pay or set apart for payment any dividend or make any distribution on any Junior Stock (other than dividends or distributions payable in additional shares of Junior Stock), unless at the time of such dividend or distribution the Company shall have paid all accrued and unpaid dividends on the outstanding shares of Series E Preferred.

(d)           In the event of a dissolution, liquidation or winding up of the Company pursuant to Section 4, all accrued and unpaid dividends on the Series E Preferred shall be payable on the day immediately preceding the date of payment of the preferential amount to the holders of Series E Preferred.  In the event of the Company’s exercise of either optional redemption right set forth in Section 7 below, all accrued and unpaid dividends on the Series E Preferred shall be payable on the day immediately preceding the date of such redemption.

(e)           For purposes hereof, unless the context otherwise requires, “distribution” shall mean the transfer of cash or property without consideration, whether by way of dividend or otherwise, payable other than in shares of Common Stock or other equity securities of the Company, or the purchase or redemption of shares of the Company (other than redemptions set forth in Section 7 below or repurchases of Common Stock held by employees or consultants of the Company upon termination of their employment or services pursuant to agreements providing for such repurchase or upon the cashless exercise of options held by employees or consultants) for cash or property.

3.            Voting Rights . Each holder of Series E Preferred shall be entitled to vote on all matters, together with the holders of Common Stock, on an as converted basis.

 
 
 

4.            Liquidation, Dissolution; Winding-Up .

(a)           In the event of the liquidation, dissolution or winding up of the affairs of the Company, whether voluntary or involuntary, the holders of shares of the Series E Preferred then outstanding shall be entitled to receive, out of the assets of the Company available for distribution to its stockholders, an amount equal to $1,000 per share (the “ Liquidation Preference Amount ”) plus all accrued and unpaid dividends before any payment shall be made or any assets distributed to the holders of the Common Stock or any other Junior Stock. If the assets of the Company are not sufficient to pay in full the Liquidation Preference Amount payable to the holders of outstanding shares of the Series E Preferred and any series of preferred stock or any other class of stock on a parity, as to rights on liquidation, dissolution or winding up, with the Series E Preferred, then all of said assets will be distributed among the holders of the Series E Preferred and the other classes of stock on a parity with the Series E Preferred, if any, ratably in accordance with the respective amounts that would be payable on such shares if all amounts payable thereon were paid in full. The liquidation payment with respect to each outstanding fractional share of Series E Preferred shall be equal to a ratably proportionate amount of the liquidation payment with respect to each outstanding share of Series E Preferred. All payments for which this Section 4(a) provides shall be in cash, property (valued at its fair market value as determined reasonably and in good faith by the Board of Directors of the Company) or a combination thereof; provided , however , that no cash shall be paid to holders of Junior Stock unless each holder of the outstanding shares of Series E Preferred has been paid in cash the full Liquidation Preference Amount to which such holder is entitled as provided herein. After payment of the full Liquidation Preference Amount to which each holder is entitled, such holders of shares of Series E Preferred will not be entitled to any further participation as such in any distribution of the assets of the Company.
 
(b)           Written notice of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, stating a payment date and the place where the distributable amounts shall be payable, shall, to the extent possible, be given by mail, postage prepaid, no less than twenty (20) days prior to the payment date stated therein, to the holders of record of the Series E Preferred at their respective addresses as the same shall appear on the books of the Company.
 
5.            Conversion . The holder of Series E Preferred shall have the following conversion rights (the “ Conversion Rights ”):
 
(a)            Right to Convert . At any time on or after the Issuance Date, the holder of any shares of Series E Preferred may, at such holder's option, elect to convert (a “ Voluntary Conversion ”) all or any portion of the shares of Series E Preferred held by such person into a number of fully paid and nonassessable shares of Common Stock equal to the quotient of (i) the Liquidation Preference Amount of the shares of Series E Preferred being converted divided by (ii) the Conversion Price (as defined in Section 5(c) below) then in effect as of the date of the delivery by such holder of its notice of election to convert. In the event of a notice of redemption of any shares of Series E Preferred pursuant to Section 7 hereof, the Conversion Rights of the shares designated for redemption shall terminate at the close of business on the last full day preceding the date fixed for redemption, unless the redemption price is not paid on such redemption date, in which case the Conversion Rights for such shares shall continue until such price is paid in full. In the event of a liquidation, dissolution or winding up of the Company, the Conversion Rights shall terminate at the close of business on the last full day preceding the date fixed for the payment of any such amounts distributable on such event to the holders of Series E Preferred. In the event of such a redemption or liquidation, dissolution or winding up, the Company shall provide to each holder of shares of Series E Preferred notice of such redemption or liquidation, dissolution or winding up, which notice shall (i) be sent at least fifteen (15) days prior to the termination of the Conversion Rights and (ii) state the amount per share of Series E Preferred that will be paid or distributed on such redemption or liquidation, dissolution or winding up, as the case may be.

 
 
 
 
(b)            Mechanics of Voluntary Conversion . The Voluntary Conversion of Series E Preferred shall be conducted in the following manner:
 
(i)            Holder's Delivery Requirements . To convert Series E Preferred into full shares of Common Stock on any date (the “ Voluntary Conversion Date ”), the holder thereof shall transmit by facsimile (or otherwise deliver), for receipt on or prior to 5:00 p.m., New York time on such date, a copy of a fully executed notice of conversion in the form attached hereto as Exhibit I (the “ Conversion Notice ”), to the Company.  As soon as practicable following such Voluntary Conversion Date, the holder shall surrender to a common carrier for delivery to the Company the electronic shares of Series E Preferred or the original certificates representing the shares of Series E Preferred being converted (or an indemnification undertaking with respect to such shares in the case of their loss, theft or destruction) (the “ Preferred Stock Certificates ”) and the originally executed Conversion Notice.
 
(ii)            Company's Response . Upon receipt by the Company of a copy of the fully executed Conversion Notice, the Company or its designated transfer agent (the “ Transfer Agent ”), as applicable, shall within three (3) business days following the date of receipt by the Company of a copy of the fully executed Conversion Notice, issue and deliver to the Depository Trust Company (“ DTC ”) account on the holder's behalf via the Deposit Withdrawal Agent Commission System (“ DWAC ”) as specified in the Conversion Notice, registered in the name of the holder or its designee, for the number of shares of Common Stock to which the holder shall be entitled. Notwithstanding the foregoing to the contrary, the Company or its Transfer Agent shall only be required to issue and deliver the shares to the DTC on a holder's behalf via DWAC if (i) the shares of Common Stock may be issued without restrictive legends and (ii) the Company and the Transfer Agent are participating in DTC through the DWAC system.  If all of the conditions set forth in clauses (i) and (ii) above are not satisfied, the Company shall deliver physical certificates to the holder or its designee. If the number of shares of Preferred Stock represented by the Preferred Stock Certificate(s) submitted for conversion is greater than the number of shares of Series E Preferred being converted, then the Company shall, as soon as practicable and in no event later than three (3) business days after receipt of the Preferred Stock Certificate(s) and at the Company's expense, issue and deliver to the holder a new Preferred Stock Certificate representing the number of shares of Series E Preferred not converted.
 
