1.
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Serial Preferred
Stock. The Board of Directors of the Corporation is
expressly authorized at any time, and from time to time, to provide for
the issuance of shares of Serial Preferred Stock in one or more series,
with such designations, preferences and relative, participating, optional
or other special rights, and qualifications, limitations, or restrictions
thereof, as shall be stated and expressed in the resolution or resolutions
providing for the issue thereof adopted by the Board of
Directors.
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2.
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Series B Preferred
Stock.
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a.
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Number and
Designation. This series shall consist of 6,000,000
shares of Serial Preferred Stock of the Corporation and shall be
designated the Series B Convertible Preferred Stock, $0.0001 par value per
share (“Series B Stock”). The number of authorized shares of
Series B Stock may be reduced to the extent any shares are not issued and
outstanding by further resolution duly adopted by the Board of Directors
of the Corporation and by filing amendments to the Certificate of
Designations pursuant to the provisions of the General Corporation Law of
the State of Delaware stating that such reduction has been so authorized,
but the number of authorized shares of this Series shall not be increased
except with the approval of the holders of not less than a majority of
such outstanding shares of Series B Stock. None of the shares
of Series B Stock has been issued.
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b.
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Dividends. When
and as any dividend or distribution is declared or paid by the Corporation
on Common Stock, whether payable in cash, property, securities or rights
to acquire securities, the Series B Holders will be entitled to
participate with the holders of Common Stock in such dividend or
distribution as set forth in this clause. At the time such
dividend or distribution is payable to the holders of Common Stock, the
Corporation will pay to each Series B Holder such holder’s share of such
dividend or distribution equal to the amount of the dividend or
distribution per share of Common Stock payable at such time multiplied by
the number of shares of Common Stock then obtainable upon conversion of
such holder’s Series B Stock.
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c.
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Voting
Rights.
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i.
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The
Series B Holders shall be entitled to notice of any shareholders’ meeting
and to vote as a single class with the Common Stock upon any matter
submitted for approval by the holders of Common Stock on the following
basis: the Series B Holders shall have that number of votes equal to the
number of shares of Common Stock into which such Series B Stock is then
convertible.
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ii.
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In
addition to any other rights provided by law, so long as any Series B
Stock is outstanding, the Corporation, without first obtaining the
affirmative vote or written consent of the record holders of a majority of
the outstanding shares of Series B Stock (the “Required Holders”) will
not:
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1.
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amend
or repeal any provision of, or add any provision to, the Corporation’s
Certificate of Incorporation or By-Laws if such action would alter
adversely the liquidation preferences of, or the rights or restrictions
provided for the benefit of, any Series B Stock;
or
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2.
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reclassify
any class or series of stock junior to the Series B Stock into stock
senior to the Series B Stock with respect to any preference or
priority.
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d.
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Preference Upon
Liquidation.
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i.
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Upon
any liquidation, dissolution or winding up of the Corporation, each Series
B Holder will be entitled to be paid, before any distribution or payment
is made upon any Junior Securities of the Corporation, an amount in cash
equal to the aggregate Liquidation Value of all shares of Series B Stock
held by such holder, plus accrued dividends, if
any.
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ii.
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The
reorganization, consolidation or the merger of the Corporation into or
with any other corporation(s) or other entity(ies) ("Reorganization"), the
sale, lease, licensing, exchange or other transfer by the Corporation of
all or any material part of its assets or the commencement by the
Corporation of a voluntary case under the United States bankruptcy laws or
any applicable bankruptcy, insolvency or similar law of any other country,
or consent to the entry of an order for relief in an involuntary case
under any such law or to the appointment of a receiver, liquidator,
assignee, custodian, trustee, sequestrator (or other similar official) of
the Corporation or of any substantial part of its property, or the making
of an assignment for the benefit of its creditors, or an admission in
writing of its inability to pay its debts generally as they become due,
will be deemed to be a liquidation, dissolution or winding up of the
Corporation within the meaning of this subparagraph; provided that,
a Reorganization of the Corporation shall not be deemed to be a
liquidation, dissolution or winding up of the Corporation within the
meaning of this paragraph d. if (i) the principal agreement for such
Reorganization shall expressly provide that the Series B Stock shall
become preferred stock of such surviving entity with the equivalent rights
to the rights set forth herein ("Surviving Entity Preferred Stock"), (ii)
the holders of Junior Securities receive, in exchange for such Junior
Securities, common stock or preferred stock in the surviving entity
(whether or not the surviving entity is the Corporation) of such
Reorganization, or common stock or preferred stock of another entity,
which is junior as to dividends and upon liquidation, dissolution or
winding up to the Series B Stock or Surviving Entity Preferred Stock, as
applicable, and (iii) the Series B Holders shall be entitled to receive at
the option of each Series B Holder (A) either the Surviving Entity
Preferred Stock or (B) the kind and amount of shares or other securities
or property which they would have been entitled to receive had they
converted their shares of Series B Stock into shares of Common Stock of
the Corporation as of the record date for the determination of holders of
Common Stock entitled to cast their votes for or against or to express any
dissent to such Reorganization. After any such Reorganization,
the rights of such holders of Surviving Entity Preferred Stock with
respect to the adjustment of the Conversion Price shall be appropriately
continued and preserved in order to afford, as nearly as possible,
protection against dilution of the conversion rights and privileges
comparable to those conferred
herein.
