UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): June 26, 2013
Saleen Automotive, Inc.
(Exact Name of Registrant as Specified in Charter)
| Nevada | 333-176388 | 45-2808694 |
| (State or Other Jurisdiction of Incorporation) | (Commission File No.) | (I.R.S. Employer Identification No.) |
| 2735 Wardlow Road Corona, California |
92882 | |
| (Address of Principal Executive Offices) | (Zip Code) |
(800) 888-8945
Registrant’s telephone number, including area code:
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Forward Looking Statements
This Current Report on Form 8-K, including the sections entitled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Description of Business,” contains “forward-looking statements” that include information relating to future events, future financial performance, strategies, expectations, competitive environment, regulation and availability of resources. These forward-looking statements include, without limitation: statements regarding proposed new services; statements concerning litigation or other matters; statements concerning projections, predictions, expectations, estimates or forecasts for our business, financial and operating results and future economic performance; statements of management’s goals and objectives; and other similar expressions concerning matters that are not historical facts. Words such as “may,” “will,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes” and “estimates,” and similar expressions, as well as statements in future tense, identify forward-looking statements.
Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by which, that performance or those results will be achieved. Forward-looking statements are based on information available at the time they are made and/or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause these differences include, but are not limited to:
| · | our failure to implement our business plan within the time period we originally planned to accomplish; and |
| · | other factors discussed under the headings “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Description of Business.” |
Forward-looking statements speak only as of the date they are made. You should not put undue reliance on any forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.
Item 1.01 Entry into a Material Definitive Agreement.
Item 2.01 Completion of Acquisition or Disposition of Assets.
Item 2.03 Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant.
Item 3.02 Unregistered Sales of Equity Securities.
Item 3.03 Material Modification to Rights of Security Holders.
Item 4.01 Changes in Registrant’s Certifying Accountant.
Item 5.01 Changes in Control of Registrant.
Item 5.02 Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.
Item 5.06 Change in Shell Company Status.
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MERGER & CAPITAL RAISE
Merger
On May 23, 2013, we entered into an Agreement and Plan of Merger (“Merger Agreement”) with, Saleen California Merger Corporation, our wholly-owned subsidiary, Saleen Florida Merger Corporation, our wholly-owned subsidiary, Saleen Automotive, Inc. (“Saleen Automotive”), SMS Signature Cars (“SMS” and together with Saleen Automotive, the “Saleen Entities”) and Steve Saleen (“Saleen” and together with the Saleen Entities, the “Saleen Parties”). The closing (the “Closing”) of the transactions contemplated by the Merger Agreement (the “Merger”) occurred on June 26, 2013. At the Closing (a) Saleen California Merger Corporation was merged with and into SMS with SMS surviving as one of our wholly-owned subsidiaries; (b) Saleen Florida Merger Corporation was merged with and into Saleen Automotive with Saleen Automotive surviving as one of our wholly-owned subsidiaries; (c) holders of the outstanding capital stock of Saleen Automotive received an aggregate of 554,057 shares of our Super Voting Preferred Stock and holders of the outstanding capital stock of SMS received no consideration for their shares; and (d) approximately 93% of the beneficial ownership of our common stock (on a fully-diluted basis) was owned, collectively, by Saleen (including shares of our Super Voting Preferred Stock issued to Saleen pursuant to the Assignment and License Agreement discussed below) and the former holders of the outstanding capital stock of Saleen Automotive. As a result of the Merger we are solely engaged in the Saleen Entities’ business, Saleen Automotive’s officers became our officers and Saleen Automotive’s three directors became members of our five-member board of directors (which currently has two vacancies).
On May 23, 2013, we also entered into an Assignment and License Agreement with Saleen pursuant to which Saleen agreed, as of the effective time of the Merger, to contribute certain intellectual property that relates to the “Saleen” brand name and related rights which are currently owned by him to us, license to us the right to use his image, signature, full name, voice, biographical materials, likeness, and goodwill associated with the “Saleen” brand, and assign to us all shares of the capital stock of SMS Retail – Corona, a California corporation, and Saleen Automotive Show Cars, Inc., a Michigan corporation. On June 21, 2013, we amended the Assignment and License Agreement to terminate the obligation to assign to us all shares of the capital stock of SMS Retail – Corona and Saleen Automotive Show Cars, Inc. Concurrently with the Closing, pursuant to the Assignment and License Agreement, as amended, Saleen assigned certain intellectual property that relates to the “Saleen” brand name and related rights which are currently owned by him to us, and licensed the right to use his image, signature, full name, voice, biographical materials, likeness, and goodwill associated with the “Saleen” brand to us. In exchange for entering into the Assignment and License Agreement, as amended, we issued to Saleen, as of the effective time of the Merger, 341,943 shares of our Super Voting Preferred Stock.
On June 17, 2013, we consummated a merger with WSTY Subsidiary Corporation, our wholly-owned subsidiary, pursuant to which we amended our articles of incorporation to change our name to Saleen Automotive, Inc. Unless otherwise indicated, references in this Current Report on Form 8-K to ‘Saleen Automotive’ refer to Saleen Automotive, Inc., our wholly-owned Florida subsidiary.
On June 27, 2013, we filed a press release announcing the Closing, a copy of which is attached to this Current Report on Form 8-K as Exhibit 99.3.
Except for the Merger Agreement, the Assignment and License Agreement, as amended, the transactions contemplated thereby and the other transactions described herein, none of the Saleen Parties, nor any of their directors, officers and/or shareholders, as applicable, had any material relationship with our company.
We are presently authorized under our articles of incorporation, as amended to date, to issue 100,000,000 shares of common stock, par value $0.001 per share, and 1,000,000 shares of preferred stock, par value $0.001 per share, of which 896,000 shares are designated Super Voting Preferred Stock. The rights of our Super Voting Preferred Stock are set forth in a Certificate of Designations, Preferences, Limitations, Restrictions and Relative Rights of Super Voting Preferred Stock (the “Certificate of Designations”) which became effective on June 17, 2013. As of the Closing, we had 8,000,000 shares of common stock issued and outstanding and 896,000 shares of Super Voting Preferred Stock issued and outstanding.
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Under the terms of the Merger Agreement, all of the outstanding shares of capital stock held by Saleen Automotive’s former shareholders were exchanged for 554,057 shares of our Super Voting Preferred Stock, and under the terms of the Assignment and License Agreement, as amended, we issued to Saleen an additional 341,943 shares of our Super Voting Preferred Stock. Each share of our Super Voting Preferred Stock will immediately and automatically convert into 125 shares of our common stock at such time that we file an amendment to our articles of incorporation effecting a reverse stock split of our common stock so that we have a sufficient number of authorized and unissued shares of our common stock to permit the conversion of all outstanding shares of our Super Voting Preferred Stock into our common stock. Accordingly, as a result of the Merger and the transactions effectuated pursuant to the Assignment and License Agreement, as amended, Saleen and the former shareholders of Saleen Automotive own approximately 112,000,000 shares of our common stock on an as-converted basis, and our existing stockholders own 8,000,000 shares of our common stock.
We intend to effectuate a 1-for-2.63870 reverse stock split (the “Reverse Split”) which will trigger the automatic conversion of our Super Voting Preferred Stock into our common stock. As a result of the Reverse Split, each share of our Super Voting Preferred Stock will convert into approximately 47.38 shares of our common stock. Upon the effectiveness of the Reverse Split, the 896,000 outstanding shares of our Super Voting Preferred Stock will immediately and automatically convert into approximately 42,450,469 shares of our common stock (accounting for the Reverse Split ratio), and our Super Voting Preferred Stock will cease to be designated as a separate series of our preferred stock. Our existing stockholders will, following the Reverse Split, own approximately 3,032,175 shares of our common stock.
In connection with the Reverse Split, our board of directors may, in its discretion, provide special treatment to certain of our stockholders to preserve round lot holders (i.e., holders owning at least 100 shares prior to the Reverse Split) after the Reverse Split. Our board of directors may elect, in its discretion, to provide such special treatment to the record holders of our common stock only on a per certificate basis or more generally to the beneficial holders of our common stock. For example, if our board determines to provide such special treatment to record holders only, the record holders of our common stock holding a certificate representing 263 or fewer shares of common stock but at least 100 shares of common stock would receive 100 shares of common stock after the Reverse Split with respect to each such certificate, and record holders holding a certificate representing less than 100 shares of our common stock would not be affected and would continue to hold a certificate representing the same number of shares as such stockholders held before the Reverse Split. In the alternative, if our board determines to provide such special treatment to beneficial holders generally, the beneficial holders of our common stock beneficially holding 263 or fewer shares of our common stock but at least 100 shares of our common stock would receive 100 shares of our common stock after the Reverse Split, and persons beneficially holding less than 100 shares of our common stock would not be affected by the Reverse Split and would continue to hold the same number of shares as such stockholders held before the Reverse Split. The terms and conditions of special treatment afforded to our stockholders to preserve round lot stockholders, if any, including the record dates for determining which stockholders may be eligible for such special treatment, will be established in the discretion of our board of directors.
The holders of shares of our Super Voting Preferred Stock are entitled to vote together with the holders of our common stock, as a single class, upon all matters submitted to holders of our common stock for a vote. Each share of Super Voting Preferred Stock is entitled to a number of votes equal to the number of shares of common stock into which it is convertible at the record date. As such, immediately following the Closing, Saleen Automotive’s former shareholders and our existing stockholders held approximately 93% and 7%, respectively, of the total combined voting power of all classes of our stock entitled to vote.
In the event of any liquidation, dissolution or winding up of our company, the assets available for distribution to our stockholders will be distributed among the holders of our Super Voting Preferred Stock and the holders of our common stock, pro rata, on an as-converted-to-common-stock basis. The holders of our Super Voting Preferred Stock are entitled to dividends in the event that we pay cash or other dividends in property to holders of outstanding shares of our common stock, which dividends would be made pro rata, on an as-converted-to-common-stock basis.
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The ownership interests of Saleen Automotive’s former shareholders and our existing stockholders are subject to dilution in connection with the shares of our common stock issuable upon conversion of the securities issued in the Capital Raise (described below). Accordingly, upon the consummation of the Capital Raise and assuming the effectiveness of the Reverse Split, the automatic conversion of all outstanding shares of our Super Voting Preferred Stock into our common stock and the conversion of the securities issued in the Capital Raise into shares of our common stock, the ownership of our common stock would be as follows:
| Owner | Shares | Percentage | ||||||
| Steve Saleen (Merger Consideration) | 14,929,875 | 24.6 | % | |||||
| Steve Saleen (IP and License Consideration) | 16,200,469 | 26.7 | % | |||||
| Other Saleen Automotive Shareholders | 11,320,125 | 18.7 | % | |||||
| Purchasers in Capital Raise | 15,160,876 | 25 | % | |||||
| Our Existing Stockholders | 3,032,175 | 5 | % | |||||
The intended result of the Merger and the Reverse Split is that Saleen Automotive’s former shareholders will exchange 4 shares of the Saleen Automotive’s common stock for 1 share of our common stock.
Capital Raise
On June 26, 2013, we also entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with W-Net Fund I, L.P. (“W-Net”), Europa International, Inc. (“Europa”) Verdad Telecom, Inc. (“Verdad”), Gardner Syndication Management, Inc. (“Gardner”), Kartic Enterprises, Inc. (“Kartic”), MyLi Burger Holdings, LLC (“MyLi”), Scott and Sandra Alderton Family Trust (“Alderton Trust”), Adam Liebross (“Liebross”), Lee Mendelson (“Mendelson”), Elisabeth Wedam (“Wedam”), Murray Markiles (“Markiles”) and Louis Wharton (“Wharton” and together with W-Net, Europa, Verdad, Gardner, Kartic, MyLi, Alderton Trust, Liebross, Mendelson, Wedam and Markiles, the “Purchasers”), pursuant to which the Purchasers, on June 26, 2013, purchased from us 3.0% Senior Secured Convertible Notes (the “Notes”) for a cash purchase price of $2,500,000 and the conversion of $500,000 of Saleen Automotive’s existing secured convertible debt, for an aggregate principal amount of $3,000,000 outstanding under the Notes (the “Capital Raise”). The Notes, excluding accrued interest through their maturity, are convertible into 40,000,000 shares of our common stock at a conversion price of $0.075 per share, and after the Reverse Split will be convertible into approximately 15,160,876 shares of our common stock at a conversion price of approximately $0.198 per share. Under the Notes, we are obligated to repay to the Purchasers on June 25, 2017, the principal amount of $3,000,000. The Notes accrue interest at the rate of 3% per annum (which interest rate shall be increased to 12% from and for the continuation of an event of default) on the unpaid/unconverted principal balance, payable on the maturity date of the Notes. As the Notes provide that interest is payable on the maturity date, no cash interest will be paid on the Notes following the sale thereof.
If, at any time while the Notes are outstanding, (i) we effect any merger or consolidation with or into another person, (ii) we effect any sale of all or substantially all of our assets in one or a series of related transactions, (iii) any tender offer or exchange offer is completed pursuant to which holders of our common stock are permitted to tender or exchange their shares for other securities, cash or property, or (iv) we effect any reclassification of our common stock or any compulsory share exchange pursuant to which our common stock is effectively converted into or exchanged for other securities, cash or property (each, a “Fundamental Transaction”), then upon any subsequent conversion of the Notes, the Purchasers shall have the right to receive, for each share of our common stock that would have been issuable upon such conversion immediately prior to the occurrence of such Fundamental Transaction, the same kind and amount of securities, cash or property as it would have been entitled to receive upon the occurrence of such Fundamental Transaction if it had been, immediately prior to such Fundamental Transaction, the holder of one share of our common stock. In the event of a Fundamental Transaction the Purchasers may elect, by giving written notice of such election to us at least five trading days before the closing of such Fundamental Transaction, to sell the Notes to us or our designated assignee, concurrently with such closing, for a cash payment equal to the Fundamental Transaction Cash Amount (defined below) at the time of the closing. The “Fundamental Transaction Cash Amount” means the sum of (i) the greater of (a) 200% of the then outstanding principal amount of the Notes, plus 100% of accrued and unpaid interest thereon, or (b) the outstanding principal amount of the Notes, plus all accrued and unpaid interest thereon, divided by the conversion price immediately prior to the closing of the Fundamental Transaction, multiplied by the daily volume weighted average price of our common stock on the last trading day prior to the closing of the Fundamental Transaction, and (ii) all other amounts, costs, expenses and liquidated damages due in respect of the Notes.
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The Notes are convertible into shares of our common stock at the option of the Purchasers prior to their maturity at an initial conversion price of $0.075 per share. We are required to have our transfer agent issue stock certificates to the Purchasers within three trading days of an optional conversion. Each Note prohibits (until such time as the shares issuable under the Note, along with shares of our common stock held by the Purchaser, constitute 4.9% or less of our outstanding common stock, or the Purchaser elects to remove such restriction) the Purchaser from converting the Note if after such conversion the Purchaser would own more than 4.9% of our outstanding common stock. The Notes may not be prepaid or forced by us to be converted.
The conversion price set forth in the Notes is fixed, however, the Notes include customary anti-dilution provisions. If we issue or sell, or are deemed to have issued or sold, any shares of our common stock (other than certain excluded issuances) for a consideration per share less than the per share conversion price in effect immediately prior to such issuance or sale, then concurrently with such issuance or sale the per share conversion price then in effect shall be reduced to the lowest issuance price per share of such newly issued or sold securities (but not less than $0.01).
Without the prior written consent of the holders of a majority in principal amount of the outstanding Notes, we are prohibited from entering into, creating, assuming or suffering to exist any indebtedness for borrowed money, including a guarantee, on or with respect to any of our properties or assets, entering into, creating, assuming or suffering to exist any liens on or with respect to any of our properties or assets, repurchasing shares of our common stock or common stock equivalents other than as permitted under the Securities Purchase Agreement and the related Capital Raise documents, and repurchases of common stock or common stock equivalents from departing employees up to an aggregate maximum of $150,000, paying cash dividends, entering into transactions with our affiliates that would be required to be disclosed in public filings with the Securities and Exchange Commission (“SEC”), unless such transaction is expressly approved by a majority of the disinterested directors on our board of directors, or entering into any agreement with respect to any of the foregoing. We are also prohibited from issuing rights, options or warrants to all holders of our common stock (excluding the Purchasers) entitling them to subscribe for or purchase shares of our common stock at a price per share less than the daily volume weighted average price of our common stock at the record date for the determination of stockholders entitled to receive such rights, options or warrants, or from distributing to all holders of our common stock (other than the Purchasers) evidences of our indebtedness or assets or rights or warrants to subscribe for or purchase any security other than our common stock.
The following constitute events of default under the Notes: our failure to pay any amount under the Notes when due; our failure to observe or perform any covenant or agreement in the Notes; the occurrence of an event of default under any of the Capital Raise documents or any other material agreement to which we are obligated; the occurrence of a bankruptcy event with respect to our company; our default on any of our obligations under any mortgage, indenture, factoring agreement or other instrument under which there may be issued, or by which there may be secured or evidenced, any indebtedness involving an obligation greater than $100,000 that results in the acceleration of the due date of such indebtedness; the cessation of the eligibility of our common stock for listing or quotation on a securities exchange or the OTC Bulletin Board (“OTCBB”), where such listing or quotation cannot resume within 10 trading days; the cessation of the effectiveness of any documents pursuant to which the Purchasers obtained a security interest in our assets; the cessation of Saleen’s service as our President and Chief Executive Officer other than in the event we find a replacement acceptable to the Purchasers upon Saleen’s death, permanent disability, voluntary termination or termination by us for cause; our failure to deliver certificates to the Purchasers within 10 trading days after any conversion of the Notes; the rendering of a judgment against us in excess of $100,000; our breach of any representation or warranty under the Capital Raise documents; or our failure to timely file the reports required by the Exchange Act or the cessation of our obligation to file reports under Section 13 or 15(d) of the Exchange Act at any time after September 17, 2013.
Upon the occurrence of an event of default under the Notes, the outstanding principal amount of the Notes, plus accrued but unpaid interest, liquidated damages and other amounts owing in respect thereof through the date of acceleration, shall become, at the Purchasers’ election (which the Purchasers shall not make more than 30 days after the later of the date (a) such event of default is cured or otherwise resolved and (b) the Purchasers are aware of such cure or resolution), immediately due and payable in cash at the sum of (i) 120% of the then outstanding principal amount of the Notes, (ii) plus 100% of accrued and unpaid interest thereon, and (iii) all other amounts, costs, expenses and liquidated damages due in respect of the Notes.
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On June 26, 2013, we also entered into a Security Agreement and an Intellectual Property Security Agreement with the Purchasers and each of our subsidiaries, pursuant to which all of our obligations under the Notes are secured by first priority security interests in all of our assets and the assets of each of our subsidiaries, including intellectual property. Upon an event of default under the Notes or such agreements, including the failure of any representation or warranty in the Security Agreement to be true in any material respect when made, our failure to observe or perform our obligations under the Security Agreement for 5 business days after delivery of notice of such failure or if any material provision of the Security Agreement shall be declared invalid or unenforceable, the Purchasers may be entitled to foreclose on any of such assets or exercise other rights available to a secured creditor under California, Florida, Michigan and Nevada law. In addition, under a Subsidiary Guarantee, each of our subsidiaries has guaranteed all of our obligations under the Notes.
On June 26, 2013 and in connection with the Capital Raise, we entered into a Registration Rights Agreement with the Purchasers pursuant to which, among other things, we agreed to provide registration rights with respect to the shares of our common stock underlying the Notes under the Securities Act of 1933, as amended (the “Securities Act”), and applicable state securities laws. The Registration Rights Agreement provides that we must register for resale 130% of the sum of the aggregate number of shares of our common stock issued or issuable upon conversion of the Notes as of the trading day immediately preceding the date the registration statement is initially filed with the SEC, or such other amount as may be required by the staff of the SEC pursuant to Rule 415.
The Registration Rights Agreement also provides that if (i) we do not file a registration statement on or before July 24, 2013, (ii) the registration statement is not declared effective on or prior to November 23, 2013, or (iii) after its effective date, the registration statement ceases to remain continuously effective and available to the Purchasers at any time prior to the date on which the Purchasers shall have sold all of the securities covered by such registration statement, subject to certain grace periods, then we must pay the Purchasers, as a result of any of the foregoing events and for each month thereafter that such event continues, an amount in cash as partial relief for damages equal to $15,000.
Under the Registration Rights Agreement, we are also required to indemnify the Purchasers and their affiliates against any losses, claims or damages incurred in investigating, preparing or defending any action, claim or proceeding, whether pending or threatened, to which any of them may become subject insofar as such claims arise out of or are based upon: (i) any untrue statement or alleged untrue statement of a material fact in a registration statement or any post-effective amendment thereto or in any filing made in connection with the qualification of the offering under the securities or other “blue sky” laws of any jurisdiction in which registrable securities are offered, or the omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus if used prior to the effective date of such registration statement, or contained in the final prospectus (as amended or supplemented, if we file any amendment thereof or supplement thereto with the SEC) or the omission or alleged omission to state therein any material fact necessary to make the statements made therein, in the light of the circumstances under which the statements therein were made, not misleading, (iii) any violation or alleged violation by us of federal securities laws, any other law, including, without limitation, any state securities law, or any rule or regulation thereunder relating to the offer or sale of the registrable securities pursuant to a registration statement or (iv) any violation of the Registration Rights Agreement. We are also required to file with the SEC in a timely manner all reports and other documents required under federal securities laws so long as we remain subject to such requirements and the filing of such reports and other documents is required for the applicable provisions of Rule 144 under the Act.
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Each Purchaser agrees to indemnify us and our affiliates against any losses, claims or damages incurred in investigating, preparing or defending any action, claim or proceeding, whether pending or threatened, to which any of them may become subject insofar as such claims arise out of or are based upon: (i) any untrue statement or alleged untrue statement of a material fact in a registration statement or any post-effective amendment thereto or in any filing made in connection with the qualification of the offering under the securities or other “blue sky” laws of any jurisdiction in which registrable securities are offered, or the omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus if used prior to the effective date of such registration statement, or contained in the final prospectus (as amended or supplemented, if we file any amendment thereof or supplement thereto with the SEC) or the omission or alleged omission to state therein any material fact necessary to make the statements made therein, in the light of the circumstances under which the statements therein were made, not misleading, (iii) any violation or alleged violation by us of federal securities laws, any other law, including, without limitation, any state securities law, or any rule or regulation thereunder relating to the offer or sale of the registrable securities pursuant to a registration statement or (iv) any violation of the Registration Rights Agreement; but only to the extent, that such violation occurs in reliance upon and in conformity with written information furnished to us by such Purchaser expressly for use in connection with this registration statement.
A portion of the proceeds from the Capital Raise will be used to pay a dividend of an aggregate amount of $280,000 to our stockholders of record as of May 23, 2013, and to pay for legal and accounting fees and other expenses incurred in connection with the Merger and the Capital Raise. The net proceeds available to us for our operations will be reduced by such payments.
On May 8, 2013, W-Net and Verdad, formerly our two largest stockholders (the “Lenders”), and SMS, Saleen Automotive and Saleen (collectively, “Borrower”), entered a Bridge Loan and Security Agreement pursuant to which the Lenders loaned to Borrower an aggregate of $500,000 and Borrower issued to the Lenders Secured Promissory Notes. Following an event of default, the Secured Promissory Notes accrue interest at 10% per annum and had a maturity date of June 15, 2013. Borrower’s obligations under the Secured Promissory Notes were secured by a first priority security interest, subject to certain existing indebtedness, on all of the Saleen Entities’ assets. Borrower’s obligations under the Secured Promissory Notes were also guaranteed by Saleen. Borrower’s failure to pay when due amounts payable under the Secured Promissory Notes, its failure to observe any covenants under the bridge loan documents, a breach of its representations and warranties made pursuant to the bridge loan documents or its undergoing a bankruptcy or insolvency proceeding would have constituted an event of default. Upon the occurrence of an event of default, the Lenders could declare all obligations under the Secured Promissory Notes due and payable and could have foreclosed on the collateral securing such obligations. Upon the consummation of the Capital Raise, the obligations outstanding under the Secured Promissory Notes were converted into Notes in the same principal amounts.
The Notes were issued in a private placement, exempt from the Securities Act registration requirements, to purchasers who are accredited investors.
Effective as of the Closing, Eric Stoppenhagen resigned from his positions as our CEO, CFO and Secretary as resigned as a director and we appointed the following persons as our executive officers and directors:
| Name | Age | Position | ||
| Steve Saleen | 64 | Chief Executive Officer, President and Director | ||
| Robert J. Miranda | 61 | Chief Financial Officer, Secretary and Director | ||
| Jonathan Michaels | 44 | General Counsel and Director |
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Our directors will be determined pursuant to a Voting Agreement we entered into on June 26, 2013 (the “Voting Agreement”) by Saleen and the Purchasers in the Capital Raise. Together, such parties hold a majority of our outstanding shares of common stock and, under the Voting Agreement, are obligated to vote for the directors determined as described below. The authorized number of our directors is five. Those directors will consist of the three present members of our board of directors—Steve Saleen, Robert Miranda and Jonathan Michaels—whose replacements will be determined under the terms of the Voting Agreement by Saleen, one director (currently vacant), whose replacement will be determined under the terms of the Voting Agreement by the holders of a majority of the outstanding shares held by purchasers of Notes in the Capital Raise, and one director (currently vacant), whose replacement will be determined under the terms of the Voting Agreement jointly by the holders of a majority of the outstanding shares held by Saleen and by the holders of a majority of the outstanding shares held by purchasers of Notes in the Capital Raise.
On May 30, 2013, in our Current Report on Form 8-K dated May 23, 2013, we reported the execution of the Merger Agreement and included a copy of the Merger Agreement therein as Exhibit 2.1. On June 7, 2013, we filed an Information Statement on Schedule 14f-1 reporting the proposed acquisition of the Saleen Entities and a pending change of control of our company at the Closing.
DESCRIPTION OF THE BUSINESS
Immediately prior to the Closing, we were a public “shell” company with nominal assets. As a result of the Merger, we are solely engaged in the Saleen Entities’ business. With respect to this discussion, the terms “we,” “us,” “our” and “our company” refer to Saleen Automotive, Inc., a Nevada corporation and its wholly-owned subsidiaries, SMS Signature Cars, a California corporation, and Saleen Automotive, Inc., a Florida corporation.
Through a variety of related entities, we design, develop, manufacture and sell high-performance cars built from base chassis’ of Ford Mustangs, Chevrolet Camaros, and Dodge Challengers, as well as exotic sports cars. We are a low volume specialist vehicle design, engineering and manufacturing company focusing on the mass customization of OEM American Sports Cars and the production of high performance USA-engineered premium sports and racing cars. Saleen-branded products include a complete line of upgraded muscle cars, performance cars, automotive aftermarket specialty parts and lifestyle accessories. We are also developing a next-generation American supercar along with hybrid and zero-emission vehicles for commercial applications and consumer markets.
Our customers worldwide include muscle and performance car enthusiasts, collectors, automotive manufacturers, retail dealers, television and motion picture production, and consumers in the luxury supercar and motorsports market. We plan to develop a network of company-owned branded stores to complement our existing retail dealer locations.
We utilize automobile manufacturers Ford, Chevrolet and Dodge platform vehicles for our muscle and performance vehicle production. All aftermarket parts and accessory products are engineered and manufactured exclusively by us. Our current retail outlets for our products are authorized Ford, Chevrolet and Dodge dealers who fully approve all engineering upgrades.
We plan to return as a global performance automotive brand and expand our production, sales and marketing operations extensively within the markets of the USA and into multiple international markets. We also plan to open our own retail outlets, market our expertise in specialist engineering and design services to third party clients, develop our own motorsport program and introduce our next generation American supercar.
History and Background
The Saleen brand, started by former racing driver Steve Saleen, began in 1983. Saleen used his business degree from USC, coupled with experience in his father’s manufacturing business, to build the Saleen brand. Saleen began auto crossing, then rapidly moved into SCCA pro series (Formula Atlantic, Trans-Am Championship, Sport Truck racing) and then into Indy car racing.
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Saleen Autosport was founded in 1983 by Saleen when he recognized a niche market opportunity for a high-end approach to improving performance and the appearance of production sports cars. By 1984, the first Saleen Autosport street car, the Saleen Mustang, was ready for sale. It boasted special aerodynamics, an attractive and highly functional cockpit and a precise handling suspension package. The result was a car built as a limited edition model with individual serial numbers assuring authenticity. Later, demonstrating the car’s performance, the company’s race team brought home a victory for Saleen Autosport, Ford and sponsor General Tire at the 24-hour race at Mosport Park in Ontario, Canada.
During the 1990s Saleen Autosport changed its name to Saleen Productions and then to Saleen Performance. In 1991 it introduced the Saleen Mustang S351, which had 495 horse power. The S281 followed in 1996, expanding the market by offering high performance to a broader audience. During the 90’s that company entered the SUV market with Saleen’s interpretation of a high performance SUV based on the Ford Explorer platform.
In 2000, Saleen established himself as a true visionary in the automotive industry, with the complete ground up production of the Saleen S7, a hand-built high-performance supercar. The Saleen S7 was not built on an existing chassis, and is a rolling testament to Saleen’s ability to manufacture a high-performance automobile on a modest budget. The Saleen-designed engine, which included castings for the aluminum block and head, and the Saleen-engineered and developed transmission including all internal controls unique to the vehicle, were engineered by Saleen Performance. The Saleen S7 Supercar has won on every major racetrack worldwide from Le Mans to Daytona. Saleen-branded vehicles have won ten Manufacturers Championships over the last 25 years of racing, including Grand AM, British GT, ALMS, ELMS, FIA GT, and both the French and Spanish GT series.
In 2003, Saleen Performance became Saleen, Inc. Due to its achievements with the Saleen S7 Supercar and its performance cars expertise, Ford Motor Company out-sourced a contract to Saleen, Inc. to serve as chief of engineering in charge of Ford Engineers and Tier One Suppliers for the Ford GT (40) supercar project. The project included the complete assembly and painting of the vehicles in Saleen, Inc.’s facility that was established in Troy, Michigan.
Additionally, Saleen, Inc. was contracted to help produce specialty vehicles including the Dodge Viper and Ford Harley Davidson Supercharged F-150 truck. In addition, Saleen, Inc. produced specialty vehicles for numerous high profile movie projects, including the Chevrolet Camaro for the movie “Transformers,” and vehicles for “Fast and Furious,” “Bruce Almighty,” and “Ironman.”
During 2003, in order to finance Saleen, Inc.’s expansion with the Ford GT (40) project, Saleen sold a majority interest in Saleen, Inc. to a private equity fund. Since its inception in 1983 as Saleen Autosport to its evolution to Saleen, Inc., that company grew over a period of some 28 years. Saleen resigned from Saleen, Inc. in 2007 following a change in direction of that company.
On July 1, 2008, Saleen established SMS Signature Cars. SMS commenced operations in Corona, California, producing high performance automobiles and selling automotive aftermarket parts. SMS expanded the historical offering of mass customized Mustangs into a broader line of vehicles including Chevrolet Camaros and Dodge Challengers. SMS also was contracted to produce specialty vehicles for the movie “Bullet” and recently completed a contract to produce replica supercars for a movie that is currently under development by a major movie production company.
On July 21, 2011, Saleen and a group of private investors established Saleen Electric Automotive, Inc., a Florida corporation (“SEA”). SEA had identified opportunities in the commercial electric vehicle market and was formed to develop a line of electric delivery vans, automobiles, and high capacity chargers. On April 26, 2012, Saleen Electric Automotive, Inc. changed its name to “Saleen Automotive, Inc.”
On April 2, 2012, Saleen announced that after several years of litigation with the former Saleen, Inc., he had successfully regained control of the Saleen brand and products that he had created. With the recapture of the Saleen brand by Saleen, and the name and likeness of Steve Saleen – both of which were assigned to us in connection with the Merger – we now have a significant presence within the automobile industry and are positioned to become the global leader in the mass customization of OEM American sports cars.
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Since their launch in 1983 Saleen’s businesses have produced hundreds of Saleen-branded vehicles. Saleen customers and non-Saleen customers alike continue to upgrade their vehicles with specialty parts and accessories that they purchase from our company.
Our Vehicles, Products and Services
We currently provide or intend to provide the following products and services:
Performance Cars: We are a leader in the mass-customization of OEM American sports cars, building them into Saleen-branded performance cars through a transformational process in which every part we incorporate into the vehicle is designed, engineered, tooled, tested, manufactured and certified by us or under our control for the entire vehicle. We are currently converting Ford Mustangs, Chevrolet Camaros and Dodge Challengers. The current product line of ultra-high performance vehicles includes the Saleen 570 and 570X Challenger, the Saleen 302 and 302SC and S351 Mustang and the Saleen 620 and 620X Camaro.
Performance Parts: We manufacture and distribute specialty automotive aftermarket parts and accessories to our base of over 25,000 loyal Saleen automotive enthusiasts in the U.S. and overseas. Additionally, many of these parts and accessories are marketed and sold to millions of Mustang, Camaro, Challenger and Ford Truck owners.
American Supercars: We are currently designing our next-generation American supercar that will be manufactured and sold through our Supercars division and our retail stores.
Motorsports & Engineering Services – We provide contract design, engineering and product development services. We recently completed a contract for a major Hollywood movie producer to develop and manufacture working replicas of high performance racing “supercars” to be featured in a new movie. We have established over several years a formidable reputation for the highest quality engineering and technology development capabilities.
Battery Electric Vehicles: We plan to develop a line electric battery electric vehicles (or BEVs) for commercial and consumer oriented applications, utilizing the same mass-customization process used with our performance vehicles and existing facilities to overlay the BEV design on selected new, but market proven, OEM automobile chassis designed for internal combustion engines. Our market strategy is to engage a network of distributors to enter the business enterprise and government fleet market in the U.S. and in international markets.
Retail Distribution Outlets: We intend to open a network of retail branded stores that will become a primary sales channel for our performance vehicles, supercars, aftermarket parts and accessories, founded on the concept of the former retail store in Southern California. Saleen apparel, presently sold online, is branded under the Saleen Lifestyle, Saleen Performance, Saleen Racing and Heritage marquees and provides enthusiasts with a new Saleen interactive experience and an ability to be immersed into the Saleen brand. We intend to operate these stores in high traffic malls in major cities where Saleen has a customer base, such as Orange County, Los Angeles, San Jose, Miami, Phoenix and other locations.
Technology, Design and Engineering Capabilities
We believe the core competencies of our company are performance car design and vehicle engineering. Our core intellectual property is contained within our supercharger and related performance enhancing products.
Our engineering team is staffed with experienced and dedicated professionals with a wide range of expertise in providing design, analysis, and prototyping and validation capabilities to the global vehicle industry. We offer in-house expertise in areas ranging from chassis, body and power train, NVH engineering, electrical systems, thermal systems and CAE. We provide seamlessly integrated services in a broad range of engineering disciplines through a unique mix of mainstream automotive engineering expertise and motorsports carefully matched to their position specifications. Our engineering team utilizes the most technically advanced engineering tools available in a results-driven and highly stimulating environment.
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Our product development methodology is designed to ensure a disciplined and quantifiable approach that emphasizes the highest quality and progress accountability as follows:
| · | Market Definition and Potential |
| · | Product Definition |
| · | Realistic Revenue Targets |
| · | Design and Engineering |
| · | Prototyping |
| · | Testing |
| · | Volume Production Engineering |
| · | Product Launch |
| · | Success Reporting and Measurement |
| · | Product Enhancement Plan |
Over a 30-year history, our principals have developed core competencies in the design, engineering, manufacturing, marketing and sales of high performance vehicles as well as developed or acquired the technology to apply the same processes to the production of superior performance vehicles. Specifically, we have expertise with respect to the following:
| · | Engineering Capabilities |
| · | Suspension & Chassis |
| · | Powertrain |
| · | Certification |
| · | Engineering Tools |
| · | CAD Systems |
| · | Data Acquisition Systems |
| · | ETAS Calibration Tools |
| · | Crash Simulation Software |
| · | Suspension Simulation Software |
| · | CFD, Fluid Simulation Software |
| · | Design and Prototyping Capabilities |
| · | Style & Design Center |
| · | Full product development from the first sketch to final production |
| · | Manufacturing, Assembly and Production |
Our manufacturing and assembly teams collaborate regularly with the engineering development team to ensure that the appropriate processes, tooling, sourcing and timing is considered early in every program. Sharing of ideas throughout the business ensures that every aspect of a program is considered and understood by the entire enterprise.
We utilize the most current design, testing and prototyping systems in our manufacturing process, some of which include: Adams Kinematics - CAD (Computer Aided Design) - CFD (Computational Fluid Dynamics) - FEA (Finite Element Analysis) -- CAM (Computer Aided Machining) - Rapid Prototyping - Machine Tools - Composites Manufacturing - Wind Tunnel – Pam Crash for crash simulation and design of occupant safety systems.
Vehicle Limited Warranty Policy
We provide a three-year or 36,000 mile New Vehicle Limited Warranty with every Saleen 302 and 302SC Mustang, Saleen 570 Challenger, and Saleen 620 Camaro performance vehicle. We provide a one-year or 12,000 miles New Vehicle Limited Warranty with every Saleen 351 Mustang, Saleen 570X Challenger, and Saleen 620X Camaro performance vehicle. The vehicle limited warranty applies to installed parts and/or assemblies in new Saleen performance cars. All of the unaltered parts are covered under the original full warranty of the OEM manufacturer of the base vehicles (Ford, Chevrolet, and Dodge). Our warranty claims experience to date has been negligible.
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Product Development Initiatives
Our “racing culture” is a mindset embedded throughout our company that drives all employees to continue to identify new product development initiatives that will continue to fuel our growth engine. Our new products and business opportunities currently under development include the following initiatives.
Next Generation Saleen Supercars: The next generation Saleen-branded supercar is presently in the development phase by our engineering division. Using the experience gained by our design and engineering team-members that previously developed (while working at Saleen Performance) the Saleen S7 on a modest budget to a highly successful level in terms of both road and race car sales (as well as outright motorsports podium finishes including the 24 Hours of Le Mans), we plan to expand our product offerings into the American supercar sector.
The value of the nationality of a supercar should not be underestimated. The European supercar manufacturers, who have dominated this market for the last 60 years, at times have given way to US dominance in the form of the original Ford GT40 and again with the Ford GT. There is significant international demand for US-engineered performance automobiles and a lack of product from US manufacturers.
The USA remains, at this time, a significant portion of the supercar market which we intend to target for the next-generation Saleen-branded supercar. With the superb legacy of the Saleen S7 and the brand values and image of Saleen to promote the new car, we anticipate that this new entry will achieve our projected commercial and performance objectives.
Electric Vehicle Technologies: Our engineering team includes a noted expert on the development of electric vehicle technologies. Applications of electric power trains include select commercial vehicles including delivery vans and trucks.
The federal government has several initiatives underway to support the development of electric vehicles. California is the most progressive state that supports the development of electric vehicles. We intend to target both domestic and international opportunities for electric vehicle technologies and product applications.
Supply Chain
We use over 1,000 purchased parts which we source globally from over 100 suppliers, many of whom are currently our single source suppliers for these components. We have developed close relationships with several key suppliers particularly in the procurement of body components and certain other key system parts. While we obtain components from multiple sources whenever possible, similar to other automobile manufacturers, many of the components used in our vehicles are purchased by us from a single source.
Marketing Strategy
Our principal marketing goals are to:
| · | generate demand for our vehicles and drive leads to our sales teams; |
| · | build long-term brand awareness and manage corporate reputation; |
| · | manage our existing customer base to create loyalty and customer referrals; and |
| · | enable customer input into the product development process. |
We operate as an Original Equipment Manufacturer (OEM) producing, in our opinion, the best muscle and performance cars available worldwide today. We have crafted a truly unique and dynamic business model that at its core centers on our brand’s value and our specialty in delivering the highest quality of cutting edge design, engineering and production of performance muscle cars, supercars, specialty parts and accessories to our customers.
Our perspective in enhancing existing market proven products, methodologies and technologies developed and used by the dominant U.S. muscle and performance car manufacturers, although while not unique, is an important differentiator from would be competitors. Additionally, our internally developed intellectual property and brand will continue to grow and deepen with this focus and will strengthen barriers to further competition over time.
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We currently manufacture Ford Mustangs, Chevrolet Camaros and Dodge Challengers into Saleen-branded performance cars through a company-certified transformational process in which every part incorporated into the vehicle is designed, engineered, tooled and extensively tested before being manufactured and moved into the conversion production process.
We also manufacture and distribute Saleen-branded certified specialty automotive aftermarket parts and accessories directly to an ever growing base of loyal automotive enthusiasts in both the U.S. and internationally. Additionally, many of these parts and accessories are marketed and sold to Mustang, Camaro, Challenger and Ford Truck owners.
Our Saleen-branded performance cars are sold through Ford, Chevrolet and Dodge retail dealers in the US nationwide. Having pioneered the concept of company-owned retail stores with an award winning location in Southern California, we have been an early adopter of concept branded, company-owned retail stores as traditional roles for manufacturers and retailers began to blur and their activities were becoming more intertwined.
We have positioned a three year roll-out of Saleen-branded retail locations under a unique blended “partial forward integration” formula as a value-added sales channel. We can market and sell to end consumers not only through our existing dealer network but also through our company-owned stores. We will also be able to better service our dealer network by region as a byproduct of our blended “partial forward integration” formula.
Our Motorsports and Engineering Services division is under contract to provide design, engineering, and product development services to the motion picture, television, media and specialty events industry.
Our annual operating budget includes a commitment to effective marketing, advertising and promotional efforts in order to further strengthen awareness of our brand and expose our products to a larger and more targeted worldwide audience. We will contract with marketing and advertising businesses that understand the target market and who can and will further promote our business. As such, we will carry out:
Events Marketing: As an ultra-high performance niche manufacturer, we take pride in attending events on the international auto show circuit such as in Los Angeles, Detroit, New York, Pebble Beach, Amelia Island, Paris and Tokyo.
Print Marketing: Our vehicles have graced the covers and filled the pages of automotive magazines, and sparked the imagination of generations of aspiring automotive enthusiasts. We believe that they will continue to do so, both through purchased ad space as well as free press through press releases of newsworthy or entertainment-worthy information.
Movie Magic: We will continue to leverage our proximity and connections within the entertainment and trend industries for vehicle placement across videos, broadcast, cable television and feature films. In most cases, lead actors and producers seek Saleen-branded cars out for these roles.
There are additional markets and market segments into which we intend to expand once our capabilities have been established in our core markets and market segments. We plan on expanding our business model internationally by identifying strategic partners in targeted countries throughout the world. Initial targeted areas are the Middle East, China, and India. Once a strategic partner is identified in a particular country, we and our strategic partner will jointly develop a business plan for that country. Additionally, our management believes that the completion of many of our planned commercial projects will demonstrate the breadth and depth of our capabilities and provide the foundation to enter into additional market segments.
Sales Strategy
We currently sell our performance cars through a network of Ford, Chevrolet and Dodge dealers. Our dealer sales team is continuing to increase our base of dealers that is resulting in a steady pattern of sales growth.
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We plan to sell and service our vehicles through our company-owned sales and service network in North America. Our intent is to offer a compelling customer experience while gathering rapid customer feedback and achieving operating efficiencies, better control over the costs of inventory, warranty service, pricing, and the development of the Saleen brand. Our Saleen-branded stores will not carry large vehicle inventories and, as a result, will not require corresponding large floor spaces. We believe the benefits we receive from distribution ownership will enable us to improve the speed of product development and improve the capital efficiency of our business. We believe that this approach provides us with a competitive advantage as compared to incumbent automobile manufacturers. Sales through these retail channels will be generated across the following platforms:
New Vehicle Sales: Our retail outlets will act as a primary retail channel for all Saleen-branded vehicles and financing programs. All staff will be thoroughly trained and certified to sell and market the vehicles, products and apparel. Once the new Saleen-branded supercar model is developed, it will be sold in the stores, adding to the excitement the stores will generate in high traffic areas.
Technical Performance Sales: All retail outlet staff members will be highly trained technical staff members, able to educate, inspire and ignite consumers’ interest in high performance Saleen-branded products. Each retail outlet will handle scheduling of installation of our patented performance parts or provide technical guidance for the more hands-on consumers who want to self-install performance parts.
Lifestyle Performance Sales: Each retail outlet’s highly fashionable staff will be the showcase for our diverse range of lifestyle accessories and apparel, including clothes, driving shoes, watches, eyewear, posters, books and model cars, among others.
The Global Automotive Market
Presently United States auto sales are now running at the fastest pace in the last four years and we believe that pace is poised to reverberate through the world’s largest economy with a spillover into production, profits and jobs for Americans.
Globally, the opportunities in emerging markets such as China, Russia and India are now substantial and are currently being very aggressively targeted by the major OEMs. Replicating the Western taste in automobiles, these countries are prime targets for the international expansion of our business in addition to Europe, the Middle East and the Far East.
Our strategic relationships with Ford, Chevrolet and Dodge position us effectively in the muscle and performance car segment of the North American auto industry. This segment continues to resist any downside pressure from variables in market conditions.
Automotive Aftermarkets Parts Market
The specialty equipment and parts market includes products used to modify the performance and appearance, and /or handling of vehicles. The specialty equipment, parts and accessories segment of the aftermarket (products that are not purchased out of necessity, but rather out of choice) has been a traditional bright spot in the automotive industry.
Supercars Market
Based on the prior success of the Saleen S7 supercar, and current sales of supercars, we believe that there is a solidly growing market globally for dependable, American-made supercars offering demonstrably superior performance with revolutionary styling and design characteristics.
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Regulation—Vehicle Safety and Testing
Our vehicles are subject to, and we comply with, or are exempt from, numerous regulatory requirements established by the NHTSA, including all applicable United States federal motor vehicle safety standards (FMVSS). Our performance cars fully comply with all FMVSSs without the need for any exemptions. As a manufacturer, we must self-certify that a vehicle meets, or otherwise obtain an exemption from, all applicable FMVSSs before the vehicle can be sold in the United States.
We are also required to comply with other requirements of federal laws administered by the NHTSA, including the Corporate Average Fuel Economy standards, Theft Prevention Act requirements, consumer information labeling requirements, early warning reporting requirements regarding warranty claims, field reports, death and injury reports and foreign recalls, and owner’s manual requirements.
The Automobile Information and Disclosure Act requires manufacturers of motor vehicles to disclose certain information regarding the manufacturer’s suggested retail price, optional equipment and pricing. In addition, the Act allows inclusion of city and highway fuel economy ratings, as determined by the EPA, as well as crash test ratings, as determined by the NHTSA, if such tests are conducted.
Regulation—EPA Emissions & Certificate of Conformity
The Clean Air Act requires that we obtain a Certificate of Conformity issued by the EPA and a California Executive Order issued by the California Air Resources Board (“CARB”) with respect to emissions for our vehicles. The Certificate of Conformity is required for vehicles sold in states covered by the Clean Air Act’s standards and both the Certificate of Conformity and the Executive Order is required for vehicles sold in states that have sought and received a waiver from the EPA to utilize California standards. The California standards for emissions control for certain regulated pollutants for new vehicles and engines sold in California are set by the CARB. States that have adopted the California standards as approved by the EPA also recognize the Executive Order for sales of vehicles.
Competition
Domestic United States auto sales are currently at their highest pace in over four years since the financial crisis hit. We believe that the boost in sales is poised to reverberate through the world’s largest economy with a spillover into production, profits and jobs for Americans.
Competition in this industry is in most cases based on reputation, prestige, quality, service and overall price. A strong combination of all these areas tends to attract repeat and loyal customers and enthusiast. Consumers tend to shop for name brand and expect high customer service levels. Promptness of service also matters because customers want and need their cars back as soon as possible.
In addition to customer service, name or brand recognition and reputation play an important role in determining how competitive an auto customization business is.
The location of retail outlets is another crucial competitive factor defining this industry. A location is best determined by a combination of population distribution, average income levels and the number of vehicle registrations and existing competitors. The optimum combination results in a location that often allows the company to achieve economies of scale in terms of advertising and distribution costs.
Our primary competition will come from other high-end cars, their manufacturing companies, and third-party companies that specialize in customization for these cars. These cars include:
| · | Acura NSX, which sells about 5,000 units per year |
| · | Aston Martin DB9, which sells about 1,000 units per year |
| · | Aston Martin DB9 Convertible, which sells about 1,000 units per year |
| · | Aston Martin DBS, which sells about 250+ units per year |
| · | Audi R8, which sells about 3,900 units per year |
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| · | Audi R8 V10, which sells about 3,900 units per year |
| · | Ferrari 458 Spider, which sells about 2,500 units per year |
| · | Ferrari 458 Italia, which sells about 2,500 units per year |
| · | Ferrari 430 Scuderia, which sells about 250 units per year |
| · | Ford GT, which sells about 1,800 units per year |
| · | Lamborghini Gallardo Coupe, which sells about 1,500 units per year |
| · | Lamborghini Gallardo Convertible, which sells about 1,500 units per year |
| · | Lamborghini Gallardo Superleggera, which sells about 250 units per year |
| · | Lexus LFA, which sells about 500 units per year |
| · | McLaren MPA 1ZC, which sells about 4,500 units per year |
| · | Porsche GT3, which sells about 1,00 units per year |
Intellectual Property
Our success depends, at least in part, on our ability to protect our core technology and intellectual property. To accomplish this, we rely on a combination of patents, patent applications, trade secrets, including know-how, employee and third party nondisclosure agreements, copyright laws, trademarks, intellectual property licenses and other contractual rights to establish and protect our proprietary rights in our technology. SMS and Saleen Automotive own trademarks registered with the U.S. Patent and Trademark Office. In addition, we now own the Saleen “brand” registered trademarks as well as other unregistered common law trademarks.
We currently market our products using the Saleen name and logo, as well as the name and likeness of Steve Saleen, through a royalty free license from Saleen.
Seasonality
Sales of our performance cars have fluctuated on a seasonal basis with increased sales during the spring and summer months in our second and third fiscal quarters relative to our fourth and first fiscal quarters. We note that, in general, automotive sales tend to decline over the winter season and we anticipate that our sales of Saleen 302, 351, 57, and 620 vehicles, and other vehicles we introduce in the future may have similar seasonality. However, our limited operating history makes it difficult for us to judge the exact nature or extent of the seasonality of our business.
Principal Executive Offices
Our principal executive offices are located at 2735 Wardlow Road, Corona, California 92882. We operate out of leased facilities comprised of a three building campus that constitutes approximately four acres of industrial and office space. Our telephone number is (714) 400-2121. We believe our facilities are adequate to meet our current and near-term needs.
Employees
As of June 2013, we had 16 full-time employees and six part-time employees. Since inception, we have never had a work stoppage, and our employees are not represented by labor unions. We consider our relationship with our employees to be positive.
LEGAL PROCEEDINGS
We are involved in certain legal proceedings that arise from time to time in the ordinary course of our business. We are currently a party to several legal proceedings related to claims for payment that are currently accrued for in our financial statements as accounts or notes payable. Except for income tax contingencies (commencing April 1, 2009), we record accruals for contingencies to the extent that our management concludes that the occurrence is probable and that the related amounts of loss can be reasonably estimated. Legal expenses associated with the contingency are expensed as incurred. Legal proceedings that are currently pending are as follows:
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SMS is a defendant in a case filed by ATI Performance Products on October 21, 2011 in the California Superior Court, Riverside County, that claims breach of contract related to the sale of parts. The suit claims $36,697 in damages plus interest, legal fees and costs of litigation. We have recorded this liability on our books.
Steve Saleen and SMS are defendants in a case filed by Edward Roche on November 28, 2011 in the U.S. District Court in Massachusetts that alleges breach of contract related to a vehicle dispute. The case seeks $75,000 of damages. We believe that this case is without merit however the outcome is uncertain at the present time.
SMS is a defendant in a case filed by MSY Trading, Inc. on April 13, 2012 in the California Superior Court, Riverside County, that claims breach of contract related to an engine installed by a third party vendor. The suit claims $200,000 in damages plus interest, legal fees and costs of litigation. We have filed a cross complain against MSY Trading, Inc. for breach of warranty, negligence, and indemnification. We believe that this case is without merit however the outcome is uncertain at the present time.
SMS is the plaintiff in a case filed against Connects Marketing and Eric Hruza on July 2, 2012 in the United States District Court, Central District of California, Southern Division, for misappropriation of trade secrets, trademark infringement and other related causes of action. The suit seeks damages in excess of $1,000,000.
SMS is the plaintiff in a case filed against Inland Empire Paint on August 10, 2012 in the California Superior Court, Riverside County, for breach of contract as a result of the defendant’s defective work. The suit claims $34,241 in damages.
SMS is the plaintiff in a case filed against Douglas Lopez & Rumm, LLP, Diana Lopez and Dana Douglas on October 16, 2012 in the California Superior Court, Orange County, for legal malpractice for their failure to adequately represent SMS in its litigation against Connects Marketing for the installation of defective engines in SMS vehicles. The suit seeks damages in excess of $1,000,000. The defendants have filed a cross-complaint against SMS and Steve Saleen for payment for legal services rendered in the amount of $10,000. We have recorded this liability on our books.
SMS is a defendant in a case filed on February 21, 2013, in the California Superior Court, Napa County, that claims breach of contract related to a vehicle dispute. The suit claims $25,586 in damages plus interest and costs of litigation. We have recorded this liability on our books.
Steve Saleen is a defendant in a case filed on February 26, 2013, in the California Superior Court, Orange County, that claims breach of contract. The suit claims $100,000 in damages plus interest, legal fees and costs of litigation. We have recorded this liability on our books.
Saleen Automotive is a defendant in a case filed on April 12, 2013, in the California Superior Court, Orange County, in connection with a breach of contract action. The suit claims $27,500 in damages plus interest, legal fees and costs of litigation. We have recorded this liability on our books.
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion summarizes the significant factors affecting the operating results, financial condition and liquidity and cash flows of the Saleen Entities for the fiscal years ended March 31, 2013 and 2012. The discussion and analysis that follows should be read together with the financial statements of the Saleen Entities and the notes to the financial statements included elsewhere in this Current Report on Form 8-K. Except for historical information, the matters discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are forward looking statements that involve risks and uncertainties and are based upon judgments concerning various factors that are beyond our control.
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General Overview
We design, develop, manufacture and sell high-performance cars built from base chassis’ of Ford Mustangs, Chevrolet Camaros, and Dodge Challengers. We are a low volume specialist vehicle design, engineering and manufacturing company focusing on the mass customization of OEM American Sports Cars and the production of high performance USA-engineered premium sports and racing cars.
Saleen-branded products include a complete line of upgraded muscle cars, performance cars, Saleen-developed supercars, automotive aftermarket specialty parts and lifestyle accessories. We are also developing hybrid and zero-emission vehicles for commercial applications and consumer markets.
Year Ended March 31, 2013 Compared to the Year Ended March 31, 2012
Our revenue, operating expenses, and net loss from operations for the year ended March 31, 2013 as compared to the year ended March 31, 2012 were as follows – some balances on the prior’s year’s combined financial statements have been reclassified to conform to the current year presentation:
| Year Ended March 31, | ||||||||||||||||
| 2013 | 2012 | Change | Percentage Change Inc (Dec) | |||||||||||||
| Revenue | ||||||||||||||||
| Vehicles and parts | $ | 1,453,030 | $ | 1,173,494 | $ | 279,536 | 23.8 | % | ||||||||
| Design services | 1,245,985 | — | 1,245,985 | 100.0 | % | |||||||||||
| Total revenue | 2,699,015 | 1,173,494 | 1,525,521 | 130.0 | % | |||||||||||
| Costs of goods sold | ||||||||||||||||
| Vehicles and parts | 1,320,061 | 1,075,542 | 244,519 | 22.7 | % | |||||||||||
| Design services | 859,541 | — | 859,541 | 100.0 | % | |||||||||||
| Total Costs of Goods Sold | 2,179,602 | 1,075,542 | 1,104,060 | 102.7 | % | |||||||||||
| Gross Margin - Vehicles and parts | 132,969 | 97,952 | 35,017 | 35.7 | % | |||||||||||
| Gross Margin - Design services | 386,444 | — | 386,444 | 100.0 | % | |||||||||||
| Gross Margin | 519,413 | 97,952 | 421,461 | 430.3 | % | |||||||||||
| Operating expenses | ||||||||||||||||
| Research and development | 23,277 | 94,895 | (71,618 | ) | (75.5 | %) | ||||||||||
| Sales and marketing | 302,669 | 52,475 | 250,194 | 476.8 | % | |||||||||||
| General and administrative | 2,871,483 | 2,633,316 | 238,167 | 9.0 | % | |||||||||||
| Depreciation | 80,892 | 80,475 | 417 | 0.5 | % | |||||||||||
| Total operating expenses | 3,278,321 | 2,861,162 | 417,159 | 14.6 | % | |||||||||||
| Loss from operations | (2,758,907 | ) | (2,763,209 | ) | 4,301 | 0.2 | % | |||||||||
| Interest expense | (225,046 | ) | (150,350 | ) | (74,696 | ) | (49.7 | %) | ||||||||
| Gain (Loss) on settlement of payables | (4,162 | ) | 10,000 | (14,162 | ) | (141.6 | %) | |||||||||
| Net Loss | $ | (2,988,116 | ) | $ | (2,903,559 | ) | $ | (84,557 | ) | (2.9 | %) | |||||
Revenues: Revenues consist of the sale of automotive vehicles and parts. Total revenues for the twelve months ended March 31, 2013 were $2,699,015, an increase of $1,525,521 or 130%, from $1,173,494 of total revenues for the twelve months ended March 31, 2012. Net revenue from the sale of vehicles and parts increased $279,536 or 23.8% to $1,453,030 for the twelve months ended March 31, 2013 from $1,173,494 for the twelve months ended March 31, 2012. The increase reflects an aggressive sales effort from the hiring of a vice president of sales during November 2012. During the twelve months ended March 31, 2013, revenues of $1,245,985 were realized from a contract with a major Hollywood movie producer to design and build replica supercar racing automobiles for a movie.
| -19- |
Cost of Goods Sold: Total costs of goods sold for the twelve months ended March 31, 2013 were $2,179,602, an increase of $1,104,060 or 102.7%, from $1,075,542 of costs of goods sold for the twelve months ended March 31, 2012. Cost of goods sold for vehicles and parts increased by $244,519 or 22.7% to $1,320,061 for the twelve months ended March 31, 2013 from $1,075,542 for the twelve-month period ending March 31, 2012. The increase is attributable to increased vehicle and parts sales during the year ended March 31, 2013. Costs of revenues for the contract with the Hollywood movie producer were $859,541 during the twelve months ended March 31, 2013. The costs of the movie contract of $859,541 and the increase of cost of goods sold from vehicles and parts of $244,519 result in a net increase of $1,104,060 in costs of revenues for the fiscal year ended March 31, 2013 as compared to the fiscal year ended March 31, 2012.
Gross Margin: Gross Margin from the sale of vehicles and parts increased $35,017 to $132,969 for the twelve months ended March 31, 2013 from a gross margin of $97,952 for the twelve months ended March 31, 2012. The improvement in gross margin reflects both the increase in sales as well as a decrease in costs of goods sold as a percentage of sales during the year ended March 31, 2013. During the year ended March 31, 2013, we realized $386,044 or 31% gross margin from the design services contract.
Research and Development Expenses: Research and development expenses decreased by $71,618 or 75.5% during the year ended March 31, 2013 from $94,895 for the year ended March 31, 2012. The decrease reflects the reduced expenses relating to electric vehicle development.
Sales and Marketing Expense: Sales and marketing expense increased $250,194 or 477% to $302,669 for the twelve months ended March 31, 2013 from $52,475 for the twelve months ended March 31, 2012. This increase reflects the addition of key personnel to our sales and expansion of our marketing teams.
General and Administrative Expense: General and administrative expenses increased $238,167 or 9.0% to $2,871,483 for the twelve months ended March 31, 2013 from $2,633,316 for the twelve months ended March 31, 2012. The increase reflects in large measure the additional expenses of increased administrative and management personnel, costs of private capital raising activities, and professional fees relating to the company’s plans to go public.
Depreciation Expense: Depreciation expense increased $417 or 0.5% to $80,892 for the twelve months ended March 31, 2013 from $80,475 for the twelve months ended March 31, 2012. The decrease is considered insignificant.
Interest Expense: Interest expense increased by $74,696 to $225,046 for the twelve months ended March 31, 2013 from $150,350 for the twelve months ended March 31, 2012. The increase is due to additional interest expense in 2013 due to the loan on the S7 Supercar that was settled through the issuance of $100,000 of common stock at a fair value of $0.25 per share.
Net Loss: Net loss increased by $84,557 or 2.9% to a net loss of $2,988,116 for the twelve months ended March 31, 2013 from a net loss of $2,903,559 for the twelve months ended March 31, 2012. This net loss should be viewed in light of the cash flow from operations discussed below. During the year ended March 31, 2013, as with the year ended March 31, 2012, we did not generate positive cash flow from on-going operations. As a result, we funded our operations through the private sale of equity, the issuance of equity for services and increases in short term and long term debt.
Liquidity and Capital Resources
On May 23, 2013, we entered into an Agreement and Plan of Merger (“Merger Agreement”) with Saleen California Merger Corporation, our wholly-owned subsidiary, Saleen Florida Merger Corporation, our wholly-owned subsidiary, Saleen Automotive, Inc., SMS Signature Cars and Steve Saleen. The closing of the transactions contemplated by the Merger Agreement occurred on June 26, 2013.
| -20- |
The Merger will be accounted for as a reverse merger (recapitalization) with the Saleen Entities deemed to be the accounting acquirers, and our company deemed to be the legal acquirer. Accordingly, the following represents a discussion of the operations of our wholly-owned subsidiaries, Saleen Automotive and SMS, for the periods presented. The accompanying combined financial statements are prepared as if we will continue as a going concern. The consolidated financial statements do not contain adjustments, including adjustments to recorded assets and liabilities, which might be necessary if we were unable to continue as a going concern.