(iii)            Dispute Resolution . In the case of a dispute as to the arithmetic calculation of the number of shares of Common Stock to be issued upon conversion, the Company shall cause its Transfer Agent to promptly issue to the holder the number of shares of Common Stock that is not disputed and shall submit the arithmetic calculations to the holder via facsimile as soon as possible, but in no event later than two (2) business days after receipt of such holder's Conversion Notice. If such holder and the Company are unable to agree upon the arithmetic calculation of the number of shares of Common Stock to be issued upon such conversion within two (2) business days of such disputed arithmetic calculation being submitted to the holder, then the Company shall within two (2) business days submit via facsimile the disputed arithmetic calculation of the number of shares of Common Stock to be issued upon such conversion to the Company's independent, outside accountant (the “ Accountant ”). The Company shall cause the Accountant to perform the calculations and notify the Company and the holder of the results no later than five (5) business days from the time it receives the disputed calculations. The Accountant's calculation shall be binding upon all parties absent manifest error. The reasonable expenses of such Accountant in making such determination shall be paid by the Company, in the event the holder's calculation was correct, or by the holder, in the event the Company's calculation was correct, or equally by the Company and the holder in the event that neither the Company's or the holder's calculation was correct. The period of time in which the Company is required to effect conversions or redemptions under this Certificate of Designations shall be tolled with respect to the subject conversion or redemption pending resolution of any dispute by the Company made in good faith and in accordance with this Section 5(b)(iii).
 
(iv)            Record Holder . The person or persons entitled to receive the shares of Common Stock issuable upon a conversion of the Series E Preferred shall be treated for all purposes as the record holder or holders of such shares of Common Stock on the Conversion Date.

 
 
 

(v)            Company's Failure to Timely Convert .  If within five (5) business days of the Company's receipt of an executed copy of the Conversion Notice (so long as the applicable Series E Preferred certificates, if any, and original Conversion Notice are received by the Company on or before such third business day), the Transfer Agent shall fail to issue and deliver to a holder the number of shares of Common Stock to which such holder is entitled upon such holder's conversion of the Series E Preferred or to issue a new Preferred Stock Certificate representing the number of shares of Series E Preferred to which such holder is entitled pursuant to Section 5(b)(ii) (a “ Conversion Failure ”), in addition to all other available remedies which such holder may pursue hereunder, the Company shall pay additional damages to such holder on each business week after such fifth (5th) business day that such conversion is not timely effected (so long as the applicable Preferred Stock Certificates and original Conversion Notice are received by the Company on or before such fifth business day) in an amount equal 0.5% of the product of (A) the sum of the number of shares of Common Stock not issued to the holder on a timely basis pursuant to Section 5(b)(ii) and to which such holder is entitled and, in the event the Company has failed to deliver a Preferred Stock Certificate to the holder on a timely basis pursuant to Section 5(b)(ii), the number of shares of Common Stock issuable upon conversion of the shares of Series E Preferred represented by such Series E Preferred certificate, as of the last possible date which the Company could have issued such Series E Preferred certificate to such holder without violating Section 5(b)(ii) and (B) the Closing Bid and Ask Price (as defined below) of the Common Stock on the last possible date which the Company could have issued such Common Stock and such Series E Preferred certificate, as the case may be, to such holder without violating Section 5(b)(ii).  If the Company fails to pay the additional damages set forth in this Section 5(b)(v) within seven (7) business days of the date incurred, then such payment shall bear interest at the rate of 1.0% per month (pro rated for partial months) until such payments are made.
 
(c)            Conversion Price .
 
(i)           The term “Conversion Price” shall mean $1.90 per share, subject to adjustment under Section 5(d) hereof.
 
(ii)           Notwithstanding the foregoing to the contrary, if during any period (a “ Black-Out Period ”), a holder of Series E Preferred is unable to trade any Common Stock issued or issuable upon conversion of the Series E Preferred immediately because the Company has informed such holder of Series E Preferred that an existing prospectus cannot be used at that time in the sale or transfer of such Common Stock (provided that such postponement, delay, suspension or fact that the prospectus cannot be used is not due to factors solely within the control of the holder of Series E Preferred, such holder of Series E Preferred shall have the option but not the obligation on any Conversion Date within ten (10) trading days following the expiration of the Black-Out Period of using the Conversion Price applicable on such Conversion Date or any Conversion Price selected by such holder of Series E Preferred that would have been applicable had such Conversion Date been at any earlier time during the Black-Out Period.
 
(d)            Adjustments of Conversion Price .
 
(i)            Adjustments for Stock Splits and Combinations . If the Company shall at any time or from time to time after the Issuance Date, effect a stock split of the outstanding Common Stock, the Conversion Price shall be proportionately decreased. If the Company shall at any time or from time to time after the Issuance Date, combine the outstanding shares of Common Stock, the Conversion Price shall be proportionately increased. Any adjustments under this Section 5(d)(i) shall be effective at the close of business on the date the stock split or combination becomes effective.
 
(ii)            Adjustments for Certain Dividends and Distributions . If the Company shall at any time or from time to time after the Issuance Date, make or issue or set a record date for the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in shares of Common Stock, then, and in each event, the Conversion Price shall be decreased as of the time of such issuance or, in the event such record date shall have been fixed, as of the close of business on such record date, by multiplying the Conversion Price then in effect by a fraction:
 
(1)           the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date; and

 
 
 

(2)           the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution; provided , however , that no such adjustment shall be made if the holders of Series E Preferred simultaneously receive (i) a dividend or other distribution of shares of Common Stock in a number equal to the number of shares of Common Stock as they would have received if all outstanding shares of Series E Preferred had been converted into Common Stock on the date of such event or (ii) a dividend or other distribution of shares of Series E Preferred which are convertible, as of the date of such event, into such number of shares of Common Stock as is equal to the number of additional shares of Common Stock being issued with respect to each share of Common Stock in such dividend or distribution.
 
(iii)            Adjustment for Other Dividends and Distributions . If the Company shall at any time or from time to time after the Issuance Date, make or issue or set a record date for the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in securities of the Company other than shares of Common Stock, then, and in each event, an appropriate revision to the applicable Conversion Price shall be made and provision shall be made (by adjustments of the Conversion Price or otherwise) so that the holders of Series E Preferred shall receive upon conversions thereof, in addition to the number of shares of Common Stock receivable thereon, the number of securities of the Company which they would have received had their Series E Preferred been converted into Common Stock on the date of such event and had thereafter, during the period from the date of such event to and including the Conversion Date, retained such securities (together with any distributions payable thereon during such period), giving application to all adjustments called for during such period under this Section 5(d)(iii) with respect to the rights of the holders of the Series E Preferred; provided , however , that if such record date shall have been fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Conversion Price shall be adjusted pursuant to this paragraph as of the time of actual payment of such dividends or distributions.
 
(iv)            Adjustments for Reclassification, Exchange or Substitution . If the Common Stock issuable upon conversion of the Series E Preferred at any time or from time to time after the Issuance Date shall be changed to the same or different number of shares of any class or classes of stock, whether by reclassification, exchange, substitution or otherwise (other than by way of a stock split or combination of shares or stock dividends provided for in Sections 5(d)(i), (ii) and (iii), or a reorganization, merger, consolidation, or sale of assets provided for in Section 5(d)(v)), then, and in each event, an appropriate revision to the Conversion Price shall be made and provisions shall be made (by adjustments of the Conversion Price or otherwise) so that the holder of each share of Series E Preferred shall have the right thereafter to convert such share of Series E Preferred into the kind and amount of shares of stock and other securities receivable upon reclassification, exchange, substitution or other change, by holders of the number of shares of Common Stock into which such share of Series E Preferred might have been converted immediately prior to such reclassification, exchange, substitution or other change, all subject to further adjustment as provided herein.
 
