UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) May 9, 2011
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements, which reflect our views with respect to future events and financial performance. These forward-looking statements are subject to certain uncertainties and other factors that could cause actual results to differ materially from such statements. These forward-looking statements are identified by, among other things, the words "anticipates", "believes", "estimates", "expects", "plans", "projects", "targets" and similar expressions. Statements in this report concerning the following are forward looking statements:
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future financial and operating results;
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our ability to fund operations and business plans, and the timing of any funding or corporate development transactions we may pursue;
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the ability of our suppliers to provide products or services in the future of an acceptable quality on a timely and cost-effective basis;
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expectations concerning market acceptance of our products;
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current and future economic and political conditions;
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overall industry and market trends;
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management’s goals and plans for future operations; and
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other assumptions described in this report underlying or relating to any forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. Except to the extent required by applicable securities laws, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Important factors that may cause actual results to differ from those projected include the risk factors specified below.
USE OF DEFINED TERMS
Except where the context otherwise requires and for the purposes of this report only:
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"we," "us," "our" and "Company" refer to the combined business of Diversified Opportunities, Inc., and its consolidated subsidiaries, including SugarMade, Inc.;
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"Exchange Act" refers to the United States Securities Exchange Act of 1934, as amended;
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"SEC" refers to the United States Securities and Exchange Commission;
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"Securities Act" refers to the United States Securities Act of 1933, as amended;
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“Sugarmade-CA” refers to the business and operations of our subsidiary, Sugarmade, Inc., prior to the completion of the Sugarmade Acquisition; and
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"U.S. dollars," "dollars" and "$" refer to the legal currency of the United States.
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ITEM 1.01 ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT
On May 9, 2011 (the "Closing Date") we completed the remaining conditions and closed the previously announced Exchange Agreement dated April 23, 2011 (the “Exchange Agreement”) with Sugarmade, Inc., a California corporation (“Sugarmade-CA”) and certain shareholders of Sugarmade-CA (the “Sugarmade Acquisition”). Pursuant to the terms of the Exchange Agreement, we issued (i) 8,864,108 shares of the Company's common stock to the Sugarmade-CA shareholders, in exchange for the same number of shares of stock of Sugarmade-CA issued and outstanding as of the Closing Date; (ii) warrants to purchase up to 2,330,400 shares of our Company’s common stock to current Sugarmade-CA warrant holders on a one-for-one basis in exchange for warrants that they held in Sugarmade-CA; and (iii) options to purchase up to 920,000 shares of our Company’s common stock to current Sugarmade-CA option holders on a one-for-one basis in exchange for options that they held in Sugarmade-CA.
Also effective May 9, 2011, we entered into a Cancellation Agreement (the "Cancellation Agreement") with Sugarmade-CA and three of our stockholders, including Kevin Russeth our director and Chief Executive Officer, who previously held an aggregate of 9,000,000 shares of our common stock. In order to induce Sugarmade-CA to enter into the Exchange Agreement and in consideration of warrants to purchase up to 200,000 shares of common stock, the three stockholders agreed to cancel an aggregate of 8,500,000 shares of their common stock. In addition the stockholders agreed to redeem a further 262,500 shares of their common stock in exchange for cash proceeds totaling $210,000.
This summary is qualified in its entirety by reference to the complete text of the Exchange Agreement which is incorporated by reference into this report as described below.
ITEM 2.ITEM 2.01 | COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS |
On May 9, 2011, we completed the acquisition of Sugarmade-CA pursuant to the Exchange Agreement. The Sugarmade Acquisition was accounted for as a recapitalization effected by a share exchange, wherein Sugarmade-CA is considered the acquirer for accounting and financial reporting purposes. The assets and liabilities of the acquired entity have been brought forward at their book value and no goodwill has been recognized.
We have included the information that would be required if we were filing a general form for registration of securities on Form 10, including a complete description of the business and operations of Sugarmade-CA in Item 5.06 below, which is incorporated herein by reference.
ITEM 3.ITEM 3.02 | UNREGISTERED SALES OF EQUITY SECURITIES |
On May 9, 2011, in connection the Exchange Agreement we issued: (i) 8,864,108 shares of our common stock to the shareholders of Sugarmade-CA; (ii) 2,330,400 warrants to purchase shares of our common stock to warrantholders of Sugarmade-CA; (iii) 920,000 options to purchase shares of our common stock to option holders of Sugarmade-CA; and (iv) 200,000 warrants to Kevin Russeth, our Chief Executive Officer, Steven Davis and Jonathan Shultz in connection with the Cancellation Agreement.
The shares were issued in exchange for a like number of shares of common stock of Sugarmade-CA. The warrants issued to the warrantholders of Sugarmade-CA were issued in exchange for a like number of warrants to purchase common stock of Sugarmade CA. The options issued to the option holders of Sugarmade-CA were issued in exchange for a like number of options to purchase common stock of Sugarmade-CA. The 200,000 warrants were issued in partial consideration of the agreement to cancel 8,500,000 shares of the Company's outstanding common stock under the terms of the Cancellation Agreement.
The warrants issued to the former Sugarmade-CA warrant holders and to Messrs. Russeth, Davis and Shultz grant the holder the immediately vested right to purchase shares of our common stock at $1.25 per share for a period of three years. The options granted to the option holders of Sugarmade-CA to purchase shares of our common stock have terms ranging from five to ten years with vesting periods of up to three years and exercise prices of $1.25 per share.
We did not receive any cash consideration in connection with the Sugarmade Acquisition. The number of our shares issued to the shareholders of Sugarmade-CA was determined based on an arms-length negotiation. The issuance of our shares, warrants and options to those shareholders was made in reliance on the exemption provided by Section 4(2) of the Securities Act for the offer and sale of securities not involving a public offering, and Regulation D promulgated under the Securities Act.
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Between May 9, 2011 and May 12, 2011, we issued units including a total of 100,000 shares and two-year warrants to purchase up to 100,000 shares of common stock at $1.50 per share in exchange for gross proceeds totaling $125,000.
In instances described above where we issued securities in reliance upon Regulation D, we relied upon Rule 506 of Regulation D. The parties who received the securities in such instances made representations that such party (a) is acquiring the securities for his, her or its own account for investment and not for the account of any other person and not with a view to or for distribution, assignment or resale in connection with any distribution within the meaning of the Securities Act, (b) agrees not to sell or otherwise transfer the purchased shares unless they are registered under the Securities Act and any applicable state securities laws, or an exemption or exemptions from such registration are available, (c) has knowledge and experience in financial and business matters such that he, she or it is capable of evaluating the merits and risks of an investment in us, (d) had access to all of our documents, records, and books pertaining to the investment and was provided the opportunity to ask questions and receive answers regarding the terms and conditions of the offering and to obtain any additional information which we possessed or were able to acquire without unreasonable effort and expense, and (e) has no need for the liquidity in its investment in us and could afford the complete loss of such investment. Management made the determination that the investors in instances where we relied on Regulation D are accredited investors (as defined in Regulation D) based upon management's inquiry into their sophistication and net worth. In addition, there was no general solicitation or advertising for securities issued in reliance upon Regulation D.
In instances described above where we indicate that we relied upon Section 4(2) of the Securities Act in issuing securities, our reliance was based upon the following factors: (a) the issuance of the securities was an isolated private transaction by us which did not involve a public offering; (b) there were only a limited number of offerees; (c) there were no subsequent or contemporaneous public offerings of the securities by us; (d) the securities were not broken down into smaller denominations; and (e) the negotiations for the sale of the stock took place directly between the offeree and us.
ITEM 5.01 CHANGES IN CONTROL OF REGISTRANT
We had 9,199,192 shares of common stock outstanding immediately prior to the Closing Date. After giving effect to the cancellations and redemptions described in the Cancellation Agreement, the Company had 436,692 shares of common stock outstanding immediately prior to the closing of the Sugarmade Acquisition. In connection with the closing of the Sugarmade Acquisition (and assuming all of the former Sugarmade-CA shareholders exchange their Sugarmade-CA shares for shares of Company common stock), up to an additional 8,864,108 shares of Company common stock will be issued to the shareholders of Sugarmade-CA. As a result of the Sugarmade Acquisition, the shareholders of the Company which existed prior to the closings would own approximately 4.7% of the outstanding common stock of the Company, and the former Sugarmade-CA shareholders would own approximately 95.3% of the outstanding common stock of the Company, which resulted in a change of control of the Company.
Reference is made to the beneficial ownership table disclosure set forth under Item 5.06 of this Current Report, which disclosure is incorporated herein by reference, regarding the identity of the persons who acquired control of the Company, and their percentage ownership of voting securities of the Company as of the Closing Date.
ITEM 5.02 DEPARTURE OF DIRECTORS OR CERTAIN OFFICERS; ELECTION OF DIRECTORS; APPOINTMENT OF CERTAIN OFFICERS; COMPENSATORY ARRANGEMENTS OF CERTAIN OFFICERS
Upon the closing of the Exchange Agreement, as of May 9, 2011, Kevin Russeth, our sole director, submitted his resignation letter pursuant to which he resigned immediately from all offices of our company that he holds. Mr. Russeth also resigned from his position as our director effective ten days following our filing of a Schedule 14F-1 with the SEC and mailing the Schedule 14F-1 to our registered stockholders. The resignation of Mr. Russeth is not in connection with any known disagreement with us on any matter.
On May 9, 2011, in connection with the closing of the Exchange Agreement, Mr. Scott Lantz was appointed to our Board of Directors. We also appointed Clifton Kuok Wai Leung, Sandy Salzberg, C. James Jensen and Ed Roffman to our Board of Directors with such appointment to be effective ten days following our filing of a Schedule 14F-1 with the SEC and mailing the Schedule 14F-1 to our registered stockholders.
On May 9, 2011 Scott Lantz became our Chief Executive Officer, Chief Financial officer and Treasurer. For certain biographical and other information regarding the newly appointed officer and directors, see the disclosure under Item 5.06 of this report, which disclosure is incorporated herein by reference.
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ITEM 5.06 CHANGE IN SHELL COMPANY STATUS
On May 9, 2011, we acquired Sugarmade-CA in a reverse acquisition transaction. Prior to the transactions contemplated by the Exchange Agreement, we were a shell company as defined in Rule 12b-2 under the Exchange Act. As a result of the transactions contemplated by the Exchange Agreement, we are no longer a shell company. The information with respect to the transaction set forth in Item 2.01 is incorporated herein by reference.
FORM 10 DISCLOSURE
We are providing below the information that would be included in a Form 10 if we were to file a Form 10. Please note that the information provided below relates to the combined enterprises after the acquisition of Sugarmade-CA, except that information relating to periods prior to the date of the reverse acquisition only relate to Sugarmade-CA unless otherwise specifically indicated.
DESCRIPTION OF BUSINESS
Business
We are a distributor of paper products that are derived from non-wood sources. We are parties to an Exclusive License and Supply Agreement (“LSA”) with Sugar Cane Paper Company (“SCPC”), a company located in the People’s Republic of China. SCPC is a manufacturer and a holder of intellectual property rights and patents in the area of developing and manufacturing paper from non-wood sources. Under the LSA, we hold the exclusive right to market, distribute and manufacture SCPC’s proprietary products in Europe, North, Central and South America, Australia and in other designated territories in the world. We also obtained the rights (within the designated territories) to the Sugarmade brand name and trademarks.
We believe that our Company has a unique advantage in the market to provide paper products derived from earth-friendly sources to much of the world’s population. SCPC’s use of agricultural residuals, namely bagasse (derived from sugar cane) and bamboo, as opposed to wood products significantly reduces its manufacturing carbon footprint, energy consumption, and attendant water pollution during the manufacture of its products. This allows us to offer our unique, exclusive, tree-free paper products at price-parity equal to or less than current recycled fiber products already on the market. Our products are unique and we believe offer an ideal solution for those consumers (both corporate and individual) seeking to meet their sustainability mandates or personal environmentally conscious goals, at a price that is equal to or less than current recycled products.
Pulp and paper manufacturing processes have not changed significantly for decades. Most equipment and processes used today are still based primarily on tree-based inputs and require massive amounts of resources including water, energy and caustic chemicals. Globally, pulp for paper and related uses is expected to continue to consume an increasing share of all wood production, from forty percent (40%) in 1998 to an estimated nearly sixty percent (60%) over the next fifty years. During that same time span, easily accessible and inexpensive sources of wood will continue disappearing. Because of the rapid consumption of virgin forests in places as far apart as Canada and Southeast Asia, forest restoration has not been able to keep pace with the demand for wood products.
Loss of forests is not the only concern. Deforestation has released an estimated 120 billion tons of carbon dioxide (CO2 - the major global warming gas) into the atmosphere. The pulp and paper industry is the third-largest industrial polluter in both Canada and the United States, releasing an estimated 220 million pounds of toxic pollution into the air, ground and water each year. In the United States, paper-producing companies are the third-largest energy consumer. Our Company offers an alternative to this situation through our ability to provide the developed world paper products without utilizing the deforestation, pollution and resource waste of current paper producing methods.
All our products are manufactured from 100% tree-free agricultural waste residues such as bagasse and bamboo. Both bagasse and bamboo contain significantly higher amounts of cellulose (2.5 times or more) than wood fiber. Additionally, both sugar cane and bamboo can be harvested in 7-10 months. This contrasts with trees that take a minimum of seven years before being ready for pulping and paper production. By utilizing bagasse and bamboo fibers for paper making, we can produce one ton of finished paper product for every one ton of raw material as contrasted to wood fiber which requires four tons of raw material to produce one ton of finished products. Our process greatly reduces the carbon footprint and environmental damages from paper production.
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History
On October 26, 2009, we (operating at the time as Simple Earth, Inc.) acquired all of the outstanding common stock of Sugarmade, Inc. (“SMI”), a California corporation incorporated in March 2009 to import, sell and distribute sustainable and environmentally friendly non-tree-based paper products. During 2010, we began doing business as Sugarmade, Inc. (“Sugarmade-CA”). On February 1, 2011, Sugarmade-CA changed its legal name to Sugarmade, Inc. and dissolved the SMI legal entity. Our Company intends to change its name to “Sugarmade, Inc.” and operate under that name.
The Industry and the Overall Market
Currently, the U.S. paper industry is a $230 billion industry. The U.S. alone consumes over 110 million tons of paper products each year. Our area of focus includes (but SCPC’s manufacturing capabilities are not limited to):
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Printing and writing paper (27% of total production);
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Containerboard or corrugated boxes (29% of total production); and
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Tissue (8% of total production).
Within each of these sectors, there are varying amounts of recycled materials that can be used in production. Tissue has an industry average of 45% recycled fibers. Containerboard averages 24% recycled fibers. Printing and writing paper uses a scant 6% recycled fibers. We see a significant market opportunity to leverage our capabilities to eliminate tree materials included in these products.
The advent of the Internet and email would at first sight seem to argue for decreased paper consumption. Many (including industry experts) forecasted that these technologies would lead to substantial reductions in the level of paper consumption. The reality has been the opposite. Paper sales have increased roughly four percent annually since the onset of the Internet age. Worldwide, paper constitutes approximately 42% of the wood harvested in the world. The U.S. alone consumes nearly 30% of the world’s paper products. The average American consumes over 700 pounds of paper per year, including the paper products that are the focus of our market strategy.
Paper is manufactured from three primary sources: 1) tree-based (i.e. virgin) materials; 2) recycled content (varying compositions of virgin and recycled) materials; and 3) tree-free materials. Tree-based paper is made from trees harvested from the forest, converted into pulp and bleached. Recycled (to varying percentages of composition) paper is a combination of virgin materials combined with previously used paper that undergoes an additional de-inking and bleaching process before further pulping process.
Tree-free paper (our Company’s product offering) is made from fibrous materials that contain high levels of cellulose. The sources of tree-free products are agricultural byproducts, also called residuals. As a byproduct, residuals do not require dedicated farmland. Aside from preserving forest and farmland, residuals also greatly reduce environmental impact because of the reduction of water required in paper production, the decreased energy required to break down the cellulose in tree-based materials and a reduction of air pollution from the use of previously burned byproducts. Unlike competing manufacturers, our paper products are elemental chlorine free, meaning that we use chlorine dioxide instead of elemental chlorine gas in our manufacturing process. Elemental chlorine gas produces dioxin (a known carcinogen) as a by-product.
Agricultural residual paper is produced from the waste by-products from a crop that has been harvested. While there are numerous crops that can be used for this, the ideal crops are bagasse (sugar cane), corn and wheat. The quality of these agricultural residual papers differs depending on the amount of cellulose that is present in the plant material. Depending on the strength of the fibers of the residual, a secondary material may have to be added to increase the strength of the final paper product. In some manufacturing processes, virgin or recycled pulp will be added to strengthen the paper. With our paper products, we combine bamboo with the bagasse pulp to give the strength necessary to produce the highest quality paper. The percentages of bamboo vary depending on products being produced (e.g. copy paper is 80% bagasse and 20% bamboo).
The paper industry is the fourth largest contributor to greenhouse gas emissions among U.S. manufacturing industries and contributes 9% of the manufacturing sector's carbon emissions. The following table gives a comparison of the environmental impacts of each category of paper production. The table gives data for the production of one ton of copy paper and the environmental impact each category has on our environment.
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Table : Environmental Impacts
Per 1 Ton Finished Goods | Wood Use (Tons) | Net Energy (million BTUs) | Greenhouse Gasses (lbs CO2 equivalent) | Waste Water (gallons) | Solid Waste (lbs) |
**Sugarmade™ | - | 10 | 1,957 | 3,953 | 72 |
*Virgin Pulp | 4 | 30 | 5,882 | 22,219 | 1,909 |
*30% Recycled | 3 | 27 | 5,144 | 18,665 | 1,693 |
*100% Recycled | - | 22 | 3,422 | 10,372 | 1,189 |
*Data from EDF Paper Calculator **Internal Sugarmade Statistics
We believe that trends in government, corporate and consumer awareness of the environmental impacts of paper production will increase demand for alternative paper supplies which are more environmentally friendly. Within the market for environmentally friendly paper, we believe that our tree-free products are unique in their low carbon footprint. In addition, our relationship with SCPC gives us access to experience in manufacturing tree-free paper and the ability to reach commercial scale quickly.
Our Partner SCPC: Capacity, License and Territory
SCPC is a 56 year-old paper products company and is among the largest bagasse and bamboo pulping companies in the world. With over a half-century of experience, research, and business development effort, SCPC contends that it is the largest producer of 100% tree-free paper products in the Asian markets. SCPC converts plant material from the waste residuals of sugar cane (bagasse) and bamboo to commercial grade tree-free fibers. SCPC’s processes are proprietary and patented and previously virtually all of its paper products were marketed and consumed in the Asian markets. SCPC has been selling tree-free paper products into the Asian markets for over fifty years.
Under the LSA, we are the exclusive distributor for all of SCPC’s tree-free and bagasse-based products in the Americas, Europe, Australia and New Zealand (the “Territories”). As its exclusive licensee, SCPC has also assigned us their relevant production patents in the Territories. Our exclusive distribution and license agreement for the Territories has an initial term of 20 years with a renewable option at our discretion for an additional 20 years.
SCPC provides us with readily available commercial scale, having annual tree-free paper production capacity of over 350,000 metric tons. At current price levels, 350,000 metric tons of products represents the manufacturing capacity to support annual revenues up of to $420 million. Moreover, with metric ton quantities of sugar cane and bamboo residual waste material locally available (in China) to SCPC for tree-free pulp, we see little risk of product supply constraints. We believe that our exclusive relationship with SCPC, together with SCPC's intellectual property rights and access to source materials provides us with a substantial barrier to entry for potential competitors.
While our Company is independent of SCPC, Clifton Leung the Chief Executive Officer and Chairman of SCPC is an incoming member of our Board of Directors and significant shareholder of our Company. Mr. Leung’s involvement in our Company is invaluable both for his industry expertise and the attendant alignment of the interests of both SCPC and our Company. We are neither a factory representative, commissioned sales agency nor simply a middleman. The LSA and our relationship and ongoing participation of SCPC’s Mr. Leung provides assurances that we will not compete with others for the products manufactured by SCPC.
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Products
We will have available to market, a complete suite of tree-less paper products in order to concurrently capitalize on multiple commercial market verticals. More specifically, our company will have 32 separate SKU's of tree-free paper products in order to take advantage of all the products being produced by SCPC in commercially scalable quantities. These 32 SKU's break down into four (4) product categories:
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Printing, Writing, and Copy Paper (4 SKU’s)
a.
Letter size – 8.5” x 11”
b.
Legal size – 8.5” x 14”
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Industrial/Commercial Packaging (2 SKU’s)
a.
Corrugated box
b.
Industrial paper
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Tissue (Bath/Kitchen) (7 SKU’s)
a.
Paper towels – multi-fold and roll
b.
Toilet paper – regular roll and jumbo (janitorial) roll
c.
Napkins – beverage, lunch, dinner
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Tableware/Foodservice items (Plates, Cups, etc.) (18 SKU’s)
a.
Plates – 10.25”, 10”, 9” and 8.75” rounds with or without compartments
b.
Bowls – 24 oz., 20 oz., 16 oz., 12 oz. with lids
c.
Away from home – 9”, 6” clamshells with or without compartments
d.
Trays – assorted sizes and shapes based on requirements
We intend to primarily focus our sales and marketing efforts on the printing, writing and copy paper and industrial/commercial packaging categories.
Production and Logistics
SCPC’s manufacturing facility is located in the city of Jiangmen, in the province of Guangdong in the Peoples’ Republic of China. Its operations include pulping (from locally available bagasse and bamboo) and conversion (from pulp to finished product). Based on discussions with SCPC management, we believe that SCPC tree-free paper production is currently operating at roughly 28% capacity.
After transport from SCPC’s factory to the nearby port of Yan Tian, product is shipped to a warehouse located in Oakland, CA. We have contracted for a warehousing facility that we use as a staging area for shipments throughout the U.S. as well as storage for inventory sold regionally. The third party warehouse can inventory up to 2,000 shipping containers or 1.44 million cases of copy paper.
We have access to an extensive network of third-party logistics companies. If required, we are prepared to handle the moving and transporting of our products to customers anywhere in the U.S.
Target Markets
Our initial target markets are corporate entities and government agencies. We are in currently in advanced discussions with retailers and distribution channels that service the corporate market as well as a number of large government agencies. A number of these potential distribution channels and customers are testing our products. Our products' unique focus on sustainability and carbon footprint reduction has a significant appeal to these customers.
Product Pricing
The heightened environmental consciousness among society’s leaders and the general public (often referred to as the “Green Movement”) has spurred product marketers, distributors and wholesalers to seek better green alternatives to provide to their commercial, corporate, and retail clients. We believe that this movement creates a unique and timely opportunity to gain market share as the sole commercial provider of 100% tree-free paper products.
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While paper products made from tree-free sources are typically more costly than traditional virgin tree sources, we have made and intend to continue to make significant strides to narrow this cost gap. Our goal is to provide the paper needs of a rapidly increasing share of the market through competitive pricing, uncompromising quality and the ability to produce our product to specific customer specifications.
Our products are priced competitively with products from recycled sources. We believe this is a compelling price point, since ‘green’ products are often priced at a significant premium compared to the ‘non-green’ offerings.
Corporate Social Responsibility
Corporate Social Responsibility ("CSR") is the practice of corporate self-regulation integrated into an organization’s business model. CSR takes into account the impact of business decisions on the environment, society, consumers, employees, stakeholders and other members of public sphere. The Company proactively promotes the public’s interest by encouraging community growth and development, and voluntarily eliminating practices that harm the public sphere. Through the deliberate inclusion of public interest into corporate decision-making, and honoring the triple bottom line, People, Planet, and Profitability, we hope to better our communities for generations to come.
Intellectual Property
In conjunction with SCPC, we rely on a combination of trademark, patent laws, trade secrecy laws and contractual provisions to protect ours and SCPC’s intellectual property rights. There can be no assurance that the steps taken by us to protect these proprietary rights will be adequate or that third parties will not infringe or misappropriate our trademarks, trade secrets or similar proprietary rights. In addition, there can be no assurance that other parties will not assert infringement claims against us, nor that we may have to pursue litigation against other parties to assert our rights. Any such claim or litigation could be costly and we may lack the resources required to defend against such claims. In addition, any event that would jeopardize our proprietary rights or any claims of infringement by third parties could have a material adverse affect on our ability to market or sell our brands, and profitably exploit our products.
Competition
We face competition from traditional paper manufacturers as well as other manufacturers that claim to produce environmentally friendly products. Paper is a mature industry with a number of manufacturers with significant capital resources, distribution channels and entrenched customer accounts. We compete against traditional paper manufacturers primarily based on our environmental benefits. As discussed above, our products compete well in terms of reduced environmental impact. Our products are generally more expensive than paper manufactured from virgin wood. Some customers will pay a premium for "green" or environmentally friendly paper, provided that the price is a reasonable premium, and the products are of comparable quality. We also believe that we provide comparable quality as compared to virgin wood products in our product applications. Currently, we are priced competitively with recycled paper products. If there were a significant reduction in the cost of virgin wood based products, or if our costs of products were to rise significantly, it would reduce our ability to compete.
There are a number of manufacturers deploying different techniques to develop environmentally sensitive paper products. We classify these manufacturers into the following four distinct categories:
1.
Companies focused on very limited niche markets with limited distribution potential or limited access to commercial supply quantities. In general, companies in this group find their products are too expensive for massive consumer scaled tree-free commodity products (e.g. Living Tree Paper Company, TreeFrog, Environmental Pulp and Paper Company Limited).
2.
Companies that in addition to employing bagasse or bamboo in their products, also include wood fillers, post-consumer waste and wood pulp or fiber whose products are not truly tree-free (e.g. Canefields, Terradigm, New Leaf Paper Company and Quena Paper Company).
3.
Companies producing a tree-free paper product employing wheat, corn, bananas or kenaf fiber. These materials have not proven to yield a commercially successful product for scalable quantities. (e.g. Echo Paper Store, Natures Paper Company, Banana Paper Company, and Vision Paper Company).
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4.
Companies employing tree-free competitive products that are unable to meet standard quality requirements (e.g. “jam-free" copy paper) (e.g. Shangi Hongtuo, Ltd.).
We believe the products we acquire from SCPC are the only commercially scalable tree-free paper products able to meet U.S. customer product quality specifications (moisture content, multi-sheet feeding, etc.). In addition, we believe that our competitors lack economical access to the hundreds of thousands of metric tons of bagasse and bamboo available to SCPC. Through SCPC, we can supply commercial quantities of our products.
Regulation
SCPC is subject to extensive regulation by various Chinese national and local agencies concerning compliance with environmental control statutes and regulations. The major environmental regulations applicable to SCPC include:
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The Environmental Protection Law of the PRC
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The Law of PRC on the Prevention and Control of Water Pollution
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Implementation Rules of the Law of PRC on the Prevention and Control of Water Pollution
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The Law of PRC on the Prevention and Control of Air Pollution
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Implementation Rules of the Law of PRC on the Prevention and Control of Air Pollution
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The Law of PRC on the Prevention and Control of Solid Waste Pollution
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The Law of PRC on the Prevention and Control of Noise Pollution
SCPC is also subject to periodic inspections by local environmental protection authorities. SCPC has received certifications from the relevant PRC government agencies in charge of environmental protection indicating that their business operations are in material compliance with the relevant PRC environmental laws and regulations. To our knowledge, SCPC is not currently subject to any pending actions alleging any violations of applicable PRC environmental laws.