On June 26, 2013, we issued 3.0% Senior Secured Convertible Notes for a cash purchase price of $2,500,000 and the conversion of $500,000 of Saleen Automotive’s existing secured convertible debt, for an aggregate principal amount of $3,000,000 outstanding under the Notes. The Notes, excluding accrued interest through their maturity, are convertible into 40,000,000 shares of our common stock at a conversion price of $0.075 per share, and after the Reverse Split will be convertible into approximately 15,160,876 shares of our common stock at a conversion price of approximately $0.198 per share. Under the Notes, we are obligated to repay to the Purchasers on June 25, 2017, the principal amount of $3,000,000. The Notes accrue interest at the rate of 3% per annum (which interest rate shall be increased to 12% from and for the continuation of an event of default) on the unpaid/unconverted principal balance, payable on the maturity date of the Notes. As the Notes provide that interest is payable on the maturity date, no cash interest will be paid on the Notes following the sale thereof.
As presented in the combined financial statements, we incurred a net loss of $2,988,116 during the twelve months ended March 31, 2013, and losses are expected to continue in the near term. The accumulated deficit since inception is $8,743,532 at March 31, 2013. We have been funding our operations through private loans and the sale of common stock in private placement transactions. Management anticipates that significant additional expenditures will be necessary to develop and expand our automotive assets before significant positive operating cash flows will be achieved.
Our combined financial statements have been presented on the basis that we are a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. We have incurred an accumulative loss of $8,743,532 since inception. In addition, we had a stockholders deficit of $4,148,287 as of March 31, 2013, and as of that date, we were delinquent in payment of $246,075 of payroll taxes and $1,000,312 of outstanding notes payable are in default. Our cash resources are insufficient to meet our planned business objectives without additional financing. These and other factors raise substantial doubt about our ability to continue as a going concern. The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of our company to continue as a going concern.
Our ability to continue as a going concern is dependent upon our ability to raise additional capital and to ultimately achieve sustainable revenues and profitable operations. At March 31, 2013, we had cash on hand in the amount of $4,434. Subsequent to March 31, 2013, we obtained a $500,000 secured bridge loan which was converted into the notes we issued in the Capital Raise. Of this amount, $200,000 was paid to reduce a related party debt. We realized $2,500,000 net cash proceeds upon the closing of the Capital Raise that will be used to pay down some debts and fund our operations through September 30, 2013. However, the funds raised are insufficient to complete our business plan and as a consequence, we will need to seek additional funds, primarily through the issuance of debt or equity securities for cash to operate our business. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to us. Even if we are able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial dilution for our stock holders, in case or equity financing.
| -21- |
Cash, total current assets, total assets, total current liabilities and total liabilities as of March 31, 2013 as compared to March 31, 2012, were as follows:
| March 31, | ||||||||
| 2013 | 2012 | |||||||
| Cash | $ | 4,434 | $ | 6,779 | ||||
| Total current assets | $ | 746,493 | $ | 323,888 | ||||
| Total assets | $ | 1,124,070 | $ | 782,247 | ||||
| Total current liabilities | $ | 4,722,099 | $ | 3,661,148 | ||||
| Total liabilities | $ | 5,272,358 | $ | 4,237,368 | ||||
At March 31, 2013, we had a working capital deficit of $3,975,606 compared to a working capital deficit of $3,337,259 at March 31, 2012. Current liabilities increased to $4,722,099 at March 31, 2013 from $3,661,148 at March 31, 2012 primarily as a result of short term notes payable, accrued payroll, accrued payroll taxes, accrued interest and customer deposits.
Net cash used by operating activities for the twelve months ended March 31, 2013 totaled $1,779,345 after the cash used in the net loss of $2,988,116 was decreased by $534,430 in non-cash charges and by $674,342 in changes in the working capital accounts. This compares to cash used by operating activities for the twelve months ended March 31, 2012 of $2,300,304 after the net loss for the period of $2,903,559 was decreased by $95,475 in non-cash charges and by $507,780 in changes to the working capital accounts.
Net cash used in investing activities was $110 for the twelve months ended March 31, 2013. This compares to $33,876 of net proceeds from the disposition of equipment for the twelve months ended March 31, 2012.
Net cash provided by financing activities for the twelve months ended March 31, 2013 was $1,777,111. Of this amount, $1,607,073 came from the sale of common stock, $275,000 came from short term notes, and $104,962 was used to pay principal on long term notes. This compares to the $2,270,830 in cash provided by financing activities during the twelve months ended March 31, 2012, of which $2,275,295 came from the sale of common stock, $16,000 came from notes payable to a related party, and $20,466 was used to pay down long term notes payable.
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND ALL OTHER INFORMATION CONTAINED IN THIS REPORT BEFORE PURCHASING SHARES OF OUR COMMON STOCK. INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. IF ANY OF THE FOLLOWING EVENTS OR OUTCOMES ACTUALLY OCCURS, OUR BUSINESS OPERATING RESULTS AND FINANCIAL CONDITION WOULD LIKELY SUFFER. AS A RESULT, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MAY LOSE ALL OR PART OF THE MONEY YOU PAID TO PURCHASE OUR COMMON STOCK.
Risks Relating to our Business
We may be unable to sustain our current level of production or deliveries of our performance cars both of which could harm our business and prospects.
Performance car production and deliveries will continue to require significant resources and we may experience unexpected delays or difficulties that could harm our ability to maintain full manufacturing capacity, or cause us to miss planned production targets, any of which could have a material adverse effect on our business, prospects, operating results and financial condition. Additionally, sustaining high volume production and doing so in a manner that avoids significant cost overruns, including as a result of factors beyond our control such as problems with suppliers and vendors, may be difficult.
| -22- |
Our ability to sustain volume production and deliveries for our next-generation supercar is subject to certain risks and uncertainties, including:
| · | that our suppliers will be able to deliver components on a timely basis and in the necessary quantities, quality and at acceptable prices to produce our supercars in volume and reach our financial targets; |
| · | that we will be able to complete any necessary adjustments to the vehicle design or manufacturing processes of our supercars in a timely manner that meets our production plan and allows for high quality vehicles; |
| · | that we will not encounter parts quality issues before, during or after production of performance cars; |
| · | that we will be able to schedule and complete deliveries at our planned volume production; |
| · | that the equipment or tooling which we have purchased or which we select will be able to accurately manufacture the vehicle within specified design tolerances and will not suffer from unexpected breakdowns or damage which could negatively affect the rate needed to produce vehicles in volume; |
| · | that we will be able to comply with environmental, workplace safety and similar regulations to operate our manufacturing facilities and our business on our projected timeline; |
| · | that we will be able to maintain high quality controls as we transition to a higher level of in-house manufacturing process; and |
| · | that the information technology systems that we are currently expanding and improving upon will be effective to manage high volume production. |
Finally, detailed long-term testing of systems integration, performance and safety as well as long-term quality, reliability and durability testing are ongoing and any negative results from such testing could cause production delays in performance cars, cost increases or lower quality vehicles.
We are dependent on our suppliers, the vast majority of which are single source suppliers, and the inability of these suppliers to continue to deliver, or their refusal to deliver, necessary components of our vehicles in a timely manner at prices, quality levels, and volumes acceptable to us would have a material adverse effect on our business, prospects and operating results.
Performance cars contain numerous purchased parts which we source globally from over 50 direct suppliers, the vast majority of whom are currently single source suppliers for these components. While we obtain components from multiple sources whenever possible, similar to other automobile manufacturers, the vast majority of the components used in our vehicles are purchased by us from single sources. To date we have not qualified alternative sources for most of the single sourced components used in our vehicles and we generally do not maintain long-term agreements with our suppliers.
While we believe that we may be able to establish alternate supply relationships and can obtain or engineer replacement components for our single source components, we may be unable to do so in the short term, or at all, at prices or costs that are favorable to us. In particular, while we believe that we will be able to secure alternate sources of supply for most of our single sourced components in a relatively short time frame, qualifying alternate suppliers or developing our own replacements for certain highly customized components of our vehicles may be time consuming, costly and may force us to make additional modifications to a vehicle’s design.
This supply chain exposes us to multiple potential sources of delivery failure or component shortages for our performance cars and/or supercars. We may experience additional delays in the future with respect to performance cars, supercars and any other future vehicle we may produce. In addition, because we do not have written agreements in place with all our suppliers, this may create uncertainty regarding certain suppliers’ obligations to us, including but not limited to, those regarding warranty and product liability. Changes in business conditions, wars, governmental changes and other factors beyond our control or which we do not presently anticipate, could also affect our suppliers’ ability to deliver components to us on a timely basis. Furthermore, if we experience significant increased demand, or need to replace certain existing suppliers, there can be no assurance that additional supplies of component parts will be available when required on terms that are favorable to us, at all, or that any supplier would allocate sufficient supplies to us in order to meet our requirements or fill our orders in a timely manner. In the past, we have replaced certain suppliers because of their failure to provide components that met our quality control standards. The loss of any single or limited source supplier or the disruption in the supply of components from these suppliers could lead to delays in vehicle deliveries to our customers, which could hurt our relationships with our customers and also materially adversely affect our business, prospects and operating results.
| -23- |
Changes in our supply chain have resulted in the past, and may result in the future, in increased cost and delay. We have also experienced cost increases from certain of our suppliers in order to meet our quality targets and development timelines as well as due to design changes that we made, and we may experience similar cost increases in the future. Additionally, we are negotiating with existing suppliers for cost reductions, seeking new and less expensive suppliers for certain parts, and attempting to redesign certain parts to make them cheaper to produce. If we are unsuccessful in our efforts to control and reduce supplier costs, our operating results will suffer. Additionally, cost reduction efforts may interrupt or harm our normal production processes, thereby harming performance car and supercar quality or reducing production output.
Furthermore, a failure by our suppliers to provide the components in a timely manner or at the level of quality necessary to manufacture our performance vehicles could prevent us from fulfilling customer orders in a timely fashion which could result in negative publicity, damage our brand and have a material adverse effect on our business, prospects, financial condition and operating results.
If we are unable to adequately reduce the manufacturing costs of performance cars and supercars or otherwise control the costs associated with operating our business, our business, financial condition, operating results and prospects will suffer.
Our production costs for performance cars have been high due to start-up costs at our factory, manufacturing inefficiencies including low absorption of fixed manufacturing costs, higher logistics costs due to the immaturity of our supply chain, and higher initial prices for component parts during the initial period after the launch and ramp of the business. As we are now producing cars at our steady state production volume of 12 vehicles per month, manufacturing costs have started to fall. While we expect further cost reduction efforts undertaken by both us and our suppliers will continue to reduce costs during 2014, there is no guarantee that we will be able to achieve planned cost reductions from our various cost savings initiatives, and the failure to achieve such savings would negatively affect our ability to reach our gross margin and profitability goals.
We incur significant costs related to procuring the raw materials required to manufacture our high-performance cars, assembling vehicles and compensating our personnel. We may also incur substantial costs in increasing the production capability of our performance cars manufacturing facilities, each of which could potentially face cost overruns. If performance cars tooling, production equipment and parts are insufficient for use in supercars, perhaps as a result of a lower level of commonality between the two vehicles than we currently anticipate, our costs related to the production of supercars may exceed our expectations.
Additionally, in the future we may be required to incur substantial marketing costs and expenses to promote our vehicles, including through the use of traditional media such as television, radio and print, even though our marketing expenses to date have been relatively limited as we have to date relied upon unconventional marketing efforts. If we are unable to keep our operating costs aligned with the level of revenues we generate, our operating results, business and prospects will be harmed. Furthermore, many of the factors that impact our operating costs are beyond our control. For example, the costs of our raw materials and components could increase due to shortages as global demand for these products increases.
Our long-term success will be dependent upon our ability to design and achieve market acceptance of new vehicle models, specifically supercars and new vehicle models such as midline sports cars.
Our long-term success is dependent on market acceptance of our performance cars and supercars. There is no guarantee that these new vehicles will be successfully accepted by the general public in the long-term.
Additionally, there can be no assurance that we will be able to design future vehicles that will meet the expectations of our customers or that our future models will become commercially viable. To the extent that we are not able to build future supercars to the expectations created by the early prototype and our announced specifications, customers may cancel their reservations, our future sales could be harmed and investors may lose confidence in us. Furthermore, historically, automobile customers have come to expect new and improved vehicle models to be introduced frequently. In order to meet these expectations, we may in the future be required to introduce on a regular basis new vehicle models as well as enhanced versions of existing vehicle models. As technologies change in the future for automobiles in general and performance vehicles specifically, we will be expected to upgrade or adapt our vehicles and introduce new models in order to continue to provide vehicles with the latest technology and meet customer expectations. To date, we have limited experience simultaneously designing, testing, manufacturing, upgrading, adapting and selling our vehicles.
| -24- |
Our limited operating history makes evaluating our business and future prospects difficult, and may increase the risk of your investment.
You must consider the risks and difficulties we face as an early stage company with a limited operating history. If we do not successfully address these risks, our business, prospects, operating results and financial condition will be materially and adversely harmed. Saleen Automotive was formed in July 2011. SMS was formed in July 2008 and began delivering the SMS Challenger in early 2009. SMS began producing the SMS Mustang in April 2010. Our production processes continue to mature.
It is difficult to predict our future revenues and appropriately budget for our expenses, and we have limited insight into trends that may emerge and affect our business. In the event that actual results differ from our estimates or we adjust our estimates in future periods, our operating results and financial position could be materially affected.
We have a history of losses and have to deliver significant cost reductions to achieve profitability in 2013 and long-term commercial success.
We incurred a combined net loss of $2,573,463 for the year ended March 31, 2013. In addition, we have combined accumulated net losses of $8,290,715 from our inception through March 31, 2013. We have had net losses in each quarter since our inception. Even if we are able to successfully maintain our current performance car production levels, there can be no assurance that we will be commercially successful. In order to achieve profitability in 2014 as well as long-term commercial success, we must continue to achieve our planned cost reductions and control our operational costs while producing quality vehicles at volume, maintain our delivery rates to match our current and anticipated production capacity, maintain strong demand for performance cars, and achieve our planned cost reductions and control our operational costs. Failure to do one or more of these things could prevent us from reaching profitability.
Increases in costs, disruption of supply or shortage of raw materials, in particular superchargers, could harm our business.
We may experience increases in the cost or a sustained interruption in the supply or shortage of raw materials. Any such increase or supply interruption could materially negatively impact our business, prospects, financial condition and operating results. We use various raw materials in our business including aluminum, steel, nickel and copper. The prices for these raw materials fluctuate depending on market conditions and global demand for these materials and could adversely affect our business and operating results. Substantial increases in the prices for our raw materials or prices charged to us, such as those charged by our supercharger manufacturers, would increase our operating costs, and could reduce our margins if we cannot recoup the increased costs through increased vehicle prices. There can be no assurance that we will be able to recoup increasing costs of raw materials by increasing vehicle prices.
Our distribution model is different from the predominant current distribution model for automobile manufacturers, which makes evaluating our business, operating results and future prospects difficult.
Our distribution model is not common in the automobile industry today, particularly in the United States. We plan to sell our performance vehicles in company-owned Saleen stores and over the Internet. This model of vehicle distribution is relatively new and unproven, especially in the United States, and subjects us to substantial risk as it requires, in the aggregate, a significant expenditure and provides for slower expansion of our distribution and sales systems than may be possible by utilizing a more traditional dealer franchise system. For example, we will not be able to utilize long-established sales channels developed through a franchise system to increase our sales volume, which may harm our business, prospects, financial condition and operating results. Moreover, we will be competing with companies with well-established distribution channels.
| -25- |
We plan to open Saleen stores in the United States initially, and expand internationally as opportunities arise. We have only limited experience distributing and selling our performance vehicles through our Saleen stores. Our success will depend in large part on our ability to effectively develop our own sales channels and marketing strategies. Implementing our business model is subject to numerous significant challenges, including obtaining permits and approvals from local and state authorities, and we may not be successful in addressing these challenges. The concept and layout of these new stores, which are located in high profile retail centers, is different than what has previously been used in automotive sales. We do not know whether our new store strategy will be successful, if consumers will be willing to purchase vehicles in this manner or if these locations will be deemed to comply with applicable zoning restrictions as well as approval and acceptance from the specific high profile retail centers in which we seek to locate our stores. As a result, we may incur additional costs in order to improve or change our retail strategy.
You must consider our business and prospects in light of the risks, uncertainties and difficulties we encounter as we implement our business model. For instance, we will need to persuade customers, suppliers and regulators of the validity and sustainability of our business model. We cannot be certain that we will be able to do so, or to successfully address the risks, uncertainties and difficulties that our business strategy faces. Any failure to successfully address any of the risks, uncertainties and difficulties related to our business model would have a material adverse effect on our business and prospects.
We may face regulatory limitations on our ability to sell vehicles directly or over the Internet which could materially and adversely affect our ability to sell our vehicles.
We plan to sell our vehicles from our Saleen stores as well as over the Internet. We may not be able to sell our vehicles through this sales model in each state in the United States as many states have laws that may be interpreted to prohibit Internet sales by manufacturers to residents of the state or to impose other limitations on this sales model, including laws that prohibit manufacturers from selling vehicles directly to consumers without the use of an independent dealership or without a physical presence in the state. For example, some states provide that a manufacturer cannot deliver a vehicle to a resident of their state except through a dealer licensed to do business in such state, which may be interpreted to require us to open a store in that state in order to sell vehicles to their residents. In some states where we have opened a gallery, which is a location where potential customers can view our vehicles but is not a full retail location, it is possible that a state regulator could take the position that activities at our gallery constitute an unlicensed motor vehicle dealership and thereby violates applicable manufacturer-dealer laws. In addition, some states have requirements that service facilities be available with respect to vehicles sold in the state, which may be interpreted to also require that service facilities be available with respect to vehicles sold over the Internet to residents of the state thereby limiting our ability to sell vehicles in states where we do not maintain service facilities.
The foregoing examples of state laws governing the sale of motor vehicles are just some of the regulations we will face as we sell our vehicles. In many states, the application of state motor vehicle laws to our specific sales model is largely untested under state motor vehicle industry laws, particularly with respect to sales over the Internet, and would be determined by a fact-specific analysis of numerous factors, including whether we have a physical presence or employees in the applicable state, whether we advertise or conduct other activities in the applicable state, how the sale transaction is structured, the volume of sales into the state, and whether the state in question prohibits manufacturers from acting as dealers. As a result of the fact-specific and untested nature of these issues, and the fact that applying these laws intended for the traditional automobile distribution model to our sales model allows for some interpretation and discretion by the regulators, the manner in which the applicable authorities will apply their state laws to our distribution model is difficult to predict. Such laws, as well as other laws governing the motor vehicle industry, may subject us to potential inquiries and investigations from state motor vehicle regulators who may question whether our sales model complies with applicable state motor vehicle industry laws and who may require us to change our sales model or may prohibit our ability to sell our vehicles to residents in such states. In addition, decisions by regulators permitting us to sell vehicles may be subject to challenges as to whether such decisions comply with applicable state motor vehicle industry laws.
| -26- |
The automotive market is highly competitive, and we may not be successful in competing in this industry. We currently face competition from new and established competitors and expect to face competition from others in the future.
The worldwide automotive market is highly competitive today and we expect it will become even more so in the future. With respect to our supercars, we face competition from existing and future automobile manufacturers in the extremely competitive premium sedan market, including Audi, BMW, Lexus and Mercedes.
Most of our current and potential competitors have significantly greater financial, technical, manufacturing, marketing and other resources than we do and may be able to devote greater resources to the design, development, manufacturing, distribution, promotion, sale and support of their products. Virtually all of our competitors have more extensive customer bases and broader customer and industry relationships than we do. In addition, almost all of these companies have longer operating histories and greater name recognition than we do. Our competitors may be in a stronger position to respond quickly to new technologies and may be able to design, develop, market and sell their products more effectively.
Furthermore, certain large automobile manufacturers offer financing and leasing options on their vehicles and also have the ability to market vehicles at a substantial discount, provided that the vehicles are financed through their affiliated financing company.
Demand in the automobile industry is highly volatile, which may lead to lower vehicle unit sales and adversely affect our operating results.
Volatility of demand in the automobile industry may materially and adversely affect our business, prospects, operating results and financial condition. The markets in which we currently compete and plan to compete in the future have been subject to considerable volatility in demand in recent periods. Demand for automobile sales depends to a large extent on general, economic, political and social conditions in a given market and the introduction of new vehicles and technologies. As a new automobile manufacturer and low volume producer, we have less financial resources than more established automobile manufacturers to withstand changes in the market and disruptions in demand. As our business grows, economic conditions and trends in other countries and regions where we sell our performance vehicles will impact our business, prospects and operating results as well. Demand for our performance vehicles may also be affected by factors directly impacting automobile price or the cost of purchasing and operating automobiles such as sales and financing incentives, prices of raw materials and parts and components, cost of fuel and governmental regulations, including tariffs, import regulation and other taxes. Volatility in demand may lead to lower vehicle unit sales and increased inventory, which may result in further downward price pressure and adversely affect our business, prospects, financial condition and operating results. These effects may have a more pronounced impact on our business given our relatively smaller scale and financial resources as compared to many incumbent automobile manufacturers.
Difficult economic conditions may negatively affect consumer purchases of luxury items, such as our performance vehicles.
Over the last few years, the deterioration in the global financial markets and continued challenging condition of the macroeconomic environment has negatively impacted consumer spending and we believe has adversely affected the sales of our performance vehicles. The automobile industry in particular was severely impacted by the poor economic conditions and several vehicle manufacturing companies, including General Motors and Chrysler, were forced to file for bankruptcy. Sales of new automobiles generally have dropped during this recessionary period. Sales of high-end and luxury consumer products, such as our performance vehicles, depend in part on discretionary consumer spending and are even more exposed to adverse changes in general economic conditions. Difficult economic conditions could therefore temporarily reduce the market for vehicles in our price range. Discretionary consumer spending also is affected by other factors, including changes in tax rates and tax credits, interest rates and the availability and terms of consumer credit.
| -27- |
If the current difficult economic conditions continue or worsen, we may experience a decline in the demand for performance vehicles or future vehicles, any of which could materially harm our business, prospects, financial condition and operating results. Accordingly, any events that have a negative effect on the United States economy or on foreign economies or that negatively affect consumer confidence in the economy, including disruptions in credit and stock markets, and actual or perceived economic slowdowns, may harm our business, prospects, financial condition and operating results.
Our financial results may vary significantly from period-to-period due to the seasonality of our business and fluctuations in our operating costs.
Our operating results may vary significantly from period-to-period due to many factors, including seasonal factors that may have an effect on the demand for our performance vehicles. Demand for new cars in the automobile industry in general, typically decline over the winter season, while sales are generally higher during the spring and summer months. We note that, in general, automotive sales tend to decline over the winter season and we anticipate that our sales of performance vehicles and other models we introduce may have similar seasonality. However, our limited operating history makes it difficult for us to judge the exact nature or extent of the seasonality of our business. Also, any unusually severe weather conditions in some markets may impact demand for our vehicles. Our operating results could also suffer if we do not achieve revenue consistent with our expectations for this seasonal demand because many of our expenses are based on anticipated levels of annual revenue.
In addition, we expect our period-to-period operating results to vary based on our operating costs which we anticipate will increase significantly in future periods as we, among other things, design, develop and manufacture our supercars, increase the production capacity at our manufacturing facilities to produce our supercars, incur costs for warranty repairs or product recalls, if any, increase our sales and marketing activities, and increase our general and administrative functions to support our growing operations. As a result of these factors, we believe that quarter-to-quarter comparisons of our operating results, especially in the short-term, are not necessarily meaningful and that these comparisons cannot be relied upon as indicators of future performance. Moreover, our operating results may not meet expectations of equity research analysts or investors. If any of this occurs, the trading price of our common stock after the Merger could fall substantially, either suddenly or over time.
If we are unable to establish and maintain confidence in our long-term business prospects among consumers, analysts and within our industry, then our financial condition, operating results, business prospects and stock price may suffer materially.
Our vehicles are highly technical products that require maintenance and support. If we were to cease or cut back operations, even years from now, buyers of our vehicles from years earlier might have much more difficulty in maintaining their vehicles and obtaining satisfactory support. As a result, consumers may be less likely to purchase our vehicles now if they are not convinced that our business will succeed or that our operations will continue for many years. Similarly, suppliers and other third parties will be less likely to invest time and resources in developing business relationships with us if they are not convinced that our business will succeed.
Accordingly, in order to build and maintain our business, we must maintain confidence among customers, suppliers, analysts and other parties in our liquidity and long-term business prospects. In contrast to some more established automakers, we believe that, in our case, the task of maintaining such confidence may be particularly complicated by factors such as the following:
| · | our limited operating history; |
| · | our limited revenues and lack of profitability to date; |
| · | unfamiliarity with or uncertainty about the our supercars; |
| · | uncertainty about the long-term marketplace acceptance of alternative fuel vehicles generally, or electric vehicles specifically; |
| · | the prospect that we will need ongoing infusions of external capital to fund our planned operations; |
| · | the size of our expansion plans in comparison to our existing capital base and scope and history of operations; and |
| · | the prospect or actual emergence of direct, sustained competitive pressure from more established automakers, which may be more likely if our initial efforts are perceived to be commercially successful. |
Many of these factors are largely outside our control, and any negative perceptions about our long-term business prospects, even if exaggerated or unfounded, would likely harm our business and make it more difficult to raise additional funds when needed.
We may not succeed in maintaining and strengthening the Saleen brand, which would materially and adversely affect customer acceptance of our vehicles and components and our business, revenues and prospects.
Our business and prospects are heavily dependent on our ability to develop, maintain and strengthen the Saleen brand. Any failure to develop, maintain and strengthen our brand may materially and adversely affect our ability to sell our performance vehicles and future planned supercars. If we do not continue to establish, maintain and strengthen our brand, we may lose the opportunity to build a critical mass of customers. Promoting and positioning our brand will likely depend significantly on our ability to provide high quality performance vehicles and we have very limited experience in these areas.
In addition, we expect that our ability to develop, maintain and strengthen the Saleen brand will also depend heavily on the success of our marketing efforts. To date, we have limited experience with marketing activities as we have relied primarily on the Internet, word of mouth and attendance at industry trade shows to promote our brand. To further promote our brand, we may be required to change our marketing practices, which could result in substantially increased advertising expenses, including the need to use traditional media such as television, radio and print. The automobile industry is intensely competitive, and we may not be successful in building, maintaining and strengthening our brand. Many of our current and potential competitors, particularly automobile manufacturers headquartered in Detroit, Japan and the European Union, have greater name recognition, broader customer relationships and substantially greater marketing resources than we do. If we do not develop and maintain a strong brand, our business, prospects, financial condition and operating results will be materially and adversely impacted.
Our plan to develop our network of Saleen stores will require significant cash investments and management resources and may not meet our expectations with respect to additional sales of our performance vehicles. In addition, we may not be able to open stores in certain states.
Our plan to develop our network of Saleen stores will require significant cash investments and management resources and may not meet our expectations with respect to additional sales of our vehicles. This planned U.S. expansion of Saleen stores may not have the desired effect of increasing sales and expanding our brand presence to the degree we are anticipating. Furthermore there can be no assurances that we will be able to construct additional storefronts on the budget or timeline we have established. We will also need to ensure we are in compliance with any regulatory requirements applicable to the sale of our vehicles in those jurisdictions, which could take considerable time and expense. If we experience any delays in expanding our network of Saleen stores, this could lead to a decrease in sales of our vehicles and could negatively impact our business, prospects, financial condition and operating results. We plan to open Saleen stores with a goal of establishing approximately 12 U.S. stores within the next several years. However, we may not be able to expand our network at such rate and our planned expansion of our network of Saleen stores will require significant cash investment and management resources, as well as efficiency in the execution of establishing these storefronts and in hiring and training the necessary employees to effectively sell our vehicles. Such additional investments may not be available to us or may not be available on terms reasonably acceptable to us.
Furthermore, certain states and foreign jurisdictions may have permit requirements, franchise dealer laws or similar laws or regulations that may preclude or restrict our ability to open stores or sell vehicles out of such states and jurisdictions. Any such prohibition or restriction may lead to decreased sales in such jurisdictions, which could harm our business, prospects and operating results. See Risk Factor “We may face regulatory limitations on our ability to sell vehicles directly or over the Internet which could materially and adversely affect our ability to sell our vehicles.”
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If we fail to manage future growth effectively as we rapidly grow our company, we may not be able to produce, market, sell and service our vehicles successfully.
Any failure to manage our growth effectively could materially and adversely affect our business, prospects, operating results and financial condition. We continue to expand our operations significantly, and additional significant expansion will be required, especially in connection with the expansion of our network of Saleen stores. Our future operating results depend to a large extent on our ability to manage this expansion and growth successfully. Risks that we face in undertaking this expansion include:
| · | finding and training new personnel; |
| · | forecasting production and revenue; |
| · | controlling expenses and investments in anticipation of expanded operations; |
| · | establishing or expanding design, manufacturing, sales and service facilities; |
| · | implementing and enhancing manufacturing and administrative infrastructure, systems and processes; |
| · | addressing new markets; and |
| · | expanding international operations. |
We intend to continue to hire a significant number of additional personnel, including manufacturing personnel, design personnel, engineers and service technicians for our performance vehicles. Because our high-performance vehicles are based on a different technology platform than traditional internal combustion engines, individuals with sufficient training in performance vehicles may not be available to hire, and we will need to expend significant time and expense training the employees we do hire. Competition for individuals with experience designing, manufacturing and servicing performance vehicles are intense, and we may not be able to attract, assimilate, train or retain additional highly qualified personnel in the future. The failure to attract, integrate, train, motivate and retain these additional employees could seriously harm our business and prospects.
If we are unable to attract and/or retain key employees and hire qualified management, technical vehicle engineering, and manufacturing personnel, our ability to compete could be harmed and our stock price may decline.
The loss of the services of any of our key employees could disrupt our operations, delay the development and introduction of our vehicles and services, and negatively impact our business, prospects and operating results as well as cause the stock price of the combined business to decline. In particular, we are highly dependent on the services of Steve Saleen, our Chief Executive Officer and Chairman of our Board of Directors, and Robert Miranda, our Chief Financial Officer. There can be no assurance that we will be able to successfully attract and retain senior leadership necessary to grow our business. Our future success depends upon our ability to attract and retain our executive officers and other key technology, sales, marketing, engineering, manufacturing and support personnel and any failure to do so could adversely impact our business, prospects, financial condition and operating results. We have in the past and may in the future experience difficulty in retaining members of our senior management team as well as technical, vehicle engineering and manufacturing personnel due to various factors, such as a very competitive labor market for talented individuals with automotive experience. In addition, we do not have “key person” life insurance policies covering any of our officers or other key employees. Currently in Southern California, there is increasing competition for talented individuals with the specialized knowledge of performance vehicles, software engineers and other skilled employees and this competition affects both our ability to retain key employees and hire new ones. Our continued success depends upon our continued ability to hire and retain employees. Additionally, we compete with many mature and prosperous companies in Southern California that have far greater financial resources than we do and thus can offer current or perspective employees more lucrative incentive packages than we can. Any difficulties in retaining current employees or recruiting new ones would have an adverse effect on our performance.
Many members of our management team are new to the company or to the automobile industry, and execution of our business plan and development strategy could be seriously harmed if integration of our management team into our company is not successful.
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Our business could be seriously harmed if integration of our management team into our company is not successful. We expect that it will take time for our new management team to integrate into our company and it is too early to predict whether this integration will be successful. We have recently experienced significant changes in our management team and expect to continue to experience significant growth in our management team. Our senior management team has only limited experience working together as a group. This lack of long-term experience working together may impact the team’s ability to collectively quickly and efficiently respond to problems and effectively manage our business. Although we are taking steps to add senior management personnel that have significant automotive experience, some members of our current senior management team have limited experience in the automobile industry.
We are subject to various environmental and safety laws and regulations that could impose substantial costs upon us and negatively impact our ability to operate our manufacturing facilities.
As an automobile manufacturer, we and our operations, both in the United States and abroad, are subject to national, state, provincial and/or local environmental, health and safety laws and regulations, including laws relating to the use, handling, storage, disposal and human exposure to hazardous materials. Environmental and health and safety laws and regulations can be complex, and we expect that our business and operations will be affected by future amendments to such laws or other new environmental and health and safety laws which may require us to change our operations, potentially resulting in a material adverse effect on our business. These laws can give rise to liability for administrative oversight costs, cleanup costs, property damage, bodily injury and fines and penalties. Capital and operating expenses needed to comply with environmental, health and safety laws and regulations can be significant, and violations may result in substantial fines and penalties, third party damages, suspension of production or a cessation of our operations.
Contamination at properties formerly owned or operated by us, as well as at properties we will own and operate, and properties to which hazardous substances were sent by us, may result in liability for us under environmental laws and regulations, including, but not limited to the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), which can impose liability for the full amount of remediation-related costs without regard to fault, for the investigation and cleanup of contaminated soil and ground water, for building contamination and impacts to human health and for damages to natural resources. The costs of complying with environmental laws and regulations and any claims concerning noncompliance, or liability with respect to contamination in the future, could have a material adverse effect on our financial condition or operating results. We may face unexpected delays in obtaining the necessary permits and approvals required by environmental laws in connection with our manufacturing facilities that could require significant time and financial resources and negatively impact our ability to operate these facilities, which would adversely impact our business prospects and operating results.
Our business may be adversely affected by union activities.
Although none of our employees are currently represented by a labor union, it is common throughout the automobile industry generally for many employees at automobile companies to belong to a union, which can result in higher employee costs and increased risk of work stoppages. Our employees may join or seek recognition to form a labor union, or we may be required to become a union signatory. Additionally, disgruntled ex-employees may actively encourage unionization of our employees. We are also directly or indirectly dependent upon companies with unionized work forces, such as parts suppliers and trucking and freight companies, and work stoppages or strikes organized by such unions could have a material adverse impact on our business, financial condition or operating results. If a work stoppage occurs, it could delay the manufacture and sale of our performance vehicles and have a material adverse effect on our business, prospects, operating results or financial condition. The mere fact that our labor force could be unionized may harm our reputation in the eyes of some investors and thereby negatively affect the stock price of the combined business. Additionally, the unionization of our labor force could increase our employee costs and decrease our profitability, both of which could adversely affect our business, prospects, financial condition and results of operations.
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We are subject to substantial regulation, which is evolving, and unfavorable changes or failure by us to comply with these regulations could substantially harm our business and operating results.
Our performance vehicles, and the sale of motor vehicles in general, are subject to substantial regulation under international, federal, state and local laws. We have incurred, and expect to incur in the future, significant costs in complying with these regulations. Regulations related to the automobile industry are currently evolving and we face risks associated with changes to these regulations such as:
| · | the amendment or rescission of the federal law and regulations mandating increased fuel economy in the United States, referred to as the Corporate Average Fuel Economy (CAFE) standards, could reduce new business opportunities for our development activities; |
| · | the amendment or rescission of federal greenhouse gas tailpipe emission regulations administered by the EPA under the authority of the Clean Air Act could reduce new business opportunities for our development activities; |
| · | increased sensitivity by regulators to the needs of established automobile manufacturers with large employment bases, high fixed costs and business models based on the internal combustion engine could lead them to pass regulations that could reduce the compliance costs of such established manufacturers or mitigate the effects of government efforts to promote alternative fuel vehicles; and |
| · | changes to regulations governing the export of our products could increase our costs incurred to deliver products outside the United States or force us to charge a higher price for our vehicles in such jurisdictions. |
To the extent the laws change, some or all of our vehicles may not comply with applicable international, federal, state or local laws, which would have an adverse effect on our business. Compliance with changing regulations could be burdensome, time consuming, and expensive. To the extent compliance with new regulations is cost prohibitive, our business, prospects, financial condition and operating results will be adversely affected.
We may become subject to product liability claims, which could harm our financial condition and liquidity if we are not able to successfully defend or insure against such claims.
We may become subject to product liability claims, which could harm our business, prospects, operating results and financial condition. The automobile industry experiences significant product liability claims and we face inherent risk of exposure to claims in the event our vehicles do not perform as expected or malfunction resulting in personal injury or death. Our risks in this area are particularly pronounced given the limited number of vehicles delivered to date and limited field experience of those vehicles. A successful product liability claim against us could require us to pay a substantial monetary award. Moreover, a product liability claim could generate substantial negative publicity about our vehicles and business and inhibit or prevent commercialization of other future vehicle candidates which would have a material adverse effect on our brand, business, prospects and operating results. We insure against the risk of product liability claims, however, any lawsuit seeking significant monetary damages may have a material adverse effect on our reputation, business and financial condition. We may not be able to secure additional product liability insurance coverage on commercially acceptable terms or at reasonable costs when needed, particularly if we do face liability for our products and are forced to make a claim under our policy.
We may be compelled to undertake product recalls, which could adversely affect our brand image and financial performance.
Any product recall in the future may result in adverse publicity, damage our brand and adversely affect our business, prospects, operating results and financial condition. In the future, we may at various times, voluntarily or involuntarily, initiate a recall if any of our vehicles prove to be defective or noncompliant with applicable federal motor vehicle safety standards. Such recalls, voluntary or involuntary, involve significant expense and diversion of management attention and other resources, which could adversely affect our brand image in our target markets and could adversely affect our business, prospects, financial condition and results of operations.
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Our current and future warranty reserves may be insufficient to cover future warranty claims which could adversely affect our financial performance.
If our warranty reserves are inadequate to cover future warranty claims on our vehicles, our business, prospects, financial condition and operating results could be materially and adversely affected. We provide a three year or 36,000 mile New Vehicle Limited Warranty with every Saleen 302 and 302SC Mustang, Saleen 570 Challenger, and Saleen 620 Camaro performance vehicle. We provide a one year or 12,000 miles New Vehicle Limited Warranty with every Saleen 351 Mustang, Saleen 570X Challenger, and Saleen 620X Camaro performance vehicle. The vehicle limited warranty applies to installed parts and/or assemblies in new performance vehicles. All of the unaltered parts are covered under the original full warranty of the OEM manufacturer of the base vehicles (Ford, Chevrolet, and Dodge).
We have limited operating experience with our vehicles, and therefore little experience with warranty claims for these vehicles or with estimating warranty reserves. Our warranty claims to date have been negligible and we currently do not have reserves recorded for warranty claims.
We could in the future become subject to a significant and unexpected warranty expense. There can be no assurances that our currently existing or future warranty reserves will be sufficient to cover all claims or that our limited experience with warranty claims will adequately address the needs of our customers to their satisfaction.
We may need to defend ourselves against patent or trademark infringement claims, which may be time-consuming and would cause us to incur substantial costs.
Companies, organizations or individuals, including our competitors, may hold or obtain patents, trademarks or other proprietary rights that would prevent, limit or interfere with our ability to make, use, develop or sell our vehicles or components, which could make it more difficult for us to operate our business. From time to time, we may receive inquiries from holders of patents or trademarks inquiring whether we infringe their proprietary rights. Companies holding patents or other intellectual property rights relating to our base vehicles may bring suits alleging infringement of such rights or otherwise asserting their rights and seeking licenses. In addition, if we are determined to have infringed upon a third party’s intellectual property rights, we may be required to do one or more of the following:
| · | cease selling, incorporating or using vehicles that incorporate the challenged intellectual property; |
| · | pay substantial damages; |
| · | obtain a license from the holder of the infringed intellectual property right, which license may not be available on reasonable terms or at all; or |
| · | redesign our vehicles. |
In the event of a successful claim of infringement against us and our failure or inability to obtain a license to the infringed technology, our business, prospects, operating results and financial condition could be materially adversely affected. In addition, any litigation or claims, whether or not valid, could result in substantial costs and diversion of resources and management attention.
We also license patents and other intellectual property from third parties, and we may face claims that our use of this in-licensed technology infringes the rights of others. In that case, we may seek indemnification from our licensors under our license contracts with them. However, our rights to indemnification may be unavailable or insufficient to cover our costs and losses, depending on our use of the technology, whether we choose to retain control over conduct of the litigation, and other factors.
Our business will be adversely affected if we are unable to protect our intellectual property rights from unauthorized use or infringement by third parties.
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Any failure to protect our proprietary rights adequately could result in our competitors offering similar products, potentially resulting in the loss of some of our competitive advantage and a decrease in our revenue which would adversely affect our business, prospects, financial condition and operating results. Our success depends, at least in part, on our ability to protect our core technology and intellectual property. To accomplish this, we rely on a combination of patents, patent applications, trade secrets, including know-how, employee and third party nondisclosure agreements, copyright laws, trademarks, intellectual property licenses and other contractual rights to establish and protect our proprietary rights in our technology. We have also received from third parties patent licenses related to manufacturing our vehicles.
The protection provided by the patent laws is and will be important to our future opportunities. However, such patents and agreements and various other measures we take to protect our intellectual property from use by others may not be effective for various reasons, including the following:
| · | our pending patent applications may not result in the issuance of patents; |
| · | our patents, if issued, may not be broad enough to protect our proprietary rights; |
| · | the patents we have been granted may be challenged, invalidated or circumvented because of the pre-existence of similar patented or unpatented intellectual property rights or for other reasons; |
| · | the costs associated with enforcing patents, confidentiality and invention agreements or other intellectual property rights may make aggressive enforcement impracticable; |
| · | current and future competitors may independently develop similar technology, duplicate our vehicles or design new vehicles in a way that circumvents our patents; and |
| · | our in-licensed patents may be invalidated or the holders of these patents may seek to breach our license arrangements. |
Existing trademark and trade secret laws and confidentiality agreements afford only limited protection. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States, and policing the unauthorized use of our intellectual property is difficult.
Our patent applications may not result in issued patents, which may have a material adverse effect on our ability to prevent others from commercially exploiting products similar to ours.
We cannot be certain that we are the first creator of inventions covered by pending patent applications or the first to file patent applications on these inventions, nor can we be certain that our pending patent applications will result in issued patents or that any of our issued patents will afford protection against a competitor. In addition, patent applications filed in foreign countries are subject to laws, rules and procedures that differ from those of the United States, and thus we cannot be certain that foreign patent applications related to issued U.S. patents will result in issued foreign patents. Furthermore, even if these patent applications do result in issued patents, some foreign countries provide significantly less effective patent enforcement than in the United States.
The status of patents involves complex legal and factual questions and the breadth of claims allowed is uncertain. As a result, we cannot be certain that the patent applications that we file will result in patents being issued, or that our patents and any patents that may be issued to us in the near future will afford protection against competitors with similar technology. In addition, patents issued to us may be infringed upon or designed around by others and others may obtain patents that we need to license or design around, either of which would increase costs and may adversely affect our business, prospects, financial condition and operating results.
Our facilities or operations could be damaged or adversely affected as a result of disasters or unpredictable events.
Our corporate headquarters and factory in Corona are located in southern California, a region known for seismic activity. If major disasters such as earthquakes, fires, floods, hurricanes, wars, terrorist attacks, computer viruses, pandemics or other events occur, or our information system or communications network breaks down or operates improperly, our headquarters and production facilities may be seriously damaged, or we may have to stop or delay production and shipment of our products. In addition, our lease for our Corona facility permits the landlord to terminate the lease following a casualty event if the needed repairs are in excess of certain thresholds and we do not agree to pay for any uninsured amounts. We may incur expenses relating to such damages, which could have a material adverse impact on our business, operating results and financial condition.
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If our suppliers fail to use ethical business practices and comply with applicable laws and regulations, our brand image could be harmed due to negative publicity.
Our core values, which include developing the highest quality performance vehicles while operating with integrity, are an important component of our brand image, which makes our reputation particularly sensitive to allegations of unethical business practices. We do not control our independent suppliers or their business practices. Accordingly, we cannot guarantee their compliance with ethical business practices, such as environmental responsibility, fair wage practices, appropriate sourcing of raw materials, and compliance with child labor laws, among others. A lack of demonstrated compliance could lead us to seek alternative suppliers, which could increase our costs and result in delayed delivery of our products, product shortages or other disruptions of our operations.
Violation of labor or other laws by our suppliers or the divergence of an independent supplier’s labor or other practices from those generally accepted as ethical in the United States or other markets in which we do business could also attract negative publicity for us and our brand. This could diminish the value of our brand image and reduce demand for our performance vehicles if, as a result of such violation, we were to attract negative publicity. If we, or other manufacturers in our industry, encounter similar problems in the future, it could harm our brand image, business, prospects, financial condition and operating results.
We will continue to need additional financing to carry out our business plan.
The net proceeds from the Capital Raise available to fund our business will be reduced by the required payments and reimbursements to stockholders to whom we are indebted and other transaction costs incurred by prior operations. Although we estimate that the net funds from the Capital Raise will be sufficient to fund our planned activities for up to a year, we will need thereafter or sooner to obtain significant additional funding to successfully continue our business. Such additional funds may not be readily available or may not be available on terms acceptable to us.
Our auditors have expressed a going concern opinion on our financial statements. We may be unable to obtain additional capital required to implement our business plan, which could restrict our ability to grow.
We are delinquent in payment of $246,075 of payroll taxes, and $1,000,312 of our outstanding notes payable is in default. If we fail to make certain required payments and perform other contractual obligations to the tax authorities and our lenders, the debt obligations to such creditors will accelerate, which would have a material adverse effect on our continued operations.
Future acquisitions and product development activity will require additional capital that exceeds our operating cash flow. In addition, our administrative costs (such as salaries, insurance expenses and general overhead expenses, as well as legal compliance costs and accounting expenses) will require cash resources.
We may pursue sources of additional capital through various financing transactions or arrangements, including joint venturing of projects, debt financing, equity financing or other means. We may not be successful in identifying suitable financing transactions in the time period required or at all, and we may not obtain the required capital by other means. If we are not successful in raising additional capital, our resources may be insufficient to fund our planned operations in 2014 or thereafter.
Any additional capital raised through the sale of equity or convertible debt will dilute the ownership percentage of our stockholders. Raising any such capital could also result in a decrease in the nominal fair market value of our equity securities because our assets would be owned by a larger pool of outstanding equity. The terms of securities we issue in future capital transactions may be more favorable to new investors, and may include preferences, superior voting rights and the issuance of other derivative securities, and issuances of incentive awards under equity employee incentive plans, all of which may have a dilutive effect to existing investors.
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Our ability to obtain financing, if and when necessary, may be impaired by such factors as the capital markets, our limited operating history, market acceptance of our performance vehicles and parts, and the departure of key employees. Further, if demand for our products does not grow, our revenues will likely decrease and such decreased revenues may increase our requirements for capital. If the amount of capital we are able to raise from financing activities, together with revenues from our operations, is not sufficient to satisfy our capital needs (even if we reduce our operations), we may be required to cease operations, divest our assets at unattractive prices or obtain financing on unattractive terms.
For these reasons, the report of our auditor accompanying our financial statements filed herewith includes a statement that these factors raise substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern will be dependent on our raising of additional capital and the success of our business plan.
We have a history of operating losses and there can be no assurance that we can achieve or maintain profitability.
We have a history of operating losses and may not achieve or sustain profitability. We cannot guarantee that we will become profitable. Even if we achieve profitability, given the competitive and evolving nature of the industry in which we operate, we may not be able to sustain or increase profitability and our failure to do so would adversely affect our business, including our ability to raise additional funds.
We may not be able to effectively manage our growth.
Our strategy envisions growing our business. We plan to expand our technology, sales, administrative and marketing organizations. Any growth in or expansion of our business is likely to continue to place a strain on our management and administrative resources, infrastructure and systems. As with other growing businesses, we expect that we will need to further refine and expand our business development capabilities, our systems and processes and our access to financing sources. We also will need to hire, train, supervise and manage new employees. These processes are time consuming and expensive, will increase management responsibilities and will divert management attention. We cannot assure you that we will be able to:
| · | expand our systems effectively or efficiently or in a timely manner; |
| · | allocate our human resources optimally; |
| · | meet our capital needs; |
| · | identify and hire qualified employees or retain valued employees; or |
| · | incorporate effectively the components of any business or product line that we may acquire in our effort to achieve growth. |
Our inability or failure to manage our growth and expansion effectively could harm our business and materially and adversely affect our operating results and financial condition.
We will be required to attract and retain top quality talent to compete in the marketplace.
We believe our future growth and success will depend in part on our abilities to attract and retain highly skilled managerial, product development, sales and marketing, and finance personnel. There can be no assurance of success in attracting and retaining such personnel. Shortages in qualified personnel could limit our ability to increase sales of existing products and services and launch new product and service offerings.
Our forecasts are highly speculative in nature and we cannot predict results in a development stage company with a high degree of accuracy.
Any financial projections, especially those based on ventures with minimal operating history, are inherently subject to a high degree of uncertainty, and their ultimate achievement depends on the timing and occurrence of a complex series of future events, both internal and external to the enterprise. There can be no assurance that potential revenues or expenses we project will, in fact, be received or incurred.
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We will be subject to evolving and expensive corporate governance regulations and requirements. Our failure to adequately adhere to these requirements or the failure or circumvention of our controls and procedures could seriously harm our business.
As a publicly traded company, we are subject to various federal, state and other rules and regulations, including applicable requirements of the Sarbanes-Oxley Act of 2002. Compliance with these evolving regulations is costly and requires a significant diversion of management time and attention, particularly with regard to our disclosure controls and procedures and our internal control over financial reporting. Our internal controls and procedures may not be able to prevent errors or fraud in the future. Faulty judgments, simple errors or mistakes, or the failure of our personnel to adhere to established controls and procedures, may make it difficult for us to ensure that the objectives of the control system are met. A failure of our controls and procedures to detect other than inconsequential errors or fraud could seriously harm our business and results of operations.
We are obligated to develop and maintain proper and effective internal control over financial reporting. We may not complete our analysis of our internal control over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may adversely affect investor confidence in our company and, as a result, the value of the stock of the combined business.
We will be required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. This assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting.
Complying with Section 404 requires a rigorous compliance program as well as adequate time and resources. As a result of developing, improving and expanding our core information technology systems as well as implementing new systems to support our sales, engineering, supply chain and manufacturing activities, all of which require significant management time and support, we may not be able to complete our internal control evaluation, testing and any required remediation in a timely fashion. Additionally, if we identify one or more material weaknesses in our internal control over financial reporting, we may be unable to assert that our internal controls are effective. If we are unable to assert that our internal control over financial reporting is effective we could lose investor confidence in the accuracy and completeness of our financial reports, which would have a material adverse effect on the price of the stock of the combined business.
Our limited senior management team size may hamper our ability to effectively manage a publicly traded company while developing our products and harm our business.
Our management team has experience in the management of publicly traded companies and complying with federal securities laws, including compliance with recently adopted disclosure requirements on a timely basis. They realize it will take significant resources to meet these requirements while simultaneously working on licensing, developing and protecting our products and intellectual property. Our management will be required to design and implement appropriate programs and policies in responding to increased legal, regulatory compliance and reporting requirements, and any failure to do so could lead to the imposition of fines and penalties and harm our business.
The failure of the United States automotive industry to experience a rebound to pre-recessionary performance could adversely harm our business.
The global recession, which commenced in 2008, had a dire impact on the United States automotive industry. The sudden collapse in demand for new automobiles resulted in bankruptcy filings and significant, long-term restructuring for Chrysler and General Motors, with Ford narrowly avoiding the need for a bail-out loan from the federal government to stay solvent. The auto industry, as we have known it for over a century, nearly collapsed.
The “Big Three” automakers have responded by revamping their product lines, garnering wider consumer popularity and grabbing market share from the Asian automakers. As a result they have posted strong quarterly earnings, allowing both Chrysler and GM to repay the bulk of their government loans. However, the future of the industry remains uncertain, and the demand for new vehicles has not been as robust as in the pre-recessionary period. The U.S. automotive industry faces tough overseas competition and soft consumer demand that will likely persist for the foreseeable future.
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Furthermore, the automakers are traversing a new regulatory environment with a higher Corporate Average Fuel Economy standard being ushered in where high mileage vehicles have typically not been the strong suit of the U.S. automakers. In addition, several states have instituted legislation to quell carbon emissions which will necessarily have an impact on the auto industry as vehicles are responsible for 40% of all carbon emission in the United States. Policies focused on mitigating vehicle usage and steering commuters toward alternative forms of transportation are gaining wider acceptance and will likely have a significant impact. In addition, the U.S. population is aging overall and becoming more urbanized, which is leading analysts to conclude that the U.S. is becoming less demographically inclined to drive.
In light of the above conditions, it is not unforeseeable that the U.S. automotive industry may never rebound to the performance experienced before the recession. The relative decline of the U.S. automotive industry could prove permanent, and such a development could have an adverse impact on our business.
The global economy may continue to experience soft growth over the next several years, reducing demand for our products.
The global economy continues to experience difficulty in its recovery from the 2008 global recession. In light of the current global economic environment, there can be no guarantees that the United States, or its trading partners abroad, with whom it is largely interdependent, will experience a return to pre-recessionary growth and economic performance. Continued lackluster growth and economic figures would serve to further quell economic demand, and subsequently, growth of the automotive market, reducing demand for our products.
Risks Related to our Common Stock
There is little current trading of shares or our common stock. Our stock price is likely to be highly volatile.
Although prices for shares of our common stock are quoted on the OTCBB, there is little current trading and no assurance can be given that an active public trading market will develop or, if developed, that it will be sustained. The OTCBB is generally regarded as a less efficient and less prestigious trading market than other national markets. There is no assurance if or when our common stock will be quoted on another more prestigious exchange or market. The market price of our common stock is likely to be highly volatile because for some time there will likely be a thin trading market for the stock, which causes trades of small blocks of stock to have a significant impact on the stock price.
Because our common stock is a “penny stock,” trading therein will be subject to regulatory restrictions.
Our common stock is currently, and in the near future will likely continue to be, considered a “penny stock.” The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document prepared by the SEC, which specifies information about penny stocks and the nature and significance of risks of the penny stock market. The broker-dealer also must provide the customer with bid and offer quotations for the penny stock, the compensation of the broker-dealer and any salesperson in the transaction, and monthly account statements indicating the market value of each penny stock held in the customer’s account. In addition, the penny stock rules require that, prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure and other requirements may adversely affect the trading activity in the secondary market for our common stock.
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Limited future sales of our common stock in the public market could make it difficult to generate significant liquidity.
As noted above, we will be obligated to file a registration statement with the SEC to cover resales of shares underlying the Notes issued to the Purchasers. However, upon the effectiveness of this registration statement, most of the stock covered under the registration may not be immediately available for trading. Due to a limitation in the number of shares traded on a regular basis, there may be significant swings in the bid and ask prices of our stock or there may not be any significant volume of the stock available to trade.
We have not paid dividends in the past and, except for the dividend to be paid to our existing stockholders at the closing of the Merger, do not expect to pay dividends for the foreseeable future, and any return on investment may be limited to potential future appreciation on the value of our common stock.
While we declared a dividend to holders of record of our common stock as of May 23, 2013, we do not anticipate paying dividends in the foreseeable future and currently intend to retain any future earnings to support the development and expansion of our business. Our payment of any future dividends will be at the discretion of our board of directors after taking into account various factors, including without limitation, the our financial condition, operating results, cash needs, growth plans and the terms of any credit agreements that we may be a party to at the time. To the extent we do not pay dividends, our stock may be less valuable because a return on investment will only occur if and to the extent the stock price appreciates, which may never occur. In addition, shareholders must generally rely on sales of the shares they own after price appreciation as the only way to realize their investment, and if the price of our common stock does not appreciate, then there will be no return on investment.
Our officers, directors and principal stockholders, after the Merger, will be able to exert significant influence over the combined business and may make decisions that are not in the best interests of all stockholders.
After the Merger our officers, directors and principal stockholders (greater than 5% stockholders) will collectively own approximately 51.8% of our fully-diluted common stock. As a result of such ownership and the voting agreement entered into at the closing of the Capital Raise, these stockholders will be able to affect the outcome of, or exert significant influence over, all matters requiring stockholder approval, including the election and removal of directors and any change in control. In particular, this concentration of ownership of our common stock could have the effect of delaying or preventing a change of control of our company or otherwise discouraging or preventing a potential acquirer from attempting to obtain control of our company. This, in turn, could have a negative effect on the market price of our common stock. It could also prevent our stockholders from realizing a premium over the market prices for their shares of our common stock. Moreover, the interests of this concentration of ownership may not always coincide with the combined company’s interests or the interests of other stockholders, and accordingly, they could cause the combined company to enter into transactions or agreements that it would not otherwise consider.
Anti-takeover provisions may limit the ability of another party to acquire our company, which could cause our stock price to decline.
Our articles of incorporation, as amended, bylaws and Nevada law contain provisions that could discourage, delay or prevent a third party from acquiring our company, even if doing so may be beneficial to our stockholders. In addition, these provisions could limit the price investors would be willing to pay in the future for shares of our common stock.
The requirements of being a public company, including compliance with the reporting requirements of the Securities Exchange Act of 1934, as amended, and the requirements of the Sarbanes-Oxley Act of 2002, may strain our resources, increase our costs and distract management, and we may be unable to comply with these requirements in a timely or cost-effective manner.
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As a public company, we need to comply with laws, regulations and requirements, certain corporate governance provisions of the Sarbanes-Oxley Act of 2002, related regulations of the SEC, and requirements of the principal trading market upon which our common stock may trade, with which we are not required to comply as a private company. As a result, the combined business will incur significant legal, accounting and other expenses that a private company would not incur. Complying with these statutes, regulations and requirements will occupy a significant amount of the time of our board of directors and management, will require us to have additional finance and accounting staff, may make it more difficult to attract and retain qualified officers and members of our board of directors, particularly to serve on the audit committee, and may make some activities more difficult, time consuming and costly. We will need to:
| · | institute a more comprehensive compliance function; |
| · | establish new internal policies, such as those relating to disclosure controls and procedures and insider trading; |
| · | design, establish, evaluate and maintain a system of internal control over financial reporting in compliance with the requirements of the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC and the Public Company Accounting Oversight Board; |
| · | prepare and distribute periodic reports in compliance with its obligations under the federal securities laws including the Securities Exchange Act of 1934, as amended, or Exchange Act; |
| · | involve and retain to a greater degree outside counsel and accountants in the above activities; and |
| · | establish an investor relations function. |
If we are unable to accomplish these objectives in a timely and effective fashion for our business, our ability to comply with financial reporting requirements and other rules that apply to reporting companies could be impaired. If our finance and accounting personnel insufficiently support our business in fulfilling these public-company compliance obligations, or if we are unable to hire adequate finance and accounting personnel, we could face significant legal liability, which could have a material adverse effect on our financial condition and results of operations. Furthermore, if we identify any issues in complying with those requirements (for example, if our company or the independent registered public accountants identified a material weakness or significant deficiency in our company’s internal control over financial reporting), we could incur additional costs rectifying those issues, and the existence of those issues could adversely affect, our reputation or investor perceptions of our company.
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SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding our common stock beneficially owned on June 26, 2013, prior to giving effect to the Closing, for (i) each stockholder known to be the beneficial owner of more than 5% of our outstanding common stock, (ii) each of our executive officers and directors, and (iii) all executive officers and directors as a group. In general, a person is deemed to be a “beneficial owner” of a security if that person has or shares the power to vote or direct the voting of such security, or the power to dispose or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which the person has the right to acquire beneficial ownership within 60 days, through the exercise of a warrant or stock option, conversion of a convertible security or otherwise. At June 26, 2013, immediately prior to the Closing, 8,000,000 shares of our common stock were outstanding. Unless otherwise noted below the address of each person identified is 1328 W. Balboa Blvd. Suite C, Newport Beach, CA 92661.
|
Name of Beneficial Owner
|
Amount of Beneficial Ownership
|
Percent of Beneficial Ownership
|
| Directors and Executive Officers | ||
|
Eric Stoppenhagen
|
3,000,000 | 37.5% |
|
All Directors and Executive Officers as a group
|
3,000,000 | 37.5% |
| Greater than 5% Stockholders | ||
|
Verdad Telecom, Inc.(1)
|
3,000,000 | 37.5% |
|
W-Net Fund I, L.P. (2)
|
3,000,000 | 37.5% |
| David Weiner(2) | 3,000,000 | 37.5% |
| (1) | Eric Stoppenhagen has voting and investment control over the securities owned by Verdad, and therefore Mr. Stoppenhagen may be deemed a beneficial owner of the 3,000,000 shares of common stock owned by Verdad. Mr. Stoppenhagen disclaims beneficial ownership in such shares. |
| (2) | The stockholder’s address is 12400 Ventura Boulevard, Suite 327, Studio City, CA 91604. David Weiner has voting and investment control over the securities owned by W-Net, and therefore Mr. Weiner may be deemed a beneficial owner of the 3,000,000 shares of common stock owned by W-Net. Mr. Weiner disclaims beneficial ownership in such shares. |
The following table sets forth certain information regarding our common stock beneficially owned on June 26, 2013, immediately following the Closing, for (i) each stockholder known to be the beneficial owner of more than 5% of our outstanding common stock, (ii) each executive officer and director, and (iii) all executive officers and directors as a group, on a pro forma basis to reflect the transactions contemplated by the Merger Agreement and the Capital Raise. In general, a person is deemed to be a “beneficial owner” of a security if that person has or shares the power to vote or direct the voting of such security, or the power to dispose or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which the person has the right to acquire beneficial ownership within 60 days, through the exercise of a warrant or stock option, conversion of a convertible security or otherwise. The table assumes a total of 160,000,044 and 60,643,520 shares of our common stock outstanding as of June 26, 2013, on a pre- and post- Reverse Split basis, respectively, and on an as-converted-to-common-stock basis, accounting for the conversion of the Notes issued in the Capital Raise. Unless otherwise noted below the address of each person identified is 2735 Wardlow Road, Corona, CA 92882.