(v)            Adjustments for Reorganization, Merger, Consolidation or Sales of Assets . If at any time or from time to time after the Issuance Date there shall be a capital reorganization of the Company (other than by way of a stock split or combination of shares or stock dividends or distributions provided for in Section 5(d)(i), (ii) and (iii), or a reclassification, exchange or substitution of shares provided for in Section 5(d)(iv)), or a merger or consolidation of the Company with or into another corporation where the holders of outstanding voting securities prior to such merger or consolidation do not own over fifty percent (50%) of the outstanding voting securities of the merged or consolidated entity, immediately after such merger or consolidation, or the sale of all or substantially all of the Company's properties or assets to any other person (an “ Organic Change ”), then as a part of such Organic Change an appropriate revision to the Conversion Price shall be made if necessary and provision shall be made if necessary (by adjustments of the Conversion Price or otherwise) so that the holder of each share of Series E Preferred shall have the right thereafter to convert such share of Series E Preferred into the kind and amount of shares of stock and other securities or property which such holder would have had the right to receive had such holder converted its shares of Series E Preferred immediately prior to the consummation of such Organic Change. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 5(d)(v) with respect to the rights of the holders of the Series E Preferred after the Organic Change to the end that the provisions of this Section 5(d)(v) (including any adjustment in the Conversion Price then in effect and the number of shares of stock or other securities deliverable upon conversion of the Series E Preferred) shall be applied after that event in as nearly an equivalent manner as may be practicable.

 
 
 

(vi)            Consideration for Stock . In case any shares of Common Stock or Convertible Securities other than the Series E Preferred, or any rights or warrants or options to purchase any such Common Stock or Convertible Securities, shall be issued or sold:
 
(1)           in connection with any merger or consolidation in which the Company is the surviving corporation (other than any consolidation or merger in which the previously outstanding shares of Common Stock of the Company shall be changed to or exchanged for the stock or other securities of another corporation), the amount of consideration therefore shall be deemed to be the fair value, as determined reasonably and in good faith by the Board of Directors of the Company, of such portion of the assets and business of the nonsurviving corporation as such Board may determine to be attributable to such shares of Common Stock, Convertible Securities, rights or warrants or options, as the case may be; or
 
(2)           in the event of any consolidation or merger of the Company in which the Company is not the surviving corporation or in which the previously outstanding shares of Common Stock of the Company shall be changed into or exchanged for the stock or other securities of another corporation, or in the event of any sale of all or substantially all of the assets of the Company for stock or other securities of any corporation, the Company shall be deemed to have issued a number of shares of its Common Stock for stock or securities or other property of the other corporation computed on the basis of the actual exchange ratio on which the transaction was predicated, and for a consideration equal to the fair market value on the date of such transaction of all such stock or securities or other property of the other corporation. If any such calculation results in adjustment of the applicable Conversion Price, or the number of shares of Common Stock issuable upon conversion of the Series E Preferred, the determination of the applicable Conversion Price or the number of shares of Common Stock issuable upon conversion of the Series E Preferred immediately prior to such merger, consolidation or sale, shall be made after giving effect to such adjustment of the number of shares of Common Stock issuable upon conversion of the Series E Preferred. In the event any consideration received by the Company for any securities consists of property other than cash, the fair market value thereof at the time of issuance or as otherwise applicable shall be as determined in good faith by the Board of Directors of the Company. In the event Common Stock is issued with other shares or securities or other assets of the Company for consideration which covers both, the consideration computed as provided in this Section 5(d)(viii) shall be allocated among such securities and assets as determined in good faith by the Board of Directors of the Company.
 
(vii)            Record Date . In case the Company shall take record of the holders of its Common Stock or any other Preferred Stock for the purpose of entitling them to subscribe for or purchase Common Stock or Convertible Securities, then the date of the issue or sale of the shares of Common Stock shall be deemed to be such record date.
 
(e)            No Impairment . The Company shall not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith, assist in the carrying out of all the provisions of this Section 5 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 the Series E Preferred against impairment.  In the event a holder shall elect to convert any shares of Series E Preferred as provided herein, the Company cannot refuse conversion based on any claim that such holder or any one associated or affiliated with such holder has been engaged in any violation of law, unless (i) an order from the Securities and Exchange Commission prohibiting such conversion or (ii) an injunction from a court, on notice, restraining and/or adjoining conversion of all or of said shares of Series E Preferred shall have been issued and the Company posts a surety bond for the benefit of such holder in an amount equal to 100% of the Liquidation Preference Amount of the Series E Preferred such holder has elected to convert, which bond shall remain in effect until the completion of arbitration/litigation of the dispute and the proceeds of which shall be payable to such holder in the event it obtains judgment.  If the Company is the prevailing party in any legal action or other legal proceeding relating to the Conversion Rights of the holders of the Series E Preferred, then the Company shall be entitled to recover from the holders of Series E Preferred reasonable attorneys’ fees, costs and disbursements (in addition to any other relief to which the Company may be entitled).

 
 
 

(f)            Certificates as to Adjustments . Upon occurrence of each adjustment or readjustment of the Conversion Price or number of shares of Common Stock issuable upon conversion of the Series E Preferred pursuant to this Section 5, the Company at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of such Series E Preferred a certificate setting forth such adjustment and readjustment, showing in detail the facts upon which such adjustment or readjustment is based. The Company shall, upon written request of the holder of such affected Series E Preferred, at any time, furnish or cause to be furnished to such holder a like certificate setting forth such adjustments and readjustments, the Conversion Price in effect at the time, and the number of shares of Common Stock and the amount, if any, of other securities or property which at the time would be received upon the conversion of a share of such Series E Preferred. Notwithstanding the foregoing, the Company shall not be obligated to deliver a certificate unless such certificate would reflect an increase or decrease of at least one percent of such adjusted amount.
 
(g)            Issue Taxes . The Company shall pay any and all issue and other taxes, excluding federal, state or local income taxes, that may be payable in respect of any issue or delivery of shares of Common Stock on conversion of shares of Series E Preferred pursuant thereto; provided, however, that the Company shall not be obligated to pay any transfer taxes resulting from any transfer requested by any holder in connection with any such conversion.
 
(h)            Notices . All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or by facsimile or three (3) business days following being mailed by certified or registered mail, postage prepaid, return-receipt requested, addressed to the holder of record at its address appearing on the books of the Company. The Company will give written notice to each holder of Series E Preferred at least twenty (20) days prior to the date on which the Company closes its books or takes a record (i) with respect to any dividend or distribution upon the Common Stock, (ii) with respect to any pro rata subscription offer to holders of Common Stock or (iii) for determining rights to vote with respect to any Organic Change, dissolution, liquidation or winding-up and in no event shall such notice be provided to such holder prior to such information being made known to the public. The Company will also give written notice to each holder of Series E Preferred at least twenty (20) days prior to the date on which any Organic Change, dissolution, liquidation or winding-up will take place and in no event shall such notice be provided to such holder prior to such information being made known to the public.
 