These regulations impose limitations (including but not limited to effluent and emission limitations) on the discharge of materials into the environment as well as require SCPC to obtain and operate in compliance with conditions of permits and other governmental authorizations. Future regulations could materially increase SCPC’s capital requirements and certain of their operating expenses in future years. Such increases in SCPC’s required outlays to comply with such regulation could result in higher costs being passed to our Company and could have a negative effect on the competitiveness of our product offerings.
Our Employees
We had approximately two full-time employees as of December 31, 2010 and five contracted positions. None of our employees are subject to collective bargaining agreements.
Backlog
We do not have any material order backlog as of the date of this Current Report.
Seasonality
We do not expect that our business will experience significant seasonality.
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RISK FACTORS
An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below, together with all of the other information included in this Current Report, before making an investment decision. If any of the following risks actually occurs, our business, financial condition or results of operations could suffer. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment. You should read the section entitled "Special Notes Regarding Forward-Looking Statements" for a discussion of what types of statements are forward-looking statements as well as the significance of such statements in the context of this report.
RISKS RELATED TO OUR BUSINESS
We have a very limited operating history. Prior to the Sugarmade Acquisition, our Company was a “shell” company with no or nominal operations. Sugarmade-CA recently completed its funding and the related acquisition with our Company. Sugarmade-CA was formed in 2009 to market paper products manufactured from tree-fee materials. Sugarmade-CA does not currently have significant operating revenues and has a very limited operating history. Because Sugarmade-CA has a limited operating history, we do not have any historical financial data upon which to base planned operations. Our historical financial information is not a reliable indicator of future performance or prospects.
The segments of the paper industry in which we operate are highly competitive and increased competition could reduce our sales and profitability. We compete in different markets within the paper industry on the basis of the uniqueness of our products, the quality of our products, customer service, price and distribution. All of our markets are highly competitive. Our competitors vary in size and many have greater financial and marketing resources than we do. While we believe that our products offer unique advantages because of their tree-free composition, if we cannot maintain quality and pricing that are comparable to traditional products we may not be able to develop, or may lose, market share. In some of our markets, the industry’s capacity to make products exceeds current demand levels. Competitive conditions in some of our segments may cause us to incur lower net selling prices, reduced gross margins and net earnings.
Our business and financial performance may be adversely affected by downturns in the target markets that we serve or reduced demand for the types of products we sell. Demand for our products is often affected by general economic conditions as well as product-use trends in our target markets. These changes may result in decreased demand for our products. The occurrence of these conditions is beyond our ability to control and, when they occur, they may have a significant impact on our sales and results of operations. Our products are comparably priced with paper products comprised of 30% recycled materials. Both our products and paper products comprised of 30% recycled materials are typically higher in cost than paper products made from virgin pulp wood. The inability or unwillingness of our customers to pay a premium for our products due to general economic conditions or a downturn in the economy may have a significant adverse impact on our sales and results of operations.
Changes within the paper industry may adversely affect our financial performance. Changes in the identity, ownership structure and strategic goals of our competitors and the emergence of new competitors in our target markets may harm our financial performance. New competitors may include foreign-based companies and commodity-based domestic producers who could enter our specialty markets if they are unable to compete in their traditional markets. The paper industry has also experienced consolidation of producers and distribution channels. Further consolidation could unite other producers with distribution channels through which we intend to sell our products, thereby limiting access to our target markets.
Any interruption in delivery from our only supplier will impair our ability to distribute our products and generate revenues. We are dependent on a sole supplier—SCPC—for the production of our products. We have no manufacturing facilities and we rely on SCPC to provide us with an adequate and reliable supply of products on a timely basis. Any interruption in the distribution from our sole supplier could affect our ability to distribute our products. Additionally, our sole supplier is located outside of the United States in the PRC. Any legislation or consumer preferences in the United States or other countries requiring products which are made in the United States or such other countries may have a material adverse impact on our sales and results of operations.
Uncertainties with respect to the PRC legal system could limit the legal protections available for us to pursue any claim against SCPC, and therefore our ability to protect our contract rights. We rely on SCPC for our supply of products. SCPC operates entirely within the PRC. The PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties, which may limit legal protections available to us in the event that we needed to bring a claim against SCPC. Courts in the PRC may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based on treaties between China and the country
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where the judgment is made or on reciprocity between jurisdictions. The PRC does not have any treaties or other arrangements that provide for the reciprocal recognition and enforcement of foreign judgments with the United States. So it is uncertain whether a PRC court would enforce a judgment rendered by a court in the United States. Any litigation we may try to bring in the PRC may be protracted and result in substantial costs and diversion of resources and management attention.
If we fail to maintain satisfactory relationships with our larger customers, our business may be harmed. We do not have and are unlikely to enter into long-term fixed quantity supply agreements with our customers. Due to competition or other factors, we could lose future business from our customers, either partially or completely. The future loss of one or more of our significant customers or a substantial future reduction of orders by any of our significant customers, could harm our business and results of operations. Moreover, our customers may vary their order levels significantly from period to period and customers may not continue to place orders with us in the future at the same levels as in prior periods. In the event that in the future we lose any of our larger customers, we may not be able to replace that revenue source. This could harm our financial results.
The costs of complying with environmental regulations may increase substantially and adversely affect our consolidated financial condition, liquidity or results of operations. SCPC is subject to various environmental laws and regulations that govern discharges into the environment and the handling and disposal of hazardous substances and wastes. Environmental laws impose liabilities and clean-up responsibilities for releases of hazardous substances into the environment. However, many PRC laws and regulations are uncertain in their scope, and the implementation of such laws and regulations in different localities could have significant differences. In certain instances, local implementation rules and/or the actual implementation are not necessarily consistent with the regulations at the national level. We cannot assure you that the relevant PRC government authorities will not determine that SCPC has failed to comply with certain laws or regulations. SCPC will likely continue to incur substantial capital and operating expenses in order to comply with current laws. Any future changes in these laws or their interpretation by government agencies or the courts may significantly increase SCPC’s capital expenditures and operating expenses and decrease the amount of funds available for investment in other areas of their operations. In addition, SCPC may be required to eliminate or mitigate any adverse effects on the environment caused by the release of hazardous materials, whether or not SCPC had knowledge of or were responsible for such release. SCPC may also incur liabilities for personal injury and property damages as a result of discharges into the environment. If costs or liabilities related to environmental compliance increase significantly for SCPC, such costs could be passed along to us in the form of higher prices paid for SCPC supplied materials. Our consolidated financial condition, liquidity or results of operations may be adversely affected in the event that we were forced to absorb such costs.
If SCPC were to suffer a catastrophic loss, unforeseen or recurring operational problems at any of its facilities, we could suffer significant product shortages, sales declines and/or cost increases. SCPC’s paper making and converting facilities as well as its distribution warehouses could suffer catastrophic loss due to fire, flood, terrorism, mechanical failure or other natural or human caused events. If any of these facilities were to experience a catastrophic loss, it could disrupt our supply of products for sale, delay or reduce shipments and reduce our revenues. These expenses and losses may not be adequately covered by property or business interruption insurance. Even if covered by insurance, our inability to deliver our products to customers, even on a short-term basis, may cause us to lose market share on a more permanent basis.
We may become involved in claims concerning intellectual property rights, and we could suffer significant litigation or related expenses in defending ours or SCPC’s intellectual property rights or defending claims that we infringed the rights of others. We consider our licensed intellectual property to be a material asset. We may lose market share and suffer a decline in our revenue and net earnings if we cannot successfully defend one or more trademarks or patents we have secured or licensed. We do not believe that any of our products infringe the valid intellectual property rights of third parties. However, we may be unaware of intellectual property rights of others that may cover some of our products or services. In that event, we may be subject to significant future claims for damages. Any litigation regarding patents or other intellectual property could be costly and time-consuming and could divert our management and key personnel from our business operations. Claims of intellectual property infringement might also require us to enter into licensing agreements which would reduce our operating margins, or in some cases, we may not be able to obtain license agreements on terms acceptable to us.
FINANCIAL RISKS
If we cannot return to and sustain profitable operations, we will need to raise additional capital to continue our operations, which may not be available on commercially reasonable terms, or at all, and which may dilute your investment. We incurred a net loss for the year ended December 31, 2010 of $598,481. Achieving and sustaining profitability will require us to increase our revenues and manage our product, operating and administrative expenses. We cannot guarantee that we will be successful in achieving profitability. If we are unable to generate sufficient revenues to pay our expenses and our existing sources of cash and
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cash flows are otherwise insufficient to fund our activities, we will need to raise additional funds to continue our operations. We do not have any arrangements in place for additional funds. If needed, those funds may not be available on favorable terms, or at all. Furthermore, if we issue equity or debt securities to raise additional funds, our existing stockholders may experience dilution, and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing stockholders. If we are unsuccessful in achieving profitability, and we cannot obtain additional funds on commercially reasonable terms or at all, we may be required to curtail significantly or cease our operations, which could result in the loss of all of your investment in our stock.
Our financial statements have been prepared assuming that the Company will continue as a going concern. We have generated losses to date and have limited working capital. These factors raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from this uncertainty. The report of our independent registered public accounting firm included an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern in their audit report included herein. If we cannot generate the required revenues and gross margin to achieve profitability or obtain additional capital on acceptable terms, we will need to substantially revise our business plan or cease operations and an investor could suffer the loss of a significant portion or all of his investment in our Company.
Fluctuations in exchange rates could adversely affect our cost of goods sold and consequently our profit margins. The price we pay for product from SCPC will be directly affected by the foreign exchange rate between U.S. dollars and the Chinese Renminbi ("RMB") and between those currencies and other currencies in which our sales may be denominated. Because substantially all of our product purchases will be from SCPC in China, fluctuations in the exchange rate between the U.S. dollar and the RMB will affect the prices that we effectively pay for product. Since July 2005, the RMB has no longer been pegged to the U.S. dollar. Although the People's Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market. Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions. While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure at all.
As we transition from a Company with insignificant revenues to what we hope will be a Company generating substantial revenues, we may not be able to manage our growth effectively, which could adversely affect our operations and financial performance. The ability to manage and operate our business as we execute our growth strategy will require effective planning. Significant rapid growth could strain our internal resources, leading to a lower quality of customer service, reporting problems and delays in meeting important deadlines resulting in loss of market share and other problems that could adversely affect our financial performance. Our efforts to grow could place a significant strain on our personnel, management systems, infrastructure and other resources. If we do not manage our growth effectively, our operations could be adversely affected, resulting in slower growth and a failure to achieve or sustain profitability.
We do not expect to pay dividends for the foreseeable future, and we may never pay dividends and, consequently, the only opportunity for investors to achieve a return on their investment is if a trading market develops and investors are able to sell their shares for a profit or if our business is sold at a price that enables investors to recognize a profit. We currently intend to retain any future earnings to support the development and expansion of our business and do not anticipate paying cash dividends for the foreseeable future. Our payment of any future dividends will be at the discretion of our Board of Directors after taking into account various factors, including but not limited to 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. In addition, our ability to pay dividends on our common stock may be limited by state law. Accordingly, we cannot assure investors any return on their investment, other than in connection with a sale of their shares or a sale of our business. At the present time there is a limited trading market for our shares. Therefore, holders of our securities may be unable to sell them. We cannot assure investors that an active trading market will develop or that any third party will offer to purchase our business on acceptable terms and at a price that would enable our investors to recognize a profit.
Our net operating loss (“NOL”) carry-forward is limited. We have recorded a valuation allowance amounting to our entire net deferred tax asset balance due to our lack of a history of earnings, possible statutory limitations on the use of tax loss carry-forwards generated in the past and the future expiration of our NOL. This gives rise to uncertainty as to whether the net deferred tax asset is realizable. Internal Revenue Code Section 382, and similar California rules, place a limitation on the amount of taxable income that can be offset by carry-forwards after a change in control (generally greater than a 50% change in ownership). As a result of these provisions, it is likely that given our acquisition of Sugarmade-CA, future utilization of the NOL will be severely limited. Our
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inability to use our Company’s historical NOL, or the full amount of the NOL, would limit our ability to offset any future tax liabilities with its NOL.
CORPORATE AND OTHER RISKS
Limitations on director and officer liability and indemnification of our Company’s officers and directors by us may discourage stockholders from bringing suit against an officer or director. Our Company’s certificate of incorporation and bylaws provide, with certain exceptions as permitted by governing state law, that a director or officer shall not be personally liable to us or our stockholders for breach of fiduciary duty as a director, except for acts or omissions which involve intentional misconduct, fraud or knowing violation of law, or unlawful payments of dividends. These provisions may discourage stockholders from bringing suit against a director for breach of fiduciary duty and may reduce the likelihood of derivative litigation brought by stockholders on our behalf against a director.
We are responsible for the indemnification of our officers and directors. Should our officers and/or directors require us to contribute to their defense, we may be required to spend significant amounts of our capital. Our certificate of incorporation and bylaws also provide for the indemnification of our directors, officers, employees, and agents, under certain circumstances, against attorney's fees and other expenses incurred by them in any litigation to which they become a party arising from their association with or activities on behalf of our Company. This indemnification policy could result in substantial expenditures, which we may be unable to recoup. If these expenditures are significant, or involve issues which result in significant liability for our key personnel, we may be unable to continue operating as a going concern.
Our executive officers, directors and insider stockholders beneficially own or control a substantial portion of our outstanding common stock, which may limit your ability and the ability of our other stockholders, whether acting alone or together, to propose or direct the management or overall direction of our Company. Additionally, this concentration of ownership could discourage or prevent a potential takeover of our Company that might otherwise result in an investor receiving a premium over the market price for his shares. A substantial portion of our outstanding shares of common stock is beneficially owned and controlled by a group of insiders, including our directors and executive officers. Accordingly, any of our existing outside principal stockholders together with our directors, executive officers and insider shareholders would have the power to control the election of our directors and the approval of actions for which the approval of our stockholders is required. If you acquire shares of our common stock, you may have no effective voice in the management of our Company. Such concentrated control of our Company may adversely affect the price of our common stock. Our principal stockholders may be able to control matters requiring approval by our stockholders, including the election of directors, mergers or other business combinations. Such concentrated control may also make it difficult for our stockholders to receive a premium for their shares of our common stock in the event we merge with a third party or enter into different transactions which require stockholder approval. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock.
Certain provisions of our Certificate of Incorporation may make it more difficult for a third party to effect a change-of-control. Our certificate of incorporation authorizes the Board of Directors to issue up to 10,000,000 shares of preferred stock. The preferred stock may be issued in one or more series, the terms of which may be determined at the time of issuance by the Board of Directors without further action by the stockholders. These terms may include preferences as to dividends and liquidation, conversion rights, redemption rights and sinking fund provisions. The issuance of any preferred stock could diminish the rights of holders of our common stock, and therefore could reduce the value of such common stock. In addition, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The ability of the Board of Directors to issue preferred stock could make it more difficult, delay, discourage, prevent or make it more costly to acquire or effect a change-in-control, which in turn could prevent our stockholders from recognizing a gain in the event that a favorable offer is extended and could materially and negatively affect the market price of our common stock.
We are dependent for our success on a few key executive officers. Our inability to retain those officers would impede our business plan and growth strategies, which would have a negative impact on our business and the value of your investment. Our success depends on the skills, experience and performance of key members of our management team. Each of those individuals may voluntarily terminate his employment with the Company at any time. Were we to lose one or more of these key executive officers, we would be forced to expend significant time and money in the pursuit of a replacement, which would result in both a delay in the implementation of our business plan and the diversion of limited working capital. We do not maintain a key man insurance policy on any of our executive officers.
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CAPITAL MARKET RISKS
Our common stock is thinly traded, so you may be unable to sell at or near ask prices or at all if you need to sell your shares to raise money or otherwise desire to liquidate your shares. There is limited market activity in our stock and we are too small to attract the interest of many brokerage firms and analysts. We cannot give you any assurance that a broader or more active public trading market for our common stock will develop or be sustained. While we are trading on OTC Markets, the trading volume we will develop may be limited by the fact that many major institutional investment funds, including mutual funds, as well as individual investors follow a policy of not investing in OTC stocks and certain major brokerage firms restrict their brokers from recommending OTC stocks because they are considered speculative, volatile, thinly traded and the market price of the common stock may not accurately reflect the underlying value of our Company. The market price of our common stock could be subject to wide fluctuations in response to quarterly variations in our revenues and operating expenses, announcements of new products or services by us, significant sales of our common stock, including “short” sales, the operating and stock price performance of other companies that investors may deem comparable to us, and news reports relating to trends in our markets or general economic conditions.
The application of the “penny stock” rules to our common stock could limit the trading and liquidity of the common stock, adversely affect the market price of our common stock and increase your transaction costs to sell those shares. As long as the trading price of our common stock is below $5 per share, the open-market trading of our common stock will be subject to the “penny stock” rules, unless we otherwise qualify for an exemption from the “penny stock” definition. The “penny stock” rules impose additional sales practice requirements on certain broker-dealers who sell securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse). These regulations, if they apply, require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the associated risks. Under these regulations, certain brokers who recommend such securities to persons other than established customers or certain accredited investors must make a special written suitability determination regarding such a purchaser and receive such purchaser’s written agreement to a transaction prior to sale. These regulations may have the effect of limiting the trading activity of our common stock, reducing the liquidity of an investment in our common stock and increasing the transaction costs for sales and purchases of our common stock as compared to other securities. The stock market in general and the market prices for penny stock companies in particular, have experienced volatility that often has been unrelated to the operating performance of such companies. These broad market and industry fluctuations may adversely affect the price of our stock, regardless of our operating performance. Stockholders should be aware that, according to Securities and Exchange Commission (“SEC”) Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include 1) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; 2) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; 3) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; 4) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and 5) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. The occurrence of these patterns or practices could increase the volatility of our share price.
We may not be able to attract the attention of major brokerage firms, which could have a material adverse impact on the market value of our common stock. Security analysts of major brokerage firms may not provide coverage of our common stock since there is no incentive to brokerage firms to recommend the purchase of our common stock. The absence of such coverage limits the likelihood that an active market will develop for our common stock. It will also likely make it more difficult to attract new investors at times when we require additional capital.
We may be unable to list our common stock on NASDAQ or on any securities exchange. Although we may apply to list our common stock on NASDAQ or the American Stock Exchange in the future, we cannot assure you that we will be able to meet the initial listing standards, including the minimum per share price and minimum capitalization requirements, or that we will be able to maintain a listing of our common stock on either of those or any other trading venue. Until such time as we qualify for listing on NASDAQ, the American Stock Exchange or another trading venue, our common stock will continue to trade on OTC Markets or another over-the-counter quotation system where an investor may find it more difficult to dispose of shares or obtain accurate quotations as to the market value of our common stock. In addition, rules promulgated by the SEC impose various practice requirements on broker-dealers who sell securities that fail to meet certain criteria set forth in those rules to persons other than established customers and accredited investors. Consequently, these rules may deter broker-dealers from recommending or selling our common stock, which may further affect the liquidity of our common stock. It would also make it more difficult for us to raise additional capital.
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Future sales of our equity securities could put downward selling pressure on our securities, and adversely affect the stock price. There is a risk that this downward pressure may make it impossible for an investor to sell his or her securities at any reasonable price, if at all. Future sales of substantial amounts of our equity securities in the public market, or the perception that such sales could occur, could put downward selling pressure on our securities, and adversely affect the market price of our common stock.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis is intended as a review of significant factors affecting our financial condition and results of operations for the periods indicated. The discussion should be read in conjunction with our consolidated financial statements and the notes presented herein. In addition to historical information, the following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors discussed herein and any other periodic reports (to be) filed with the Securities and Exchange Commission.
Overview and Financial Condition
Discussions with respect to our Company’s operations included herein refer to our operating subsidiary, Sugarmade-CA. Our Company purchased Sugarmade-CA on May 9, 2011. We have no other operations than those of Sugarmade-CA. Information with respect to our Company’s nominal operations prior to the Sugarmade Acquisition is not included herein.
Results of Operations
Revenues
Our Company had insignificant revenues totaling $40,792 for the year ended December 31, 2010 (we had no revenues in 2009). Our Company had its first sale in January 2010. Our activities to date have been primarily centered on establishing relationships with our supplier and potential customers, recruiting an executive management team and instituting systems to control and grow our future operations. Going forward, we plan to heavily market our tree-free paper products and educate potential customers concerning their quality, suitability and environmental advantages over traditional tree-based paper products. While we are optimistic about the prospects for our Company, since this is a relatively new product offering with significantly different characteristics compared with existing paper products on the market (and we have not recognized significant revenues to date), there can be no assurance about whether or when our products will generate sufficient revenues with adequate margins in order for our Company to be profitable.
Cost of goods sold
Cost of goods sold totaled $53,483 in 2010 (there were no corresponding amounts in 2009). Included in costs of goods sold were materials and freight costs totaling $35,944 as well as a charge for inventory obsolescence totaling $17,539.
Gross margin
Gross margin was a negative $12,691 in 2010 with no corresponding amounts in 2009. We had a slightly positive gross margin from sales before our provision for inventory obsolescence. The gross margin percentage realized in 2010 is not indicative of anticipated future results due to the lack of product sales volume to date.
Selling, general and administrative expenses
Selling, general and administrative expenses totaled $480,156 and $130,042 in 2010 and 2009, respectively. Included in these expenses were payroll and related expenses of $183,591 and $22,860 in 2010 and 2009, respectively. Consulting expenses totaled $170,892 in 2010 and $10,030 in 2009, while legal and auditing expenses totaled $45,964 and $86,691 in 2010 and 2009, respectively. Warehousing and storage costs totaled $25,511 and $3,156 in 2010 and 2009, respectively. Travel expenses were $11,474 in 2010 and $2,181 in 2009. Advertising and promotion totaled $4,165 in 2010 with no corresponding amounts in 2009.
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Amortization of license and supply agreement
We recognized amortization of our license and supply agreement with SCPC totaling $18,400 and $3,067 in 2010 and 2009, respectively. The amortization represented the recognition of the cost of the SCPC agreement over its initial twenty year term on a twenty year basis.
Interest expense and interest income
Interest expense totaled $105,766 and $9,879 in 2010 and 2009, respectively. Interest expense was primarily the result of amounts due under notes payable outstanding through December 31, 2010. Interest income totaled $18,532 in 2010 and was derived almost exclusively from a note receivable due from a stockholder of our Company. In connection with the Sugarmade Acquisition an aggregate of $693,900 in principal under outstanding promissory notes was converted to equity. Accordingly, we expect that interest expense to be substantially less for the balance of 2011.
Net loss
Net loss totaled $598,481 and $142,988 in 2010 and 2009, respectively.
Liquidity and Capital Resources
We have primarily financed our operations from our inception in March 2009 through the sale of unregistered equity and convertible notes payable. As of December 31, 2010, our Company had cash totaling $13,614, current assets totaling $33,760 and total assets of $567,764 (including $368,058 in intangible assets related to the license and supply agreement with SCPC). We had total current liabilities of $290,603 and a working capital deficiency of $256,843. Total liabilities were $1,092,503 (including notes payable totaling $928,200), resulting in a stockholders’ deficiency of $524,739.
Net cash used by operating activities was $474,358 for year ended December 31, 2010, an increase of $386,400 from $87,958 for the year ended December 31, 2010. The increase of net cash used by operating activities was related to a full year's worth of operating expenses and the additional costs incurred in ramping up our business operations.
Net cash used in investing activities for year ended December 31, 2010 was $163,000 compared to $346,000 for the year ended December 31, 2009. The investment in for the year ended December 31, 2010 related to additional advances to a shareholder under a note receivable. The investment for the year ended December 31, 2009 primarily related to the acquisition of SMI.
Net cash provided by financing activities was $621,100 for the year ended December 31, 2010, compared to $463,830 for the year ended December 31, 2009. The net cash provided by financing activities for the year ended December 31, 2010 was mainly attributable to proceeds from the sale of common stock and convertible promissory notes.
Subsequent to December 31, 2010, we converted notes payable with a principal balance of $693,000 into 252,070 shares of our common stock. Beginning in April 2011, we also sold 1,730,400 shares of common stock and warrants to purchase an additional 1,730,400 shares of common stock to investors in exchange for net proceeds totaling $2,083,000 (gross proceeds of $2,163,000, less estimated issuance costs of $80,000). Additionally, we made a cash payment totaling $210,000 to two shareholders of DVOP in exchange for shares previously owned by them. On May 9, 2011 (the closing date of the Sugarmade Acquisition), we had a cash balance totaling approximately $1,738,000 (amount is net of operating expenses incurred and paid by the Company through the date of closing) and notes payable totaling $262,000. We expect the balance of notes payable to be repaid prior to June 30, 2011. We also currently estimate that we will raise additional cash through the sale of common stock and warrants (with similar terms to those just sold to investors) totaling up to $500,000 (gross) prior to June 30, 2011.
Our Company has entered into an operating credit facility with SCPC whereby we are able to finance the purchase of all of our Company’s products for resale from them on an interest-free basis. Qualifying orders placed with SCPC are not required to be paid for by our Company until up to thirty days after we receive payment from our customers. This credit facility allows us to grow our business quickly without the capital constraints posed by the need for financing our working capital requirements. Our capital requirements going forward will consist of financing our operations until we are able to reach a level of revenues and gross margins adequate to equal or exceed our ongoing operating expenses. Other than the operating credit facility with SCPC we do not have any credit agreement or source of liquidity immediately available to us.
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Given estimates of our Company’s future operating results and our credit arrangements with SCPC, we are currently forecasting that we have adequate financial resources to achieve cash flow break-even. We have nevertheless included a discussion concerning the presentation of our financial statements on a going concern basis in the notes to our financial statements and our independent public accountants have included a similar discussion in their opinion on our financial statements through December 31, 2010.
Should we not achieve our forecasted operating results or should strategic opportunities present themselves such that additional financial resources would present attractive investing opportunities for our Company, we may decide in the future to issue debt or sell our Company’s equity securities in order to raise additional cash. There are no arrangements in place for any such financing at this time. We cannot provide any assurances as to whether we will be able to secure any necessary financing, or the terms of any such financing transaction if one were to occur.
Capital Expenditures
Our current plans do not call for our Company to expend significant amounts for capital expenditures for the foreseeable future beyond office furniture and information technology related equipment as we add employees to our Company. SCPC produces our products that we market and our warehousing facilities are contracted for with third parties (and therefore do not require us to make capital purchases in this area).