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| Shares Beneficially Owned | ||||
| Name of Beneficial Owner |
Amount of Beneficial Ownership (Pre-Reverse Split) |
Amount of Beneficial Ownership (Post-Reverse Split) |
Percent of Beneficial Ownership | |
|
Executive Officers and Directors Steve Saleen
|
82,133,366 |
31,130,344 |
51.3% | |
|
Robert Miranda
|
395,756 | 150,000 | * | |
|
Jonathan Michaels
|
329,796 | 125,000 | * | |
| All Executive Officers and Directors as a Group (3 individuals) |
82,858,918 | 31,405,344 | 51.8% | |
DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
At the Closing, Eric Stoppenhagen resigned from his positions as President, Chief Financial Officer, Secretary and Director and we appointed the following persons as our executive officers and directors. All directors serve until the next annual meeting of stockholders or until their successors are elected and qualified. Officers are appointed by the board of directors and their terms of office are, except to the extent governed by an employment contract, at the discretion of the board of directors.
| Name | Age | Position | ||
| Steve Saleen | 64 | Chief Executive Officer, President and Director | ||
| Robert J. Miranda | 61 | Chief Financial Officer, Secretary and Director | ||
| Jonathan A. Michaels | 44 | General Counsel and Director |
| (1) | There are no family relationships among our executive officers and directors. |
| (2) | Steve Saleen served as President and CEO of Saleen Automotive since its inception in 2008 and was appointed a director of our company at the close of the merger. |
| (3) | Robert J Miranda was affiliated with Saleen Automotive as acting CFO and was appointed a director of our company at the close of the merger. |
| (4) | Jonathan Michaels was affiliated with Saleen Automotive as acting general counsel and was appointed a director of our company at the close of the merger. |
| (5) | Directors receive shares of stock as compensation for services as a director of our company. |
Steve Saleen, 64, founder has been president and CEO of SMS since its formation in July 2008. He has been board chairman and CEO of Saleen Automotive since its formation in July 2011. Mr. Saleen is considered one of the most successful and well known automotive legends in the country, making him a well qualified candidate to serve on our board of directors in light of our proposed business and structure. He was born and raised in Southern California, which has been the home of the “hot rod” culture for decades. Like many of his peers, he was inspired by the performance and muscle car era of the time. Mr. Saleen’s entrepreneurial business plan laid the groundwork for an entire new industry of design, engineering, manufacturing and sales of high performance vehicles that were race proven and marketed for sales through new car dealership showrooms nationwide; this included very successful racing programs featuring himself as a lead driver in vehicles of his design that went on to win numerous national championships. Mr. Saleen’s approach to tie in marketing with vendors created a never before seen collaboration of race proven parts that were subsequently used for street cars. Mr. Saleen is recognized worldwide for his expertise in small volume vehicle manufacturing, vehicle certification processes and mass customization – creating
| -41- |
customized products in an efficient mass – production manner. From humble beginnings in a 3 car garage to an expansive network for multiple manufacturing plants and distributions centers in North America and Asia, Mr. Saleen dominated the automotive landscape with his much respected brand. Mr. Saleen’s Mustangs, Sportrucks, Saleen SSC, Saleen S351 and S281 led the way for the truly innovative and world class “Great American Supercar”, the Saleen S7, which is the most successful supercar to date, having won races at virtually every major racetrack in the world, including Daytona (US), 24 Hours of LeMans (France), Silverstone (England), Monza (Italy), and Nurburgring (Germany). Other significant accomplishments are the engineering, development and subsequent manufacturing of Ford Motor Company’s supercar, the Ford GT (40), paint and sub-assembly of the Dodge Viper, the supercharged Harley Davidson Ford F150 and the construction of the first “running” Camaro for its introduction in the movie “Transformer”. Numerous Hollywood films have featured Saleen vehicles such as “Fast and Furious”, “Bruce Almighty”, “Transformers” (as the Decepticon “Barricade”) and “Ironman”. As the “History Channel” program pointed out, Steve Saleen is part of a trio of “legendary” performance car builders alongside Enzo Ferrari and Ferdinand Porsche. Mr. Saleen has a bachelor’s degree in business from the University of Southern California.
Robert J. Miranda, 61, has been Chief Financial Officer of Saleen Automotive since February 2012 and director since June 2012. Since October 2007, Mr. Miranda has been the managing director of Miranda & Associates, a professional accountancy corporation. From March 2003 through October 2007, Mr. Miranda was a Global Operations Director at Jefferson Wells, where he specialized in providing Sarbanes-Oxley compliance reviews for public companies. Mr. Miranda was a national director at Deloitte & Touche where he participated in numerous audits, corporate finance transactions, mergers and acquisitions. Mr. Miranda is a licensed Certified Public Accountant and has over 35 years of experience in accounting, including experience in Sarbanes-Oxley compliance, auditing, business consulting, strategic planning and advisory services, making him a well qualified candidate to serve on our board of directors in light of our proposed business and structure. He served as Chief Financial Officer of Balqon Corporation (BLQN) from October 2008 through October 2012. He served as Chief Executive Officer and Chief Financial Officer of Victory Energy Corporation (VYEY) from May 2009 through December 2011. He currently serves as chairman of the board and audit committee of Victory Energy Corporation. Mr. Miranda has a bachelor’s degree in Business Administration from the University of Southern California, a certificate from the Owner/President Management Program from the Harvard Business School and membership in the American Institute of Certified Public Accountants. He is a certified public accountant licensed in California.
Jonathan A. Michaels, 44, is a director of Saleen Automotive and has served as the general counsel for Saleen Automotive and SMS since their inception. Prior to that, Mr. Michaels served as the general counsel for Saleen, Inc., dating back to 2004. Mr. Michaels is the founding member of Michaels Law Group, APLC, a business law firm in Newport Beach and that focuses on representing clients in the automotive industry, making him a well qualified candidate to serve on our board of directors in light of our proposed business and structure. Mr. Michaels graduated from the USC Marshall School of Business in 1992 and from Whittier Law School in 1995, finishing in the top 4% of his class. While in law school, Mr. Michaels served as an editor of the Whittier Law Review, represented his alma mater in several national Moot Court Honors Board competitions and, among other things, published a winning Law Review article that is permanently housed in the U.S. Library of Congress. Since 1995, Mr. Michaels has represented clients in complex litigation at all levels of state and federal court throughout the United States, resulting in substantial verdicts and settlements. In particular, Mr. Michaels has extensive experience representing clients in the automotive industry against some of the largest auto manufacturers in the world. During his tenure, Mr. Michaels has litigated cases against General Motors, Nissan North America, American Honda, AM General, Toyota Motor Sales, DaimlerChrysler, Kia Motors, Land Rover USA, Ford Motor Company, Jaguar Cars and Chrysler Group. Mr. Michaels has also been recognized by his peers for his outstanding ability. He has received the AVVO rating of "Excellent," and has been named to Southern California Super Lawyers – a distinction given to no more than 5% of the attorneys in the state. Mr. Michaels has also been invited to guest lecture at undergraduate and graduate programs at some of the world's most prestigious Universities, and he has written extensively in the legal community, with numerous publications to his credit. In 2012, Mr. Michaels was named "Attorney of the Year" by his law school alma mater. Mr. Michaels is a member of the California and Colorado State Bars, and is actively involved in the Southern California community.
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Executive compensation
The following table and related footnotes show the compensation paid to our Chief Executive Officer and to each of the other two most highly compensated executive officers whose compensation exceeded $100,000 during the last fiscal year, and information concerning all compensation paid for services to us in all officer capacities for our last two fiscal years.
| Summary Compensation Table | ||||
| Name and Principal Position | Year |
Salary ($) |
All Other Compensation ($) |
Total ($) |
| Steve Saleen | 2013 | 340,000 | 340,000 | |
|
CEO, President & Chairman
|
2012 | 226,250 | 226,250 | |
| Robert J. Miranda(1) | 2013 | 200,195 | 200,195 | |
|
Director, CFO & Secretary
|
2012 | 65,000 | 65,000 | |
| Jonathan Michaels(2) | 2013 | 216,250 | 216,250 | |
| Director & General Counsel | 2012 | 31,200 | 31,200 | |
| (1) | Represents fees for CFO services rendered by Mr. Miranda through his accounting firm, Miranda & Associates, A Professional Accountancy Corporation. |
On November 25, 2011, we entered into an engagement agreement with Miranda & Associates, A Professional Accountancy Corporation (“M&A”), a company owned by Mr. Miranda. Under the terms of the engagement agreement, M&A performed certain accounting, tax compliance, internal controls, and other consulting services for us including the provision of executive CFO services (including, without limitation, the services of Mr. Robert Miranda, our Secretary and Chief Financial Officer). We paid M&A fees for the services provided by Mr. Miranda and other professional associates of his accounting firm.
| (2) | Represents fees for legal services rendered by Mr. Michaels through his law firm, Michaels Law Group. |
We have engagement agreements with Michaels Law Group (“MLG”). Under the terms of the engagement agreement, MLG performed certain litigation, legal advisory, transaction advisory and other legal services for us including the provision of executive General Counsel services (including, without limitation, the services of Mr. Jonathan Michaels, our General Counsel). We paid MLG fees for the services provided by Mr. Michaels and other professional associates of his law firm.
Employment Contracts
Except as disclosed below, neither our company nor any of our subsidiaries has any employment agreements with our or its executive officers.
On August 1, 2011, Saleen Automotive entered into an Employment Agreement with Steve Saleen under which he is compensated at the rate of $20,000 per month. The Agreement has a term of eight years and provides for Mr. Saleen’s service as Saleen Automotive’s Chief Executive Officer.
Option Grants
Neither our company nor any of our subsidiaries granted options to executive officers during the fiscal year ended March 31, 2013.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
Neither our company nor any of our subsidiaries had options outstanding as of March 31, 2013.
| -43- |
Director Compensation
We did not compensate our non-employee directors for services during our fiscal year ended March 31, 2013.
The following table presents information regarding compensation paid to our non-employee directors for our fiscal year ending March 31, 2014.
|
Name
|
Stock Awards ($)
|
Total ($)
| ||
|
Robert J. Miranda(1)
|
125,000 | 125,000 | ||
|
Jonathan Michaels(1)
|
125,000 | 125,000 |
| (1) | Represents the value of 500,000 shares of common stock of Saleen Automotive valued at $0.25 per share issued to Mr. Miranda on May 12, 2013, for services as a director during the ensuing year ending March 31, 2014. |
| (2) | Represents the value of 500,000 shares of common stock of Saleen Automotive valued at $0.25 per share issued to Mr. Michaels on May 12, 2013, for services as a director during the ensuing year ending March 31, 2014. |
Indemnification of Directors and Executive Officers and Limitation of Liability
We are a Nevada corporation. The Nevada Revised Statutes and certain provisions of our articles of incorporation, as amended, and bylaws under certain circumstances provide for indemnification of our officers, directors and controlling persons against liabilities which they may incur in such capacities. A summary of the circumstances in which such indemnification is provided for is contained herein, but this description is qualified in its entirety by reference to our bylaws and to the statutory provisions.
In general, any officer, director, employee or agent may be indemnified against expenses, fines, settlements or judgments arising in connection with a legal proceeding to which such person is a party, if that person is not liable due to conduct that constituted a breach of his or her fiduciary duties and such breach involved intentional misconduct, fraud or a knowing violation of law, and that person’s actions were in good faith, were believed to be in our best interest, and were not unlawful. Indemnification may not be made for any claim as to which the person seeking indemnity has been adjudged by a court of competent jurisdiction, after exhaustion of all appeals, to be liable to our company unless the court in which the action or suit was brought or another court of competent jurisdiction determines that in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses as such court deems proper. Unless such person is successful upon the merits in such an action, indemnification may be awarded only after a determination by independent decision of our board of directors, by legal counsel, or by a vote of our stockholders, that the applicable standard of conduct was met by the person to be indemnified. Under our articles of incorporation, as amended, and bylaws , we will advance expenses incurred by officers, directors, employees or agents who are parties to or are threatened to made parties to any threatened, pending or completed action by reason of the fact that such person was serving in such capacity, prior to the disposition of such action and promptly following request therefor, upon receipt of an undertaking by or on behalf of such person to repay such advances if it should be determined ultimately that such person is not entitled to indemnification.
The circumstances under which indemnification is granted in connection with an action brought on our behalf is generally the same as those set forth above; however, with respect to such actions, indemnification is granted only with respect to expenses actually incurred in connection with the defense or settlement of the action. Indemnification may also be granted pursuant to the terms of agreements which may be entered in the future or pursuant to a vote of stockholders or directors. The Nevada Revised Statutes also grant us the power to purchase and maintain insurance which protects our officers and directors against any liabilities incurred in connection with their service in such a position, and we have obtained such a policy.
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A stockholder’s investment may be adversely affected to the extent we pay the costs of settlement and damage awards against directors and officers as required by these indemnification provisions. At present, except for the legal proceedings described above to which Steve Saleen is a party, there is no pending litigation or proceeding involving any of our directors, officers or employees regarding which indemnification by us is sought, nor are we aware of any threatened litigation that may result in claims for indemnification.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been informed that, in the opinion of the SEC, this indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
Certain Relationships and Related Party Transactions
Other than the transactions described below, since April 1, 2011, there has not been, nor is there currently proposed, any transaction or series of similar transactions to which we were or will be a party:
| · | in which the amount involved exceeds the lesser of $120,000 or one percent of the average of our total assets at year end for the last two completed fiscal years; and |
| · | in which any director, executive officer, stockholders who beneficially owns more than 5% of our common stock or any member of their immediate family had or will have a direct or indirect material interest. |
During the years ended March 31, 2013 and 2012, we incurred $340,000 and $226,250, respectively, in officers’ salary expense with our Director, Chairman and CEO, Mr. Steve Saleen. As of March 31, 2013 and 2012, the balances of $300,000 and $60,000, respectively, were payable to Mr. Saleen for his officers’ salary. Effective March 31, 2013, Mr. Saleen agreed to defer the $300,000 of unpaid salary for payment on April 1, 2014. This deferral of salary was memorialized in a note payable to Steve Saleen dated March 31, 2013.
During the years ended March 31, 2013 and 2012, we incurred $134,675 and $297,842, respectively, in CFO services and accounting fees expense with Miranda & Associates, a firm owned by our Director and CFO, Mr. Robert Miranda. As of March 31, 2013 and 2012, the balances of $167,322 and $69,675, respectively, were payable to Miranda & Associates for these services. Effective March 31, 2013, Miranda & Associates and Mr. Miranda agreed to defer the $167,222 of unpaid fees for payment on April 1, 2014. This deferral of fees was memorialized in a note payable to Miranda & Associates dated effective March 31, 2013.
During the years ended March 31, 2013 and 2012, we incurred $341,452 and $18,399, respectively, in General Counsel services and legal fees expense with Michaels Law Group, a firm owned by our Director and General Counsel, Mr. Jonathan Michaels. As of March 31, 2013 and 2012, the balances of $242,045 and $97,868, respectively, were payable to Michaels Law Group for these services. Effective March 31, 2013, Michaels Law Group and Mr. Michaels agreed to defer the $242,045 of unpaid fees for payment on April 1, 2014. This deferral of fees was memorialized in a note payable to Michaels Law Group dated effective March 31, 2013.
During the year ended March 31, 2012, we incurred $529,449, in salary expense with Alexander Bafer, a former shareholder of Saleen Automotive, for his services as vice president of business development.
During the years ended March 31, 2013 and 2012, we incurred $315,750 and $324,936, respectively, in consulting fees with former Saleen Automotive shareholders for marketing, business development, engineering, business management, and financial advisory services. The amounts incurred with these related parties are as follows:
| -45- |
| Related Party | March 31, 2013 | March 31, 2012 | ||||||
| Gerald Parker | $ | - | $ | 121,565 | ||||
| Greentech Consulting Alexander James LLC Michael Kadie Anthony Lanham Brian Black RAV Marketing, LLC | 62,750 130,000 - 10,000 13,000 100,000 | - - 55,266 83,305 64,800 - | ||||||
| Totals | $ | 315,750 | $ | 324,936 | ||||
The $130,000 consulting fee incurred with Alexander James, LLC during the year ended March 31, 2013, was initially recorded as a related party note payable and then subsequently settled by the transfer of a net 621,000 founders’ shares from founders Brian Black and Anthony Lanham.
On May 8, 2013, W-Net and Verdad, formerly our two largest stockholders (the “Lenders”), and SMS, Saleen Automotive and Saleen (collectively, “Borrower”), entered a Bridge Loan and Security Agreement pursuant to which the Lenders loaned to Borrower an aggregate of $500,000 and Borrower issued to the Lenders Secured Promissory Notes. Following an event of default, the Secured Promissory Notes accrue interest at 10% per annum and had a maturity date of June 15, 2013. Borrower’s obligations under the Secured Promissory Notes were secured by a first priority security interest, subject to certain existing indebtedness, on all of the Saleen Entities’ assets. Borrower’s obligations under the Secured Promissory Notes were also guaranteed by Saleen. Borrower’s failure to pay when due amounts payable under the Secured Promissory Notes, its failure to observe any covenants under the bridge loan documents, a breach of its representations and warranties made pursuant to the bridge loan documents or its undergoing a bankruptcy or insolvency proceeding would have constituted an event of default. Upon the occurrence of an event of default, the Lenders could declare all obligations under the Secured Promissory Notes due and payable and could have foreclosed on the collateral securing such obligations. Upon the consummation of the Capital Raise, the obligations outstanding under the Secured Promissory Notes were converted into Notes in the same principal amounts.
On May 12, 2013, Saleen Automotive issued 500,000 shares of its common stock each to two of its new directors, a total of 1,000,000 shares, in payment of director fees for future service on Saleen Automotive’s board of directors. The total value of these shares is $250,000 based on a per share value of $0.25.
On June 10, 2013, Saleen Automotive issued 150,000 shares of its common stock to a new employee as a condition of employment. The total value of these shares is $37,500 based on a per share value of $0.25.
On June 17, 2013, Saleen Automotive issued 25,000 shares of its common stock to an employee in payment of employee expenses. The total value of these shares is $6,250 based on a per share value of $0.25.
On June 17, 2013, Saleen Automotive issued 942,924 shares of its common stock to an information technology service provider in payment of future services. The total value of these shares is $235,731 based on a per share value of $0.25.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Action Stock Transfer Corporation. Its mailing address is 2469 East Fort Union Boulevard, Suite 214, Salt Lake City, UT 84121, its telephone number is (801) 274-1088, and its facsimile number is (801) 274-1099.
Listing
Our common stock is currently quoted on the OTCQB and OTCBB under the trading symbol “WSTY.”
Market Prices
The shares of our common stock have been listed and principally quoted on the OTCQB and OTCBB under the trading symbol “WSTY.” Historical closing prices for shares of our common stock on the OTCQB and OTCBB are only available from and after May 6, 2013. We have therefore omitted the table setting forth the high and low bid prices of our common stock for the last two fiscal years.
Holders
As of June 26, 2013, there were 5 registered holders of record of our common stock.
Dividends
On May 23, 2013, our board of directors declared, for stockholders of record of our common stock as of May 23, 2013, a per share dividend of $0.035 in cash, subject to (a) the closing of the Merger, (b) our compliance with the applicable requirements of the Nevada Revised Statutes and (c) our notification to the Financial Industry Regulatory Authority (“FINRA”) of the dividend and FINRA’s confirmation that it has received the necessary documentation to process the dividend. On June 26, 2013, we satisfied all of the conditions to payment of the dividend and intend to pay and issue such dividend within the next 10 days.
Other than the aforementioned dividend, we do not anticipate paying dividends in the foreseeable future and currently intend to retain any future earnings to support the development and expansion of our business. The declaration and payment of dividends is subject to the discretion of our board of directors and to certain limitations imposed under Nevada statutes. The timing, amount and form of dividends, if any, will depend upon, among other things, our results of operation, financial condition, cash requirements, and other factors deemed relevant by our board of directors.
Description of Our Securities
As of June 26, 2013, our authorized capital stock consisted of:
| · | 100,000,000 shares of common stock, par value $0.001 per share; and |
| · | 1,000,000 shares of preferred stock, par value $0.001 per share, 896,000 of which were designated Super Voting Preferred Stock. |
As of June 26, 2013, there were outstanding:
| · | 8,000,000 shares of common stock held by 8 stockholders of record; and |
| · | 896,000 shares of Super Voting Preferred Stock, held by 169 stockholders of record. |
Common Stock
Dividend Rights
Subject to preferences that may apply to shares of preferred stock outstanding at the time, the holders of outstanding shares of our common stock are entitled to receive dividends out of funds legally available at the times and in the amounts that our board of directors may determine.
Voting Rights
Each holder of our common stock is entitled to one vote for each share of our common stock held on all matters submitted to a vote of stockholders. Cumulative voting for the election of directors is not provided for in our articles of incorporation, as amended, which means that the holders of a majority of the voting shares voted can elect all of the directors then standing for election.
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No Preemptive or Similar Rights
Holders of our common stock do not have preemptive rights, and our common stock is not convertible or redeemable.
Right to Receive Liquidation Distributions
Upon our dissolution, liquidation or winding-up, the assets legally available for distribution to our stockholders are distributable ratably among the holders of our common stock, subject to the preferential rights and payment of liquidation preferences, if any, on any outstanding shares of preferred stock.
Preferred Stock
We are authorized, subject to limitations prescribed by Nevada law, to issue preferred stock in one or more series, to establish from time to time the number of shares to be included in each series, to fix the designation, powers, preferences and rights of the shares of each series and any of its qualifications, limitations or restrictions. Our board of directors can also increase or decrease the number of shares of any series, but not below the number of shares of that series then outstanding, by the affirmative vote of the holders of a majority of our capital stock entitled to vote, unless a vote of any other holders is required by our articles of incorporation, as amended, or the Nevada Revised Statutes. Our board of directors may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of our common stock. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, have the effect of delaying, deferring or preventing a change in control of our company and may adversely affect the market price of our common stock and the voting and other rights of the holders of our common stock.
The rights of our Super Voting Preferred Stock, which are described above, are set forth in a Certificate of Designations, Preferences, Limitations, Restrictions and Relative Rights of Super Voting Preferred Stock which became effective on June 17, 2013. Upon the automatic conversion of the Super Voting Preferred Stock such shares will cease to be designated as a separate series of our preferred stock.
We have no current plan to issue any other shares of preferred stock.
Anti-takeover Provisions
Certain provisions of our articles of incorporation, as amended, and Nevada law may have the effect of delaying, deferring or discouraging another person from acquiring control of our company.
Charter Provisions
Our articles of incorporation, as amended, currently allows our board of directors to issue 104,000 shares, and after the automatic conversion of our Super Voting Preferred Stock will allow our board of directors to issue 1,000,000 share, of our preferred stock in one or more series and with such rights and preferences including voting rights, without further stockholder approval. In the event that our board of directors designates additional series of preferred stock with rights and preferences, including super-majority voting rights, and issues such preferred stock, the preferred stock could make our acquisition by means of a tender offer, a proxy contest or otherwise, more difficult, and could also make the removal of incumbent officers and directors more difficult. As a result, these provisions may have an anti-takeover effect. The preferred stock authorized in our articles of incorporation, as amended, may inhibit changes of control that are not approved by our board of directors. These provisions could limit the price that future investors might be willing to pay for our common stock. This could have the effect of delaying, deferring or preventing a change in control. The issuance of our preferred stock could also effectively limit or dilute the voting power of our stockholders. Accordingly, such provisions of our articles of incorporation, as amended, may discourage or prevent an acquisition or disposition of our business that could otherwise be in the best interest of our stockholders.
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Nevada Law
In addition, Nevada has enacted the following legislation that may deter or frustrate takeovers of Nevada corporations:
Authorized but Unissued Stock – The authorized but unissued shares of our common stock are available for future issuance without stockholder approval. These additional shares may be used for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans. The existence of authorized but unissued shares of common stock may enable our board of directors to issue shares of stock to persons friendly to existing management.
Evaluation of Acquisition Proposals – The Nevada Revised Statutes expressly permit our board of directors, when evaluating any proposed tender or exchange offer, any merger, consolidation or sale of substantially all of our assets, or any similar extraordinary transaction, to consider all relevant factors including, without limitation, the social, legal, and economic effects on our employees, customers, suppliers, and other relevant interest holders, and on the communities and geographical areas in which they operate. Our board of directors may also consider the amount of consideration being offered in relation to the then current market price of our outstanding shares of capital stock and our then current value in a freely negotiated transaction.
Control Share Acquisitions –Nevada has adopted a control share acquisitions statute designed to afford stockholders of public corporations in Nevada protection against acquisitions in which a person, entity or group seeks to gain voting control. With enumerated exceptions, the statute provides that shares acquired within certain specific ranges will not possess voting rights in the election of directors unless the voting rights are approved by a majority vote of the public corporation’s disinterested stockholders. Disinterested shares are shares other than those owned by the acquiring person or by a member of a group with respect to a control share acquisition, or by any officer of the corporation or any employee of the corporation who is also a director. The specific acquisition ranges that trigger the statute are: acquisitions of shares possessing one-fifth or more but less than one-third of all voting power; acquisitions of shares possessing one-third or more but less than a majority of all voting power; or acquisitions of shares possessing a majority or more of all voting power. Under certain circumstances, the statute permits the acquiring person to call a special stockholders meeting for the purpose of considering the grant of voting rights to the holder of the control shares. The statute also enables a corporation to provide for the redemption of control shares with no voting rights under certain circumstances. As permitted by the statute, we have elected in our articles of incorporation, as amended, not to be governed by the control share acquisitions statute.
Recent Sales of Unregistered Securities
Our Company
On June 26, 2013, we issued 896,000 shares of our Super Voting Preferred Stock to Steve Saleen and the other former shareholders of Saleen Automotive, as consideration for the Merger and the transactions contemplated under the Assignment and License Agreement, as amended.
In connection with the above security issuances, we did not pay any underwriting discounts or commissions. None of the sales of securities described or referred to above was registered under the Securities Act. In making the sales without registration under the Securities Act, we relied upon one or more of the exemptions from registration contained in Section 4(2) of the Securities Act, and in Regulation D promulgated under the Securities Act. No general solicitation or advertising was used in connection with the sales.
Saleen Automotive
From its formation in July 2011 through June 18, 2013, Saleen Automotive sold or issued an aggregate of 105,000,000 shares of its common stock to officers, directors, employees and other investors for cash, services rendered and services to be rendered.
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In connection with the above security issuances, Saleen Automotive did not pay any underwriting discounts or commissions. None of the sales of securities described or referred to above was registered under the Securities Act. In making the sales without registration under the Securities Act, Saleen Automotive relied upon one or more of the exemptions from registration contained in Section 4(2) of the Securities Act, and in Regulation D promulgated under the Securities Act. No general solicitation or advertising was used in connection with the sales.
Principal Accountant Fees and Services
On June 26, 2013, we dismissed Goldman Kurland and Mohidin, LLP (“GKM”) as our independent registered public accounting firm. The decision was approved by our board of directors.
GKM did not render any reports on our financial statements and during the period of GKM’s engagement there were (i) no disagreements with GKM on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of GKM would have caused GKM to make reference to the subject matter of the disagreements in connection with its report, and (ii) no “reportable events” as that term is defined in Item 304(a)(1)(v) of Regulation S-K.
We provided GKM with a copy of the disclosures above and requested that GKM furnish us with a letter addressed to the SEC stating whether or not it agreed with our statements above and, if not, stating the respects in which it did not agree. We will provide GKM’s response by amendment to this Current Report on Form 8-K.
On June 26, 2013, we engaged Weinberg & Company, P.A. (“Weinberg”) as our new independent registered public accounting firm. We engaged Weinberg to audit our financial statements for the year ended March 31, 2014. The appointment of Weinberg was approved by our board of directors.
Weinberg is also the Saleen Entities’ independent public accounting firm. Weinberg billed the Saleen Entities aggregate audit fees of approximately $102,688 for professional services rendered for the audit of their annual financial statements for the years ended March 31, 2013 and December 31, 2012.
Steve Saleen, Saleen Automotive’s chief executive officer, and Robert Miranda, Saleen Automotive’s chief financial officer, were directly responsible for interviewing and retaining Weinberg, considering Weinberg’s independence and effectiveness, and pre-approving the engagement fees and other compensation to be paid to, and the services to be conducted by, Weinberg. Messrs. Saleen and Miranda pre-approved 100% of the services described above.
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Item 9.01 Financial Statements and Exhibits.
(a) Financial statements of business acquired.
The audited combined financial statements of Saleen Automotive, Inc. and SMS Signature Cars for the fiscal years ended March 31, 2013 and 2012 are incorporated herein by reference to Exhibit 99.1 to this Current Report.
(b) Pro forma financial information.
The unaudited combined pro forma financial statements of Saleen Automotive, Inc. (Nevada), Saleen Automotive, Inc. (Florida) and SMS Signature Cars for the fiscal years ended March 31, 2013 and 2012 are incorporated herein by reference to Exhibit 99.2 to this Current Report.
(c) Shell company transactions.
Reference is made to the disclosure set forth under Item 9.01(a) and 9.01(b) of this Current Report on Form 8-K, which disclosure is incorporated herein by reference.
(d) Exhibits.
See attached Exhibit Index.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
June 27, 2013
Saleen Automotive, Inc.
By:_/s/ Steve Saleen________________
Steve Saleen
Chief Executive Officer
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EXHIBIT INDEX
|
Exhibit Number
|
Description of Exhibit
| |
| 2.1 |
Agreement and Plan of Merger dated May 23, 2013, among the Registrant, Saleen California Merger Corporation, Saleen Florida Merger Corporation, SMS Signature Cars, Saleen Automotive, Inc. and Steve Saleen. Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K (File No. 333-176388) filed with the Securities and Exchange Commission on May 30, 2013.
| |
| 3.1.1 |
Articles of Incorporation. Incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 (File No. 333-176388) filed with the Securities and Exchange Commission on August 18, 2011.
| |
| 3.1.2 |
Certificate of Designations, Preferences, Limitations, Restrictions and Relative Rights of Super Voting Preferred Stock. Incorporated by reference to Exhibit 3.1.2 to the Current Report on Form 8-K (File No. 333-176388) filed with the Securities and Exchange Commission on June 21, 2013.
| |
| 3.1.3 |
Articles of Merger effective June 17, 2013. Incorporated by reference to Exhibit 3.1.1 to the Current Report on Form 8-K (File No. 333-176388) filed with the Securities and Exchange Commission on June 21, 2013.
| |
| 3.2 |
Bylaws. Incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-1 (File No. 333-176388) filed with the Securities and Exchange Commission on August 18, 2011.
| |
| 10.1 |
Registration Rights Agreement dated March 13, 2013, among the Registrant, W-Net Fund I, L.P. and Verdad Telecom, Inc. Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 333-176388) filed with the Securities and Exchange Commission on March 18, 2013.
| |
| 10.2 |
Securities Purchase Agreement dated June 26, 2013, among the Registrant and the purchasers signatory thereto.
| |
| 10.3 |
Registration Rights Agreement dated June 26, 2013, among the Registrant and the investors signatory thereto.
| |
| 10.4 |
Security Agreement dated June 26, 2013, among the Registrant, Saleen Automotive, Inc., SMS Signature Cars and the purchasers signatory thereto.
| |
| 10.5 |
Intellectual Property Security Agreement dated June 26, 2013, among the Registrant, Saleen Automotive, Inc., SMS Signature Cars and the purchasers signatory thereto.
| |
| 10.6 |
Form of 3.0% Senior Secured Convertible Note.
| |
| 10.7 |
Commercial Lease dated December 2, 2008, between Larry R. Haupert dba Rexco and SMS Signature Cars.
| |
| 10.8 |
Employment Agreement dated August 1, 2011, between Saleen Automotive, Inc. and Steve Saleen.
| |
| 10.9 | Commercial Lease dated September 1, 2012, between Larry R. Haupert dba Rexco and Saleen Automotive, Inc.
| |
| 21.1 |
Subsidiaries of the Registrant.
| |
| 99.1 |
Audited combined financial statements of Saleen Automotive, Inc. and SMS Signature Cars for the fiscal years ended March 31, 2013 and 2012.
| |
| 99.2 |
Unaudited combined pro forma financial statements of the Registrant, Saleen Automotive, Inc. and SMS Signature Cars for the fiscal years ended March 31, 2013 and 2012.
| |
| 99.3 | Press release dated June 27, 2013. |
Exhibit 10.2
SECURITIES PURCHASE AGREEMENT
This Securities Purchase Agreement (this “Agreement”) is dated as of June 26, 2013 between W270, Inc., a Nevada corporation (the “Company”), each purchaser identified on the signature pages hereto (each, including its successors and assigns, a “Purchaser” and collectively the “Purchasers”), and W-Net Fund I, L.P., which will serve as the representative of the Purchasers, and is referred to herein from time to time as the “Purchaser Representative”.
WHEREAS, the Company, Saleen California Merger Corporation, a California corporation (“CA MergerCo”), Saleen Florida Merger Corporation, a Florida corporation (“FL MergerCo”), Saleen Automotive, Inc., a Florida corporation (“Saleen Automotive”), SMS Signature Cars, a California corporation (“SMS” and together with Saleen Automotive, collectively, the “Saleen Entities”), and Steve Saleen (“Saleen” and together with the Saleen Entities, the “Saleen Parties”), have entered into an Agreement and Plan of Merger, dated May 23, 2013 (as the same may be amended from time to time) (the “Merger Agreement”), which provides, upon the terms and subject to the conditions thereof, for the merger of (a) CA MergerCo with and into SMS and (b) FL MergerCo with and into Saleen Automotive, whereby the outstanding capital stock of SMS and Saleen Automotive shall be cancelled and the holders of Saleen Automotive’s common stock shall receive certain securities of the Company as further set forth in the Merger Agreement (the “Merger”);
WHEREAS, it is contemplated that immediately following the Merger, the Company shall consummate a capital raise and in connection therewith the Purchasers shall agree to enter into this Agreement; and
WHEREAS, subject to the terms and conditions set forth in this Agreement and pursuant to Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”), and Rule 506 promulgated thereunder, the Company desires to issue and sell to each Purchaser, and each Purchaser, severally and not jointly, desires to purchase from the Company, securities of the Company as more fully described in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants contained in this Agreement, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Company and each Purchaser agree as follows:
ARTICLE I.
DEFINITIONS
1.1 Definitions. In addition to the terms defined elsewhere in this Agreement: (a) capitalized terms that are not otherwise defined herein have the meanings given to such terms in the Notes (as defined herein), and (b) the following terms have the meanings set forth in this Section 1.1:
“Affiliate” means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 405 under the Securities Act. With respect to a Purchaser, any investment fund or managed account that is managed on a discretionary basis by the same investment manager as such Purchaser will be deemed to be an Affiliate of such Purchaser.
“Board of Directors” means the board of directors of the Company.
“Business Day” means any day except any Saturday, any Sunday, any day which is a federal legal holiday in the United States or any day on which banking institutions in the State of California are authorized or required by law or other governmental action to close.
“Closing” shall have the meaning ascribed to such term in Section 2.1(a).
“Closing Date” shall have the meaning ascribed to such term in Section 2.1(a).
“Commission” means the Securities and Exchange Commission.
“Common Stock” means the common stock of the Company, par value $0.001 per share, and any other class of securities into which such securities may hereafter be reclassified or changed into.
“Common Stock Equivalents” means any securities of the Company or the Subsidiaries which would entitle the holder thereof to acquire at any time Common Stock, including, without limitation, any debt, preferred stock, rights, options, warrants or other instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, Common Stock.
“Company Counsel” means Stubbs Alderton & Markiles, LLP, with offices located at 15260 Ventura Boulevard, 20th Floor, Sherman Oaks, California 91403, Attention: Greg Akselrud, fax: (818) 444-6303.
“Conversion Price” shall have the meaning ascribed to such term in the Notes.
“Disclosure Schedules” shall have the meaning ascribed to such term in Section 3.1.
“Discussion Time” shall have the meaning ascribed to such term in Section 3.2(f).
“Escrow Agent” shall have the meaning ascribed to such term in Section 2.1(b).
“Escrow Agreement” shall have the meaning ascribed to such term in Section 2.1(b).
“Europa” means Europa International Inc.
“Evaluation Date” shall have the meaning ascribed to such term in Section 3.1(q).
“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.
“Exempt Issuance” means the issuance of securities upon the exercise or exchange of or conversion of any Securities issued hereunder and/or other securities exercisable or exchangeable for or convertible into shares of Common Stock issued and outstanding on the date of this Agreement, provided that such securities have not been amended since the date of this Agreement to directly or indirectly effectively increase the number of such securities or to decrease the exercise, exchange or conversion price of such securities.
“GAAP” shall have the meaning ascribed to such term in Section 3.1(h).
“Indebtedness” shall have the meaning ascribed to such term in Section 3.1(z).
“Intellectual Property” means any and all United States and foreign: (a) patent registrations and patent applications (including all reissues, divisions, continuations, continuations-in-part, extensions and reexaminations) and all rights therein and all improvements to the inventions disclosed in each such registration or application, (b) trademarks, service marks, trade dress, trade names and corporate names, whether or not registered, including but not limited to all common law rights, and registrations and applications for registration thereof, (c) copyrights (including but not limited to copyrights on designs) (registered or otherwise) and registrations and applications for registration thereof, (d) computer software, including, without limitation, source code, operating systems and specifications, data, data bases, files, documentation and other materials related thereto, data and documentation, (e) trade secrets and confidential technical and business information (including but not limited to formulas, compositions, and inventions reduced to practice, whether or not patentable), (f) confidential technology (including know-how and show-how), manufacturing and production processes and techniques, research and development information, drawings, specifications, designs, plans, proposals, technical data, copyrightable works, financial, marketing and business data, pricing and cost information, business and marketing plans and customer and supplier lists and information, (h) any right arising under any law providing protection to industrial or other designs, (i) all rights to obtain and rights to apply for patents, and to register trademarks and copyrights, and (j) all rights to sue or recover and retain damages and costs and attorneys fees for present and past infringement of any of the foregoing.
“IP Security Agreement” means the Intellectual Property Security Agreement, dated the date hereof, by the Company in favor of the Purchasers, in the form of Exhibit C attached hereto, securing the obligations of the Company under the Notes and other Transaction Documents.
“Legend Removal Date” shall have the meaning ascribed to such term in Section 4.1(c).
“Liens” means a lien, charge, security interest, encumbrance, right of first refusal, preemptive right or other restriction.
“Material Adverse Effect” shall have the meaning assigned to such term in Section 3.1(b).
“Maximum Rate” shall have the meaning ascribed to such term in Section 5.17.
“Notes” means the 3.0% Senior Secured Convertible Notes due, subject to the terms therein, four (4) years from their date of issuance, issued by the Company to the Purchasers hereunder, in the form of Exhibit A attached hereto.
“Person” means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind.
“Proceeding” means an action, claim, suit, investigation or proceeding (including, without limitation, an informal investigation or partial proceeding, such as a deposition), whether commenced or threatened.
“Purchaser Party” shall have the meaning ascribed to such term in Section 4.10.
“Purchaser Rep Expenses” shall have the meaning ascribed to such term in Section 2.1(c)(iii).
“Purchaser Representative” shall have the meaning ascribed to such term in Section 2.1(c)(i).
“Registration Rights Agreement” means the Registration Rights Agreement, dated the date hereof, among the Company, the Purchasers and the other holders named therein, in the form of Exhibit D attached hereto.
“Required Approvals” shall have the meaning ascribed to such term in Section 3.1(e).
“Required Minimum” means, as of any date, the maximum aggregate number of shares of Common Stock then issued or potentially issuable in the future pursuant to the Transaction Documents, including any Underlying Shares issuable upon exercise or conversion in full of all Notes (including Underlying Shares issuable as payment of interest), ignoring any conversion or exercise limits set forth therein, and assuming that the Conversion Price is at all times on and after the date of determination 75% of the then Conversion Price on the Trading Day immediately prior to the date of determination.
“Regulation 13D-G” means Regulation 13D-G promulgated by the Commission pursuant to the Exchange Act, as such Regulation and the Rules thereunder may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Regulation.
“Rule 144” means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule.
“Saleen Entities” shall have the meaning ascribed to such term in the recitals hereto.
“Saleen Entities Financial Statements” shall have the meaning ascribed to such term in Section 3.1(h).
“Saleen Parties Intellectual Property” shall have the meaning ascribed to such term in Section 3.1(n).
“SEC Reports” shall have the meaning ascribed to such term in Section 3.1(h).
“Securities” means the Notes and the Underlying Shares.
“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
“Security Agreement” means the Security Agreement, dated the date hereof, by the Company in favor of the Purchasers, in the form of Exhibit B attached hereto, securing the obligations of the Company under the Notes and other Transaction Documents.
“Security Documents” means any and all means any and all security agreements, pledge agreements, hypothecation agreements, collateral assignments, mortgages, deeds of trust, control agreements and similar such agreements, executed and delivered by the Company, any of its Subsidiaries and/or any third party in favor of the Purchasers pursuant to the Transaction Documents which secures the Company’s obligations under the Transaction Documents and/or any of the Securities, and other documents executed, delivered and/or filed by the Company, any of its Subsidiaries, any third party and/or the Purchasers as permitted or required under any of the foregoing, including without limitation the Security Agreement and the IP Security Agreement.
“Short Sales” means all “short sales” as defined in Rule 200 of Regulation SHO under the Exchange Act (but shall not be deemed to include the location and/or reservation of borrowable shares of Common Stock).
“Subscription Amount” means, as to each Purchaser, the aggregate amount to be paid for Notes purchased hereunder as specified below such Purchaser’s name on the signature page of this Agreement and next to the heading “Subscription Amount,” in United States dollars and in immediately available funds. The initial principal amount of each Purchaser’s Note shall be equal to such Purchaser’s Subscription Amount.
“Subsidiary” means any subsidiary of the Company as set forth on Schedule 3.1(a) and shall, where applicable, include any direct or indirect subsidiary of the Company formed or acquired after the date hereof.
“Subsidiary Guarantee” means the Subsidiary Guarantee, in the form attached hereto as Exhibit E, executed by each Subsidiary in favor of the Purchasers, guaranteeing the Company’s obligations under the Notes.
“Trading Day” means a day on which the Nasdaq Capital Market is open for trading.
“Trading Market” means the following markets or exchanges on which the Common Stock is listed or quoted for trading on the date in question: the American Stock Exchange, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the New York Stock Exchange or the OTC Bulletin Board.
“Transaction Documents” means this Agreement, the Notes, the Security Documents, the Registration Rights Agreement, the Voting Agreement and all exhibits and schedules thereto and hereto and any other documents or agreements executed in connection with the transactions contemplated hereunder.
“Transfer Agent” means Action Stock Transfer, the current transfer agent of the Company with a mailing address of 2469 E. Fort Union Blvd., Suite 214, Salt Lake City, UT 84121, and a facsimile number of (801) 274-1099, and any successor transfer agent of the Company.
“Underlying Shares” means the shares of Common Stock issued and issuable upon conversion or redemption of the Notes and issued and issuable in lieu of the cash payment of interest on the Notes in accordance with the terms of the Notes.
“Verdad” means Verdad Telecom, Inc.
“Voting Agreement” means the Voting Agreement, dated the date hereof, among the Company, the Purchasers and the other stockholders named therein, in the form of Exhibit F attached hereto.
“VWAP” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market, the daily volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. New York City time to 4:02 p.m. New York City time); (b) if the OTC Bulletin Board is not a Trading Market, the volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the OTC Bulletin Board; (c) if the Common Stock is not then listed or quoted on the OTC Bulletin Board and if prices for the Common Stock are then reported in the “Pink Sheets” published by Pink Sheets, LLC (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported; or (d) in all other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by the Purchasers of a majority-in-interest of the Securities then outstanding and reasonably acceptable to the Company, the fees and expenses of which shall be paid by the Company.
“W-Net” means W-Net Fund I, L.P.
ARTICLE II.
PURCHASE AND SALE
2.1 Closing.
(a) The purchase and sale of the Notes (the “Closing”) shall take place on June 26, 2013, at 10:00 a.m., Pacific Time (“Closing Date”), at the offices of Company Counsel or at such other location or time or on such other date mutually agreed upon by the Company and all of the Purchasers, subject to the conditions precedent for the Closing as set forth in Section 2.3, and to each party’s obligations hereunder having been satisfied or waived. At the Closing, upon the terms and subject to the conditions set forth herein, the Company agrees to sell, and the Purchasers, severally and not jointly, agree to purchase, in the aggregate, $3,000,000 in principal amount of the Notes. On or prior to the Closing, each Purchaser participating in the Closing shall deliver to the Escrow Agent, via wire transfer or a certified check, immediately available funds equal to its Subscription Amount (other than Purchasers converting existing indebtedness as permitted by the Company, who shall deliver to the Escrow Agent original versions of the instruments evidencing such indebtedness) and the Company shall deliver to the Escrow Agent in respect of each Purchaser its respective Note, as determined pursuant to Section 2.2(a), and the Company and each Purchaser shall deliver the other items set forth in Section 2.2 deliverable at the Closing.
(b) Prior to the Closing, the Purchasers and the Company shall enter into an escrow agreement (the “Escrow Agreement”) with an independent escrow agent selected by the Purchaser Representative and reasonably acceptable to the Company (the “Escrow Agent”). Pursuant to the terms of the Escrow Agreement, the Purchasers and the Company shall deliver the closing deliveries referenced in Section 2.2 with the Escrow Agent in connection with the Closing. Distributions of any Subscription Amounts, Notes, and other Transaction Documents shall be governed by the terms and conditions of the Escrow Agreement. The adoption of this Agreement shall constitute approval of the Escrow Agreement and of all the arrangements relating thereto, including, without limitation, the placement of the Notes in escrow and the appointment of W-Net as representative of the Purchasers.
| (c) | Purchaser Representative. |
(i) By virtue of the execution of this Agreement by each Purchaser, each of the Purchasers shall be deemed to have agreed to appoint W-Net as its agent and attorney-in-fact, as the purchaser representative (the “Purchaser Representative”) for and on behalf of the Purchasers to give and receive notices and communications, to agree to, negotiate, enter into settlements and compromises of, and comply with orders of courts with respect to any indemnification claims, to assert, negotiate, enter into settlements and compromises of, and comply with orders of courts with respect to, any other claim by the Company against any Purchaser or by any such Purchaser against the Company, in each case relating to this Agreement or the transactions contemplated hereby, and to take all other actions that are either (A) necessary or appropriate in the judgment of the Purchaser Representative for the accomplishment of the foregoing or (B) specifically mandated by the terms of this Agreement. Such agency may be changed by the Purchasers from time to time upon not less than thirty (30) days prior written notice to the Company; provided, however, that the Purchaser Representative may not be removed unless Purchasers holding at least two-thirds (2/3) of the outstanding principal amount of the Notes agree to such removal and to the identity of the substituted agent. A vacancy in the position of Purchaser Representative, whether due to the resignation, removal or dissolution of the Purchaser Representative or for any other reason, may be filled by the recipients of a majority in interest of the outstanding principal amount of the Notes. No bond shall be required of the Purchaser Representative, and the Purchaser Representative shall not receive any compensation for its services. Notices or communications to or from the Purchaser Representative shall constitute notice to or from the Purchasers.
(ii) The Purchaser Representative shall not be liable for any act done or omitted hereunder as Purchaser Representative while acting (A) in good faith or (B) with the consent of the holders of a majority in interest of the outstanding principal amount of the Notes. The Purchasers shall indemnify the Purchaser Representative and hold the Purchaser Representative harmless against any loss, liability or expense incurred without willful misconduct or bad faith on the part of the Purchaser Representative and arising out of or in connection with the acceptance or administration of the Purchaser Representative’s duties hereunder, including the reasonable fees and expenses of any legal counsel, accountant or other professional advisor retained by the Purchaser Representative. The Purchaser Representative will be entitled to the advancement and reimbursement by the Purchasers of costs and expenses incurred by or on behalf of the Purchaser Representative in the performance of its duties hereunder, including the reasonable fees and expenses of any legal counsel. A decision, act, consent or instruction of the Purchaser Representative, including, but not limited to, an amendment, extension or waiver of this Agreement, shall constitute a decision of the Purchasers and shall be final, binding and conclusive upon the Purchasers; and the Company may rely upon any such decision, act, consent or instruction of the Purchaser Representative as being the decision, act, consent or instruction of the Purchasers.
(iii) Each Purchaser agrees to pay and be responsible for such Purchaser’s pro rata portion (based upon the portion of Notes previously subscribed for by such Purchaser) of any expenses or other costs incurred by the Purchaser Representative in the course of performing the role of Purchaser Representative under this Agreement (“Purchaser Rep Expenses”). From time to time as such Purchaser Rep Expenses are incurred or are reasonably anticipated to be incurred, the Purchaser Representative may submit invoices therefor to each of the Purchasers with a calculation of the amount owed by each Purchaser based on their respective pro rata portions thereof. Within thirty (30) days after delivery of each such invoice, each Purchaser shall pay to the Purchaser Representative such Purchaser’s pro rata portion of such invoiced amount. All such invoiced amounts shall be deemed to be valid and reimbursable unless (A) the amount of such Purchaser Rep Expenses is manifestly incorrect or (B) the nature of such invoiced amounts is clearly unrelated to any reasonable activities of the Purchaser Representative under this Agreement.
2.2 Deliveries.
(a) On the Closing Date, the Company shall deliver or cause to be delivered to each Purchaser the following:
| (i) | this Agreement, duly executed by the Company; |
(ii) a Note with a principal amount equal to such Purchaser’s Subscription Amount, registered in the name of such Purchaser;
(iii) the Security Documents, including, without limitation, the Security Agreement and the IP Security Agreement, duly executed by the Company and each Subsidiary;
(iv) the Voting Agreement, duly executed by the Company;
(v) the Registration Rights Agreement, duly executed by the Company;
(vi) the Subsidiary Guarantee, duly executed by each Subsidiary of the Company; and
(vii) the Escrow Agreement, duly executed by the Company.
(b) On the Closing Date, each Purchaser shall deliver or cause to be delivered to the Company the following:
| (i) | this Agreement, duly executed by such Purchaser; |
(ii) such Purchaser’s Subscription Amount by wire transfer to the account as specified in writing by the Company or, with respect to Purchasers converting existing indebtedness as permitted by the Company, original versions of the instruments evidencing such indebtedness;
(iii) the Security Documents to which each Purchaser is a party and required by law to be signed by such Party in order to be binding;
(iv) the Voting Agreement, duly executed by such Purchaser;
(v) the Registration Rights Agreement, duly executed by such Purchaser; and
(i) the Escrow Agreement, duly executed by such Purchaser.
2.3 Closing Conditions.
(a) The obligations of the Company hereunder in connection with the Closing are subject to the following conditions being met:
(i) the accuracy in all material respects on the Closing Date of the representations and warranties of the Purchasers contained herein;
(ii) all obligations, covenants and agreements of each Purchaser required to be performed at or prior to the Closing Date shall have been performed; and
(iii) at the Closing, the delivery by each Purchaser of the items set forth in Section 2.2(b) of this Agreement.
(b) The respective obligations of the Purchasers hereunder in connection with the Closing are subject to the following conditions being met:
(i) the accuracy in all material respects when made and on the Closing Date of the representations and warranties of the Company contained herein;
(ii) all obligations, covenants and agreements of the Company required to be performed at or prior to the Closing Date shall have been performed;
(iii) at the Closing, the delivery by the Company of the items set forth in Section 2.2(a) of this Agreement;
(iv) there shall have been no Material Adverse Effect with respect to the Company since the date hereof; and
(v) from the date hereof to the Closing Date, trading in the Common Stock shall not have been suspended by the Commission or the applicable Trading Market and, at any time prior to the Closing Date, trading in securities generally as reported by Bloomberg L.P. shall not have been suspended or limited, or minimum prices shall not have been established on securities whose trades are reported by such service, or on any Trading Market, nor shall a banking moratorium have been declared either by the United States or New York State authorities nor shall there have occurred any material outbreak or escalation of hostilities or other national or international calamity of such magnitude in its effect on, or any material adverse change in, any financial market which, in each case, in the reasonable judgment of each Purchaser, makes it impracticable or inadvisable to purchase the Securities at the Closing.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of the Company. Except as set forth under the corresponding section of the disclosure schedules delivered to the Purchasers concurrently herewith (“Disclosure Schedules”) which Disclosure Schedules shall be deemed a part hereof, the Company hereby makes the following representations and warranties to each Purchaser. However, it is understood and agreed that, except for (a) any representations and warranties set forth in this Section 3.1 that may apply to SMS or Saleen Automotive specifically, or by virtue of SMS’ or Saleen Automotive’s existence as a Subsidiary, and (b) the representations and warranties set forth in Sections 3.1(f), 3.1(h)(ii), 3.1(i) (as applicable to SMS or Saleen Automotive), 3.1(n), 3.1(s), 3.1(x), 3.1(bb), 3.1(ee), 3.1(gg), 3.1(hh) 3.1(jj) below which shall be deemed to exist hereunder for all purposes, the representations and warranties set forth in this Section 3.1, as applicable to the Company (as opposed to SMS or Saleen Automotive), shall apply for purposes of Section 2.3(b)(i) above, but otherwise shall not be deemed to exist for purposes of any liability to the Purchasers or indemnification under Section 4.10 below, to the extent any such representations and warranties are inaccurate as of the closing of the Merger.
(a) Subsidiaries. All of the direct and indirect subsidiaries of the Company are set forth on Schedule 3.1(a). The Company owns, directly or indirectly, all of the capital stock or other equity interests of each Subsidiary free and clear of any Liens, and all of the issued and outstanding shares of capital stock of each Subsidiary are validly issued and are fully paid, non-assessable and free of preemptive and similar rights to subscribe for or purchase securities.
(b) Organization and Qualification. The Company and each of the Subsidiaries is an entity duly incorporated or otherwise organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization (as applicable), with the requisite power and authority to own and use its properties and assets and to carry on its business as currently conducted. Neither the Company nor any Subsidiary is in violation or default of any of the provisions of its respective articles of incorporation, bylaws or other organizational or charter documents. Each of the Company and the Subsidiaries is duly qualified to conduct business and is in good standing as a foreign corporation or other entity in each jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, except where the failure to be so qualified or in good standing, as the case may be, could not have or reasonably be expected to result in (i) a material adverse effect on the legality, validity or enforceability of any Transaction Document, (ii) a material adverse effect on the results of operations, assets, business, prospects or condition (financial or otherwise) of the Company and the Subsidiaries, taken as a whole, or (iii) a material adverse effect on the Company’s ability to perform in any material respect on a timely basis its obligations under any Transaction Document (any of (i), (ii) or (iii), a “Material Adverse Effect”) and no Proceeding has been instituted in any such jurisdiction revoking, limiting or curtailing or seeking to revoke, limit or curtail such power and authority or qualification. The Company has furnished to the Purchasers true and correct copies of the Company’s articles of incorporation and the Company’s bylaws, as each is currently in effect.
(c) Authorization; Enforcement. The Company and the Subsidiaries have the requisite corporate power and authority to enter into and to consummate the transactions contemplated by each of the Transaction Documents and otherwise to carry out their obligations hereunder and thereunder. The execution and delivery of each of the Transaction Documents by the Company and the Subsidiaries and the consummation by it of the transactions contemplated hereby and thereby have been duly authorized by all necessary action on the part of the Company and the Subsidiaries and no further action is required by the Company, the Subsidiaries, their board of directors or their stockholders in connection therewith other than in connection with the Required Approvals. Each Transaction Document has been (or upon delivery will have been) duly executed by the Company and the Subsidiaries, as applicable, and, when delivered in accordance with the terms hereof and thereof, will constitute the valid and binding obligation of the Company and the Subsidiaries enforceable against the Company and the Subsidiaries in accordance with its terms, except (i) as limited by general equitable principles and applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies and (iii) insofar as indemnification and contribution provisions may be limited by applicable law.
(d) No Conflicts. The execution, delivery and performance of the Transaction Documents by the Company and the Subsidiaries and the consummation by the Company and the Subsidiaries of the other transactions contemplated hereby and thereby do not and will not: (i) conflict with or violate any provision of the Company’s or any Subsidiary’s articles of incorporation, bylaws or other organizational or charter documents, or (ii) conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, result in the creation of any Lien upon any of the properties or assets of the Company or any Subsidiary, or give to others any rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any agreement, loan or credit facility, debt or other instrument (evidencing a Company or Subsidiary debt or otherwise) or other understanding to which the Company or any Subsidiary is a party or by which any property or asset of the Company or any Subsidiary is bound or affected (other than Liens in favor of the Purchasers), or (iii) subject to the Required Approvals, conflict with or result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which the Company or a Subsidiary is subject (including federal and state securities laws and regulations), or by which any property or asset of the Company or a Subsidiary is bound or affected; except in the case of each of clauses (ii) and (iii), such as could not have or reasonably be expected to result in a Material Adverse Effect.
(e) Filings, Consents and Approvals. Neither the Company nor any Subsidiary is required to obtain any consent, waiver, authorization or order of, give any notice to, or make any filing or registration with, any court or other federal, state, local or other governmental authority or other Person in connection with the execution, delivery and performance by the Company and the Subsidiaries of the Transaction Documents, other than (i) filings required pursuant to Section 4.6, (ii) the notice and/or application(s) to each applicable Trading Market for the issuance and sale of the Securities and the listing of the Underlying Shares for trading thereon in the time and manner required thereby, (iii) the filing of Form D with the Commission and such filings as are required to be made under applicable state securities laws, and (iv) filings required under the terms of the Security Documents (collectively, the “Required Approvals”).
(f) Issuance of the Securities. The Securities are duly authorized and, when issued and paid for in accordance with the applicable Transaction Documents, will be duly and validly issued, fully paid and nonassessable, free and clear of all Liens imposed by the Company other than restrictions on transfer provided for in the Transaction Documents. The Underlying Shares, when issued in accordance with the terms of the Transaction Documents, will be validly issued, fully paid and nonassessable, free and clear of all Liens imposed by the Company other than restrictions on transfer provided for in the Transaction Documents. The Company has reserved from its duly authorized capital stock a number of shares of Common Stock for issuance of the Underlying Shares at least equal to the Required Minimum on the date hereof.
(g) Capitalization. The capitalization of the Company is as set forth on Schedule 3.1(g), which Schedule 3.1(g) shall also include the number of shares of Common Stock owned beneficially, and of record, by Affiliates of the Company as of the date hereof. The Company has not issued any capital stock since its most recently filed periodic report under the Exchange Act, other than in connection with the Merger. No Person has any right of first refusal, preemptive right, right of participation, or any similar right to participate in the transactions contemplated by the Transaction Documents. Except as set forth on Schedule 3.1(g) and a result of the purchase and sale of the Securities, there are no outstanding options, warrants, scrip rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities, rights or obligations convertible into or exercisable or exchangeable for, or giving any Person any right to subscribe for or acquire, any shares of Common Stock, or contracts, commitments, understandings or arrangements by which the Company or any Subsidiary is or may become bound to issue additional shares of Common Stock or Common Stock Equivalents. The issuance and sale of the Securities will not obligate the Company to issue shares of Common Stock or other securities to any Person (other than the Purchasers) and will not result in a right of any holder of Company securities to adjust the exercise, conversion, exchange or reset price under any of such securities. All of the outstanding shares of capital stock of the Company are validly issued, fully paid and nonassessable, have been issued in compliance with all federal and state securities laws, and none of such outstanding shares was issued in violation of any preemptive rights or similar rights to subscribe for or purchase securities. No further approval or authorization of any stockholder, the Board of Directors or others is required for the issuance and sale of the Securities. There are no stockholders agreements, voting agreements or other similar agreements with respect to the Company’s capital stock to which the Company is a party or, to the knowledge of the Company, between or among any of the Company’s stockholders.
(h) SEC Reports; Financial Statements.
(i) The Company has filed all reports, schedules, forms, statements and other documents required to be filed by the Company under the Securities Act and the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, for the two years preceding the date hereof (or such shorter period as the Company was required by law or regulation to file such material) (the foregoing materials, including the exhibits thereto and documents incorporated by reference therein, being collectively referred to herein as the “SEC Reports”) on a timely basis or has received a valid extension of such time of filing and has filed any such SEC Reports prior to the expiration of any such extension. As of their respective dates, the SEC Reports complied in all material respects with the requirements of the Securities Act and the Exchange Act, as applicable, and none of the SEC Reports, when filed, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the SEC Reports comply in all material respects with applicable accounting requirements and the rules and regulations of the Commission with respect thereto as in effect at the time of filing. Such financial statements have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis during the periods involved (“GAAP”), except as may be otherwise specified in such financial statements or the notes thereto and except that unaudited financial statements may not contain all footnotes required by GAAP, and fairly present in all material respects the financial position of the Company and its consolidated Subsidiaries as of and for the dates thereof and the results of operations and cash flows for the periods then ended, subject, in the case of unaudited statements, to normal, immaterial, year-end audit adjustments.