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e.
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Conversion into
Conversion Stock
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i.
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Conversion.
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1.
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At
any time any Series B Holder may convert all or any portion of such
holder’s shares of Series B Stock into a number of shares of the
Conversion Stock computed by multiplying the number of shares to be
converted by $0.18 and dividing the result by the Conversion Price then in
effect. For purposes of this Section, “Conversion Stock” means
the Common Stock.
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2.
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All
of the outstanding shares of Series B stock will be automatically
converted into Common Stock in the event the Required Holders determine to
convert all shares of Series B Stock. Any such mandatory
conversion shall be effected only at the time of and subject to the
conversion of all Series B Stock held by the Required Holders and upon
written notice of such mandatory conversion delivered to all holders of
Series B Stock at least seven (7) days prior to such
date.
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3.
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Each
conversion of Series B Stock will be deemed to have been effected as of
the close of business on the date on which the certificate or certificates
representing the Series B Stock to be converted have been surrendered at
the principal office of the Corporation. At such time as such
conversion has been effected, the rights of the holder of such Series B
Stock as such holder will cease and the person or persons in whose name or
names any certificate or certificates for shares of Conversion Stock are
to be issued upon such conversion will be deemed to have become the holder
or holders of record of the shares of Conversion Stock represented
thereby.
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4.
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As
soon as possible after a conversion has been effected, the Corporation
will deliver to the converting
holder:
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a.
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a
certificate or certificates representing the number of shares of
Conversion Stock issuable by reason of such conversion in such name or
names and such denomination or denominations as the converting holder has
specified; and
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b.
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a
certificate representing any shares of Series B Stock which were
represented by the certificate or certificates delivered to the
Corporation in connection with such conversion but which were not
converted.
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c.
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If
any fractional share of Conversion Stock would be issuable upon any
conversion, the Corporation will pay the holder of the Conversion Stock
the fair market value of such fractional
share.
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d.
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The
issuance of certificates for shares of Conversion Stock upon conversion of
Series B Stock will be made without
charge.
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e.
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The
Corporation will not close its books against the transfer of Series B
Stock or of Conversion Stock issued or issuable upon conversion of Series
B Stock in any manner which interferes with the conversion of Series B
Stock.
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f.
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Conversion
Price. The initial Conversion Price for the Series B
Stock will be $0.18. In order to prevent dilution of the
conversion rights, the Conversion Price will be subject to adjustment from
time to time pursuant to this
clause.
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g.
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Subdivision or
Combination of Common Stock;
Dissolution.
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i.
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If
the Corporation at any time subdivides (by any stock split, stock dividend
or otherwise) its outstanding shares of Common Stock into a greater number
of shares, the Conversion Price in effect immediately prior to such
subdivision will be proportionately reduced, and if the Corporation at any
time combines (by reverse stock split or otherwise) its outstanding shares
of Common Stock into a smaller number of shares, the Conversion Price in
effect immediately prior to such combination will be proportionately
increased.
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ii.
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In
the event of a judicial or non-judicial dissolution of the Corporation,
the conversion rights and privileges of the Series B Holders shall
terminate on a date, as fixed by the Board of Directors of the
Corporation, not more than 45 days and not less than 30 days before the
date of such dissolution. The reference to shares of Common Stock herein
shall be deemed to include shares of any class into which said shares of
Common Stock may be changed.