Critical Accounting Policies
Use of estimates
The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue recognition
We recognize revenue in accordance with Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) No. 605, Revenue Recognition. Revenue is recognized when we have evidence of an arrangement, a determinable fee, and when collection is considered to be probable and products are delivered. This generally occurs upon shipment of the merchandise, which is when legal transfer of title occurs. In the event that final acceptance of our product by the customer is uncertain, revenue is deferred until all acceptance criteria have been met. Cash received in connection with the sales of our products prior to their being recognized as revenue is recorded as deferred revenue.
Inventory
Inventory consists of finished goods paper and paper-based products ready for sale and is stated at the lower of cost or market. We value inventories using the weighted average costing method. We regularly review inventory and consider forecasts of future demand, market conditions and product obsolescence. If the estimated realizable value or our inventory is less than cost, we make provisions in order to reduce its carrying value to its estimated market value. We had valuation reserves against inventory of $17,539 at December 31, 2010 (none at December 31, 2009).
Valuation of long-lived assets
We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate their net book value may not be recoverable. When such factors and circumstances exist, we compare 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. Our management currently believes there is no impairment of our long-lived assets. There can be no assurance, however, that market conditions will not change or demand for our products under development will continue. Either of these could result in future impairment of long-lived assets.
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Stock based compensation
Future stock based compensation cost will be measured at the date of grant, based on the calculated fair value of the stock-based award, and will be recognized as expense over the employee’s requisite service period (generally the vesting period of the award). We will estimate the fair value of employee stock options granted using the Black-Scholes Option Pricing Model. Key assumptions used to estimate the fair value of stock options will include the exercise price of the award, the fair value of our common stock on the date of grant, the expected option term, the risk free interest rate at the date of grant, the expected volatility and the expected annual dividend yield on our common stock. We will use comparable public company data among other information to estimate the expected price volatility and the expected forfeiture rate. There were no options or warrants issued or outstanding from our Company’s inception through December 31, 2010.
Net loss per share
We calculate basic earnings per share (“EPS”) by dividing our net loss by the weighted average number of common shares outstanding for the period, without considering common stock equivalents. Diluted EPS is computed by dividing net income or net loss by the weighted average number of common shares outstanding for the period and the weighted average number of dilutive common stock equivalents, such as options and warrants. Options and warrants are only included in the calculation of diluted EPS when their effect is dilutive.
Recent accounting pronouncements
For discussion of recently issued and adopted accounting pronouncements, please see Note 1 to the Sugarmade financial statements included herein.
DESCRIPTION OF PROPERTY
Our corporate offices are located at 2280 Lincoln Avenue, San Jose, California 95125, where we lease approximately 1,560 square feet of office space. This lease is for a term of 38 months and commenced in February 2011. The current monthly rental payment including utilities and operating expenses for the facility is approximately $3,700. We believe this facility is in good condition and adequate to meet our current and anticipated requirements.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of May 9, 2011, information with respect to the securities holdings of (i) our officers and directors, and (ii) all persons (currently none) which, pursuant to filings with the SEC and our stock transfer records, we have reason to believe may be deemed the beneficial owner of more than five percent (5%) of the Common Stock. The securities "beneficially owned" by an individual are determined in accordance with the definition of "beneficial ownership" set forth in the regulations promulgated under the Exchange Act and, accordingly, may include securities owned by or for, among others, the spouse and/or minor children of an individual and any other relative who resides in the same home as such individual, as well as other securities as to which the individual has or shares voting or investment power or which each person has the right to acquire within 60 days through the exercise of options or otherwise. Beneficial ownership may be disclaimed as to certain of the securities. This table has been prepared based on the number of shares outstanding totaling 9,300,800, adjusted individually as shown below.
Name and Address of Beneficial Owner (1) |
| Amount and Nature of Beneficial Ownership |
| Percentage of Class | ||
Officers and Directors |
|
|
|
|
|
|
Scott Lantz |
| 2,859,229 |
|
| 30.7% |
|
Clifton Kuok Wai Leung |
| 1,000,000 |
|
| 10.8% |
|
Sandy Salzberg (2) |
| 230,555 |
|
| 2.4% |
|
C. James Jensen (3) |
| 305,555 |
|
| 3.2% |
|
Ed Roffman (4) |
| 105,555 |
|
| 1.1% |
|
All directors and executive officers as a group (5 persons) |
| 4,500,894 |
|
| 48.2% |
|
|
|
|
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(1)
Unless otherwise noted, the address is c/o Sugarmade, Inc., 2280 Lincoln Avenue, Suite 200, San Jose CA 95125.
(2)
Mr. Salzberg’s beneficial ownership is calculated as 100,000 shares of common stock owned outright; vested warrants to purchase up to 100,000 shares of common stock and options to purchase up to 30,555 share of common stock that will be vested prior to July 8, 2011.
(3)
Mr. Jensen’s beneficial ownership is calculated as 100,000 shares of common stock owned outright; vested warrants to purchase up to 100,000 shares of common stock, 100,000 shares granted to him under a consulting agreement (subject to repurchase on a diminishing basis over two years) and options to purchase up to 5,555 shares of common stock that will be vested prior to July 8, 2011.
(4)
Mr. Roffman’s beneficial ownership is calculated as 100,000 shares granted to him under a consulting agreement (subject to repurchase on a diminishing basis over three years) and options to purchase up to 5,555 shares of common stock that will be vested prior to July 8, 2011.
(5)
Percentage of class beneficially owned is calculated by dividing the amount and nature of beneficial ownership by the total shares of common stock outstanding plus the shares subject to warrants and options through July 8, 2011 held by the individual. No amounts have been subtracted for shares of common stock granted that are subject to repurchase.
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MANAGEMENT
Prior to the date of the Exchange Agreement, our Board of Directors consisted of one sole director, Kevin Russeth, who was elected to serve until his successor is duly elected and qualified or until the next annual meeting of our stockholders. Mr. Russeth has submitted a letter of resignation and each of Mr. Scott Lantz, Clifton Kuok Wai Leung, Sandy Salzberg, C. James Jensen and Ed Roffman has been appointed to our Board of Directors. The appointment of Mr. Lantz was effective on the date of the Exchange Agreement, while Mr. Russeth resignation and the appointments of each of Messrs Leung, Salzberg, Jensen and Roffman will become effective on the date that is ten days following the date that we file a Schedule 14F-1 and mail it to our registered stockholders. In addition, effective on the date of the Exchange Agreement Mr. Russeth resigned each of his officer positions with our company and we appointed Mr. Lantz our Chief Executive Officer.
The names of our current officers and directors and the incoming directors, as well as certain information about them, are set forth below:
Name
Age
Position
Scott Lantz
36
Chief Executive Officer, Chairman and Director
Clifton Kuok Wai Leung
31
Incoming Director
Sandy Salzberg
51
Incoming Director
C. James Jensen
70
Incoming Director
Ed Roffman
61
Incoming Director
Scott Lantz. Mr. Lantz has served as the Chief Executive Officer, Chairman of the Board and a Director of our Company since December 2009 and was a co-founder of our Company in 2009. From November 2002 to February 2009, Mr. Lantz was employed by The Margarita King, a privately held consumer packaged goods company, during which time he served as its Chief Operating Officer and its Vice President of Sales.
Clifton Kuok Wai Leung. Mr. Leung has served as a member of our Board of Directors since October 2009 and is also the Chief Executive Officer and 100% owner of SCPC.
Sandy Salzberg. Mr. Salzberg has served as a member of our Board of Directors since August 2010. Since 2001, Mr. Salzberg is the President of Shasta Beverages Inc., a subsidiary of National Beverage Corporation. Prior to that, from 1988 to 1991 Mr. Salzberg served as Area Vice President with PepsiCo’s Frito-Lay Snack division.
C. James Jensen. Mr. Jensen was appointed to our Board of Directors on April 2011. Mr. Jensen is the co-founder and managing partner of Mara Gateway Associates, L.P, a privately owned real estate investment company. Additionally, Mr. Jensen is the co-managing partner of Stronghurst, LLC., an advisory and financial services firm. Mr. Jensen has previously served as the Chairman and Chief Executive Officer of Thousand Trails, Inc., an industry leader of private campground resorts; President of Grantree Furniture Rental Corporation, a privately held furniture rental company, and Senior Vice President and Chief Operating Officer of Great Books of the Western World. During the past 5 years, Mr. Jensen has served on the board of Health Benefits Inc. and as Chairman of the Board for Thousand Trails, Inc.
Ed Roffman. Mr. Roffman was appointed to our Board of Directors in April 2011. Mr. Roffman, has been the Chief Financial Officer for Public Media Works, Inc. since October 2010. Mr. Roffman has also been an independent business consultant since April 2006. Mr. Roffman currently serves on the board and is chairman of the audit committee of Westinghouse Solar (formerly Akeena Solar), a designer and distributor of solar modules. During the past five years Mr. Roffman has also served on the Boards and audit committees of Silverstar Holdings and Adex Media.
In evaluating director nominees, our Company considers the following factors:
·
The appropriate size of the Board;
·
Our needs with respect to the particular talents and experience of our directors;
·
The knowledge, skills and experience of nominees;
·
Experience with accounting rules and practices; and
·
The nominees’ other commitments.
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Our Company’s goal is to assemble a Board of Directors that brings our Company a variety of perspectives and skills derived from high quality business, professional and personal experience. Other than the foregoing, there are no stated minimum criteria for director nominees.
Specific talents and qualifications that we considered for the members of our Company’s Board of Directors are as follows:
·
Mr. Lantz, in addition to his role as a director and Chairman of the Board, is our Company’s Chief Executive Officer. We feel that the senior member of our management team is the appropriate person to lead our Board of Directors.
·
Mr. Leung, in addition to his role as a director, is SCPC’s Chief Executive Officer. The combination of the desirability of a close working relationship between our Company and SCPC as well as the significant equity ownership of Mr. Leung, makes his membership on our Board of Directors highly desirable to our Company.
·
Mr. Salzberg has deep experience in consumer products marketing. During his tenure as the president of Shasta Beverages, Inc., sales have grown from $212 million to $600 million. Prior to Shasta, Mr. Salzberg was a Regional Vice President with PepsiCo’s Frito-Lay Snack division during which time his division achieved growth rates of 15% or two times the Company average. We believe Mr. Salzberg’s strong record of sales growth achievement are a significant asset and complement to Mr. Lantz’s sales talents and will benefit our Company greatly.
·
Mr. Jensen’s broad experience in executive senior management and investment management within public companies will provide additional guidance in areas such as strategic planning, sales and marketing, revenue growth and distribution. The board and company will also gain valuable insight from Mr. Jensen in the areas of national and international sales and distribution models.
·
Mr. Roffman’s extensive financial and accounting experience and his training as a certified public accountant brings a valuable asset to our Board. Mr. Roffman's experience on public company boards has provided extensive audit committee experience as well as additional insight into the practices of other Boards and their committees. He has also been designated to head the audit committee and serve as the financial expert for our Company’s Board of Directors.
There are no family relationships among any of our officers or directors.
Corporate Governance
Leadership Structure
Prior to the consummation of the Exchange Agreement we had only one director who also served as our Chief Executive Officer. Following the Exchange Agreement, Scott Lantz will act as our Chairman and Chief Executive Officer. Our Board of Directors does not have a lead independent director. Our Board of Directors has determined that its leadership structure was appropriate and effective for the Company given its stage of operations. In connection with the Exchange Agreement, we intend to establish a full Board of Directors, including a majority of independent directors. We will re-evaluate our leadership structure once we have added additional members to our Board of Directors.
Board Committees
We presently do not have an audit committee, compensation committee or nominating committee or committee performing similar functions, as our management believes that until this point it has been premature at the early stage of our management and business development to form an audit, compensation or nominating committee. However, our new Board plans to form an audit, compensation and nominating committee in the near future. We envision that the audit committee will be primarily responsible for reviewing the services performed by our independent auditors and evaluating our accounting policies and system of internal controls. We envision that the compensation committee will be primarily responsible for reviewing and approving our salary and benefits policies (including stock options) and other compensation of our executive officers. The nominating committee would be primarily responsible for nominating directors and setting policies and procedures for the nomination of directors. The nominating committee would also be responsible for overseeing the creation and implementation of our corporate governance policies and procedures. Until these committees are established, these decisions will continue to be made by our Board of Directors.
Director Independence
The Board has determined that Messrs. Leung, Saltzberg, Jensen and Roffman are independent as the term "independent" is defined by the rules of NASDAQ Rule 5605.
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Involvement in Certain Legal Proceedings
To the best of our knowledge, none of our directors or executive officers has been convicted in a criminal proceeding, excluding traffic violations or similar misdemeanors, or has been a party to any judicial or administrative proceeding during the past ten years that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities laws, except for matters that were dismissed without sanction or settlement. Except as set forth in our discussion below in "Transactions with Related Persons; Promoters and Certain Control Persons; Director Independence," none of our directors, director nominees or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the SEC.
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EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information concerning all cash and non-cash compensation awarded to, earned by or paid to the named persons for services rendered in all capacities during the noted periods. No other executive officers received total annual compensation in excess of $100,000.
Sugarmade, Inc.
Change in
Pension
Value and
Non-Qual.
Deferred
Stock
Option
Non-equity
Compens.
All Other
Salary
Bonus
Awards
Awards
Incentive
Earnings
Comp.
Total
Position
Year
($)
($)
($)
($)
Comp ($)
($)
($)(1)
($)
Scott Lantz
2010
120,000
-
-
-
-
-
3,519
123,519
2009
10,000
-
-
-
-
-
-
10,000
President/Chief Executive Officer/Director since December 9, 2009.
Ethan Farid Jinian
2010
37,500
-
-
-
-
-
-
37,500
2009
12,500
-
-
-
-
-
-
12,500
President/Chief Executive Officer/Director from October 1, 2009 through December 9, 2009.
(1)
- All other compensation consists of health insurance reimbursed by our Company on behalf of the individual.
Diversified Opportunities, Inc.
Change in
Pension
Value and
Non-Qual.
Deferred
Stock
Option
Non-equity
Compens.
All Other
Salary
Bonus
Awards
Awards
Incentive
Earnings
Comp.
Total
Position
Year
($)
($)
($)
($)
Comp ($)
($)
($)
($)
Kevin Russeth
2010
-
-
-
-
-
-
-
-
2009
-
-
-
-
-
-
-
-
President/Chief Executive Officer/Director since May 2008.
Employment Agreements
None.
Grants of Stock Awards
During 2010 and 2009, there were no grants of plan-based awards to our named executive officers. In April 2011, our Company issued stock option grants to purchase up to 920,000 shares of our common stock at an exercise price of $1.25 per share, vesting over periods up to three years.
Option Exercises and Stock Vested
During the 2010 and 2009, there were no option exercises or vesting of stock awards to our named executive officers.
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Outstanding Equity Awards at Fiscal Year End
None of our executive officers received any equity awards, including, options, restricted stock or other equity incentives during 2010 and 2009.
Compensation of Directors
Our former Chairman of the Sugarmade, Inc. Board of Directors received compensation for his service as a director totaling $18,000. During the 2010 and 2009, no other member of our Boards of Directors received any compensation for his services as a director.
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TRANSACTIONS WITH RELATED
PERSONS, PROMOTERS AND CERTAIN CONTROL PERSONS
Transactions with Related Persons
The following includes a summary of any transaction occurring since January 1, 2010, or any proposed transaction, in which we were or are to be a participant and the amount involved exceeded or exceeds $120,000, and in which any related person had or will have a direct or indirect material interest (other than compensation described under "Executive Compensation" above). We believe the terms obtained or consideration that we paid or received, as applicable, in connection with the transactions described below were comparable to terms available or the amounts that would be paid or received, as applicable, in arm's-length transactions.
·
On April 27, 2011, we issued a total of 2,484,299 and 800,000 shares of common stock to Scott Lantz our Chief Executive Officer and Clifton Leung, a member of its Board of Directors, respectively, in exchange for nominal cash consideration.
·
On May 9, 2011 we completed the Cancellation Agreement with Kevin Russeth, Steven Davis and Jonathan Shultz. At the time of the Cancellation Agreement, Mr. Russeth was our sole director and was our Chief Executive Officer and Chief Financial Officer. In addition, each of Messrs. Russeth, Davis and Shultz were stockholders of our Company holding in excess of 10% of our outstanding common stock. Under the terms of the Cancellation Agreement, Messrs. Russeth, Davis and Shultz cancelled 8,500,000 shares of our common stock held by them in exchange for Sugarmade-CA's agreement to consummate the transactions contemplated by the Exchange Agreement and 200,000 warrants to purchase shares of our common stock. The warrants are three year warrants to purchase common stock at a price of $1.25 per share. Also under the terms of the Cancellation Agreement, Messrs Russeth and Shultz agreed to redeem an aggregate of 262,500 shares of our outstanding common stock in exchange for cash payments aggregating to $210,000.
·
In 2010, Sugarmade-CA loaned money to Ethan Farid Jinian in exchange for a note payable secured by shares of stock in our Company. At the time of the loan, Mr. Jinian was a former director and executive officer of Sugarmade-CA and was a 5% stockholder. The loans bore interest at a rate of 14 percent per annum. The largest amount outstanding under the loan was $163,000. Mr. Jinian repaid the loan in its entirety through the tender to Sugarmade-CA of 59,962 shares of common stock for cancellation.
·
Effective January 1, 2011, we entered into the LSA with SCPC. We are dependent on SCPC to supply us with paper products and our costs of goods sold, exclusive of freight and transportation costs and inventory obsolescence are generally comprised of payments to SCPC for our products. Clifton Leung, a director and 10% stockholder in our Company is the Chief Executive Officer and 100% owner of SCPC.
Review, approval or ratification of transactions with related persons
We do not have any other special committee, policy or procedure related to the review, approval or ratification of related party transactions.
Promoters and Control Persons
We did not have any promoters at any time during the past five fiscal years.
LEGAL PROCEEDINGS
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse affect on our business, financial condition or operating results.
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MARKET PRICE AND DIVIDENDS ON OUR COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
Our Company is a fully reporting public company (a public company that is fully subject to the Securities and Exchange Commission’s reporting requirements). Our common stock began trading publicly on the OTC Bulletin Board under the symbol “DVOP” on May 8, 2008. The OTC Bulletin Board is a regulated quotation service that displays real-time quotes, last-sale prices and volume information in over-the-counter equity securities. The OTC Bulletin Board securities are traded by a community of market makers that enter quotes and trade reports. Our stock is also quoted on the OTCQB which accounts for a majority of the volume of fully reporting over-the-counter companies. OTCQB displays real-time quotes, last-sale prices and volume information in over-the-counter equity securities. The market is extremely limited for our stock and any prices quoted may not be a reliable indication of the value of our common stock. The following table sets forth the high and low bid prices per share of our common stock by both the OTC Bulletin Board and OTCQB for the periods indicated. These prices reflect prices paid for our common stock prior to the Sugarmade Acquisition.
For the year ended June 30, 2011 | High | Low |
Fourth Quarter (through May 6, 2011) | $13.50 | $4.00 |
Third Quarter | 5.00 | 1.50 |
Second Quarter | 5.50 | 0.10 |
First Quarter | 0.40 | 0.25 |
|
|
|
For the year ended June 30, 2010 | High | Low |
Fourth Quarter | $0.60 | $0.25 |
Third Quarter | 0.20 | 0.15 |
Second Quarter | 5.00 | 0.12 |
First Quarter | 0.95 | 0.01 |
|
|
|
For the year ended June 30, 2009 | High | Low |
Fourth Quarter | $0.15 | $0.01 |
Third Quarter | 0.51 | 0.15 |
Second Quarter | 0.55 | 0.25 |
First Quarter | 0.84 | 0.10 |
The quotes represent inter-dealer prices, without adjustment for retail mark-up, markdown or commission and may not represent actual transactions. The trading volume of our securities fluctuates and may be limited during certain periods. As a result of these volume fluctuations, the liquidity of an investment in our securities may be adversely affected.
Holders
As of May 5, 2011, there were approximately 802 stockholders of record of our common stock.
Dividends
We have never declared or paid a cash dividend. Any future decisions regarding dividends will be made by our Board of Directors. We currently intend to retain and use any future earnings for the development and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Our Board of Directors has complete discretion on whether to pay dividends, subject to the approval of our stockholders. Even if our Board of Directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the Board of Directors may deem relevant.
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Equity Compensation Plans
On May 5, 2011, our Board of Directors adopted the Diversified Opportunities, Inc. 2011 Stock Option/Stock Issuance Plan (the “Plan”). The exercise of any options issued under the Plan, and the issuance of any shares under the Plan, is subject to the Plan being approved by the vote of a majority of our shareholders. The Plan is intended to promote the interests of our Company by “providing eligible person with the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Corporation as an incentive for them to remain in the service of the Corporation.” The Plan is divided into two separate equity programs: 1) a stock option grant program; and 2) a stock issuance program. The maximum number of shares available to be issued under the Plan is currently 1,500,000 shares, subject to adjustments for any stock splits, stock dividends or other specified adjustments which may take place in the future.
The Plan is administered by our Company’s Board of Directors. Persons eligible to participate in the Plan are: 1) employees; 2) non-employee members of our Company’s Board of Directors; and 3) consultants and other independent advisors who provide services to our Company or its subsidiary Sugarmade – CA. All grants under the Plan are intended to comply with the requirements under Internal Revenue Code Section 409A and activities under the Plan will be administered accordingly. Options granted under the Plan are evidenced by agreement between the recipient and our Company, subject to the following general provisions: 1) the exercise price shall not be less than 100% of the fair market value per share of our Company’s common stock on the date of grant (110% in the case of 10% or greater shareholders); and 2) the term of stock options shall be limited to a maximum of ten years. A complete description of the Plan is included as an exhibit to this Current Report.
RECENT SALE OF UNREGISTERED SECURITIES
Reference is made to the disclosure set forth under Item 3.02 of this Current Report, which disclosure is incorporated by reference into this section. In addition, Sugarmade-CA has sold the following securities in transactions that were not registered with the SEC or a state securities commission:
·
From April 11, 2011 to April 22, 2011, Sugarmade-CA issued 252,070 shares of Sugarmade-CA common stock upon the conversion by existing Sugarmade-CA note holders of notes payable with a principal balance outstanding totaling $693,900.
·
On April 27, 2011, Sugarmade-CA issued a total of 3,284,229 shares of common stock of Sugarmade-CA to its Chief Executive Officer and a member of its Board of Directors in exchange for nominal cash consideration.
·
On April 27, 2011, Sugarmade-CA issued options to purchase up to 920,000 shares of common stock of Sugarmade-CA to ten individuals with terms ranging from five to ten years and exercise prices per share of $1.25.
·
On April 27, 2011, Sugarmade-CA issued warrants to purchase up to 600,000 shares of common stock of Sugarmade-CA to three individuals with terms of two years at an exercise price of $1.25 per share.
·
From January 15, 2011 to May 6, 2011, Sugarmade-CA issued units including a total of 1,730,400 shares and two-year warrants to purchase up to 1,730,400 shares of common stock in exchange for net cash proceeds totaling $2,083,000 (gross proceeds of $2,163,000, less estimated related costs totaling $80,000).
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 300,000,000 shares of $.001 par value common stock and 10,000,000 shares of $.001 par value preferred stock. We are incorporated in the United States of America in the state of Delaware.
Common Stock
We are authorized to issue up to 300,000,000 shares of common stock, $.001 par value. Each share of common stock entitles a stockholder to one vote on all matters upon which stockholders are permitted to vote. Common stock does not confer on the holder any preemptive right or other similar right to purchase or subscribe for any additional securities issued by us and is not convertible into other securities. No shares of common stock are subject to redemption or any sinking fund provisions. All the outstanding
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shares of our common stock are fully paid and non-assessable. Subject to the rights of the holders of the preferred stock, the holders of shares of our common stock are entitled to dividends out of funds legally available when and as declared by our Board of Directors. In the event of our liquidation, dissolution or winding up, holders of our common stock are entitled to receive, ratably, the net assets available to stockholders after payment of all creditors and any liquidation preference on outstanding preferred stock.
Preferred Stock
We may issue up to 10,000,000 shares of preferred stock, $.001 par value in one or more classes or series within a class as may be determined by our Board of Directors, who may establish, from time to time, the number of shares to be included in each class or series, may fix the designation, powers, preferences and rights of the shares of each such class or series and any qualifications, limitations or restrictions thereof. Any preferred stock so issued by the Board of Directors may rank senior to the common stock with respect to the payment of dividends or amounts upon liquidation, dissolution or winding up of us, or both.
No shares of preferred stock are currently outstanding. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of our outstanding voting stock.
Transfer Agent and Registrar
Our transfer agent and registrar is Island Stock Transfer, 100 Second Avenue South, Suite 705S, St. Petersburg, FL 33701.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our bylaws provide for the indemnification of our directors to the fullest extent permitted by the Delaware General Corporation Law and may, if and to the extent authorized by our Board of Directors, so indemnify our officers and any other person whom we have the power to indemnify against liability, reasonable expense or other matter. This indemnification policy could result in substantial expenditure by us, which we may be unable to recoup.
Insofar as indemnification by us for liabilities arising under the Exchange Act may be permitted to our directors, officers and controlling persons pursuant to provisions of the Certificate of incorporation and bylaws, or otherwise, we have been advised that in the opinion of the SEC, such indemnification is against public policy and is, therefore, unenforceable. In the event that a claim for indemnification by such director, officer or controlling person of us in the successful defense of any action, suit or proceeding is asserted by such director, officer or controlling person in connection with the securities being offered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by us is against public policy as expressed in the Exchange Act and will be governed by the final adjudication of such issue.
At the present time, there is no pending litigation or proceeding involving a director, officer, employee or other agent of ours in which indemnification would be required or permitted. We are not aware of any threatened litigation or proceeding which may result in a claim for such indemnification.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Reference is made to the disclosure set forth under Item 4.01 of this report, which disclosure is incorporated herein by reference.
ITEM 9.01
FINANCIAL STATEMENTS AND EXHIBITS
(a)
Financial Statements
Filed at the end of this Current Report are the audited consolidated financial statements of Sugarmade, Inc. for the year ended December 31, 2010 and the period March 2, 2009 (inception) to December 31, 2009. Also filed at the end of this Current Report are the audited financial statements of Diversified Opportunities, Inc. for the years ended June 30, 2010 and 2009.
(b)
Pro Forma Financial Information
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Filed at the end of this Current Report are pro forma of operations, assuming the acquisition was completed on January 1, 2010.
(d) Exhibits
Exhibit No.
Description
2.1
Exchange Agreement, dated April 23, 2011, among the Company, Sugarmade-CA and the Sugarmade-CA shareholders (incorporated by reference to Exhibit 2.1 of the registrant’s current report on Form 8-K, filed with the SEC on April 27, 2011).
4.1
Form of Warrant issued to Sugarmade-CA warrant holders in connection with private placement.
4.2
Form of Warrant issued to Sugarmade-CA consultants.
4.3
Form of Warrant issued in connection with the Share Cancellation Agreement.
4.4
Form of Convertible Note Issued to note holders of Sugarmade-CA.
10.1
Share Cancellation Agreement, dated April 23, 2011, among the Company and three of its shareholders.