(i)            Fractional Shares . No fractional shares of Common Stock shall be issued upon conversion of the Series E Preferred. In lieu of any fractional shares to which the holder would otherwise be entitled, the Company shall pay cash equal to the product of such fraction multiplied by the average of the Closing Bid and Ask Prices of the Common Stock for the five (5) consecutive trading immediately preceding the Voluntary Conversion Date.
 
(j)            Reservation of Common Stock . The Company shall, so long as any shares of Series E Preferred are outstanding, reserve and keep available out of its authorized and unissued Common Stock, solely for the purpose of effecting the conversion of the Series E Preferred, such number of shares of Common Stock as shall from time to time be sufficient to effect the conversion of all of the Series E Preferred then outstanding; provided that the number of shares of Common Stock so reserved shall at no time be less than 100% of the number of shares of Common Stock for which the shares of Series E Preferred are at any time convertible. The initial number of shares of Common Stock reserved for conversions of the Series E Preferred and each increase in the number of shares so reserved shall be allocated pro rata among the holders of the Series E Preferred based on the number of shares of Series E Preferred held by each holder of record at the time of issuance of the Series E Preferred or increase in the number of reserved shares, as the case may be. In the event a holder shall sell or otherwise transfer any of such holder's shares of Series E Preferred, each transferee shall be allocated a pro rata portion of the number of reserved shares of Common Stock reserved for such transferor. Any shares of Common Stock reserved and which remain allocated to any person or entity which does not hold any shares of Series E Preferred shall be allocated to the remaining holders of Series E Preferred, pro rata based on the number of shares of Series E Preferred then held by such holder.
 
(k)            Retirement of Series E Preferred . Conversion of Series E Preferred shall be deemed to have been effected on the applicable Conversion Date. Upon conversion of only a portion of the number of shares of Series E Preferred represented by a certificate surrendered for conversion, the Company shall issue and deliver to such holder at the expense of the Company, a new certificate covering the number of shares of Series E Preferred representing the unconverted portion of the certificate so surrendered as required by Section 5(b)(ii).
 
 
 
 

(l)            Regulatory Compliance . If any shares of Common Stock to be reserved for the purpose of conversion of Series E Preferred require registration or listing with or approval of any governmental authority, stock exchange or other regulatory body under any federal or state law or regulation or otherwise before such shares may be validly issued or delivered upon conversion, the Company shall, at its sole cost and expense, in good faith and as expeditiously as possible, endeavor to secure such registration, listing or approval, as the case may be.
 
6.            No Preemptive Rights . Except as provided in Section 5 hereof, no holder of the Series E Preferred shall be entitled to rights to subscribe for, purchase or receive any part of any new or additional shares of any class, whether now or hereinafter authorized, or of bonds or debentures, or other evidences of indebtedness convertible into or exchangeable for shares of any class, but all such new or additional shares of any class, or any bond, debentures or other evidences of indebtedness convertible into or exchangeable for shares, may be issued and disposed of by the Board of Directors on such terms and for such consideration (to the extent permitted by law), and to such person or persons as the Board of Directors in their absolute discretion may deem advisable.
 
7.            Redemption .
 
(a)            Redemption Option Upon Change of Control . In addition to any other rights of the Company or the holders of Series E Preferred contained herein, simultaneous with the occurrence of a Change of Control (as defined below), the Company, at its option, shall have the right to redeem all or a portion of the outstanding Series E Preferred in cash at a price per share of Series E Preferred equal to 110% of the Liquidation Preference Amount plus all accrued and unpaid dividends (the “ Change of Control Redemption Price ”). Notwithstanding the foregoing to the contrary, the Company may effect a redemption pursuant to this Section 7(a) only if the Company is in material compliance with the terms and conditions of this Certificate of Designations.

(b)            “Change of Control” .  A “ Change of Control ” shall be deemed to have occurred at such time as a third party not affiliated with the Company or any holders of the Series E Preferred shall have acquired, in one or a series of related transactions, equity securities of the Company representing more than fifty percent 50% of the outstanding voting securities of the Company.
 
(c)            Mechanics of Redemption at Option of Company Upon Change of Control . At any time within ten (10) days prior to a Change of Control transaction, the Company may redeem, effective immediately prior to the consummation of such Change of Control, all of the holder's Series E Preferred then outstanding by delivering written notice thereof via facsimile and overnight courier (“ Notice of Redemption at Option of Company Upon Change of Control ”) to each holder of Series E Preferred, which Notice of Redemption at Option of Company Upon Change of Control shall indicate (i) the number of shares of Series E Preferred that the Company is electing to redeem and (ii) the Change of Control Redemption Price, as calculated pursuant to Section 7(a) above.  The Change of Control Redemption Price shall be paid in cash in accordance with Section 7(a) of this Certificate of Designations. On or prior to the Change of Control, the holders of Series E Preferred shall surrender to the Company the certificate or certificates representing such shares, in the manner and at the place designated in the Notice of Redemption at Option of Company Upon Change of Control.  The Company shall deliver the Change of Control Redemption Price immediately prior to or simultaneously with the consummation of the Change of Control; provided that a holder's Preferred Stock Certificates shall have been so delivered to the Company (or an indemnification undertaking with respect to such Preferred Stock Certificates in the event of their loss, theft or destruction).  From and after the Change of Control transaction, unless there shall have been a default in payment of the Change of Control Redemption Price, all rights of the holders of Series E Preferred as a holder of such Series E Preferred (except the right to receive the Change of Control Redemption Price without interest upon surrender of their certificate or certificates) shall cease with respect to any redeemed shares of Series E Preferred, and such shares shall not thereafter be transferred on the books of the Company or be deemed to be outstanding for any purpose whatsoever.  Notwithstanding the foregoing to the contrary, nothing contained herein shall limit a holder’s ability to convert its shares of Series E Preferred following the receipt of the Notice of Redemption at Option of Company Upon Change of Control and prior to the consummation of the Change of Control transaction.

 
 
 

(d)            Company's Redemption Option .  Any time after the six-month period following the Issuance Date, the Company may redeem all or a portion of the Series E Preferred outstanding upon thirty (30) calendar days prior written notice (the “ Company's Redemption Notice ”) in cash at a price per share of Series E Preferred equal to 110% of the Liquidation Preference Amount plus all accrued and unpaid dividends  (the “ Company’s Redemption Price ”); provided, that if a holder has delivered a Conversion Notice to the Company for all or a portion of the shares of Series E Preferred, such shares of Series E Preferred designated to be redeemed may be converted by such holder. The Company's Redemption Notice shall state the date of redemption which date shall be thirty (30) calendar days after the Company has delivered the Company's Redemption Notice (the “ Company's Redemption Date ”), the Company's Redemption Price and the number of shares to be redeemed by the Company. The Company shall deliver the Company's Redemption Price to the holder(s) within five (5) business days after the Company has delivered the Company's Redemption Notice, provided, that if the holder(s) delivers a Conversion Notice before the Company's Redemption Date, then the portion of the Company's Redemption Price which would be paid to redeem the shares of Series E Preferred covered by such Conversion Notice shall be returned to the Company upon delivery of the Common Stock issuable in connection with such Conversion Notice to the holder(s). On the Redemption Date, the Company shall pay the Company's Redemption Price, subject to any adjustment pursuant to the immediately preceding sentence, to the holder(s) on a pro rata basis, provided, however, that upon receipt by the Company of the Preferred Stock Certificates to be redeemed pursuant to this Section 7(d), the Company shall, on the next business day following the date of receipt by the Company of such Preferred Stock Certificates, pay the Company's Redemption Price, subject to any adjustment pursuant to the immediately preceding sentence, to the holder(s) on a pro rata basis.  Notwithstanding the foregoing to the contrary, the Company may effect a redemption pursuant to this Section 7(d) only if (A) the arithmetic average of the closing sale price of the Common Stock is or was at least 150% of the Conversion Price on the Issuance Date for twenty (20) consecutive trading days after the date that is six (6) months after the Issuance Date, (B) trading in the Common Stock shall not have been suspended by the Securities and Exchange Commission or the OTC Bulletin Board (or other exchange or market on which the Common Stock is trading) , (C) the Company is in material compliance with the terms and conditions of this Certificate of Designations, and (D) the Company is not in possession of any material non-public information.  Nothing contained herein shall limit a holder’s ability to convert its shares of Series E Preferred following the receipt of the Company’s Redemption Notice and prior to the Company's Redemption Date.
 