(ii) On Schedule 3.1(h) are set forth the following financial statements of the Saleen Entities (collectively the “Saleen Entities Financial Statements”): audited consolidated balance sheets and statements of income, changes in stockholders’ equity, and cash flow as of and for the fiscal years ended March 31, 2013 and 2012. The Saleen Entities Financial Statements have been prepared in accordance with GAAP applied on a consistent basis throughout the periods covered thereby, present fairly the financial condition of the Saleen Entities as of such dates and the results of operations of the Saleen Entities for such periods, are correct and complete, and are consistent with the books and records of the Saleen Entities. Since March 31, 2013, the Saleen Entities have not effected any change in any method of accounting or accounting practice, except for any such change required because of a concurrent change in GAAP.
(i) Material Changes. Since the date of the latest audited financial statements included within the SEC Reports and/or the Saleen Entities Financial Statements, except as specifically disclosed in a subsequent SEC Report filed prior to the date hereof or disclosed on Schedule 3.1(i), (i) there has been no event, occurrence or development that has had or that could reasonably be expected to result in a Material Adverse Effect, (ii) the Company and the Subsidiaries have not incurred any liabilities (contingent or otherwise) other than (A) that have been incurred since the date of the most recent balance sheet included in the SEC Reports or the Saleen Entities Financial Statements in the ordinary course of business and are not (singly or in the aggregate) material to the Company’s business, and (B) not due and payable or to be performed or satisfied after the date hereof under the Company and the Subsidiaries’ material contracts in accordance with their terms, in each case which are not (singly or in the aggregate) material to the Company’s business, (iii) the Company and the Subsidiaries have not altered their method of accounting, (iv) the Company has not declared or made any dividend or distribution of cash or other property to its stockholders or purchased, redeemed or made any agreements to purchase or redeem any shares of its capital stock and (v) the Company has not issued any equity securities to any officer, director or Affiliate. The Company does not have pending before the Commission any request for confidential treatment of information. Except for the issuance of the Securities contemplated by this Agreement or as set forth on Schedule 3.1(i), no event, liability or development has occurred or exists with respect to the Company or its Subsidiaries or their respective business, properties, operations or financial condition, that would be required to be disclosed by the Company under applicable securities laws at the time this representation is made or deemed made that has not been publicly disclosed on or prior to the date that this representation is made.
(j) Litigation. There is no suit, action, claim, arbitration, proceeding or investigation pending or, to the knowledge of the Company, threatened against, relating to or involving the Company, any Subsidiary, or real or personal property of the Company or any Subsidiary, before any Governmental Entity (as such term is defined in the Merger Agreement) or other third party. To the knowledge of the Company, there is no basis for any such suit, action, proceeding or investigation. The Commission has not issued any stop order or other order suspending the effectiveness of any registration statement filed by the Company or any Subsidiary under the Exchange Act or the Securities Act.
(k) Labor; Benefits. Schedule 3.1(k) contains a true and complete list of each benefit plan currently sponsored, maintained or contributed to by the Company and the Subsidiaries. The Company’s records accurately reflect the service histories of the Company and the Subsidiaries’ employees, contractors and consultants, including their hours of service, and all such data is maintained in a usable form. Neither the Company nor any Subsidiary is a party to any employment, contractor or consultant agreement which could result in the payment to any current, former or future director, employee, contractor or consultant of the Company or the Subsidiaries of any money or other property or rights or accelerate or provide any other rights or benefits to any such director, employee, contractor or consultant as a result of the transactions contemplated by the Merger or this Agreement, whether or not (i) such payment, acceleration or provision would constitute a “parachute payment” (within the meaning of Section 280G of the Code), or (ii) some other subsequent action or event would be required to cause such payment, acceleration or provision to be triggered.
(l) Compliance. To the knowledge of the Company, the Company and the Subsidiaries are in compliance in all material respects with all applicable laws (including, without limitation, applicable laws relating to zoning, environmental matters and the safety and health of employees), ordinances, regulations and orders of all Governmental Entities. Neither the Company nor any of the Subsidiaries has been charged with and, to the knowledge of the Company, is not now under investigation with respect to, a violation of any applicable law, regulation, ordinance, order or other requirement of a Governmental Entity. Neither the Company nor any of its Subsidiaries is a party to or bound by any order, judgment, decree or injunction of any Governmental Entity.
(m) Title to Assets. The Company and the Subsidiaries have good, clear and marketable title to all the tangible properties and tangible assets reflected in their latest balance sheet as being owned by them or acquired after the date thereof which are, individually or in the aggregate, material to the Company’s business (except properties sold or otherwise disposed of since the date thereof in the ordinary course of business), free and clear of all Liens. All equipment and other items of tangible personal property and assets of the Company and the Subsidiaries (i) are in good operating condition and in a state of good maintenance and repair, ordinary wear and tear excepted, and (ii) are usable in the regular and ordinary course of the Company’s business. The Company and the Subsidiaries do not own any real property. Schedule 3.1(m) sets forth all real property leases to which the Company and the Subsidiaries are a party. The Company and/or the Subsidiaries, as applicable, have a valid leasehold interest in such leased real property, and such leases are in full force and effect. The improvements and fixtures on such real property leased by the Company and/or the Subsidiaries are in good operating condition and in a state of good maintenance and repair, ordinary wear and tear excepted.
(n) Intellectual Property.
(i) Saleen and/or the Saleen Entities own or have the right to use pursuant to an enforceable contract all Intellectual Property necessary or desirable to operate the Saleen businesses as currently conducted and as currently proposed to be conducted (the “Saleen Parties Intellectual Property”). Other than the Saleen Parties Intellectual Property, the Company has no Intellectual Property. The Saleen Parties have taken all necessary and desirable action to maintain and protect each item of Saleen Parties Intellectual Property.
(ii) The Company has delivered to the Purchasers correct and complete copies of all written documentation evidencing ownership and prosecution (if applicable) of each item of any Saleen Parties Intellectual Property. With respect to each such item of Saleen Parties Intellectual Property:
(A) The Saleen Parties possess all right, title, and interest in and to the item, free and clear of any Lien;
(B) the item is not subject to any order, judgment, decree or injunction of any Governmental Entity;
(C) no action or proceeding is pending or, to the Company’s best knowledge, threatened (and, to the Company’s best knowledge, there is no basis therefor) which challenges the enforceability, use, or ownership of the item; and
(D) neither the Company nor any Subsidiary has ever agreed to indemnify any Person for or against any interference, infringement, misappropriation, or other conflict with respect to the item.
(iii) The Saleen Parties Intellectual Property does not interfere with, infringe upon, misappropriate, or otherwise violate or come into conflict with any other Person’s Intellectual Property, and neither the Company nor any Subsidiary has received any notice alleging any such interference, infringement, misappropriation, violation, or conflict (including any claim that the Company or any Subsidiary must license or refrain from using any other Person’s Intellectual Property). No third Person has any Intellectual Property that interferes or would be likely to interfere with the Company’s use of any Saleen Parties Intellectual Property. The Saleen Parties Intellectual Property will not interfere with, infringe upon, misappropriate, or otherwise come into conflict with, any Intellectual Property rights of any other Person as a result of the continued operation by the Company or the Subsidiaries of their businesses as currently conducted and as currently proposed to be conducted. No other Person has interfered with, infringed upon, misappropriated, or otherwise come into conflict with any Saleen Parties Intellectual Property.
(iv) Schedule 3.1(n) identifies each contract pursuant to which the Company or any Subsidiary has granted to a third party rights under or with respect to any Saleen Parties Intellectual Property (together with any exceptions). The Company has made available to the Purchasers correct and complete copies of all contracts with respect to such use as amended to date. With respect to the Contracts (1) related to each item of Saleen Parties Intellectual Property, the statements in clauses (A) through (H) below are true and correct, and (2) in Schedule 3.1(n), the statements in clauses (A) through (D) below are true and correct:
(A) the contract is enforceable against each of the parties thereto in accordance with its terms;
(B) the contract will continue to be enforceable on identical terms following the consummation of the Merger;
(C) The Saleen Entities are not (and no counter-party is) in breach of such contract, and no event has occurred that with notice or lapse of time would constitute a breach thereunder;
(D) no party to the contract has repudiated any provision thereof;
(E) with respect to each sublicense contract, the representations and warranties set forth in (A) – (D) are true and correct with respect to the underlying license contract;
(F) the underlying item of Saleen Parties Intellectual Property is not subject to any outstanding order, judgment, decree or injunction of any Governmental Entity;
(G) no action or proceeding is pending or threatened (and there is no basis therefor) that challenges the enforceability of the underlying item of Intellectual Property; and
(H) neither the Company nor any Subsidiary has granted any sublicense or similar contract with respect to the contract.
(v) Except as set forth in Schedule 3.1(n), all former and current employees, contractors and consultants of the Saleen Entities have executed written contracts with the Saleen Entities that assign to the Saleen Entities all rights to any inventions, improvements, discoveries or information relating to the Saleen Entities’ business. No employee, contractor or consultant of the Saleen Entities has entered into any contract that restricts or limits in any way the scope or type of work in which the employee, contractor or consultant may be engaged or requires the employee, contractor or consultant to transfer, assign, or disclose information concerning his or her work to any Person other than Saleen Entities.
(vi) To the Company’s knowledge, there are no new products, inventions, procedures, or methods of manufacturing or processing that any competitors or other Person have developed which reasonably could be expected to supersede or make obsolete any, or any planned, product or process of the Saleen Entities.
(o) Insurance. The Company and the Subsidiaries do not maintain any insurance policies.
(p) Transactions with Affiliates and Employees. The Company and the Subsidiaries are not a party to any contract, lease, license, commitment or arrangement, written or oral, which, were the Saleen Entities “registrants” under the Exchange Act, would be required to be disclosed pursuant to Item 404(a) or (c) of Regulation S-K as promulgated by the SEC, and there are no loans outstanding to or from any Person specified in Item 404(a) of Regulation S-K from or to the Company or the Subsidiaries.
(q) Sarbanes-Oxley; Internal Accounting Controls. The Company is in material compliance with all provisions of the Sarbanes-Oxley Act of 2002 which are applicable to it as of the Closing Date. The Company and the Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management’s general or specific authorization, and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. The Company has established disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and designed such disclosure controls and procedures to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. The Company’s certifying officers have evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by the Company’s most recently filed periodic report under the Exchange Act (such date, the “Evaluation Date”). The Company presented in its most recently filed periodic report under the Exchange Act the conclusions of the certifying officers about the effectiveness of the disclosure controls and procedures based on their evaluations as of the Evaluation Date. Since the Evaluation Date, there have been no changes in the Company’s internal control over financial reporting (as such term is defined in the Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
(r) Certain Fees. No brokerage or finder’s fees or commissions are or will be payable by the Company to any broker, financial advisor or consultant, finder, placement agent, investment banker, bank or other Person with respect to the transactions contemplated by the Transaction Documents. The Purchasers shall have no obligation with respect to any fees or with respect to any claims made by or on behalf of other Persons for fees of a type contemplated in this Section that may be due in connection with the transactions contemplated by the Transaction Documents.
(s) Private Placement. Assuming the accuracy of the Purchasers’ representations and warranties set forth in Section 3.2, no registration under the Securities Act is required for the offer and sale of the Securities by the Company to the Purchasers as contemplated hereby. The issuance and sale of the Securities hereunder does not contravene the rules and regulations of the Trading Market.
(t) Investment Company. The Company is not, and is not an Affiliate of, and immediately after receipt of payment for the Securities, will not be or be an Affiliate of, an “investment company” within the meaning of the Investment Company Act of 1940, as amended. The Company shall conduct its business in a manner so that it will not become subject to the Investment Company Act of 1940, as amended.
(u) Registration Rights. Except as provided in those certain Registration Rights Agreements, each dated March 13, 2013 disclosed in the SEC Reports, no Person has any right to cause the Company to effect the registration under the Securities Act of any securities of the Company.
(v) Listing and Maintenance Requirements. The Common Stock is registered pursuant to Section 12(b) of the Exchange Act, and the Company has taken no action designed to, or which to its knowledge is likely to have the effect of, terminating the registration of the Common Stock under the Exchange Act nor has the Company received any notification that the Commission is contemplating terminating such registration. Except as set forth in the SEC Reports, the Company has not, in the twelve (12) months preceding the date hereof, received notice from any Trading Market on which the Common Stock is or has been listed or quoted to the effect that the Company is not in compliance with the listing or maintenance requirements of such Trading Market. Except as set forth in the SEC Reports, the Company is, and has no reason to believe that it will not in the foreseeable future continue to be, in compliance with all such listing and maintenance requirements.
(w) Application of Takeover Protections. The Company and the Board of Directors have taken all necessary action, if any, in order to render inapplicable any control share acquisition, business combination, poison pill (including any distribution under a rights agreement) or other similar anti-takeover provision under the Company’s articles of incorporation or the laws of its state of incorporation that is or could become applicable to the Purchasers as a result of the Purchasers and the Company fulfilling their obligations or exercising their rights under the Transaction Documents, including, without limitation, as a result of the Company’s issuance of the Securities and the Purchasers’ ownership of the Securities.
(x) Disclosure. None of the Transaction Documents, nor any Schedule or Exhibit thereto, nor any other statements, documents or certificates made or delivered in connection herewith or therewith contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained herein and therein not misleading in light of the circumstances under which such statements were made.
(y) No Integrated Offering. Assuming the accuracy of the Purchasers’ representations and warranties set forth in Section 3.2, neither the Company, nor any of its Affiliates, nor any Person acting on its or their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would cause this offering of the Securities to be integrated with prior offerings by the Company for purposes of (i) the Securities Act which would require the registration of any such securities under the Securities Act, or (ii) any applicable shareholder approval provisions of any Trading Market on which any of the securities of the Company are listed or designated.
(z) Solvency. Based on the consolidated financial condition of the Company as of the Closing Date after giving effect to the receipt by the Company of the proceeds from the sale of the Securities hereunder, (i) the fair saleable value of the Company’s assets exceeds the amount that will be required to be paid on or in respect of the Company’s existing debts and other liabilities (including known contingent liabilities) as they mature, (ii) the Company’s assets do not constitute unreasonably small capital to carry on its business as now conducted and as proposed to be conducted including its capital needs taking into account the particular capital requirements of the business conducted by the Company, and projected capital requirements and capital availability thereof, and (iii) the current cash flow of the Company, together with the proceeds the Company would receive, were it to liquidate all of its assets, after taking into account all anticipated uses of the cash, would be sufficient to pay all amounts on or in respect of its liabilities when such amounts are required to be paid. The Company does not intend to incur debts beyond its ability to pay such debts as they mature (taking into account the timing and amounts of cash to be payable on or in respect of its debt). The Company has no knowledge of any facts or circumstances which lead it to believe that it will file for reorganization or liquidation under the bankruptcy or reorganization laws of any jurisdiction within one year from the Closing Date. Schedule 3.1(z) sets forth as of the date hereof all outstanding secured and unsecured Indebtedness of the Company or any Subsidiary, or for which the Company or any Subsidiary has commitments. For the purposes of this Agreement, “Indebtedness” means (a) any liabilities for borrowed money or amounts owed in excess of $50,000 (other than trade accounts payable incurred in the ordinary course of business), (b) 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 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 (c) the present value of any lease payments in excess of $50,000 due under leases required to be capitalized in accordance with GAAP. Neither the Company nor any Subsidiary is in default with respect to any Indebtedness.
(aa) Tax Status. Except for matters that would not, individually or in the aggregate, have or reasonably be expected to result in a Material Adverse Effect, the Company and each Subsidiary has filed all necessary federal, state and foreign income and franchise tax returns and has paid or accrued all taxes shown as due thereon, and the Company has no knowledge of a tax deficiency which has been asserted or threatened against the Company or any Subsidiary.
(bb) No General Solicitation. Neither the Company nor any person acting on behalf of the Company has offered or sold any of the Securities by any form of general solicitation or general advertising. The Company has offered the Securities for sale only to the Purchasers and certain other “accredited investors” within the meaning of Rule 501 under the Securities Act.
(cc) Foreign Corrupt Practices. Neither the Company, nor to the knowledge of the Company, any agent or other person acting on behalf of the Company, has (i) directly or indirectly, used any funds for unlawful contributions, gifts, entertainment or other unlawful expenses related to foreign or domestic political activity, (ii) made any unlawful payment to foreign or domestic government officials or employees or to any foreign or domestic political parties or campaigns from corporate funds, (iii) failed to disclose fully any contribution made by the Company (or made by any person acting on its behalf of which the Company is aware) which is in violation of law, or (iv) violated in any material respect any provision of the Foreign Corrupt Practices Act of 1977, as amended.
(dd) Accountants. The Company’s accounting firm is Weinberg & Company. To the knowledge and belief of the Company, such accounting firm (i) is a registered public accounting firm as required by the Exchange Act and (ii) shall express its opinion with respect to the financial statements to be included in the Company’s Annual Report for the year ending March 31, 2013.
(ee) Seniority. As of the Closing Date, no Indebtedness or other claim against the Company is senior to the Notes in right of payment, whether with respect to interest or upon liquidation or dissolution, or otherwise, other than indebtedness secured by purchase money security interests (which is senior only as to underlying assets covered thereby) and capital lease obligations (which is senior only as to the property covered thereby).
(ff) No Disagreements with Accountants and Lawyers. There are no disagreements of any kind presently existing, or reasonably anticipated by the Company to arise, between the Company and the accountants and lawyers formerly or presently employed by the Company and the Company is current with respect to any fees owed to its accountants and lawyers which could affect the Company’s ability to perform any of its obligations under any of the Transaction Documents.
(gg) Acknowledgment Regarding Purchasers’ Purchase of Securities. The Company acknowledges and agrees that each of the Purchasers is acting solely in the capacity of an arm’s length purchaser with respect to the Transaction Documents and the transactions contemplated thereby. The Company further acknowledges that no Purchaser is acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to the Transaction Documents and the transactions contemplated thereby and any advice given by any Purchaser or any of their respective representatives or agents in connection with the Transaction Documents and the transactions contemplated thereby is merely incidental to the Purchasers’ purchase of the Securities. The Company further represents to each Purchaser that the Company’s decision to enter into this Agreement and the other Transaction Documents has been based solely on the independent evaluation of the transactions contemplated hereby by the Company and its representatives.
(hh) Acknowledgment Regarding Purchasers’ Trading Activity. Notwithstanding anything in this Agreement or elsewhere herein to the contrary (except for Section 3.2(f)), it is understood and acknowledged by the Company that (i) none of the Purchasers has been asked to agree by the Company, nor has any Purchaser agreed, to desist from purchasing or selling, long and/or short, securities of the Company, or “derivative” securities based on securities issued by the Company or to hold the Securities for any specified term, (ii) past or future open market or other transactions by any Purchaser, specifically including, without limitation, Short Sales or “derivative” transactions, before or after the closing of this or future private placement transactions, may negatively impact the market price of the Company’s publicly-traded securities, (iii) any Purchaser, and counter-parties in “derivative” transactions to which any such Purchaser is a party, directly or indirectly, may presently have a “short” position in the Common Stock, and (iv) each Purchaser shall not be deemed to have any affiliation with or control over any arm’s length counter-party in any “derivative” transaction. The Company further understands and acknowledges that (a) one or more Purchasers may engage in hedging activities at various times during the period that the Securities are outstanding, including, without limitation, during the periods that the value of the Underlying Shares deliverable with respect to Securities are being determined and (b) such hedging activities (if any) could reduce the value of the existing stockholders' equity interests in the Company at and after the time that the hedging activities are being conducted. The Company acknowledges that such aforementioned hedging activities do not constitute a breach of any of the Transaction Documents.
(ii) Regulation M Compliance. The Company has not, and to its knowledge no one acting on its behalf has, (i) taken, directly or indirectly, any action designed to cause or to result in the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of any of the Securities, (ii) sold, bid for, purchased, or paid any compensation for soliciting purchases of, any of the securities of the Company or (iii) paid or agreed to pay to any Person any compensation for soliciting another to purchase any other securities of the Company, other than, in the case of clauses (ii) and (iii), compensation paid to the Company’s placement agent in connection with the placement of the Securities.
(jj) Significant Shareholders. Except for Steve Saleen, no Person has any direct or indirect beneficial ownership (as determined in accordance with Regulation 13D-G) of shares of Common Stock which exceeds in the aggregate (together with other Persons which would constitute a “group” under Regulation 13D-G) five percent (5%) of the total number of outstanding shares of Common Stock as of the date hereof and the Closing Date, including, without limitation, as a result of any Person’s beneficial interest in a trust. For purposes of the calculations under this paragraph, any limitations on beneficial ownership contained in any instrument directly or indirectly convertible, exchangeable or exercisable into or for Common Stock shall be ignored and any such instruments shall be deemed to be currently convertible, exchangeable or exercisable in full.
3.2 Representations and Warranties of the Purchasers. Each Purchaser, for itself and for no other Purchaser, hereby represents and warrants as of the date hereof and as of the Closing Date to the Company as follows:
(a) Organization; Authority. Such Purchaser is an entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization with full right, corporate or partnership power and authority to enter into and to consummate the transactions contemplated by the Transaction Documents and otherwise to carry out its obligations hereunder and thereunder. The execution and delivery of the Transaction Documents and performance by such Purchaser of the transactions contemplated by the Transaction Documents have been duly authorized by all necessary corporate or similar action on the part of such Purchaser. Each Transaction Document to which it is a party has been duly executed by such Purchaser, and when delivered by such Purchaser in accordance with the terms hereof, will constitute the valid and legally binding obligation of such Purchaser, enforceable against it in accordance with its terms, except (i) as limited by general equitable principles and applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies and (iii) insofar as indemnification and contribution provisions may be limited by applicable law.
(b) Own Account. Such Purchaser understands that the Securities are “restricted securities” and have not been registered under the Securities Act or any applicable state securities law and is acquiring the Securities as principal for its own account and not with a view to or for distributing or reselling such Securities or any part thereof in violation of the Securities Act or any applicable state securities law, has no present intention of distributing any of such Securities in violation of the Securities Act or any applicable state securities law and has no direct or indirect arrangement or understandings with any other persons to distribute or regarding the distribution of such Securities (this representation and warranty not limiting such Purchaser’s right to sell the Securities pursuant to any registration statement filed under the Securities Act or otherwise in compliance with applicable federal and state securities laws) in violation of the Securities Act or any applicable state securities law. Such Purchaser is acquiring the Securities hereunder in the ordinary course of its business.
(c) Purchaser Status. At the time such Purchaser was offered the Securities, it was, and at the date hereof it is, and on each date on which it or its permitted assignee converts any Notes it or such permitted assignee, as the case may be, will be an “accredited investor” as defined in Rule 501 under the Securities Act. Such Purchaser is not required to be registered as a broker-dealer under Section 15 of the Exchange Act.
(d) Experience of Such Purchaser. Such Purchaser, either alone or together with its representatives, has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment in the Securities, and has so evaluated the merits and risks of such investment. Such Purchaser is able to bear the economic risk of an investment in the Securities and, at the present time, is able to afford a complete loss of such investment.
(e) General Solicitation. Such Purchaser is not purchasing the Securities as a result of any advertisement, article, notice or other communication regarding the Securities published in any newspaper, magazine or similar media or broadcast over television or radio or presented at any seminar or any other general solicitation or general advertisement.
(f) Short Sales and Confidentiality Prior To The Date Hereof. Other than consummating the transactions contemplated hereunder, such Purchaser has not directly or indirectly, nor has any Person acting on behalf of or pursuant to any understanding with such Purchaser, executed any purchases or sales, including Short Sales, of the securities of the Company during the period commencing from the time that such Purchaser first received a term sheet (written or oral) from the Company or any other Person representing the Company setting forth the material terms of the transactions contemplated hereunder until the date hereof (“Discussion Time”). Notwithstanding the foregoing, in the case of a Purchaser that is a multi-managed investment vehicle whereby separate portfolio managers manage separate portions of such Purchaser's assets and the portfolio managers have no direct knowledge of the investment decisions made by the portfolio managers managing other portions of such Purchaser's assets, the representation set forth above shall only apply with respect to the portion of assets managed by the portfolio manager that made the investment decision to purchase the Securities covered by this Agreement. Other than to other Persons party to this Agreement, such Purchaser has maintained the confidentiality of all disclosures made to it in connection with this transaction (including the existence and terms of this transaction).
ARTICLE IV.
OTHER AGREEMENTS OF THE PARTIES
4.1 Transfer Restrictions.
(a) The Securities may only be disposed of in compliance with state and federal securities laws. In connection with any transfer of Securities other than pursuant to an effective registration statement or Rule 144, to the Company or to an Affiliate of a Purchaser or in connection with a pledge as contemplated in Section 4.1(b), the Company may require the transferor thereof to provide to the Company an opinion of counsel selected by the transferor and reasonably acceptable to the Company, the form and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does not require registration of such transferred Securities under the Securities Act. As a condition of transfer, any such transferee shall agree in writing to be bound by the terms of this Agreement and shall have the rights of a Purchaser under this Agreement.
(b) The Purchasers agree to the imprinting, so long as is required by this Section 4.1, of a legend on any of the Securities in the following form:
[NEITHER] THIS SECURITY [NOR THE SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE] HAS [NOT] BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS. THIS SECURITY [AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS SECURITY] MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.
The Company acknowledges and agrees that a Purchaser may from time to time pledge pursuant to a bona fide margin agreement with a registered broker-dealer or grant a security interest in some or all of the Securities to a financial institution that is an “accredited investor” as defined in Rule 501 under the Securities Act and who agrees to be bound by the provisions of this Agreement and, if required under the terms of such arrangement, such Purchaser may transfer pledged or secured Securities to the pledgees or secured parties. Such a pledge or transfer would not be subject to approval of the Company and no legal opinion of legal counsel of the pledgee, secured party or pledgor shall be required in connection therewith. Further, no notice shall be required of such pledge. At the appropriate Purchaser’s expense, the Company will execute and deliver such reasonable documentation as a pledgee or secured party of Securities may reasonably request in connection with a pledge or transfer of the Securities, including, if the Securities are subject to a registration statement filed under the Securities Act, the preparation and filing of any required prospectus supplement under Rule 424(b)(3) under the Securities Act or other applicable provision of the Securities Act to appropriately amend the list of selling stockholders thereunder.
(c) Certificates evidencing the Underlying Shares shall not contain any legend (including the legend set forth in Section 4.1(b) hereof), except for any legend reasonably referring to any applicable transfer restrictions under state securities laws: (i) while a registration statement covering the resale of such security is effective under the Securities Act, or (ii) if such Underlying Shares are eligible for resale under Rule 144 and the holder thereof is not an Affiliate of the Company, or (iii) if such legend is not required under applicable requirements of the Securities Act (including judicial interpretations and pronouncements issued by the staff of the Commission). If required by the Transfer Agent to effect the removal of the legend hereunder, the Company shall cause its counsel to issue a legal opinion to the Transfer Agent promptly after the date which is six (6) months following the Closing Date (if the Company has been subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act for the then preceding ninety (90) days and has filed all reports required to be filed thereunder during the then preceding twelve (12) months (or such shorter period that the Company was required to file such reports) and the holder thereof is not an Affiliate of the Company). If all or any portion of a Note is converted or exercised (as applicable) at a time when there is an effective registration statement to cover the resale of the Underlying Shares, or if such Underlying Shares may be sold under Rule 144 or if such legend is not otherwise required under applicable requirements of the Securities Act (including judicial interpretations and pronouncements issued by the staff of the Commission) then such Underlying Shares shall be issued free of all legends, except for any legend reasonably referring to any applicable transfer restrictions under state securities laws. The Company agrees that at such time as such legend is no longer required under this Section 4.1(c), it will, no later than three Trading Days following the delivery by a Purchaser to the Company or the Transfer Agent of a certificate representing Underlying Shares, as applicable, issued with a restrictive legend (such third Trading Day, the “Legend Removal Date”), deliver or cause to be delivered to such Purchaser a certificate representing such shares that is free from all restrictive and other legends. The Company may not make any notation on its records or give instructions to the Transfer Agent that enlarge the restrictions on transfer set forth in this Section. Certificates for Underlying Shares subject to legend removal hereunder shall be transmitted by the Transfer Agent to the Purchaser by crediting the account of the Purchaser’s prime broker with the Depository Trust Company System as directed by such Purchaser.
(d) In addition to such Purchaser’s other available remedies, the Company shall be subject to the liquidated damage provisions and other remedies for failing timely to provide proper certificates to a Purchaser which are set forth in such Purchaser’s Note. Nothing herein shall limit such Purchaser’s right to pursue actual damages for the Company’s failure to deliver certificates representing any Securities as required by the Transaction Documents, and such Purchaser shall have the right to pursue all remedies available to it at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief.
(e) Each Purchaser, severally and not jointly with the other Purchasers, agrees that such Purchaser will sell any Securities pursuant to either Rule 144 or the registration requirements of the Securities Act, including any applicable prospectus delivery requirements, or an exemption therefrom, and that if Securities are sold pursuant to a registration statement filed under the Securities Act, they will be sold in compliance with the plan of distribution set forth therein, and acknowledges that the removal of the restrictive legend from certificates representing Securities as set forth in this Section 4.1 is predicated upon the Company’s reliance upon this understanding.
(f) The Company represents and warrants that, except as may otherwise be set forth in the Disclosure Schedules, none of the Purchasers is currently nor has been, nor upon consummation of the Closing will become, an affiliate of the Company for purposes of Rule 144. With respect to each Purchaser, the Company covenants and agrees to take the position at all times in the future that such Purchaser is not an affiliate of the Company for purposes of Rule 144 solely as result of such Purchaser’s ownership of the Securities, except that this covenant shall not apply if such Purchaser beneficially owns (as determined in accordance with Regulation 13D-G of the Exchange Act) in excess of ten percent (10%) of the outstanding shares of Common Stock.
4.2 Acknowledgment of Dilution. The Company acknowledges that the issuance of the Securities may result in dilution of the outstanding shares of Common Stock, which dilution may be substantial under certain market conditions. The Company further acknowledges that its obligations under the Transaction Documents, including, without limitation, its obligation to issue the Underlying Shares pursuant to the Transaction Documents, are unconditional and absolute and not subject to any right of set off, counterclaim, delay or reduction, regardless of the effect of any such dilution or any claim the Company may have against any Purchaser and regardless of the dilutive effect that such issuance may have on the ownership of the other stockholders of the Company.
4.3 Furnishing of Information. Until the time that no Purchaser owns Securities, the Company covenants to timely file (or obtain extensions in respect thereof and file within the applicable grace period) all reports required to be filed by the Company after the date hereof pursuant to the Exchange Act even if the Company is not then subject to the reporting requirements of the Exchange Act. As long as any Purchaser owns Securities, if the Company is not required to file reports pursuant to the Exchange Act, it will prepare and furnish to the Purchasers and make publicly available in accordance with Rule 144(c) such information as would be required if the Purchasers were able to sell the Securities under Rule 144. The Company further covenants that it will take such further action as any holder of Securities may reasonably request, to the extent required from time to time to enable such Person to sell such Securities without registration under the Securities Act within the requirements of the exemption provided by Rule 144 if such exemption becomes available. So long as any Securities are outstanding, the Company shall cause itself to be subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act and timely file all reports required to be filed thereunder.
4.4 Integration. The Company shall not sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in Section 2 of the Securities Act) that would be integrated with the offer or sale of the Securities to the Purchasers in a manner that would require the registration under the Securities Act of the sale of the Securities to the Purchasers or that would be integrated with the offer or sale of the Securities for purposes of the rules and regulations of any Trading Market.
4.5 Conversion Procedures. The form of Notice of Conversion included in the Notes set forth the totality of the procedures required of the Purchasers in order to convert the Notes. No additional legal opinion or other information or instructions shall be required of the Purchasers to convert their Notes. The Company shall honor conversions of the Notes and shall deliver Underlying Shares in accordance with the terms, conditions and time periods set forth in the Transaction Documents.
4.6 Securities Laws Disclosure; Publicity. The Company shall, by 8:30 a.m. (New York City time) on the Trading Day following the date hereof, issue a Current Report on Form 8-K disclosing the material terms of the transactions contemplated hereby and attaching the Transaction Documents as exhibits thereto. The Company and each Purchaser shall consult with each other in issuing any other press releases with respect to the transactions contemplated hereby, and neither the Company nor any Purchaser shall issue any such press release or otherwise make any such public statement without the prior consent of the Company, with respect to any press release of any Purchaser, or without the prior consent of each Purchaser, with respect to any press release of the Company, which consent shall not unreasonably be withheld or delayed, except if such disclosure is required by law, in which case the disclosing party shall promptly provide the other party with prior notice of such public statement or communication. Notwithstanding the foregoing, the Company shall not publicly disclose the name of any Purchaser, or include the name of any Purchaser in any filing with the Commission or any regulatory agency or Trading Market, without the prior written consent of such Purchaser, except (a) as required by federal securities law in connection with (i) any registration statement filed under the Securities Act covering the resale of the Securities, and (ii) the filing of final Transaction Documents (including signature pages thereto) with the Commission and (b) to the extent such disclosure is required by law or Trading Market regulations, in which case the Company shall provide the Purchasers with prior notice of such disclosure permitted under this clause (b).
4.7 Shareholder Rights Plan. No claim will be made or enforced by the Company or, with the consent of the Company, any other Person, that any Purchaser is an “Acquiring Person” under any control share acquisition, business combination, poison pill (including any distribution under a rights agreement) or similar anti-takeover plan or arrangement in effect or hereafter adopted by the Company, or that any Purchaser could be deemed to trigger the provisions of any such plan or arrangement, by virtue of receiving Securities under the Transaction Documents or under any other agreement between the Company and the Purchasers.
4.8 Non-Public Information. Except with respect to the material terms and conditions of the transactions contemplated by the Transaction Documents, the Company covenants and agrees that neither it nor any other Person acting on its behalf will provide any Purchaser or its agents or counsel with any information that the Company believes constitutes material non-public information, unless prior thereto such Purchaser shall have executed a written agreement regarding the confidentiality and use of such information. The Company understands and confirms that each Purchaser shall be relying on the foregoing covenant in effecting transactions in securities of the Company.
4.9 Use of Proceeds. Except as set forth on Schedule 4.9 attached hereto or as provide in Section 5.2 hereof, the Company shall use the net proceeds from the sale of the Securities hereunder for working capital purposes and shall not use such proceeds for (a) the satisfaction of any portion of the Company’s debt (other than payment of trade payables in the ordinary course of the Company’s business and prior practices), (b) the redemption of any Common Stock or Common Stock Equivalents or (c) the settlement of any outstanding litigation.
4.10 Indemnification of Purchasers. Subject to the provisions of this Section 4.10, the Company will indemnify and hold each Purchaser and its directors, officers, shareholders, members, partners, employees and agents (and any other Persons with a functionally equivalent role of a Person holding such titles notwithstanding a lack of such title or any other title), each Person who controls such Purchaser (within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the directors, officers, shareholders, agents, members, partners or employees (and any other Persons with a functionally equivalent role of a Person holding such titles notwithstanding a lack of such title or any other title) of such controlling person (each, a “Purchaser Party”) harmless from any and all losses, liabilities, obligations, claims, contingencies, damages, costs and expenses, including all judgments, amounts paid in settlements, court costs and reasonable attorneys’ fees and costs of investigation that any such Purchaser Party may suffer or incur as a result of or relating to (a) any breach of any of the representations, warranties, covenants or agreements made by the Company in this Agreement or in the other Transaction Documents or (b) any action instituted against a Purchaser in any capacity, or any of them or their respective Affiliates, by any stockholder of the Company who is not an Affiliate of such Purchaser, with respect to any of the transactions contemplated by the Transaction Documents (unless such action is based upon a breach of such Purchaser’s representations, warranties or covenants under the Transaction Documents or any agreements or understandings such Purchaser may have with any such stockholder or any violations by the Purchaser of state or federal securities laws or any conduct by such Purchaser which constitutes fraud, gross negligence, willful misconduct or malfeasance). If any action shall be brought against any Purchaser Party in respect of which indemnity may be sought pursuant to this Agreement, such Purchaser Party shall promptly notify the Company in writing, and the Company shall have the right to assume the defense thereof with counsel of its own choosing reasonably acceptable to the Purchaser Party. Any Purchaser Party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Purchaser Party except to the extent that (i) the employment thereof has been specifically authorized by the Company in writing, (ii) the Company has failed after a reasonable period of time to assume such defense and to employ counsel or (iii) in such action there is, in the reasonable opinion of such separate counsel, a material conflict on any material issue between the position of the Company and the position of such Purchaser Party, in which case the Company shall be responsible for the reasonable fees and expenses of no more than one such separate counsel. The Company will not be liable to any Purchaser Party under this Agreement (i) for any settlement by a Purchaser Party effected without the Company’s prior written consent, which shall not be unreasonably withheld or delayed; or (ii) to the extent, but only to the extent that a loss, claim, damage or liability is attributable to any Purchaser Party’s breach of any of the representations, warranties, covenants or agreements made by such Purchaser Party in this Agreement or in the other Transaction Documents.
4.11 Reservation and Listing of Securities.
(a) The Company shall maintain a reserve from its duly authorized shares of Common Stock for issuance pursuant to the Transaction Documents in such amount as may be required to fulfill its obligations in full under the Transaction Documents.
(b) If, on any date, the number of authorized but unissued (and otherwise unreserved) shares of Common Stock is less than the Required Minimum on such date, then the Board of Directors shall use commercially reasonable efforts to amend the Company’s articles of incorporation to increase the number of authorized but unissued shares of Common Stock to at least the Required Minimum at such time, as soon as possible and in any event not later than the seventy-fifth (75th) day after such date.
(c) If applicable, the Company shall (i) in the time and manner required by the principal Trading Market, prepare and file with such Trading Market an additional shares listing application covering a number of shares of Common Stock at least equal to the Required Minimum on the date of such application, (ii) take all steps necessary to cause such shares of Common Stock to be approved for listing on such Trading Market as soon as possible thereafter, (iii) provide to the Purchasers evidence of such listing, and (iv) maintain the listing of such Common Stock on any date at least equal to the Required Minimum on such date on such Trading Market or another Trading Market.
4.12 Corporate Structure. For a period of twelve (12) months following the Closing, the Company and its Subsidiaries shall maintain and conduct its business at a physical office or offices, hire and retain key employees and other personnel, and otherwise operate its business in a reasonable and customary manner similar to other public reporting companies engaged in similar businesses.
4.13 Bank Account Signatures. So long as any Notes remain outstanding, any check written against or other withdrawal from the Company or any of its Subsidiaries’ bank account(s) in an amount greater than $5,000.00 shall require the signature of two executive officers.
4.14 Equal Treatment of Purchasers. No consideration shall be offered or paid to any Person to amend or consent to a waiver or modification of any provision of any of the Transaction Documents unless the same consideration is also offered to all of the parties to the Transaction Documents. Further, the Company shall not make any payment of principal or interest on the Notes in amounts which are disproportionate to the respective principal amounts outstanding on the Notes at any applicable time. For clarification purposes, this provision constitutes a separate right granted to each Purchaser by the Company and negotiated separately by each Purchaser, and is intended for the Company to treat the Purchasers as a class and shall not in any way be construed as the Purchasers acting in concert or as a group with respect to the purchase, disposition or voting of Securities or otherwise.
4.15 Form D; Blue Sky Filings. The Company agrees to timely file a Form D with respect to the Securities as required under Regulation D and to provide a copy thereof, promptly upon request of any Purchaser. The Company shall take such action as the Company shall reasonably determine is necessary in order to obtain an exemption for, or to qualify the Securities for, sale to the Purchasers at the Closing under applicable securities or “Blue Sky” laws of the states of the United States, and shall provide evidence of such actions promptly upon request of any Purchaser.
4.16 Security. The Company’s and any Subsidiaries’ obligations under the Notes and other Transaction Documents shall be secured by all the assets of the Company and its Subsidiaries. As of the Closing, the Purchasers participating therein shall be granted a security interest in all the assets of the Company, including, without limitation, all of its Intellectual Property Rights and its ownership of any and all Subsidiaries, and in the assets of any such Subsidiaries, to be memorialized in the Security Documents. The Company shall execute such other agreements, documents and financing statements reasonably requested by Purchasers, which will be filed at the Company’s expense with the applicable jurisdictions and authorities. The Company shall also execute all such documents reasonably necessary in the opinion of the Purchasers to memorialize and further protect the security interests described herein. The Purchasers may appoint a collateral agent to represent them collectively in connection with the security interests being granted to the Purchasers.
4.17 Additional Guarantors. The Company shall cause each of its Subsidiaries, including those formed or acquired on or after the date hereof, to execute and deliver to the Purchasers a Subsidiary Guarantee and a Security Agreement in conformity with those executed and delivered at the Closing.
4.18 Investor Relations. For a period of 12 months after the Closing Date, the Company shall expend at least $10,000 per month on investor relations activities.
ARTICLE V.
MISCELLANEOUS
5.1 Termination. This Agreement may be terminated by any Purchaser, as to such Purchaser’s obligations hereunder only and without any effect whatsoever on the obligations between the Company and the other Purchasers, by written notice to the other parties, if the Closing has not been consummated on or before June 26, 2013; provided, however, that such termination will not affect the right of any party to sue for any breach by the other party (or parties).
5.2 Fees and Expenses. The Company and Purchasers agree that, except as set forth in this Section 5.2, all fees and expenses shall be paid (or advanced and repaid, as applicable) as set forth in the Merger Agreement. For the avoidance of doubt, W-Net shall advance all legal fees incurred by the Company, Europa, Verdad and W-Net in connection with the Transaction Documents, which fees will be repaid in full by the Company upon the Closing from the proceeds thereof, up to a maximum of $35,000. Except as expressly set forth in the Transaction Documents to the contrary, each party shall pay the fees and expenses of its advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and performance of this Agreement. The Company shall pay all transfer agent fees, stamp taxes and other taxes and duties levied in connection with the delivery of any Securities to the Purchasers. The amounts set forth in this paragraph as payable by the Company shall be so payable regardless of whether the Closing occurs.
5.3 Entire Agreement. The Transaction Documents, together with the exhibits and schedules thereto, contain the entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, with respect to such matters, which the parties acknowledge have been merged into such documents, exhibits and schedules.
5.4 Notices. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (a) the date of transmission or delivery, if such notice or communication is delivered via facsimile at the facsimile number, or delivered by a U.S. nationally recognized overnight courier service to the address, set forth on the signature pages attached hereto prior to 5:30 p.m. (New York City time) on a Trading Day, (b) the next Trading Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number, or delivered by such courier service to the address, set forth on the signature pages attached hereto on a day that is not a Trading Day or later than 5:30 p.m. (New York City time) on any Trading Day, or (c) upon actual receipt by the party to whom such notice is required to be given. The address for such notices and communications shall be as set forth on the signature pages attached hereto.
5.5 Amendments; Waivers. No provision of this Agreement may be waived, modified, supplemented or amended except in a written instrument signed, in the case of an amendment, by the Company and the Purchasers of at least a majority in interest of the Securities still held by Purchasers or, in the case of a waiver, by the party against whom enforcement of any such waived provision is sought. No waiver of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any subsequent default or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of any party to exercise any right hereunder in any manner impair the exercise of any such right.
5.6 Headings. The headings herein are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof.
5.7 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns. The Company may not assign this Agreement or any rights or obligations hereunder without the prior written consent of each Purchaser (other than by merger). Any Purchaser may assign any or all of its rights under this Agreement to any Person to whom such Purchaser assigns or transfers any Securities, provided that such transferee agrees in writing to be bound, with respect to the transferred Securities, by the provisions of the Transaction Documents that apply to the “Purchasers.”
5.8 No Third-Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective successors and permitted assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other Person, except as otherwise set forth in Section 4.10.
5.9 Governing Law. All questions concerning the construction, validity, enforcement and interpretation of the Transaction Documents shall be governed by and construed and enforced in accordance with the internal laws of the State of California, without regard to the principles of conflicts of law thereof. Each party agrees that all legal proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Agreement and any other Transaction Documents (whether brought against a party hereto or its respective affiliates, directors, officers, shareholders, employees or agents) shall be commenced exclusively in the state and federal courts sitting in the County of Los Angeles. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the County of Los Angeles for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of any of the Transaction Documents), and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is improper or is an inconvenient venue for such proceeding. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by law. If either party shall commence an action or proceeding to enforce any provisions of the Transaction Documents, then the prevailing party in such action or proceeding shall be reimbursed by the other party for its reasonable attorneys’ fees and other costs and expenses incurred with the investigation, preparation and prosecution of such action or proceeding.
5.10 Survival. The representations and warranties shall survive the Closing and the delivery of the Securities for the applicable statute of limitations.
5.11 Execution. This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both parties need not sign the same counterpart. In the event that any signature is delivered by facsimile transmission or by e-mail delivery of a “.pdf” or other document image format data file, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile or “.pdf” or other document image format data file signature page were an original thereof.
5.12 Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their commercially reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable.
5.13 Rescission and Withdrawal Right. Notwithstanding anything to the contrary contained in (and without limiting any similar provisions of) any of the other Transaction Documents, whenever any Purchaser exercises a right, election, demand or option under a Transaction Document and the Company does not timely perform its related obligations within the periods therein provided, then, until the earlier of sixty (60) days after such failure by the Company or the Company performs such obligations, such Purchaser may rescind or withdraw, in its sole discretion from time to time upon written notice to the Company, any relevant notice, demand or election in whole or in part without prejudice to its future actions and rights; provided, however, in the case of a rescission of a conversion of a Note, the Purchaser shall be required to return any shares of Common Stock delivered in connection with any such rescinded conversion or exercise notice.
5.14 Replacement of Securities. If any certificate or instrument evidencing any Securities is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation thereof (in the case of mutilation), or in lieu of and substitution therefor, a new certificate or instrument, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction. The applicant for a new certificate or instrument under such circumstances shall also pay any reasonable third-party costs (including customary indemnity) associated with the issuance of such replacement Securities.
5.15 Remedies. In addition to being entitled to exercise all rights provided herein or granted by law, including recovery of damages, each of the Purchasers and the Company will be entitled to specific performance under the Transaction Documents. The parties agree that monetary damages may not be adequate compensation for any loss incurred by reason of any breach of obligations contained in the Transaction Documents and hereby agrees to waive and not to assert in any action for specific performance of any such obligation the defense that a remedy at law would be adequate.
5.16 Payment Set Aside. To the extent that the Company makes a payment or payments to any Purchaser pursuant to any Transaction Document or a Purchaser enforces or exercises its rights thereunder, and such payment or payments or the proceeds of such enforcement or exercise or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside, recovered from, disgorged by or are required to be refunded, repaid or otherwise restored to the Company, a trustee, receiver or any other person under any law (including, without limitation, any bankruptcy law, state or federal law, common law or equitable cause of action), then to the extent of any such restoration the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred.
5.17 Usury. To the extent it may lawfully do so, the Company hereby agrees not to insist upon or plead or in any manner whatsoever claim, and will resist any and all efforts to be compelled to take the benefit or advantage of, usury laws wherever enacted, now or at any time hereafter in force, in connection with any claim, action or proceeding that may be brought by any Purchaser in order to enforce any right or remedy under any Transaction Document. Notwithstanding any provision to the contrary contained in any Transaction Document, it is expressly agreed and provided that the total liability of the Company under the Transaction Documents for payments in the nature of interest shall not exceed the maximum lawful rate authorized under applicable law (the “Maximum Rate”), and, without limiting the foregoing, in no event shall any rate of interest or default interest, or both of them, when aggregated with any other sums in the nature of interest that the Company may be obligated to pay under the Transaction Documents exceed such Maximum Rate. It is agreed that if the maximum contract rate of interest allowed by law and applicable to the Transaction Documents is increased or decreased by statute or any official governmental action subsequent to the date hereof, the new maximum contract rate of interest allowed by law will be the Maximum Rate applicable to the Transaction Documents from the effective date forward, unless such application is precluded by applicable law. If under any circumstances whatsoever, interest in excess of the Maximum Rate is paid by the Company to any Purchaser with respect to indebtedness evidenced by the Transaction Documents, such excess shall be applied by such Purchaser to the unpaid principal balance of any such indebtedness or be refunded to the Company, the manner of handling such excess to be at such Purchaser’s election.
5.18 Independent Nature of Purchasers’ Obligations and Rights. The obligations of each Purchaser under any Transaction Document are several and not joint with the obligations of any other Purchaser, and no Purchaser shall be responsible in any way for the performance or non-performance of the obligations of any other Purchaser under any Transaction Document. Nothing contained herein or in any other Transaction Document, and no action taken by any Purchaser pursuant thereto, shall be deemed to constitute the Purchasers as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Purchasers are in any way acting in concert or as a group with respect to such obligations or the transactions contemplated by the Transaction Documents. In furtherance of the foregoing, the signature page of the Company and each Purchaser to each Transaction Document shall evidence the binding agreement of the Company and such Purchaser to such Transaction Document, and no Purchaser shall be entitled to receive a copy of the signature page of any other Purchaser to any other Transaction Document. Each Purchaser shall be entitled to independently protect and enforce its rights, including without limitation the rights arising out of this Agreement or out of the other Transaction Documents, and it shall not be necessary for any other Purchaser to be joined as an additional party in any proceeding for such purpose. Each Purchaser has been represented by its own separate legal counsel in their review and negotiation of the Transaction Documents. For reasons of administrative convenience only, Purchasers and their respective counsel have chosen to communicate with the Company through W-Net. W-Net does not represent all of the Purchasers but only W-Net. The Company has elected to provide all Purchasers with the same terms and Transaction Documents for the convenience of the Company and not because it was required or requested to do so by the Purchasers.
5.19 Liquidated Damages. The Company’s obligations to pay any partial liquidated damages or other amounts owing under the Transaction Documents is a continuing obligation of the Company and shall not terminate until all unpaid partial liquidated damages and other amounts have been paid notwithstanding the fact that the instrument or security pursuant to which such partial liquidated damages or other amounts are due and payable shall have been canceled.
5.20 Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall not be a Business Day, then such action may be taken or such right may be exercised on the next succeeding Business Day.
5.21 Construction. The parties agree that each of them and/or their respective counsel has reviewed and had an opportunity to revise the Transaction Documents and, therefore, the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of the Transaction Documents or any amendments hereto.
5.22 Waiver of Jury Trial. In any action, suit or proceeding in any jurisdiction brought by any party against any other party, the parties each knowingly and intentionally, to the greatest extent permitted by applicable law, hereby absolutely, unconditionally, irrevocably and expressly waives forever trial by jury.
(Signature Pages Follow)
IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.
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W270, Inc.
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Address for Notice:
1328 W. Balboa Blvd., Ste. C Newport Beach, CA 92661 |
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By:__/s/ Eric Stoppenhagen________________ Name: Eric Stoppenhagen Title: President
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Fax: (949) 258-5379 |
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With a copy to (which shall not constitute notice):
Stubbs Alderton & Markiles, LLP 15260 Ventura Boulevard, 20th Floor Sherman Oaks, CA 91403 Attn: Gregor Akselrud, Esq. Fax: (818) 444-6309
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[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGES FOR PURCHASERS FOLLOWS]
[PURCHASER SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT]
IN WITNESS WHEREOF, the undersigned have caused this Securities Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.
Name of Purchaser: ________________________________________________________
Signature of Authorized Signatory of Purchaser: __________________________________
Name of Authorized Signatory: ____________________________________________________
Title of Authorized Signatory: _____________________________________________________
Email Address of Purchaser: ________________________________________________
Facsimile Number of Purchaser: ________________________________________________
Address for Notice of Purchaser:
Address for Delivery of Securities for Purchaser (if not same as address for notice):
Subscription Amount: $_____________
EXHIBIT A
NOTES
EXHIBIT B
SECURITY AGREEMENT
EXHIBIT C
INTELLECTUAL PROPERTY SECURITY AGREEMENT
EXHIBIT D
REGISTRATION RIGHTS AGREEMENT
EXHIBIT E
SUBSIDIARY GUARANTEE
EXHIBIT F
VOTING AGREEMENT
Exhibit 10.3
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this “Agreement”) is made and entered into June 26, 2013, by and among, W270, Inc., a Nevada corporation (“W270” or, the “Company”), those stockholders of the Company set forth on the signature pages to this Agreement (the “Stockholders”) and those investors of the Company set forth on the signature pages to this Agreement (the “Purchasers”, and together with the Stockholders, the “Holders”).
WITNESSETH:
WHEREAS, the Company and certain Stockholders are parties to those certain Registration Rights Agreements, each dated March 13, 2013 (the “Registration Rights Agreements”) pursuant to which such Stockholders were given registration rights with respect to their shares of W270 Common Stock (“Common Stock”);
WHEREAS, the Company, Saleen California Merger Corporation, a California corporation (“CA MergerCo”), Saleen Florida Merger Corporation, a Florida corporation (“FL MergerCo”), Saleen Automotive, Inc., a Florida corporation (“Saleen Automotive”), SMS Signature Cars, a California corporation (“SMS”), and Steve Saleen have entered into an Agreement and Plan of Merger, dated May 23, 2013 (as the same may be amended from time to time) (the “Merger Agreement”), which provides, upon the terms and subject to the conditions thereof, for the merger of (a) CA MergerCo with and into SMS and (b) FL MergerCo with and into Saleen Automotive, whereby the outstanding capital stock of SMS and Saleen Automotive shall be cancelled and the holders of Saleen Automotive’s common stock shall receive certain securities of the Company as further set forth in the Merger Agreement (the “Merger”);
WHEREAS, in connection with the Merger, and in further connection with the Securities Purchase Agreement by and among the Purchasers and the Company dated June 26, 2013 (the “Securities Purchase Agreement”), the Company has agreed, upon the terms and subject to the conditions set forth in the Securities Purchase Agreement to issue and sell to the Purchasers, $3,000,000 in proceeds in a private placement offering (the “Offering”) of its (i) 3.0% Senior Secured Promissory Notes (the “Notes”), which will, among other things, be convertible into shares of Common Stock (the “Conversion Shares”) in accordance with the terms of the Notes;
WHEREAS, it is a condition of the Offering that the Stockholders terminate the registration rights provided by the Registration Rights Agreements and enter into a new registration rights agreement in the form hereof; and
WHEREAS, to induce the Purchasers to execute and deliver the Securities Purchase Agreement, the Company has agreed to provide certain registration rights under the Securities Act of 1933, as amended, and the rules and regulations thereunder, or any similar successor statute (collectively the “Securities Act”), and applicable state securities laws.
NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and each of the Holders hereby agree as follows:
1. Definitions.
Capitalized terms used herein and not otherwise defined herein shall have the respective meanings set forth in the Securities Purchase Agreement. As used in this Agreement, the following terms shall have the following meanings:
a. “Business Day” means any day other than Saturday, Sunday or any other day on which commercial banks in the City of New York are authorized or required by law to remain closed.
b. “Closing Date” shall have the meaning set forth in the Securities Purchase Agreement.
c. “Cutback Note Amount” the principal amount of Notes cut back pursuant to clause (A) of the definition of Required Registration Amount.
d. “Cutback Shares” means any of the Required Registration Amount included in the Registration Statement as a result of a limitation on the maximum number of shares of Common Stock permitted to be registered by the staff of the SEC pursuant to Rule 415.
e. “Effective Date” means the date the Registration Statement has been declared effective by the SEC.
f. “Effectiveness Deadline” means the earlier of the date which is (i) in the event that the Registration Statement is not subject to a full review by the SEC, one hundred fifty (150) calendar days after the Closing Date or (ii) in the event that the Registration Statement is subject to a full review by the SEC, one-hundred eighty (180) calendar days after the Closing Date.
g. “Filing Deadline” means the date thirty (30) calendar days after the Closing Date.
h. “Investor” means a Holder or any transferee or assignee thereof to whom a Holder assigns its rights as a holder of Registrable Securities under this Agreement and who agrees to become bound by the provisions of this Agreement in accordance with Section 10 and any transferee or assignee thereof to whom a transferee or assignee assigns its rights as a holder of Registrable Securities under this Agreement and who agrees to become bound by the provisions of this Agreement in accordance with Section 10.
i. “Person” means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof.
j. “register,” “registered,” and “registration” refer to a registration effected by preparing and filing one or more Registration Statements (as defined below) in compliance with the Securities Act and pursuant to Rule 415 and the declaration or ordering of effectiveness of such Registration Statement(s) by the SEC.
k. “Registrable Securities” means (i) the Conversion Shares issued or issuable upon conversion of the Notes, and (ii) any shares of capital stock of the Company issued or issuable with respect to the Conversion Shares, the Notes as a result of any stock split, stock dividend, recapitalization, exchange or similar event or otherwise, without regard to any limitations on conversions of the Notes.
l. “Registration Statement” means a registration statement or registration statements of the Company filed under the Securities Act covering the Registrable Securities.
m. “Required Holders” means Investors that hold at least a majority of the Registrable Securities.
n. “Required Registration Amount” for the Registration Statement means (i) one hundred thirty percent (130%) of the aggregate of the maximum number of Conversion Shares issued and issuable pursuant to the Notes at the then applicable Conversion Price as of the Trading Day (as defined in the Notes) immediately preceding the applicable date of determination subject to adjustment as provided in Section 3(e) (without regard to any limitations on conversion of the Notes) or (ii) such other amount as may be required by the staff of the SEC pursuant to Rule 415 with any cutback applied among the Investors pro rata: (A) first, to any Conversion Shares being registered under such Registration Statement until such number of Conversion Shares issuable upon conversion of $500,000.00 in principal amount of the Notes are cutback; and (B) thereafter, to all other Registrable Securities. For purposes of calculating the Required Registration Amount for any Registration Statement other than the initial Registration Statement, the Conversion Shares subject to the initial Registration Statement or any other prior Registration Statement shall not be counted.
o. “Rule 415” means Rule 415 promulgated under the Securities Act or any successor rule providing for offering securities on a continuous or delayed basis.
p. “SEC” means the United States Securities and Exchange Commission.
2. Termination of Registration Rights Agreements. Effective upon the date hereof, and without necessity of any further action or approval by W270 or the Stockholders, the Registration Rights Agreements shall be terminated, and neither W270 nor the Stockholders shall have any further rights, obligations or liabilities of any nature whatsoever pursuant to, or arising out of, the Registration Rights Agreements. W270 and the Stockholders party to the Registration Rights Agreements each represent that they have full power and authority to terminate the Registration Rights Agreements.