10.2
Form of Subscription Agreement dated between January 15, 2011 and May 6, 2011 among Sugarmade-CA and certain investors identified therein.
10.3
Conversion Agreement dated April 11, 2011 to April 22, 2011 among Sugarmade-CA and certain note holders of Sugarmade-CA identified therein.
10.4
Registration Rights Agreement dated May 9, 2011 among the Company, Sugarmade-CA and the shareholders identified therein.
10.5
Purchase Agreement dated October 26, 2009 between Sugarmade CA and Sugarmade Inc.
10.6
License and Supply Agreement dated January 1, 2011 between The Sugar Cane Paper Co. Ltd and Sugarmade-CA.
10.7
Lease Agreement dated January 10, 2011 between Sugarmade-CA and Michael Frangis with respect to the premises located at 2280 Lincoln Avenue, Suite 200, San Jose CA 95125.
10.8
Consulting Agreement dated February 1, 2011 between Sugarmade-CA and Joseph Abrams with respect to strategic advisory services.
10.9
Diversified Opportunities, Inc. 2011 Stock Option/Stock Issuance Plan.
21.1
List of subsidiaries.
24.1
Power of Attorney (included on signature page).
| -29- |
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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.
DIVERSIFIED OPPORTUNITIES, INC
Date: May 9, 2011
/s/ Scott Lantz
Scott Lantz
Chief Executive Officer and Chief Financial Officer
| -30- |
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INDEX TO FINANCIAL STATEMENTS
Sugarmade, Inc. Annual Audited Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2010 and 2009
Consolidated Statements of Operations for the year ended December 31, 2010 and the period from March 2, 2009 (inception) to December 31, 2009
Consolidated Statements of Changes in Stockholders’ Deficit for the year ended December 31, 2010 and the period from March 2, 2009 (inception) to December 31, 2009
Consolidated Statements of Cash Flows for the year ended December 31, 2010 and the period from March 2, 2009 (inception) to December 31, 2009
Notes to Consolidated Financial Statements
Diversified Opportunities, Inc. Annual Audited Financial Statements
Report of Independent Registered Public Accountant
Balance Sheets at June 30, 2010 and 2009
Statements of Operations for the years ended June 30, 2010 and 2009
Statements of Changes in Shareholders' Deficit for the years ended June 30, 2010 and 2009
Statements of Cash Flows for the years ended June 30, 2010 and 2009
Notes to Financial Statements
Diversified Opportunities, Inc. Interim Unaudited Financial Statements
Balance Sheets as of March 31, 2011 (unaudited) and June 30, 2010
Statements of Operations (unaudited) for the three and nine months ended March 31, 2011 and 2009
Statements of Cash Flows (unaudited) for the nine months ended March 31, 2011 and 2009
F - 1
To the Board of Directors and Stockholders:
Sugarmade, Inc. and Subsidiary
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the accompanying consolidated balance sheets of Sugarmade, Inc. and Subsidiary as of December 31, 2010 and 2009 and the related consolidated statements of operations, changes in stockholders’ deficit and cash flows for the year ended December 31, 2010 and the period from March 2, 2009 (inception) to December 31, 2009. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sugarmade, Inc. and Subsidiary, at December 31, 2010 and 2009, and the results of its operations and its cash flows for the year ended December 31, 2010 and the period from March 2, 2009 (inception) to December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As described in Note 1 to the consolidated financial statements, the Company has incurred net losses since inception and has a deficiency in stockholders’ equity at December 31, 2010. These and other factors discussed therein raise a substantial doubt about the ability of the Company to continue as a going concern. Management’s plans in regard to those matters are also described in Note 1. The Company’s ability to achieve its plans with regard to those matters, which may be necessary to permit the realization of assets and satisfaction of liabilities in the ordinary course of business, is uncertain. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Anton & Chia, LLP
Newport Beach, California
May 9, 2011
F - 2
Sugarmade, Inc. (formerly Simple Earth, Inc.) and Subsidiary | |||||||
Consolidated Balance Sheets | |||||||
December 31, 2010 and 2009 | |||||||
|
|
|
|
|
|
|
|
|
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|
| 2010 |
|
| 2009 |
|
|
|
|
|
|
|
|
Assets | |||||||
Current assets: |
|
|
|
|
| ||
| Cash | $ | 13,614 |
| $ | 29,872 | |
| Inventory |
| 17,439 |
|
| 31,942 | |
| Other current assets |
| 2,707 |
|
| 4,564 | |
|
|
|
|
|
|
|
|
|
| Total current assets |
| 33,760 |
|
| 66,378 |
|
|
|
|
|
|
|
|
License and supply agreement with Sugar Cane Paper Co., Ltd., net of |
|
|
|
|
| ||
| accumulated amortization of $21,467 (2009 - $3,067) |
| 346,591 |
|
| 364,991 | |
Note receivable and amounts due from stockholder |
| 187,413 |
|
| 6,000 | ||
|
|
|
|
|
|
|
|
|
|
| $ | 567,764 |
| $ | 437,369 |
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Deficit | |||||||
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
| ||
| Accounts payable and accrued liabilities, including amounts due to related |
|
|
|
|
| |
|
| parties of $9,750 in 2010 | $ | 115,046 |
| $ | 48,801 |
| Accrued interest, including amounts due to related parties of $5,902 (2009 - $4,997) |
| 21,080 |
|
| 5,397 | |
| Notes payable due to shareholders |
| 126,300 |
|
| 75,100 | |
| Accrued compensation and personnel related payables |
| 28,177 |
|
| 2,329 | |
|
|
|
|
|
|
|
|
|
| Total current liabilities |
| 290,603 |
|
| 131,627 |
|
|
|
|
|
|
|
|
Convertible notes payable |
| 549,000 |
|
| - | ||
Convertible notes payable to related parties |
| 252,900 |
|
| 448,000 | ||
|
|
|
|
|
|
|
|
|
| Total liabilities |
| 1,092,503 |
|
| 579,627 |
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
| ||
|
|
|
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Stockholders’ deficit |
|
|
|
|
| ||
| Preferred stock (no par value, 20,000,000 shares authorized, none issued |
|
|
|
|
| |
|
| and outstanding) |
| - |
|
| - |
| Common stock (no par value, 50,000,000 shares authorized, 788,107 shares issued |
|
|
|
|
| |
|
| and outstanding at December 31, 2010 (729,729 at December 31, 2009)) |
| 216,730 |
|
| 730 |
| Accumulated deficit |
| (741,469) |
|
| (142,988) | |
|
|
|
|
|
|
|
|
|
| Total stockholders' deficit |
| (524,739) |
|
| (142,258) |
|
|
|
|
|
|
|
|
|
|
| $ | 567,764 |
| $ | 437,369 |
| The accompanying notes are an integral part of these consolidated financial statements. |
|
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| |||
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|
|
|
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|
F - 3
Sugarmade, Inc. (formerly Simple Earth, Inc.) and Subsidiary | ||||||
Consolidated Statements of Operations | ||||||
For the year ended December 31, 2010 and the period March 2, 2009 (inception) to December 31, 2009 | ||||||
|
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|
|
|
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|
|
|
| 2010 |
| 2009 |
|
|
|
|
|
|
|
Sales revenues | $ | 40,792 | $ | - | ||
|
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|
|
|
|
|
Cost of goods sold: |
|
|
|
| ||
| Materials and freight costs |
| 35,944 |
| - | |
| Provision for inventory obsolescence |
| 17,539 |
| - | |
|
|
|
|
|
|
|
|
|
|
| 53,483 |
| - |
|
|
|
|
|
|
|
Gross margin |
| (12,691) |
| - | ||
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
| ||
| Selling, general and administrative expenses |
| 480,156 |
| 130,042 | |
| Amortization of license and supply agreement |
| 18,400 |
| 3,067 | |
|
|
|
|
|
|
|
|
| Total operating expenses |
| 498,556 |
| 133,109 |
|
|
|
|
|
|
|
Loss from operations |
| (511,247) |
| (133,109) | ||
|
|
|
|
|
|
|
Nonoperating income (expense): |
|
|
|
| ||
| Interest expense: |
|
|
|
| |
|
| Related parties |
| (46,895) |
| (515) |
|
| Other |
| (58,871) |
| (9,364) |
|
|
|
|
|
|
|
| Interest income (including $18,413 from shareholder note receivable) |
| 18,532 |
| - | |
|
|
|
|
|
|
|
|
|
|
| (87,234) |
| (9,879) |
|
|
|
|
|
|
|
Net loss | $ | (598,481) | $ | (142,988) | ||
|
|
|
|
|
|
|
Basic and diluted net loss per share | $ | (0.78) | $ | (0.24) | ||
|
|
|
|
|
|
|
Basic and diluted weighted average common shares |
|
|
|
| ||
| outstanding used in computing net loss per share |
| 766,835 |
| 605,495 | |
|
|
|
|
|
|
|
| The accompanying notes are an integral part of these consolidated financial statements. |
| ||||
|
|
|
|
|
|
|
F - 4
Sugarmade, Inc. (formerly Simple Earth, Inc.) and Subsidiary | ||||||||||
Consolidated Statements of Changes in Stockholders' Deficit | ||||||||||
For the year ended December 31, 2010 and the period March 2, 2009 (inception) to December 31, 2009 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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| Total |
|
|
|
|
|
|
|
|
|
| Stockholders' |
|
|
|
| Common Stock |
| Accumulated |
| Equity | ||
|
|
|
| Shares |
| Amount |
| Deficit |
| (Deficit) |
|
|
|
|
|
|
|
|
|
|
|
Beginning balance at March 2, 2009 (inception) |
| - | $ | - | $ | - | $ | - | ||
|
|
|
|
|
|
|
|
|
|
|
| Issuance of common stock at inception |
| 656,756 |
| 657 |
| - |
| 657 | |
| Issuance of common stock in connection with acquisition |
|
|
|
|
|
|
|
| |
|
| of SugarMade |
| 72,973 |
| 73 |
| - |
| 73 |
| Net loss |
| - |
| - |
| (142,988) |
| (142,988) | |
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
| 729,729 |
| 730 |
| (142,988) |
| (142,258) | ||
|
|
|
|
|
|
|
|
|
|
|
| Issuance of common stock for cash |
| 58,378 |
| 216,000 |
| - |
| 216,000 | |
| Net loss |
| - |
| - |
| (598,481) |
| (598,481) | |
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010 |
| 788,107 | $ | 216,730 | $ | (741,469) | $ | (524,739) | ||
|
|
|
|
|
|
|
|
|
|
|
| The accompanying notes are an integral part of these consolidated financial statements. |
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
F - 5
Sugarmade, Inc. (formerly Simple Earth, Inc.) and Subsidiary | |||||||
Consolidated Statements of Cash Flows | |||||||
For the year ended December 31, 2010 and the period March 2, 2009 (inception) to December 31, 2009 | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
| 2010 |
| 2009 |
|
|
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
| |||
| Net loss | $ | (598,481) | $ | (142,988) | ||
| Adjustments to reconcile net loss to cash flows from operating activities: |
|
|
|
| ||
|
| Amortization of license and supply agreement |
| 18,400 |
| 3,067 | |
|
| Interest income from note receivable from stockholder |
| (18,413) |
| - | |
|
| Provision for inventory obsolescence |
| 17,539 |
| - | |
|
| Changes in operating assets and liabilities: |
|
|
|
| |
|
|
| Inventory |
| (3,036) |
| - |
|
|
| Other assets |
| 1,857 |
| (4,564) |
|
|
| Accounts payable and accrued liabilities |
| 66,245 |
| 48,801 |
|
|
| Accrued interest |
| 15,683 |
| 5,397 |
|
|
| Accrued compensation and personnel related payables |
| 25,848 |
| 2,329 |
|
|
|
|
|
|
|
|
|
| Cash flows from operating activities |
| (474,358) |
| (87,958) | |
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
| |||
| Additions to notes receivable from stockholder |
| (163,000) |
| (6,000) | ||
| Cash paid in connection with acquisition of Sugarmade, Inc. |
| - |
| (340,000) | ||
|
|
|
|
|
|
|
|
|
| Cash flows from investing activities |
| (163,000) |
| (346,000) | |
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
| |||
| Proceeds from issuances of common stock |
| 216,000 |
| 730 | ||
| Additions to notes payable due to related parties |
| 66,300 |
| 15,100 | ||
| Repayments of notes payable due to related parties |
| (15,100) |
| - | ||
| Proceeds from the issuances of convertible notes payable |
| 602,900 |
| 448,000 | ||
| Repayments of convertible notes payable |
| (249,000) |
| - | ||
|
|
|
|
|
|
|
|
|
| Cash flows from financing activities |
| 621,100 |
| 463,830 | |
|
|
|
|
|
|
|
|
Change in cash during period |
| (16,258) |
| 29,872 | |||
|
|
|
|
|
|
|
|
Cash, beginning of period |
| 29,872 |
| - | |||
|
|
|
|
|
|
|
|
Cash, end of period | $ | 13,614 | $ | 29,872 | |||
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
| |||
| Cash paid during the period for: |
|
|
|
| ||
|
| Interest | $ | 71,551 | $ | 4,482 | |
|
|
|
|
|
|
|
|
Noncash investing and financing transactions: |
|
|
|
| |||
| Assets acquired and liabilities assumed in connection with acquisition |
|
|
|
| ||
|
| of SugarMade, Inc.: |
|
|
|
| |
|
|
| Inventory | $ | - | $ | 31,942 |
|
|
| License and supply agreement with Sugar Cane Paper Co., Ltd. |
| - |
| 308,058 |
|
|
| Less: note payable |
| - |
| - |
|
|
|
|
|
|
|
|
|
|
|
| $ | - | $ | 340,000 |
|
|
|
|
|
|
|
|
| The accompanying notes are an integral part of these consolidated financial statements. |
|
| ||||
|
|
|
|
|
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|
|
F - 6
Sugarmade, Inc.
Notes to Consolidated Financial Statements
1.
Summary of significant accounting policies
Nature of business
Sugarmade, Inc. (hereinafter referred to as “we” or “the/our Company”) was incorporated in the state of California on March 2, 2009 under the name Simple Earth, Inc. On October 26, 2009, we acquired all of the outstanding common stock of Sugarmade, Inc. (“SMI”) and during 2010 we began doing business as Sugarmade, Inc. On February 1, 2011, we changed the legal name of our Company to Sugarmade, Inc. and dissolved the SMI legal entity. Our Company is principally engaged in the business of marketing and distributing environmentally friendly non-tree-based paper products.
Basis of presentation
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) as promulgated in the United States of America.
Principles of consolidation
The consolidated financial statements include the accounts of our Company and its wholly-owned subsidiary, SMI. All significant intercompany transactions and balances have been eliminated in consolidation.
Going concern
Our consolidated financial statements have been prepared assuming that we will continue as a going concern. Such assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. However, we have incurred significant net losses, have a net working capital deficiency and have a deficiency of stockholders’ equity as of and through December 31, 2010. These factors among others raise a substantial doubt about our ability to continue as a going concern. We are dependent upon sufficient future profitable operations and additional sales of debt or equity securities in order to meet our operating cash requirements. Barring our generation of revenues in excess of our costs and expenses or our obtaining additional funds from equity or debt financing, we will not have sufficient cash to continue to fund the operations of our Company through December 31, 2011. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
We have taken significant steps to lessen this uncertainty including: 1) the completion of a sale of common stock and warrants in April 2011 that netted our Company cash proceeds totaling $2,083,000; and 2) the conversion of notes payable outstanding totaling $693,900 into common stock of our Company. While we believe that these actions have provided the Company with necessary operating capital, there can be no assurance that we will not require future infusions of capital and that such financings will be available on acceptable terms, or at all.
Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue recognition
We recognize revenue in accordance with Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) No. 605, Revenue Recognition. Revenue is recognized when we have evidence of an arrangement, a determinable fee, and when collection is considered to be probable and products are delivered. This generally occurs upon shipment of the merchandise, which is when legal transfer of title occurs. In the event that final acceptance of our product by the customer is uncertain, revenue is deferred until all acceptance criteria have been met. Cash received in connection with the sales of our products prior to their being recognized as revenue is recorded as deferred revenue.
F - 7
Sugarmade, Inc.
Notes to Consolidated Financial Statements
Cash and cash equivalents
We consider all investments with a remaining maturity of three months or less at purchase to be cash equivalents. Cash equivalents primarily represent funds invested in money market funds, bank certificates of deposit and U.S. government debt securities whose cost equals fair market value. At both December 31, 2010 and 2009, our Company had no cash equivalents.
From time to time, we may maintain bank balances in excess of the $250,000 insured by the Federal Deposit Insurance Corporation. We have not experienced any losses with respect to cash. Management believes our Company is not exposed to any significant credit risk with respect to its cash and cash equivalents.
Accounts receivable
Accounts receivable are carried at their estimated collectible amounts, net of any estimated allowances for doubtful accounts. We grant unsecured credit to our customers deemed credit worthy. Ongoing credit evaluations are performed and potential credit losses estimated by management are charged to operations on a regular basis. At the time any particular account receivable is deemed uncollectible, the balance is charged to the allowance for doubtful accounts. Since we cannot necessarily predict future changes in the financial stability of our customers, we cannot guarantee that our allowance for doubtful accounts will be adequate.
From time to time, we may have a limited number of customers with individually large amounts due. Any unanticipated change in a customer’s creditworthiness could have a material effect on our results of operations in the period in which such changes or events occurred. We had only insignificant amounts of accounts receivable (currently classified with other current assets) and no allowance for doubtful accounts as of December 31, 2010 and 2009.
Inventory
Inventory consists of finished goods paper and paper-based products ready for sale and is stated at the lower of cost or market. We value inventories using the weighted average costing method. We regularly review inventory and consider forecasts of future demand, market conditions and product obsolescence. If the estimated realizable value or our inventory is less than cost, we make provisions in order to reduce its carrying value to its estimated market value. We had valuation reserves against inventory of $17,539 at December 31, 2010 (none at December 31, 2009).
Valuation of long-lived assets
We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate their net book value may not be recoverable. When such factors and circumstances exist, we compare 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. Our management currently believes there is no impairment of our long-lived assets. There can be no assurance, however, that market conditions will not change or demand for our products under development will continue. Either of these could result in future impairment of long-lived assets.
Income taxes
We provide for federal and state income taxes currently payable, as well as for those deferred due to timing differences between reporting income and expenses for financial statement purposes versus tax purposes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary 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 income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in income tax rates is recognized as income or expense in the period that includes the enactment date.
Stock based compensation
Future stock based compensation cost will be measured at the date of grant, based on the calculated fair value of the stock-based award, and will be recognized as expense over the employee’s requisite service period (generally the vesting period of the award). We will estimate the fair value of employee stock options granted using the Black-Scholes Option Pricing Model. Key assumptions used to estimate the fair value of stock options will include the exercise price of the award, the fair value of our common stock on the date of grant, the expected option term, the risk free interest rate at the date of grant, the expected volatility and the expected annual dividend
F - 8
Sugarmade, Inc.
Notes to Consolidated Financial Statements
yield on our common stock. We will use comparable public company data among other information to estimate the expected price volatility and the expected forfeiture rate. There were no options or warrants issued or outstanding from our Company’s inception through December 31, 2010.
Net loss per share
We calculate basic earnings per share (“EPS”) by dividing our net loss by the weighted average number of common shares outstanding for the period, without considering common stock equivalents. Diluted EPS is computed by dividing net income or net loss by the weighted average number of common shares outstanding for the period and the weighted average number of dilutive common stock equivalents, such as options and warrants. Options and warrants are only included in the calculation of diluted EPS when their effect is dilutive.
Fair value of financial instruments
The fair value accounting guidance defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” The definition is based on an exit price rather than an entry price, regardless of whether the entity plans to hold or sell the asset. This guidance also establishes a fair value hierarchy to prioritize inputs used in measuring fair value as follows:
•
Level 1: Observable inputs such as quoted prices in active markets;
•
Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
•
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
The estimated fair values of our financial assets and liabilities that are recognized at fair value on a recurring basis, using available market information and other observable data are as follows:
F - 9
Sugarmade, Inc.
Notes to Consolidated Financial Statements
The intangible assets are related to the exclusive license and supply agreement with Sugar Cane Paper Company. The Company recorded the exclusivity agreement at fair value. The exclusivity agreement will be amortized over the life of the agreement, or twenty years.
Advertising
To the extent present in the future, we will expense advertising costs as incurred. We have no existing arrangements under which we provide or receive advertising services from others for any consideration other than cash.
Litigation
From time to time, we may become involved in disputes, litigation and other legal actions. We estimate the range of liability related to any pending litigation where the amount and range of loss can be estimated. We record our best estimate of a loss when the loss is considered probable. Where a liability is probable and there is a range of estimated loss with no best estimate in the range, we record a charge equal to at least the minimum estimated liability for a loss contingency when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements and (ii) the range of loss can be reasonably estimated.
Recently issued and adopted accounting pronouncements
Accounting standards promulgated by the Financial Accounting Standards Board (“FASB”) are subject to change. Changes in such standards may have an impact on the Company’s future financial statements. The following are a summary of recent accounting developments.
In June 2009, the FASB issued additional guidance which requires an enterprise to determine whether its variable interest or interests give it a controlling financial interest in a variable interest entity. The primary beneficiary of a variable interest entity is that the enterprise that has both (1) the power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance, and (2) the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. The guidance also requires ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. The new guidance was effective for our Company beginning January 1, 2010 and had no material impact on our consolidated financial statements.
In October 2009, the FASB issued new accounting guidance for revenue recognition with multiple deliverables. The new guidance affects the determination of when the individual deliverables included in a multiple-element arrangement may be treated as separate units of accounting. Additionally, the guidance modifies the manner in which the transaction consideration is allocated across the separately identified deliverables by no longer permitting the residual method of revenue recognition in accounting for multiple deliverable arrangements. Our Company adopted the new guidance effective January 1, 2010 and it had no material impact on our consolidated financial statements.
In January 2010, the FASB issued revised authoritative guidance that requires more robust disclosures about the different classes of assets and liabilities measured at fair value, the valuation techniques and inputs used, the activity in Level 3 fair value measurements, and the transfers between Levels 1, 2 and 3. This A portion of this guidance (excepting disclosures about purchases, sales, issuances and settlements in the roll forward activity in Level 3 fair value measurements) is was effective for interim and annual reporting periods beginning after December 15, 2009 except for the disclosures about purchases, sales, issuances, and settlements in the roll forward activity in Level 3 fair value measurements. Those disclosures about purchases, sales, issuances and settlements in the roll forward activity in Level 3 fair value measurements are were effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early application is encouraged. The revised guidance was adopted as of January 1, 2010 and did not have a material impact our consolidated financial statements.
2.
Acquisition of Sugarmade, Inc.
On October 26, 2009, we acquired all of the outstanding common stock of SMI in exchange for: 1) cash totaling $340,000; 2) a note payable totaling $60,000; and 3) 10% of the then outstanding common stock of our Company or 72,973 shares (with a nominal value at the date of acquisition of $.001 per share). Additionally, we are required to pay up to two additional earn-out payments of $200,000 to the seller of SMI: 1) if net income equals or exceeds $10 million in 2011; and/or 2) if net income exceeds $11 million in 2012.
F - 10
Sugarmade, Inc.
Notes to Consolidated Financial Statements
In addition to minimal amounts of saleable inventory, SMI also had an exclusive license and supply agreement (“LSA”) with Sugar Cane Paper Company (“SCPC”) located in the People’s Republic of China. SCPC is a manufacturer and a holder of intellectual property in the area of paper from non-wood sources. Under the LSA (as subsequently amended), we obtained the exclusive right (as defined) to market, distribute and manufacture SCPC’s proprietary products in Europe, North and South America and in other designated territories in the world. We also obtained the rights to the Sugarmade brand name and trademarks and other provisions of the agreement with SCPC also inure to the benefit of our Company.
We accounted for the acquisition of SMI under the purchase method with the total consideration of $400,000 (the 72,973 shares issued at the time of the transaction had only a nominal fair value) allocated to: 1) the fair value of inventory of $31,942; and 2) the fair value of the LSA of $368,058. We are amortizing the cost of the LSA over its twenty-year term and it is included in the accompanying balance sheet at its cost (net of accumulated amortization) at December 31, 2010 of $346,591 ($364,991 at December 31, 2009). Amortization charged to operations in 2010 and 2009 totaled $18,400 and $3,067, respectively and future amortization of the LSA (barring future impairments) will be $18,400 per year through its term. When accounting for the acquisition of SMI, we did not record the value of any future contingent earn-out payments as a liability nor as an increase to the value of the SMI assets acquired as we deemed that the likelihood of our Company’s attaining the required levels of profitability that would require such future payments was negligible.
We also entered into an agreement with SCPC to provide a line of credit (“LOC”) for future purchases of product from SCPC. Advances under the LOC will require that we possess valid purchase orders from non-related customers and repayments will be due thirty days after we receive payments from our customers for the related products financed. Total borrowings under the agreement are limited to $20 million. We have had no borrowings outstanding under the LOC through December 31, 2010.
3.
Note receivable and amounts due from shareholder
On February 1, 2010, we advanced cash totaling $163,000 to a shareholder of our Company under a note receivable bearing interest at the rate of 14% per annum. The note matures on December 31, 2012 and is secured by 60,370 shares of our Company’s common stock held by the shareholder. Accrued interest due from the shareholder in connection with the notes totaled $18,413 at December 31, 2010. Additionally, we advanced other amounts to the shareholder and to employees totaling $6,000 at both December 31, 2010 and 2009.
4.
Notes payable due to shareholders
Notes payable to shareholders consisted of the following at December 31, 2010 and 2009, respectively. :
| Notes payable | Accrued interest | ||
| 2010 | 2009 | 2010 | 2009 |
|
|
|
|
|
Note payable to shareholder and former owner of SMI, | $ 60,000 | $ 60,000 | $ 2,800 | $ 400 |
Notes payable from shareholder, unsecured, interest free, due on demand | 66,300 | 15,100 | - | - |
|
|
|
|
|
| $ 126,300 | $ 75,100 | $ 2,800 | $ 400 |
Interest expense in connection with these notes payable totaled $2,400 and $400 for the years ended December 31, 2010 and 2009, respectively, and is included with interest expense to related parties in the accompanying statements of operations.
F - 11
Sugarmade, Inc.
Notes to Consolidated Financial Statements
5.