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h.
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Other
Adjustments.
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i.
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General. In
any case to which PART C (2)(g) hereof is not applicable, except as set
forth below, where the Corporation shall issue or sell shares of its
Common Stock, during the two year period commencing on the Original Issue
Date for a consideration per share less than the Conversion Price in
effect pursuant to the terms of the Series B Stock at the time of issuance
or sale of such additional shares (the “Issuance Price”), then the
Conversion Price in effect hereunder shall simultaneously with such
issuance or sale be reduced to an amount equal to the Issuance
Price. This clause shall not apply to the (a) issuance of
Common Stock, Convertible Securities or Options (as defined below) that
have been approved by the holders of not less than a majority of the
outstanding Common Stock, (b) issuance of Common Stock pursuant to the
exercise of Options, (I) outstanding on the date hereof or (II) issued
pursuant to a plan which has been approved by the holders of not less than
a majority of the outstanding Common Stock, (c) issuance of Options to a
lender(s) pursuant to a loan to the Corporation with a term of not less
than two years in an amount of not less than $250,000 (and the issuance of
Common Stock on the exercise of such lender Options), (d) issuance of
Common Stock or Options to financial institutions, lessors or vendors in
connection with commercial credit arrangements, equipment financings or
similar transactions with a term of not less than one year approved by the
Board of Directors, (e)(i) securities issued or deemed to have been issued
as full or partial consideration in connection with a strategic merger,
acquisition, consolidation or purchase of substantially all of the
securities or assets of a corporation or other entity, (f) securities
issued or deemed to have been issued in connection with strategic license
agreements and other partnering arrangements so long as such issuances are
not for the purpose of raising capital, and (g) the shares of Common Stock
issued or deemed to be issued by the Company upon conversion of this
Debenture or exercise conversion of Options or Convertible Securities
outstanding on the Original Issue
Date.
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ii.
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Convertible
Securities.
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1.
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In
case the Corporation shall issue or sell any securities convertible into
Common Stock of the Corporation (“Convertible Securities”) after the
Original Issue Date, there shall be determined the price per share for
which Common Stock is issuable upon the conversion or exchange thereof,
such determination to be made by dividing (1) the total amount received or
receivable by the Corporation as consideration for the issue or sale of
such Convertible Securities, plus the minimum aggregate amount of
additional consideration, if any, payable to the Corporation upon the
conversion or exchange thereof, by (2) the maximum number of shares of
Common Stock of the Corporation issuable upon the conversion or exchange
of all of such Convertible
Securities.
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2.
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If
the price per share so determined shall be less than the applicable
Conversion Price, then such issue or sale shall be deemed to be an issue
or sale for cash (as of the date of issue or sale of such Convertible
Securities) of such maximum number of shares of Common Stock at the price
per share so determined, provided that, if such Convertible Securities
shall by their terms provide for an increase or increases or decrease or
decreases with the passage of time, in the amount of additional
consideration, if any, to the Corporation, or in the rate of exchange,
upon the conversion or exchange thereof, the adjusted
Conversion Price shall, forthwith upon any such increase or
decrease becoming effective, be readjusted to reflect the same, and
provided further, that upon the expiration of such rights of conversion or
exchange of such Convertible Securities, if any thereof shall not have
been exercised, the adjusted Conversion Price shall forthwith
be readjusted and thereafter be the price which it would have been had an
adjustment been made on the basis that the only shares of Common Stock so
issued or sold were issued or sold upon the conversion or exchange of such
Convertible Securities, and that they were issued or sold for the
consideration actually received by the Corporation upon such conversion or
exchange, plus the consideration, if any, actually received by the
Corporation for the issue or sale of all of such Convertible Securities
which shall have been converted or
exchanged.
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iii.
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Rights
and Options.
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1.
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In
case the Corporation shall grant any rights, warrants or options to
subscribe for, purchase or otherwise acquire Common Stock (collectively,
“Options”), there shall be determined the price per share for which Common
Stock is issuable upon the exercise of such Options, such determination to
be made by dividing (1) the total amount, if any, received or receivable
by the Corporation as consideration for the granting of such Options, plus
the minimum aggregate amount of additional consideration payable to the
Corporation upon the exercise of such Options, by (2) the maximum number
of shares of Common Stock of the Corporation issuable upon the exercise of
such Options.