3. Registration.
a. Mandatory Registration. The Company shall prepare, and, as soon as practicable but in no event later than the Filing Deadline, file with the SEC a Registration Statement on Form S-1 covering the resale of at least the number of shares of Common Stock equal to the Required Registration Amount determined as of date the Registration Statement is initially filed with the SEC. The Registration Statement shall contain (except if otherwise directed by the Required Holders) the “Selling Stockholders” and “Plan of Distribution” sections for the Investors in substantially the form attached hereto as Exhibit B. The Company shall use its reasonable best efforts to have the Registration Statement declared effective by the SEC as soon as practicable, but in no event later than the Effectiveness Deadline. By 9:30 am on the Business Day following the Effective Date, the Company shall file with the SEC in accordance with Rule 424 under the Securities Act the final prospectus to be used in connection with sales pursuant to such Registration Statement. Notwithstanding anything herein to the contrary, the Company has no obligation hereunder to include Cutback Shares, if any, on any Registration Statement.
b. Allocation of Registrable Securities. The initial number of Registrable Securities included in any Registration Statement and any increase or decrease in the number of Registrable Securities included therein shall be allocated pro rata among the Investors based on the number of Registrable Securities held by each Investor at the time the Registration Statement covering such initial number of Registrable Securities or increase or decrease thereof is declared effective by the SEC. In the event that an Investor sells or otherwise transfers any of such Investor’s Registrable Securities, each transferee shall be allocated a pro rata portion of the then remaining number of Registrable Securities included in such Registration Statement for such transferor. Any shares of Common Stock included in a Registration Statement and which remain allocated to any Person which ceases to hold any Registrable Securities covered by such Registration Statement shall be allocated to the remaining Investors, pro rata based on the number of Registrable Securities then held by such Investors which are covered by such Registration Statement. In no event shall the Company include any securities other than Registrable Securities on any Registration Statement without the prior written consent of the Required Holders.
c. Legal Counsel. Subject to Section 6 hereof, the Required Holders shall have the right to select one legal counsel to review and oversee any registration pursuant to this Section 3 (“Legal Counsel”), which shall be Stubbs Alderton & Markiles, LLP or such other counsel as thereafter designated by the Required Holders with the consent of the Company, which consent shall not be unreasonably withheld or delayed. The Company and Legal Counsel shall reasonably cooperate with each other in performing the Company's obligations under this Agreement.
d. Ineligibility for Form S-3. As Form S-3 is not available for the initial registration of the resale of Registrable Securities hereunder, the Company shall undertake to register the Registrable Securities on Form S-3 as soon as such form is available, provided that the Company shall maintain the effectiveness of the Registration Statement then in effect until such time as a Registration Statement on Form S-3 covering the Registrable Securities has been declared effective by the SEC.
e. Sufficient Number of Shares Registered. In the event the number of shares available under a Registration Statement filed pursuant to Section 3(a) is insufficient to cover the Required Registration Amount or an Investor’s allocated portion of such Registrable Securities pursuant to Section 3(b), the Company shall amend the applicable Registration Statement, or file a new Registration Statement (on the short form available therefor, if applicable), or both, so as to cover at least the Required Registration Amount as of the Trading Day immediately preceding the date of the filing of such amendment or new Registration Statement, in each case, as soon as practicable, but in any event not later than fifteen (15) days after the necessity therefor arises. The Company shall use its reasonable best efforts to cause such amendment and/or new Registration Statement to become effective as soon as practicable following the filing thereof. For purposes of the foregoing provision, the number of shares available under a Registration Statement shall be deemed “insufficient to cover the Required Registration Amount” if at any time the number of shares of Common Stock available for resale under the Registration Statement is less than the product determined by multiplying (i) the Required Registration Amount as of such time by (ii) 0.90. The calculation set forth in the foregoing sentence shall be made without regard to any limitations on the conversion of the Notes and such calculation shall assume that the Notes are then convertible into shares of Common Stock at the then prevailing Conversion Rate (as defined in the Notes).
f. Effect of Failure to File and Obtain and Maintain Effectiveness of Registration Statement. If (i) a Registration Statement covering all of the Registrable Securities required to be covered thereby and required to be filed by the Company pursuant to this Agreement is (a) not filed with the SEC on or before the Filing Deadline (a “Filing Failure”) or (b) not declared effective by the SEC on or before the Effectiveness Deadline or Resolution Date (as defined below, if applicable) (an “Effectiveness Failure”) or (ii) on any day during the Registration Period, and after the Effective Date, sales of all of the Registrable Securities required to be included on such Registration Statement cannot be made (other than during an Allowable Grace Period (as defined in Section 4(r)) pursuant to such Registration Statement (including, without limitation, because of a failure to keep such Registration Statement effective, to disclose such information as is necessary for sales to be made pursuant to such Registration Statement or to register a sufficient number of shares of Common Stock) (a “Maintenance Failure”) then, as partial relief for the damages to any Investor by reason of any such delay in or reduction of its ability to sell the underlying shares of Common Stock (which remedy shall not be exclusive of any other remedies available at law or in equity), the Company shall pay to each Investor relating to such Registration Statement an amount in cash equal to one percent (1%) of the aggregate Subscription Amount (as such term is defined in the Securities Purchase Agreement) of such Investor’s Registrable Securities included in such Registration Statement on each of the following dates: (i) the day of a Filing Failure and on every thirtieth (30th) day (pro rated for periods totaling less than thirty (30) days) thereafter until the date such Filing Failure is cured; (ii) the day of an Effectiveness Failure and on every thirtieth (30th) day (pro rated for periods totaling less than thirty (30) days) thereafter until the date such Effectiveness Failure is cured; and (iii) the initial day of a Maintenance Failure and on every thirtieth (30th) day (pro rated for periods totaling less than thirty (30) days) thereafter until the date such Maintenance Failure is cured. The payments to which an Investor shall be entitled pursuant to this Section 3(f) are referred to herein as “Registration Delay Payments.” Registration Delay Payments shall be paid on the earlier of (I) the last day of the calendar month during which such Registration Delay Payments are incurred and (II) the third (3rd) Business Day after the event or failure giving rise to the Registration Delay Payments is cured. In the event the Company fails to make Registration Delay Payments in a timely manner, such Registration Delay Payments shall bear interest at the rate of one and one-half percent (1.5%) per month (prorated for partial months) until paid in full. Notwithstanding anything herein to the contrary, (1) no Registration Delay Payments shall accrue with respect to Cutback Shares, if any; and (2) in the event that the SEC has not declared a Registration Statement effective on or before the Effectiveness Deadline solely as a result of unresolved comments or inquiries based on or arising from facts or circumstances of the Company occurring prior to the closing date of the Merger, and for no other reason, then the Registration Delay Payments applicable to an Effectiveness Failure shall not accrue and shall toll for each day following the Effectiveness Deadline until the earlier of (x) the date that the Company and the SEC resolve all such comments or inquiries (the “Resolution Date”), and (y) the effective date of the Registration Statement.
g. Neither the Company nor any Subsidiary (as defined in the Securities Purchase Agreement) nor affiliate thereof shall identify any Holder as an underwriter in any public disclosure or filing with the SEC or any Trading Market (as defined in the Securities Purchase Agreement) and any Holder being deemed an underwriter by the SEC shall not relieve the Company of any obligations it has under this Agreement or any other Transaction Document (as defined in the Securities Purchase Agreement) provided, however, that the foregoing shall not prohibit the Company from including the disclosure found in the “Plan of Distribution” section attached hereto as Exhibit B in the Registration Statement.
4. Related Obligations.
At such time as the Company is obligated to file a Registration Statement with the SEC pursuant to Section 3(a), 3(d) or 3(e), the Company will use its reasonable best efforts to effect the registration of the Registrable Securities in accordance with the intended method of disposition thereof and, pursuant thereto, the Company shall have the following obligations:
a. The Company shall submit to the SEC, within two (2) Business Days after the Company learns that no review of a particular Registration Statement will be made by the staff of the SEC or that the staff has no further comments on a particular Registration Statement, as the case may be, a request for acceleration of effectiveness of such Registration Statement to a time and date not later than 48 hours after the submission of such request. The Company shall use its reasonable best efforts to keep each Registration Statement effective pursuant to Rule 415 at all times until the date on which the Investors shall have sold all of the Registrable Securities covered by such Registration Statement (the “Registration Period”). The Company shall ensure that each Registration Statement (including any amendments or supplements thereto and prospectuses contained therein) shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein, or necessary to make the statements therein (in the case of prospectuses, in the light of the circumstances in which they were made) not misleading.
b. The Company shall prepare and file with the SEC such amendments (including post-effective amendments) and supplements to a Registration Statement and the prospectus used in connection with such Registration Statement, which prospectus is to be filed pursuant to Rule 424 promulgated under the Securities Act, as may be necessary to keep such Registration Statement effective at all times during the Registration Period, and, during such period, comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities of the Company covered by such Registration Statement until such time as all of such Registrable Securities shall have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof as set forth in such Registration Statement. In the case of amendments and supplements to a Registration Statement which are required to be filed pursuant to this Agreement (including pursuant to this Section 4(b)) by reason of the Company filing a report on Form 10-Q, Form 10-K or any analogous report under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company shall have incorporated such report by reference into such Registration Statement, if applicable, or shall file such amendments or supplements with the SEC within one (1) Business Day of the day on which the Exchange Act report is filed which created the requirement for the Company to amend or supplement such Registration Statement.
c. The Company shall (i) permit Legal Counsel to review and comment upon (A) a Registration Statement at least two (2) Business Days prior to its filing with the SEC and (B) all amendments and supplements to all Registration Statements (except for Annual Reports on Form 10-K and Reports on Form 10-Q and any similar or successor reports) within a reasonable number of days prior to their filing with the SEC, and (ii) not file any Registration Statement or amendment or supplement thereto in a form to which Legal Counsel reasonably and timely objects. The Company shall not submit a request for acceleration of the effectiveness of a Registration Statement or any amendment or supplement thereto without the prior approval of Legal Counsel, which consent shall not be unreasonably withheld or delayed. The Company shall furnish to Legal Counsel, without charge, (i) copies of any correspondence from the SEC or the staff of the SEC to the Company or its representatives relating to any Registration Statement, (ii) promptly after the same is prepared and filed with the SEC, one copy of any Registration Statement and any amendment(s) thereto, including financial statements and schedules, all documents incorporated therein by reference, if requested by an Investor, and all exhibits (unless such Registration Statement is available on EDGAR) and (iii) upon the effectiveness of any Registration Statement, one copy of the prospectus included in such Registration Statement and all amendments and supplements thereto. The Company shall reasonably cooperate with Legal Counsel in performing the Company’s obligations pursuant to this Section 4.
d. The Company shall furnish to each Investor whose Registrable Securities are included in any Registration Statement, without charge, (i) promptly after the same is prepared and filed with the SEC, at least one copy of such Registration Statement and any amendment(s) thereto, including financial statements and schedules, all documents incorporated therein by reference, if requested by an Investor, all exhibits and each preliminary prospectus (unless such Registration Statement is available on EDGAR), (ii) upon the effectiveness of any Registration Statement, ten (10) copies of the prospectus included in such Registration Statement and all amendments and supplements thereto (unless such amendments and supplements are available on EDGAR) and (iii) such other documents, including copies of the foregoing (regardless of whether such documents are available upon EDGAR) and any preliminary or final prospectus, as such Investor may reasonably request from time to time in order to facilitate the disposition of the Registrable Securities owned by such Investor.
e. The Company shall use its reasonable best efforts to (i) register and qualify, unless an exemption from registration and qualification applies, the resale by Investors of the Registrable Securities covered by a Registration Statement under the applicable other securities or “blue sky” laws of such jurisdictions in the United States as shall be reasonably requested by such Investors holding at least a majority in interest of the Registrable Securities included in that Registration Statement, (ii) prepare and file in those jurisdictions, such amendments (including post-effective amendments) and supplements to such registrations and qualifications as may be necessary to maintain the effectiveness thereof during the Registration Period, (iii) take such other actions as may be reasonably necessary to maintain such registrations and qualifications in effect at all times during the Registration Period, and (iv) take all other actions reasonably necessary or advisable to qualify the Registrable Securities for sale in such jurisdictions; provided, however, that the Company shall not be required in connection therewith or as a condition thereto to (x) qualify to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 4(e), (y) subject itself to general taxation in any such jurisdiction, or (z) file a general consent to service of process in any such jurisdiction. The Company shall promptly notify Legal Counsel and each Investor who holds Registrable Securities of the receipt by the Company of any notification with respect to the suspension of the registration or qualification of any of the Registrable Securities for sale under the securities or “blue sky” laws of any jurisdiction in the United States or its receipt of notice of the initiation or threatening of any proceeding for such purpose.
f. The Company shall notify Legal Counsel and each Investor in writing of the happening of any event, as promptly as practicable after becoming aware of such event, as a result of which the prospectus included in a Registration Statement, as then in effect, includes an untrue statement of a material fact or omission to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading (provided that in no event shall such notice contain any material, nonpublic information), and, subject to Section 4(r), promptly prepare a supplement or amendment to such Registration Statement to correct such untrue statement or omission, and deliver ten (10) copies of such supplement or amendment to Legal Counsel and each Investor (or such other number of copies as Legal Counsel or such Investor may reasonably request) (unless such supplements or amendments are available on EDGAR). The Company shall also promptly notify Legal Counsel and each Investor in writing (i) when a prospectus or any prospectus supplement or post-effective amendment has been filed, and when a Registration Statement or any post-effective amendment has become effective (notification of such effectiveness shall be delivered to Legal Counsel and each Investor by facsimile no later than the second (2nd) Business Day after such effectiveness and by overnight mail), (ii) of any request by the SEC for amendments or supplements to a Registration Statement or related prospectus or related information, and (iii) of the Company's reasonable determination that a post-effective amendment to a Registration Statement would be appropriate.
g. The Company shall use its reasonable best efforts to prevent the issuance of any stop order or other suspension of effectiveness of a Registration Statement, or the suspension of the qualification of any of the Registrable Securities for sale in any jurisdiction and, if such an order or suspension is issued, to obtain the withdrawal of such order or suspension at the earliest possible moment and to notify Legal Counsel and each Investor who holds Registrable Securities being sold of the issuance of such order and the resolution thereof or its receipt of notice of the initiation or threat of any proceeding for such purpose.
h. If any Investor is required under applicable securities law to be described in the Registration Statement as an underwriter, at the reasonable request of such Investor, the Company shall furnish to such Investor, on the date of the effectiveness of the Registration Statement and thereafter from time to time on such dates as an Investor may reasonably request (i) a letter, dated such date, from the Company’s independent certified public accountants in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the Investors, and (ii) an opinion, dated as of such date, of counsel representing the Company for purposes of such Registration Statement, in form, scope and substance as is customarily given in an underwritten public offering, addressed to the Investors.
i. If, after the execution of this Agreement, an Investor believes that it could reasonably be deemed to be an underwriter of Registrable Securities, upon the request of such Investor, the Company shall make available for inspection by (i) any Investor, (ii) Legal Counsel and (iii) one firm of accountants or other agents retained by the Investors (collectively, the “Inspectors”), all pertinent financial and other records, and pertinent corporate documents and properties of the Company (collectively, the “Records”), as shall be reasonably deemed necessary by each Inspector, and cause the Company’s officers, directors and employees to supply all information which any Inspector may reasonably request; provided, however, that each Inspector shall agree to hold in strict confidence and shall not make any disclosure (except to an Investor) or use of any Record or other information which the Company determines in good faith to be confidential, and of which determination the Inspectors are so notified, unless (a) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in any Registration Statement or is otherwise required under the Securities Act, (b) the release of such Records is ordered pursuant to a final, non-appealable subpoena or order from a court or government body of competent jurisdiction, or (c) the information in such Records has been made generally available to the public other than by disclosure in violation of this or any other Transaction Document. Each Investor agrees that it shall, upon learning that disclosure of such Records is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt notice to the Company and allow the Company, at its expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, the Records deemed confidential. Nothing herein (or in any other confidentiality agreement between the Company and any Investor) shall be deemed to limit the Investors' ability to sell Registrable Securities in a manner which is otherwise consistent with applicable laws and regulations.
j. The Company shall hold in confidence and not make any disclosure of information concerning an Investor provided to the Company unless (i) disclosure of such information is necessary to comply with federal or state securities laws, (ii) the disclosure of such information is necessary to avoid or correct a misstatement or omission in any Registration Statement, (iii) the release of such information is ordered pursuant to a subpoena or other final, non-appealable order from a court or governmental body of competent jurisdiction or (iv) such information has been made generally available to the public other than by disclosure in violation of this Agreement, any other agreement to which the Company is a party, or, to the Company’s knowledge, any other agreement. The Company agrees that it shall, upon learning that disclosure of such information concerning an Investor is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt written notice to such Investor and allow such Investor, at the Investor’s expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, such information.
k. The Company shall use its reasonable best efforts, to the extent then reasonably feasible, either to (i) cause all of the Registrable Securities covered by a Registration Statement to be listed on each securities exchange on which securities of the same class or series issued by the Company are then listed, if any, if the listing of such Registrable Securities is then permitted under the rules of such exchange, or (ii) secure designation and quotation of all of the Registrable Securities covered by a Registration Statement on NYSE Amex or (iii) if, despite the Company's reasonable best efforts to satisfy, the preceding clauses (i) and (ii) the Company is unsuccessful in satisfying the preceding clauses (i) and (ii), to secure the inclusion for quotation on the The New York Stock Exchange, The NASDAQ Capital Market or The NASDAQ Global Market for such Registrable Securities and, without limiting the generality of the foregoing, to use its best efforts to arrange for at least two (2) market makers to register with the Financial Industry Regulatory Authority (the “FINRA”) as such with respect to such Registrable Securities. The Company shall pay all fees and expenses in connection with satisfying its obligation under this Section 4(k).
l. The Company shall cooperate with the Investors who hold Registrable Securities being offered and, to the extent applicable, facilitate the timely preparation and delivery of certificates (not bearing any restrictive legend) representing the Registrable Securities to be offered pursuant to a Registration Statement and enable such certificates to be in such denominations or amounts, as the case may be, as the Investors may reasonably request and registered in such names as the Investors may request.
m. If requested by an Investor, the Company shall (i) as soon as practicable incorporate in a prospectus supplement or post-effective amendment such information as an Investor reasonably requests to be included therein relating to the sale and distribution of Registrable Securities, including, without limitation, information with respect to the number of Registrable Securities being offered or sold, the purchase price being paid therefor and any other terms of the offering of the Registrable Securities to be sold in such offering; (ii) as soon as practicable make all required filings of such prospectus supplement or post-effective amendment after being notified of the matters to be incorporated in such prospectus supplement or post-effective amendment; and (iii) as soon as practicable, supplement or make amendments to any Registration Statement if reasonably requested by an Investor holding any Registrable Securities.
n. The Company shall use its reasonable best efforts to cause the Registrable Securities covered by a Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to consummate the disposition of such Registrable Securities.
o. The Company shall make generally available to its security holders as soon as practical, but not later than ninety (90) days after the close of the period covered thereby, an earnings statement (in form complying with, and in the manner provided by, the provisions of Rule 158 under the Securities Act) covering a twelve (12)-month period beginning not later than the first (1st) day of the Company's fiscal quarter next following the effective date of a Registration Statement.
p. The Company shall otherwise use its reasonable best efforts to comply with all applicable rules and regulations of the SEC in connection with any registration hereunder.
q. Within two (2) Business Days after a Registration Statement which covers Registrable Securities is ordered effective by the SEC, the Company shall deliver, and shall cause legal counsel for the Company (which may be the General Counsel of the Company) to deliver, to the transfer agent for such Registrable Securities (with copies to the Investors whose Registrable Securities are included in such Registration Statement) confirmation that such Registration Statement has been declared effective by the SEC in the form attached hereto as Exhibit A (with any reasonable limitations required to comply with applicable state securities laws).
r. Notwithstanding anything to the contrary herein, at any time after the Effective Date, the Company may delay the disclosure of material, non-public information concerning the Company the disclosure of which at the time is not, in the good faith opinion of the Board of Directors of the Company, in the best interest of the Company or otherwise required (a “Grace Period”); provided, that the Company shall promptly (i) notify the Investors in writing of the existence of material, non-public information giving rise to a Grace Period (provided that in each notice the Company will not disclose the content of such material, non-public information to the Investors) and the date on which the Grace Period will begin, and (ii) notify the Investors in writing of the date on which the Grace Period ends; and, provided further, that no Grace Period shall exceed five (5) consecutive Trading Days and during any three hundred sixty five (365) day period such Grace Periods shall not exceed an aggregate of twenty (20) Trading Days and the first day of any Grace Period must be at least five (5) Trading Days after the last day of any prior Grace Period (each, an “Allowable Grace Period”). For purposes of determining the length of a Grace Period above, the Grace Period shall begin on and include the date the Investors receive the notice referred to in clause (i) and shall end on and include the later of the date the Investors receive the notice referred to in clause (ii) and the date referred to in such notice. The provisions of Section 4(g) hereof shall not be applicable during the period of any Allowable Grace Period. Upon expiration of the Grace Period, the Company shall again be bound by the first sentence of Section 4(f) with respect to the information giving rise thereto unless such material, non-public information is no longer applicable. Notwithstanding anything to the contrary, the Company shall cause its transfer agent to deliver unlegended shares of Common Stock to a transferee of an Investor in accordance with the terms of the Securities Purchase Agreement in connection with any sale of Registrable Securities with respect to which an Investor has entered into a contract for sale, and delivered a copy of the prospectus included as part of the applicable Registration Statement (unless an exemption from such prospectus delivery requirement exists), prior to the Investor's receipt of the notice of a Grace Period and for which the Investor has not yet settled. For the avoidance of doubt, no portion of this Section 4(r) shall require, or be deemed to require, disclosure to the Investors of material, non-public information concerning the Company.
5. Obligations of the Investors.
a. At least five (5) Business Days prior to the first anticipated filing date of a Registration Statement, the Company shall notify each Investor in writing of the information the Company requires from each such Investor if such Investor elects to have any of such Investor’s Registrable Securities included in such Registration Statement. It shall be a condition precedent to the obligations of the Company to complete the registration pursuant to this Agreement with respect to the Registrable Securities of a particular Investor that such Investor shall furnish to the Company such information regarding itself, the Registrable Securities held by it and the intended method of disposition of the Registrable Securities held by it as shall be reasonably required to effect the effectiveness of the registration of such Registrable Securities and shall execute such documents in connection with such registration as the Company may reasonably request.
b. Each Investor, by such Investor’s acceptance of the Registrable Securities, agrees to cooperate with the Company as reasonably requested by the Company in connection with the preparation and filing of any Registration Statement hereunder, unless such Investor has notified the Company in writing of such Investor's election to exclude all of such Investor's Registrable Securities from such Registration Statement.
c. Each Investor agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 4(g) or the first sentence of 4(f), such Investor will immediately discontinue disposition of Registrable Securities pursuant to any Registration Statement(s) covering such Registrable Securities until such Investor's receipt of the copies of the supplemented or amended prospectus contemplated by Section 4(g) or the first sentence of 4(f) or receipt of notice that no supplement or amendment is required. Notwithstanding anything to the contrary, the Company shall cause its transfer agent to deliver unlegended shares of Common Stock to a transferee of an Investor in accordance with the terms of the Securities Purchase Agreement in connection with any sale of Registrable Securities with respect to which an Investor has entered into a contract for sale prior to the Investor’s receipt of a notice from the Company of the happening of any event of the kind described in Section 4(g) or the first sentence of 4(f) and for which the Investor has not yet settled.
d. Registrable
6. Expenses of Registration.
All expenses of Legal Counsel, which will lead the effort for the Company with respect to the initial filing of any Registration Statement (but not the maintenance thereof) will be paid by the Investors (jointly and severally), provided, however, if any Investor fails to pay their pro rata portion of such expenses, (i) the Registrable Securities held by such Investor shall be removed from the applicable Registration Statement (and accordingly, not registered thereunder), and (ii) the balance of such unpaid expenses shall be paid by the remaining Investors, pro rata. All other reasonable expenses, other than underwriting discounts and commissions incurred in connection with registrations, filings or qualifications pursuant to Sections 3 and 4, including, without limitation, all registration, listing and qualifications fees, printers and accounting fees, and fees and disbursements of counsel for the Company, shall be paid by the Company.
7. Indemnification.
In the event any Registrable Securities are included in a Registration Statement under this Agreement:
a. To the fullest extent permitted by law, the Company will, and hereby does, indemnify, hold harmless and defend each Investor, the directors, officers, members, partners, employees, agents, representatives of, and each Person, if any, who controls any Investor within the meaning of the Securities Act or the Exchange Act (each, an “Indemnified Person”), against any losses, claims, damages, liabilities, judgments, fines, penalties, charges, costs, reasonable attorneys' fees, amounts paid in settlement or expenses, joint or several, (collectively, “Claims”) incurred in investigating, preparing or defending any action, claim, suit, inquiry, proceeding, investigation or appeal taken from the foregoing by or before any court or governmental, administrative or other regulatory agency, body or the SEC, whether pending or threatened, whether or not an indemnified party is or may be a party thereto (“Indemnified Damages”), to which any of them may become subject insofar as such Claims (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon: (i) any untrue statement or alleged untrue statement of a material fact in a Registration Statement or any post-effective amendment thereto or in any filing made in connection with the qualification of the offering under the securities or other "blue sky" laws of any jurisdiction in which Registrable Securities are offered (“Blue Sky Filing”), or the omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus if used prior to the effective date of such Registration Statement, or contained in the final prospectus (as amended or supplemented, if the Company files any amendment thereof or supplement thereto with the SEC) or the omission or alleged omission to state therein any material fact necessary to make the statements made therein, in the light of the circumstances under which the statements therein were made, not misleading, (iii) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any other law, including, without limitation, any state securities law, or any rule or regulation thereunder relating to the offer or sale of the Registrable Securities pursuant to a Registration Statement or (iv) any violation of this Agreement (the matters in the foregoing clauses (i) through (iv) being, collectively, “Violations”). Subject to Section 7(c), the Company shall reimburse the Indemnified Persons, promptly as such expenses are incurred and are due and payable, for any legal fees or other reasonable expenses incurred by them in connection with investigating or defending any such Claim. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 7(a): (i) shall not apply to a Claim by an Indemnified Person arising out of or based upon a Violation which occurs in reliance upon and in conformity with information furnished in writing to the Company by such Indemnified Person for such Indemnified Person expressly for use in connection with the preparation of the Registration Statement or any such amendment thereof or supplement thereto, if such prospectus was timely made available by the Company pursuant to Section 4(d) and (ii) shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Company, which consent shall not be unreasonably withheld or delayed. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Indemnified Person and shall survive the transfer of the Registrable Securities by the Investors pursuant to Section 10.
b. In connection with any Registration Statement in which an Investor is participating, each such Investor agrees to severally and not jointly indemnify, hold harmless and defend, to the same extent and in the same manner as is set forth in Section 7(a), the Company, each of its directors, each of its officers who signs the Registration Statement and each Person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act (each, an “Indemnified Party”), against any Claim or Indemnified Damages to which any of them may become subject, under the Securities Act, the Exchange Act or otherwise, insofar as such Claim or Indemnified Damages arise out of or are based upon any Violation, in each case to the extent, and only to the extent, that such Violation occurs in reliance upon and in conformity with written information furnished to the Company by such Investor expressly for use in connection with such Registration Statement; and, subject to Section 7(c), such Investor shall reimburse the Indemnified Party, promptly as such expenses are incurred and are due and payable, for any legal fees or other reasonable expenses incurred by it in connection with investigating or defending any such Claim; provided, however, that the indemnity agreement contained in this Section 7(b) and the agreement with respect to contribution contained in Section 8 shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of such Investor, which consent shall not be unreasonably withheld or delayed; provided, further, however, that the Investor shall be liable under this Section 7(b) for only that amount of a Claim or Indemnified Damages as does not exceed the net proceeds to such Investor as a result of the sale of Registrable Securities pursuant to such Registration Statement. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Indemnified Party and shall survive the transfer of the Registrable Securities by the Investors pursuant to Section 10.
c. Promptly after receipt by an Indemnified Person or Indemnified Party under this Section 7 of notice of the commencement of any action or proceeding (including any governmental action or proceeding) involving a Claim, such Indemnified Person or Indemnified Party shall, if a Claim in respect thereof is to be made against any indemnifying party under this Section 7, deliver to the indemnifying party a written notice of the commencement thereof, and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume control of the defense thereof with counsel mutually satisfactory to the indemnifying party and the Indemnified Person or the Indemnified Party, as the case may be; provided, however, that an Indemnified Person or Indemnified Party shall have the right to retain its own counsel with the fees and expenses of not more than one counsel for such Indemnified Person or Indemnified Party to be paid by the indemnifying party, if, in the reasonable opinion of counsel retained by the indemnifying party, the representation by such counsel of the Indemnified Person or Indemnified Party and the indemnifying party would be inappropriate due to actual or potential differing interests between such Indemnified Person or Indemnified Party and any other party represented by such counsel in such proceeding. In the case of an Indemnified Person, legal counsel referred to in the immediately preceding sentence shall be selected by the Investors holding at least a majority in interest of the Registrable Securities included in the Registration Statement to which the Claim relates. The Indemnified Party or Indemnified Person shall cooperate fully with the indemnifying party in connection with any negotiation or defense of any such action or Claim by the indemnifying party and shall furnish to the indemnifying party all information reasonably available to the Indemnified Party or Indemnified Person which relates to such action or Claim. The indemnifying party shall keep the Indemnified Party or Indemnified Person reasonably apprised at all times as to the status of the defense or any settlement negotiations with respect thereto. No indemnifying party shall be liable for any settlement of any action, claim or proceeding effected without its prior written consent; provided, however, that the indemnifying party shall not unreasonably withhold, delay or condition its consent. No indemnifying party shall, without the prior written consent of the Indemnified Party or Indemnified Person, consent to entry of any judgment or enter into any settlement or other compromise which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party or Indemnified Person of a release from all liability in respect to such Claim or litigation, and such settlement shall not include any admission as to fault on the part of the Indemnified Party. Following indemnification as provided for hereunder, the indemnifying party shall be subrogated to all rights of the Indemnified Party or Indemnified Person with respect to all third parties, firms or corporations relating to the matter for which indemnification has been made. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the Indemnified Person or Indemnified Party under this Section 7, except to the extent that the indemnifying party is prejudiced in its ability to defend such action.
d. The indemnification required by this Section 7 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or Indemnified Damages are incurred.
e. The indemnity agreements contained herein shall be in addition to (i) any cause of action or similar right of the Indemnified Party or Indemnified Person against the indemnifying party or others, and (ii) any liabilities the indemnifying party may be subject to pursuant to the law.
8. Contribution.
To the extent any indemnification by an indemnifying party is prohibited or limited by law, the indemnifying party agrees to make the maximum contribution with respect to any amounts for which it would otherwise be liable under Section 7 to the fullest extent permitted by law; provided, however, that: (i) no Person involved in the sale of Registrable Securities, which Person is guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) in connection with such sale, shall be entitled to contribution from any Person involved in such sale of Registrable Securities who was not guilty of fraudulent misrepresentation; and (ii) contribution by any seller of Registrable Securities shall be limited in amount to the amount of net proceeds received by such seller from the sale of such Registrable Securities pursuant to such Registration Statement.
9. Reports Under the Exchange Act.
With a view to making available to the Investors the benefits of Rule 144 promulgated under the Securities Act or any other similar rule or regulation of the SEC that may at any time permit the Investors to sell securities of the Company to the public without registration (“Rule 144”), the Company agrees to:
a. make and keep public information available, as those terms are understood and defined in Rule 144;
b. file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act so long as the Company remains subject to such requirements and the filing of such reports and other documents is required for the applicable provisions of Rule 144; and
c. furnish to each Investor so long as such Investor owns Registrable Securities, promptly upon request, (i) a written statement by the Company, if true, that it has complied with the reporting requirements of Rule 144, the Securities Act and the Exchange Act, (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company and (iii) such other information as may be reasonably requested to permit the Investors to sell such securities pursuant to Rule 144 without registration.
10. Assignment of Registration Rights.
The rights under this Agreement shall be automatically assignable by the Investors to any transferee of all or any portion of such Investor's Registrable Securities if: (i) the Investor agrees in writing with the transferee or assignee to assign such rights and a copy of such agreement is furnished to the Company within a reasonable time after such assignment; (ii) the Company is, within a reasonable time after such transfer or assignment, furnished with written notice of (a) the name and address of such transferee or assignee and (b) the securities with respect to which such registration rights are being transferred or assigned; (iii) immediately following such transfer or assignment the further disposition of such securities by the transferee or assignee is restricted under the Securities Act or applicable state securities laws; (iv) at or before the time the Company receives the written notice contemplated by clause (ii) of this sentence the transferee or assignee agrees in writing with the Company to be bound by all of the provisions contained herein; and (v) such transfer shall have been made in accordance with the applicable requirements of the Securities Purchase Agreement.
11. Amendment of Registration Rights.
Provisions of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the Required Holders. Any amendment or waiver effected in accordance with this Section 11 shall be binding upon each Investor and the Company. No such amendment shall be effective to the extent that it applies to less than all of the Investors. No consideration shall be offered or paid to any Person to amend or consent to a waiver or modification of any provision of any of this Agreement unless the same consideration also is offered to all of the parties to this Agreement.
12. Miscellaneous.
a. A Person is deemed to be a holder of Registrable Securities whenever such Person owns or is deemed to own of record such Registrable Securities. If the Company receives conflicting instructions, notices or elections from two or more Persons with respect to the same Registrable Securities, the Company shall act upon the basis of instructions, notice or election received from the record owner of such Registrable Securities.
b. Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered: (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party); or (iii) one (1) Business Day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be:
If to the Company:
W270, Inc.
2735 Wardlow Road
Corona, CA 92882
Facsimile: (888) 729-4827
Attention: Chief Executive Officer
If to Legal Counsel:
| Stubbs Alderton & Markiles, LLP |
| 15260 Ventura Blvd., 20th Floor |
| Telephone: (818) 444-4503 |
| Facsimile: (818) 444-6303 |
| Attention: Greg Akselrud, Esq. |
If to a Holder, to its address and facsimile number set forth on such Holder’s signature page to the Securities Purchase Agreement, or to such other address and/or facsimile number and/or to the attention of such other Person as the recipient party has specified by written notice given to each other party five (5) days prior to the effectiveness of such change. Written confirmation of receipt (A) given by the recipient of such notice, consent, waiver or other communication, (B) mechanically or electronically generated by the sender's facsimile machine containing the time, date, recipient facsimile number and an image of the first page of such transmission or (C) provided by a courier or overnight courier service shall be rebuttable evidence of personal service, receipt by facsimile or receipt from a nationally recognized overnight delivery service in accordance with clause (i), (ii) or (iii) above, respectively.
c. Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof.
d. All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by the internal laws of the State of California, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of California or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of California. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the County of Los Angeles, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address for such notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.
e. This Agreement, the other Transaction Documents and the instruments referenced herein and therein constitute the entire agreement among the parties hereto with respect to the subject matter hereof and thereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein. This Agreement, the other Transaction Documents and the instruments referenced herein and therein supersede all prior agreements and understandings among the parties hereto with respect to the subject matter hereof and thereof.
f. Subject to the requirements of Section 10, this Agreement shall inure to the benefit of and be binding upon the permitted successors and assigns of each of the parties hereto.
g. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof.
h. This Agreement may be executed in identical counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement. This Agreement, once executed by a party, may be delivered to the other party hereto by facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement.
i. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as any other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.
j. All consents and other determinations required to be made by the Investors pursuant to this Agreement shall be made, unless otherwise specified in this Agreement, by the Required Holders.
k. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent and no rules of strict construction will be applied against any party.
l. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other Person.
m. The obligations of each Investor hereunder are several and not joint with the obligations of any other Investor, and no provision of this Agreement is intended to confer any obligations on any Investor vis-à-vis any other Investor. Nothing contained herein, and no action taken by any Investor pursuant hereto, shall be deemed to constitute the Investors as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Investors are in any way acting in concert or as a group with respect to such obligations or the transactions contemplated herein.
* * * * * *
IN WITNESS WHEREOF, each Holder and the Company have caused their respective signature page to this Registration Rights Agreement to be duly executed as of the date first written above.
| COMPANY: | |
| W270, INC. | |
| By: ___/s/
Eric Stoppenhagen_________________ Name: Eric Stoppenhagen Title: President | |
IN WITNESS WHEREOF, each Holder and the Company have caused their respective signature page to this Registration Rights Agreement to be duly executed as of the date first written above.
PURCHASER:
[NAME]
By:
Name:
Title:
IN WITNESS WHEREOF, each Holder and the Company have caused their respective signature page to this Registration Rights Agreement to be duly executed as of the date first written above.
STOCKHOLDERS:
W-NET FUND I, L.P.
By: W-Net Fund GP I LLC
Title: General Partner
By: /s/ David Weiner
Name: David Weiner
Title: Manager
VERDAD TELECOM, INC.
By: /s/ Eric Stoppenhagen
Name: Eric Stoppenhagen
Title: President
EXHIBIT A
FORM OF NOTICE OF EFFECTIVENESS
OF REGISTRATION STATEMENT
Action Stock Transfer Corporation
2469 E. Fort Union Blvd., Ste. 214
Salt Lake City, UT 84121
Attention: Justeen Blankenchip
Re: W270, Inc.
Ladies and Gentlemen:
[We are][I am] counsel to W270, Inc., a Nevada corporation (the “Company”), and have represented the Company in connection with that certain Securities Purchase Agreement (the “Securities Purchase Agreement”) entered into by and among the Company and the Purchasers named therein (collectively, the “Holders”) pursuant to which the Company issued to the Holders senior secured convertible notes (the “Notes”) convertible into the Company’s common stock, $0.001 par value per share (the “Common Stock”). Pursuant to the Securities Purchase Agreement, the Company also has entered into a Registration Rights Agreement with the Holders (the “Registration Rights Agreement”) pursuant to which the Company agreed, among other things, to register the Registrable Securities (as defined in the Registration Rights Agreement), including the shares of Common Stock issuable upon conversion of the Notes, under the Securities Act of 1933, as amended (the "Securities Act"). In connection with the Company’s obligations under the Registration Rights Agreement, on ____________ ___, 20__, the Company filed a Registration Statement on Form S-3 (File No. 333-_____________) (the “Registration Statement”) with the Securities and Exchange Commission (the “SEC”) relating to the Registrable Securities which names each of the Holders as a selling stockholder thereunder.
In connection with the foregoing, [we][I] advise you that a member of the SEC’s staff has advised [us][me] by telephone that the SEC has entered an order declaring the Registration Statement effective under the Securities Act at [ENTER TIME OF EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and [we][I] have no knowledge, after telephonic inquiry of a member of the SEC’s staff, that any stop order suspending its effectiveness has been issued or that any proceedings for that purpose are pending before, or threatened by, the SEC and the Registrable Securities are available for resale under the Securities Act pursuant to the Registration Statement.
This letter shall serve as our standing instruction to you that the shares of Common Stock are freely transferable by the Holders pursuant to the Registration Statement. You need not require further letters from us to effect any future legend-free issuance or reissuance of shares of Common Stock to the Holders as contemplated by the Company's Irrevocable Transfer Agent Instructions dated ________ __, 2013, provided at the time of such reissuance, the Company has not otherwise notified you that the Registration Statement is unavailable for the resale of the Registrable Securities.
.
Very truly yours,
Stubbs Alderton & Markiles, LLP
By:_____________________
Name:
Title:
CC: [LIST NAME OF HOLDER]
EXHIBIT B
SELLING STOCKHOLDERS
The shares of Common Stock being offered by the selling stockholders are issuable upon conversion of the convertible notes and in payment of interest on the convertible notes. For additional information regarding the issuance of those convertible notes, see “Private Placement of Convertible Notes” above. We are registering the shares of Common Stock in order to permit the selling stockholders to offer the shares for resale from time to time. Except for the ownership of the convertible notes issued pursuant to the Securities Purchase Agreement, the selling stockholders have not had any material relationship with us within the past three years.
The table below lists the selling stockholders and other information regarding the beneficial ownership of the shares of Common Stock by each of the selling stockholders. The second column lists the number of shares of Common Stock beneficially owned by each selling stockholder, based on its ownership of the convertible notes, as of ________, 2013, assuming conversion of all convertible notes held by the selling stockholders on that date, without regard to any limitations on conversions.
The third column lists the shares of Common Stock being offered by this prospectus by each selling stockholder.
In accordance with the terms of a registration rights agreement among the Company and the selling stockholders, this prospectus generally covers the resale of at least 130% of the aggregate number of shares of Common Stock issued or issuable upon conversion of the convertible notes as of the trading day immediately preceding the date the registration statement is initially filed with the SEC. Because the conversion price of the convertible notes may be adjusted, the number of shares that will actually be issued may be more or less than the number of shares being offered by this prospectus. The fourth column assumes the sale of all of the shares offered by the selling stockholders pursuant to this prospectus.
Under the terms of the convertible notes, a selling stockholder may not convert the convertible notes to the extent such conversion would cause such selling stockholder, together with its affiliates, to beneficially own a number of shares of Common Stock which would exceed 4.9% of our then outstanding shares of Common Stock following such conversion, excluding for purposes of such determination shares of Common Stock issuable upon conversion of the convertible notes which have not been converted. The number of shares in the second column does not reflect this limitation. The selling stockholders may sell all, some or none of their shares in this offering. See “Plan of Distribution.”
Name of Selling Stockholder |
Number of Shares Owned Prior to Offering |
Maximum Number of Shares to be Sold Pursuant to this Prospectus | Number of Shares Owned After Offering |
PLAN OF DISTRIBUTION
We are registering the shares of Common Stock issuable upon conversion of the convertible notes, and as interest on the convertible notes to permit the resale of these shares of Common Stock by the holders of the convertible notes from time to time after the date of this prospectus. We will not receive any of the proceeds from the sale by the selling stockholders of the shares of Common Stock. We will bear all fees and expenses incident to our obligation to register the shares of Common Stock.
The selling stockholders may sell all or a portion of the shares of Common Stock beneficially owned by them and offered hereby from time to time directly or through one or more underwriters, broker-dealers or agents. If the shares of Common Stock are sold through underwriters or broker-dealers, the selling stockholders will be responsible for underwriting discounts or commissions or agent’s commissions. The shares of Common Stock may be sold in one or more transactions at fixed prices, at prevailing market prices at the time of the sale, at varying prices determined at the time of sale, or at negotiated prices. These sales may be effected in transactions, which may involve crosses or block transactions,
| · | on any national securities exchange or quotation service on which the securities may be listed or quoted at the time of sale; |
| · | in the over-the-counter market; |
| · | in transactions otherwise than on these exchanges or systems or in the over-the-counter market; |
| · | through the writing of options, whether such options are listed on an options exchange or otherwise; |
| · | ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers; |
| · | block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; |
| · | purchases by a broker-dealer as principal and resale by the broker-dealer for its account; |
| · | an exchange distribution in accordance with the rules of the applicable exchange; |
| · | privately negotiated transactions; |
| · | short sales; |
| · | sales pursuant to Rule 144; |
| · | broker-dealers may agree with the selling securityholders to sell a specified number of such shares at a stipulated price per share; |
| · | a combination of any such methods of sale; and |
| · | any other method permitted pursuant to applicable law. |
If the selling stockholders effect such transactions by selling shares of Common Stock to or through underwriters, broker-dealers or agents, such underwriters, broker-dealers or agents may receive commissions in the form of discounts, concessions or commissions from the selling stockholders or commissions from purchasers of the shares of Common Stock for whom they may act as agent or to whom they may sell as principal (which discounts, concessions or commissions as to particular underwriters, broker-dealers or agents may be in excess of those customary in the types of transactions involved). In connection with sales of the shares of Common Stock or otherwise, the selling stockholders may enter into hedging transactions with broker-dealers, which may in turn engage in short sales of the shares of Common Stock in the course of hedging in positions they assume. The selling stockholders may also sell shares of Common Stock short and deliver shares of Common Stock covered by this prospectus to close out short positions and to return borrowed shares in connection with such short sales. The selling stockholders may also loan or pledge shares of Common Stock to broker-dealers that in turn may sell such shares.
The selling stockholders may pledge or grant a security interest in some or all of the convertible notes or shares of Common Stock owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of Common Stock from time to time pursuant to this prospectus or any amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act of 1933, as amended, amending, if necessary, the list of selling stockholders to include the pledgee, transferee or other successors in interest as selling stockholders under this prospectus. The selling stockholders also may transfer and donate the shares of Common Stock in other circumstances in which case the transferees, donees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus.
The selling stockholders and any broker-dealer participating in the distribution of the shares of Common Stock may be deemed to be “underwriters” within the meaning of the Securities Act, and any commission paid, or any discounts or concessions allowed to, any such broker-dealer may be deemed to be underwriting commissions or discounts under the Securities Act. At the time a particular offering of the shares of Common Stock is made, a prospectus supplement, if required, will be distributed which will set forth the aggregate amount of shares of Common Stock being offered and the terms of the offering, including the name or names of any broker-dealers or agents, any discounts, commissions and other terms constituting compensation from the selling stockholders and any discounts, commissions or concessions allowed or reallowed or paid to broker-dealers.
Under the securities laws of some states, the shares of Common Stock may be sold in such states only through registered or licensed brokers or dealers. In addition, in some states the shares of Common Stock may not be sold unless such shares have been registered or qualified for sale in such state or an exemption from registration or qualification is available and is complied with.
There can be no assurance that any selling stockholder will sell any or all of the shares of Common Stock registered pursuant to the registration statement, of which this prospectus forms a part.
The selling stockholders and any other person participating in such distribution will be subject to applicable provisions of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder, including, without limitation, Regulation M of the Exchange Act, which may limit the timing of purchases and sales of any of the shares of Common Stock by the selling stockholders and any other participating person. Regulation M may also restrict the ability of any person engaged in the distribution of the shares of Common Stock to engage in market-making activities with respect to the shares of Common Stock. All of the foregoing may affect the marketability of the shares of Common Stock and the ability of any person or entity to engage in market-making activities with respect to the shares of Common Stock.
We will pay all expenses of the registration of the shares of Common Stock pursuant to the registration rights agreement, estimated to be $[ ] in total, including, without limitation, Securities and Exchange Commission filing fees and expenses of compliance with state securities or “blue sky” laws; provided, however, that a selling stockholder will pay all underwriting discounts and selling commissions, if any. We will indemnify the selling stockholders against liabilities, including some liabilities under the Securities Act, in accordance with the registration rights agreements, or the selling stockholders will be entitled to contribution. We may be indemnified by the selling stockholders against civil liabilities, including liabilities under the Securities Act, that may arise from any written information furnished to us by the selling stockholder specifically for use in this prospectus, in accordance with the related registration rights agreement, or we may be entitled to contribution.
Once sold under the registration statement, of which this prospectus forms a part, the shares of Common Stock will be freely tradable in the hands of persons other than our affiliates.
Exhibit 10.4
SECURITY AGREEMENT
This SECURITY AGREEMENT, dated as of June 26, 2013 (this “Agreement”), is among W270, Inc., a Nevada corporation (the “Company”), all of the Subsidiaries of the Company (such Subsidiaries, the “Guarantors”, and together with the Company, the “Debtors”), and the holders, each signatory hereto, of the Company’s 3.0% Senior Secured Convertible Notes issued or to be issued in the original aggregate principal amount of up to $3,000,000 (the “Notes”) pursuant to the Purchase Agreement (as defined below) (collectively, together with their endorsees, transferees and assigns, the “Secured Parties”, and each individually, a “Secured Party”).
W I T N E S S E T H:
WHEREAS, pursuant to that certain Securities Purchase Agreement dated on or about June 26, 2013 between the Company and the Secured Parties (the “Purchase Agreement”), the Secured Parties have severally agreed to extend the loans to the Company evidenced by the Notes;
WHEREAS, pursuant to that certain Subsidiary Guarantee, dated as of the date hereof (“Guarantee”), the Guarantors have jointly and severally agreed to guarantee and act as surety for payment of such Notes;
WHEREAS, in order to induce the Secured Parties to extend the loans evidenced by the Notes, each Debtor has agreed to execute and deliver to the Secured Parties this Agreement and to grant the Secured Parties a security interest in certain property of such Debtor to secure the prompt payment, performance and discharge in full of all of the Company’s obligations under the Notes and other Transaction Documents and the Guarantors’ obligations under the Guarantee; and
WHEREAS, the rights of each Secured Party hereunder shall be pari passu with each other Secured Party and enforced through the agent for the Secured Parties appointed pursuant to Section 18 hereunder.
NOW, THEREFORE, in consideration of the agreements herein contained and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows:
1. Certain Definitions. As used in this Agreement, the following terms shall have the meanings set forth in this Section 1. Terms used but not otherwise defined in this Agreement that are defined in Article 9 of the UCC (such as “account”, “chattel paper”, “commercial tort claim”, “deposit account”, “document”, “equipment”, “fixtures”, “general intangibles”, “goods”, “instruments”, “inventory”, “investment property”, “letter-of-credit rights”, “proceeds” and “supporting obligations”) shall have the respective meanings given such terms in Article 9 of the UCC.
(a) “Collateral” means the collateral in which the Secured Parties are granted a security interest by this Agreement and which shall include the following personal property of the Debtors, whether presently owned or existing or hereafter acquired or coming into existence, wherever situated, and all additions and accessions thereto and all substitutions and replacements thereof, and all proceeds, products and accounts thereof, including, without limitation, all proceeds from the sale or transfer of the Collateral and of insurance covering the same and of any tort claims in connection therewith, and all dividends, interest, cash, notes, securities, equity interest or other property at any time and from time to time acquired, receivable or otherwise distributed in respect of, or in exchange for, any or all of the Pledged Securities (as defined below):
(i) All goods, including without limitation (A) all machinery, equipment, computers, motor vehicles, trucks, tanks, boats, ships, appliances, furniture, special and general tools, fixtures, test and quality control devices and other equipment of every kind and nature and wherever situated, together with all documents of title and documents representing the same, all additions and accessions thereto, replacements therefor, all parts therefor, and all substitutes for any of the foregoing and all other items used and useful in connection with any Debtor’s businesses and all improvements thereto; and (B) all inventory;
(ii) All contract rights and other general intangibles, including without limitation, all partnership interests, membership interests, stock or other securities, rights under any of the Organizational Documents, agreements related to the Pledged Securities, licenses, distribution and other agreements, computer software (whether “off-the-shelf”, licensed from any third party or developed by any Debtor), computer software development rights, leases, franchises, customer lists, quality control procedures, grants and rights, goodwill, trademarks, service marks, trade styles, trade names, patents, patent applications, copyrights, and income tax refunds;
(iii) All accounts, together with all instruments, all documents of title representing any of the foregoing, all rights in any merchandising, goods, equipment, motor vehicles and trucks which any of the same may represent, and all right, title, security and guaranties with respect to each account, including any right of stoppage in transit;
(iv) All documents, letter-of-credit rights, instruments and chattel paper;
(v) All commercial tort claims;
(vi) All deposit accounts and all cash (whether or not deposited in such deposit accounts);
(vii) All investment property;
(viii) All supporting obligations;
(ix) All files, records, books of account, business papers, and computer programs, including without limitation and all files, records, books, ledger cards, correspondence, computer programs, tapes, disks, digital storage media and related data processing software that at any time evidence or contain information relating to any of the Collateral set forth in clauses (i)-(viii) above or are otherwise necessary or helpful in the collection thereof or realization thereupon; and
(x) the products, profits and proceeds of all of the foregoing Collateral set forth in clauses (i)-(ix) above, and all payments under insurance (whether or not the Secured Party is the loss payee thereof) or under any indemnity, warranty or guaranty, payable by reason or loss or damage to, or otherwise with respect to, any of the foregoing Collateral set forth in clauses (i)-(ix) above.
Without limiting the generality of the foregoing, the “Collateral” shall include all investment property and general intangibles respecting ownership and/or other equity interests in each Guarantor, including, without limitation, the shares of capital stock and the other equity interests listed on Schedule H hereto (as the same may be modified from time to time pursuant to the terms hereof), and any other shares of capital stock and/or other equity interests of any other direct or indirect subsidiary of any Debtor obtained in the future, and, in each case, all certificates representing such shares and/or equity interests and, in each case, all rights, options, warrants, stock, other securities and/or equity interests that may hereafter be received, receivable or distributed in respect of, or exchanged for, any of the foregoing and all rights arising under or in connection with the Pledged Securities, including, but not limited to, all dividends, interest and cash.
Notwithstanding the foregoing, nothing herein shall be deemed to constitute an assignment of any asset which, in the event of an assignment, becomes void by operation of applicable law or the assignment of which is otherwise prohibited by applicable law (in each case to the extent that such applicable law is not overridden by Sections 9-406, 9-407 and/or 9-408 of the UCC or other similar applicable law); provided, however, that to the extent permitted by applicable law, this Agreement shall create a valid security interest in such asset and, to the extent permitted by applicable law, this Agreement shall create a valid security interest in the proceeds of such asset.
(b) “Intellectual Property” means the collective reference to all rights, priorities and privileges relating to intellectual property, whether arising under United States, multinational or foreign laws or otherwise, including, without limitation, (i) all copyrights arising under the laws of the United States, any other country or any political subdivision thereof, whether registered or unregistered and whether published or unpublished, all registrations and recordings thereof, and all applications in connection therewith, including without limitation all registrations, recordings and applications in the United States Copyright Office, (ii) all letters patent of the United States, any other country or any political subdivision thereof, all reissues and extensions thereof, and all applications for letters patent of the United States or any other country and all divisions, continuations and continuations-in-part thereof, (iii) all trademarks, trade names, corporate names, company names, business names, fictitious business names, trade dress, service marks, logos, domain names and other source or business identifiers, and all goodwill associated therewith, now existing or hereafter adopted or acquired, all registrations and recordings thereof, and all applications in connection therewith, whether in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof or any other country or any political subdivision thereof, or otherwise, and all common law rights related thereto, (iv) all trade secrets arising under the laws of the United States, any other country or any political subdivision thereof, (v) all rights to obtain any reissues, renewals or extensions of the foregoing, (vi) all licenses for any of the foregoing, and (vii) all causes of action for infringement of the foregoing.
(c) “Majority in Interest” means, at any time of determination, at least a majority in interest (based on then-outstanding principal amounts of Notes at the time of such determination) of the Secured Parties.
(d) “Necessary Endorsement” means undated stock powers endorsed in blank or other proper instruments of assignment duly executed and such other instruments or documents as the Agent (as that term is defined below) may reasonably request.
(e) “Obligations” means all of the liabilities and obligations (primary, secondary, direct, contingent, sole, joint or several) due or to become due, or that are now or may be hereafter contracted or acquired, or owing to, of any Debtor to the Secured Parties either (i) under this Agreement, the Notes, the Guarantee, the other Transaction Documents and any other instruments, agreements or other documents executed and/or delivered in connection herewith or therewith, or (ii) related to any other liabilities or obligations associated with any indebtedness for borrowed money from any Secured Party to any Debtor, in each case, whether now or hereafter existing, voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from any of the Secured Parties as a preference, fraudulent transfer or otherwise as such obligations may be amended, supplemented, converted, extended or modified from time to time. Without limiting the generality of the foregoing, the term “Obligations” shall include, without limitation: (i) principal of and interest on the Notes and the loans extended pursuant thereto; (ii) any and all other fees, indemnities, costs, obligations and liabilities of the Debtors from time to time under or in connection with this Agreement, the Notes, the Guarantee, the other Transaction Documents and any other instruments, agreements or other documents executed and/or delivered in connection herewith or therewith; and (iii) all amounts (including but not limited to post-petition interest) in respect of the foregoing that would be payable but for the fact that the obligations to pay such amounts are unenforceable or not allowable due to the existence of a bankruptcy, reorganization or similar proceeding involving any Debtor.
(f) “Organizational Documents” means with respect to any Debtor, the documents by which such Debtor was organized (such as articles of incorporation, certificate of limited partnership or articles of organization, and including, without limitation, any certificates of designation for preferred stock or other forms of preferred equity) and which relate to the internal governance of such Debtor (such as bylaws, a partnership agreement or an operating, limited liability or members agreement).
(g) “Pledged Securities” shall have the meaning ascribed to such term in Section 4(i).
(h) “Transaction Documents” shall have the meaning ascribed to such term in the Purchase Agreement.
(i) “UCC” means the Uniform Commercial Code of the State of California and/or any other applicable law of any state or states which has jurisdiction with respect to all, or any portion of, the Collateral or this Agreement from time to time. It is the intent of the parties that defined terms in the UCC should be construed in their broadest sense so that the term “Collateral” will be construed in its broadest sense. Accordingly if there are, from time to time, changes to defined terms in the UCC that broaden the definitions, they are incorporated herein and if existing definitions in the UCC are broader than the amended definitions, the existing ones shall be controlling.
2. Grant of Security Interest in Collateral. As an inducement for the Secured Parties to extend the loans as evidenced by the Notes and to secure the complete and timely payment, performance and discharge in full, as the case may be, of all of the Obligations, each Debtor hereby unconditionally and irrevocably pledges, grants and hypothecates to the Secured Parties, subject to Permitted Liens (as defined in the Notes), a first priority security interest in and to, a lien upon and a right of set-off against all of their respective right, title and interest of whatsoever kind and nature in and to, the Collateral (a “Security Interest” and, collectively, the “Security Interests”).
3. Delivery of Certain Collateral. Contemporaneously or prior to the execution of this Agreement, each Debtor shall deliver or cause to be delivered to the Agent (a) any and all certificates and other instruments representing or evidencing the Pledged Securities, together with all Necessary Endorsements, and (b) any and all certificates and other instruments or documents representing any of the other Collateral, in each case, together with all Necessary Endorsements. The Debtors are, contemporaneously with the execution hereof, delivering to the Agent, or have previously delivered to the Agent, a true and correct copy of each Organizational Document governing any of the Pledged Securities.
4. Representations, Warranties, Covenants and Agreements of the Debtors. Except as set forth under the corresponding section of the disclosure schedules delivered to the Secured Parties concurrently herewith (the “Disclosure Schedules”), which Disclosure Schedules shall be deemed a part hereof, each Debtor represents and warrants to, and covenants and agrees with, the Secured Parties as follows:
(a) Each Debtor has the requisite corporate, partnership, limited liability company or other power and authority to enter into this Agreement and otherwise to carry out its obligations hereunder. The execution, delivery and performance by each Debtor of this Agreement and the filings contemplated therein have been duly authorized by all necessary action on the part of such Debtor and no further action is required by such Debtor. This Agreement has been duly executed by each Debtor. This Agreement constitutes the legal, valid and binding obligation of each Debtor, enforceable against each Debtor in accordance with its terms.
(b) The Debtors have no place of business or offices where their respective books of account and records are kept (other than temporarily at the offices of its attorneys or accountants) or places where Collateral is stored or located, except as set forth on Schedule A attached hereto. Except as specifically set forth on Schedule A, each Debtor is the record owner of the real property where such Collateral is located, and there exist no mortgages or other liens on any such real property except for Permitted Liens. Except as disclosed on Schedule A, none of such Collateral is in the possession of any consignee, bailee, warehouseman, agent or processor.
(c) Except for Permitted Liens and except as set forth on Schedule B attached hereto, the Debtors are the sole owner of the Collateral, free and clear of any liens, security interests, encumbrances, rights or claims, and are fully authorized to grant the Security Interests. Except as set forth on Schedule B attached hereto, there is not on file in any governmental or regulatory authority, agency or recording office an effective financing statement, security agreement, license or transfer or any notice of any of the foregoing (other than those that will be filed in favor of the Secured Parties pursuant to this Agreement) covering or affecting any of the Collateral. Except as set forth on Schedule B attached hereto and except pursuant to this Agreement, as long as this Agreement shall be in effect, the Debtors shall not execute and shall not knowingly permit to be on file in any such office or agency any other financing statement or other document or instrument (except to the extent filed or recorded in favor of the Secured Parties pursuant to the terms of this Agreement).
(d) Except as set forth on Schedule 4(d) hereto, no written claim has been received that any Collateral or Debtor’s use of any Collateral violates the rights of any third party. There has been no adverse decision to any Debtor's claim of ownership rights in or exclusive rights to use the Collateral in any jurisdiction or to any Debtor's right to keep and maintain such Collateral in full force and effect, and there is no proceeding involving said rights pending or, to the best knowledge of any Debtor, threatened before any court, judicial body, administrative or regulatory agency, arbitrator or other governmental authority.
(e) Each Debtor shall at all times maintain its books of account and records relating to the Collateral at its principal place of business and its Collateral at the locations set forth on Schedule A attached hereto and may not relocate such books of account and records or tangible Collateral unless it delivers to the Secured Parties at least 30 days prior to such relocation (i) written notice of such relocation and the new location thereof (which must be within the United States) and (ii) evidence that appropriate financing statements under the UCC and other necessary documents have been filed and recorded and other steps have been taken to perfect the Security Interests to create in favor of the Secured Parties a valid, perfected and continuing second priority lien in all the Collateral.
(f) This Agreement creates in favor of the Secured Parties a valid security interest in the Collateral, subject only to Permitted Liens securing the payment and performance of the Obligations. Upon making the filings described in the immediately following paragraph, all security interests created hereunder in any Collateral which may be perfected by filing Uniform Commercial Code financing statements shall have been duly perfected. Except for the execution and delivery of this Agreement, the filing of the Uniform Commercial Code financing statements referred to in the immediately following paragraph, the recordation of the Intellectual Property Security Agreement (as defined below) with the United States Copyright Office or the United States Patent and Trademark Office with respect to copyrights, patents and trademarks (and applications relating each of the foregoing) as described in paragraph 4(mm), the execution and delivery of deposit account control agreements satisfying the requirements of Section 9-104(a)(2) of the UCC with respect to each deposit account of the Debtors, and the delivery of the certificates and other instruments provided in Section 3, no further action is necessary to create, perfect or protect the security interests created hereunder. Without limiting the generality of the foregoing, except for the execution and delivery of this Agreement by all (100%) of the Secured Parties, the filing of said financing statements, the recordation of said Intellectual Property Security Agreement, and the execution and delivery of said deposit account control agreements, except as set forth on Schedule 4(f), no consent of any third parties and no authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for (i) the execution, delivery and performance of this Agreement, (ii) the creation or perfection of the Security Interests created hereunder in the Collateral, or (iii) the enforcement of the rights of the Agent and the Secured Parties hereunder (except that the Secured Parties shall have a second priority security interest with respect to the Collateral).
(g) Each Debtor hereby authorizes the Agent to file one or more financing statements under the UCC, with respect to the Security Interests, with the proper filing and recording agencies in any jurisdiction deemed proper by it.
(h) The execution, delivery and performance of this Agreement by the Debtors does not (i) violate any of the provisions of any Organizational Documents of any Debtor or any judgment, decree, order or award of any court, governmental body or arbitrator or any applicable law, rule or regulation applicable to any Debtor or (ii) conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any agreement, credit facility, debt or other instrument (evidencing any Debtor's debt or otherwise) or other understanding to which any Debtor is a party or by which any property or asset of any Debtor is bound or affected. All required consents (including without limitation from stockholders or creditors of any Debtor) necessary for any Debtor to enter into and perform its obligations hereunder have been obtained.
(i) The capital stock and other equity interests listed on Schedule H hereto (the “Pledged Securities”) represent all of the capital stock and other equity interests of the Guarantors, and represent all capital stock and other equity interests owned, directly or indirectly, by the Company. All of the Pledged Securities are validly issued, fully paid and nonassessable, and the Company is the legal and beneficial owner of the Pledged Securities, free and clear of any lien, security interest or other encumbrance except for the security interests created by this Agreement and other Permitted Liens.
(j) The ownership and other equity interests in partnerships and limited liability companies (if any) included in the Collateral (the “Pledged Interests”) by their express terms do not provide that they are securities governed by Article 8 of the UCC and are not held in a securities account or by any financial intermediary.
(k) Except for Permitted Liens, until this Agreement and the Security Interest hereunder shall be terminated pursuant to Section 14 hereof, each Debtor shall at all times maintain in favor of the Secured Parties the liens and Security Interests provided for hereunder as valid and perfected first priority liens and security interests in all the Collateral. Each Debtor hereby agrees to defend the same against the claims of any and all persons and entities. Each Debtor shall safeguard and protect all Collateral for the account of the Secured Parties. At the request of the Agent, each Debtor will sign and deliver to the Agent on behalf of the Secured Parties at any time or from time to time one or more financing statements pursuant to the UCC in form reasonably satisfactory to the Agent and will pay the cost of filing the same in all public offices wherever filing is, or is deemed by the Agent to be, necessary or desirable to effect the rights and obligations provided for herein. Without limiting the generality of the foregoing, each Debtor shall pay all fees, taxes and other amounts necessary to maintain the Collateral and the Security Interests hereunder, and each Debtor shall obtain and furnish to the Agent from time to time, upon demand, such releases and/or subordinations of claims and liens which may be required to maintain the priority of the Security Interests hereunder.