Convertible notes payable and accrued interest
Convertible notes payable and accrued interest consisted of the following at December 31, 2010 and 2009:
| Notes payable | Accrued interest | ||
| 2010 | 2009 | 2010 | 2009 |
|
|
|
|
|
Notes payable to related parties, unsecured, interest accrues at the rate of 14% per annum with accrued interest payable monthly, bonus interest of up to 8.78% of earnings before interest, depreciation, taxes and amortization (as defined), all amounts due and payable December 31, 2015 (unless demanded beforehand by note holder on or after December 31, 2012), convertible into shares of our Company’s common stock after December 31, 2012 at the rate of $2.70 per share | $252,900 | $448,000 | $ 5,902 | $ 4,997 |
Notes payable, unsecured, interest accrues at the rate of 14% per annum with accrued interest payable monthly, bonus interest of up to 18% of earnings before interest, depreciation, taxes and amortization (as defined), all amounts due and payable December 31, 2015 (unless demanded beforehand by note holder on or after December 31, 2012), convertible into shares of our Company’s common stock after December 31, 2012 at the rate of $2.70 per share | 465,000 | - | 10,850 | - |
Notes payable, unsecured, interest accrues at the rate of 6% per annum, all principal and interest amounts due and payable October 2013, convertible into shares of our Company’s common stock at the rate of $3.70 per share | 84,000 | - | 1,528 | - |
|
|
|
|
|
| $801,900 | $448,000 | $ 18,280 | $ 4,997 |
Interest expense in connection with all convertible notes payable outstanding totaled $99,282 and $8,964 for the years ended December 31, 2010 and 2009, respectively, and is recorded as interest expense in the accompanying statements of operations.
6.
Stockholders’ equity
Our Company issued 58,378 shares of common stock in 2010 in exchange for net cash proceeds totaling $216,000. In 2009, we issued 656,756 shares of common stock to our founding shareholders in exchange for nominal cash proceeds totaling $657.
Stock Option Plan
On March 2, 2009, the Company’s shareholders adopted the 2009 Stock Option/Stock Issuance Plan (the “2009 Plan”) and reserved 150,000 shares of common stock for issuance under the 2009 Plan. The 2009 Plan provided for the issuance of both non-qualified stock options and incentive stock options (“ISOs”), and permitted grants to employees, non-employee directors and consultants of the Company. Generally, stock option grants under this plan will vest over a period from four to five years and have a term not to exceed 10 years, although the Plan Administrator has the discretion to issue option grants with varying terms. No stock or stock options have been issued under the 2009 Plan through December 31, 2010.
F - 12
Sugarmade, Inc.
Notes to Consolidated Financial Statements
7.
Income taxes
Our provisions for income taxes for the years ended December 31, 2010, and 2009, were as follows (using our blended effective Federal and State income tax rate of 40.3%):
|
| 2010 |
|
| 2009 |
| ||
|
|
|
|
|
|
| ||
Current Tax Provision: |
|
|
|
|
|
| ||
Federal and state |
|
|
|
|
|
|
|
|
Taxable income |
| $ | - |
|
| $ | - |
|
Total current tax provision |
| $ | - |
|
| $ | - |
|
|
|
|
|
|
|
|
|
|
Deferred Tax Provision: |
|
|
|
|
|
|
|
|
Federal and state |
|
|
|
|
|
|
|
|
Net loss carryforwards |
| $ | (220,000) |
|
| $ | (55,000) |
|
Change in valuation allowance |
|
| 220,000 |
|
|
| 55,000 |
|
Total deferred tax provision |
| $ | - |
|
| $ | - |
|
We had deferred income tax assets as of December 31, 2010, and 2009, as follows:
|
| 2010 |
|
| 2009 |
| ||
|
|
|
|
|
|
| ||
Loss carryforwards |
| $ | 275,000 |
|
| $ | 55,000 |
|
Less - valuation allowance |
|
| (275,000) |
|
|
| (55,000) |
|
Total net deferred tax assets |
| $ | - |
|
| $ | - |
|
As of December 31, 2010, we had net operating loss carryforwards for income tax reporting purposes of approximately $682,000 for federal and California state income tax that may be offset against future taxable income. The net operating loss carryforwards begin to expire in 2024. Current tax laws limit the amount of loss available to be offset against future taxable income when a substantial change in ownership occurs. Therefore, future issuances of our equity securities may limit the amount of NOL available to offset any future taxable income that our Company may generate in the future. Accordingly, the potential tax benefits of the loss carryforwards are offset by a valuation allowance of an equivalent amount. The items accounting for the difference between income taxes computed at the federal statutory rate and the provision for income taxes were as follows:
|
| 2010 |
| 2009 |
Federal statutory rate |
| 34.0% |
| 34.0% |
State tax, net of federal benefits |
| 6.3% |
| 6.3% |
Less valuation allowance |
| (40.3%) |
| (40.3%) |
Effective income tax rate |
| - % |
| - % |
We performed an analysis of our previous tax filings and determined that there were no positions taken that we consider uncertain and therefore, there were no unrecognized tax benefits as of December 31, 2010. 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. We estimate that the unrecognized tax benefit will not change within the next twelve months. We will classify income tax penalties and interest, if any, as part of interest and other expenses in our statements of operations (we have incurred no interest or penalties through December 31, 2010). We have open tax years for federal and state of 2009 through 2010. Due to our significant net operating loss carryforwards, even if certain of our tax positions were disallowed, we do not believe we will be liable for the payment of taxes in the near future. Consequently, we did not calculate the impact of interest or penalties on amounts that might be disallowed.
8.
Commitments and contingencies
Our Company entered into a lease agreement for its office facilities with a term beginning on February 1, 2011 and extending through April 2014. Future annual lease amounts due under our lease agreement total: $33,273 - 2011; $51,386 - 2012; $54,350 - 2013 and $9,220 - 2014.
F - 13
Sugarmade, Inc.
Notes to Consolidated Financial Statements
9.
Subsequent events
In preparing these financial statements, our Company has evaluated events and transactions for potential recognition or disclosure through May 9, 2011, the date the financial statements were available to be issued.
On February 17, 2011, SCPC forgave all amounts outstanding under a note payable due to them totaling $60,000.
On April 23, 2011, we entered into an exchange agreement (the “Exchange Agreement”) with Diversified Opportunities, Inc. (“DVOP”), a Delaware corporation. Under the terms of the Exchange Agreement, DVOP will acquire up to 90% of our shares through an acquisition of all or at least 90% of our outstanding stock (the "Exchange"). Upon the closing of the Exchange on May 9, 2011, DVOP owned our Company as a subsidiary. The Exchange Agreement provides that upon the closing of the transaction, our current Chief Executive Officer, Scott Lantz will be appointed as a director and the Chief Executive Officer of DVOP. The Exchange Agreement further provides that 10 days after the filing and mailing of a Schedule 14(f)-1, DVOP’s remaining member of its Board of Directors will resign as a director, and four new directors to be designated by our Company shall be appointed to DVOP’s Board of Directors.
Under the terms of the Exchange Agreement, at least 90% of our shareholders exchanged all of their shares of stock for an aggregate of 8,864,108 shares of DVOP common stock. In connection with the Exchange Agreement and effective at the closing of the Exchange transaction, DVOP’s three principal shareholders agreed to enter into a Share Cancellation Agreement pursuant to which 8,762,500 shares held by them were canceled or redeemed in exchange for the Company’s payment of $210,000, the issuance of 200,000 warrants to purchase DVOP common stock at $1.25 per share, and certain registration rights.
At the closing of the Exchange, DVOP had no operations and was a “shell” company. At the closing of the Exchange, DVOP’s operations became those of our Company, and DVOP intends to change its name to “Sugarmade, Inc.” and operate under that name. In April 2011, we entered into the following transactions in contemplation of a merger with DVOP:
·
Issued 252,070 shares of Sugarmade-CA common stock upon the conversion by existing Sugarmade-CA note holders of notes payable with a principal balance outstanding totaling $693,600.
·
Issued a total of 3,284,229 shares of common stock of Sugarmade-CA to its Chief Executive Officer and a member of its Board of Directors in exchange for nominal cash proceeds.
·
Issued options to purchase up to 920,000 shares of common stock of Sugarmade-CA to ten individuals with terms ranging from five to ten years at an exercise price of $1.25 per share.
·
Issued warrants to purchase up to 600,000 shares of common stock of Sugarmade-CA to three individuals with immediate vesting, terms of two years and an exercise price of $1.25 per share.
·
Issued units including a total of 1,730,400 shares and two-year warrants to purchase up to 1,730,400 shares of common stock in exchange for net cash proceeds totaling $2,083,000 (gross proceeds of $2,163,000, less commissions and related costs totaling $80,000).
F - 14
To the Board of Directors and Shareholders:
Diversified Opportunities, Inc.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANT
I have audited the accompanying balance sheets of Diversified Opportunities, Inc. as of June 30, 2010 and 2009 and the related statements of operations, stockholders' deficiency and cash flows for the year and six months then ended, respectively. These financial statements are the responsibility of the Company’s management. My responsibility is to express an opinion on these financial statements based on my audits.
I conducted my audits in accordance with the standards of the Public Company Accounting Oversight Board (UNITED STATES). Those standards require that I plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor was I engaged to perform, an audit of its internal control over financial reporting. My audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, I express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the 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. I believe that my audits provide a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Diversified Opportunities, Inc. as of June 30, 2010 and 2009 and the results of its operations, its cash flows and changes in stockholders' deficiency for the year and the six months then ended, respectively, in conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that Diversified Opportunities, Inc. will continue as a going concern. The Company had immaterial assets consisting entirely of cash at June 30, 2010 and, as discussed in the notes to the financial statements, is dependent on future additional funding in order to meet its obligations. These conditions raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are described in the notes to the financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Michael F. Cronin
Michael F. Cronin, Certified Public Accountant
Orlando, Florida
September 17, 2010
F - 15
DIVERSIFIED OPPORTUNITIES, INC. | ||||
BALANCE SHEETS June 30, 2010 and 2009 | ||||
| ||||
|
| 2010 |
| 2009 |
ASSETS | ||||
Current assets: |
|
| ||
Cash | $ | 4,130 | $ | 4,072 |
LIABILITIES AND SHAREHOLDERS’ DEFICIT | ||||
|
|
| ||
Current liabilities: |
|
| ||
Accounts payable and accrued liabilities | $ | 1,500 | $ | 76,066 |
Amounts due to related parties, including accrued interest |
| 18,885 |
| 114,511 |
Total current liabilities |
| 20,385 |
| 190,577 |
|
|
| ||
Shareholders’ deficit: |
|
| ||
Preferred stock; $0.001 par value; 10,000,000 shares authorized; no shares issued or outstanding |
| - |
| - |
Common stock; $0.001 par value; 300,000,000 shares authorized; |
| 9,199 |
| 9,199 |
Additional paid-in capital |
| 237,154 |
| 43,000 |
Accumulated deficit |
| (262,608) |
| (238,704) |
Total shareholders' deficit |
| (16,255) |
| (186,505) |
| $ | 4,130 | $ | 4,072 |
See accompanying notes. |
|
| ||
F - 16
DIVERSIFIED OPPORTUNITIES, INC.
STATEMENTS OF OPERATIONS
Years ended June 30, 2010 and 2009
|
| 2010 |
| 2009 |
|
|
|
|
|
General and administrative expenses | $ | 16,257 | $ | 111,809 |
Interest expense in connection with borrowings from related parties |
| 7,647 |
| 5,621 |
Net loss | $ | (23,904) | $ | (117,430) |
Basic and diluted net loss per share | $ | (0.00) | $ | (0.01) |
Basic and diluted weighted average common shares outstanding |
| 9,199,192 |
| 9,199,192 |
See accompanying notes.
F - 17
DIVERSIFIED OPPORTUNITIES, INC.
STATEMENTS OF STOCKHOLDERS’ DEFICIT
Years ended June 30, 2010 and 2009
F - 18
DIVERSIFIED OPPORTUNITIES, INC.
STATEMENTS OF CASH FLOWS
Years ended June 30, 2010 and 2009
|
| 2010 |
| 2009 | |||
|
|
|
|
| |||
Cash flows from operating activities: |
|
| |||||
Net loss | $ | (23,904) | $ | (117,430) | |||
Adjustments to reconcile net loss to net cash flows from operating activities: |
|
|
| ||||
Fair value of services provided by related parties |
| 11,133 |
| - | |||
Expenses paid by related parties |
| 11,576 |
| - | |||
Changes in accounts payable and accrued expenses |
| (666) |
| 6,991 | |||
Net cash flows from operating activities |
| (1,861) |
| (110,439) | |||
Cash flows from financing activities: |
|
|
|
| |||
Proceeds from related party borrowings |
| 4,000 |
| 114,511 | |||
Repayments of related party borrowings |
| (2,081) |
| - | |||
Net cash flows from financing activities |
| 1,919 |
| 114,511 | |||
Change in cash |
| 58 |
| 4,072 | |||
Cash, beginning balance |
| 4,072 |
| - | |||
Cash, ending balance | $ | 4,130 | $ | 4,072 | |||
Noncash investing and financing transactions:
Extinguishment of repayment obligations to QRSciences | $ | 131,654 | $ | - |
Assumption of liability by related party | $ | 62,500 | $ | - |
|
|
|
|
|
F - 19
Diversified Opportunities, Inc.
Notes to Financial Statements
1.
Basis of Presentation
Diversified Opportunities, Inc. (hereinafter referred to as “DVOP”, “we” or “the/our Company”) is incorporated in the state of Delaware. Our Company is controlled by CT Partners pursuant to the April 13, 2010 purchase by CT Partners of 9,000,000 shares of common stock from QRSciences. The 9,000,000 shares of DVOP common stock constitute 97.83% of the 9,199,192 shares of Company common stock outstanding as of June 30, 2010. This purchase of QRSciences’s shares by CT Partners resulted in a change of control.
Going concern
Our financial statements have been prepared assuming that we will continue as a going concern. While we currently project that our cash on hand and existing commitments for additional investment will be sufficient to maintain our Company’s operations beyond one year from the date of this annual report, we are dependent on CT Partners to fund our on-going operations that include primarily general and administrative expenses required to maintain our Company compliant with the requirements of a fully reporting public company. While we believe that CT Partners will continue to fund our operations for the foreseeable future, there is no requirement for CT Partners to maintain this funding.
Our dependence on CT Partners for the maintenance of our operations raises a substantial doubt about our ability to continue as a going concern due to uncertainties that could arise should CT Partners decide to no longer continue funding our Company. Our financial statements do not include any adjustments that might result from this uncertainty. We believe at present that CT Partners will continue to fund our operations. In the event of their discontinuation of funding our Company, our management could seek the capital we require from other sources. However, there can be no assurance as to whether, when, or upon what terms we would be able to consummate any such financing.
2.
Summary of Significant Accounting Policies
Basis of Presentation
Our financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America. We adopted “fresh-start” accounting as of September 14, 2001 in accordance with the guidance specified by American Institute of Certified Public Accounts Statement of Position (“SOP”) 90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy Code. Our accumulated deficit for all periods presented reflects our losses to date since September 14, 2001 in accordance with SOP 90-7.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash and investments that are readily convertible into cash and have original maturities of three months or less. We had no cash equivalents at either June 30, 2010 or 2009.
Income Tax Expense Estimates and Policies
As part of the income tax provision process of preparing our financial statements, we are required to estimate our liabilities for income taxes. This process involves estimating our current tax expenses together with assessing temporary differences resulting from differing treatments of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. Management then assesses the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent believed that recovery is not likely, a valuation allowance is established. Further, to the extent a valuation allowance is established and changes occur to this allowance in a financial accounting period, such changes are recognized in our tax provision in our consolidated statement of operations. We use our judgment in making estimates to determine our provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets.
There are various factors that may cause these tax assumptions to change in the near term, and we may have to record a future valuation allowance against our deferred tax assets. We recognize the benefit of an uncertain tax position taken or expected to be taken on our income tax returns if it is “more likely than not” that such tax position will be sustained based on its technical merits.
F - 20
Diversified Opportunities, Inc.
Notes to Financial Statements
We account for uncertainties in income taxes in accordance with FIN 48, Accounting for Uncertainty in Income Taxes — an Interpretation of FASB No. 109 (“FIN 48”) which prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return. Additionally, FIN 48 provides guidance on recognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions.
Share-Based Compensation
We account for share-based compensation arrangements in accordance with the provisions of Statement of Financial Accounting Standards No. 123R (“SFAS 123R”) Share-Based Payment, which requires the measurement and recognition of compensation expense for all share-based payment awards to employees and directors based on estimated fair values. We use the Black-Scholes option valuation model to estimate the fair value of our stock options and warrants. The Black-Scholes option valuation model requires the input of subjective assumptions to calculate the value of stock options. We use historical data among other information to estimate the expected price volatility, the expected option life and the expected forfeiture rate.
Net loss per share
Basic net loss per share is computed using the weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed using the weighted average number of common dilutive and dilutive equivalent shares outstanding during the period. Dilutive common equivalent shares consist of options and warrants to purchase common stock (only if those options and warrants are exercisable at prices below the existing market price) and shares issuable upon the conversion of preferred stock. We had no common equivalent shares outstanding during any period included herein and accordingly, dilutive loss per share was equivalent to basic loss per share. All share and per share amounts have been restated for the effect of the 25 for 1 reverse stock split in February 2008.
Litigation
From time to time, we may become involved in disputes, litigation and other legal actions. We estimate the range of liability related to pending litigation where the amount and range of loss can be estimated. We record our best estimate of a loss when the loss is considered probable. Where a liability is probable and there is a range of estimated loss with no best estimate in the range, we record a charge equal to at least the minimum estimated liability for a loss contingency when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements and (ii) the range of loss can be reasonably estimated.
Recently Issued Accounting Pronouncements
Accounting standards promulgated by the Financial Accounting Standards Board (“FASB”) are subject to change. Changes in such standards may have an impact on the Company’s future financial statements. The following are a summary of recent accounting developments.
In May 2009, the FASB issued additional guidance concerning subsequent events that requires that management must evaluate, as of each reporting period, events or transactions that occur for potential recognition or disclosure in the financial statements and the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date through the date that the financial statements are issued or available to be issued. It also requires the disclosure of the date through which an entity has evaluated subsequent events. We adopted the FASB guidance during the year ended June 30, 2010 and the required disclosures are included herein.
F - 21
Diversified Opportunities, Inc.
Notes to Financial Statements
3.
Related party transactions
Effective as of July 29, 2008, our Company also entered into a Loan Agreement with QRSciences, which agreement was subsequently amended on November 25, 2008. The Loan Agreement provided that the Company was entitled to borrow up to $500,000 from QRSciences, provided the purposes of the requested funds were approved by QRSciences. The amount borrowed by the Company under the Loan Agreement accrued interest at 8% and was due and payable as agreed by the parties.
Through April 13, 2010, QRSciences advanced to our Company funds for operating expenses and working capital requirements totaling $131,654 (including accrued interest). Interest expense from borrowings from QRSciences totaled $7,647 and $5,621 for the years ended June 30, 2010 and 2009, respectively. Effective April 13, 2010, we terminated our Loan Agreement with QRSciences and in connection with the termination, QRSciences extinguished all outstanding repayment obligations of our Company under the Loan Agreement. We accounted for the extinguishment of the repayment obligations as an addition to additional paid in capital.
Effective April 1, 2010, CT Partners assumed our Company’s liability totaling $62,500 for the future issuance of 208,333 shares of our common stock in connection with Finders’ fees incurred during the year ended June 30, 2008. CT Partners expects to satisfy the liability with cash payments to the Finders totaling $3,000. CT Partners’ assumption of the liability was accounted for as a capital contribution of the carrying value of the liability at March 31, 2010.
4.
Stockholders’ equity
Common stock
We are currently authorized to issue up to 300,000,000 shares of $0.001 par value common stock. All issued shares of common stock are entitled to vote on a one share/one vote basis.
Preferred stock
We are currently authorized to issue up to 10,000,000 shares of $0.001 par value preferred stock.
Stock options and warrants
There are no employee or non-employee options or warrant grants outstanding.
5.
Income taxes
We estimate that our net operating loss carryforwards incurred prior to May 30, 2008 that would be available to reduce future income taxes were significantly reduced or eliminated through our change of control in accordance with Internal Revenue Code Section 382 (“Section 382”) and similar California rules. Our operating loss carry-forwards generated subsequent to May 30, 2008 total slightly in excess of $200,000 through June 30, 2010. Our net operating loss carryforwards will be subject to expiration as to their future use beginning in 2023. Also, Section 382 and similar California rules place limitations on the amount of taxable income that can be offset by net operating loss carryforwards (“NOL”) after a change in control (generally greater than a 50% change in ownership). Future transactions such as sales of our preferred and/or common stock may be included in determining such a change in control.
Our deferred tax assets arise entirely as the result of our net operating loss carryforwards and at June 30, 2010 total approximately $80,000. We have recorded a valuation allowance against our entire deferred tax asset balance due because we believe that a substantial doubt exists that we will be unable to realize the benefits of our net operating loss carryforwards due to our lack of a history of earnings and due to possible limitations under Section 382.
F - 22
DIVERSIFIED OPPORTUNITIES, INC. | ||||||||
BALANCE SHEETS | ||||||||
| ||||||||
|
| March 31, 2011 (unaudited) |
| Jun. 30, 2010 | ||||
ASSETS | ||||||||
Current assets: |
|
| ||||||
Cash | $ | 80 | $ | 4,130 | ||||
LIABILITIES AND SHAREHOLDERS’ DEFICIT | ||||||||
|
|
| ||||||
Current liabilities: |
|
| ||||||
Accounts payable and accrued liabilities | $ | 2,246 | $ | 1,500 | ||||
Amounts due to related parties, including accrued interest |
| 116,626 |
| 18,885 | ||||
Total current liabilities |
| 118,872 |
| 20,385 | ||||
|
|
| ||||||
Shareholders’ deficit: |
|
| ||||||
Preferred stock; $0.001 par value; 10,000,000 shares authorized; no shares issued or outstanding |
| - |
| - | ||||
Common stock; $0.001 par value; 300,000,000 shares authorized; |
| 9,199 |
| 9,199 | ||||
Additional paid-in capital |
| 237,154 |
| 237,154 | ||||
Accumulated deficit |
| (365,145) |
| (262,608) | ||||
Total shareholders' deficit |
| (118,792) |
| (16,255) | ||||
| $ | 80 | $ | 4,130 | ||||
See accompanying notes. |
|
| ||||||
F - 23
DIVERSIFIED OPPORTUNITIES, INC.
UNAUDITED STATEMENTS OF OPERATIONS
Three and nine months ended March 31, 2011 and 2010
|
| Three months ended March 31, 2011 |
| Three months ended March 31, 2010 |
| Nine months ended March 31, 2011 |
| Nine months ended March 31, 2010 |
|
|
|
|
|
|
|
|
|
General and administrative expenses, including amounts incurred from shareholders totaling $30,000 and $90,000 during the three and nine months ended March 31, 2011 | $ | 39,187 | $ | 2,643 | $ | 102,537 | $ | 12,935 |
Interest expense in connection with advances from related parties |
| - |
| 2,446 |
| - |
| 7,273 |
Net loss | $ | (39,187) | $ | (5,089) | $ | (102,537) | $ | (20,208) |
Basic and diluted net loss per share | $ | 0.00 | $ | 0.00 | $ | (0.01) | $ | 0.00 |
Basic and diluted weighted average common shares outstanding |
| 9,199,192 |
| 9,199,192 |
| 9,199,192 |
| 9,199,192 |
See accompanying notes.
F - 24
DIVERSIFIED OPPORTUNITIES, INC.
UNAUDITED STATEMENTS OF CASH FLOWS
Nine months ended March 31, 2011 and 2010
|
| 2011 |
| 2010 | |||
|
|
|
|
| |||
Cash flows from operating activities: |
|
| |||||
Net loss | $ | (102,537) | $ | (20,208) | |||
Adjustments to reconcile net loss to net cash flows from operating activities: |
|
|
| ||||
Fair value of services provided by related parties |
| 97,341 |
| - | |||
Interest on advances from related parties |
| - |
| 7,273 | |||
Changes in accounts payable and accrued expenses |
| 746 |
| (502) | |||
Net cash flows from operating activities |
| (4,450) |
| (13,437) | |||
Cash flows from financing activities: |
|
|
|
| |||
Proceeds from related party borrowings |
| 400 |
| 9,495 | |||
Change in cash |
| (4,050) |
| (3,942) | |||
Cash, beginning balance |
| 4,130 |
| 4,072 | |||
Cash, ending balance | $ | 80 | $ | 130 | |||
See accompanying notes.
F - 25
Diversified Opportunities, Inc.
Notes to Unaudited Financial Statements
1.
Basis of Presentation
Diversified Opportunities, Inc. (hereinafter referred to as “DVOP”, “we” or “the/our Company”) is incorporated in the state of Delaware. Our Company is controlled by CT Partners (a California general partnership comprised of our three principal shareholders, including Kevin Russeth, our Chief Executive Officer and the sole director of our Company) pursuant to the April 13, 2010 purchase by CT Partners of 9,000,000 shares of common stock from QRSciences Holdings Limited (“QRSciences”). The 9,000,000 shares of DVOP common stock constitute 97.83% of the 9,199,192 shares of Company common stock outstanding as of March 31, 2011. This purchase of QRSciences’ shares by CT Partners resulted in a change of control.
Going concern
Our financial statements have been prepared assuming that we will continue as a going concern. We are dependent on CT Partners to fund our on-going operations that include primarily general and administrative expenses required to maintain our Company compliant with the requirements of a fully reporting public company. While we believe that CT Partners will continue to fund our operations for the foreseeable future, there is no requirement for CT Partners to maintain this funding.
Our dependence on CT Partners for the maintenance of our operations raises a substantial doubt about our ability to continue as a going concern due to uncertainties that could arise should CT Partners decide to no longer continue funding our Company. Our financial statements do not include any adjustments that might result from this uncertainty. We believe at present that CT Partners will continue to fund our operations. In the event of their discontinuation of funding our Company, our management could seek the capital we require from other sources. However, there can be no assurance as to whether, when, or upon what terms we would be able to consummate any such financing.
We have prepared the accompanying unaudited financial statements in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. In the opinion of our management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the nine months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the entire year. For further information, see our financial statements and related disclosures thereto for the periods ended June 30, 2010 in our Annual Report on Form 10-K filed with the Securities and Exchange Commission.
2.
Summary of Significant Accounting Policies
Basis of Presentation
Our financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America. We adopted “fresh-start” account as of September 14, 2001 in accordance with the guidance specified by American Institute of Certified Public Accounts Statement of Position (“SOP”).
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
To the extent that we have future revenues from the sale of goods, they will be recognized when an order has been received, the product has been shipped, the selling price is fixed or determinable and collection is reasonably assured and when both title and risk of loss transfer to the customer, provided that no significant obligations remain. To the extent that we have revenues from the provision of services, they will be recognized at the time services are rendered, their selling price is fixed or determinable and collection is reasonably assured, provided that no significant obligations remain. Sales revenues will not include sales taxes collected from the customer.
F - 26
Diversified Opportunities, Inc.
Notes to Unaudited Financial Statements
Cash and Cash Equivalents
Our policy is to classify as cash and cash equivalents, cash in demand deposit and checking accounts as well as investments that are readily convertible into cash with original maturities of three months or less.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets. Costs incurred for maintenance and repairs are expensed as incurred and expenditures for major replacements and improvements are capitalized and depreciated over their estimated remaining useful lives.