8.            Inability to Fully Convert .
 
(a)            Holder's Option if Company Cannot Fully Convert . If, upon the Company's receipt of a Conversion Notice, the Company cannot issue shares of Common Stock issuable pursuant to such Conversion Notice because the Company (x) does not have a sufficient number of shares of Common Stock authorized and available or (y) is otherwise prohibited by applicable law or by the rules or regulations of any stock exchange, interdealer quotation system or other self-regulatory organization with jurisdiction over the Company or its securities from issuing all of the Common Stock which is to be issued to a holder of Series E Preferred pursuant to a Conversion Notice, then the Company shall issue as many shares of Common Stock as it is able to issue in accordance with such holder's Conversion Notice and pursuant to Section 5(b)(ii) above and, with respect to the unconverted Series E Preferred, the holder, solely at such holder's option, can elect, within five (5) business days after receipt of notice from the Company thereof to:
 
(i)           if the Company's inability to fully convert Series E Preferred is pursuant to Section 8(a)(y) above, require the Company to issue restricted shares of Common Stock in accordance with such holder's Conversion Notice and pursuant to Section 5(b)(ii) above; or
 
(ii)           void its Conversion Notice and retain or have returned, as the case may be, the shares of Series E Preferred that were to be converted pursuant to such holder's Conversion Notice (provided that a holder's voiding its Conversion Notice shall not effect the Company's obligations to make any payments which have accrued prior to the date of such notice).

 
 
 

(b)            Mechanics of Fulfilling Holder's Election . The Company shall promptly send via e-mail or facsimile to a holder of Series E Preferred, upon receipt of a e-mail or facsimile copy of a Conversion Notice from such holder which cannot be fully satisfied as described in Section 8(a) above, a notice of the Company's inability to fully satisfy such holder's Conversion Notice (the “ Inability to Fully Convert Notice ”). Such Inability to Fully Convert Notice shall indicate (i) the reason why the Company is unable to fully satisfy such holder's Conversion Notice, and (ii) the number of Series E Preferred which cannot be converted. Such holder shall notify the Company of its election pursuant to Section 8(a) above by delivering written notice via facsimile to the Company (“ Notice in Response to Inability to Convert ”).
 
(c)            Pro-Rata Conversion and Redemption . In the event the Company receives a Conversion Notice from more than one holder of Series E Preferred on the same day and the Company can convert and redeem some, but not all, of the Series E Preferred pursuant to this Section 8, the Company shall convert and redeem from each holder of Series E Preferred electing to have Series E Preferred converted and redeemed at such time an amount equal to such holder's pro-rata amount (based on the number shares of Series E Preferred held by such holder relative to the number shares of Series E Preferred outstanding) of all shares of Series E Preferred being converted and redeemed at such time.
 
9.            Protective Provisions . So long as shares of the Series E Preferred representing at least fifty percent (50%) of the total number of shares of Series E Preferred issued on the Issuance Date remain issued and outstanding, the Company shall not, without obtaining the approval (by vote or written consent) of the holders of more than fifty percent (50%) of the issued and outstanding shares of Series E Preferred:
 
(a)           issue any shares of capital stock that ranks senior to on a parity with the Series E Preferred; and
 
(b)           incur any Indebtedness, other than Permitted Indebtedness.
 
“ Indebtedness ” means (x) any liabilities for borrowed money or amounts owed in excess of $500,000 (other than trade accounts payable incurred in the ordinary course of business), (y) all guaranties, endorsements and other contingent obligations in respect of indebtedness of others, whether or not the same are or should be reflected in the Company's consolidated balance sheet (or the notes thereto), except guaranties by endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business; and (z) the present value of any lease payments in excess of $100,000 due under leases required to be capitalized in accordance with GAAP.  
 
“ Permitted Indebtedness ” means (x) all indebtedness of the Company now or hereafter outstanding that does not constitute Indebtedness for purposes of this Section 9; (y) any commercial bank loan entered into by the Company after the Issuance Date hereof in an amount not to exceed $2.0 million; and (z) monies borrowed under credit lines of the Company existing on the Issuance Date in an amount not to exceed $3.5 million.
 
10.            Vote to Change the Terms of or Issue Preferred Stock . The affirmative vote at a meeting duly called for such purpose, or the written consent without a meeting, of the holders of not less than two-thirds (2/3rds) of the then outstanding shares of Series E Preferred, shall be required (a) for any change to this Certificate of Designations or the Company's Certificate of Incorporation which would amend, alter, change or repeal, or otherwise adversely affect, any of the powers, designations, preferences and rights of the Series E Preferred.
 
11.            Lost or Stolen Certificates . Upon receipt by the Company of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of any Preferred Stock Certificates representing the shares of Series E Preferred, and, in the case of loss, theft or destruction, of an indemnification undertaking by the holder to the Company (in form and substance satisfactory to the Company) and, in the case of mutilation, upon surrender and cancellation of the Preferred Stock Certificate(s), the Company shall execute and deliver new Preferred Stock Certificate(s) of like tenor and date; provided, however, the Company shall not be obligated to re-issue Preferred Stock Certificates if the holder contemporaneously requests the Company to convert such shares of Series E Preferred into Common Stock.

 
 
 

12.            Remedies, Characterizations, Other Obligations, Breaches and Injunctive Relief . The remedies provided in this Certificate of Designations shall be cumulative and in addition to all other remedies available under this Certificate of Designations, at law or in equity (including a decree of specific performance and/or other injunctive relief), no remedy contained herein shall be deemed a waiver of compliance with the provisions giving rise to such remedy and nothing herein shall limit a holder's right to pursue actual damages for any failure by the Company to comply with the terms of this Certificate of Designations. Amounts set forth or provided for herein with respect to payments, conversion and the like (and the computation thereof) shall be the amounts to be received by the holder thereof and shall not, except as expressly provided herein, be subject to any other obligation of the Company (or the performance thereof). The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the holders of the Series E Preferred and that the remedy at law for any such breach may be inadequate. The Company therefore agrees that, in the event of any such breach, the holders of the Series E Preferred shall be entitled, in addition to all other available remedies, to an injunction restraining any breach or the Series E Preferred holders' reasonable perception of a threatened breach by the Company of the provisions of this Certificate of Designations, without the necessity of showing economic loss and without any bond or other security being required.
 