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2.
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If
the price per share so determined shall be less than the applicable
Conversion Price, then the granting of such Options shall be deemed to be
an issue or sale for cash (as of the date of the granting of such rights
or options) of such maximum number of shares of Common Stock at the price
per share so determined, provided that, if such Options shall by their
terms provide for an increase or increases or decrease or decreases, with
the passage of time, in the amount of additional consideration payable to
the Corporation upon the exercise thereof, the adjusted
Conversion Price shall, forthwith upon any such increase or
decrease becoming effective, be readjusted to reflect the same, and
provided, further, that upon the expiration of such Options, if any
thereof shall not have been exercised, the adjusted
Conversion Price shall forthwith be readjusted and thereafter
be the price which it would have been had an adjustment been made on the
basis that the only shares of Common Stock so issued or sold were those
issued or sold upon the exercise of such Options and that they were issued
or sold for the consideration actually received by the Corporation
received by the Corporation for the granting of all such Options, whether
or not exercised.
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i.
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Notices.
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i.
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Immediately
upon any adjustment of the Conversion Price, the Corporation will send
written notice thereof to all Series B
Holders.
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ii.
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The
Corporation will send written notice to all Series B Holders at least 20
days prior to the date on which the Corporation (a) closes its books or
takes a record (1) with respect to any dividend or distribution upon
Common Stock, (2) with respect to any pro rata
subscription offer to holders of Common Stock, (3) for determining rights
to vote on or approve any matter or (b) proposes to take any action on
which the Series B Holders are entitled to vote pursuant to PART C
(2)(c)(ii) and (d)(ii).
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iii.
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All
notices and other communications from the Corporation to a Series B Holder
shall be mailed by first class registered or certified mail, postage
prepaid, at such address as may have been furnished to the Corporation in
writing by such holder, or, until an address is so furnished, to and at
the address of the last holder who has so furnished an address to the
Corporation.
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j.
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Converted
Shares. Any shares of Series B Stock which are converted
pursuant to this clause will be canceled and will not be reissued, sold or
transferred.
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k.
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Miscellaneous.
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i.
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Registration of
Transfer. The Corporation will keep at its principal
office a register for the registration of Series B Stock. Upon
the surrender of any certificate representing Series B Stock at such
place, the Corporation will, at the request of the record holder of such
certificate, execute and deliver (at the Corporation’s expense) a new
certificate or certificates in exchange therefor representing in the
aggregate the number of shares represented by the surrendered
certificate. Each such new certificate will be registered in
such name and will represent such number of shares as is requested by the
holder of the surrendered certificate and will be substantially identical
in form to the surrendered
certificate.
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ii.
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Replacement. Upon
receipt of evidence reasonably satisfactory to the Corporation (an
affidavit of the registered holder will be satisfactory) of the ownership
and the loss, theft, destruction or mutilation of any certificate
evidencing one or more shares of Series B Stock, and in the case of any
such loss, theft or destruction, upon receipt of indemnity reasonably
satisfactory to the Corporation, the Corporation will (at its expense)
execute and deliver in lieu of such certificate a new certificate
representing the number of shares represented by such lost, stolen,
destroyed or mutilated certificate.
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iii.
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Definitions. For
purposes hereof:
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l.
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Amendment and
Waiver. No amendment, modification or waiver will be
binding or effective with respect to any provision hereof without the
prior approval of the Required Holders; provided that notwithstanding PART
C (2) (c)(ii) above no such action will change or affect (a) the
Conversion Price of the Series B Stock or the number of shares or the
class of stock into which the Series B Stock is convertible, (b) the
Liquidation Value of the Series B Stock, or (c) the amount of cash,
securities or other property receivable or to be received by the Series B
Holders.
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m.
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Generally Accepted
Accounting Principles. When any accounting determination
or calculation is required to be made, such determination or calculation
(unless otherwise provided) will be made in accordance with generally
accepted accounting principles, consistently applied, except that if
because of a change in generally accepted accounting principles the
Corporation would have to alter a previously utilized accounting method or
policy in order to remain in compliance with generally accepted accounting
principles, such determination or calculation will continue to be made in
accordance with the Corporation’s previous accounting methods and policies
unless the Corporation has obtained the prior written consent of the
holders of a majority of the Series B Stock then
outstanding.
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