Income Tax Expense Estimates and Policies
As part of the income tax provision process of preparing our financial statements, we are required to estimate our Company’s provision for income taxes. This process involves estimating our current tax liabilities together with assessing temporary differences resulting from differing treatments of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. Management then assesses the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent believed that recovery is not likely, a valuation allowance is established. Further, to the extent a valuation allowance is established and changes occur to this allowance in a financial accounting period, such changes are recognized in our tax provision in our consolidated statement of operations. We use our judgment in making estimates to determine our provision for income taxes, deferred tax assets and liabilities and any valuation allowance is recorded against our net deferred tax assets.
There are various factors that may cause these tax assumptions to change in the near term, and we may have to record a future valuation allowance against our deferred tax assets. We recognize the benefit of an uncertain tax position taken or expected to be taken on our income tax returns if it is “more likely than not” that such tax position will be sustained based on its technical merits.
Share-Based Compensation
We account for stock based compensation arrangements through the measurement and recognition of compensation expense for all stock based payment awards to employees and directors based on estimated fair values. We use the Black-Scholes option valuation model to estimate the fair value of our stock options at the date of grant. The Black-Scholes option valuation model requires the input of subjective assumptions to calculate the value of stock options. We use historical data among other information to estimate the expected price volatility, the expected option life and the expected forfeiture rate.
Net loss per share
Basic net loss per share is computed using the weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed using the weighted average number of common dilutive and dilutive equivalent shares outstanding during the period. Dilutive common equivalent shares consist of options and warrants to purchase common stock (only if those options and warrants are exercisable at prices below the existing market price) and shares issuable upon the conversion of preferred stock. We had no common equivalent shares outstanding during any period included herein and accordingly, dilutive loss per share was equivalent to basic loss per share.
Litigation
From time to time, we may become involved in disputes, litigation and other legal actions. We estimate the range of liability related to pending litigation where the amount and range of loss can be estimated. We record our best estimate of a loss when the loss is considered probable. Where a liability is probable and there is a range of estimated loss with no best estimate in the range, we record a charge equal to at least the minimum estimated liability for a loss contingency when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements and (ii) the range of loss can be reasonably estimated.
F - 27
Diversified Opportunities, Inc.
Notes to Unaudited Financial Statements
3.
Related party transactions
Effective as of July 29, 2008, our Company entered into a Loan Agreement with QRSciences that provided that the Company was entitled to borrow up to $500,000 from QRSciences, provided the purposes of the requested funds were approved by QRSciences. The amount borrowed by the Company under the Loan Agreement accrued interest at 8% and was due and payable as agreed by the parties.
Through the date of the purchase of 9,000,000 shares of our Company by CT Partners on April 13, 2010, QRSciences had advanced to our Company funds for operating expenses and working capital requirements totaling $131,654 (including accrued interest). Interest expense from borrowings from QRSciences totaled $4,828 for the six months ended March 31, 2010. Effective April 13, 2010, we terminated our Loan Agreement with QRSciences and in connection with the termination, QRSciences extinguished all outstanding repayment obligations of our Company under the Loan Agreement. We accounted for the extinguishment of the repayment obligations as an addition to additional paid in capital during the three months ended June 30, 2010.
Effective April 13, 2010, CT Partners assumed our Company’s liability in the amount of $3,000 in connection with finders’ fees incurred during the year ended June 30, 2008. CT Partners’ assumption of the liability was accounted for as a capital contribution of the carrying value of the liability outstanding at March 31, 2010.
During the three and nine months ended March 31, 2011, our Company recorded general and administrative expenses totaling $30,000 and $90,000, respectively, in connection with accrued but unpaid amounts due to CT Partners in connection with services performed by them on our Company’s behalf pursuant to a consulting arrangement with the Company. In addition, one of the members of CT Partners advanced the Company $400 during the three months ended March 31, 2011.
4.
Stockholders’ equity
Common stock
We are currently authorized to issue up to 300,000,000 shares of $0.001 par value common stock. All issued shares of common stock are entitled to vote on a one share/one vote basis.
Preferred stock
We are currently authorized to issue up to 10,000,000 shares of $0.001 par value preferred stock. Stock options and warrants
As of March 31, 2011, there are no employee or non-employee options grants outstanding. As of March 31, 2011, there were no warrants outstanding to purchase any class of our capital stock.
5.
Income taxes
We estimate that our net operating loss carryforwards incurred prior to May 30, 2008 that would be available to reduce future income taxes were significantly reduced or eliminated through our change of control in accordance with Internal Revenue Code Section 382 (“Section 382”) and similar California rules. Our operating loss carry-forwards generated subsequent to May 30, 2008 total in excess of $265,000 through March 31, 2011. Our net operating loss carryforwards will be subject to expiration as to their future use beginning in 2023. Also, Section 382 and similar California rules place limitations on the amount of taxable income that can be offset by net operating loss carryforwards (“NOL”) after a change in control (generally greater than a 50% change in ownership). Future transactions such as sales of our preferred and/or common stock or the issuance of such stock in a transaction with another entity may be included in determining such a change in control.
Our deferred tax assets arise entirely as the result of our net operating loss carryforwards and at March 31, 2011 total approximately $105,000. We have recorded a valuation allowance against our entire deferred tax asset balance due because we believe that a substantial doubt exists that we will be unable to realize the benefits of our net operating loss carryforwards due to our lack of a history of earnings and due to possible limitations under Section 382.
F - 28
Diversified Opportunities, Inc.
Notes to Unaudited Financial Statements
6.
Subsequent events
On April 23, 2011, we entered into an exchange agreement (the “Exchange Agreement”) with Sugarmade, Inc., a California corporation (“Sugarmade”), and certain shareholders of Sugarmade which own more than 90% of the outstanding common stock of Sugarmade. Under the terms of the Exchange Agreement, we will acquire Sugarmade through an acquisition of all or at least 90% of its outstanding common stock. In exchange, we will issue to the Sugarmade shareholders, in the aggregate, up to 9,263,308 shares of the Company’s common stock (the “Company Shares”).
Upon the closing of the Exchange Agreement, we would own Sugarmade as a subsidiary. The Exchange Agreement and the transactions contemplated there under (the “Exchange”) were approved by our sole director Kevin Russeth, who is also a shareholder of the Company. The Share Exchange Agreement provides that upon the closing of the transaction, our current Chief Executive Officer (“CEO”), Kevin Russeth will resign, and Scott Lantz, the current CEO of Sugarmade, will be appointed as a director and the CEO of the Company. The Exchange Agreement further provides that 10 days after the filing and mailing of a Schedule 14(f)-1, that Mr. Russeth will resign as a director, and four new directors to be designated by Sugarmade shall be appointed to the Company’s Board of Directors.
Under the terms of the Exchange Agreement, at least 90% of the Sugarmade shareholders will exchange all of their shares of Sugarmade common stock for an aggregate of up to 9,263,308 shares of our Company’s common stock. We currently have 9,199,192 shares of common stock outstanding. In connection with the Exchange Agreement and effective at the closing of the Exchange, our Company’s three principal shareholders, Kevin Russeth, Jonathan Shultz and Steven Davis, have agreed to enter into a Share Cancellation Agreement pursuant to which 8,762,500 shares held by them will be canceled or redeemed in exchange for our Company’s payment of an aggregate of $210,000, the issuance of 200,000 warrants to purchase Company common stock at $1.25 per share, and certain registration rights. Additionally, the Exchange Agreement includes a closing condition (among others) that Sugarmade must complete a financing resulting in gross proceeds of at least $2,000,000 and a maximum of $2,500,000. Assuming the completion of the financing in the maximum amount, the financing investors will receive 2,000,000 shares of our Company’s common stock and warrants to purchase 2,000,000 shares of the Company’s common stock at $1.50 per share. The financing investors will also receive registration rights.
Under the terms of the Exchange Agreement, the Company has also agreed that it shall have no more than $20,000 in accounts payable and accrued liabilities, including any and all amounts due to related parties, as of the closing date of the Exchange. As of the date of this report, all amounts due to related parties (including accrued interest) of the Company are amounts owed to our three principal shareholders and CT Partners (which is comprised of the three principal shareholders). The Exchange Agreement may be terminated by mutual consent of Sugarmade and the Company; by either party if the Exchange is not consummated by April 30, 2011; by either party if the Exchange is prohibited by issuance of an order, decree or ruling; or by either party for various other grounds as provided in the Exchange Agreement. The parties anticipate closing the Exchange upon completion of the closing conditions. However, the Company cannot provide any assurance that the Exchange or any other transactions contemplated by the Exchange Agreement will be consummated. The foregoing summary and description of the terms of the transaction contemplated under the Exchange Agreement contained herein is qualified in its entirety by reference to the complete agreement, a copy of which is filed as an exhibit to the Company’s Form 8-K filed with the SEC on April 26, 2011 and incorporated herein by reference.
F - 29
Diversified Opportunities, Inc.
Unaudited Pro Forma Condensed Combined Financial Statements
Unaudited Pro Forma Condensed Combined Balance Sheet
Unaudited Pro Forma Condensed Combined Statement of Operations
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
F - 30
Diversified Opportunities, Inc. |
|
|
|
|
|
|
|
|
|
|
| ||
Unaudited Pro Forma Condensed Balance Sheets |
|
|
|
|
|
|
|
|
|
|
| ||
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
| ||
|
|
|
| Diversified Opportunities |
|
| Sugarmade, Inc. |
|
| Pro Forma Adjustments |
|
| Pro Forma Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
| ||||
Current assets: |
|
|
|
|
|
|
|
|
|
|
| ||
| Cash | $ | 480 |
| $ | 13,614 |
| $ | - |
| $ | 14,094 | |
| Inventory |
| - |
|
| 17,439 |
|
| - |
|
| 17,439 | |
| Other current assets |
| - |
|
| 2,707 |
|
| - |
|
| 2,707 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total current assets |
| 480 |
|
| 33,760 |
|
| - |
|
| 34,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License and supply agreement with Sugar Cane Paper Co., Ltd. |
| - |
|
| 346,591 |
|
| - |
|
| 346,591 | ||
Note receivable and amounts due from stockholder |
| - |
|
| 187,413 |
|
| - |
|
| 187,413 | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 480 |
| $ | 567,764 |
| $ | - |
| $ | 568,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Deficiency |
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
| ||
| Accounts payable and accrued liabilities | $ | 1,200 |
| $ | 115,046 |
| $ | - |
| $ | 116,246 | |
| Accrued interest |
| - |
|
| 21,080 |
|
| - |
|
| 21,080 | |
| Notes and amounts payable due to shareholders |
| 78,885 |
|
| 126,300 |
|
| (60,000) | (1) | 145,185 | ||
| Accrued compensation and personnel related payables |
| - |
|
| 28,177 |
|
| - |
|
| 28,177 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total current liabilities |
| 80,085 |
|
| 290,603 |
|
| (60,000) |
|
| 310,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible notes payable |
| - |
|
| 549,000 |
|
| - |
|
| 549,000 | ||
Convertible notes payable to related parties |
| - |
|
| 252,900 |
|
| - |
|
| 252,900 | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total liabilities |
| 80,085 |
|
| 1,092,503 |
|
| (60,000) |
|
| 1,112,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ deficiency |
|
|
|
|
|
|
|
|
|
|
| ||
| Preferred stock |
| - |
|
| - |
|
| - |
|
| - | |
| Common stock |
| 9,199 |
|
| 216,730 |
|
| (216,229) | (2) | 9,700 | ||
| Additional paid-in capital |
| 237,154 |
|
| - |
|
| (109,729) | (3) |
| 127,425 | |
| Accumulated deficit |
| (325,958) |
|
| (741,469) |
|
| 385,958 |
|
| (681,469) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total stockholders' deficiency |
| (79,605) |
|
| (524,739) |
|
| 60,000 |
|
| (544,344) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 480 |
| $ | 567,764 |
| $ | - |
| $ | 568,244 |
F - 31
Diversified Opportunities, Inc. |
|
|
|
|
|
|
|
|
|
|
| ||
Unaudited Pro Forma Condensed Statements of Operations |
|
|
|
|
|
|
|
|
|
|
| ||
For the year ended December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Diversified Opportunities |
|
| Sugarmade, Inc. |
|
| Pro Forma Adjustments |
|
| Pro Forma Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales revenues | $ | - |
| $ | 40,792 |
| $ | - |
| $ | 40,792 | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
| - |
|
| 53,483 |
|
| - |
|
| 53,483 | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
| - |
|
| (12,691) |
|
| - |
|
| (12,691) | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
| ||
| Selling, general and administrative expenses |
| 69,316 |
|
| 480,156 |
|
| (60,000) | (1) | 489,472 | ||
| Amortization of license and supply agreement |
| - |
|
| 18,400 |
|
| - |
|
| 18,400 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total operating expenses |
| 69,316 |
|
| 498,556 |
|
| (60,000) |
|
| 507,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
| (69,316) |
|
| (511,247) |
|
| 60,000 |
|
| (520,563) | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonoperating income (expense): |
|
|
|
|
|
|
|
|
|
|
| ||
| Interest expense |
| (2,818) |
|
| (105,766) |
|
| - |
|
| (108,584) | |
| Interest income |
| - |
|
| 18,532 |
|
| - |
|
| 18,532 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (2,818) |
|
| (87,234) |
|
| - |
|
| (90,052) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss | $ | (72,134) |
| $ | (598,481) |
| $ | 60,000 |
| $ | (610,615) | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share | $ | (0.01) |
| $ | (0.78) |
|
|
|
|
| (0.07) | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average common shares |
|
|
|
|
|
|
|
|
|
|
| ||
| outstanding used in computing net loss per share |
| 9,199,192 |
|
| 766,835 |
|
|
|
|
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F - 32
Diversified Opportunities, Inc.
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
Basis of Presentation
The unaudited pro forma condensed statement of operations for the year ended December 31, 2010, and the unaudited pro forma condensed balance sheet as of December 31, 2010, are based on the balance sheets of Diversified Opportunities, Inc and Sugarmade, Inc. as of December 31, 2010 and the statement of operations of Sugarmade, Inc. for the year ended December 31, 2010 and the unaudited statement of operations of Diversified, Inc. for the year ended December 31, 2010, and the adjustments and assumptions described below.
Pro forma adjustments:
The unaudited pro forma balance sheet and statement of operations reflect the following adjustments associated with the Sugarmade transaction as of and for the year ended December 31, 2010.
(1)
Reflect the pro forma adjustment to selling, general and administrative expense to reduce the total by the amount of consulting expenses previously charged by the former controlling shareholders of Diversified Opportunities, Inc. through December 31, 2010.
(2)
Adjust the par value of common stock to reflect the maximum final ending shares outstanding upon the completion of the transaction of 9,700,000 shares of common stocks of Diversified Opportunities, Inc.
(3)
Eliminate the accumulated deficit of Diversified Opportunities, Inc. to reflect reverse merger accounting to occur at the time of the transaction.
F - 33
EXCHANGE AGREEMENT
BY AND AMONG
DIVERSIFIED OPPORTUNITIES, INC.
SUGARMADE, INC.
AND
CERTAIN STOCKHOLDERS OF SUGARMADE, INC.
Dated April 23, 2011
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TABLE OF CONTENTS
Page
ARTICLE I EXCHANGE OF SECURITIES
1
Section 1.1 The Exchange
1
Section 1.2 Exchange Ratio
2
ARTICLE II THE CLOSING
3
Section 2.1 Closing Date
3
Section 2.2 Transactions at Closing
3
ARTICLE III REPRESENTATIONS AND WARRANTIES OF DVOP
5
Section 3.1 Organization and Qualification
5
Section 3.2 Authorization
5
Section 3.3 Validity and Effect of Agreement
5
Section 3.4 No Conflict
6
Section 3.5 Required Filings and Consents
6
Section 3.6 Capitalization
6
Section 3.7 Status of Common Stock
7
Section 3.8 SEC Reports and Financial Statements
7
Section 3.9 Financial Statements
7
Section 3.10 No Undisclosed Liabilities
7
Section 3.11 Material Contracts
7
Section 3.12 Intellectual Property Rights
8
Section 3.13 Litigation
8
Section 3.14 Taxes
8
Section 3.15 Registration
8
Section 3.16 Listing and Maintenance Requirements
8
Section 3.17 Books and Records
8
Section 3.18 Insurance
8
Section 3.19 Compliance
9
Section 3.20 Absence of Certain Changes
9
Section 3.21 Material Transactions or Affiliations
10
Section 3.22 Employees
10
Section 3.23 Previous Sales of Securities
10
Section 3.24 Principals of DVOP
10
Section 3.25 Tax-Free Exchange
10
Section 3.26 Brokers and Finders
11
Section 3.27 Disclosure
11
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SUGARMADE
11
Section 4.1 Organization and Qualification
11
Section 4.2 Authorization
11
Section 4.3 Validity and Effect of Agreement
11
Section 4.4 No Conflict
11
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Section 4.5 Required Filings and Consents
12
Section 4.6 Capitalization
12
Section 4.7 Financial Statements
12
Section 4.8 No Undisclosed Liabilities
13
Section 4.9 Material Contracts
13
Section 4.10 Intellectual Property Rights.
13
Section 4.11 Litigation
14
Section 4.12 Taxes
14
Section 4.13 Compliance
14
Section 4.14 Absence of Certain Changes
14
Section 4.15 Material Transactions or Affiliations
15
Section 4.16 Employees
15
Section 4.17 Principals of Sugarmade
15
Section 4.18 Tax-Free Exchange
16
Section 4.19 Brokers and Finders
16
Section 4.20 Disclosure
16
ARTICLE V REPRESENTATIONS AND WARRANTIES OF EACH SELLER
16
Section 5.1 Authorization
16
Section 5.2 Validity and Effect of Agreement
16
Section 5.3 No Breach or Violation
16
Section 5.4 Consents and Approvals
17
Section 5.5 Title
17
Section 5.6 Investor Status
17
Section 5.7 No Government Review
17
Section 5.8 Investment Intent
17
Section 5.9 Restrictions on Transfer
17
Section 5.10 Informed Investment
18
Section 5.11 Access to Information
18
Section 5.12 Reliance on Representations
18
Section 5.13 No General Solicitation
18
Section 5.14 Legends
18
Section 5.15 Placement and Finder's Fees
19
Section 5.16 Disclosure
19
ARTICLE VI CERTAIN COVENANTS
19
Section 6.1 Conduct of Business by DVOP
19
Section 6.2 Access to Information
19
Section 6.3 Confidentiality
20
Section 6.4 No Shop
20
Section 6.5 Further Assurances
21
Section 6.6 Public Announcements
21
Section 6.7 Notification of Certain Matters
21
Section 6.8 Financial Statements
21
Section 6.9 Capital Raise
21
Section 6.10 Share Cancellation
21
Section 6.11 Tax-Free Exchange Status
21
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Section 6.12 Conversion of Notes Payable
22
Section 6.13 Resignation of Directors.
22
ARTICLE VII CONDITIONS TO CONSUMMATION OF THE EXCHANGE
22
Section 7.1 Conditions to Obligations of Sugarmade
22
Section 7.2 Conditions to Obligations of DVOP
22
ARTICLE VIII INDEMNIFICATION
23
Section 8.1 Indemnification between the Parties
23
Section 8.2 Indemnification Procedures for Third Party Claims
24
Section 8.3 Indemnification Procedures for Non-Third Party Claims
25
Section 8.4 Limitations on Indemnification
25
ARTICLE IX TERMINATION
26
Section 9.1 Termination
26
Section 9.2 Procedure and Effect of Termination
26
ARTICLE X MISCELLANEOUS
27
Section 10.1 Entire Agreement
27
Section 10.2 Amendment and Modifications
27
Section 10.3 Extensions and Waivers
27
Section 10.4 Successors and Assigns
27
Section 10.5 Survival of Representations, Warranties and Covenants
27
Section 10.6 Headings; Definitions
27
Section 10.7 Specific Performance
28
Section 10.8 Notices
28
Section 10.9 Governing Law
28
Section 10.10 Consent to Jurisdiction
28
Section 10.11 Counterparts
28
Section 10.12 Certain Definitions
29
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EXHIBITS AND SCHEDULES
Exhibit A
Form of Share Cancellation Agreement
Exhibit B
Form of DVOP Officer and Director Release
Exhibit C
Form of Notice of Exchange (Common Stock)
Exhibit D
Form of Notice of Exchange (Warrants)
Exhibit E
Form of Registration Rights Agreement
Schedule I
Schedule of Sugarmade Shares to be exchanged for DVOP Common
Stock
Schedule II
Schedule of Sugarmade warrants to be exchanged for DVOP warrants
Schedule III
Investor Questionnaire
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EXCHANGE AGREEMENT
This Exchange Agreement ("Agreement"), is made and entered into as of April 23, 2011, by and among Diversified Opportunities, Inc., a Delaware corporation ("DVOP"), Sugarmade, Inc., a California corporation ("Sugarmade"), and the stockholders of Sugarmade set forth on the signature pages to this Agreement (collectively, the "Sellers" and individually, a "Seller") with respect to the following facts:
RECITALS
A.
Sellers own more than fifty percent (50%) of the issued and outstanding shares of Common Stock, no par value, of Sugarmade (the "Sugarmade Shares") and more than ninety percent (90%) of the issued and outstanding warrants or other rights to acquire or purchase Sugarmade Shares ("Sugarmade Warrants") in the denominations as set forth opposite their respective names on Schedule I and Schedule II to this Agreement;
B.
DVOP desires to acquire from Sellers, and Sellers desire to sell and transfer to DVOP, all of the Sugarmade Shares owned by Sellers on the Closing Date in exchange for the issuance and delivery by DVOP of one (1) share of Common Stock, par value $0.001 per share, of DVOP ("Common Stock"), for each one (1) Sugarmade Share (the "Exchange Ratio") and all of the Sugarmade Warrants owned by Sellers on the Closing Date, in exchange for the issuance of warrants of DVOP on substantially identical terms and conditions (the "Exchange");
C.
It is intended that, for federal income tax purposes, the Exchange shall qualify as an exchange described in Section 351 of the of the Internal Revenue Code of 1986, as amended (the "Code") and a reorganization described in Section 368 of the Code.
NOW, THEREFORE, in consideration of the foregoing premises and representations, warranties, covenants and agreements contained herein, and intending to be legally bound hereby, the parties hereto agree as follows:
ARTICLE I
EXCHANGE OF SECURITIES
Section 1.1 The Exchange
. On the terms and subject to the conditions of this Agreement:
(a)
DVOP shall issue and deliver to each of the Sellers owning Sugarmade Shares such number of shares of Common Stock as is set forth opposite such Seller's name on Schedule I hereto, subject to adjustment as set forth in Section 1.2, and each such Seller shall sell, transfer and deliver to DVOP, the number of issued and outstanding Sugarmade Shares set forth opposite such Seller's name on Schedule I hereto along with a duly executed share assignment endorsed in favor of DVOP on the Closing Date.
(b)
In the event that Sellers' Sugarmade Shares are subject to a repurchase right in favor of Sugarmade, then, by virtue of this Agreement, such repurchase right shall be assigned to DVOP and shall continue in full force and effect with respect to the
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Common Stock under its original terms and conditions; provided, that to the extent that the repurchase right was triggered upon termination of service from Sugarmade, after the Exchange such trigger shall be predicated upon termination of service from DVOP or any of its affiliated entities.
(c)
DVOP shall issue and deliver to each of the Sellers owning Sugarmade Warrants such number of DVOP Warrants as is set forth opposite such Seller's name on Schedule II hereto, subject to adjustment as set forth in Section 1.2, and each such Seller shall sell, transfer and deliver to DVOP, the number of issued and outstanding Sugarmade Warrants set forth opposite such Seller's name on Schedule II hereto along with a duly executed share assignment endorsed in favor of DVOP on the Closing Date.
(d)
The terms of the DVOP Warrants shall be identical to the terms of the Sugarmade Warrants, or as near to the terms of the Sugarmade Warrants as possible. Any restriction on the exercise of any such Sugarmade Warrant shall continue in full force and effect and the term, exercisability, vesting schedule and other provisions of such Sugarmade Warrant shall otherwise remain unchanged.
Section 1.2 Exchange Ratio
.
(a)
Based on the outstanding capital stock of DVOP as of the date hereof of 9,199,192 shares outstanding and the anticipated stock cancellation and/or redemption of 8,762,500 outstanding DVOP shares to take place prior to Closing, the former stockholders of Sugarmade would own no more than 9,263,308 shares of Common Stock of DVOP, and all of the current stockholders of DVOP would own no more than an aggregate of 436,692 shares of Common Stock of DVOP. The number of shares of Common Stock to be owned by the former stockholders of Sugarmade is subject to the representations made in Section 4.6.
(b)
If between the date of this Agreement and the Closing Date, there shall be any change in the number of shares of outstanding capital stock of either DVOP or Sugarmade, including the issuance of any options or rights to acquire Common Stock, the Exchange Ratio shall be adjusted such that immediately following the Closing the aggregate number of shares of Common Stock issued to each represents the percentage ownership set forth above.
(c)
If between the date of this Agreement and the Closing Date, the holders of issued and outstanding Sugarmade Shares constituting less than one hundred percent (100%) but more than ninety percent (90%) have agreed to the Exchange contemplated hereunder (all other Sugarmade stockholders, hereinafter the "Delayed Stockholders"), then Sugarmade shall proceed to the Closing of the Exchange, subject to satisfaction of the conditions set forth in Section 7.1. For a period of three months following the Closing Date, DVOP may, but shall not be required to accept for Exchange any Sugarmade Shares then held by any Delayed Stockholder, subject to such Delayed Stockholder's execution of this Agreement as a Seller for all intents and purpose, including but not limited to assuming all representations, warranties and undertakings of the Sellers hereunder and performance of all of the conditions for Closing to be performed by each Seller hereunder. Until such time as a Delayed Stockholder executes this Agreement and submits his Sugarmade Shares in exchange for shares of Common Stock (thereby
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becoming a Seller), and such exchange is accepted by DVOP, such Delayed Stockholder shall remain a stockholder of Sugarmade and shall not be considered a stockholder of DVOP and shall not be entitled to any of the rights thereof, including without limitation the right to vote or receive any distributions with respect thereto. Prior to the Closing and upon written notice from DVOP as provided in Section 10.8, DVOP may in its sole discretion, reduce the required percentage described in the first sentence of this Section 1.2(c) from ninety percent (90%) to eighty percent (80%).
Section 2.1 Closing Date
. The closing of the Exchange and the other transactions contemplated by this Agreement (the "Closing") shall take place at the offices of Sheppard Mullin Richter & Hampton LLP, San Diego, CA 92130 at 10:00 a.m. on April 29, 2011, or at such other location, date and time as DVOP and Sugarmade may agree. The time and date upon which the Closing actually occurs being referred to herein as the "Closing Date".