13.            Specific Shall Not Limit General; Construction . No specific provision contained in this Certificate of Designations shall limit or modify any more general provision contained herein.   This Certificate of Designation shall be deemed to be jointly drafted by the Company and all initial purchasers of the Series E Preferred and shall not be construed against any person as the drafter hereof.
 
14.            Failure or Indulgence Not Waiver . No failure or delay on the part of a holder of Series E Preferred in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege.
 
         IN WITNESS WHEREOF, the undersigned has executed and subscribed this Certificate and does affirm the foregoing as true this 29 th day of January, 2015.
 
IMAGEWARE SYSTEMS, INC.

By:            /s/ S. James Miller
S. James Miller, Jr.
Chief Executive Officer


 
 
 

IMAGEWARE SYSTEMS, INC.
 
CONVERSION NOTICE
 
Reference is made to the Certificate of Designations, Preferences and Rights of the Series E Convertible Preferred Stock (“ Series E Preferred ”) of ImageWare Systems, Inc. (the “ Certificate of Designations ”). In accordance with and pursuant to the Certificate of Designations, the undersigned hereby elects to convert the number of shares of Series E Preferred, par value $0.01 per share (the “ Preferred Shares ”), of ImageWare Systems, Inc., a Delaware corporation (the “ Company ”), indicated below into shares of Common Stock, par value $0.01 per share (the “ Common Stock ”), of the Company, by tendering the stock certificate(s) representing the share(s) of Preferred Shares specified below as of the date specified below.
 
Date of Conversion: __________________________ 
Number of Preferred Shares to be converted:     __________________________         
Stock certificate no(s). of Preferred Shares to be converted:  __________________________
Please confirm the following information:__________________________
Conversion Price: __________________________
Number of shares of Common Stock to be issued: __________________________
 
  Number of shares of Common Stock beneficially owned or deemed
beneficially owned by the Holder on the Date of Conversion: __________________________
Please issue the Common Stock into which the Preferred Shares are being converted and, if applicable, any check drawn on an account of the Company in the following name and to the following address:__________________________
Issue to:
 __________________________
__________________________
 __________________________
 
Facsimile Number: __________________________
Name of bank/broker due to receive the underlying Common Stock:__________________________
Bank/broker's four digit “DTC” participant number
(obtained from the receiving bank/broker):__________________________
 
Authorization: __________________________
                                 By:    __________________________
                                 Title: __________________________
 
Dated: __________________________

Exhibit 3.2
 
CERTIFICATE OF ELIMINATION
OF THE
SERIES C 8% CONVERTIBLE PREFERRED STOCK
OF
IMAGEWARE SYSTEMS INC.
 
Pursuant to the provisions of Section 151(g) of the General Corporation Law of the State of Delaware (the “ DGCL ”), it is hereby certified that:
 
1.      The name of the corporation is ImageWare Systems Inc. (the “ Corporation ”).
 
2.      The designation of the series of shares of stock of the Corporation to which this certificate relates is the “Series C 8% Convertible Preferred Stock.”
 
3.      Pursuant to Section 151 of the DGCL and authority granted in the certificate of incorporation of the Corporation (the “ Certificate of Incorporation ”), the Board of Directors of the Corporation previously designated 4,000,000 shares of preferred stock as Series C 8% Convertible Preferred Stock, par value $0.01 per share (the “ Series C Preferred Stock ”), and established the voting powers, designations, preferences, and the relative, participating, optional, or other rights, and the qualifications, limitations, and restrictions of such series as set forth in the Certificate of Designations of the Rights, Preferences, Privileges and Limitations of Series C Preferred Stock (the “ Series C Certificate of Designations ”), with respect to such Series C Preferred Stock, which Series C Certificate of Designations has been heretofore filed with the Secretary of State of the State of Delaware. None of the authorized shares of Series C Preferred Stock are outstanding and none will be issued subject to the Series C Certificate of Designations.
 
4.      The Board of Directors of the Corporation has duly adopted the following resolutions, which resolutions remain in full force and effect as of the date hereof:
 
RESOLVED , that none of the authorized shares of Series C Preferred Stock are outstanding, and that none will be issued subject to the Series C Certificate of Designations;
 
FURTHER RESOLVED , that pursuant to the authority conferred on the Board of Directors by the provisions of Section 151 of the DGCL, the Board of Directors hereby eliminates the Series C Preferred Stock;

FURTHER RESOLVED,  that the proper officers of the Corporation, or any one or more of them, are hereby authorized, in the name and on behalf of the Corporation, pursuant to Section 151(g) of the DGCL, to execute and file a Certificate of Elimination of the Series C Preferred Stock of ImageWare Systems Inc. with the Secretary of State of the State of Delaware, which shall have the effect, when filed with the Secretary of State of the State of Delaware, of eliminating from the Certificate of Incorporation all matters set forth in the Series C Certificate of Designations with respect to such Series C Preferred Stock; and
 
FURTHER RESOLVED,  that in accordance with the provisions of Section 151 of the DGCL, the Certificate of Incorporation is hereby amended to eliminate all references to the Series C Preferred Stock, and the shares that were designated to such series hereby are returned to the status of authorized but unissued shares of the preferred stock of the Corporation, without designation as to series.
 
Signed on January 30, 2015
 
IMAGEWARE SYSTEMS INC.

By:  /s/ Wayne Wetherell
Name: Wayne Wetherell
Title: Chief Financial Officer

Exhibit 3.3
CERTIFICATE OF ELIMINATION
OF THE
SERIES D 8% CONVERTIBLE PREFERRED STOCK
OF
IMAGEWARE SYSTEMS INC.
 
Pursuant to the provisions of Section 151(g) of the General Corporation Law of the State of Delaware (the “ DGCL ”), it is hereby certified that:
 
1.      The name of the corporation is ImageWare Systems Inc. (the “ Corporation ”).
 
2.      The designation of the series of shares of stock of the Corporation to which this certificate relates is the “Series D 8% Convertible Preferred Stock.”
 
3.      Pursuant to Section 151 of the DGCL and authority granted in the certificate of incorporation of the Corporation (the “ Certificate of Incorporation ”), the Board of Directors of the Corporation previously designated 4,000,000 shares of preferred stock as Series D 8% Convertible Preferred Stock, par value $0.01 per share (the “ Series D Preferred Stock ”), and established the voting powers, designations, preferences, and the relative, participating, optional, or other rights, and the qualifications, limitations, and restrictions of such series as set forth in the Certificate of Designations of the Rights, Preferences, Privileges and Limitations of Series D Preferred Stock (the “ Series D Certificate of Designations ”), with respect to such Series D Preferred Stock, which Series D Certificate of Designations has been heretofore filed with the Secretary of State of the State of Delaware. None of the authorized shares of Series D Preferred Stock are outstanding and none will be issued subject to the Series D Certificate of Designations.
 