(l) Except as listed on Schedule I, no Debtor will transfer, pledge, hypothecate, encumber, license, sell or otherwise dispose of any of the Collateral (except for licenses granted by a Debtor in its ordinary course of business and sales of inventory and other unused or outdated assets by a Debtor in its ordinary course of business) without the prior written consent of a Majority in Interest.
(m) Each Debtor shall keep and preserve its equipment, inventory and other tangible Collateral in good condition, repair and order and shall not operate or locate any such Collateral (or cause to be operated or located) in any area excluded from insurance coverage.
(n) Each Debtor shall maintain with financially sound and reputable insurers, insurance with respect to the Collateral, including Collateral hereafter acquired, against loss or damage of the kinds and in the amounts customarily insured against by entities of established reputation having similar properties similarly situated and in such amounts as are customarily carried under similar circumstances by other such entities and otherwise as is prudent for entities engaged in similar businesses but in any event sufficient to cover the full replacement cost thereof. Each Debtor shall cause each insurance policy issued in connection herewith to provide, and the insurer issuing such policy to certify to the Agent, that (i) the Agent will be named as lender loss payee and additional insured under each such insurance policy; (ii) if such insurance be proposed to be cancelled or materially changed for any reason whatsoever, such insurer will promptly notify the Agent and such cancellation or change shall not be effective as to the Agent for at least thirty (30) days after receipt by the Agent of such notice, unless the effect of such change is to extend or increase coverage under the policy; and (iii) the Agent will have the right (but no obligation) at its election to remedy any default in the payment of premiums within thirty (30) days of notice from the insurer of such default. If no Event of Default (as defined in the Notes) exists, loss payments in each instance will be applied by the applicable Debtor to the repair and/or replacement of property with respect to which the loss was incurred to the extent reasonably feasible, and any loss payments or the balance thereof remaining, to the extent not so applied, shall be payable to the applicable Debtor; provided, however, that payments received by any Debtor after an Event of Default occurs and is continuing shall be paid to the Agent on behalf of the Secured Parties and, if received by such Debtor, shall be held in trust for the Secured Parties and immediately paid over to the Agent unless otherwise directed in writing by the Agent. Copies of such policies or the related certificates, in each case, naming the Agent as lender loss payee and additional insured shall be delivered to the Agent at least annually and at the time any new policy of insurance is issued.
(o) Each Debtor shall promptly, but no later than ten (10) days after obtaining knowledge thereof, advise the Secured Parties, through the Agent, in sufficient detail of any change in the Collateral and of the occurrence of any event which would have a material adverse effect on the value of the Collateral or on the Secured Parties’ security interest therein.
(p) Each Debtor shall promptly execute and deliver to the Agent such further deeds, mortgages, assignments, security agreements, financing statements or other instruments, documents, certificates and assurances and take such further action as the Agent may from time to time request and may in its sole discretion deem necessary to perfect, protect or enforce the Secured Parties’ security interest in the Collateral including, without limitation, if applicable, the execution and delivery of a separate security agreement with respect to each Debtor’s Intellectual Property (“Intellectual Property Security Agreement”) in which the Secured Parties have been granted a security interest hereunder, substantially in a form reasonably acceptable to the Agent, which Intellectual Property Security Agreement, other than as stated therein, shall be subject to all of the terms and conditions hereof.
(q) Each Debtor shall permit the Agent and its representatives and agents to inspect the Collateral during normal business hours and upon reasonable prior notice, and to make copies of records pertaining to the Collateral as may be reasonably requested by the Agent from time to time.
(r) Each Debtor shall take all steps reasonably necessary to diligently pursue and seek to preserve, enforce and collect any rights, claims, causes of action and accounts receivable in respect of the Collateral.
(s) Each Debtor shall promptly notify the Secured Parties in sufficient detail upon becoming aware of any attachment, garnishment, execution or other legal process levied against any Collateral and of any other information received by such Debtor that may materially affect the value of the Collateral, the Security Interests or the rights and remedies of the Secured Parties hereunder.
(t) All information heretofore, herein or hereafter supplied to the Secured Parties by or on behalf of any Debtor with respect to the Collateral is and will be accurate and complete in all material respects as of the date furnished.
(u) The Debtors shall at all times preserve and keep in full force and effect their respective valid existence and good standing and any rights and franchises material to its business.
(v) No Debtor will change its name, type of organization, jurisdiction of organization, organizational identification number (if it has one), legal or corporate structure, or identity, or add any new fictitious name unless it provides at least thirty (30) days prior written notice to the Secured Parties of such change and, at the time of such written notification, such Debtor provides any financing statements or fixture filings necessary to perfect and continue the perfection of the Security Interests granted and evidenced by this Agreement.
(w) Except in the ordinary course of business, no Debtor may consign any of its inventory or sell any of its inventory on bill and hold, sale or return, sale on approval, or other conditional terms of sale without the consent of the Agent which shall not be unreasonably withheld.
(x) No Debtor may relocate its chief executive office to a new location without providing thirty (30) days’ prior written notification thereof to the Secured Parties and so long as, at the time of such written notification, such Debtor provides any financing statements or fixture filings necessary to perfect and continue the perfection of the Security Interests granted and evidenced by this Agreement.
(y) Each Debtor was organized and remains organized solely under the laws of the state set forth next to such Debtor’s name in Schedule D attached hereto, which Schedule D sets forth each Debtor’s organizational identification number or, if any Debtor does not have one, states that one does not exist.
(z) (i) The actual name of each Debtor is the name set forth in Schedule D attached hereto; (ii) no Debtor has any trade names except as set forth on Schedule E attached hereto; (iii) no Debtor has used any name other than that stated in the preamble hereto or as set forth on Schedule E for the preceding five (5) years; and (iv) no entity has merged into any Debtor or been acquired by any Debtor within the past five (5) years except as set forth on Schedule E.
(aa) At any time and from time to time that any Collateral consists of instruments, certificated securities or other items that require or permit possession by the secured party to perfect the Security Interest created hereby, the applicable Debtor shall deliver such Collateral to the Agent.
(bb) Each Debtor, in its capacity as issuer, hereby agrees to comply with any and all orders and instructions of the Agent regarding the Pledged Interests consistent with the terms of this Agreement without the further consent of any Debtor as contemplated by Section 8-106 (or any successor section) of the UCC. Further, each Debtor agrees that it shall not enter into a similar agreement (or one that would confer “control” within the meaning of Article 8 of the UCC) with any other person or entity.
(cc) Each Debtor shall cause all tangible chattel paper constituting Collateral to be delivered to the Agent, or, if such delivery is not possible, then to cause such tangible chattel paper to contain a legend noting that it is subject to the security interest created by this Agreement. To the extent that any Collateral consists of electronic chattel paper, the applicable Debtor shall cause the underlying chattel paper to be “marked” within the meaning of Section 9-105 of the UCC (or successor section thereto).
(dd) If there is any investment property or deposit account included as Collateral that can be perfected by “control” through an account control agreement, the applicable Debtor shall, promptly upon written request of the Agent following the occurrence of an Event of Default, cause such an account control agreement, in form and substance in each case satisfactory to the Agent, to be entered into and delivered to the Agent for the benefit of the Secured Parties.
(ee) To the extent that any Collateral consists of letter-of-credit rights, the applicable Debtor shall, promptly upon written request of the Agent following the occurrence of an Event of Default, cause the issuer of each underlying letter of credit to consent to an assignment of the proceeds thereof to the Secured Parties.
(ff) To the extent that any Collateral is in the possession of any third party, the applicable Debtor shall join with the Agent in notifying such third party of the Secured Parties’ security interest in such Collateral and shall use its best efforts to obtain an acknowledgement and agreement from such third party with respect to the Collateral, in form and substance reasonably satisfactory to the Agent.
(gg) If any Debtor shall at any time hold or acquire a commercial tort claim, such Debtor shall promptly notify the Secured Parties in a writing signed by such Debtor of the particulars thereof and grant to the Secured Parties in such writing a security interest therein and in the proceeds thereof, all upon the terms of this Agreement, with such writing to be in form and substance reasonably satisfactory to the Agent.
(hh) Each Debtor shall immediately provide written notice to the Secured Parties of any and all accounts which arise out of contracts with any governmental authority and, to the extent necessary to perfect or continue the perfected status of the Security Interests in such accounts and proceeds thereof, shall execute and deliver to the Agent an assignment of claims for such accounts and cooperate with the Agent in taking any other steps required, in its judgment, under the Federal Assignment of Claims Act or any similar federal, state or local statute or rule to perfect or continue the perfected status of the Security Interests in such accounts and proceeds thereof.
(ii) Each Debtor shall cause each subsidiary of such Debtor to immediately become a party hereto (an “Additional Debtor”), by executing and delivering an Additional Debtor Joinder in substantially the form of Annex A attached hereto and comply with the provisions hereof applicable to the Debtors. Concurrent therewith, the Additional Debtor shall deliver replacement schedules for, or supplements to all other Schedules to (or referred to in) this Agreement, as applicable, which replacement schedules shall supersede, or supplements shall modify, the Schedules then in effect. The Additional Debtor shall also deliver such authorizing resolutions, good standing certificates, incumbency certificates, organizational documents, financing statements and other information and documentation as the Agent may reasonably request. Upon delivery of the foregoing to the Agent, the Additional Debtor shall be and become a party to this Agreement with the same rights and obligations as the Debtors, for all purposes hereof as fully and to the same extent as if it were an original signatory hereto and shall be deemed to have made the representations, warranties and covenants set forth herein as of the date of execution and delivery of such Additional Debtor Joinder, and all references herein to the “Debtors” shall be deemed to include each Additional Debtor.
(jj) Each Debtor shall vote the Pledged Securities to comply with the covenants and agreements set forth herein and in the Notes.
(kk) Each Debtor shall register the pledge of the applicable Pledged Securities on the books of such Debtor. Each Debtor shall notify each issuer of Pledged Securities to register the pledge of the applicable Pledged Securities in the name of the Secured Parties on the books of such issuer. Further, except with respect to certificated securities delivered to the Agent, the applicable Debtor shall deliver to the Agent an acknowledgement of pledge (which, where appropriate, shall comply with the requirements of the relevant UCC with respect to perfection by registration) signed by the issuer of the applicable Pledged Securities, which acknowledgement shall confirm that: (i) it has registered the pledge on its books and records; and (ii) at any time directed by the Agent during the continuation of an Event of Default, such issuer will transfer the record ownership of such Pledged Securities into the name of any designee of the Agent, will take such steps as may be necessary to effect the transfer, and will comply with all other instructions of the Agent regarding such Pledged Securities without the further consent of the applicable Debtor.
(ll) In the event that, upon an occurrence of an Event of Default, the Agent shall sell all or any of the Pledged Securities to another party or parties (herein called the “Transferee”) or shall purchase or retain all or any of the Pledged Securities, each Debtor shall, to the extent applicable: (i) deliver to the Agent or the Transferee, as the case may be, the articles of incorporation, bylaws, minute books, stock certificate books, corporate seals, deeds, leases, indentures, agreements, evidences of indebtedness, books of account, financial records and all other Organizational Documents and records of the Debtors and their direct and indirect subsidiaries; (ii) use commercially reasonable efforts to obtain resignations of the persons then serving as officers and directors of the Debtors and their direct and indirect subsidiaries, if so requested; and (iii) use its best efforts to obtain any approvals that are required by any governmental or regulatory body in order to permit the sale of the Pledged Securities to the Transferee or the purchase or retention of the Pledged Securities by the Agent and allow the Transferee or the Agent to continue the business of the Debtors and their direct and indirect subsidiaries.
(mm) Without limiting the generality of the other obligations of the Debtors hereunder, each Debtor shall promptly (i) cause to be registered at the United States Copyright Office all of its material copyrights, (ii) cause the security interest contemplated hereby with respect to all Intellectual Property registered at the United States Copyright Office or United States Patent and Trademark Office to be duly recorded at the applicable office, and (iii) give the Agent notice whenever it acquires (whether absolutely or by license) or creates any additional material Intellectual Property.
(nn) Each Debtor will from time to time, at the joint and several expense of the Debtors, promptly execute and deliver all such further instruments and documents, and take all such further action as may be necessary or desirable, or as the Agent may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable the Secured Parties to exercise and enforce their rights and remedies hereunder and with respect to any Collateral or to otherwise carry out the purposes of this Agreement.
(oo) Schedule F attached hereto lists all of the patents, patent applications, trademarks, trademark applications, registered copyrights, and domain names owned by any of the Debtors as of the date hereof. Schedule F lists all material licenses in favor of any Debtor for the use of any patents, trademarks, copyrights and domain names as of the date hereof. All material patents and trademarks of the Debtors have been duly recorded at the United States Patent and Trademark Office and all material copyrights of the Debtors have been duly recorded at the United States Copyright Office.
(pp) Except as set forth on Schedule G attached hereto, none of the account debtors or other persons or entities obligated on any of the Collateral is a governmental authority covered by the Federal Assignment of Claims Act or any similar federal, state or local statute or rule in respect of such Collateral.
5. Effect of Pledge on Certain Rights. If any of the Collateral subject to this Agreement consists of nonvoting equity or ownership interests (regardless of class, designation, preference or rights) that may be converted into voting equity or ownership interests upon the occurrence of certain events (including, without limitation, upon the transfer of all or any of the other stock or assets of the issuer), it is agreed that the pledge of such equity or ownership interests pursuant to this Agreement or the enforcement of any of the Agent’s rights hereunder shall not be deemed to be the type of event which would trigger such conversion rights notwithstanding any provisions in the Organizational Documents or agreements to which any Debtor is subject or to which any Debtor is party.
6. Defaults. The following events shall be “Events of Default”:
(a) The occurrence of an Event of Default (as defined in the Notes) under the Notes;
(b) Any representation or warranty of any Debtor in this Agreement shall prove to have been incorrect in any material respect when made;
(c) The failure by any Debtor to observe or perform any of its obligations hereunder for five (5) business days after delivery to such Debtor of notice of such failure by or on behalf of a Secured Party unless such default is capable of cure but cannot be cured within such time frame and such Debtor is using best efforts to cure same in a timely fashion; or
(d) If any material provision of this Agreement shall at any time for any reason be declared to be null and void, or the validity or enforceability thereof shall be contested by any Debtor, or a proceeding shall be commenced by any Debtor, or by any governmental authority having jurisdiction over any Debtor, seeking to establish the invalidity or unenforceability thereof, or any Debtor shall deny that any Debtor has any material liability or obligation purported to be created under this Agreement.
7. Duty to Hold in Trust.
(a) Upon the occurrence and continuation of any Event of Default, each Debtor shall, upon receipt of any revenue, income, dividend, interest or other sums subject to the Security Interests, whether payable pursuant to the Notes or otherwise, or of any check, draft, note, trade acceptance or other instrument evidencing an obligation to pay any such sum, hold the same in trust for the Secured Parties and shall forthwith endorse and transfer any such sums or instruments, or both, to the Secured Parties, pro-rata in proportion to their respective then-currently outstanding principal amount of Notes for application to the satisfaction of the Obligations.
(b) If any Debtor shall become entitled to receive or shall receive any securities or other property (including, without limitation, shares of Pledged Securities or instruments representing Pledged Securities acquired after the date hereof, or any options, warrants, rights or other similar property or certificates representing a dividend, or any distribution in connection with any recapitalization, reclassification or increase or reduction of capital, or issued in connection with any reorganization of such Debtor or any of its direct or indirect subsidiaries) in respect of the Pledged Securities (whether as an addition to, in substitution of, or in exchange for, such Pledged Securities or otherwise), such Debtor agrees to (i) accept the same as the agent of the Secured Parties; (ii) hold the same in trust on behalf of and for the benefit of the Secured Parties; and (iii) deliver any and all certificates or instruments evidencing the same to the Agent on or before the close of business on the fifth business day following the receipt thereof by such Debtor, in the exact form received together with the Necessary Endorsements, to be held by the Agent subject to the terms of this Agreement as Collateral.
8. Rights and Remedies Upon Default.
(a) Upon the occurrence of any Event of Default and at any time thereafter, the Secured Parties, acting through the Agent, shall have the right to exercise all of the remedies conferred hereunder and under the Notes and other Transaction Documents, and the Secured Parties, acting through the Agent, shall have all the rights and remedies of a secured party under the UCC. Without limitation, the Agent, for the benefit of the Secured Parties, shall have the following rights and powers:
(i) The Agent shall have the right to take possession of the Collateral and, for that purpose, enter, with the aid and assistance of any person, any premises where the Collateral, or any part thereof, is or may be placed and remove the same, and each Debtor shall assemble the Collateral and make it available to the Agent at places which the Agent shall reasonably select, whether at such Debtor's premises or elsewhere, and make available to the Agent, without rent, all of such Debtor’s respective premises and facilities for the purpose of the Agent taking possession of, removing or putting the Collateral in saleable or disposable form.
(ii) Upon notice to the Debtors by the Agent, all rights of each Debtor to exercise the voting and other consensual rights which it would otherwise be entitled to exercise and all rights of each Debtor to receive the dividends and interest which it would otherwise be authorized to receive and retain, shall cease. Upon such notice, the Agent shall have the right to receive, for the benefit of the Secured Parties, any interest, cash dividends or other payments on the Collateral and, at the option of the Agent, to exercise in such Agent’s discretion all voting rights pertaining thereto. Without limiting the generality of the foregoing, the Agent shall have the right (but not the obligation) to exercise all rights with respect to the Collateral as it were the sole and absolute owner thereof, including without limitation to vote and/or to exchange, at its sole discretion, any or all of the Collateral in connection with a merger, reorganization, consolidation, recapitalization or other readjustment concerning or involving the Collateral or any Debtor or any of its direct or indirect subsidiaries.
(iii) The Agent shall have the right to assign, sell, lease or otherwise dispose of and deliver all or any part of the Collateral, at public or private sale or otherwise, either with or without special conditions or stipulations, for cash or on credit or for future delivery, in such parcel or parcels and at such time or times and at such place or places, and upon such terms and conditions as the Agent may deem commercially reasonable, all without (except as shall be required by applicable statute and cannot be waived) advertisement or demand upon or notice to any Debtor or right of redemption of a Debtor, which are hereby expressly waived. Upon each such sale, lease, assignment or other transfer of Collateral, the Agent, for the benefit of the Secured Parties, may, unless prohibited by applicable law which cannot be waived, purchase all or any part of the Collateral being sold, free from and discharged of all trusts, claims, right of redemption and equities of any Debtor, which are hereby waived and released.
(iv) The Agent shall have the right (but not the obligation) to notify any account debtors and any obligors under instruments or accounts to make payments directly to the Agent, on behalf of the Secured Parties, and to enforce the Debtors’ rights against such account debtors and obligors.
(v) The Agent, for the benefit of the Secured Parties, may (but is not obligated to) direct any financial intermediary or any other person or entity holding any investment property to transfer the same to the Agent, on behalf of the Secured Parties, or its designee.
(vi) The Agent may (but is not obligated to) transfer any or all Intellectual Property registered in the name of any Debtor at the United States Patent and Trademark Office and/or Copyright Office into the name of the Secured Parties or any designee or any purchaser of any Collateral.
(b) The Agent shall comply with any applicable law in connection with a disposition of Collateral and such compliance will not be considered adversely to affect the commercial reasonableness of any sale of the Collateral. The Agent may sell the Collateral without giving any warranties and may specifically disclaim such warranties. If the Agent sells any of the Collateral on credit, the Debtors will only be credited with payments actually made by the purchaser. In addition, each Debtor waives any and all rights that it may have to a judicial hearing in advance of the enforcement of any of the Agent’s rights and remedies hereunder, including without limitation the Agent’s right following an Event of Default to take immediate possession of the Collateral and to exercise its rights and remedies with respect thereto.
(c) For the purpose of enabling the Agent to further exercise rights and remedies under this Section 8 or elsewhere provided by agreement or applicable law, each Debtor hereby grants to the Agent, for the benefit of the Agent and the Secured Parties, an irrevocable, nonexclusive license (exercisable without payment of royalty or other compensation to such Debtor) to use, license or sublicense following an Event of Default, any Intellectual Property now owned or hereafter acquired by such Debtor, and wherever the same may be located, and including in such license access to all media in which any of the licensed items may be recorded or stored and to all computer software and programs used for the compilation or printout thereof.
9. Inter Secured Party Rights; Transaction/Applications of Proceeds.
(a) All Obligations owed to the Secured Parties shall rank in the order of priority pari passu and pro-rata in proportion to each Secured Party’s outstanding principal amount of Notes at any given time that a determination needs to be made of pro-rata holdings. If an Event of Default occurs and any party hereto collects proceeds pursuant to its rights under any Obligations, the Agent shall be immediately notified and such payment shall be shared with all of the other Secured Parties as set forth above. Notwithstanding anything to the contrary contained in the Purchase Agreement or any document executed in connection with the Obligations and irrespective of: (i) the time, order or method of attachment or perfection of the security interests created in favor of Secured Parties; (ii) the time or order of filing or recording of financing statements or other documents filed or recorded to perfect security interests in any Collateral; (iii) anything contained in any filing or agreement to which any Secured Party now or hereafter may be a party; and (iv) the rules for determining perfection or priority under the Uniform Commercial Code or any other law governing the relative priorities of secured creditors, each of the Secured Parties acknowledges that (x) all other Secured Parties have a valid security interest in the Collateral and (y) the security interests of the Secured Parties in any Collateral pursuant to any outstanding Obligations shall be pari passu with each other and enforced pursuant to the terms of this Agreement through the Agent. Each Secured Party, severally and not jointly with the other Secured Parties, shall indemnify, defend, and hold harmless the other Secured Parties against and in respect of any and all claims, demands, losses, costs, expenses, obligations, liabilities, damages, recoveries, and deficiencies, including interest, penalties, and reasonable professional and attorneys’ fees, including those arising from settlement negotiations, that the other Secured Parties shall incur or suffer, which arise, result from, or relate to a breach of, or failure by such Secured Party to perform under this Agreement.
(b) The proceeds of any such sale, lease or other disposition of the Collateral hereunder or from payments made on account of any insurance policy insuring any portion of the Collateral shall be applied first, to the expenses of retaking, holding, storing, processing and preparing for sale, selling, and the like (including without limitation any taxes, fees and other costs incurred in connection therewith) of the Collateral, then to the reasonable attorneys’ fees and expenses incurred by the Agent in enforcing the Secured Parties’ rights hereunder and in connection with collecting, storing and disposing of the Collateral, then to satisfaction of the Obligations pro rata among the Secured Parties (based on then-outstanding principal amounts of Notes at the time of any such determination), and then to the payment of any other amounts required by applicable law. If, upon the sale, license or other disposition of the Collateral, the proceeds thereof are insufficient to pay all amounts to which the Secured Parties are legally entitled, the Debtors will be liable for the deficiency, together with interest thereon, at the rate of twelve percent (12%) per annum or the lesser amount permitted by applicable law (the “Default Rate”), and the reasonable fees of any attorneys employed by the Secured Parties to collect such deficiency. To the extent permitted by applicable law, each Debtor waives all claims, damages and demands against the Secured Parties arising out of the repossession, removal, retention or sale of the Collateral, unless due solely to the gross negligence or willful misconduct of the Secured Parties as determined by a final judgment (not subject to further appeal) of a court of competent jurisdiction.
10. Securities Law Provision. Each Debtor recognizes that the Agent may be limited in its ability to effect a sale to the public of all or part of the Pledged Securities by reason of certain prohibitions in the Securities Act of 1933, as amended, or other federal or state securities laws (collectively, the “Securities Laws”), and may be compelled to resort to one or more sales to a restricted group of purchasers who may be required to agree to acquire the Pledged Securities for their own account, for investment and not with a view to the distribution or resale thereof. Each Debtor agrees that sales so made may be at prices and on terms less favorable than if the Pledged Securities were sold to the public and that the Agent has no obligation to delay the sale of any Pledged Securities for the period of time necessary to register the Pledged Securities for sale to the public under the Securities Laws. Each Debtor shall cooperate with the Agent in its attempt to satisfy any requirements under the Securities Laws applicable to the sale of the Pledged Securities by the Agent.
11. Costs and Expenses. Each Debtor agrees to pay all reasonable out-of-pocket fees, costs and expenses incurred in connection with any filing required hereunder, including, without limitation, any financing statements pursuant to the UCC, continuation statements, partial releases and/or termination statements related thereto or any expenses of any searches reasonably required by the Agent. The Debtors shall also pay all other claims and charges which in the reasonable opinion of the Agent is reasonably likely to prejudice, imperil or otherwise affect the Collateral or the Security Interests therein. The Debtors will also, upon demand, pay to the Agent the amount of any and all reasonable expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, which the Agent, for the benefit of the Secured Parties, may incur in connection with (a) the enforcement of this Agreement, (b) the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Collateral, or (c) the exercise or enforcement of any of the rights of the Secured Parties under the Notes. Until so paid, any fees payable hereunder shall be added to the principal amount of the Notes and shall bear interest at the Default Rate.
12. Responsibility for Collateral. The Debtors assume all liabilities and responsibility in connection with all Collateral, and the Obligations shall in no way be affected or diminished by reason of the loss, destruction, damage or theft of any of the Collateral or its unavailability for any reason. Without limiting the generality of the foregoing, (a) neither the Agent nor any Secured Party (i) has any duty (either before or after an Event of Default) to collect any amounts in respect of the Collateral or to preserve any rights relating to the Collateral, or (ii) has any obligation to clean-up or otherwise prepare the Collateral for sale, and (b) each Debtor shall remain obligated and liable under each contract or agreement included in the Collateral to be observed or performed by such Debtor thereunder. Neither the Agent nor any Secured Party shall have any obligation or liability under any such contract or agreement by reason of or arising out of this Agreement or the receipt by the Agent or any Secured Party of any payment relating to any of the Collateral, nor shall the Agent or any Secured Party be obligated in any manner to perform any of the obligations of any Debtor under or pursuant to any such contract or agreement, to make inquiry as to the nature or sufficiency of any payment received by the Agent or any Secured Party in respect of the Collateral or as to the sufficiency of any performance by any party under any such contract or agreement, to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to the Agent or to which the Agent or any Secured Party may be entitled at any time or times.
13. Security Interests Absolute. All rights of the Secured Parties and all obligations of the Debtors hereunder, shall be absolute and unconditional, irrespective of: (a) any lack of validity or enforceability of this Agreement, the Notes, any other Transaction Documents or any agreement entered into in connection with the foregoing, or any portion hereof or thereof; (b) any change in the time, manner or place of payment or performance of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to any departure from the Notes, any other Transaction Documents or any other agreement entered into in connection with the foregoing; (c) any exchange, release or nonperfection of any of the Collateral, or any release or amendment or waiver of or consent to departure from any other collateral for, or any guarantee, or any other security, for all or any of the Obligations; (d) any action by the Secured Parties to obtain, adjust, settle and cancel in its sole discretion any insurance claims or matters made or arising in connection with the Collateral; or (e) any other circumstance which might otherwise constitute any legal or equitable defense available to a Debtor, or a discharge of all or any part of the Security Interests granted hereby. Until the Obligations shall have been paid and performed in full, the rights of the Secured Parties shall continue even if the Obligations are barred for any reason, including without limitation the running of the statute of limitations or bankruptcy. Each Debtor expressly waives presentment, protest, notice of protest, demand, notice of nonpayment and demand for performance. In the event that at any time any transfer of any Collateral or any payment received by the Secured Parties hereunder shall be deemed by final order of a court of competent jurisdiction to have been a voidable preference or fraudulent conveyance under the bankruptcy or insolvency laws of the United States, or shall be deemed to be otherwise due to any party other than the Secured Parties, then, in any such event, each Debtor’s obligations hereunder shall survive cancellation of this Agreement, and shall not be discharged or satisfied by any prior payment thereof and/or cancellation of this Agreement, but shall remain a valid and binding obligation enforceable in accordance with the terms and provisions hereof. Each Debtor waives all right to require the Secured Parties to proceed against any other person or entity or to apply any Collateral which the Secured Parties may hold at any time, or to marshal assets, or to pursue any other remedy. Each Debtor waives any defense arising by reason of the application of the statute of limitations to any obligation secured hereby.
14. Term of Agreement. This Agreement and the Security Interests shall terminate, automatically and without any action on the part of the Agent or Secured Parties, on the date on which all payments under the Notes have been indefeasibly paid or otherwise discharged in full and all other Obligations have been paid or discharged; provided, however, that all indemnities of the parties hereto contained in this Agreement (including, without limitation, Annex B hereto) shall survive and remain operative and in full force and effect regardless of the termination of this Agreement. The Agent and Secured Parties shall, at Debtor’s request and expense, take any and all action required to discharge any and all security interests and release to Debtor any and all Collateral in the Agent’s or Secured Parties’ possession or control. The Secured Parties hereby agree that the Debtor shall have the right, and the Debtor is hereby authorized, to take all necessary action to cause the termination and release of all security interests granted hereunder upon termination of this Agreement, including the filing of one or more UCC termination statements or amendments relating to the Collateral.
15. Power of Attorney; Further Assurances.
(a) Each Debtor authorizes the Agent, and does hereby make, constitute and appoint the Agent and its officers, agents, successors or assigns with full power of substitution, as such Debtor’s true and lawful attorney-in-fact, with power, in the name of the Agent or such Debtor, to, after the occurrence and during the continuance of an Event of Default, (i) endorse any note, checks, drafts, money orders or other instruments of payment (including payments payable under or in respect of any policy of insurance) in respect of the Collateral that may come into possession of the Agent; (ii) sign and endorse any financing statement pursuant to the UCC or any invoice, freight or express bill, bill of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications and notices in connection with accounts, and other documents relating to the Collateral; (iii) pay or discharge taxes, liens, security interests or other encumbrances at any time levied or placed on or threatened against the Collateral; (iv) demand, collect, receive, compromise, settle and sue for monies due in respect of the Collateral; (v) transfer any Intellectual Property or provide licenses respecting any Intellectual Property; and (vi) generally, at the option of the Agent, and at the expense of the Debtors, at any time, or from time to time, execute and deliver any and all documents and instruments and do all acts and things which the Agent deems necessary to protect, preserve and realize upon the Collateral and the Security Interests granted therein in order to effect the intent of this Agreement, the Notes and other Transaction Documents all as fully and effectually as the Debtors might or could do; and each Debtor hereby ratifies all that said attorney shall lawfully do or cause to be done by virtue hereof. This power of attorney is coupled with an interest and shall be irrevocable for the term of this Agreement. The designation set forth herein shall be deemed to amend and supersede any inconsistent provision in the Organizational Documents or other documents or agreements to which any Debtor is subject or to which any Debtor is a party. Without limiting the generality of the foregoing, after the occurrence and during the continuance of an Event of Default, each Secured Party is specifically authorized to execute and file any applications for or instruments of transfer and assignment of any patents, trademarks, copyrights or other Intellectual Property with the United States Patent and Trademark Office and the United States Copyright Office.
(b) On a continuing basis, each Debtor will make, execute, acknowledge, deliver, file and record, as the case may be, with the proper filing and recording agencies in any jurisdiction, including without limitation the jurisdictions indicated on Schedule C attached hereto, all such instruments, and take all such action as may reasonably be deemed necessary or advisable, or as reasonably requested by the Agent, to perfect the Security Interests granted hereunder and otherwise to carry out the intent and purposes of this Agreement, or for assuring and confirming to the Agent the grant or perfection of a perfected security interest in all the Collateral under the UCC.
(c) Each Debtor hereby irrevocably appoints the Agent as such Debtor’s attorney-in-fact, with full authority in the place and instead of such Debtor and in the name of such Debtor, from time to time in the Agent’s discretion, to take any action and to execute any instrument which the Agent may deem necessary or advisable to accomplish the purposes of this Agreement, including the filing, in its sole discretion, of one or more financing or continuation statements and amendments thereto, relative to any of the Collateral without the signature of such Debtor where permitted by law, which financing statements may (but need not) describe the Collateral as “all assets” or “all personal property” or words of like import, and ratifies all such actions taken by the Agent. This power of attorney is coupled with an interest and shall be irrevocable for the term of this Agreement.
16. Notices. All notices, requests, demands and other communications hereunder shall be subject to the notice provision of the Purchase Agreement.
17. Other Security. To the extent that the Obligations are now or hereafter secured by property other than the Collateral or by the guarantee, endorsement or property of any other person, firm, corporation or other entity, then the Agent shall have the right, in its sole discretion, to pursue, relinquish, subordinate, modify or take any other action with respect thereto, without in any way modifying or affecting any of the Secured Parties’ rights and remedies hereunder.
18. Appointment of Agent. The Secured Parties hereby appoint W-Net Fund I, L.P. or its appointed agent to act as their agent (“Agent”) for purposes of exercising any and all rights and remedies of the Secured Parties hereunder. Such appointment shall continue until revoked in writing by a Majority in Interest, at which time a Majority in Interest shall appoint a new Agent. The Agent shall have the rights, responsibilities and immunities set forth in Annex B hereto. The Debtors shall be entitled to rely, without independent verification and irrespective of contrary instructions from any Secured Party, on any action or decision of the Agent as the act or decision of the Secured Parties.
19. Miscellaneous.
(a) No course of dealing between the Debtors and the Secured Parties, nor any failure to exercise, nor any delay in exercising, on the part of the Secured Parties, any right, power or privilege hereunder or under the Notes shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege hereunder or thereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege.
(b) All of the rights and remedies of the Secured Parties with respect to the Collateral, whether established hereby or by the Notes or by any other agreements, instruments or documents or by law, shall be cumulative and may be exercised singly or concurrently.
(c) This Agreement, together with the exhibits and schedules hereto, contain the entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, with respect to such matters, which the parties acknowledge have been merged into this Agreement and the exhibits and schedules hereto. No provision of this Agreement may be waived, modified, supplemented or amended except in a written instrument signed, in the case of an amendment, by the Debtors and a Majority in Interest or, in the case of a waiver, by the party against whom enforcement of any such waived provision is sought.
(d) If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their commercially reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable.
(e) No waiver of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any subsequent default or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of any party to exercise any right hereunder in any manner impair the exercise of any such right.
(f) This Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns. The Company and the Guarantors may not assign this Agreement or any rights or obligations hereunder without the prior written consent of each Secured Party (other than by merger). Any Secured Party may assign any or all of its rights under this Agreement to any Person to whom such Secured Party assigns or transfers any Securities, provided such transferee agrees in writing to be bound, with respect to the transferred Securities, by the provisions of this Agreement that apply to the “Secured Parties.”
(g) Each party shall take such further action and execute and deliver such further documents as may be necessary or appropriate in order to carry out the provisions and purposes of this Agreement.
(h) All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of California, without regard to the principles of conflicts of law thereof. Each Debtor agrees that all proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Agreement and the Notes (whether brought against a party hereto or its respective affiliates, directors, officers, shareholders, partners, members, employees or agents) shall be commenced exclusively in the state and federal courts sitting in the County of Los Angeles. Each Debtor hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the County of Los Angeles for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any proceeding, any claim that it is not personally subject to the jurisdiction of any such court or that such proceeding is improper. Each party hereto hereby irrevocably waives personal service of process and consents to process being served in any such proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby. If any party shall commence a proceeding to enforce any provisions of this Agreement, then the prevailing party in such proceeding shall be reimbursed by the other party for its reasonable attorney’s fees and other costs and expenses incurred with the investigation, preparation and prosecution of such proceeding.
(i) This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and, all of which taken together shall constitute one and the same Agreement. In the event that any signature is delivered by facsimile transmission or e-mail transmission, such signature shall create a valid binding obligation of the party executing the same (or on whose behalf such signature is executed) with the same force and effect as if such facsimile signature were the original thereof.
(j) All Debtors shall be jointly and severally be liable for the obligations of each Debtor to the Secured Parties hereunder.
(k) Each Debtor shall indemnify, reimburse and hold harmless the Agent and the Secured Parties and their respective partners, members, shareholders, officers, directors, employees and agents (and any other persons with other titles that have similar functions) (collectively, “Indemnitees”) from and against any and all losses, claims, liabilities, damages, penalties, suits, costs and expenses, of any kind or nature, (including fees relating to the cost of investigating and defending any of the foregoing) imposed on, incurred by or asserted against such Indemnitee in any way related to or arising from or alleged to arise from this Agreement or the Collateral, except any such losses, claims, liabilities, damages, penalties, suits, costs and expenses which result from any violation of the terms or provisions of this Agreement or the agreements underlying the Obligations or the negligence or willful misconduct of the Indemnitee. This indemnification provision is in addition to, and not in limitation of, any other indemnification provision in the Notes, the Purchase Agreement or any other agreement, instrument or other document executed or delivered in connection herewith or therewith.
(l) Nothing in this Agreement shall be construed to subject the Agent or any Secured Party to liability as a partner or member in or of any Debtor or any of its direct or indirect subsidiaries, nor shall the Agent or any Secured Party be deemed to have assumed any obligations under any partnership agreement or limited liability company agreement, as applicable, of any such Debtor or any of its direct or indirect subsidiaries or otherwise, unless and until any such Secured Party exercises its right to be substituted for such Debtor as a partner or member, as applicable, pursuant hereto.
(m) To the extent that the grant of the security interest in the Collateral and the enforcement of the terms hereof require the consent, approval or action of any partner or member, as applicable, of any Debtor or any direct or indirect subsidiary of any Debtor or compliance with any provisions of any of the Organizational Documents, the Debtors hereby grant such consent and approval and waive any such noncompliance with the terms of said documents.
IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement to be duly executed on the day and year first above written.
|
W270, INC.
|
|
By:__________________________________________ Name: Title:
SALEEN AUTOMOTIVE, INC.
By:_________________________________ Name: Title:
SMS SIGNATURE CARS
By:_________________________________ Name: Title:
|
[SIGNATURE PAGE OF HOLDERS FOLLOWS]
IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement to be duly executed on the day and year first above written.
Independently and as Agent:
W-NET FUND I, L.P.
By: W-Net Fund GP I LLC
Title: General Partner
By:
Name: David Weiner
Title: Manager
IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement to be duly executed on the day and year first above written.
SECURED PARTY:
[NAME]
By:
Name:
Title:
SCHEDULE A
Principal Place of Business of Debtors:
2735 Wardlow Road
Corona, CA 92882
Locations Where Collateral is Located or Stored:
2735 Wardlow Road
Corona, CA 92882
SCHEDULE B
Exceptions
None.
SCHEDULE C
Recording Jurisdictions
California
Florida
SCHEDULE D
Legal Names, Organizational Jurisdictions and Identification Numbers
Name Jurisdiction ID Number Address
W270, Inc. Nevada NV20111422852 2735 Wardlow Road
Corona, CA 92882
Saleen Automotive, Inc. Florida P11000065963 2735 Wardlow Road
Corona, CA 92882
SCHEDULE E
Names; Mergers and Acquisitions
On June 26, 2013, Saleen California Merger Corporation was merged with and into SMS Signature Cars, and Saleen Florida Merger Corporation was merged with and into Saleen Automotive, Inc.
SCHEDULE F
Intellectual Property
| Mark | No. | Owner |
| Registered Trademarks | ||
| Saleen | 2407911 | Steve Saleen |
| [Stylized "S"] | 2007476 | Steve Saleen |
| Saleen | 2005539 | Steve Saleen |
| Speedlab | 3593081 | Steve Saleen |
| Supershaker | 3706317 | Steve Saleen |
| Trademarks - Applications Pending | ||
| SMS Supercars | 85551574 | SMS Signature Cars, Inc. |
| SMS Supercars | 85551743 | SMS Signature Cars, Inc. |
| SMS Supercars | 85551715 | SMS Signature Cars, Inc. |
| Power in the Hands of a Few | 85551696 | Saleen Automotive, Inc. |
| Power in the Hands of a Few | 85551645 | Saleen Automotive, Inc. |
| Trademarks - Common Law | ||
| Saleen Performance Vehicles | n/a | SMS Signature Cars, Inc. |
| The Science of Speed | n/a | SMS Signature Cars, Inc. |
| Speed Science Style | n/a | SMS Signature Cars, Inc. |
| SMS Limited | n/a | SMS Signature Cars, Inc. |
| Racecraft | n/a | SMS Signature Cars, Inc. |
| Powerflash | n/a | SMS Signature Cars, Inc. |
| No. | Description | Owner |
| Patents - Issued | ||
| D399,465 | Side skirt for customized automobile body | Steve Saleen |
| D418,468 | Vehicle sideskirt set | Steve Saleen, Phil Frank |
| D437,271 | Mustang car brake and/or clutch pedal | Saleen Inc.* |
| D443,570 | Mustang car brake/clutch pedal | Saleen Inc.* |
| D444,114 | Pair of car pillar inserts | Saleen Inc.* |
| D444,436 | Vehicle brake pedal | Saleen Inc.* |
| D444,435 | Set of pedals for vehicle | Saleen Inc.* |
| D447,102 | Vehicle gas pedal | Saleen Inc.* |
| D472,861 | Automobile side skirt | Saleen Inc.* |
| D472,855 | Automobile front bumper | Saleen Inc.* |
| D473,831 | Automobile wing | Saleen Inc.* |
| D476,605 | Automobile rear bumper | Saleen Inc.* |
| D482,995 | Automobile flares | Saleen Inc.* |
| D483,312 | Automobile front flares | Saleen Inc.* |
| 7,597,088 | Apparatus for boosting engine performance | MJ Acquisitions* |
| Patents - Applications Pending | ||
| 463864 | Transparent Vehicle Roof | Saleen Inc.* |
| 384838 | Intercooler cartridge assembly | SMS Signature Cars, Inc. |
Domains
saleen.com
Licenses
February 15, 2012 License Agreement between Steve Saleen and Roadwire, LLC (for the manufacture of Saleen seats)
February 7, 2011 License Agreement between Steve Saleen and Molly Saleen (for t-shirts and hats)
SCHEDULE G
Government Account Debtors
None.
SCHEDULE H
Pledged Securities
SMS Signature Cars 100 shares of Common Stock
Saleen Automotive, Inc. 100 shares of Common Stock
SMS Retail – Corona 1,000,000 shares of Common Stock
Saleen Automotive Show Cars, Inc. 100,000 shares of Common Stock
SCHEDULE I
Permitted Licenses and Dispositions
None.
ANNEX A
to
SECURITY AGREEMENT
FORM OF ADDITIONAL DEBTOR JOINDER
Security Agreement dated as of June 26, 2013 made by
W270, Inc.
and its subsidiaries party thereto from time to time, as Debtors
to and in favor of
the Secured Parties identified therein (the “Security Agreement”)
Reference is made to the Security Agreement as defined above; capitalized terms used herein and not otherwise defined herein shall have the meanings given to such terms in, or by reference in, the Security Agreement.
The undersigned hereby agrees that upon delivery of this Additional Debtor Joinder to the Secured Parties referred to above (or the Agent on their behalf), the undersigned shall (a) be an Additional Debtor under the Security Agreement, (b) have all the rights and obligations of the Debtors under the Security Agreement as fully and to the same extent as if the undersigned was an original signatory thereto, and (c) be deemed to have made the representations and warranties set forth therein as of the date of execution and delivery of this Additional Debtor Joinder. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, THE UNDERSIGNED SPECIFICALLY GRANTS TO THE SECURED PARTIES A SECURITY INTEREST IN THE COLLATERAL OWNED BY IT AS MORE FULLY SET FORTH IN THE SECURITY AGREEMENT AND ACKNOWLEDGES AND AGREES TO THE WAIVER OF JURY TRIAL PROVISIONS SET FORTH THEREIN.
Attached hereto are supplemental and/or replacement Schedules to the Security Agreement, as applicable. An executed copy of this Joinder shall be delivered to the Secured Parties (or the Agent on their behalf), and the Secured Parties may rely on the matters set forth herein on or after the date hereof. This Joinder shall not be modified, amended or terminated without the prior written consent of the Secured Parties.
IN WITNESS WHEREOF, the undersigned has caused this Joinder to be executed in the name and on behalf of the undersigned.
| [Name of Additional Debtor] |
By: ________________________
| Name: |
| Title: |
| Address: |
Dated:
ANNEX B
to
SECURITY AGREEMENT
THE AGENT
1. Appointment. The Secured Parties (all capitalized terms used herein and not otherwise defined shall have the respective meanings provided in the Security Agreement to which this Annex B is attached (the “Agreement”)), by their acceptance of the benefits of the Agreement, hereby designate W-Net Fund I, L.P. (“Agent”) as the Agent to act as specified herein and in the Agreement. Each Secured Party shall be deemed irrevocably to authorize the Agent to take such action on its behalf under the provisions of the Agreement and any other Transaction Document (as such term is defined in the Notes) and to exercise such powers and to perform such duties hereunder and thereunder as are specifically delegated to or required of the Agent by the terms hereof and thereof and such other powers as are reasonably incidental thereto. The Agent may perform any of its duties hereunder by or through its agents or employees.
2. Nature of Duties. The Agent shall have no duties or responsibilities except those expressly set forth in the Agreement. Neither the Agent nor any of its partners, members, shareholders, officers, directors, employees or agents shall be liable for any action taken or omitted by it as such under the Agreement or hereunder or in connection herewith or therewith, be responsible for the consequence of any oversight or error of judgment or answerable for any loss, unless caused solely by its or their gross negligence or willful misconduct as determined by a final judgment (not subject to further appeal) of a court of competent jurisdiction. The duties of the Agent shall be mechanical and administrative in nature; the Agent shall not have by reason of the Agreement or any other Transaction Document a fiduciary relationship in respect of any Debtor or any Secured Party; and nothing in the Agreement or any other Transaction Document, expressed or implied, is intended to or shall be so construed as to impose upon the Agent any obligations in respect of the Agreement or any other Transaction Document except as expressly set forth herein and therein.
3. Lack of Reliance on the Agent. Independently and without reliance upon the Agent, each Secured Party, to the extent it deems appropriate, has made and shall continue to make (a) its own independent investigation of the financial condition and affairs of the Company and its subsidiaries in connection with such Secured Party’s investment in the Debtors, the creation and continuance of the Obligations, the transactions contemplated by the Transaction Documents, and the taking or not taking of any action in connection therewith, and (b) its own appraisal of the creditworthiness of the Company and its subsidiaries, and of the value of the Collateral from time to time, and the Agent shall have no duty or responsibility, either initially or on a continuing basis, to provide any Secured Party with any credit, market or other information with respect thereto, whether coming into its possession before any Obligations are incurred or at any time or times thereafter. The Agent shall not be responsible to the Debtors or any Secured Party for any recitals, statements, information, representations or warranties herein or in any document, certificate or other writing delivered in connection herewith, or for the execution, effectiveness, genuineness, validity, enforceability, perfection, collectibility, priority or sufficiency of the Agreement or any other Transaction Document, or for the financial condition of the Debtors or the value of any of the Collateral, or be required to make any inquiry concerning either the performance or observance of any of the terms, provisions or conditions of the Agreement or any other Transaction Document, or the financial condition of the Debtors, or the value of any of the Collateral, or the existence or possible existence of any default or Event of Default under the Agreement, the Notes or any of the other Transaction Documents.
4. Certain Rights of the Agent. The Agent shall have the right to take any action with respect to the Collateral, on behalf of all of the Secured Parties. To the extent practical, the Agent shall request instructions from the Secured Parties with respect to any material act or action (including failure to act) in connection with the Agreement or any other Transaction Document, and shall be entitled to act or refrain from acting in accordance with the instructions of Secured Parties holding a majority in principal amount of Notes (based on then-outstanding principal amounts of Notes at the time of any such determination); if such instructions are not provided despite the Agent’s request therefor, the Agent shall be entitled to refrain from such act or taking such action, and if such action is taken, shall be entitled to appropriate indemnification from the Secured Parties in respect of actions to be taken by the Agent; and the Agent shall not incur liability to any person or entity by reason of so refraining. Without limiting the foregoing, (a) no Secured Party shall have any right of action whatsoever against the Agent as a result of the Agent acting or refraining from acting hereunder in accordance with the terms of the Agreement or any other Transaction Document, and the Debtors shall have no right to question or challenge the authority of, or the instructions given to, the Agent pursuant to the foregoing, and (b) the Agent shall not be required to take any action which the Agent believes (i) could reasonably be expected to expose it to personal liability or (ii) is contrary to this Agreement, the Transaction Documents or applicable law.
5. Reliance. The Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, statement, certificate, telex, teletype or telecopier message, cablegram, radiogram, order or other document or telephone message signed, sent or made by the proper person or entity, and, with respect to all legal matters pertaining to the Agreement and the other Transaction Documents and its duties thereunder, upon advice of counsel selected by it, and upon all other matters pertaining to this Agreement and the other Transaction Documents and its duties thereunder, upon advice of other experts selected by it. Anything to the contrary notwithstanding, the Agent shall have no obligation whatsoever to any Secured Party to assure that the Collateral exists or is owned by the Debtors or is cared for, protected or insured or that the liens granted pursuant to the Agreement have been properly or sufficiently or lawfully created, perfected, or enforced or are entitled to any particular priority.
6. Indemnification. To the extent that the Agent is not reimbursed and indemnified by the Debtors, the Secured Parties will jointly and severally reimburse and indemnify the Agent, in proportion to their initially purchased respective principal amounts of Notes, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against the Agent in performing its duties hereunder or under the Agreement or any other Transaction Document, or in any way relating to or arising out of the Agreement or any other Transaction Document except for those determined by a final judgment (not subject to further appeal) of a court of competent jurisdiction to have resulted solely from the Agent's own gross negligence or willful misconduct. Prior to taking any action hereunder as Agent, the Agent may require each Secured Party to deposit with it sufficient sums as it determines in good faith is necessary to protect the Agent for costs and expenses associated with taking such action.
7. Resignation by the Agent.
(a) The Agent may resign from the performance of all its functions and duties under the Agreement and the other Transaction Documents at any time by giving thirty (30) days’ prior written notice (as provided in the Agreement) to the Debtors and the Secured Parties. Such resignation shall take effect upon the appointment of a successor Agent pursuant to clauses (b) and (c) below.
(b) Upon any such notice of resignation, the Secured Parties, acting by a Majority in Interest, shall appoint a successor Agent hereunder.
(c) If a successor Agent shall not have been so appointed within said thirty (30)-day period, the Agent shall then appoint a successor Agent who shall serve as Agent until such time, if any, as the Secured Parties appoint a successor Agent as provided above. If a successor Agent has not been appointed within such thirty (30)-day period, the Agent may petition any court of competent jurisdiction or may interplead the Debtors and the Secured Parties in a proceeding for the appointment of a successor Agent, and all fees, including, but not limited to, extraordinary fees associated with the filing of interpleader and expenses associated therewith, shall be payable by the Debtors on demand.
(d) Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent and the retiring Agent shall be discharged from its duties and obligations under the Agreement. After any retiring Agent’s resignation or removal hereunder as Agent, the provisions of the Agreement including this Annex B shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent.
8. Rights with respect to Collateral. Each Secured Party agrees with all other Secured Parties and the Agent (a) that it shall not, and shall not attempt to, exercise any rights with respect to its security interest in the Collateral, whether pursuant to any other agreement or otherwise (other than pursuant to this Agreement), or take or institute any action against the Agent or any of the other Secured Parties in respect of the Collateral or its rights hereunder (other than any such action arising from the breach of this Agreement) and (b) that such Secured Party has no other rights with respect to the Collateral other than as set forth in this Agreement and the other Transaction Documents.
Exhibit 10.5
INTELLECTUAL PROPERTY SECURITY AGREEMENT
This INTELLECTUAL PROPERTY SECURITY AGREEMENT (this “Agreement”), dated as of June 26, 2013, is made by W270, Inc., a Nevada corporation (the “Company”), and all of the Subsidiaries of the Company (such Subsidiaries, the “Guarantors”, and together with the Company, the “Grantors”), in favor of the holders of the Company’s 3.0% Senior Secured Convertible Notes issued or to be issued in the original aggregate principal amount of up to $3,000,000 (the “Notes”) pursuant to the Purchase Agreement (as defined below) (collectively, together with their endorsees, transferees and assigns, the “Lenders”).
W I T N E S S E T H:
WHEREAS, the Company and the Lenders are party to that certain Securities Purchase Agreement, dated on or about on or about June 26, 2013 (“Purchase Agreement”), pursuant to which the Company issued or is issuing the Notes, among other things;
WHEREAS, pursuant to that certain Subsidiary Guarantee, dated as of the date hereof (“Guarantee”), the Guarantors have jointly and severally agreed to guarantee and act as surety for payment of such Notes;
WHEREAS, contemporaneously herewith the Grantors are entering into a Security Agreement (“Security Agreement”), pursuant to which each Grantor has granted a security interest in its assets and properties to secure the satisfaction of the Company’s obligations under the Notes and the Guarantor’s obligations under the Guarantee, among other things; and
WHEREAS, the Grantors are obligated under the Security Agreement to take such further actions as the collateral Agent (as defined therein) requests to further perfect the Lenders’ security interest granted under the Security Agreement, including without limitation with respect to intellectual property;
NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Grantors hereby agree as follows:
DEFINED TERMS.
(a) Certain Defined Terms. As used in this Agreement, the following terms shall have the meanings set forth below:
“Copyright” means copyrights and copyright registrations, including, without limitation, the copyright registrations and recordings listed on Schedule I attached hereto, if any, in which the Grantors have any right, title and interest, and (i) all reissues, continuations, extensions or renewals thereof, (ii) all income, royalties, damages and payments now and hereafter due and/or payable under and with respect thereto, subject to payment to any co-owner of its, his or her share thereof, including without limitation payments under all licenses entered into in connection therewith and damages and payments for past or future infringements thereof, (iii) the right to sue for past, present and future infringements thereof, and (iv) all of the Grantors’ rights corresponding thereto throughout the world.
“Intellectual Property Licenses” means rights under or interest in any patent, trademark, copyright or other intellectual property, including software license agreements with any other party, whether the Grantors are a licensee or licensor under any such license agreement, and the right to use the foregoing in connection with the enforcement of the Lenders’ rights pursuant to the Security Agreement.
“Patent” means patents and patent applications, including, without limitation, the patents and patent applications listed on Schedule I hereto and all continuations, divisionals, provisionals, continuations in part, or reissues of applications related to patents thereon, and (i) all renewals thereof, (ii) all income, royalties, damages and payments now and hereafter due and/or payable under and with respect thereto, subject to payment to any co-owner or inventor of its, his or her share thereof, including without limitation payments under all licenses entered into in connection therewith and damages and payments for past or future infringements or dilutions thereof, (iii) the right to sue for past, present and future infringements thereof, and (iv) all of the Grantors’ rights corresponding thereto throughout the world.
“Trademark” means trademarks, trade names, registered trademarks, trademark applications, service marks, registered service marks and service mark applications, including without limitation the registered trademarks listed on Schedule I hereto, and (i) all renewals thereof, (ii) all income, royalties, damages and payments now and hereafter due and/or payable under and with respect thereto, subject to payment to any co-owner of its, his or her share thereof, including without limitation payments under all licenses entered into in connection therewith and damages and payments for past or future infringements or dilutions thereof, (iii) the right to sue for past, present and future infringements and dilutions thereof, (iv) the goodwill of the Grantors’ business symbolized by the foregoing and connected therewith, and (v) all of the Grantors’ rights corresponding thereto throughout the world.
(b) Terms Defined in the Purchase Agreement. Capitalized terms used in this Agreement and not otherwise defined herein have the meanings ascribed to them in the Purchase Agreement.
2. GRANT OF SECURITY INTEREST IN INTELLECTUAL PROPERTY COLLATERAL. Grantors hereby grant to Lenders a continuing first priority security interest (as set forth in the Security Agreement) in all of Grantors’ right, title and interest in, to and under all of Grantors’ Intellectual Property (as defined in the Security Agreement), including, without limitation, the following, whether presently existing or hereafter created or acquired (collectively, the “Intellectual Property Collateral”):
(a) all of Grantors’ Patents and Grantors’ rights under all Patent Intellectual Property Licenses to which it is a party, including those patents referred to on Schedule I hereto, including:
(i) all registrations and applications in respect of the foregoing, including continuations, divisionals, provisionals, continuations in part, or reissues of applications and patents issuing thereon; and
(ii) all products and proceeds of the foregoing, including, without limitation, any claim by Grantors against third parties for past, present or future infringement of any Patent or any Patent licensed under any Intellectual Property License;
(b) all of Grantors’ Trademarks and Grantors’ rights under all Trademark Intellectual Property Licenses to which it is a party, including those trademarks referred to on Schedule I hereto, including:
(i) all registrations, applications, and renewals in respect of the foregoing;
(ii) all goodwill of the business connected with the use of, and symbolized by, each Trademark and each Trademark licensed under an Intellectual Property License; and
(iii) all products and proceeds of the foregoing, including without limitation any claim by Grantor against third parties for past, present or future (A) infringement or dilution of any Trademark or any Trademark licensed under any Intellectual Property License or (B) injury to the goodwill associated with any Trademark or any Trademark licensed under any Intellectual Property License; and
(c) all of Grantors’ Copyrights and Grantors’ rights under all Copyright Intellectual Property Licenses to which it is a party, including those referred to on Schedule I hereto, including:
(i) all registrations, applications, and renewals in respect of the foregoing; and
(ii) all products and proceeds of the foregoing, including without limitation any claim by Grantors against third parties for past, present or future infringement of any Copyright or any Copyright licensed under any Intellectual Property License.
3. SECURITY AGREEMENT. The security interests granted pursuant to this Agreement are granted in conjunction with the security interests granted to Lenders pursuant to the Security Agreement. Grantors hereby acknowledge and affirm that the rights and remedies of Lenders with respect to the security interest in the Intellectual Property Collateral made and granted hereby are more fully set forth in the Security Agreement, the terms and provisions of which are incorporated by reference herein as if fully set forth herein. Each Lender acknowledges that the priorities set forth herein are subject to the terms of the Intercreditor Agreement.
4. AUTHORIZATION TO SUPPLEMENT. If Grantors shall obtain rights to any new Intellectual Property (as defined in the Security Agreement), the provisions of this Agreement shall automatically apply thereto. Grantors shall give Lenders prompt written notice with respect to any such material new Intellectual Property. Grantors represent that Schedule I is substantially accurate and complete but reserve the right from time to time to correct inaccuracies and/or omissions by giving Lenders written notice thereof. Without limiting Grantors’ obligations under this Section 4, Grantors hereby authorize Lenders unilaterally to modify this Agreement by amending Schedule I to include any such corrections and other modifications and any such new Intellectual Property of Grantors. Notwithstanding the foregoing, no failure to so modify this Agreement or amend Schedule I shall in any way affect, invalidate or detract from Lenders’ continuing security interest in all Intellectual Property Collateral, whether or not listed on Schedule I.
5. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all such separate counterparts shall together constitute but one and the same instrument. In proving this Agreement in any judicial proceedings, it shall not be necessary to produce or account for more than one such counterpart signed by the party against whom enforcement is sought. Any signatures delivered by a party by facsimile transmission or by e-mail transmission shall be deemed an original signature hereto.
6. GOVERNING LAW; JURISDICTION. This Agreement shall be governed by and construed under the laws of the State of California applicable to contracts made and to be performed entirely within the State of California. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the County of Los Angeles for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law.
7. SUCCESSORS AND ASSIGNS. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and permitted assigns of the parties. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and permitted assigns any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. A Lender may assign its rights hereunder in connection with any private sale or transfer of its Notes, in which case the term “Lender” shall be deemed to refer to such transferee as though such transferee were an original signatory hereto. No Grantor may assign its rights or obligations under this Agreement.
[Signature Pages Follow]
IN WITNESS WHEREOF, each of the Grantors have caused this Intellectual Property Security Agreement to be executed and delivered by its duly authorized officer as of the date first set forth above.
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W270, INC.
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By:__________________________________________ Name: Title:
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Saleen Automotive, Inc.
By:_________________________________ Name: Title:
SMS Signature Cars
By:_________________________________ Name: Title:
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ACCEPTED AND ACKNOWLEDGED BY:
LENDER:
[NAME]
By:
Name:
Title:
SCHEDULE I
to
INTELLECTUAL PROPERTY SECURITY AGREEMENT
Exhibit 10.6
NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS. THIS SECURITY AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.
Original Issue Date: June 26, 2013
Original Conversion Price (subject to adjustment herein): $0.075
$____,000.00
W270, INC.
3.0% SENIOR SECURED CONVERTIBLE NOTE
THIS NOTE is one of a series of duly authorized and validly issued 3.0% Senior Secured Convertible Notes of W270 Inc., a Nevada corporation (the “Company”), having its principal place of business at 2735 Wardlow Road, Corona, CA 92882, designated as its 3.0% Senior Secured Convertible Notes (this Note, the “Note” and, collectively with the other Notes of such series, the “Notes”).
FOR VALUE RECEIVED, the Company promises to pay to ___________ or its registered assigns (the “Holder”), or shall have paid pursuant to the terms hereunder, the principal sum of $____,000.00 on June 25, 2017 (the “Maturity Date”) or such earlier date as this Note is required or permitted to be repaid as provided hereunder, or such later date as may be permitted by the Holder as set forth in Section 2 hereof, and to pay interest to the Holder on the aggregate unconverted and then outstanding principal amount of this Note in accordance with the provisions hereof.
The Company’s and its Subsidiaries’ obligations under this Note and the other Transaction Documents are secured by the Collateral (as defined in the Security Agreement, including, without limitation, all Intellectual Property Rights) pursuant to the terms of the Security Documents and the obligations under this Note are guaranteed by the Subsidiaries pursuant to the Subsidiary Guarantee.
This Note is subject to the following additional provisions:
Section 1. Definitions. For the purposes hereof, in addition to the terms defined elsewhere in this Note (a) capitalized terms not otherwise defined herein shall have the meanings set forth in the Purchase Agreement and (b) the following terms shall have the following meanings:
“Alternate Consideration” shall have the meaning set forth in Section 5(e).