Section 2.2 Transactions at Closing
. At the Closing, the following transactions shall take place, which transactions shall be deemed as having taken place simultaneously and no transaction shall be deemed to have been completed or any document delivered until all such transactions have been completed and all required documents delivered:
(a)
DVOP shall deliver to Sugarmade, as agent for Sellers, the following documents:
(i)
Validly executed stock certificates corresponding to the Common Stock issued in the name of the Sellers in the amounts set forth in Schedule I;
(ii)
Validly executed DVOP warrants corresponding to the Sugarmade Warrants issued in the name of the Sellers in the amounts and on the terms set forth in Schedule II;
(iii)
A duly executed Share Cancellation Agreement in the form attached hereto as Exhibit A;
(iv)
A resignation and release agreement, substantially in the form attached hereto as Exhibit B from the current chief executive officer and director of DVOP to be effective as of the Closing (which shall be not less than 10 days after the mailing of a 14(f)-1 Information Statement to DVOP's stockholders of record);
(v)
True copies of all consents and waivers obtained by DVOP, in accordance with the provisions of Section 7.1 below;
(vi)
Certificate of good standing from the Secretary of State of the State of Delaware, dated at or about the Closing Date, to the effect that DVOP is in good standing under the laws of said state;
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(vii)
Certified copy of the Certificate of Incorporation of DVOP, as certified by the Secretary of State of the State of Delaware at or about the Closing Date;
(viii)
Secretary's certificate duly executed by DVOP's secretary attaching and attesting to the accuracy of: (A) the bylaws of DVOP, (B) the resolutions of DVOP's board of directors issuing and allotting the Common Stock to the Sellers subject to the provisions hereof, approving the transactions contemplated hereby, including the Exchange, selecting Scott Lantz as a director of DVOP (resulting in the DVOP directors to be Kevin Russeth and Scott Lantz) and appointing the officers of Sugarmade as follows: Scott Lantz as the officer of DVOP, and (C) an incumbency certificate signed by all of the executive officers of DVOP dated at or about the Closing Date;
(ix)
An officer's certificate duly executed by DVOP's chief executive officer to the effect that the conditions set forth in Section 7.1(a) below have been satisfied, dated as of the date of the Closing;
(x)
All corporate books and records of DVOP; and
(xi)
A registration rights agreement for the investors in the Capital Raise referenced in Section 6.9, in the form attached hereto as Exhibit E;
(xii)
Such other documents and instruments as Sugarmade may reasonably request.
(b)
Sugarmade shall deliver, or cause to be delivered, to DVOP the following documents and/or shall take the following actions:
(i)
Validly executed stock certificates corresponding to the number of Sugarmade Shares being transferred by the Sellers, issued in the name of DVOP and shall register the shares in the name of DVOP in the stockholders register of Sugarmade.
(ii)
Certificate of good standing from the Secretary of State of the State of California, dated at or about the Closing Date, to the effect that Sugarmade is in good standing under the laws of said state;
(iii)
Certified copy of the Articles of Incorporation of Sugarmade, as amended to date certified by the Secretary of State of the State of California at or about the Closing Date;
(iv)
Secretary's certificate duly executed by Sugarmade's secretary attaching and attesting to the accuracy of: (A) the bylaws of Sugarmade, (B) the resolutions of Sugarmade's board of directors, approving the transactions contemplated hereby, including the Exchange, and (C) an incumbency certificate signed by all of the executive officers of Sugarmade dated at or about the Closing Date;
(v)
An officer's certificate duly executed by Sugarmade's chief executive officer of Sugarmade to the effect that the conditions set forth in Section 7.2(a) below have been satisfied, dated as of the date of the Closing; and
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(vi)
Such other documents as DVOP may reasonably request.
(c)
The Sellers shall deliver the following documents:
(i)
to DVOP, duly executed assignments in the form attached hereto as Exhibit C and or Exhibit D effecting the immediate and unconditional sale, assignment and irrevocable transfer of Sugarmade Shares and Sugarmade Warrants to DVOP, free and clear of any Liens, or any other third party rights of any kind and nature, whether voluntarily incurred or arising by operation of law;
(ii)
to Sugarmade, as agent for DVOP, all share certificates in respect of Sugarmade Shares;
(iii)
for the Sellers which are investors in the Capital Raise referenced in Section 6.9, the Sellers shall deliver to the escrow agent an executed authorization to release funds and proceed with the Closing, in the form presented to the Seller by the escrow agent; and
(iv)
to Sugarmade, as agent for DVOP, all agreements issued in respect of the Sugarmade Warrants.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF DVOP
DVOP represents and warrants to Sugarmade and each Seller that, subject to such exceptions as may be specifically set forth in the public reports filed by DVOP on the SEC's EDGAR database, the statements contained in this Article III are true and correct as of the date of this Agreement:
Section 3.1 Organization and Qualification
. DVOP is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, with the corporate power and authority to own and operate its business as presently conducted, except where the failure to be or have any of the foregoing would not have a Material Adverse Effect. DVOP is duly qualified as a foreign corporation to do business and is in good standing in each jurisdiction where the character of its properties owned or held under lease or the nature of their activities makes such qualification necessary, except for such failures to be so qualified or in good standing as would not have a Material Adverse Effect. DVOP has no subsidiaries and is not a participant in any joint venture, partnership, or similar arrangement.
Section 3.2 Authorization
. DVOP has the requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement and to consummate the Exchange.
Section 3.3 Validity and Effect of Agreement
. This Agreement has been duly and validly executed and delivered by DVOP and, assuming that it has been duly authorized, executed and delivered by the other parties hereto, constitutes a legal, valid and binding obligation of DVOP, in accordance with its terms except as limited by applicable bankruptcy,
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insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally.
Section 3.4 No Conflict
. Neither the execution and delivery of this Agreement by DVOP nor the performance by DVOP of its obligations hereunder, nor the consummation of the Exchange, will: (i) conflict with DVOP's Certificate of Incorporation or Bylaws; (ii) violate any statute, law, ordinance, rule or regulation, applicable to DVOP or any of the properties or assets of DVOP; or (iii) violate, breach, be in conflict with or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or permit the termination of any provision of, or result in the termination of, the acceleration of the maturity of, or the acceleration of the performance of any obligation of DVOP, or result in the creation or imposition of any Lien upon any properties, assets or business of DVOP under, any Contract or any order, judgment or decree to which DVOP is a party or by which it or any of its assets or properties is bound or encumbered except, in the case of clauses (ii) and (iii), for such violations, breaches, conflicts, defaults or other occurrences which, individually or in the aggregate, would not have a Material Adverse Effect on DVOP, or would not prevent or materially delay consummation of the Exchange or otherwise prevent the parties hereto from performing their respective obligations under this Agreement.
Section 3.5 Required Filings and Consents
. The execution and delivery of this Agreement by DVOP does not, and the performance of this Agreement by DVOP will not, require any consent, approval, authorization or permit of, or filing with or notification to, Governmental Authority with respect to DVOP except: (i) compliance with applicable requirements of the Securities Act, the Exchange Act and state securities laws ("Blue Sky Laws"); and (ii) where the failure to obtain such consents, approvals, authorizations or permits, or to make such filings or notifications would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on DVOP, or would not prevent or materially delay consummation of the Exchange or otherwise prevent the parties hereto from performing their respective obligations under this Agreement.
Section 3.6 Capitalization
. The authorized capital stock of DVOP consists of 300,000,000 shares of Common Stock, par value $0.001 per share, of which 9,199,192 shares of Common Stock are issued and outstanding as of the date of this Agreement, and no more than 436,692 shares of Common Stock will be issued and outstanding as of the Closing Date. In addition, as of the date of this Agreement, there are no warrants outstanding to purchase shares of Common Stock, and as of the Closing Date, there will be no warrants to purchase shares of Common Stock other than 200,000 warrants to purchase common stock at an exercise price of $1.25 with a 3 year term, in the same form of warrant agreement as issued to the investors in the Capital Raise. Except for the transactions contemplated by this Agreement, there are no other share capital, preemptive rights, convertible securities, outstanding warrants, options or other rights to subscribe for, purchase or acquire from DVOP and there are no contracts or commitments providing for the issuance of, or the granting of rights to acquire, any shares of capital stock of DVOP or under which DVOP is, or may become, obligated to issue any of its securities. All shares of capital stock of DVOP outstanding as of the date of this Agreement have been duly authorized and validly issued, are fully paid and nonassessable, and are free of preemptive rights.
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Section 3.7 Status of Common Stock
. The Common Stock, when issued and allotted at the Closing in exchange for Sugarmade Shares, will be duly authorized, validly issued, fully paid, nonassessable, and free of any preemptive rights, will be issued in compliance with all applicable laws concerning the issuance of securities, and will have the rights, preferences, privileges, and restrictions set forth in DVOP's Certificate of Incorporation and bylaws, and will be free and clear of any Liens of any kind and duly registered in the name of the Sellers, in DVOP's stockholders ledger.
Section 3.8 SEC Reports and Financial Statements
. DVOP has timely filed with the SEC all forms, reports, notices, schedules, statements and other documents and instruments required to be filed by it under any applicable law, and has heretofore made available (or promptly following filing will make available) to Sugarmade true and complete copies of, all such forms, reports, notices, schedules, statements and other documents and instruments required to be filed by it under the Exchange Act or the Securities Act (the "DVOP SEC Documents"). As of their respective dates or, if amended, as of the date of the last such amendment, the DVOP SEC Documents, including any financial statements or schedules included therein (i) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading, (ii) were complete and accurate in all material respects, and (iii) complied in all material respects with the applicable requirements of the Exchange Act and the Securities Act, as the case may be, and the applicable rules and regulations of the SEC thereunder.
Section 3.9 Financial Statements
. Each of the financial statements included in the DVOP SEC Documents including but not limited to the audited financial statements for the years ended June 30, 2009 and June 30, 2010 and the unaudited financial statements for the six (6) month period ended December 31, 2010 (the "DVOP Financial Statements") have been filed in accordance with any applicable law and prepared from, and are in accordance with, the books and records of DVOP, comply in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with GAAP applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto) and fairly present the financial positions and the results of operations and cash flows of DVOP as of the dates thereof or for the periods presented therein (subject, in the case of unaudited statements, to normal year-end audit adjustments not material in amount).
Section 3.10 No Undisclosed Liabilities
. Except as disclosed in the DVOP Financial Statements, DVOP does not have any liabilities, indebtedness or obligations, whether known or unknown, absolute, accrued, contingent or otherwise, and whether due or to become due (each a “Liability” and collectively, "Liabilities"), and, there is no existing condition, situation or set of circumstances that could reasonably be expected to result in such a Liability, including without limitation any liabilities for foreign, federal, state, local or other taxes (including deficiencies, interest and penalties) in excess of $3,000. As of the Closing Date, DVOP shall have no Liabilities other than up to $20,000 in unsecured accounts payable or accrued expenses.
Section 3.11 Material Contracts
. DVOP has no material contracts.
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Section 3.12 Intellectual Property Rights
(a)
.
(a)
DVOP has no material Intellectual Property Rights.
(b)
DVOP (i) has not received notice of a claim of infringement of any patent, trademark, service mark, copyright, trade secret or other proprietary right of any third party and (ii) does not have any knowledge of any claim challenging or questioning the validity or effectiveness of any license or agreement relating to any DVOP Intellectual Property Rights or Licensed Intellectual Property. DVOP has at all times used reasonable efforts to protect its proprietary information and to prevent such information from being released into the public domain.
Section 3.13 Litigation
. There is no action pending or, to the knowledge of DVOP, threatened against DVOP that, individually or in the aggregate, directly or indirectly, would be reasonably likely to have a Material Adverse Effect, nor is there any outstanding judgment, decree or injunction, in each case against DVOP, that, individually or in the aggregate, has or would be reasonably likely to have a Material Adverse Effect.
Section 3.14 Taxes
. DVOP has filed (or has had timely filed on its behalf) with the appropriate tax authorities all tax returns required to be filed by it or on behalf of it, and each such tax return was complete and accurate in all material respects, and DVOP has timely paid (or has had paid on its behalf) all material Taxes due and owing by it, regardless of whether required to be shown or reported on a tax return, including Taxes required to be withheld by it. No deficiency for a material Tax has been asserted in writing or otherwise, to DVOP's Knowledge, against DVOP or with respect to any of its assets, except for asserted deficiencies that either (i) have been resolved and paid in full or (ii) are being contested in good faith. There are no material Liens for Taxes upon DVOP's assets.
Section 3.15 Registration
. No order revoking the registration of DVOP or the Common Stock under the Exchange Act has been issued by any court, securities commission or regulatory authority in the United States and no proceedings for such purpose are pending or, to the Knowledge of DVOP, after reasonable inquiry, threatened.
Section 3.16 Listing and Maintenance Requirements
. The Common Stock is registered under Section 12(g) of the Exchange Act, and DVOP has taken no action designed to, or which to the knowledge of DVOP is likely to have the effect of, terminating the registration of the Common Stock under the Exchange Act, nor has DVOP received any notification that the SEC is contemplating terminating such registration. The Common Stock is presently traded under the symbol "DVOP". DVOP is, and has no reason to believe that it will not in the foreseeable future continue to be, in compliance with all such SEC registration requirements.
Section 3.17 Books and Records
. The books and records, financial and others, of DVOP are in all material respects complete and correct and have been maintained in accordance with good business accounting practices.
Section 3.18 Insurance
. DVOP does not presently have any insurance policies.
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Section 3.19 Compliance
. DVOP is in compliance with all foreign, federal, state and local laws and regulations of any Governmental Authority, except to the extent that failure to comply would not, individually or in the aggregate, have a Material Adverse Effect. DVOP has not received any notice asserting a failure, or possible failure, to comply with any such law or regulation, the subject of which notice has not been resolved as required thereby or otherwise to the satisfaction of the party sending the notice, except for such failure as would not, individually or in the aggregate, have a Material Adverse Effect. Except as otherwise required herein, DVOP does not, and is not required to, hold any permits, licenses or franchises from Governmental Authorities.
Section 3.20 Absence of Certain Changes
. Since the date of the latest DVOP Financial Statements, except as described in the DVOP SEC Documents or as expressly permitted or required by this Agreement or with the consent of Sugarmade, DVOP has not:
(a)
sold or otherwise issued any shares of capital stock;
(b)
acquired any assets or incurred any Liabilities (other than for routine ordinary expenses incurred in the course of normal business);
(c)
amended its Certificate of Incorporation or Bylaws;
(d)
waived any rights of value which in the aggregate are extraordinary or material considering the business of DVOP;
(e)
made any material change in its method of management, operation or accounting;
(f)
made any accrual or arrangement for or payment of bonuses or special compensation of any kind or any severance or termination pay to any present or former officer or employee which have not been disclosed;
(g)
granted or agreed to grant any options, warrants or other rights for its stocks, bonds or other corporate securities calling for the issuance thereof, which option, warrant or other right has not been cancelled as of the Closing Date;
(h)
borrowed or agreed to borrow any funds or incurred or become subject to, any material obligation or liability (absolute or contingent) except liabilities incurred in the ordinary course of business; and
(i)
become subject to any law or regulation which materially and adversely affects, or in the future may adversely affect, the business, operations, properties, assets or condition of DVOP or become subject to any change or development in, or effect on, DVOP that has or could reasonably be expected to have a Material Adverse Effect,
(j)
entered into any agreement to take any action described in clauses (a) through (i) above
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Section 3.21 Material Transactions or Affiliations
. Except as described in the DVOP SEC Documents, there is no contract, agreement or arrangement between DVOP and any person who was, at the time of such contract, agreement or arrangement an officer, director or person owning of record, or known by DVOP to own beneficially, five percent or more of the issued and outstanding Common Stock and which is to be performed in whole or in part after the date hereof. DVOP has no commitment, whether written or oral, to lend any funds to, borrow any money from or enter into any other material transactions with, any such affiliated person.
Section 3.22 Employees
. DVOP is in compliance with all currently applicable laws and regulations respecting terms and conditions of employment, except where any failure to comply would not constitute a Material Adverse Effect. There are no proceedings pending or, to DVOP's knowledge, reasonably expected or threatened, between DVOP, on the one hand, and any or all of its current or former employees, on the other hand. There are no claims pending, or, to DVOP's knowledge, reasonably expected or threatened, against DVOP under any workers' compensation or long term disability plan or policy. DVOP has no unsatisfied obligations that would have a Material Adverse Effect on DVOP to any employees, former employees, or qualified beneficiaries pursuant to any employee benefit plans, COBRA, HIPAA, or any state law governing health care coverage extension or continuation.
Section 3.23 Previous Sales of Securities
. Since the purchase of 9,000,000 shares of DVOP common stock on May 30, 2008 by QRSciences Holding Limited, DVOP has neither sold nor issued shares of common stock to any Person or entity. Except as provided in this Agreement, DVOP has not granted or agreed to grant any registration rights, including piggyback rights, to any Person or entity.
Section 3.24 Principals of DVOP
. During the past 10 years, no current officer or director of DVOP has been:
(a)
the subject of any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
(b)
the subject of any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
(c)
the subject of any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or
(d)
found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.
Section 3.25 Tax-Free Exchange
. DVOP has not taken any action, nor does DVOP know of any fact, that is reasonably likely to prevent the Exchange from qualifying as a "reorganization" within the meaning of Section 351 or 368 of the Code.
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Section 3.26 Brokers and Finders
. Neither DVOP, nor any of its officers, directors, employees or managers, has employed any broker, finder, advisor or consultant, or incurred any liability for any investment banking fees, brokerage fees, commissions or finders' fees, advisory fees or consulting fees in connection with the Exchange for which DVOP has or could have any liability.
Section 3.27 Disclosure
. There is no known material fact or information relating to the business, condition (financial or otherwise), affairs, operations or assets of DVOP and/or its subsidiaries that has not been disclosed in writing to Sugarmade and/or Sellers by DVOP. No representation or warranty of DVOP in this Agreement or any statement or document delivered in connection herewith or therewith, contained or will contain any untrue statement of a material fact or fail to state any material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SUGARMADE
Sugarmade represents and warrants to DVOP and each Seller that the statements contained in this Article IV are true and correct as of the date of this Agreement:
Section 4.1 Organization and Qualification
. Sugarmade is duly organized and validly existing under the laws of the State of California, with the corporate power and authority to own and operate its business as presently conducted, except where the failure to be or have any of the foregoing would not have a Material Adverse Effect. Sugarmade is duly qualified as a foreign corporation to do business in each jurisdiction where the character of its properties owned or held under lease or the nature of its activities makes such qualification necessary, except for such failures to be so qualified as would not have a Material Adverse Effect. Sugarmade has no subsidiaries.
Section 4.2 Authorization
. Sugarmade has the requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement and to consummate the Exchange.
Section 4.3 Validity and Effect of Agreement
. This Agreement has been duly and validly executed and delivered by Sugarmade and, assuming that it has been duly authorized, executed and delivered by the other parties hereto, constitutes a legal, valid and binding obligation of Sugarmade, in accordance with its terms except as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally.
Section 4.4 No Conflict
. Neither the execution and delivery of this Agreement by Sugarmade nor the performance by Sugarmade of its obligations hereunder, nor the consummation of the Exchange, will: (i) conflict with Sugarmade's Articles of Incorporation; (ii) violate any statute, law, ordinance, rule or regulation, applicable to Sugarmade or any of its properties or assets; or (iii) violate, breach, be in conflict with or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or permit the
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termination of any provision of, or result in the termination of, the acceleration of the maturity of, or the acceleration of the performance of any obligation of Sugarmade, or result in the creation or imposition of any Lien upon any properties, assets or business of Sugarmade under, any Material Contract or any order, judgment or decree to which Sugarmade is a party or by which it or any of its assets or properties is bound or encumbered except, in the case of clauses (ii) or (iii), for such violations, breaches, conflicts, defaults or other occurrences which, individually or in the aggregate, would not have a Material Adverse Effect on Sugarmade, or materially delay consummation of the Exchange or otherwise prevent the parties hereto from performing their obligations under this Agreement.
Section 4.5 Required Filings and Consents
. The execution and delivery of this Agreement by Sugarmade do not, and the performance of this Agreement by Sugarmade will not require any consent, approval, authorization or permit of, or filing with or notification to, any Governmental Authority, with respect to Sugarmade, except: (i) compliance with applicable requirements of the Securities Act, the Exchange Act, and Blue Sky Laws; and (ii) where the failure to obtain such consents, approvals, authorizations or permits, or to make such filings or notifications would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on Sugarmade, or materially delay consummation of the Exchange or otherwise prevent the parties hereto from performing their obligations under this Agreement.
Section 4.6 Capitalization
. The authorized capital stock of Sugarmade is 50,000,000 shares of Sugarmade's common stock, par value $0.001 per share, and (i) no more than 9,263,308 shares of common stock will be issued and outstanding as of the Closing Date (including the shares issued to the investors in the Capital Raise); and (ii) as of the Closing Date there will be no more than 2,753,600 warrants to purchase shares of common stock (including the warrants issued to the investors in the Capital Raise); provided, however, (a) in the event the gross proceeds of the Capital Raise is less than $2,500,000, then the amount of issued and outstanding shares and warrants as of the Closing Date set forth in (i) and (ii) above shall be reduced by 1 share and 1 warrant for each $1.25 less than $2,500,000 in gross proceeds; and (b) the amount of issued and outstanding shares and warrants as of the Closing Date set forth in (i) and (ii) above shall be reduced by 1 share and 1 warrant for each $1.25 of Sugarmade notes payable which remain unconverted and outstanding as of the Closing Date. In addition, as of the Closing Date there will be no more than 1,000,000 options to purchase shares of common stock. Except for the transactions contemplated by this Agreement, there are no other share capital, preemptive rights, convertible securities, outstanding warrants, options or other rights to subscribe for, purchase or acquire from Sugarmade and, except for the up to 500,000 shares of common stock to be issued after the Closing Date pursuant to the consulting agreement (and which are subject to the repurchase rights in the consulting agreement) described in the footnotes in the Sugarmade Financial Statements, there are no contracts or commitments providing for the issuance of, or the granting of rights to acquire, any shares of capital stock of Sugarmade or under which Sugarmade is, or may become, obligated to issue any of its securities. All Sugarmade Shares outstanding as of the date of this Agreement have been duly authorized and validly issued, are fully paid and nonassessable, and are free of preemptive rights.
Section 4.7 Financial Statements
. Sugarmade has previously furnished to DVOP true and complete copies of its audited consolidated balance sheet of Sugarmade for the fiscal years ended December 31, 2009 and December 31, 2010 and the related statements of
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operations, stockholders equity and cash flows for the year then ended (all of such financial statements of Sugarmade collectively, the "Sugarmade Financial Statements"). The Sugarmade Financial Statements (including the notes thereto) present fairly in all material respects the financial position and results of operations and cash flows of Sugarmade at the date or for the period set forth therein, in each case in accordance with GAAP applied on a consistent basis throughout the periods involved (except as otherwise indicated therein). The Sugarmade Financial Statements have been prepared from and in accordance with the books and records of Sugarmade.
Section 4.8 No Undisclosed Liabilities
. Except as disclosed in the Sugarmade Financial Statements, Sugarmade has no material liabilities, indebtedness or obligations, except those that have been incurred in the ordinary course of business, whether absolute, accrued, contingent or otherwise, and whether due or to become due, and there is no existing condition, situation or set of circumstances that could reasonably be expected to result in such a liability, indebtedness or obligation. As of the Closing Date, Sugarmade shall have no Liabilities other than up to $250,000 in unsecured accounts payable or accrued expenses and $262,000 of notes payable.
Section 4.9 Material Contracts
. Each Sugarmade Material Contract (i) is legal, valid, binding and enforceable and in full force and effect with respect to Sugarmade, and to Sugarmade's knowledge is legal, valid, binding, enforceable and in full force and effect with respect to each other party thereto, in either case subject to the effect of bankruptcy, insolvency, moratorium or other similar laws affecting the enforcement of creditors' rights generally and except as the availability of equitable remedies may be limited by general principles of equity; and (ii) will continue to be legal, valid, binding and enforceable and in full force and effect immediately following the Closing (but only for such Material Contracts that have a contract term that continues beyond the Closing) in accordance with the terms thereof as in effect prior to the Closing, subject to the effect of bankruptcy, insolvency, moratorium or other similar laws affecting the enforcement of creditors' rights generally and except as the availability of equitable remedies may be limited by general principles of equity. Neither Sugarmade nor, to Sugarmade's knowledge, any other party, is in breach or default, and no event has occurred which with notice or lapse of time would (i) constitute a breach or default by Sugarmade or, to Sugarmade's knowledge, by any such other party, or (ii) permit termination, modification or acceleration, under the Sugarmade Material Agreement.
Section 4.10 Intellectual Property Rights.
(a)
Sugarmade owns, or is licensed or otherwise possesses legally enforceable rights to use, all patents, trademarks, common law trademarks, trade names, trade secrets (including customer lists), service marks and copyrights, and any applications for and registrations of such patents, trademarks, service marks, and copyrights and all processes, formulas, methods, schematics, technology, know-how, computer software programs, data or applications and tangible or intangible proprietary information or material that are used in its business, free and clear of all liens, claims or encumbrances (all of which are referred to as the "Sugarmade Intellectual Property Rights"). The foregoing representation as it relates to all licenses, sublicenses and other agreements to which Sugarmade is a party and pursuant to which Sugarmade is authorized to use any third party technology, trade secret, know-how, process,
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patent, trademark or copyright, including software ("Licensed Intellectual Property") is limited to the interests of Sugarmade pursuant to licenses from third parties, each of which is in full force and effect, is valid, binding and enforceable and grants Sugarmade such rights to such intellectual property as are used in the business as currently conducted.
(b)
Sugarmade (i) has not received notice of a claim of infringement of any patent, trademark, service mark, copyright, trade secret or other proprietary right of any third party and (ii) does not have any knowledge of any claim challenging or questioning the validity or effectiveness of any license or agreement relating to any Sugarmade Intellectual Property Rights or Licensed Intellectual Property. Sugarmade has at all times used reasonable efforts to protect its proprietary information and to prevent such information from being released into the public domain.
Section 4.11 Litigation
. There is no action pending or, to the knowledge of Sugarmade, threatened against Sugarmade that, individually or in the aggregate, directly or indirectly, would be reasonably likely to have a Material Adverse Effect, nor is there any outstanding judgment, decree or injunction, in each case against Sugarmade, that, individually or in the aggregate, has or would be reasonably likely to have a Material Adverse Effect.
Section 4.12 Taxes
. Sugarmade has timely filed (or has had timely filed on its behalf) with the appropriate tax authorities all tax returns required to be filed by it or on behalf of it, and each such tax return was complete and accurate in all material respects, and Sugarmade has timely paid (or has had paid on its behalf) all material Taxes due and owing by it, regardless of whether required to be shown or reported on a tax return, including Taxes required to be withheld by it. No deficiency for a material Tax has been asserted in writing or otherwise, to Sugarmade's Knowledge, against Sugarmade or with respect to any of its assets, except for asserted deficiencies that either (i) have been resolved and paid in full or (ii) are being contested in good faith. There are no material Liens for Taxes upon Sugarmade's assets.