4.      The Board of Directors of the Corporation has duly adopted the following resolutions, which resolutions remain in full force and effect as of the date hereof:
 
RESOLVED , that none of the authorized shares of Series D Preferred Stock are outstanding, and that none will be issued subject to the Series D Certificate of Designations;
 
FURTHER RESOLVED , that pursuant to the authority conferred on the Board of Directors by the provisions of Section 151 of the DGCL, the Board of Directors hereby eliminates the Series D Preferred Stock;

FURTHER RESOLVED,  that the proper officers of the Corporation, or any one or more of them, are hereby authorized, in the name and on behalf of the Corporation, pursuant to Section 151(g) of the DGCL, to execute and file a Certificate of Elimination of the Series D Preferred Stock of ImageWare Systems Inc. with the Secretary of State of the State of Delaware, which shall have the effect, when filed with the Secretary of State of the State of Delaware, of eliminating from the Certificate of Incorporation all matters set forth in the Series D Certificate of Designations with respect to such Series D Preferred Stock; and
 
FURTHER RESOLVED,  that in accordance with the provisions of Section 151 of the DGCL, the Certificate of Incorporation is hereby amended to eliminate all references to the Series D Preferred Stock, and the shares that were designated to such series hereby are returned to the status of authorized but unissued shares of the preferred stock of the Corporation, without designation as to series.
 
Signed on January 30, 2015
 
IMAGEWARE SYSTEMS INC.

By:  /s/ Wayne Wetherell
Name: Wayne Wetherell
Title: Chief Financial Officer

Exhibit 10.1
EXCHANGE AGREEMENT
 
This Exchange Agreement (this “ Agreement ”) is dated as of January 29, 2015, by and among ImageWare Systems, Inc., a Delaware corporation (the “ Company ”), Neal I. Goldman (“ Goldman ”).
 
RECITALS
 
WHEREAS, the Company and Goldman are currently parties to that certain Convertible Promissory Note, dated March 27, 2013, as amended dated March 12, 2014, April 23, 2014 and December 8, 2014 (as amended, the “ Note ”), which Note provides for maximum borrowings of up to $5.0 million;
 
WHEREAS, as of the date of this Agreement, the total amount of advances under the Note, including principal and unpaid interest thereon, equals approximately $2.3 million, which advances are specifically set forth on Exhibit A attached hereto, of which $350,000 was advanced on the date hereof (“ Recent Advance ”); and
 
WHEREAS, subject to the terms and conditions set forth herein, the Company and Goldman desire that (i) all accrued and unpaid interest due and payable on such Note, up to and including the Closing Date, as defined herein, as more particularly set forth on Exhibit A attached hereto, net of the Recent Advance (“ Outstanding Amount ”), be exchanged for shares of the Company’s Series E Convertible Preferred Stock, $0.01 par value (the “ Exchange Shares ”)  (the “ Exchange ”); and (ii) that the Recent Advance, and all accrued and unpaid interest thereon, be paid to Goldman on the Closing Date, each on the terms and conditions set forth in this Agreement.
 
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby agreed and acknowledged, the parties hereby agree as follows:
 
AGREEMENT
 
1.             Securities Exchange .
 
(a)            In consideration of and in express reliance upon the representations, warranties, covenants, terms and conditions of this Agreement, Goldman agrees to exchange the Outstanding Balance for that number of Exchange Shares equal to the Outstanding Balance divided by 1,000, it being understood that the number of Exchange Shares issued in connection with the Exchange shall include accrued and unpaid interest on such Note up to and including the Closing Date, net of the Recent Advance.  In consideration for the foregoing, the Company agrees to issue and deliver the Exchange Shares to Goldman, as directed by Goldman.  In addition, on the Closing Date, the Recent Advance, and all accrued and unpaid interest thereon, shall be paid to Goldman in cash or other immediately available funds as directed by Goldman.
 
(b)            The closing under this Agreement (the “ Closing ”) shall take place upon the satisfaction of each of the conditions set forth in Sections 4 and 5 hereof (the “ Closing Date ”)
 
(c)            Within five business days after the Closing, the Company shall issue and deliver to Goldman a certificate evidencing the Exchange Shares.  Upon delivery of the Exchange Shares to Goldman, and the repayment to Goldman of the Recent Advance, and all accrued and unpaid interest thereon, the Parties agree that no further amounts shall be due and payable Goldman under the terms of the Note as of the Closing Date.   Notwithstanding the above, or Section 2(c) of the Note, the Note shall remain in full force and effect, allowing the Company to request further advances under the terms and conditions set forth in the Note, as the same may be amended.  The parties agree and acknowledge that, as a result of the foregoing, the Note shall be deemed to be amended as of the Closing Date to delete Section 2(c) of the Note.  To the extent of a conflict between the terms and conditions of the Note and this Agreement, this Agreement shall control.
 
2.             Representations, Warranties and Covenants of Goldman .   Goldman hereby makes the following representations and warranties to the Company, and covenants for the benefit of the Company:
 
 
 
 

(a)            This Agreement has been duly authorized, validly executed and delivered by Goldman and is a valid and binding agreement and obligation of Goldman enforceable against Goldman in accordance with its terms, subject to limitations on enforcement by general principles of equity and by bankruptcy or other laws affecting the enforcement of creditors’ rights generally, and Goldman has full power and authority to execute and deliver the Agreement and the other agreements and documents contemplated hereby and to perform its obligations hereunder and thereunder.
 
(b)            Goldman understands that the Exchange Shares are being offered and sold to it in reliance on the truth and accuracy of the representations, warranties, agreements, acknowledgments and understandings of Goldman set forth herein.
 
(c)            Goldman is and will be acquiring the Exchange Shares for Goldman’s own account, for investment purposes, and not with a view to any resale or distribution in whole or in part, in violation of the Securities Act of 1933, as amended (“ Securities Act ”) or any applicable securities laws.
 
(d)            Goldman owns and holds, beneficially and of record, the entire right, title, and interest in and to the Note free and clear of all rights and Encumbrances (as defined below).   Goldman has full power and authority to transfer and dispose of the Note free and clear of any right or Encumbrance.  Other than the transactions contemplated by this Agreement, there is no outstanding plan, pending proposal, or other right of any person to acquire all or any of the Note.   Encumbrances shall mean any security or other property interest or right, claim, lien, pledge, option, charge, security interest, contingent or conditional sale, or other title claim or retention agreement, interest or other right or claim of third parties, whether perfected or not perfected, voluntarily incurred or arising by operation of law, and including any agreement (other than this Agreement) to grant or submit to any of the foregoing in the future.
 
(e)            Goldman agrees and acknowledges that it is currently an “affiliate” of the Company, as such term is defined in the Securities Act, and as a result cannot resell the Exchange Shares or Conversion Shares except in compliance with the Securities Act and any applicable state blue sky laws.
 
3.             Representations, Warranties and Covenants of the Company .   The Company represents and warrants to Goldman, and covenants for the benefit of Goldman, as follows:
 
(a)            The Company has been duly incorporated and is validly existing and in good standing under the laws of the state of Delaware, with full corporate power and authority to own, lease and operate its properties and to conduct its business as currently conducted, and is duly registered and qualified to conduct its business and is in good standing in each jurisdiction or place where the nature of its properties or the conduct of its business requires such registration or qualification, except where the failure to register or qualify would not have a Material Adverse Effect.  For purposes of this Agreement, “ Material Adverse Effect ” shall mean any material adverse effect on the business, operations, properties, prospects, or financial condition of the Company and its subsidiaries and/or any condition, circumstance, or situation that would prohibit or otherwise materially interfere with the ability of the Company to perform any of its obligations under this Agreement in any material respect.
 