“Bankruptcy Event” means any of the following events: (a) the Company or any Significant Subsidiary (as such term is defined in Rule 1-02(w) of Regulation S-X) thereof commences a case or other proceeding under any bankruptcy, reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction relating to the Company or any Significant Subsidiary thereof; (b) there is commenced against the Company or any Significant Subsidiary thereof any such case or proceeding that is not dismissed within sixty (60) days after commencement; (c) the Company or any Significant Subsidiary thereof is adjudicated insolvent or bankrupt or any order of relief or other order approving any such case or proceeding is entered; (d) the Company or any Significant Subsidiary thereof suffers any appointment of any custodian or the like for it or any substantial part of its property that is not discharged or stayed within sixty (60) calendar days after such appointment; (e) the Company or any Significant Subsidiary thereof makes a general assignment for the benefit of creditors; (f) the Company or any Significant Subsidiary thereof calls a meeting of its creditors with a view to arranging a composition, adjustment or restructuring of its debts; or (g) the Company or any Significant Subsidiary thereof, by any act or failure to act, expressly indicates its consent to, approval of or acquiescence in any of the foregoing or takes any corporate or other action for the purpose of effecting any of the foregoing.
“Base Conversion Price” shall have the meaning set forth in Section 5(b).
“Business Day” means any day except any Saturday, any Sunday, any day which shall be a federal legal holiday in the United States or any day on which banking institutions in the State of California are authorized or required by law or other governmental action to close.
“Buy-In” shall have the meaning set forth in Section 4(d)(v).
“Common Stock Equivalents” means any securities of the Company or its subsidiaries which would entitle the holder thereof to acquire at any time Common Stock, including, without limitation, any debt, preferred stock, rights, options, warrants or other instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, Common Stock.
“Conversion Date” shall have the meaning set forth in Section 4(a).
“Conversion Price” shall have the meaning set forth in Section 4(b).
“Conversion Shares” means, collectively, the shares of Common Stock issued or issuable upon conversion or redemption of this Note in accordance with the terms hereof, including without limitation shares of Common Stock issued or issuable as interest hereunder or as damages under the Transaction Documents.
“Dilutive Issuance” shall have the meaning set forth in Section 5(b).
“Dilutive Issuance Notice” shall have the meaning set forth in Section 5(b).
“Event of Default” shall have the meaning set forth in Section 7(a).
“Fundamental Transaction” shall have the meaning set forth in Section 5(e).
“Fundamental Transaction Cash Amount” means the sum of (a) the greater of (i) two hundred percent (200%) of the then outstanding principal amount of this Note, plus one hundred percent (100%) of accrued and unpaid interest thereon, or (ii) the outstanding principal amount of this Note, plus all accrued and unpaid interest hereon, divided by the Conversion Price immediately prior to the closing of the Fundamental Transaction, multiplied by the VWAP on the last Trading Day prior to the closing of the Fundamental Transaction, and (b) all other amounts, costs, expenses and liquidated damages due in respect of this Note.
“Los Angeles Courts” shall have the meaning set forth in Section 8(d).
“Mandatory Default Amount” means the sum of (a) one hundred twenty percent (120%) of the then outstanding principal amount of this Note, (b) plus one hundred percent (100%) of accrued and unpaid interest hereon, and (c) all other amounts, costs, expenses and liquidated damages due in respect of this Note.
“Note Register” shall have the meaning set forth in Section 2(c).
“Notice of Conversion” shall have the meaning set forth in Section 4(a).
“Original Issue Date” means the date of the first issuance of this Note, regardless of any transfers of this Note and regardless of the number of instruments which may be issued to evidence this Note.
“Permitted Indebtedness” means (a) the indebtedness evidenced by the Notes, (b) the indebtedness existing on the initial Closing Date and set forth on Schedule 3.1(z) attached to the Purchase Agreement, (c) lease obligations and purchase money indebtedness incurred in connection with the acquisition of capital assets and lease obligations with respect to newly acquired or leased assets, (d) loans previously provided to Saleen Automotive, Inc., SMS Signature Cars and/or Steve Saleen by the Small Business Administration and (e) indebtedness that is expressly subordinate to the Notes pursuant to a written subordination agreement with the Purchasers that is acceptable to each Purchaser in its sole and absolute discretion; provided that such Permitted Indebtedness shall not exceed seventy-five percent (75%) of the aggregate principal amount of all Notes then outstanding.
“Permitted Lien” means the individual and collective reference to the following: (a) Liens for taxes, assessments and other governmental charges or levies not yet due or Liens for taxes, assessments and other governmental charges or levies being contested in good faith and by appropriate proceedings for which adequate reserves (in the good faith judgment of the management of the Company) have been established in accordance with GAAP; (b) Liens imposed by law which were incurred in the ordinary course of the Company’s business, such as carriers’, warehousemen’s and mechanics’ Liens, statutory landlords’ Liens, and other similar Liens arising in the ordinary course of the Company’s business, and which (x) do not individually or in the aggregate materially detract from the value of such property or assets or materially impair the use thereof in the operation of the business of the Company and its consolidated Subsidiaries or (y) are being contested in good faith by appropriate proceedings, which proceedings have the effect of preventing for the foreseeable future the forfeiture or sale of the property or asset subject to such Lien; and (c) Liens incurred in connection with Permitted Indebtedness.
“Purchase Agreement” means the Securities Purchase Agreement, dated as of June 26, 2013, among the Company and the original Holders, as amended, modified or supplemented from time to time in accordance with its terms.
“Registration Statement” means an effective registration statement under the Securities Act that registers the resale of all Conversion Shares of the Holder, names the Holder as a “selling stockholder” therein, and contains a current prospectus not subject to any blackout, suspension or stop order.
“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
“Share Delivery Date” shall have the meaning set forth in Section 4(d)(ii).
“Subsidiary” shall have the meaning set forth in the Purchase Agreement.
“Trading Day” means a day on which the principal Trading Market is open for business.
“Trading Market” means the following markets or exchanges on which the Common Stock is listed or quoted for trading on the date in question: NYSE Amex, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the New York Stock Exchange or the OTC Bulletin Board.
“Transaction Documents” shall have the meaning set forth in the Purchase Agreement.
“VWAP” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market, the daily volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted for trading as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time)); (b) if the OTC Bulletin Board is not a Trading Market, the volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the OTC Bulletin Board; (c) if the Common Stock is not then quoted for trading on the OTC Bulletin Board and if prices for the Common Stock are then reported in the “Pink Sheets” published by Pink Sheets, LLC (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported; or (d) in all other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by the Holder and reasonably acceptable to the Company.
Section 2. Interest; No Prepayment.
a) Interest Rate. Interest shall accrue daily on the outstanding principal amount of this Note at a rate per annum equal to 3.0%, subject to Section 2(d) below.
b) Payment of Interest. On the Maturity Date, the Company shall pay to the Holder any accrued but unpaid and unconverted interest hereunder on the aggregate unconverted and then outstanding principal amount of this Note, and on each Conversion Date the Company shall pay to the Holder any accrued but unpaid and unconverted interest hereunder on that portion of the principal amount then being converted. The amount of interest payable on each Conversion Date and the Maturity Date (“Interest Amount”) may be added to and included with the principal amount being so converted or redeemed on such date.
c) Interest Calculations. Interest shall be calculated on the basis of a three hundred sixty (360)-day year, consisting of twelve (12) thirty (30) calendar day periods, and shall accrue daily commencing on the Original Issue Date until payment in full of the outstanding principal, together with all accrued and unpaid interest, liquidated damages and other amounts which may become due hereunder, has been made. Interest hereunder will be paid to the Person in whose name this Note is registered on the records of the Company regarding registration and transfers of this Note (the “Note Register”). Except as otherwise provided herein, if at any time the Company pays interest partially in cash and partially in shares of Common Stock to the holders of the Notes, then such payment of cash shall be distributed ratably among the holders of the then-outstanding Notes based on their (or their predecessor’s) initial purchases of Notes pursuant to the Purchase Agreement.
d) Default Interest. After the occurrence and during the continuance of any Event of Default, the interest rate on this Note shall accrue at an interest rate equal to the lesser of twelve percent (12%) per annum, compounded daily, or the maximum rate permitted under applicable law.
e) Prepayment. This Note may not be prepaid.
Section 3. Registration of Transfers and Exchanges.
a) Different Denominations. This Note is exchangeable for an equal aggregate principal amount of Notes of different authorized denominations, as requested by the Holder surrendering the same. No service charge will be payable for such exchange.
b) Investment Representations. This Note has been issued subject to certain investment representations of the original Holder set forth in the Purchase Agreement and may be transferred or exchanged only in compliance with the Purchase Agreement and applicable federal and state securities laws and regulations.
c) Reliance on Note Register. Prior to due presentment for transfer to the Company of this Note, the Company and any agent of the Company may treat the Person in whose name this Note is duly registered on the Note Register as the owner hereof for the purpose of receiving payment as herein provided and for all other purposes, whether or not this Note is overdue, and neither the Company nor any such agent shall be affected by notice to the contrary.
d) Transfer Restrictions. Any transfer of this Note shall also be subject to the applicable restrictions and requirements of Sections 3.2 and 4.1 of the Purchase Agreement and other provisions of the Transaction Documents.
Section 4. Conversion.
a) Voluntary Conversion. At any time after the Original Issue Date until this Note is no longer outstanding, this Note shall be convertible, in whole or in part, into shares of Common Stock at the option of the Holder, at any time and from time to time (subject to the conversion limitations set forth in Section 4(c) hereof). The Holder shall effect conversions by delivering to the Company a Notice of Conversion, the form of which is attached hereto as Annex A (a “Notice of Conversion”), specifying therein the principal amount of this Note and any accrued but unpaid interest thereon to be converted and the future date (which may be the same date as the date such notice is deemed effective pursuant to Section 8(a)) on which such conversion shall be effected (such date, the “Conversion Date”). If no Conversion Date is specified in a Notice of Conversion, the Conversion Date shall be the date that such Notice of Conversion is deemed delivered hereunder. To effect conversions hereunder, the Holder shall not be required to physically surrender this Note to the Company unless the entire principal amount of this Note, plus all accrued and unpaid interest thereon, has been so converted. Conversions hereunder shall have the effect of lowering the outstanding principal amount of this Note in an amount equal to the applicable conversion. The Holder and the Company shall maintain records showing the principal amount(s) converted and the date of such conversion(s). In the event of any dispute or discrepancy, the records of the Company shall be controlling and determinative in the absence of manifest error. The Holder, and any assignee by acceptance of this Note, acknowledge and agree that, by reason of the provisions of this paragraph, following conversion of a portion of this Note, the unpaid and unconverted principal amount of this Note may be less than the amount stated on the face hereof.
b) Conversion Price. The conversion price shall be equal to $0.075, subject to adjustment herein (the “Conversion Price”).
c) Conversion Limitations.
i. Holder’s Restriction on Conversion. The Company shall not effect any conversion of this Note, and a Holder shall not have the right to convert any portion of this Note, to the extent that after giving effect to the conversion set forth on the applicable Notice of Conversion, the Holder (together with the Holder’s Affiliates, and any other person or entity acting as a group together with the Holder or any of the Holder’s Affiliates) would beneficially own in excess of the Beneficial Ownership Limitation (as defined below). For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates shall include the number of shares of Common Stock issuable upon conversion of this Note with respect to which such determination is being made, but shall exclude the number of shares of Common Stock which are issuable upon (A) conversion of the remaining, unconverted principal amount of this Note beneficially owned by the Holder or any of its Affiliates and (B) exercise or conversion of the unexercised or unconverted portion of any other securities of the Company subject to a limitation on conversion or exercise analogous to the limitation contained herein (including, without limitation, any other Notes) beneficially owned by the Holder or any of its Affiliates. Except as set forth in the preceding sentence, for purposes of this Section 4(c), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. To the extent that the limitation contained in this paragraph applies, the determination of whether this Note is convertible (in relation to other securities owned by the Holder together with any Affiliates) and of which principal amount of this Note is convertible shall be in the sole discretion of the Holder, and the submission of a Notice of Conversion shall be deemed to be the Holder’s determination of whether this Note may be converted (in relation to other securities owned by the Holder together with any Affiliates) and which principal amount of this Note is convertible, in each case subject to the Beneficial Ownership Limitation. To ensure compliance with this restriction, the Holder will be deemed to represent to the Company each time it delivers a Notice of Conversion that such Notice of Conversion has not violated the restrictions set forth in this paragraph and the Company shall have no obligation to verify or confirm the accuracy of such determination. In addition, a determination as to any group status as contemplated above shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. For purposes of this paragraph, in determining the number of outstanding shares of Common Stock, the Holder may rely on the number of outstanding shares of Common Stock as stated in the most recent of the following: (A) the Company’s most recent periodic or annual report, as the case may be; (B) a more recent public announcement by the Company; or (C) a more recent notice by the Company or the Company’s transfer agent setting forth the number of shares of Common Stock outstanding. Upon the written or oral request of a Holder, the Company shall within three (3) Trading Days confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Note, by the Holder or its Affiliates since the date as of which such number of outstanding shares of Common Stock was reported. The “Beneficial Ownership Limitation” shall be four and nine-tenths percent (4.9%) of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon conversion of this Note held by the Holder. By written notice to the Company, the Holder may at any time and from time to time increase or decrease the Beneficial Ownership Limitation to any other percentage specified in such notice (or specify that the Beneficial Ownership Limitation shall no longer be applicable), provided, however, that (A) any such increase (or inapplicability) shall not be effective until the sixty-first (61st) day after such notice is delivered to the Company, and (B) any such increase or decrease shall apply only to the Holder and not to any other holder of Notes. The provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this paragraph to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended Beneficial Ownership Limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such limitation. The limitations contained in this paragraph shall apply to a successor holder of this Note.
ii. Unless otherwise approved in writing by the Company, any individual conversion under Section 4(a) must be for at least 10,000 Conversion Shares (such number to be appropriately adjusted for any stock splits, stock dividends and similar events).
| d) | Mechanics of Conversion. |
i. Conversion Shares Issuable Upon Conversion of Principal Amount. The number of Conversion Shares issuable upon a conversion hereunder shall be determined by the quotient obtained by dividing (a) the outstanding principal amount of this Note to be converted plus any accrued but unpaid interest thereon, by (b) the Conversion Price.
ii. Delivery of Certificate Upon Conversion. Not later than two (2) Trading Days after each Conversion Date (the “Share Delivery Date”), the Company shall deliver, or cause to be delivered, to the Holder a certificate or certificates representing the Conversion Shares which, on or after the Legend Removal Date, shall be free of restrictive legends and trading restrictions (other than those which may then be required by the Purchase Agreement) representing the number of Conversion Shares being acquired upon the conversion of this Note. On or after the date which is six (6) months following the Original Issue Date on which this Note is issued, the Company shall use commercially reasonable efforts to deliver any certificate(s) or shares required to be delivered by the Company under this Section 4 electronically through the Depository Trust Company or another established clearing corporation performing similar functions.
iii. Failure to Deliver Certificates. If in the case of any Notice of Conversion such certificate(s) or shares are not delivered to or as directed by the applicable Holder by the second (2nd) Trading Day after the Conversion Date, the Holder shall be entitled to elect by written notice to the Company at any time on or before its receipt of such certificate or certificates, to rescind such Conversion, in which event the Company shall promptly return to the Holder any original Note delivered to the Company and the Holder shall promptly return to the Company the Common Stock certificates representing the principal amount of this Note unsuccessfully tendered for conversion to the Company.
iv. Obligation Absolute; Partial Liquidated Damages. The Company’s obligations to issue and deliver the Conversion Shares upon conversion of this Note in accordance with the terms hereof are absolute and unconditional, irrespective of any action or inaction by the Holder to enforce the same, any waiver or consent with respect to any provision hereof, the recovery of any judgment against any Person or any action to enforce the same, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Holder or any other Person of any obligation to the Company or any violation or alleged violation of law by the Holder or any other Person, and irrespective of any other circumstance which might otherwise limit such obligation of the Company to the Holder in connection with the issuance of such Conversion Shares; provided, however, that such delivery shall not operate as a waiver by the Company of any such action the Company may have against the Holder. In the event the Holder of this Note shall elect to convert any or all of the outstanding principal amount hereof, the Company may not refuse conversion based on any claim that the Holder or anyone associated or affiliated with the Holder has been engaged in any violation of law, agreement or for any other reason, unless an injunction from a court, on notice to Holder, restraining and or enjoining conversion of all or part of this Note shall have been sought and obtained, and the Company posts a surety bond for the benefit of the Holder in the amount of one hundred percent (100%) of the outstanding principal amount of this Note, which is subject to the injunction, which bond shall remain in effect until the completion of arbitration/litigation of the underlying dispute and the proceeds of which shall be payable to the Holder to the extent it obtains judgment. In the absence of such injunction, the Company shall issue Conversion Shares or, if applicable, cash, upon a properly noticed conversion. If the Company fails for any reason to deliver to the Holder such certificate(s) or shares pursuant to Section 4(d)(ii) by the third (3rd) Trading Day after the Share Delivery Date, the Company shall pay to the Holder, in cash, as liquidated damages and not as a penalty, for each $1,000 of principal amount being converted, $7.00 per Trading Day (increasing to $13.00 per Trading Day on the fifth (5th) Trading Day after such liquidated damages begin to accrue) for each Trading Day after such third (3rd) Trading Day after the Share Delivery Date until such certificates are delivered. Nothing herein shall limit a Holder’s right to pursue actual damages or declare an Event of Default pursuant to Section 7 hereof for the Company’s failure to deliver Conversion Shares within the period specified herein and the Holder shall have the right to pursue all remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief. The exercise of any such rights shall not prohibit the Holder from seeking to enforce damages pursuant to any other Section hereof or under applicable law. Notwithstanding any portion of the foregoing to the contrary, if the Company fails to deliver to the Holder such certificate(s) or shares by the Share Delivery Date pursuant to Section 4(d)(ii) because (A) the conversion by the Holder is delivered in connection with a proposed sale by the Holder of the Conversion Shares under Rule 144 promulgated under the Securities Act, and (B) in connection with such sale, the Holder has failed to deliver customary representation letters, as prepared by the brokerage firm of Holder in the ordinary course of its business, appropriate to evidence compliance with such rule, then the liquidated damages provisions herein shall not begin to accrue until the Trading Day immediately following the date that the Holder has delivered such representation letters.
v. Compensation for Buy-In on Failure to Timely Deliver Certificates Upon Conversion. In addition to any other rights available to the Holder, if the Company fails for any reason to deliver to the Holder such certificate(s) or shares by the Share Delivery Date pursuant to Section 4(d)(ii), and if after such Share Delivery Date the Holder is required by its brokerage firm to purchase (in an open market transaction or otherwise), or the Holder’s brokerage firm otherwise purchases, shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Conversion Shares which the Holder was entitled to receive upon the conversion relating to such Share Delivery Date (a “Buy-In”), then the Company shall (A) pay in cash to the Holder (in addition to any other remedies available to or elected by the Holder) the amount by which (x) the Holder’s total purchase price (including any brokerage commissions) for the Common Stock so purchased exceeds (y) the product of (1) the aggregate number of shares of Common Stock that the Holder was entitled to receive from the conversion at issue multiplied by (2) the actual sale price at which the sell order giving rise to such purchase obligation was executed (including any brokerage commissions) and (B) at the option of the Holder, either reissue (if surrendered) this Note in a principal amount equal to the principal amount of the attempted conversion or deliver to the Holder the number of shares of Common Stock that would have been issued if the Company had timely complied with its delivery requirements under Section 4(d)(ii). For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted conversion of this Note with respect to which the actual sale price of the Conversion Shares (including any brokerage commissions) giving rise to such purchase obligation was a total of $10,000 under clause (A) of the immediately preceding sentence, the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In and, upon request of the Company, evidence of the amount of such loss. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely deliver certificates representing shares of Common Stock upon conversion of this Note as required pursuant to the terms hereof.
vi. Reservation of Shares Issuable Upon Conversion. The Company covenants that it will at all times reserve and keep available out of its authorized and unissued shares of Common Stock for the sole purpose of issuance upon conversion of this Note and payment of interest on this Note, each as herein provided, free from preemptive rights or any other actual contingent purchase rights of Persons other than the Holder (and the other holders of the Notes), not less than such aggregate number of shares of the Common Stock as shall (subject to the terms and conditions set forth in the Purchase Agreement) be issuable (taking into account the adjustments of Section 5) upon the conversion of the outstanding principal amount of this Note and payment of interest hereunder. The Company covenants that all shares of Common Stock that shall be so issuable shall, upon issue, be duly authorized, validly issued, fully paid and nonassessable and, if the Registration Statement is then effective under the Securities Act, shall be registered for public sale in accordance with such Registration Statement.
vii. Fractional Shares. No fractional shares or scrip representing fractional shares shall be issued upon the conversion of this Note. As to any fraction of a share which Holder would otherwise be entitled to purchase upon such conversion, the Company shall at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Conversion Price or round up to the next whole share.
viii. Transfer Taxes. The issuance of certificates for shares of the Common Stock on conversion of this Note shall be made without charge to the Holder hereof for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery of such certificates, provided that the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in a name other than that of the Holder of this Note and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid.
Section 5. Certain Adjustments.
a) Stock Dividends and Stock Splits. If the Company, at any time while this Note is outstanding: (i) pays a stock dividend or otherwise makes a distribution or distributions payable in shares of Common Stock on shares of Common Stock or any Common Stock Equivalents (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company upon conversion of, or payment of interest on, the Notes); (ii) subdivides outstanding shares of Common Stock into a larger number of shares; (iii) combines (including by way of a reverse stock split) outstanding shares of Common Stock into a smaller number of shares; or (iv) issues, in the event of a reclassification of shares of the Common Stock, any shares of capital stock of the Company, then the Conversion Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding any treasury shares of the Company) outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event. Any adjustment made pursuant to this Section shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification.
b) Subsequent Equity Sales. If, at any time while this Note is outstanding, the Company or any Subsidiary, as applicable, sells or grants any option to purchase or sells or grants any right to reprice, or otherwise disposes of or issues (or announces any sale, grant or any option to purchase or other disposition), any Common Stock or Common Stock Equivalents entitling any Person to acquire shares of Common Stock at an effective price per share that is lower than the then Conversion Price (such issuances, collectively, a “Dilutive Issuance”) (if the holder of the Common Stock or Common Stock Equivalents so issued shall at any time, whether by operation of purchase price adjustments, reset provisions, floating conversion, exercise or exchange prices or otherwise, or due to warrants, options or rights per share which are issued in connection with such issuance, be entitled to receive shares of Common Stock at an effective price per share that is lower than the Conversion Price, such issuance shall be deemed to have occurred for less than the Conversion Price on such date of the Dilutive Issuance), then and in such event, the Conversion Price shall be reduced, concurrently with such issue, to the lowest price per share for which any one such share of Common Stock or Common Stock Equivalent has been issued. For purposes of this paragraph, the “lowest price per share for which any one such share of Common Stock or Common Stock Equivalent has been issued” shall be equal to the sum of the lowest amount of consideration (but not less than $.01) received or receivable by the Company with respect to any such share (the “Base Conversion Price”). Such adjustment shall be made whenever such Common Stock or Common Stock Equivalents are issued. Notwithstanding the foregoing, no adjustment will be made under this Section 5(b) in respect of an Exempt Issuance. The Company shall notify the Holder in writing, no later than five (5) Business Days following the issuance of any Common Stock or Common Stock Equivalents subject to this Section 5(b), indicating therein the applicable issuance price, or applicable reset price, exchange price, conversion price and other pricing terms (such notice, the “Dilutive Issuance Notice”). For purposes of clarification, whether or not the Company provides a Dilutive Issuance Notice pursuant to this Section 5(b), upon the occurrence of any Dilutive Issuance, the Holder is entitled to receive a number of Conversion Shares based upon the Base Conversion Price on or after the date of such Dilutive Issuance, regardless of whether the Holder accurately refers to the Base Conversion Price in the Notice of Conversion.
c) Subsequent Rights Offerings. The Company shall not, at any time while the Note is outstanding, issue rights, options or warrants to all holders of Common Stock (and not to Holders) entitling them to subscribe for or purchase shares of Common Stock at a price per share less than the VWAP at the record date mentioned below.
d) Pro Rata Distributions. The Company shall not, at any time while this Note is outstanding, distribute to all holders of Common Stock (and not to Holders of the Notes) evidences of its indebtedness or assets (including cash and cash dividends) or rights or warrants to subscribe for or purchase any security other than the Common Stock.
e) Fundamental Transaction. If, at any time while this Note is outstanding, (i) the Company effects any merger or consolidation of the Company with or into another Person, (ii) the Company effects any sale of all or substantially all of its assets in one or a series of related transactions, (iii) any tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to tender or exchange their shares for other securities, cash or property, or (iv) the Company effects any reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property (each, a “Fundamental Transaction”), then upon any subsequent conversion of this Note, the Holder shall have the right to receive, for each Conversion Share that would have been issuable upon such conversion immediately prior to the occurrence of such Fundamental Transaction, the same kind and amount of securities, cash or property as it would have been entitled to receive upon the occurrence of such Fundamental Transaction if it had been, immediately prior to such Fundamental Transaction, the holder of one share of Common Stock (the “Alternate Consideration”). For purposes of any such conversion, the determination of the Conversion Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one (1) share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Conversion Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any conversion of this Note following such Fundamental Transaction. To the extent necessary to effectuate the foregoing provisions, any successor to the Company or surviving entity in such Fundamental Transaction shall issue to the Holder a new Note consistent with the foregoing provisions and evidencing the Holder’s right to convert such Note into Alternate Consideration. The terms of any agreement pursuant to which a Fundamental Transaction is effected shall include terms requiring any such successor or surviving entity to comply with the provisions of this Section 5(e) and insuring that this Note (or any such replacement security) will be similarly adjusted upon any subsequent transaction analogous to a Fundamental Transaction. In the event of a Fundamental Transaction the Holder may elect, by giving written notice of such election to the Company at least five (5) Trading Days before the closing of such Fundamental Transaction, to sell this Note to the Company or its designated assignee, concurrently with such closing, for a cash payment equal to the Fundamental Transaction Cash Amount at the time of the closing. Notice of any such proposed Fundamental Transaction and of such election shall be given to the Holder at least fifteen (15) calendar days before such closing. In connection with such purchase, the Holder shall assign this Note to the Company or its assignee, free and clear of any liens, claims or encumbrances other than transfer restrictions under applicable securities laws.
f) Calculations. All calculations under this Section 5 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of this Section 5, the number of shares of Common Stock deemed to be issued and outstanding as of a given date shall be the sum of the number of shares of Common Stock (excluding treasury shares, if any) issued and outstanding.
g) Notice to the Holder.
i. Adjustment to Conversion Price. Whenever the Conversion Price is adjusted pursuant to any provision of this Section 5, the Company shall promptly deliver to each Holder a notice setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment.
ii. Notice to Allow Conversion by Holder. If (A) the Company shall declare a dividend (or any other distribution in whatever form) on the Common Stock, (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock, (C) the Company shall authorize the granting to all holders of the Common Stock of rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (D) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, of any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property or (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company, then, in each case, the Company shall cause to be filed at each office or agency maintained for the purpose of conversion of this Note, and shall cause to be delivered to the Holder at its last address as it shall appear upon the Note Register, at least twenty (20) calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange, provided that the failure to deliver such notice or any defect therein or in the delivery thereof shall not affect the validity of the corporate action required to be specified in such notice. The Holder is entitled to convert this Note during the twenty (20)-day period commencing on the date of such notice through the effective date of the event triggering such notice.
Section 6. Negative Covenants. As long as any portion of this Note remains outstanding, unless the holders of at least a majority in principal amount of the then outstanding Notes shall have otherwise given prior written consent, the Company shall not, and shall not permit any of its subsidiaries (whether or not a Subsidiary on any Closing Date) to, directly or indirectly:
a) other than Permitted Indebtedness, enter into, create, incur, assume, guarantee or suffer to exist any indebtedness for borrowed money of any kind, including but not limited to, a guarantee, on or with respect to any of its property or assets now owned or hereafter acquired or any interest therein or any income or profits therefrom;
b) other than Permitted Liens, enter into, create, incur, assume or suffer to exist any Liens of any kind, on or with respect to any of its property or assets now owned or hereafter acquired or any interest therein or any income or profits therefrom;
c) repay, repurchase or offer to repay, repurchase or otherwise acquire more than a de minimis number of shares of its Common Stock or Common Stock Equivalents other than as to (i) the Conversion Shares as permitted or required under the Transaction Documents and (ii) repurchases of Common Stock or Common Stock Equivalents of departing employees of the Company, provided that such repurchases shall not exceed an aggregate of $150,000 for all employees during the term of this Note;
d) pay cash dividends or distributions on Common Stock of the Company;
e) enter into any transaction with any Affiliate of the Company which would be required to be disclosed in any public filing with the Commission, unless such transaction is expressly approved by a majority of the disinterested directors of the Company (even if less than a quorum otherwise required for board approval); or
f) enter into any agreement with respect to any of the foregoing.
For the avoidance of doubt, subject to the express provisions of the Transaction Documents, the Company shall be entitled to seek and obtain additional debt or equity financing from parties other than the purchasers of the Notes, as approved by its board of directors.
Section 7. Events of Default.
a) “Event of Default” means, wherever used herein, any of the following events (whatever the reason for such event and whether such event shall be voluntary or involuntary or effected by operation of law or pursuant to any judgment, decree or order of any court, or any order, rule or regulation of any administrative or governmental body), provided that an event specified in item i, ii, iii, or viii below will not become an Event of Default unless and until it is not cured, if possible to cure, within the earlier to occur of (i) five (5) Trading Days after notice of such failure sent by the Holder or by any other Holder and (ii) ten (10) Trading Days after the Company has become or should have become aware of such failure:
i. any default in the payment of (A) the principal amount of any Note or (B) interest, liquidated damages and other amounts owing to a Holder on any Note, as and when the same shall become due and payable (whether on a Conversion Date or the Maturity Date or by acceleration or otherwise);
ii. the Company shall fail to observe or perform any other covenant or agreement contained in the Notes (other than a breach by the Company of its obligations to deliver shares of Common Stock to the Holder upon conversion, which breach is addressed in clause (xi) below);
iii. a default or event of default (subject to any grace or cure period provided in the applicable agreement, document or instrument) shall occur under (A) any of the Transaction Documents or (B) any other material agreement, lease, document or instrument to which the Company or any Subsidiary is obligated (and not covered by clause (vi) below);
iv. any representation or warranty made in this Note, any other Transaction Documents, any written statement pursuant hereto or thereto or any other report, financial statement or certificate made or delivered to the Holder or any other Holder shall be untrue or incorrect in any material respect as of the date when made or deemed made;
v. the Company or any Significant Subsidiary shall be subject to a Bankruptcy Event;
vi. the Company or any Subsidiary shall default on any of its obligations under any mortgage, credit agreement or other facility, indenture agreement, factoring agreement or other instrument under which there may be issued, or by which there may be secured or evidenced, any indebtedness for borrowed money or money due under any long term leasing or factoring arrangement that (A) involves an obligation greater than $100,000, whether such indebtedness now exists or shall hereafter be created, and (B) results in such indebtedness becoming or being declared due and payable prior to the date on which it would otherwise become due and payable;
vii. if the Common Stock shall not be eligible for listing or quotation for trading on a Trading Market and shall not be eligible to resume listing or quotation for trading thereon within ten (10) Trading Days;
viii. if at any time after three (3) months following the Closing Date the Company is not subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act or has failed to file all reports required to be filed thereunder during the then preceding twelve (12) months (or such shorter period that the Company was required to file such reports);
ix. if any of the Security Documents or Subsidiary Guaranties ceases to be in full force and effect (including failure to create, to the extent reasonably feasible, a valid and perfected first priority lien (subject to the Permitted Liens) on and security interest in all the Collateral (as defined in the Security Agreement) and Intellectual Property Rights of the Company and its Subsidiaries) at any time for any reason;
x. if Steve Saleen ceases to serve full time as the President and Chief Executive Officer of the Company and perform the duties consistent with such positions for similarly situated companies, provided that if such cessation is due to Steve Saleen’s death, permanent disability, voluntary termination or termination by the Company for cause, then (A) an Event of Default shall not be deemed to have occurred unless and until the Company shall have failed to retain a full-time replacement reasonably acceptable to the Holder within ninety (90) days following such death, permanent disability, voluntary termination or termination by the Company for cause, and (B) following any such acceptable replacement this clause shall apply to such replacement in lieu of Steve Saleen;
xi. the Company shall fail for any reason to deliver certificates to a Holder prior to the tenth (10th) Trading Day after a Conversion Date or the Company shall provide at any time notice to the Holder, including by way of public announcement, of the Company’s intention to not honor requests for conversions of any Notes in accordance with the terms hereof; or
xii. any monetary judgment, writ or similar final process shall be entered or filed against the Company, any subsidiary or any of their respective property or other assets for more than $100,000, and such judgment, writ or similar final process shall remain unvacated, unbonded or unstayed for a period of forty-five (45) calendar days; provided, however, that any judgment which is covered by insurance or an indemnity from a creditworthy party (such creditworthiness as reasonably determined by the Holder) shall not be included in calculating the amount of such judgment, writ or final process so long as the Company provides the Holder a written statement from such insurer or indemnity provider (which written statement shall be reasonably satisfactory to the Holder) to the effect that such judgment is covered by insurance or an indemnity and the Company will receive the proceeds of such insurance or indemnity within forty-five (45) calendar days of the issuance of such judgment.
b) Acceleration Upon Event of Default. If any Event of Default occurs, the outstanding principal amount of this Note, plus accrued but unpaid interest, liquidated damages and other amounts owing in respect thereof through the date of acceleration, shall become, at the Holder’s election (which the Holder shall not make more than the later of thirty (30) calendar days after the date (a) such Event of Default is cured or otherwise resolved and (b) the Holder is aware of such cure or resolution), immediately due and payable in cash at the Mandatory Default Amount. After the occurrence and during the continuance of any Event of Default, the interest rate on this Note shall accrue as set forth in Section 2(d). If there is such an acceleration, then upon the payment in full of the Mandatory Default Amount, the Holder shall promptly surrender this Note to or as directed by the Company. In connection with such acceleration described herein, the Holder need not provide, and the Company hereby waives, any presentment, demand, protest or other notice of any kind, and the Holder may immediately and without expiration of any grace period enforce any and all of its rights and remedies hereunder and all other remedies available to it under applicable law. Such acceleration may be rescinded and annulled by Holder at any time prior to payment hereunder and the Holder shall have all rights as a holder of the Note until such time, if any, as the Holder receives full payment pursuant to this Section 7(b). No such rescission or annulment shall affect any subsequent Event of Default or impair any right consequent thereon.
Section 8. Miscellaneous.
a) Notices. Any and all notices or other communications or deliveries to be provided by the Holder hereunder, including, without limitation, any Notice of Conversion, shall be in writing and delivered personally, by facsimile, or sent by a nationally recognized overnight courier service, addressed to the Company, at the address set forth above, or such other facsimile number or address as the Company may specify for such purpose by notice to the Holder delivered in accordance with this Section 8. Any and all notices or other communications or deliveries to be provided by the Company hereunder shall be in writing and delivered personally, by facsimile, or sent by a nationally recognized overnight courier service addressed to each Holder at the facsimile number or address of the Holder appearing on the books of the Company, or if no such facsimile number or address appears, at the principal place of business of the Holder. Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the date of transmission or delivery, if such notice or communication is delivered via facsimile at the facsimile number, or delivered by such courier service to the address, specified in this Section 8 prior to 5:30 p.m. (New York City time), (ii) the date immediately following the date of transmission or delivery, if such notice or communication is delivered via facsimile at the facsimile number, or delivered by such courier to the address, specified in this Section 8 between 5:30 p.m. (New York City time) and 11:59 p.m. (New York City time) on any date, or (iii) upon actual receipt by the party to whom such notice is required to be given. The address for such notices and communications shall be as set forth on the signature pages attached to the Purchase Agreement.
b) Absolute Obligation. Except as expressly provided herein, no provision of this Note shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, liquidated damages and accrued interest, as applicable, on this Note at the time, place, and rate, and in the coin or currency, herein prescribed. This Note is a direct debt obligation of the Company. This Note ranks pari passu with all other Notes now or hereafter issued under the terms set forth herein.
c) Lost or Mutilated Note. If this Note shall be mutilated, lost, stolen or destroyed, the Company shall execute and deliver, in exchange and substitution for and upon cancellation of a mutilated Note, or in lieu of or in substitution for a lost, stolen or destroyed Note, a new Note for the principal amount of this Note so mutilated, lost, stolen or destroyed, but only upon receipt of evidence of such loss, theft or destruction of such Note, and of the ownership hereof, reasonably satisfactory to the Company.
d) Governing Law. All questions concerning the construction, validity, enforcement and interpretation of this Note shall be governed by and construed and enforced in accordance with the internal laws of the State of California, without regard to the principles of conflict of laws thereof. Each party agrees that all legal proceedings concerning the interpretation, enforcement and defense of the transactions contemplated by any of the Transaction Documents (whether brought against a party hereto or its respective Affiliates, directors, officers, shareholders, employees or agents) shall be commenced in the state and federal courts sitting in the County of Los Angeles (the “Los Angeles Courts”). Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the Los Angeles Courts for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of any of the Transaction Documents), and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of such Los Angeles Courts, or such Los Angeles Courts are improper or inconvenient venue for such proceeding. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Note and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by applicable law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Note or the transactions contemplated hereby. If either party shall commence an action or proceeding to enforce any provisions of this Note, then the prevailing party in such action or proceeding shall be reimbursed by the other party for its attorney’s fees and other costs and expenses reasonably incurred in the investigation, preparation and prosecution of such action or proceeding.
e) Waiver. Any waiver by the Company or the Holder of a breach of any provision of this Note shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Note. The failure of the Company or the Holder to insist upon strict adherence to any term of this Note on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Note. Any waiver by the Company or the Holder must be in writing.
f) Severability. If any provision of this Note is invalid, illegal or unenforceable, the balance of this Note shall remain in effect, and if any provision is inapplicable to any Person or circumstance, it shall nevertheless remain applicable to all other Persons and circumstances. If it shall be found that any interest or other amount deemed interest due hereunder violates the applicable law governing usury, the applicable rate of interest due hereunder shall automatically be lowered to equal the maximum rate of interest permitted under applicable law. The Company covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law or other law which would prohibit or forgive the Company from paying all or any portion of the principal of or interest on this Note as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this indenture, and the Company (to the extent it may lawfully do so) hereby expressly waives all benefits or advantage of any such law, and covenants that it will not, by resort to any such law, hinder, delay or impeded the execution of any power herein granted to the Holder, but will suffer and permit the execution of every such as though no such law has been enacted.
g) Next Business Day. Whenever any payment or other obligation hereunder shall be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day.
h) Headings. The headings contained herein are for convenience only, do not constitute a part of this Note and shall not be deemed to limit or affect any of the provisions hereof.
i) Assumption. Any successor to the Company or any surviving entity in a Fundamental Transaction shall (i) assume, prior to such Fundamental Transaction, all of the obligations of the Company under this Note and the other Transaction Documents pursuant to written agreements in form and substance satisfactory to the Holder (such approval not to be unreasonably withheld or delayed) and (ii) issue to the Holder a new Note of such successor entity evidenced by a written instrument substantially similar in form and substance to this Note, including, without limitation, having a principal amount and interest rate equal to the principal amount and the interest rate of this Note and having similar ranking to this Note, which shall be satisfactory to the Holder (any such approval not to be unreasonably withheld or delayed). The provisions of this Section 8(i) shall apply similarly and equally to successive Fundamental Transactions and shall be applied without regard to any limitations of this Note.
j) Usury. This Note shall be subject to the anti-usury limitations contained in the Purchase Agreement.
*********************
IN WITNESS WHEREOF, the Company has caused this Note to be duly executed by a duly authorized officer as of the date first above indicated.
|
W270, INC.
|
|
By:__________________________________________ Name: Title: Facsimile No. for delivery of Notices: |
ANNEX A
NOTICE OF CONVERSION
The undersigned hereby elects to convert principal under the 3.0% Senior Secured Convertible Note due June 25, 2017 of W270, Inc., a Nevada corporation (the Company”), into shares of common stock (the “Common Stock”), of the Company according to the conditions hereof, as of the date written below. If shares of Common Stock are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates and opinions as reasonably requested by the Company in accordance therewith. No fee will be charged to the holder for any conversion, except for such transfer taxes, if any.
By the delivery of this Notice of Conversion the undersigned represents and warrants to the Company that its ownership of the Common Stock does not exceed the amounts specified under Section 4 of this Note, as determined in accordance with Section 13(d) of the Exchange Act.
The undersigned agrees to comply with the prospectus delivery requirements under the applicable securities laws in connection with any transfer of the aforesaid shares of Common Stock pursuant to any prospectus.
Conversion calculations:
Date to Effect Conversion:
Principal Amount of Note to be Converted:
Interest Accrued on Account
of Conversion at Issue:
Number of shares of Common Stock to be issued (not less than 10,000 shares):
Signature:
Name:
Address for Delivery of Common Stock Certificates:
Or
DWAC Instructions:
Broker No:
Account No:
EMPLOYMENT AGREEMENT
This Employment Agreement (“Agreement”) is entered into on last date written below, and is between Saleen Automotive Electric, Inc., a Florida a corporation (“Company”), and Steve Saleen (“Executive”).
RECITALS
WHEREAS, the Company and its wholly owned subsidiary SMS Signatures Cars are in the business of designing, engineering, manufacturing, marketing and distributing electric vehicles, high performance lifestyle vehicles, and high performance lifestyle vehicle parts;
WHEREAS, the Executive has experience in the automotive industry that is complementary to the business of the Company, and the Company wishes to hire the Executive on the terms set forth herein.
AGREEMENT
1. Employment. In consideration of their mutual covenants and other valuable consideration, the receipt, adequacy and sufficiency of which is hereby acknowledged, the Company agrees to hire Executive, and Executive agrees to remain in the employ of the Company, upon the terms and conditions herein provided.
1.1. Position and Responsibilities. Executive will serve as the Chief Executive Officer of the Company, responsible for promoting, guiding and overseeing the operations of the Company and any existing or later-acquired wholly owned subsidiaries. Executive agrees to perform services consistent with his position, as outlined in the Company’s Bylaws, and as may be assigned from time to time by the Board of Directors of the Company; however, the Company is disallowed from changing the title of Executive’s position or from diminishing Executive’s responsibilities of overseeing the operations of the Company. Executive will perform all duties in a professional, ethical and businesslike manner.
1.2. Dedication and Time. During the term of this Agreement, Executive will devote his professional time and attention to faithfully serving the Company in such a manner so as to satisfactorily perform the duties as described herein. Notwithstanding the foregoing, Executive may devote time and attention to other business, civic, charitable or social organizations and endeavors, so long as such activities do not interfere with the performance of Executive’s duties and obligations to the Company.
1.3. Term. The term of this Agreement will commence on the date first referenced above, and will continue, unless sooner terminated, for a period of 8 years, and it will automatically continue thereafter for successive twelve month periods unless and until either party gives the other party written notice of termination prior to the end of a term.
2. Compensation.
2.1 Salary. For services rendered by Executive hereunder, including services as a member of the Board of Directors if so elected by the shareholders, the Company will pay Executive a salary in the following amounts, which shall not be decreased:
| i. | $6,250 per month, beginning on the commencement of this Agreement through termination. |
| ii. | In the event the Company is successful in raising a cumulative gross amount of $1 million in capital, whether such investment is in the form of equity, debt or a convertible instrument, the Company will pay Executive a salary of $10,000 per month from the date of the investment through the termination of this Agreement. |
| iii. | In the event the Company is successful in raising a cumulative gross amount of $2.5 million in capital, whether such investment is in the form of equity, debt or a convertible instrument, the Company will pay Executive a salary of $20,000 per month from the date of the investment through the termination of this Agreement. |
| iv. | In the event the Company is successful in raising a cumulative gross amount of $5 million in capital, whether such investment is in the form of equity, debt or a convertible instrument, the Company will pay Executive a salary of $27,500 per month from the date of the investment through the termination of this Agreement. |
| v. | In the event the Company is successful in raising a cumulative gross amount of $7.5 million in capital, whether such investment is in the form of equity, debt or a convertible instrument, the Company will pay Executive a salary of $32,500 per month from the date of the investment through the termination of this Agreement. |
| vi. | In the event the Company is successful in raising a cumulative gross amount of $10 million in capital, whether such investment is in the form of equity, debt or a convertible instrument, the Company will pay Executive a salary of $37,500 per month from the date of the investment through the termination of this Agreement. |
2.2 Bonus. The Company agrees that it will establish and maintain a bonus program for Executive that will compensate Executive in amounts up to Executive’s annual base salary, and which will be based on objective criteria, such as Company earnings, stock price, market capitalization, market penetration, and like. The Company and Executive agree to negotiate in good faith to develop and implement a bonus program that is consistent with this provision, and to have such program in place on or before September 30, 2012.
2.3 Benefits. Executive will be entitled to participate in other benefit programs that the Company may establish from time to time, such as group health, vision and dental insurance, life insurance, disability insurance and a retirement plan.
2.4 Vacation and Holidays. Executive shall also be entitled to four weeks’ vacation, leave for illnesses and so forth as now or hereafter granted by Company’s personnel policies. Executive will also be entitled to all major holidays as are defined by the Company’s personnel policies.
2.5 Company Car. The Company will provide Executive with a Saleen or SMS branded company car, and will be responsible for all ordinary maintenance and repairs on the car, and automobile insurance.
3. Expenses. Executive will be reimbursed for business-related expenses reasonably and necessarily incurred and advanced by the Executive in performing his duties for Company, subject to review by the Board of Directors and in accordance with Company’s policy. Executive will maintain records and written receipt as required by Company policy and reasonably requested by the Board of Directors to substantiate such expenses.
4. Insurance.
4.1 Directors and Officers Insurance. At all times during the term of this Agreement, the Company agrees to procure and maintain a Directors and Officers Insurance policy with limits of at least $1 million per occurrence and which names Executive as an Additional Insured. Such policy shall be with an insurance carrier that is admitted in California and that carries a Standard and Poor’s Rating of AA or better.
4.2 Key-Man Life Insurance. The Company may, at its sole discretion and expense, apply for and procure life insurance and disability insurance on Executive in any amount determined in the sole judgment of the Company, and place the Company as the sole beneficiary of such policies. Executive agrees to cooperate in any medical or other examination, supply information reasonably requested by the insurance companies, and execute such applications as may be reasonably necessary to obtain and procure such insurance.
5. Termination and Rights Thereafter.
5.1 Termination by Executive. Executive is entitled to terminate this Agreement at any time, with or without cause. In the event Executive terminates this Agreement, Executive will be entitled to the compensation, vacation and benefits earned through the last date of his employment.
5.2 Termination by Company for Cause. The Company is entitled to terminate this Agreement for cause, which is defined as: i) Executive’s gross and willful misconduct which is injurious to the Company; ii) Executive’s engaging in fraudulent conduct with respect to the Company’s business; iii) Executive’s conduct of a criminal nature that may have an adverse impact on the Company’s standing and reputation; iv) the continued and unjustified refusal by Executive to perform the duties required of him by this Agreement; v) Executive’s use of illicit drugs or alcohol in violation of then current Company policy; or vi) conviction of a crime involving moral turpitude or a felony involving physical violence. In the event the company terminates this Agreement for cause, Executive will be entitled to the compensation, vacation and benefits earned through the last date of his employment.
5.3 Termination by Company without Cause. In the event the Company terminates this Agreement for without cause, or otherwise materially breaches this Agreement and such material breach remains uncured after 15 days’ written notice, Executive will be entitled to a severance payment of 1.5 times his then-current annual salary plus $2 million, payable in cash or cash-equivalent within 30 days of the date of termination.
5.4 Termination by Company because of Death or Disability. The Company is entitled to terminate this Agreement in the event of Executive’s death or total mental or physical disability. In the event the company terminates this Agreement for death or disability, Executive will be entitled to the compensation, vacation and benefits earned through the last date of his employment.
6. Company Property.
6.1 Confidential Information. Executive shall not disclose, during the terms of this Agreement or at any time after its termination, any of Company’s proprietary information, account information, customer lists, customer information, policies, pricing, strategy, codes, strategic plan, plans for expansion or business development or other information of a confidential nature (hereinafter referred to as “Confidential Information”), whatsoever regarding Company without prior written consent. Upon termination of this Agreement, Executive promises to promptly return to Company all Confidential Information and other property in his possession, custody or control. Executive covenants to not take, keep, or record copies, duplications or reproductions of the Confidential Information or other property subject to this Agreement after termination of this Agreement.
6.2 Inventions. All copyrightable material, notes, records, drawings, designs, inventions, improvements, developments, discoveries, trade secrets or other intellectual property (collectively, “Inventions”) conceived, discovered, developed or reduced to practice by Executive, solely or in collaboration with others, during the performance of the services under this Agreement are the sole property of the Company. Executive agrees to assist the Company in having any Inventions created by Executive during the term of this Agreement assigned to the Company, at the Company’s expense.
7 Indemnification. The Company shall defend and indemnify Executive against any and all expenses, including amounts paid upon judgments, attorneys’ fees and amounts paid in settlement (before or after suit is commenced), incurred by the Executive in connection with his defense or settlement of any claim, action, suit or proceeding in which he is made a party or which may be asserted against him by reason of his employment or the performance of duties in this Agreement.
8. Miscellaneous.
8.1 Integration. This Agreement contains the entire understanding between the Parties concerning the subjects addressed herein. Any and all prior negotiations that are not contained in this Agreement are superseded and of no force and effect. This Agreement may be modified or amended only by a written agreement executed by all Parties.
8.2 Headings. All section headings contained in this Agreement are for convenience of reference only, do not form a part of this Agreement, and shall not in any way affect the meaning or interpretation of this Agreement.
8.3 Authority. The undersigned individuals execute this Agreement on behalf of the respective Parties and represent that they are authorized to enter into and execute this Agreement on behalf of such Parties.
8.4 Counterparts and Signatures. This Agreement may be executed in any number of counterparts, each of which, when executed and delivered, shall be deemed an original and all of which together shall constitute one and the same agreement. Signatures obtained by facsimile or email in PDF format shall be deemed to be original signatures.
8.5 Further Assurances. The Parties agree to execute all instruments and documents of further assurance and will do any and all such acts as may be reasonably required to carry out their obligations and to consummate the transactions contemplated by this Agreement. The Parties further agree to support this Agreement in all material ways, including in its application and enforcement against any and all persons or entities seeking to avoid or limit the applicability or scope of the Agreement in any manner.
8.6 Binding Effect. This Agreement is binding upon and shall inure to the benefit of the parties and each of the party’s respective successors, predecessors, assigns, heirs, personal representatives, and affiliates, without time limitation.
8.7 No Implied Waiver. No action or failure to act shall constitute a waiver of any right or duty afforded under this Agreement, nor shall any action or failure to act constitute an approval of, or acquiescence in, any breach, except as may be specifically agreed in writing. Waiver of any one provision herein shall not be deemed to be a waiver of any other provision herein.
8.8 Governing Law. This Agreement will be construed, interpreted, and enforced in accordance with, and governed by, the laws of the State of California without regard to conflicts of laws provisions thereof. The parties agree that any action or proceeding brought to enforce or declare rights arising out of or relating to this Agreement will be brought exclusively in the State or Federal Courts in Orange County, California, and the parties further consent to the jurisdiction of said Courts and waive any claims of forum non conveniens or any other claims relating to venue.
8.9 Interpretation. This Agreement shall be treated as jointly drafted and will not be construed against any Party as drafter. Furthermore, in the event of any ambiguity in or dispute regarding the interpretation of this Agreement, the interpretation will not be resolved by any rule of interpretation providing for interpretation against the party who causes the uncertainty to exist or against the draftsman.
8.10 Attorneys’ Fees. If any legal action or other proceeding is brought to enforce the provisions of this Agreement, the prevailing Party shall be entitled to recover reasonable attorneys’ fees and other costs incurred in the action or proceeding, in addition to any other relief which the prevailing Party may be entitled.
8.11 Severability. In the event that any term or provision of this Agreement is determined to be invalid, illegal, or unenforceable in any respect, all other provisions of the Agreement which are not affected by such invalidity, illegality or unenforceability shall remain in full force and effect and this Agreement shall be construed as if such invalid, illegal, or unenforceable term or provision had never been contained herein.
8.12 Time is of the Essence. All times stated herein are of the essence.
8.13 Cumulative Rights and Remedies. The rights and remedies in this Agreement will be cumulative, and in addition to, any duties, obligations, rights and remedies otherwise provided by law.
8.14 Advice of Counsel. Each party acknowledges and agrees that it has given mature and careful thought to this Agreement and that it has been given the opportunity to independently review this Agreement with its own independent legal counsel.
8.15 Assignment. This Agreement and any rights hereunder are not assignable by either party without the prior written consent of the other party except as otherwise specifically provided for herein.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date written below.
SALEEN AUTOMOTIVE ELECTRIC, INC.
Dated: 8/1/2011____ By: ____/s/ Tony Lanham_____________
Tony Lanham, President
STEVE SALEEN
Dated: __8/1/2011___ By: ___Steve Saleen___________________
Steve Saleen
Exhibit 21.1
Subsidiaries
Name Jurisdiction
SMS Signature Cars, Inc. California
Saleen Automotive, Inc. Florida
Exhibit 99.1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Saleen Automotive, Inc.
We have audited the accompanying combined balance sheets of Saleen Automotive, Inc. and SMS Signature Cars (the "Company"), as of March 31, 2013 and 2012, and the related combined statements of operations, stockholders' deficit and cash flows for the years then ended. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the combined financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits include consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the combined financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of Saleen Automotive and SMS Signature Cars as of March 31, 2013 and 2012, and the results of their combined operations and cash flows the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying combined financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1, the Company has suffered recurring losses, utilized significant cash in operations, and has a stockholders’ deficit In addition, at a significant amount of the Company’s notes payable are in default. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management’s plans in regard to these matters are described in Note 1 to the combined financial statements. The combined financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Weinberg and Company
Los Angeles, California
June 27, 2013
| Saleen Automotive, Inc. and SMS Signature Cars | ||||||||||||||||
| Combined Balance Sheets | ||||||||||||||||
| March 31, | ||||||||||||||||
| 2013 | 2012 | |||||||||||||||
| ASSETS | ||||||||||||||||
| Current Assets | ||||||||||||||||
| Cash | $ | 4,434 | $ | 6,779 | ||||||||||||
| Cash held in trust by related party | 175,000 | — | ||||||||||||||
| Accounts receivable, net | 5,352 | — | ||||||||||||||
| Inventory | 538,224 | 317,109 | ||||||||||||||
| Prepaid expenses and other current assets | 23,483 | — | ||||||||||||||
| Total Current Assets | 746,493 | 323,888 | ||||||||||||||
| Long Term Assets | ||||||||||||||||
| Property, plant and equipment, net | 340,219 | 421,001 | ||||||||||||||
| Other assets | 37,358 | 37,358 | ||||||||||||||
| TOTAL ASSETS | $ | 1,124,070 | $ | 782,247 | ||||||||||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||||||||||
| Current Liabilities | ||||||||||||||||
| Accounts Payable | $ | 666,782 | $ | 778,676 | ||||||||||||
| Accounts Payable - related parties | 709,267 | 227,543 | ||||||||||||||
| Current portion of notes payable | 1,044,074 | 1,021,325 | ||||||||||||||
| Current portion of notes payable to Related Parties | 360,500 | 176,500 | ||||||||||||||
| Payroll Taxes Payable | 246,075 | 96,153 | ||||||||||||||
| Accrued Interest on Notes Payable | 318,836 | 228,309 | ||||||||||||||
| Customer Deposits | 942,859 | 863,020 | ||||||||||||||
| Other Current Liabilities | 433,706 | 269,622 | ||||||||||||||
| Total Current Liabilities | 4,722,099 | 3,661,148 | ||||||||||||||
| Notes payable, net of current portion | 550,258 | 576,220 | ||||||||||||||
| Total Liabilities | 5,272,357 | 4,237,368 | ||||||||||||||
| Stockholders' Deficit | ||||||||||||||||
| SMS Signature Cars (California corporation) | ||||||||||||||||
| Common stock; no par; 1,000,000 shares authorized as of | ||||||||||||||||
| March, 31, 2013 and 2012, respectively; 1,000,000 shares | ||||||||||||||||
| issued and outstanding as of March 31, 2013 and 2012, respectively | — | — | ||||||||||||||
| Saleen Automotive, Inc. (Florida corporation) | ||||||||||||||||
| Common stock; $0.0001 par value; 200,000,000 shares authorized | ||||||||||||||||
| as of March, 31, 2013 and 2012, respectively; 102,692,076 and | ||||||||||||||||
| 93,012,435 shares issued and outstanding as of March 31, 2013 and 2012, respectively | 10,269 | 9,301 | ||||||||||||||
| Additional paid in capital | 4,584,976 | 2,290,994 | ||||||||||||||
| Accumulated deficit | (8,743,532 | ) | (5,755,416 | ) | ||||||||||||
| Total Stockholders' Deficit | (4,148,287 | ) | (3,455,121 | ) | ||||||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | 1,124,070 | $ | 782,247 | ||||||||||||
See accompanying notes which are an integral part of the combined financial statements.
| -2- |
Saleen Automotive, Inc. and SMS Signature Cars |
| Combined Statements of Operations |
| For the Twelve Months Ended | ||||||||||||||||
| March 31, 2013 | March 31, 2012 | |||||||||||||||
| Revenue | ||||||||||||||||
| Vehicles and parts | $ | 1,453,030 | $ | 1,173,494 | ||||||||||||
| Design services | 1,245,985 | — | ||||||||||||||
| Total revenue | 2,699,015 | 1,173,494 | ||||||||||||||
| Costs of good sold | ||||||||||||||||
| Vehicles and parts | 1,320,061 | 1,075,542 | ||||||||||||||
| Design services | 859,541 | — | ||||||||||||||
| Total Costs of Good Sold | 2,179,602 | 1,075,542 | ||||||||||||||
| Gross Margin | 519,413 | 97,952 | ||||||||||||||
| Operating expenses | ||||||||||||||||
| Research and development | 23,277 | 94,895 | ||||||||||||||
| Sales and marketing | 302,669 | 52,475 | ||||||||||||||
| General and administrative | 2,871,483 | 2,633,316 | ||||||||||||||
| Depreciation | 80,892 | 80,475 | ||||||||||||||
| Total operating expenses | 3,278,321 | 2,861,161 | ||||||||||||||
| Loss from operations | (2,758,908 | ) | (2,763,209 | ) | ||||||||||||
| Interest expense | (225,046 | ) | (150,350 | ) | ||||||||||||
| Gain (Loss) on settlement of payables | (4,162 | ) | 10,000 | |||||||||||||
| Net Loss | ($ | 2,988,116 | ) | ($ | 2,903,559 | ) | ||||||||||
See accompanying notes which are an integral part of the combined financial statements.
| -3- |
| Saleen Automotive, Inc. and SMS Signature Cars Combined Statements of Stockholders’ Deficit | ||||||||||||||||||||||||||||
| Saleen Automotive, Inc. | SMS Signature Cars | |||||||||||||||||||||||||||
| Common Stock $0.0001 Par | Common Stock No Par | Combined Additional | Combined Accumulated Deficit | Combined Stockholders’ Deficit | ||||||||||||||||||||||||
| Number | Amount | Number | Amount | Paid In Capital | ||||||||||||||||||||||||
| Balance, March 31, 2011 | — | $ | — | 1,000,000 | $ | — | $ | — | $ | (2,851,857 | ) | $ | (2,851,857 | ) | ||||||||||||||
| Shares issued to Founders | 88,086,000 | 8,808 | — | — | 8,808 | |||||||||||||||||||||||
| Shares issued for cash | 4,826,435 | 483 | 2,266,004 | — | 2,266,487 | |||||||||||||||||||||||
| Shares issued for services | 100,000 | 10 | 24,990 | — | 25,000 | |||||||||||||||||||||||
| Net loss for the year | — | — | — | (2,903,559 | ) | (2,903,559 | ) | |||||||||||||||||||||
| Balance, March 31, 2012 | 93,012,435 | 9,301 | 1,000,000 | 2,290,994 | (5,755,416 | ) | (3,455,121 | ) | ||||||||||||||||||||
| Shares issued for cash | 7,549,143 | 755 | 1,606,318 | — | 1,607,072 | |||||||||||||||||||||||
| Shares issued for services | 85,498 | 9 | 21,368 | — | 21,377 | |||||||||||||||||||||||
| Shares issued for interest on loan | 400,000 | 40 | 99,960 | — | 100,000 | |||||||||||||||||||||||
| Shares issued in settlement of related party payables | 145,000 | 15 | 36,236 | — | 36,251 | |||||||||||||||||||||||
| Shares issued as employment condition | 500,000 | 50 | 124,950 | — | 125,000 | |||||||||||||||||||||||
| Shares issued for in-kind contribution of automobile | 1,000,000 | 100 | 249,900 | — | 250,000 | |||||||||||||||||||||||
| Value of founders shares transferred in settlement of payables | 155,250 | — | 155,250 | |||||||||||||||||||||||||
| Net loss for the year | (2,988,116 | ) | (2,988,116 | ) | ||||||||||||||||||||||||
| Balance, March 31, 2013 | 102,692,076 | $ | 10,269 | 1,000,000 | $ | — | $ | 4,584,976 | $ | (8,743,532 | ) | $ | (4,148,287 | ) | ||||||||||||||
See accompanying notes which are an integral part of the combined financial statements.
| -4- |
| Saleen Automotive, Inc. and SMS Signature Cars | ||||||||||||||||||||
| Combined Statements of Cash Flows | ||||||||||||||||||||
| Twelve Months Ended March 31 | ||||||||||||||||||||
| 2013 | 2012 | |||||||||||||||||||
| Cash flows from operating activities | ||||||||||||||||||||
| Net loss | $ | (2,988,116 | ) | $ | (2,903,559 | ) | ||||||||||||||
| Adjustments to reconcile net loss to net cash used in operating activities | ||||||||||||||||||||
| Depreciation | 80,892 | 80,475 | ||||||||||||||||||
| Loss (gain) on settlement of payables | 4,162 | (10,000 | ) | |||||||||||||||||
| Shares issued for services | 21,377 | 25,000 | ||||||||||||||||||
| Shares issued for interest on loan | 100,000 | — | ||||||||||||||||||
| Value of founders shares transferred in settlement of related party payables | 155,250 | — | ||||||||||||||||||
| Shares issued as employment condition | 125,000 | — | ||||||||||||||||||
| Note payable issued for services | 47,749 | — | ||||||||||||||||||
| Changes in working capital: | ||||||||||||||||||||
| (Increase) Decrease in cash held in trust account | (175,000 | ) | — | |||||||||||||||||
| (Increase) Decrease in accounts receivable | (5,352 | ) | 12,758 | |||||||||||||||||
| (Increase) Decrease in inventory | 28,886 | 41,534 | ||||||||||||||||||
| (Increase) Decrease in prepaid expenses | (23,482 | ) | — | |||||||||||||||||
| Increase (Decrease) in accounts payable | (111,894 | ) | (29,716 | ) | ||||||||||||||||
| Increase (Decrease) in accounts payable to related parties | 481,724 | 111,874 | ||||||||||||||||||
| Increase (Decrease) in accrued liabilities | 235,538 | 136,492 | ||||||||||||||||||
| Increase (Decrease) in customer deposits | 79,839 | 234,838 | ||||||||||||||||||
| Increase (Decrease) in other liabilities | 164,084 | — | ||||||||||||||||||
| Net cash used in operating activities | (1,779,345 | ) | (2,300,304 | ) | ||||||||||||||||
| Cash flows from investing activities | ||||||||||||||||||||
| Purchases of property, plant and equipment | (110 | ) | — | |||||||||||||||||
| Proceeds from sale of property and equipment | — | 33,876 | ||||||||||||||||||
| Net cash from investing activities | (110 | ) | 33,876 | |||||||||||||||||
| Cash flows from financing activities | ||||||||||||||||||||
| Proceeds from notes payable from related parties | 275,000 | 16,000 | ||||||||||||||||||
| Principal payments on notes payable | (104,962 | ) | (20,466 | ) | ||||||||||||||||
| Proceeds from issuance of common stock | 1,607,072 | 2,275,295 | ||||||||||||||||||
| Net cash from financing activities | 1,777,110 | 2,270,830 | ||||||||||||||||||
| Net increase (decrease) in cash | (2,345 | ) | 4,402 | |||||||||||||||||
| Cash at beginning of period | 6,779 | 2,377 | ||||||||||||||||||
| Cash at end of period | $ | 4,434 | $ | 6,779 | ||||||||||||||||
(continued)
| -5- |
| Saleen Automotive, Inc. and SMS Signature Cars Combined Statements of Cash Flows (continued) | ||||||||
| Twelve Months Ended March 31 | ||||||||
| 2013 | 2012 | |||||||
| Supplemental schedule of non-cash investing and financing activities: | ||||||||
| Issuance of common stock to settle accounts and notes payable | $ | 36,251 | ||||||
| Issuance of common stock for automotive asset | $ | 250,000 | — | |||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid during the period for | ||||||||
| Interest | $ | 32,100 | $ | 36,863 | ||||
| Income taxes | $ | — | $ | — | ||||
See accompanying notes which are an integral part of the combined financial statements.
| -6- |
Saleen Automotive, Inc. and SMS Signature Cars
Notes to Combined Financial Statements
Years Ended March 31, 2013 and 2012
NOTE 1 – NATURE OF THE BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
SMS Signature Cars (“SMS”) was incorporated in California on July 31, 2008 (“SMS”). SMS’s initial capital consisted of 1,000,000 shares of no par value common stock. SMS produces high performance automobiles and sells automotive aftermarket parts. Steve Saleen owns 100% of the stock of this company.
Saleen Automotive, Inc. (“SAI”) was incorporated as Saleen Electric Automotive, Inc. in Florida on July 21, 2011. SAI’s initial capital consisted of 200,000,000 shares of $.0001 par value common stock. On April 26, 2012, SAI changed its name to Saleen Automotive, Inc. SAI was formed by Steve Saleen and four investors to raise funds to launch Steve Saleen branded battery electric vehicles and electric charging stations for electric vehicles in the US and worldwide.
As of March 31, 2013 and 2012, Steve Saleen held all of the stock of SMS, and 58.15% and 64.21%, respectively, of the outstanding stock of SAI. Since the incorporation of these companies, Steve Saleen has controlled both. The accompanying financial statements include the activity of the SMS and SAI on a combined basis. Intercompany transactions have been eliminated.
The Company develops, manufactures and sells high-performance cars built from base chassis’ of Ford Mustangs, Chevrolet Camaros, and Dodge Challengers, as well as exotic sports cars. We are a low volume specialist vehicle design, engineering and manufacturing company focusing on the mass customization of OEM American Sports Cars and the production of high performance USA-engineered premium sports and racing cars. Saleen-branded products include a complete line of upgraded muscle cars, performance cars, automotive aftermarket specialty parts and lifestyle accessories. We are also developing a next-generation American supercar along with hybrid and zero-emission vehicles for commercial applications and consumer markets.
SMS and SAI are collectively referred to as “the Company” or as “Saleen Automotive, Inc.” unless reference is made to the individual SMS or SAI entity.
Going Concern
The Company’s combined financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has incurred an accumulative loss of $8,743,532 since inception. In addition, the Company had a stockholders' deficit of $4,148,287 as of March 31, 2013, and as of that date, the Company is delinquent in payment of $246,075 of payroll taxes and $1,000,312 of outstanding notes payable are in default. The cash resources of the Company are insufficient to meet its planned business objectives without additional financing. These and other factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.
The Company’s ability to continue as a going concern is dependent upon its ability to raise additional capital and to ultimately achieve sustainable revenues and profitable operations. At March 31, 2013, the Company had cash on hand in the amount of $4,434. Management expects that the current funds on hand, along with the available funds in the trust account described below, will be sufficient to continue operations for the next two months. Management is currently seeking additional funds, primarily through the issuance of debt or equity securities for cash to operate our business, no assurance can be given that any future financing will be available or, if available, and that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial dilution for our stock holders, in case of equity financing.
| -7- |
Subsequent to March 31, 2013, the Company obtained a $500,000 secured bridge loan which was converted when the Company issued $3,000,000 of its senior secured convertible notes. The Company realized $2,500,000 net cash proceeds upon the closing of the capital raising transaction. See Note 11.
Use of Estimates
Financial statements prepared in accordance with accounting principles generally accepted in the United States require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Among other things, management has estimated the collectability of its accounts receivable and the valuation of long lived assets. Actual results could differ from those estimates.
Fair value of Financial Instruments
The Company adopted ASC topic 820, “Fair Value Measurements and Disclosures” (ASC 820), formerly SFAS No. 157 “Fair Value Measurements,” effective January 1, 2009. ASC 820 defines “fair value” as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There was no impact relating to the adoption of ASC 820 to the Company’s financial statements.
Financial instruments consist principally of cash, accounts payable and accrued liabilities, and notes payable. The carrying amounts of such financial instruments in the accompanying balance sheets approximate their fair values due to their relatively short-term nature. It is management’s opinion that the Company is not exposed to any significant currency or credit risks arising from these financial instruments.
Cash held in trust by related party
During the year ended March 31, 2013, the Company instituted a policy of having new investor funds held a trust account at Michaels Law Group, a law firm owned by a shareholder and board member. Funds held in trust are released as requested by the Company by agreement of a management committee. As of March 31, 2013, $175,000 of funds were held in trust by Michaels Law Group.
Allowance for Doubtful Accounts
The Company recognizes an allowance for doubtful accounts to ensure trade receivables are not overstated due to uncollectability. For the most part, the company generally requires advance payments for cars and credit card payments for parts. As a result, the Company had no allowance for doubtful accounts amounts at March 31, 2013 and 2012, respectively.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined principally on a first-in-first-out average cost basis. Inventories consist primarily of parts for both resale and conversion of automotive chassis. The Company will typically buy the automobile chassis of the vehicle to be converted from the dealer placing the order and then modify the vehicle as ordered. The Company typically has no finished goods inventory as the Company builds to order.
| March 31, 2013 | March 31, 2012 | |||||||
| Parts and work in process | $ | 288,224 | $ | 317,109 | ||||
| S7 Supercar held for sale | 250,000 | — | ||||||
| Total inventories | $ | 538,224 | $ | 317,109 | ||||
The S7 supercar is pledged as security for a note payable. (see notes 4 and 9)
| -8- |
Long-lived Assets and Intangible Assets
In accordance with ASC 350-30 (formerly SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets), the Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable. When such factors and circumstances exist, the Company compares the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amount. Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made.
The Company had no such asset impairments at March 31, 2013 or 2012. There can be no assurance, however, that market conditions will not change or demand for the Company’s products under development will continue. Either of these could result in future impairment of long-lived assets.
Revenue Recognition
Sales of Performance Cars and Parts
The Company generates revenues primarily from the sale of performance automobiles and parts. The Company recognizes revenue from the sale of completed performance cars and parts when there is persuasive evidence that an arrangement exists, delivery of the product has occurred and title has passed, the selling price is both fixed and determinable, and collectability is reasonably assured, all of which generally occurs upon shipment of the Company’s product or delivery of the product to the destination specified by the customer.
The Company determines whether delivery has occurred based on when title transfers and the risks and rewards of ownership have transferred to the buyer, which usually occurs upon acceptance by the customer when the Company places the cars or products with the buyer’s carrier. The Company regularly reviews its customers’ financial positions to ensure that collectability is reasonably assured. Except for warranties, the Company has no post-sales obligations.
Contract Revenue and Cost Recognition on Design Services
During the year ended March 31, 2013, the Company completed a contract a with a major Hollywood movie producer to develop and manufacture working replicas of high performance racing “supercars” that are to be featured in a new movie. The Company recognizes revenues using the percentage-of-completion method of accounting by relating contract costs incurred to date to the total estimated costs at completion. This method is used because management considers costs to be the best available measure of progress on its contracts. Contract losses are provided for in their entirety in the period that they become known, without regard to the percentage-of-completion. The Company also recognizes as revenues costs associated with claims and unapproved change orders to the extent it is probable that such claims and change orders will result in additional contract revenue, and the amount of such additional revenue can be reliably estimated. As of March 31, 2013 or 2012, there were no contracts in progress.
Warranty Policy
The Company provides a three-year or 36,000 mile New Vehicle Limited Warranty with every Saleen 302 and 302SC Mustang, Saleen 570 Challenger, and Saleen 620 Camaro performance vehicle. We provide a one-year or 12,000 miles New Vehicle Limited Warranty with every Saleen 351 Mustang, Saleen 570X Challenger, and Saleen 620X Camaro performance vehicle. The vehicle limited warranty applies to installed parts and/or assemblies in new Saleen performance cars. All of the unaltered parts are covered under the original full warranty of the OEM manufacturer of the base vehicles (Ford, Chevrolet, and Dodge). The Company has not experienced significant claims under its warranty policy, and management determined no accrual for warranty reserve was necessary at March 31, 2013 or 2012.
| -9- |
Concentrations
During the year ended March 31, 2013, the Company completed a contract a with a major Hollywood movie producer to develop and manufacture working replicas of high performance racing “supercars” that are to be featured in a new movie. The Company realized $1,245,985 of revenues from the contract which represents 46% of the Company’s total revenues during the year ended March 31, 2013.
Business Segments
The Company has one business segment that is converting automobiles into high performance vehicles.
Research and Development Costs
Research and development costs consist of expenditures for the research and development of new products and technology. Research and development costs were $23,277 and $94,895 during the years ended March 31, 2013 and 2012 and were expensed as incurred.
Income Taxes
The Company accounts for income taxes under FASB Codification Topic 740-10-25 (“ASC 740-10-25”). Under ASC 740-10-25, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740-10-25, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company maintains a valuation allowance with respect to deferred tax assets. The Company established a valuation allowance based upon the potential likelihood of realizing the deferred tax asset and taking into consideration the Company’s financial position and results of operations for the current period. Future realization of the deferred tax benefit depends on the existence of sufficient taxable income within the carry forward period under the Federal tax laws.
Changes in circumstances, such as the Company generating taxable income, could cause a change in judgment about the realizability of the related deferred tax asset. Any change in the valuation allowance will be included in income in the year of the change in estimate.
Common Stock and Common Stock Warrants
The Company uses the fair value recognition provision of ASC 718, “Stock Compensation,” which requires the Company to expense the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of such instruments. The Company uses the Black-Scholes option pricing model to calculate the fair value of any equity instruments on the grant date.
At March 31, 2013 and 2012, respectively, the Company had no common stock options or warrants for common stock outstanding.
The Company also uses the provisions of ASC 505-50, “Equity Based Payments to Non-Employees,” to account for stock-based compensation awards issued to non-employees for services. Such awards for services are recorded at either the fair value of the services rendered or the instruments issued in exchange for such services, whichever is more readily determinable, using the measurement date guidelines enumerated in ASC 505-50.
At March 31, 2013 and 2012, respectively, the Company used the fair value of the services rendered to record certain exchanges of stock for services and an automotive asset.
| -10- |
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and amortization. The cost of property and equipment is depreciated or amortized on the straight-line method over the following estimated useful lives:
Computer equipment and software 3 years
Furniture 3 years
Machinery 3-5 years
Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life of the asset or the lease term.
NOTE 2 – PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at March 31 of the year indicated:
| 2013 | 2012 | |||||||
| Tooling | $ | 384,293 | $ | 387,167 | ||||
| Plant & Equipment | 121,186 | 118,439 | ||||||
| Leasehold improvements | 129,402 | 129,165 | ||||||
| Total, cost | 634,881 | 634,771 | ||||||
| Accumulated Depreciation and Amortization | (294,662 | ) | (213,770 | ) | ||||
| Total Fixed Assets | $ | 340,219 | $ | 421,001 | ||||
Depreciation expense for the years ended March 31, 2013 and 2012 was $80,892 and $80,475, respectively.
NOTE 3 – NOTES PAYABLE
| Notes payable are comprised as follows: | March 31, 2013 | March 31, 2012 | ||||||||||
| Senior secured note payable to a bank, guaranteed by the U.S. Small Business Administration and personally guaranteed by Steve Saleen, payable in monthly installments of $5,300, including interest at a rate of 6% per annum payable monthly, through November 19,2019 | $ | 582,258 | $ | 608,220 | ||||||||
| Subordinated secured bonds payable, interest at 6% per annum payable at various maturity dates, currently in default (1) | 414,500 | 414,500 | ||||||||||
| Subordinated secured note payable, interest at 10% per annum, payable December 16, 2010, currently in default (2) | 105,312 | 105,312 | ||||||||||
| Subordinated secured note payable, interest at 10% per annum payable March 31, 2009, in default as of March 31, 2012, current as of March 31, 2013 (3) | 124,513 | 149,513 | ||||||||||
| Subordinated secured note payable for legal services rendered, non interest bearing, payable on October 25, 2013 (4) | 47,749 | — | ||||||||||
| Unsecured notes payable, interest at 10% per annum payable on various dates from July 31 to March 31, 2010, currently in default (5) | 320,000 | 320,000 | ||||||||||
| Total notes payable | $ | 1,594,332 | $ | 1,597,545 | ||||||||
| Less: current portion of notes payable | (1,044,074 | ) | (1,021,325 | ) | ||||||||
| Notes payable, net of current portion | $ | 550,258 | $ | 576,220 | ||||||||
| -11- |
| (1) | Bonds issued on December 1, 2008, 2009 and 2010, payable in full upon one year from issuance. The
Bonds accrue interest at 6% per annum and are secured by the real and personal property of SMS Signature Cars As of March
31, 2011, 2012 and 2013, respectively, the bonds were in default due to non-payment. |
| (2) | Note payable issued on December 16, 2010 due in full on December 16, 2011. The note accrues interest
at 10% per annum and is secured by three vehicles owned by SMS Signature Cars. The note was in default at March 31, 2012 and 2013
due to non payment. |
| (3) | Note payable issued on October 3, 2008 due in full on March 31, 2009. The note accrues interest
at 10% per annum and was secured by one vehicle owned by SMS Signature Cars. The note was in default at March 31, 2011 and 2012
due to non payment. On June 14, 2013, the Company entered into a Settlement Agreement and Mutual General Release whereby the Company
cancelled this note and issued a new unsecured 6% interest bearing note payable for $120,748 (including $15,436 accrued interest),
due (a) $34,772 on June 18, 2013, (b) $42,988 on July 17, 2013, and (c) $42,988 on August 19, 2013. |
| (4) | Non-interest bearing note payable dated January 25, 2013 due in full on October 25, 2013 or earlier
upon the occurrence of certain events that had not occurred as of March 31, 2013. The note is secured by interest in certain intellectual
property of Saleen Automotive, Inc. |
| (5) | Unsecured notes issued on various dates ranging from July 2008 to March 2009 with amounts due in full on various dates ranging from July 2009 to March 2010. The notes accrue interest at 10% per annum. The notes were in default at March 31, 2011, 2012 and 2013, respectively, due to non payment. |
Total interest expense was $163,578 and $136,742 for the years ended March 31, 2013 and 2012, respectively. As of March 31, 2013 and 2012, $231, 683 and $202,624, respectively, of interest on notes payable remains unpaid.
The Company is required to make the following payments over the next five years and beyond:
| Year Ending March 31, | ||||||
| 2014 | $ | 996,326 | ||||
| 2015 | 32,000 | |||||
| 2016 | 32,000 | |||||
| 2017 | 32,000 | |||||
| 2018 | 32,000 | |||||
| Thereafter | 470,006 | |||||
| $ | 1,594,332 | |||||
| -12- |
NOTE 4 – NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties are as follows:
| March 31, 2013 | March 31, 2012 | |||||||
| Subordinated secured bonds payable, interest at 6% per annum payable at various maturity dates, currently in default (1) | $ | 63,000 | $ | 63,000 | ||||
| Note payable to a shareholder of Saleen Automotive, Inc. secured by S7 Supercar automobile, interest at 10% per annum payable quarterly, due May 23, 2013. (2) | $ | 200,000 | — | |||||
| Unsecured note payable to a shareholder, interest at 10% per annum payable March 10, 2013. (3) | — | 16,000 | ||||||
| Unsecured note payable to a shareholder, interest at 10% per annum payable at various maturity dates, currently in default. (4) | 37,500 | 37,500 | ||||||
| Unsecured note payable to a shareholder, interest at 10% per annum payable at various maturity dates, currently in default. (5) | 60,000 | 60,000 | ||||||
| Total notes payable, related parties | $ | 360,500 | $ | 176,500 | ||||
| (1) | Bonds issued to a shareholder on December 1, 2008, 2009 and 2010, payable in full upon one year from issuance. The Bonds accrue interest at 6% per annum and are secured by the real and personal property of SMS Signature Cars. As of March 31, 2011, 2012 and 2013, respectively, the bonds were in default. Subsequent to March 31, 2013. On May 22, 2013, the Company entered into a Settlement Agreement and Mutual General Release by cancelling this $63,000 bond, a related note for $37,500, and $34,500 of accrued interest of by issuing a new unsecured non interest bearing note payable for $135,000. The Company is required to make payments of $5,000 on or before June 3, 2013 and $10,000 each on or before July 31, 2013, October 31, 2013 and December 31 2013. The Company also issued 140,000 shares of stock in conjunction with this Agreement. |
| (2) | Note payable issued to a shareholder on May 3, 2012 with an original amount of $250,000 and original maturity date of July 3, 2012, which was extended to May 2013. Interest was payable with 100,000 shares of Common Stock with 33,333 due each month the principal was unpaid beyond the maturity date. The Company issued a total of 400,000 shares of Common Stock related to interest in conjunction with this note. The note was secured by a vehicle owned by SMS Signature Cars. In May 2013, the note was paid off with proceeds from a $500,000 bridge loan (Note 11). |
| (3) | Note payable issued to a shareholder on March 12, 2012 in original amount of $16,000 and maturity date of March 12, 2013. This note was settled through the issuance of 65,000 shares of common stock on June 30, 2012. |
| (4) | Notes payable to a related party issued at various dates ranging from September 2008 to August 2010 for total original principal of $37,500 with amounts due in full on various dates ranging from September 2009 to March 2011. The notes accrued interest at 10% per annum and were in default at March 31, 2011 and2012, respectively, due to non payment. On May 21, 2013, the Company entered into a Settlement Agreement and Mutual General Release ("Agreement") by cancelling this note and related bonds in the principal amount of $63,000 by issuing a new unsecured non interest bearing note payable in the amount of $135,000 due and payable in full on April 1, 2014. The Company also issued 50,000 shares of stock in conjunction with this Agreement to this related party. |
| (5) | Unsecured note payable to a related party issued on November 3, 2008
for original principal of $60,000 with interest bearing at 10% per annum and due in full on February 10, 2009. The note was in
default at March 31, 2011, 2012 and 2013, respectively, due to non payment. On May 22, 2013, the Company entered into a Settlement
Agreement and Mutual General Release by cancelling this note and issuing a new unsecured non interest bearing note payable for
$35,000. The Company is required to make payments of $5,000 on or before June 3, 2013 and $10,000 each on or before July 31, 2013,
October 31, 2013 and December 31, 2013. The Company also issued 140,000 shares of stock in conjunction with this Agreement. |
| -13- |
NOTE 5 – RELATED PARTY TRANSACTIONS
During the years ended March 31, 2013 and 2012, we incurred $340,000 and $226,250, respectively, in officers’ salary expense due our Director, Chairman and CEO, Mr. Steve Saleen. As of March 31, 2013 and 2012, the balances of $300,000 and $60,000, respectively, were payable to Mr. Saleen for his officers’ salary. Effective March 31, 2013, Mr. Saleen agreed to defer the $300,000 of unpaid salary for payment until April 1, 2014.
During the years ended March 31, 2013 and 2012, we incurred $297,842 and $134,675, respectively, in CFO services and accounting fees expense with Miranda & Associates, a firm owned by our Director and CFO, Mr. Robert Miranda. As of March 31, 2013 and 2012, the balances of $167,222 and $69,675, respectively, were payable to Miranda & Associates for these services. Effective March 31, 2013, Miranda & Associates and Mr. Miranda agreed to defer the $167,322 of unpaid fees for payment until April 1, 2014.
During the years ended March 31, 2013 and 2012, we incurred $341,452 and $18,399, respectively, in General Counsel services and legal fees expense with Michaels Law Group, a firm owned by our Director and General Counsel, Mr. Jonathan Michaels. As of March 31, 2013 and 2012, the balances of $242,045 and $97,868, respectively, were payable to Michaels Law Group for these services. Effective March 31, 2013, Michaels Law Group and Mr. Michaels agreed to defer the $242,045 of unpaid fees for payment until April 1, 2014.
The amounts of accounts payable to related parties as of March 31, 2013 and 2012 are as follows:
| Related Party | March 31, 2013 | March 31, 2012 | ||||||
| Steve Saleen | $ | 300,000 | $ | 60,000 | ||||
| Miranda & Associates | 167,222 | 69,675 | ||||||
| Michaels Law Group | 242,045 | 97,868 | ||||||
| Totals | $ | 709,267 | $ | 227,543 | ||||
During the year ended March 31, 2012, we incurred $529,449 in salary expense with Alexander Bafer, a shareholder, for his services as vice president of business development.
During the years ended March 31, 2013 and 2012, we incurred $315,750 and $324,936, respectively, in consulting fees with shareholders for marketing, business development, engineering, business management, and financial advisory services. The amounts incurred with these related parties are as follows:
| Related Party | March 31, 2013 | March 31, 2012 | ||||||
| Gerald Parker Greentech Consulting Alexander James LLC Michael Kadie Anthony Lanham Brian Black RAV Marketing, LLC | $ - 62,750 130,000 - 10,000 13,000 100,000 | $ 121,565 - - 55,266 83,305 64,800 - | ||||||
| Totals | $ | 315,750 | $ | 324,936 | ||||
The $130,000 consulting fee incurred with Alexander James, LLC during the year ended March 31, 2013, was initially recorded as a related party note payable and then subsequently settled by the transfer of a net 621,000 founders’ share from founders Brian Black and Anthony Lanham. (See Note 7)
| -14- |
NOTE 6 – INCOME TAXES
As of March 31, 2013 and 2012, the combined companies had net operating loss carry forwards for income tax reporting purposes of approximately $8,290,000 and $5,717,000 respectively that may be offset against future taxable income. Current tax laws limit the amount of loss available to be offset against future taxable income when a substantial change in ownership occurs or a change in the nature of the business. The utilization of the losses is also limited by the fact that the combined Companies file on a separate basis and losses on one cannot offset profits on the other. Therefore, the amount available to offset future taxable income may be limited.
No tax benefit has been reported in the financial statements for the realization of loss carry forwards, as the Company believes based on the Company's past operations that there is no evidence or assurance that the carry forwards will be utilized. Accordingly, the potential tax benefits of the loss carry forwards are offset by a valuation allowance of the same amount.
| March 31, 2013 | March 31, 2012 | |||||||
| Deferred income tax asset: | ||||||||
| Net operating loss carryforward | $ | 3,316,000 | $ | 2,287,000 | ||||
| Valuation allowance | (3,316,000 | ) | (2,287,000 | ) | ||||
| Net deferred income tax asset | $ | — | $ | — | ||||
Reconciliation of the effective income tax rate to the U.S. statutory rate is as follows:
| March 31, 2013 | March 31, 2012 | |||||||
| Tax expense at the U.S. statutory income tax | (34.0 | )% | (34.0 | )% | ||||
| State tax net of federal tax benefit | (5.8 | )% | (5.8 | )% | ||||
| Increase in the valuation allowance | 39.8 | % | 39.8 | % | ||||
| Effective tax rate | — | % | — | % | ||||
The Company is primarily subject to U.S. federal and state income tax. As a result of the implementation of certain provisions of ASC 740, Income Taxes, (formerly FIN 48, Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109), the Company performed an analysis of its tax liabilities and determined that there were no positions taken that it considered uncertain. Therefore, there were no unrecognized tax benefits as of March 31, 2013 and 2012, respectively.
Future changes in the unrecognized tax benefit are not expected to have an impact on the effective tax rate due to the existence of the valuation allowance. The Company estimates that the unrecognized tax benefit will not change within the next twelve months. The Company will continue to classify income tax penalties and interest, if any, as part of interest and other expenses in its statements of operations. The Company has incurred no interest or penalties as of March 31, 2013 and 2012.
NOTE 7– SHAREHOLDERS’ EQUITY
SMS Signature Cars was incorporated in California on July 31, 2008 and issued 1,000,000 shares of no par value stock to its sole shareholder, Steven Saleen.
Saleen Automotive, Inc. was incorporated in Florida on July 21, 2011 at which time it issued 88,086,000 shares of common stock to its founders. The Company has been raising capital through a Private Placement Memorandum under the provisions of Regulation D of the US Securities and Exchange Commission. During the year ended March 31, 2013, the Company raised $1,607,072 through the issuance of 7,549,143 shares of its common stock.
| -15- |
During the year ended March 31, 2013, the Company issued 1,000,000 shares of its common stock in exchange for an automobile valued at $250,000, or $0.25 per share. During the year ended March 31, 2013, the Company issued 1,130,498 shares of its common stock in exchange for interest on a related party note, settlement of claims, payment of loans, and professional services. These shares were valued at $0.25 based on management’s estimate of value of the common shares issued. During the year ended March 31, 2013, 621,000 founders shares were transferred from two of the founders to a third founder in payment of $142,205 of related party payables. These founders share transfers were valued at $155,250 based on management’s estimate of value of the common shares issued and reflected as a cost and as a contribution of additional paid in capital in the accompanying financial statements.
During the year ended March 31, 2012, the Company raised $2,266,487 through the issuance of 4,826,435 of its shares of common stock. During the year ended March 31, 2012, the Company issued 100,000 shares of its common stock to a related party for accounting and CFO services. These shares were valued at $0.25 per share based on management’s estimate of value.
The Company had no warrants, options, or convertible debt outstanding at March 31, 2013 or March 31, 2012, respectively.
NOTE 8 – COMMITMENTS AND CONTINGINCIES
Facilities Leases
The Company rents two buildings totaling approximately 76,000 square feet on triple net leases through January, 2018. The current rent is $20,336 per month. The current lease amendment provides for an annual escalation of 3% in the rent each February. Past rent will be made up with the payment of an additional $5,300 for 20 months starting in June, 2013.
The future minimum rental payments required under the non-cancelable operating leases described above as of March 31, 2013 and 2012 are as follows:
| Years ending March 31: | Lease Commitment | |
| 2014 | $ 597,548 | |
| 2015 | 615,154 | |
| 2016 | 583,671 | |
| 2017 | 599,689 | |
| 2018 | 512,172 |
Employment Agreements
In August, 2011, the Company entered into an Employment Agreement with Steve Saleen under which he is compensated at the rate of $20,000 per month. Steve Saleen has deferred all payments otherwise due under the agreement. Employer payroll taxes have been accrued for the compensation liability.
Litigation
The Company is involved in certain legal proceedings that arise from time to time in the ordinary course of its business. Except for income tax contingencies (commencing April 1, 2009), the Company records accruals for contingencies to the extent that the management concludes that the occurrence is probable and that the related amounts of loss can be reasonably estimated. Legal expenses associated with the contingency are expensed as incurred.
The Company is currently a party to the several legal proceedings related to claims for payment that are currently accrued for in the financial statements as accounts or notes payable. Other legal proceedings that are pending as of March 31, 2013 are described as follows:
| -16- |
SMS Signature Cars is a defendant in a case filed on November 28, 2011 in the U.S. District Court in Massachusetts that alleges breach of contract related to a vehicle dispute. The case seeks $75,000 of damages, plus legal fees and costs of litigation. The Company believes that the case is without merit and the outcome is uncertain at the present time.
SMS Signature Cars is a defendant in a case filed on April 13, 2012, in the California Superior Court, Riverside County, that claims breach of contract related to an engine installed by a third party vendor. The suit claims $200,000 in damages plus interest, legal fees and costs of litigation. The Company has filed a cross complaint against the third party vendor for breach of warranty, negligence, and indemnification. The Company believes that the case is without merit and the outcome is uncertain at the present time.
The Company is a defendant in a case filed on February 11, 2013, in the Texas District Court, Lampass County, that claims breach of contract related to an engine installed by a third party vendor. The suit claims $52,237 in damages plus interest, legal fees and costs of litigation. The Company believes that the case is without merit and the outcome is uncertain at the present time.
SMS Signature Cars is a defendant in a case filed on April 13, 2012, in the California Superior Court, Napa County, that claims breach of contract related to a vehicle dispute. The suit claims $25,586 in damages plus interest, legal fees and costs of litigation. The Company believes that the case is without merit and the outcome is uncertain at the present time.
NOTE 9 –
SUBSEQUENT EVENTS
Merger Agreement
On May 23, 2013, an Agreement and Plan of Merger (the “Merger Agreement”) was entered into by Saleen Automotive, Inc. (“Saleen Automotive”) and SMS Signature Cars (“SMS” and together with Saleen Automotive, “SALEEN”), and Steve Saleen (“Saleen Entities”) with W270, Inc. (“W270”), a publicly traded Nevada development stage company, and its wholly-owned subsidiaries, Saleen California Merger Corporation and Saleen Florida Merger Corporation.
On June 26, 2013, (a) Saleen California Merger Corporation merged with and into SMS and SMS became a wholly-owned subsidiary of W270; (b) Saleen Florida Merger Corporation merged with and into Saleen Automotive and Saleen Automotive became a wholly-owned subsidiary of W270; (c) holders of the outstanding capital stock of Saleen Automotive received shares of W270’s Super Voting Preferred Stock in accordance with the exchange ratio for the Merger and holders of the outstanding capital stock of SMS received no consideration for their shares in the Merger; and (d) approximately 93% of the beneficial ownership of W270’s shares of common stock (on a fully-diluted basis) are owned, collectively, by Steve Saleen and the former holders of the outstanding capital stock of Saleen Automotive. On June 17, 2013, W270, Inc. changed its name to Saleen Automotive, Inc.
On June 26, 2013, pursuant to a Securities Purchase Agreement, the Company issued senior secured convertible notes, having a total principal amount of $3,000,000, to accredited investors. The Notes were issued in a private placement, exempt from the Securities Act registration requirements, to purchasers who are accredited investors. The Notes will pay 3.0% interest per annum with a maturity of 4 years. No cash interest payments will be required, except that accrued and unconverted interest shall be due on the maturity date and on each conversion date with respect to the principal amount being converted, provided that such interest may be added to and included with the principal amount being converted.
Each Note is convertible at any time into common stock at a specified conversion price, which will initially be $0.075 per share The Note conversion price is subject to specified adjustments for certain changes in the numbers of outstanding shares of the Company's common stock, including conversions or exchanges of such. If the Company's shares are issued, except in specified exempt issuances, for consideration which is less than the then existing Note conversion price, then such conversion price will be reduced by full ratchet anti-dilution adjustments that will reduce the conversion price to equal the price in the dilutive issuance, regardless of the size of the dilutive issuance.
| -17- |
The proceeds of the convertible notes will provide funds to carry forward our business plan. As of the date of the merger, and accounting for the capital raise transaction, approximately 70% of the beneficial ownership of the Company's shares of common stock (on a fully-diluted basis) are owned, collectively, by Steve Saleen and the former holders of the outstanding capital stock of Saleen Automotive.
Steve Saleen entered into an Assignment and License Agreement (the “Assignment and License Agreement”) with W270, wherein he contributed certain intellectual property that relates to the “Saleen” brand name and related rights which were owned by him to the Company, license to the Company the right to use his image, signature, full name, voice, biographical materials, likeness, and goodwill associated with the “Saleen” brand, and assigned to the Company all shares of the capital stock of SMS Retail – Corona, a California corporation, and Saleen Automotive Show Cars, Inc., a Michigan corporation. In exchange for entering into the Assignment and License Agreement, the Company issued to Steve Saleen, 341,943 shares of the Super Voting Preferred Stock of the Company, which will be automatically converted upon the Company’s consummation of a 1-for-2.63870 reverse stock split, into 16,200,469 common shares of the Company, representing approximately 26.41% of the outstanding shares of the Company’s common stock.
Bridge Loan from related parties
On May 8, 2013, W-Net Fund I, L.P. (“W-Net”) and Verdad Telecom, Inc. (“Verdad”), the two largest existing stockholders of W270 (the “Lenders”), and SMS, Saleen Automotive and Steve Saleen (collectively, “Borrower”), entered a Bridge Loan and Security Agreement pursuant to which the Lenders loaned to Borrower an aggregate of $500,000 and Borrower issued to the Lenders Secured Promissory Notes. Following an event of default, the Secured Promissory Notes accrue interest at 10% per annum and had a maturity date of June 15, 2013. Borrower’s obligations under the Secured Promissory Notes were secured by a first priority security interest, subject to certain existing indebtedness, on all of SMS’ and Saleen Automotive’s assets, including the Companys S7 automobile. Borrower’s obligations under the Secured Promissory Notes were also guaranteed by Steve Saleen. Borrower’s failure to pay when due amounts payable under the Secured Promissory Notes, its failure to observe any covenants under the bridge loan documents, a breach of its representations and warranties made pursuant to the bridge loan documents or its undergoing a bankruptcy or insolvency proceeding constituted an event of default. Upon the occurrence of an event of default, the Lenders could declare all obligations under the Secured Promissory Notes due and payable and could foreclose on the collateral securing such obligations. During such 60-day period, Borrow had the right to otherwise satisfy such deficiency. Upon the consummation of the capital raise transaction on June 26, 2013, the obligations outstanding under the Secured Promissory Notes converted into Notes in the same principal amounts outstanding pursuant to the capital raise transaction.
Settlement of Defaulted Related Party Notes Payable
The Company had an outstanding bond payable in the amount of $63,000 and an unsecured note payable in the amount of $37,500 to a related party. On May 21, 2013, the Company entered into a Settlement Agreement and Mutual General Release ("Agreement") by cancelling this $63,000 bond, a related note for $37,500, and $34,500 of accrued interest of by issuing a new unsecured non interest bearing note payable for $135,000 due and payable in full on April 1, 2014. The Company also issued 50,000 shares of stock in conjunction with this Agreement to this related party.
The Company had a note payable to a related
party issued on November 3, 2008 for original principal of $60,000 with interest bearing at 10% per annum and due in full on February
10, 2009. The note was in default at March 31, 2011, 2012 and 2013, respectively, due to non payment. On May 22, 2013, the Company
entered into a Settlement Agreement and Mutual General Release by cancelling this note and issuing a new unsecured non interest
bearing note payable for $35,000. The Company is required to make payments of $5,000 on or before June 3, 2013 and $10,000 each
on or before July 31, 2013, October 31, 2013 and December 31, 2013. The Company also issued 140,000 shares of stock in conjunction
with this Agreement.
The Company had a note payable in the amount of $124,512 issued on October 3, 2008 due in full on March 31, 2009. The note accrues interest at 10% per annum and was secured by one vehicle owned by SMS Signature Cars. The note was in default at March 31, 2011 and 2012 due to non payment. Subsequent to March 31, 2013, the Company entered into a Settlement Agreement and Mutual General Release whereby the Company cancelled this note and issued a new unsecured non interest bearing note payable for $140,000 due in full on or before June 17, 2013. Management is negotiating an extension of this note.
| -18- |
The Company had a note payable in the amount of $105,312 issued on October 3, 2008 due in full on March 31, 2009. The note accrues interest at 10% per annum and was secured by one vehicle owned by SMS Signature Cars. The note was in default at March 31, 2011 and 2012 due to non payment. On June 14, 2013, the Company entered into a Settlement Agreement and Mutual General Release whereby the Company cancelled this note and issued a new unsecured 6% interest bearing note payable for $120,748 (including $15,436 accrued interest), due (a) $34,772 on June 18, 2013, (b) $42,988 on July 17, 2013, and (c) $42,988 on August 19, 2013.
The Company had a $200,000 note payable secured by an S7 Supercar automobile issued on May 3, 2012 due in full on May 23, 2013. The note accrues interest quarterly in the form of 100,000 shares of common stock of Saleen Automotive, Inc. a Florida corporation. The note was paid in full on May 8, 2013, from the proceeds of the Bridge Loan from W-Net and Verdad.
Common shares issued for services to Related Parties
On May 12, 2013, the Company issued 500,000 shares of its common stock each to two of its new directors, a total of 1,000,000 shares, in payment of director fees for future service on the board. The total value of these shares is $250,000 based on a per share value of $0.25.
On June 10, 2013, the Company issued 150,000 shares of its common stock to a new employee as a condition of employment. The total value of these shares is $37,500 based on a per share value of $0.25.
On June 17, 2013, the Company issued 25,000 shares of its common stock to an employee in payment of employee expenses. The total value of these shares is $6,250 based on a per share value of $0.25.
On June 17, 2013, the Company issued 942,924 shares of its common stock to an information technology service provider in payment of future services. The total value of these shares is $235,731 based on a per share value of $0.25.
Exhibit 99.2
W270, INC., SALEEN AUTOMOTIVE INC. AND SMS SIGNATURE CARS
PRO FORMA COMBINED BALANCE SHEET
AS OF MARCH 31, 2013
(unaudited)
|
Description |
Page (s) | |
|
Notes to Unaudited Pro Forma Combined Financial Statements |
F-2 | |
| Unaudited Pro Forma Combined Balance Sheet as of March 31, 2013 | F-6 | |
| Unaudited Pro Forma Combined Statement of Operations for the year ended March 31, 2013 | F-7 | |
| Unaudited Pro Forma Combined Statement of Operations for the year ended March 31, 2012 | F-8 |
W270, INC., SALEEN AUTOMOTIVE INC. AND SMS Signature Cars
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(unaudited)
Note 1 - Basis of Presentation
The following unaudited pro forma combined financial statements give effect to the reverse merger transaction (the “Recapitalization” or the “Reverse Merger”) between W270, Inc. (“W270”), its wholly owned subsidiaries, Saleen California Merger Corporation and Saleen Florida Merger Corporation (“Merger Subs”), Saleen Automotive, Inc. (“Saleen”), and SMS Signature Cars (“SMS”). In the Reverse Merger, Saleen merged into the Saleen Florida Merger Corporation and SMS merged into the Saleen California Merger Corporation. Immediately following the merger, W270, Inc. a Nevada corporation, amended its articles to change its name to Saleen Automotive, Inc.
W270, Inc. is presently authorized under its certificate of incorporation, as amended to date, to issue 100,000,000 shares of common stock, par value $0.0001 per share and 1,000,000 shares of preferred stock, par value $0.0001 per share. W270 has amended its articles of incorporation to authorize the issuance of up to 896,000 share of Super Voting Preferred Stock.
Saleen Automotive, Inc. a Florida corporation had 105,000,000 shares of common stock issued and outstanding. Of these, 59,719,500 shares were owned by Steve Saleen, representing a 56.9% ownership interest. The remaining 45,280,500 common shares, representing a 43.1% ownership interest, were owned by other existing shareholders (Saleen Automotive’s shareholders are hereinafter collectively referred to as the “Existing Shareholders”). As part of the Merger, Steve Saleen exchanged his 59,719,500 common shares of Saleen Automotive for 315,124 shares of Super Voting Preferred Stock of W270, which will be automatically converted, upon W270’s consummation of a 1-for-2.63870 reverse stock split (the “Reverse Split”), into 14,929,875 common shares of W270, representing approximately 24.62% of outstanding shares of W270’s common stock on a fully-diluted basis. Under the Merger, the remaining Existing Shareholders, who owned 45,280,500 common shares of Saleen Automotive, exchanged their ownership interest in Saleen Automotive for an aggregate of 238,933 shares of Super Voting Preferred Stock of W270, which will be automatically converted, upon W270’s consummation of the Reverse Split, into 11,320,125 common shares of W270, representing approximately 18.67% of the outstanding shares of W270’s common stock on a fully-diluted basis. Each share of W270’s Super Voting Preferred Stock will be convertible into 125 shares of W270’s common stock before the Reverse Split, and will automatically convert upon the consummation of the Reverse Split, into approximately 47.38 shares of W270’s common stock, accounting for the Reverse Split.
In conjunction with the Merger, Steve Saleen entered into an Assignment and License Agreement (the “Assignment and License Agreement”) with W270, wherein he contributed certain intellectual property that relates to the “Saleen” brand name and related rights which are currently owned by him to W270, license to W270 the right to use his image, signature, full name, voice, biographical materials, likeness, and goodwill associated with the “Saleen” brand. In exchange for entering into the Assignment and License Agreement, W270 issued to Steve Saleen 341,943 shares of the Super Voting Preferred Stock of W270, which will be automatically converted upon W270’s consummation of a 1-for-2.63870 reverse stock split, into 16,200,469 common shares of W270, representing approximately 26.41% of the outstanding shares of W270’s common stock. Upon the automatic conversion of the shares of W270’s Super Voting Preferred Stock issued to Steve Saleen pursuant to the Assignment and License Agreement, Steve Saleen will own 31,130,344 common shares of W270, representing approximately 51.33% of the outstanding shares of W270’s common stock on a fully-diluted basis (accounting for the Notes issued in the Capital Raise).
W270 changed its name to “Saleen Automotive, Inc.” and intends to effectuate a 1-for-2.63870 reverse stock split. Following the consummation of the Reverse Split, the automatic conversion of all outstanding shares of W270’s Super Voting Preferred Stock into common shares of W270 and the conversion of the principal amount of the Notes into shares of W270’s common stock, the ownership of W270 would be as follows:
| F -2- |
| Owner | Shares (Post Split Basis) | Percentage | ||||||
| Steve Saleen | 14,929,875 | 24.6 | ||||||
| Existing Shareholders | 11,320,125 | 18.7 | ||||||
| Shares issued to Steve Saleen for Assignment and License Agreement | 16,200,469 | 26.7 | ||||||
| Shares issuable under convertible notes | 15,160,876 | 25 | ||||||
| Existing W270 Stockholders | 3,032,175 | 5 | ||||||
As a result of the Merger and the Reverse Split the Existing Shareholders exchanged 4 shares of the privately-held Saleen Automotive for 1 share the publicly-traded W270.
On June 20, 2013, we entered into a Securities Purchase Agreement with W-Net Fund I, L.P. (“W-Net”), and Verdad Telecom, Inc. (“Verdad”), and together with W-Net and Verdad the (“Purchasers”), pursuant to which the Purchasers, on June17, 2013, purchased from us from W270 its 3.0% Senior Secured Convertible Notes (the “Notes”) for cash proceeds of $2,500,000 and for the conversion of $500,000 of Saleen Automotives outstanding convertible debt held by W-Net and Verdad (the “Capital Raise”), for an aggregate of $3,000,000 of principal amount under the Notes.
A portion of the proceeds from the Capital Raise were used to pay a dividend of an aggregate amount of $280,000 to the stockholders of W270 as of May 23, 2013 and to pay for legal and accounting fees and other expenses incurred in connection with the Merger and the Capital Raise. This dividend is an expense of the reverse merger transaction in the pro forma statement of operations for the year ended March 31, 2013.
The Notes were issued in a private placement, exempt from the Securities Act registration requirements, to purchasers who are accredited investors. The Notes will pay 3.0% interest per annum with a maturity of 4 years after the closing of the Capital Raise. No cash interest payments will be required, except that accrued and unconverted interest shall be due on the maturity date and on each conversion date with respect to the principal amount being converted, provided that such interest may be added to and included with the principal amount being converted.
If there is an uncured event of default (as defined in the Notes), the holder of each Note may declare the entire principal and accrued interest amount immediately due and payable. Default interest will accrue after an event of default at an annual rate of 12%. If there is an acceleration, a mandatory default amount equal to 120% of the unpaid Note principal plus accrued interest may be payable.
On June 20, 2013, we also entered into a Security Agreement and an Intellectual Property Security Agreement with the Note purchasers, W270 and each of its subsidiaries, all of W270’s obligations under the Notes will be secured by first priority (subject to existing indebtedness) security interests in all of the assets of W270 and of each of its subsidiaries, including their intellectual property. Upon an event of default under the Notes or such agreements, the Note holders may be entitled to foreclose on any of such assets or exercise other rights available to a secured creditor under applicable law. In addition, under a Subsidiary Guarantee, Saleen Automotive, SMS and W270’s other subsidiaries will guarantee all of W270’s obligations under the Notes.
Each Note will be convertible at any time into common stock of W270 at a specified conversion price, which will initially be $0.075 per share. Immediate conversion of the Notes would result in the holders receiving 40,000,000 shares of W270’s common stock prior to the Reverse Split, and 15,160,876 shares of W270’s common stock after the Reverse Split. The Notes may not be prepaid or forced by W270 to be converted.
The Note conversion price will be subject to specified adjustments for certain changes in the numbers of outstanding shares of W270 common stock, including conversions or exchanges of such. If W270 shares are issued, except in specified exempt issuances, for consideration which is less than the then existing Note conversion price, then such conversion price will be reduced by full ratchet anti-dilution adjustments that will reduce the conversion price to equal the price in the dilutive issuance, regardless of the size of the dilutive issuance.
| F -3- |
The Notes will greatly restrict the ability of W270 and its subsidiaries to issue indebtedness or grant liens on their assets without the Note holders’ consent. They will also limit and impose financial costs on W270 being acquired by any third party.
On May 8, 2013, W-Net and Verdad, the two largest existing stockholders of W270 (the “Lenders”), and SMS, Saleen Automotive and Steve Saleen (collectively, “Borrower”), entered a Bridge Loan and Security Agreement pursuant to which the Lenders loaned to Borrower an aggregate of $500,000 and Borrower issued to the Lenders Secured Promissory Notes. On June 26, 2013, the Bridge loan was converted into 3.0% Senior Secured Convertible Note described above.
The unaudited pro forma balance sheet as of March 31, 2013, and the unaudited combined statement of operations for the years ended March 31,2013 and 2012, presented herein give effect to the reverse merger as if the transaction had occurred at the beginning of such period and includes certain adjustments that are directly attributable to the transaction, which are expected to have a continuing impact on Saleen Automotive, Inc. and are factually supportable, as summarized in the accompanying notes.
The unaudited pro forma combined financial information is provided for illustrative purposes only. The unaudited pro forma combined financial information presented herein is based on management’s estimate of the effects of the reverse merger, had such transaction occurred on the dates indicated herein, based on currently available information and certain assumptions and estimates that the Company believes are reasonable under the circumstances. The unaudited pro forma combined financial information is not necessarily indicative of the results of operations or financial position that actually would have been achieved had the reverse merger been consummated on the dates indicated, or that may be achieved in the future.
The unaudited pro forma combined financial information presented herein should be read in conjunction with the financial statements contained elsewhere in this Current Report on Form 8-K, as filed with the Securities and Exchange Commission.
The following are the pro forma adjustments that were made to the combined financial statements:
| A. | On June 20, 2013, the Company issued $3,000,000 of its Senior Secured Convertible notes and realized net proceeds from the financing transaction as follows: |
| Gross proceeds from Capital Raise Transaction | $ | 3,000,000 | ||
| Less: dividend payment to W270 shareholders | (280,000 | ) | ||
| Less : payment of related party loan | (200,000 | ) | ||
| Net proceeds from Capital Raise Transaction | $ | 2,520,000 |
The pro forma combined balance sheet adjusts cash by the $2,520,000 net proceeds from the Capital Raise transaction, less the $280,000 dividend payment to the W270, Inc. shareholders, an expense of the reverse merger transaction and the repayment of a $200,000 related party loan.
| B. | The pro forma combined balance sheet has been adjusted by $52,000 of accrued liabilities of W270, Inc. that are not being assumed by Saleen Automotive, Inc. |
| C. | The purchase price adjustments contained in the $3,000,000 of senior secured convertible notes created a derivative liability upon issuance. The Company used a weighted-average Black-Scholes-Merton option pricing model to value the derivative instruments at inception. The Company estimated its derivative liability on these notes to be $2,736,398. This estimated derivative liability is reported as a current liability and as a discount on the $3,000,000 Senior Secured Convertible notes. This discount will be amortized over the term of the notes. The final value attributable to the derivative liability may differ from the estimate herein by a material amount once the effect of the transaction is adjusted for the market value of the shares , and management completes a more formal valuation. |
| F -4- |
| D. | The pro forma combined balance sheet adjusts the Shareholders equity accounts as follows upon the closing: |
| 1) | Record $896 capital stock for the issuance of 896,000 shares at a par value of $0.001 of Super Voting Preferred Stock to the shareholders of Saleen Automotive, Inc. and Steve Saleen. |
| 2) | Record the cancellation of the outstanding common shares of Saleen Automotive, Inc. that were exchanged for the Super Voting Preferred stock upon the closing of the merger. This transaction reduces capital related to the common stock by $10,269. |
| 3) | Record the net difference of $9,373 the above transactions as a charge to Additional Paid in Capital. |
| E. | The pro forma combined statements of operations adjustments are as follows: |
| a. | $280,000 expenses of the reverse merger transaction related to the issuance of dividends to the W270, Inc. shareholders. |
| b. | $39,547 of accounts payable of W270, Inc. as of March 31, 2013, that were assumed by the Company at the time of the reverse
merger transaction. |
| F. | Accumulated Deficit has been adjusted to eliminate $91,547 accumulated deficit of W270, Inc. |
Pro forma basic and diluted loss per common share is based on the weighted average number of common shares which would have been outstanding during the period if the recapitalization had occurred at March 31, 2013 and 2012. In computing pro forma diluted net loss per share, the effect of the conversion of the Super Voting Preferred shares into common shares and the effect of the 1-for-2.63870 reverse stock split have been considered as if these events had occurred on March 31, 2013.
The unaudited pro forma combined financial statements do not include any adjustment for non-recurring costs incurred or to be incurred after March 31, 2013, by the Company to consummate the Reverse Merger, except as noted above. Merger costs include fees payable for investment banking services, legal fees and accounting fees. Such costs will be expensed as incurred.
The per share information presented in the unaudited pro forma combined financial statements is presented as if the reverse split described herein occurred at the beginning of the earliest period presented.
| F -5- |
W270, INC., SALEEN AUTOMOTIVE INC. AND SMS SIGNATURE CARS
PRO FORMA COMBINED BALANCE SHEET
AS OF MARCH 31, 2013
(unaudited)
| W270, Inc. (1) | Saleen Automotive, Inc. (2) | Pro forma | Pro forma | ||||||||||||
| 31-Mar-13 | 31-Mar-13 | Adjustments | Combined | ||||||||||||
| (historical) | (historical) | (unaudited) | |||||||||||||
| ASSETS | |||||||||||||||
| CURRENT ASSETS | |||||||||||||||
| Cash | $ | - | $ | 4,434 | $ | 2,520,000 | (A) | $ | 2,524,434 | ||||||
| Cash held in trust by related party | 175,000 | 175,000 | |||||||||||||
| Accounts receivable | - | 5,352 | - | 5,352 | |||||||||||
| Inventory | - | 538,224 | - | 538,224 | |||||||||||
| Prepaid expenses | - | 23,483 | - | 23,483 | |||||||||||
| TOTAL CURRENT ASSETS | - | 746,493 | 2,520,000 | 3,466,493 | |||||||||||
| LONG TERM ASSETS | |||||||||||||||
| Property, plant & equipment | - | 340,219 | 340,219 | ||||||||||||
| Other assets | - | 37,358 | 37,358 | ||||||||||||
| TOTAL ASSETS | $ | - | $ | 1,124,070 | $ | 2,520,000 | $ | 3,644,070 | |||||||
| LIABILITIES AND | |||||||||||||||
| SHAREHOLDERS' DEFICIT | |||||||||||||||
| CURRENT LIABILITIES | |||||||||||||||
| Accounts payable | $ | 105 | $ | 666,782 | $ | (D) | $ | 666,887 | |||||||
| Payables- related parties | 39,442 | 709,267 | (D) | 748,709 | |||||||||||
| Current portion of notes payable | - | 1,044,074 | 1,044,074 | ||||||||||||
| Current portion of notes to related parties | - | 360,500 | (200,000) | (A) | 160,500 | ||||||||||
| Payroll taxes payable | - | 246,075 | 246,075 | ||||||||||||
| Accrued interest on notes payable | - | 318,836 | 318,836 | ||||||||||||
| Customer deposits | - | 942,859 | - | 942,859 | |||||||||||
| Other current liabilities | 52,000 | 433,706 | (52,000) | (B) | 433,706 | ||||||||||
| Estimated derivative liability | - | - | 2,736,398 | (C) | 2,736,398 | ||||||||||
| TOTAL CURRENT LIABILITIES | 91,547 | 4,722,099 | 2,484,398 | 7,298,044 | |||||||||||
| LONG TERM LIABILITIES | |||||||||||||||
| Notes payable, net of current portion | 550,258 | 550,258 | |||||||||||||
| Senior Secured Convertible Notes | 3,000,000 | (A) | 3,000,000 | ||||||||||||
| Discount on Convertible Notes | (2,736,398) | (C) | (2,736,398) | ||||||||||||
| TOTAL LIABILITIES | 91,547 | 5,272,357 | 2,748,000 | 8,111,904 | |||||||||||
| SHAREHOLDERS' DEFICIT | |||||||||||||||
| Preferred stock | - | - | 896 | (D) | 896 | ||||||||||
| Common stock | 8,000 | 10,269 | (10,269) | (D) | 8,000 | ||||||||||
| Additional paid in capital | 3,059 | 4,584,976 | 9,373 | (D) | 4,597,408 | ||||||||||
| Accumulated deficit | (102,605) | (8,743,532) | (319,547) | (E) | (9,074,138) | ||||||||||
| 91,547 | (F) | ||||||||||||||
| TOTAL SHAREHOLDERS' DEFICIT | (91,547) | (4,148,287) | (227,999) | (4,467,834) | |||||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT | $ | - | $ | 1,124,070 | $ | 2,520,000 | $ | 3,644,070 | |||||||
(1) Source: unaudited financial statements of W270, Inc. as of March 31, 2013
(2) Source: combined financial statements of Saleen Automotive, Inc. and SMS Signature Cars included elsewhere in the form 8-K.
See accompanying notes to unaudited pro forma combined financial statements.
| F -6- |
W270, INC., SALEEN AUTOMOTIVE INC. AND SMS SIGNATURE CARS
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 2013
(unaudited)
| W270, Inc. (1) | Saleen Automotive, Inc.(2) March 31, 2013 | Pro forma Adjustments | Pro forma Combined | |||||||||||||
| (historical) | (historical) | (unaudited) | ||||||||||||||
| Revenue | $ | — | $ | — | $ | — | $ | — | ||||||||
| Vehicles and parts | 1,453,030 | 1,453,030 | ||||||||||||||
| Design services | 1,245,985 | — | 1,245,985 | |||||||||||||
| Total revenue | 2,699,015 | — | 2,699,015 | |||||||||||||
| Cost of Goods Sold | ||||||||||||||||
| Vehicles and parts | 1,320,061 | 1,320,061 | ||||||||||||||
| Design Services | 859,541 | 859,541 | ||||||||||||||
| Total Costs of Good Sold | 2,179,602 | 2,179,602 | ||||||||||||||
| Gross Margin | 519,413 | 519,413 | ||||||||||||||
| Operating expenses | ||||||||||||||||
| Research and development | 23,277 | 23,277 | ||||||||||||||
| Sales and marketing | 302,669 | 302,669 | ||||||||||||||
| Selling, general and administrative | 75,989 | 2,871,483 | 2,947,472 | |||||||||||||
| Depreciation | 80,892 | 80,892 | ||||||||||||||
| Total operating expenses | 75,989 | 3,278,321 | 3,354,310 | |||||||||||||
| Loss from operations | (75,989 | ) | (2,758,908 | ) | (2,834,897 | ) | ||||||||||
| Other income (expense) | ||||||||||||||||
| Expenses of Reverse Merger | (319,547 | ) | (E) | (319,547 | ) | |||||||||||
| Debt forgiveness | 7,600 | 7,600 | ||||||||||||||
| Interest expense | (225,046 | ) | (225,046 | ) | ||||||||||||
| Loss on settlement of notes payable | (4,162 | ) | — | (4,162 | ) | |||||||||||
| Net loss | $ | (68,389 | ) | $ | (2,988,116 | ) | $ | (319,547 | ) | $ | (3,376,052 | ) | ||||
| Loss per common share | $ | ($0.07) | ||||||||||||||
| Weighted average shares outstanding - basic and fully diluted (on a post split basis). | 45,482,644 | |||||||||||||||
(1) Source: unaudited financial statements of W270, Inc. as of March 31, 2013
(2) Source: combined financial statements of Saleen Automotive, Inc. and SMS Signature Cars included
elsewhere in the form 8-K.
See accompanying notes to unaudited pro forma combined financial statements
| F -7- |
W270, INC., SALEEN AUTOMOTIVE INC. AND SMS SIGNATURE CARS
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 2012
(unaudited)
| W270, Inc. (1) | Saleen Automotive, Inc.(2) | Pro forma Adjustments | Pro forma | |||||||||
| March 31, 2012 | Combined | |||||||||||
| (historical) | (historical) | (unaudited) | ||||||||||
| Revenue | $ | $ | $ | - | $ | |||||||
| Vehicles and parts | 1,173,494 | 1,173,494 | ||||||||||
| Design services | - | - | - | |||||||||
| Total revenue | 1,173,494 | - | 1,173,494 | |||||||||
| Cost of Goods Sold | ||||||||||||
| Vehicles and parts | 1,075,542 | 1,075,542 | ||||||||||
| Design Services | ||||||||||||
| Total Costs of Good Sold | 1,075,542 | 1,075,542 | ||||||||||
| Gross Margin | 97,952 | 97,952 | ||||||||||
| Operating expenses | ||||||||||||
| Research and development | 94,895 | 94,895 | ||||||||||
| Sales and marketing | 52,475 | 52,475 | ||||||||||
| Selling, general and administrative | 34,217 | 2,633,316 | 2,667,533 | |||||||||
| Depreciation | 80,475 | 80,475 | ||||||||||
| Total operating expenses | 34,217 | 2,861,161 | 2,895,378 | |||||||||
| Loss from operations | (34,217) | (2,763,209) | (2,797,426) | |||||||||
| Other income (expense) | ||||||||||||
| Interest expense | (150,350) | (150,350) | ||||||||||
| Loss on settlement of notes payable | 10,000 | - | 10,000 | |||||||||
| Net loss | $ | (34,217) | $ | (2,903,559) | $ | - | $ | (2,937,776) | ||||
| Loss per common share | $ | (0.05) | ||||||||||
| Weighted average shares outstanding - basic and fully diluted (on a post split basis) | 45,482,644 | |||||||||||
(1) Source: unaudited financial statements of W270, Inc. as of March 31, 2013
(2) Source: combined financial statements of Saleen Automotive, Inc. and SMS Signature Cars included elsewhere in the form 8-K
See accompanying notes to unaudited pro forma combined financial statements
| F -8- |