(b)            The Exchange Shares have been duly authorized by all necessary corporate action and, when paid for or issued in accordance with the terms hereof, the Exchange Shares shall be validly issued and outstanding, fully paid and nonassessable, free and clear of all liens, encumbrances and rights of refusal of any kind.
 
(c)            This Agreement has been duly authorized, validly executed and delivered on behalf of the Company and is a valid and binding agreement and obligation of the Company enforceable against the Company in accordance with its terms, subject to limitations on enforcement by general principles of equity and by bankruptcy or other laws affecting the enforcement of creditors’ rights generally, and the Company has full power and authority to execute and deliver the Agreement and the other agreements and documents contemplated hereby and to perform its obligations hereunder and thereunder.
 
 
 
 

(d)            The Company has complied and will comply with all applicable federal and state securities laws in connection with the offer, issuance and delivery of the Exchange Shares hereunder.
 
4.             Conditions Precedent to the Obligation of the Company to Consummate the Exchange .  The obligation hereunder of the Company to issue and deliver the Exchange Shares to Goldman and consummate the Exchange is subject to the satisfaction or waiver, at or before the Closing Date, of each of the conditions set forth below.  These conditions are for the Company’s sole benefit and may be waived by the Company at any time in its sole discretion.
 
(a)            Goldman shall have executed and delivered this Agreement.
 
(b)            Goldman shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by Goldman at or prior to the Closing Date.
 
(c)            The representations and warranties of Goldman 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 are expressly made as of a particular date, which shall be true and correct in all material respects as of such date.
 
5.             Conditions Precedent to the Obligation of Goldman to Consummate the Exchange . The obligation hereunder of Goldman to accept the Exchange Shares and consummate the Exchange is subject to the satisfaction or waiver, at or before the Closing Date, of each of the conditions set forth below.  These conditions are for Goldman’s sole benefit and may be waived by Goldman at any time in its sole discretion.
 
(a)            The Company shall have executed and delivered this Agreement.
 
(b)            The Company shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by the Agreement to be performed, satisfied or complied with by the Company at or prior to the Closing Date.
 
(c)            Each of the representations and warranties of the Company shall be true and correct in all material respects as of the date when made and as of the Closing Date as though made at that time, except for representations and warranties that speak as of a particular date, which shall be true and correct in all material respects as of such date.
 
6.             Governing Law; Consent to Jurisdiction .   This Agreement shall be governed by and interpreted in accordance with the laws of the State of California without giving effect conflicts of law principles that would result in the application of the substantive laws of another jurisdiction.  Each of the Parties consents to the exclusive jurisdiction of the Federal courts whose districts encompass any part of the State of California in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens , to the bringing of any such proceeding in such jurisdictions.  Each Party waives its right to a trial by jury.  Each Party to this Agreement irrevocably consents to the service of process in any such proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such Party at its address set forth herein.  Nothing herein shall affect the right of any Party to serve process in any other manner permitted by law.

 
 
 

7.             Entire Agreement .   This Agreement constitutes the entire understanding and agreement of the parties with respect to the subject matter hereof and supersedes all prior and/or contemporaneous oral or written proposals or agreements relating thereto all of which are merged herein.  This Agreement may not be amended or any provision hereof waived in whole or in part, except by a written amendment signed by both of the Parties.
 
8.             Counterparts .   This Agreement may be executed by facsimile signature and in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
 
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IN WITNESS WHEREOF, this Agreement was duly executed on the date first written above.
 
 
IMAGEWARE SYSTEMS, INC.
 
     By:        /s/ Jim Miller
     Name:   Jim Miller
     Title:     Chief Executive Officer
 
NEAL I. GOLDMAN:
 
/s/ Neal I. Goldman

Exhibit 99.1
 
ImageWare Announces $12.0 Million Registered Direct Offering of Convertible Preferred Stock
 
San Diego, CA – January 29, 2015  – ImageWare Systems, Inc. (OTCQB: IWSY) (ImageWare), a leader in mobile and cloud-based, multi-modal biometric identity management solutions, has agreed to issue 12,000 shares of its Series E Convertible Preferred Stock to certain investors at a price of $1,000 per share, with each share convertible into 526.32 shares of its Common Stock at $1.90 per share.   Approximately 2,000 shares will be issued in consideration for the exchange by ImageWare’s largest shareholder and a director of certain indebtedness of ImageWare totaling approximately $2.0 million.  The offering is anticipated to close on or before February 4, 2015, and result in gross proceeds to ImageWare of approximately $10.0 million.  The shares were offered in a registered direct offering conducted without an underwriter or placement agent. The net proceeds from the closings, after deducting estimated offering expenses, will be approximately $9.925 million.

ImageWare currently intends to use the proceeds from the offering for research and development, working capital, repayment of certain indebtedness and other general corporate purposes.  Upon consummation of the offering, ImageWare will have no debt.

The securities in the above-described transactions were offered by ImageWare pursuant to a prospectus supplement dated January 29, 2015 and accompanying prospectus dated January 26, 2015, forming part of ImageWare’s shelf registration statement on Form S-3 ( File No. 333-201442 ), which was declared effective on  January 26, 2015  by the Securities and Exchange Commission (SEC).   Before you invest, you should read the prospectus supplement and prospectus, including the risk factors discussed in them and the other documents ImageWare has filed with the SEC, for more complete information about ImageWare and the offering.  The documents are available for free on the SEC's website located at  http://www.sec.gov , or by visiting our website at http://iwsinc.com.

This press release shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of, these securities in any state or jurisdiction in which such offer, solicitation or sale would be unlawful prior to the registration or qualification under the securities laws of such state or jurisdiction.

About ImageWare Systems, Inc.
ImageWare Systems, Inc. (OTCQB: IWSY) is a leading developer of mobile and cloud-based identity management solutions, providing biometric, secure credential and law enforcement technologies. Scalable for worldwide deployment, ImageWare's biometric product line includes a multi-biometric engine that is hardware and algorithm independent, enabling the enrollment and management of unlimited population sizes. ImageWare's identification products are used to manage and issue secure credentials, including national IDs, passports, driver's licenses, smart cards and access control credentials. ImageWare's digital booking products provide law enforcement with integrated mug shot, fingerprint livescan and investigative capabilities. ImageWare is headquartered in San Diego, CA, with offices in Portland, OR, Washington, D.C., and Ottawa, Ontario. For more information on ImageWare Systems, Inc., please visit www.iwsinc.com .

Forward Looking Statements
Any statements contained in this document that are not historical facts are forward-looking statements as defined in the U.S. Private Securities Litigation Reform Act of 1995. Words such as “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “project,” “predict,” “if”, “should” and “will” and similar expressions as they relate to ImageWare Systems, Inc. (“ImageWare”) are intended to identify such forward-looking statements. ImageWare may from time to time update these publicly announced projections, but it is not obligated to do so. Any projections of future results of operations should not be construed in any manner as a guarantee that such results will in fact occur. These projections are subject to change and could differ materially from final reported results. For a discussion of such risks and uncertainties, see “Risk Factors” in ImageWare’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013 and its other reports filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the dates on which they are made.

Investor Relations:
Liolios Group, Inc.
Cody Slach
Tel 1-949-574-3860
IWSY@liolios.com