Section 4.13 Compliance
. Sugarmade is in compliance with all federal, state and local laws and regulations of any Governmental Authority applicable to its operations or with respect to which compliance is a condition of engaging in the business thereof, except to the extent that failure to comply would not, individually or in the aggregate, have a Material Adverse Effect. Sugarmade has not received any notice asserting a failure, or possible failure, to comply with any such law or regulation, the subject of which notice has not been resolved as required thereby or otherwise to the satisfaction of the party sending the notice, except for such failure as would not, individually or in the aggregate, have a Material Adverse Effect. Sugarmade holds all permits, licenses and franchises from Governmental Authorities required to conduct its business as it is now being conducted, except for such failures to have such permits, licenses and franchises that would not, individually or in the aggregate, have a Material Adverse Effect.
Section 4.14 Absence of Certain Changes
. Since the date of the most recent Sugarmade Financial Statements:
(a)
there has been no change or development in, or effect on, Sugarmade that has or could reasonably be expected to have a Material Adverse Effect;
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(b)
Sugarmade has not sold, transferred, disposed of, or agreed to sell, transfer or dispose of, any material amount of its assets other than in the ordinary course of business;
(c)
Sugarmade has not paid any dividends or distributed any of its assets to any of its stockholders;
(d)
Sugarmade has not acquired any material amount of assets except in the ordinary course of business, nor acquired or merged with any other business;
(e)
Sugarmade has not waived or amended any of its respective material contractual rights except in the ordinary course of business, and
(f)
Sugarmade has not entered into any agreement to take any action described in clauses (a) through (f) above.
Section 4.15 Material Transactions or Affiliations
. Except for employment agreements, stock option agreements, and deferred compensation plans, there is no contract, agreement or arrangement between Sugarmade and any person who was, at the time of such contract, agreement or arrangement an officer, director or person owning of record, or known by Sugarmade to own beneficially, five percent or more of its issued and outstanding common stock or preferred stock and which is to be performed in whole or in part after the date hereof. Sugarmade has no commitment, whether written or oral, to lend any funds to, borrow any money from or enter into any other material transactions with, any such affiliated person.
Section 4.16 Employees
. Sugarmade is in compliance with all currently applicable laws and regulations respecting terms and conditions of employment, except where any failure to comply would not constitute a Material Adverse Effect. There are no proceedings pending or, to Sugarmade's knowledge, reasonably expected or threatened, between Sugarmade, on the one hand, and any or all of its current or former employees, on the other hand. There are no claims pending, or, to Sugarmade's knowledge, reasonably expected or threatened, against Sugarmade under any workers' compensation or long term disability plan or policy. Sugarmade has no unsatisfied obligations that would have a Material Adverse Effect on Sugarmade to any employees, former employees, or qualified beneficiaries pursuant to any employee benefit plans, COBRA, HIPAA, or any state law governing health care coverage extension or continuation.
Section 4.17 Principals of Sugarmade
. During the past ten years, no current officer or director of Sugarmade has been:
(a)
the subject of any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
(b)
the subject of any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
(c)
the subject of any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or
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temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or
(d)
found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.
Section 4.18 Tax-Free Exchange
. Sugarmade has not taken any action, nor does Sugarmade know of any fact, that is reasonably likely to prevent the Exchange from qualifying as a "reorganization" within the meaning of Section 351 or 368 of the Code.
Section 4.19 Brokers and Finders
. Except as described herein, neither Sugarmade nor any of its officers, directors, employees or managers, have employed any broker, finder, advisor or consultant, or incurred any liability for any investment banking fees, brokerage fees, commissions or finders' fees, advisory fees or consulting fees in connection with the Exchange for which Sugarmade has or could have any liability. Sugarmade has entered into an agreement with Grandview Capital, LLC to raise $400,000 - $600,000. For these services, Grandview Capital LLC shall receive 10% cash commission on the amount of funds raised and 10% stock commission on the number of shares purchased by these funds.
Section 4.20 Disclosure
. There is no known material fact or information relating to the business, condition (financial or otherwise), affairs, operations or assets of Sugarmade that has not been disclosed in writing to DVOP by Sugarmade. No representation or warranty of Sugarmade in this Agreement or any statement or document delivered in connection herewith or therewith, contained or will contain any untrue statement of a material fact or fail to state any material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF EACH SELLER
Each Seller, individually and not jointly, hereby makes the following representations and warranties to Sugarmade and DVOP:
Section 5.1 Authorization
. Such Seller has all requisite power to execute and deliver, to perform its obligations under, and to consummate the transactions contemplated by, this Agreement.
Section 5.2 Validity and Effect of Agreement
. Upon the execution and delivery of each other document to which such Seller is a party (assuming due execution and delivery by each other party thereto) each such other document will be the legal, valid and binding obligations of such Seller, enforceable against such Seller in accordance with their respective terms except as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally.
Section 5.3 No Breach or Violation
. The execution, delivery and performance by such Seller of this Agreement and each other document to which it is a party, and the
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consummation of the transactions contemplated hereby and thereby in accordance with the terms and conditions hereof and thereof, do not and will not conflict with (i) the certificate of incorporation or bylaws of such Seller, if applicable, or (ii) any agreement to which such Seller is a party, or by which such Seller or such Seller's assets are bound or affected.
Section 5.4 Consents and Approvals
. No consent, approval, authorization or order of, registration or filing with, or notice to, any Government Authority or any other Person is necessary to be obtained, made or given by such Seller in connection with the execution, delivery and performance by such Seller of this Agreement or any other document to which it is a party or for the consummation by such Seller of the transactions contemplated hereby or thereby.
Section 5.5 Title
. The Sugarmade Shares to be delivered by such Seller in connection with the transactions contemplated herein are, and at the Closing will be owned, of record and beneficially, solely by such Seller, free and clear of any Lien and represent such Seller's entire ownership interest in Sugarmade.
Section 5.6 Investor Status
. Such Seller is an "accredited investor" as that term is defined in Rule 501(a) of Regulation D under the Securities Act and has properly completed the form attached hereto as Schedule III.
Section 5.7 No Government Review
. Such Seller understands that neither the SEC nor any securities commission or other Governmental Authority of any state, country or other jurisdiction has approved the issuance of the Common Stock or passed upon or endorsed the merits of the Common Stock or the Exchange Agreement or any of the other documents relating to the Exchange (collectively, the "Offering Documents"), or confirmed the accuracy of, determined the adequacy of, or reviewed the Exchange Agreement or the other Offering Documents.
Section 5.8 Investment Intent
. The shares of Common Stock are being acquired by Seller for Seller's own account for investment purposes only, not as a nominee or agent and not with a view to the resale or distribution of any part thereof, and Seller has no present intention of selling, granting any participation in or otherwise distributing the same. Seller further represents that Seller does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participation to such person or third person with respect to any of Sugarmade Shares.
Section 5.9 Restrictions on Transfer
. Seller understands that the shares of Common Stock have not been registered under the Securities Act or registered or qualified under any foreign or state securities law, and may not be, directly or indirectly, sold, transferred, offered for sale, pledged, hypothecated or otherwise disposed of without registration under the Securities Act and registration or qualification under applicable state securities laws or the availability of an exemption therefrom. In any case where such an exemption is relied upon by Seller from the registration requirements of the Securities Act and the registration or qualification requirements of such state securities laws, Seller shall furnish DVOP with an opinion of counsel stating that the proposed sale or other disposition of such securities may be effected without registration under the Securities Act and will not result in any violation of any
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applicable state securities laws relating to the registration or qualification of securities for sale, such counsel and opinion to be satisfactory to DVOP. Seller acknowledges that it is able to bear the economic risks of an investment in the Common Stock for an indefinite period of time, and that its overall commitment to investments that are not readily marketable is not disproportionate to its net worth.
Section 5.10 Informed Investment
. Seller has made such investigations in connection herewith as it deemed necessary or desirable so as to make an informed investment decision without relying upon Sugarmade for legal or tax advice related to this investment. In making its decision to acquire the Common Stock, Seller has not relied upon any information other than information contained in this Agreement and in the other Offering Documents.
Section 5.11 Access to Information
. Seller acknowledges that it has had access to and has reviewed all documents and records relating to DVOP, including, but not limited to, the DVOP SEC Documents, that it has deemed necessary in order to make an informed investment decision with respect to an investment in DVOP.
Section 5.12 Reliance on Representations
. Seller understands that the shares of Common Stock are being offered and sold to Seller in reliance on specific exemptions from the registration and/or public offering requirements of the U.S. federal and state securities laws and that DVOP and Sugarmade are relying in part upon the truth and accuracy of, and such Seller's compliance with, the representations, warranties, agreements, acknowledgments and understandings of such Seller set forth herein in order to determine the availability of such exemptions and the eligibility of such Seller to acquire the Common Stock. Seller represents and warrants to DVOP and Sugarmade that any information Seller has heretofore furnished or furnishes herewith to DVOP and Sugarmade is complete and accurate, and further represents and warrants that it will notify and supply corrective information to DVOP and Sugarmade immediately upon the occurrence of any change therein occurring prior to Sugarmade's issuance of the Common Stock. Within five (5) days after receipt of a request from Sugarmade, Seller will provide such information and deliver such documents as may reasonably be necessary to comply with any and all laws and regulations to which Sugarmade is subject.
Section 5.13 No General Solicitation
. Seller is unaware of, and in deciding to participate in the transactions contemplated hereby is in no way relying upon, and did not become aware of the transactions contemplated hereby through or as a result of, any form of general solicitation or general advertising including, without limitation, any article, notice, advertisement or other communication published in any newspaper, magazine or similar media, or broadcast over television or radio or the internet, in connection with the transactions contemplated hereby.
Section 5.14 Legends
. Seller understands that the certificates representing the Common Stock shall have endorsed thereon the following legend, and stop transfer instructions reflecting that these restrictions on transfer will be placed with the transfer agent of the Common Stock:
“THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY MAY
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NOT BE OFFERED OR TRANSFERRED BY SALE, ASSIGNMENT, PLEDGE OR OTHERWISE UNLESS (I) A REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933 IS IN EFFECT, (II) THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL, WHICH OPINION IS SATISFACTORY TO THE COMPANY, TO THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933. HEDGING TRANSACTIONS INVOLVING THESE SECURITIES MAY NOT BE CONDUCTED UNLESS IN COMPLIANCE WITH THE SECURITIES ACT OF 1933.”
Section 5.15 Placement and Finder's Fees
. No agent, broker, investment banker, finder, financial advisor or other person acting on behalf of Seller or under its authority is or will be entitled to any broker's or finder's fee or any other commission or similar fee, directly or indirectly, in connection with the transactions contemplated hereby, and no person is entitled to any fee or commission or like payment in respect thereof based in any way on any agreements, arrangements or understanding made by or on behalf of Seller.
Section 5.16 Disclosure
. No representation or warranty of the Seller in this Agreement or any statement or document delivered in connection herewith or therewith, contained or will contain any untrue statement of a material fact or fail to state any material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.
Section 6.1 Conduct of Business by DVOP
. Except (i) as expressly permitted or required by this Agreement, or (ii) with the consent of Sugarmade, during the period commencing with the date of this Agreement and continuing until the Closing Date, DVOP shall not conduct any trade or business other than as presently conducted, shall preserve intact its business organizations and maintain the registration of DVOP and the Common Stock under the Exchange Act.
Section 6.2 Access to Information
. At all times prior to the Closing or the earlier termination of this Agreement in accordance with the provisions of Article IX, and in each case subject to Section 6.3 below, each party hereto shall provide to the other party (and the other party's authorized representatives) reasonable access during normal business hours and upon reasonable prior notice to the premises, properties, books, records, assets, liabilities, operations, contracts, personnel, financial information and other data and information of or relating to such party (including without limitation all written proprietary and trade secret information and documents, and other written information and documents relating to intellectual property rights and matters), and will cooperate with the other party in conducting its due diligence investigation of such party, provided that the party granted such access shall not interfere unreasonably with the operation of the business conducted by the party granting access, and provided that no such access need be granted to privileged information or any agreements or documents subject to confidentiality agreements.
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Section 6.3 Confidentiality
. Each party shall hold, and shall cause its respective Affiliates and representatives to hold, all Confidential Information made available to it in connection with the Exchange in strict confidence, shall not use such information except for the sole purpose of evaluating the Exchange and shall not disseminate or disclose any of such information other than to its directors, officers, managers, employees, stockholders, interest holders, Affiliates, agents and representatives, as applicable, who need to know such information for the sole purpose of evaluating the Exchange (each of whom shall be informed in writing by the disclosing party of the confidential nature of such information and directed by such party in writing to treat such information confidentially). The above limitations on use, dissemination and disclosure shall not apply to Confidential Information that (i) is learned by the disclosing party from a third party entitled to disclose it; (ii) becomes known publicly other than through the disclosing party or any third party who received the same from the disclosing party, provided that the disclosing party had no Knowledge that the disclosing party was subject to an obligation of confidentiality; (iii) is required by law or court order to be disclosed by the parties; or (iv) is disclosed with the express prior written consent thereto of the other party. The parties shall undertake all necessary steps to ensure that the secrecy and confidentiality of such information will be maintained. In the event a party is required by court order or subpoena to disclose information which is otherwise deemed to be confidential or subject to the confidentiality obligations hereunder, prior to such disclosure, the disclosing party shall: (i) promptly notify the non-disclosing party and, if having received a court order or subpoena, deliver a copy of the same to the non-disclosing party; (ii) cooperate with the non-disclosing party, at the expense of the non-disclosing party, in obtaining a protective or similar order with respect to such information; and (iii) provide only that amount of information as the disclosing party is advised by its counsel is necessary to strictly comply with such court order or subpoena.
Section 6.4 No Shop
. Until the earlier of the Closing Date and the date of termination of this Agreement pursuant to Article IX, neither DVOP, nor Sugarmade, nor the Sellers, nor any of their respective representatives shall, directly or indirectly, take any of the following actions with any third party: (i) solicit, initiate, encourage, entertain or agree to any proposals or offers from any Person relating to (A) any merger, share exchange, business combination, reorganization, consolidation or similar transaction involving DVOP or Sugarmade, (B) the acquisition of beneficial ownership of any equity interest in DVOP or Sugarmade, whether by issuance or by purchase (through a tender offer, exchange offer, negotiated purchase or otherwise) from the Sellers or otherwise, (C) the license or transfer of all or a material portion of the assets of DVOP or Sugarmade or (D) any transaction that may be inconsistent with or that may have an adverse effect upon the transactions contemplated by this Agreement (any of the transactions described in clauses (A) through (D), a “Third-Party Acquisition”); or (ii) participate in any discussions or negotiations regarding, or furnish to any person any information with respect to DVOP or Sugarmade in connection with, or take any other action to solicit, consider, entertain, facilitate or encourage any Inquiries or the making of any proposal that constitutes, or may reasonably be expected to lead to, any Third-Party Acquisition. The Parties acknowledge and agreed that money damages would not be a sufficient remedy for any breach of this Section and that any aggrieved party shall therefore be entitled to seek equitable relief, including an injunction or specific performance, as a remedy for any such breach. Such remedies shall not be deemed to be the exclusive remedies but shall be in addition to all other remedies available at law or equity.
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Section 6.5 Further Assurances
. Each of the parties hereto agrees to use commercially reasonable efforts before and after the Closing Date to take or cause to be taken all action, to do or cause to be done, and to assist and cooperate with the other party hereto in doing, all things necessary, proper or advisable under applicable laws to consummate and make effective, in the most expeditious manner practicable, the Exchange, including, but not limited to: (i) satisfying the conditions precedent to the obligations of any of the parties hereto; (ii) obtaining all waivers, consents and approvals from other parties necessary for the consummation of the Exchange, (iii) making all filings with, and obtain all consents, approvals and authorizations that are required to be obtained from, Governmental Authorities, (iv) defending of any lawsuits or other legal proceedings, whether judicial or administrative, challenging this Agreement or the performance of the obligations hereunder; and (v) executing and delivering such instruments, and taking such other actions, as the other party hereto may reasonably require in order to carry out the intent of this Agreement.
Section 6.6 Public Announcements
. DVOP, the Sellers and Sugarmade shall consult with each other before issuing any press release or otherwise making any public statements with respect to the Exchange or this Agreement, and shall not issue any other press release or make any other public statement without prior consent of the other parties, except as may be required by law or, with respect to DVOP, by obligations pursuant to rule or regulation of the Exchange Act, the Securities Act, any rule or regulation promulgated thereunder or any rule or regulation of FINRA.
Section 6.7 Notification of Certain Matters
. Each party hereto shall promptly notify the other party in writing of any events, facts or occurrences that would result in any breach of any representation or warranty or breach of any covenant by such party contained in this Agreement.
Section 6.8 Financial Statements
. Prior to the Closing, Sugarmade shall deliver to DVOP the consent of its independent auditors to the inclusion of their audit report and the Sugarmade Financial Statements in a Current Report on Form 8-K relating to the Exchange. Sugarmade shall use its best efforts to have its independent auditor consent to DVOP's use of and reliance on the Sugarmade Financial Statements as may be required in connection with any further filings made by DVOP under the United States federal securities laws.
Section 6.9 Capital Raise
(a)
. Prior to the Closing, Sugarmade shall raise gross proceeds of not less than $2,000,000 through the private placement of common stock and warrants to purchase common stock (the “Capital Raise”).
Section 6.10 Share Cancellation
(a)
. Prior to the Closing, DVOP shall have entered into the Share Cancellation Agreement in the form attached hereto as Exhibit A.
Section 6.11 Tax-Free Exchange Status
. The parties hereto shall take (or refrain from taking) any and all actions necessary to ensure that, for United States federal income tax purposes: (i) the Exchange shall qualify as a reorganization within the meaning of Sections 368(a)(1)(B) of the Code, and (ii) that the tax consequences to the stockholders of both companies are minimized.
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Section 6.12 Conversion of Notes Payable
(a)
. Except as described herein, prior to the Closing, Sugarmade shall have converted all notes payable outstanding at and subsequent to December 31, 2010, including those notes offset by the note receivable from Ethan Farid at and subsequent to December 31, 2010. The conversion of such notes shall have been completed in compliance with all state and federal securities laws. $162,000 of convertible notes payable will be outstanding at Closing resulting from three note holders who will not be converting their notes. These note holders are Jeffery Barnes, David Banks and Lee Banks.
Section 6.13 Resignation of Directors. At the Closing, (i) Kevin Russeth, the sole DVOP officer, shall resign all of his officer positions with DVOP; and (ii) Kevin Russeth, the sole DVOP director, shall appoint Scott Lantz to the DVOP Board of Directors and as the Chief Executive Officer and Chief Financial Officer of DVOP. On or promptly after the Closing, DVOP shall file with the SEC a Schedule 14(f)-1 with respect to the change of control transactions described in this Agreement, and shall cause the Schedule 14(f)-1 to be mailed to each registered holder of its Common Stock. Ten days following the mailing of the Schedule 14(f)-1 to the DVOP registered stockholders, the director of DVOP shall appoint Clifton Leung, Jim Jensen, Sandy Salzberg and Ed Roffman to the DVOP Board of Directors, and Kevin Russeth shall resign from the Board of Directors.
ARTICLE VII
CONDITIONS TO CONSUMMATION OF THE EXCHANGE
Section 7.1 Conditions to Obligations of Sugarmade
. The obligations of Sugarmade and Sellers to consummate the Exchange shall be subject to the fulfillment, or written waiver by Sugarmade, at or prior to the Closing, of each of the following conditions:
(a)
The representations and warranties of DVOP set out in this Agreement shall be true and correct in all material respects at and as of the time of the Closing as though such representations and warranties were made at and as of such time;
(b)
DVOP shall have performed and complied in all material respects with all covenants, conditions, obligations and agreements required by this Agreement to be performed or complied with by it on or prior to the Closing Date;
(c)
All consents, approvals, permits, authorizations and orders required to be obtained from, and all registrations, filings and notices required to be made with or given to, any Regulatory Authority or Person as provided herein shall have been obtained; and
(d)
There has been no Material Adverse Effect on the business, condition or prospects of DVOP until the Closing Date.
Section 7.2 Conditions to Obligations of DVOP
. The obligations of DVOP to consummate the Exchange shall be subject to the fulfillment, or written waiver by DVOP, at or prior to the Closing of each of the following conditions:
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(a)
The representations and warranties of Sugarmade set out in this Agreement shall be true and correct in all material respects at and as of the time of the Closing as though such representations and warranties were made at and as of such time;
(b)
Sugarmade shall have performed and complied in all material respects with all covenants, conditions, obligations and agreements required by this Agreement to be performed or complied with by Sugarmade on or prior to the Closing Date;
(c)
All consents, approvals, permits, authorizations and orders required to be obtained from, and all registrations, filings and notices required to be made with or given to, any Regulatory Authority or Person as provided herein shall have been obtained;
(d)
There has been no Material Adverse Effect on the business, condition or prospects of Sugarmade until the Closing Date; and
(e)
Sellers owning at least ninety percent (90%) of the issued and outstanding Sugarmade Shares (including the Sugarmade Shares to be issued in the Capital Raise) shall have executed this Agreement.
Section 8.1 Indemnification between the Parties
.
(a)
Notwithstanding any other indemnification provision hereunder, DVOP (in this context, the "Indemnifying Party") shall indemnify and hold harmless Sugarmade and its officers, directors and each of the Sellers (in this context an "Indemnified Party"), from and against any and all demands, claims, actions or causes of action, judgments, assessments, losses, liabilities, damages or penalties and reasonable attorneys' fees and related disbursements (collectively, "Claims") suffered by such Indemnified Party resulting from or arising out of (i) any inaccuracy in or breach of any of the representations or warranties made by DVOP at the time they were made, and, except for representations and warranties that speak as of a specific date or time (which need only be true and correct as of such date or time), on and as of the Closing Date, (ii) any breach or nonfulfillment of any covenants or agreements made by DVOP, (iii) any misrepresentation made by DVOP, in each case as made herein or in the Schedules or Exhibits annexed hereto or in any closing certificate, schedule or any ancillary certificates or other documents or instruments furnished by DVOP pursuant hereto or in connection with the Exchange, (iv) any untimely filing of or inaccuracy in, any SEC Document, and (v) the operations and liabilities of DVOP and/or any of its subsidiaries, whether known or unknown, arising out of any action, omission and/or period of time preceding the Closing Date, including but not limited to any taxes levied with respect to same.
(b)
Notwithstanding any other indemnification provision hereunder, Sugarmade (in this context, the "Indemnifying Party") shall indemnify and hold harmless DVOP and its officers and directors (in this context an "Indemnified Party"), from and against any and all Claims suffered by such Indemnified Party resulting from or arising out of (i) any inaccuracy in or breach of any of the representations or warranties made by Sugarmade at the
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time they were made, and, except for representations and warranties that speak as of a specific date or time (which need only be true and correct as of such date or time), on and as of the Closing Date, (ii) any breach or nonfulfillment of any covenants or agreements made by Sugarmade, and (iii) any misrepresentation made by Sugarmade, in each case as made herein or in the Schedules or Exhibits annexed hereto or in any closing certificate, schedule or any ancillary certificates or other documents or instruments furnished by Sugarmade pursuant hereto or in connection with the Exchange.
(c)
Notwithstanding any other indemnification provision hereunder, Sellers, individually and not severally or jointly (in this context, the "Indemnifying Party"), shall indemnify and hold harmless Sugarmade and DVOP (in this context an "Indemnified Party"), from and against any and all Claims suffered by such Indemnified Party resulting from or arising out of (i) any inaccuracy in or breach of any of the representations or warranties made by such Seller under this Agreement at the time they were made, and, except for representations and warranties that speak as of a specific date or time (which need only be true and correct as of such date or time), on and as of the Closing Date and (ii) any breach or nonfulfillment of any covenants or agreements made by the Seller.
Section 8.2 Indemnification Procedures for Third Party Claims
.
(a)
Upon obtaining knowledge of any Claim by a third party which has given rise to, or is expected to give rise to, a claim for indemnification hereunder, the Indemnified Party shall give written notice ("Notice of Claim") of such claim or demand to the Indemnifying Party, specifying in reasonable detail such information as the Indemnified Party may have with respect to such indemnification claim (including copies of any summons, complaint or other pleading which may have been served on it and any written claim, demand, invoice, billing or other document evidencing or asserting the same). No failure or delay by the Indemnified Party in the performance of the foregoing shall reduce or otherwise affect the obligation of the Indemnifying Party to indemnify and hold the Indemnified Party harmless, except to the extent that such failure or delay shall have actually adversely affected the Indemnifying Party's ability to defend against, settle or satisfy any Claims for which the Indemnified Party entitled to indemnification hereunder.
(b)
If the claim or demand set forth in the Notice of Claim given by an Indemnified Party pursuant to Section 8.1 hereof is a claim or demand asserted by a third party, the Indemnifying Party shall have fifteen (15) days after the date on which Notice of Claim is given to notify Indemnified Party in writing of their election to defend such third party claim or demand on behalf of the Indemnified Party. If the Indemnifying Party elects to defend such third party claim or demand, Indemnified Party shall make available to the Indemnifying Party and its agents and representatives all records and other materials that are reasonably required in the defense of such third party claim or demand and shall otherwise cooperate with, and assist the Indemnifying Party in the defense of, such third party claim or demand, and so long as the Indemnifying Party is defending such third party claim in good faith, the Indemnified Party shall not pay, settle or compromise such third party claim or demand. If the Indemnifying Party elects to defend such third party claim or demand, the Indemnified Party shall have the right to participate in the defense of such third party claim or demand, at such Indemnified Party's own expense. In the event, however, that such Indemnified Party reasonably determines that
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representation by counsel to the Indemnifying Party of both the Indemnifying Party and such Indemnified Party could reasonably be expected to present counsel with a conflict of interest, then the Indemnified Party may employ separate counsel to represent or defend it in any such action or proceeding and the Indemnifying Party will pay the fees and expenses of such counsel. If the Indemnifying Party does not elect to defend such third party claim or demand or do not defend such third party claim or demand in good faith, the Indemnified Party shall have the right, in addition to any other right or remedy it may have hereunder, at the Indemnifying Party's expense, to defend such third party claim or demand; provided, however, that (i) such Indemnified Party shall not have any obligation to participate in the defense of, or defend, any such third party claim or demand; (ii) such Indemnified Party's defense of or its participation in the defense of any such third party claim or demand shall not in any way diminish or lessen the obligations of the Indemnifying Party under the agreements of indemnification set forth in this Article VII; and (iii) such Indemnified Party may not settle any claim without the consent of the Indemnifying Party, which consent shall not be unreasonably withheld or delayed.
(c)
The Indemnifying Party and the other Indemnified Parties, if any, shall cooperate fully in all aspects of any investigation, defense, pre-trial activities, trial, compromise, settlement or discharge of any claim in respect of which indemnity is sought pursuant to this Article VIII, including, but not limited to, by providing the other party with reasonable access to employees and officers (including as witnesses) and other information.
Section 8.3 Indemnification Procedures for Non-Third Party Claims
. In the event any Indemnified Party should have an indemnification claim against the Indemnifying Party under this Agreement that does not involve a claim by a third party, the Indemnified Party shall promptly deliver notice of such claim to the Indemnifying Party in writing and in reasonable detail. The failure by any Indemnified Party to so notify the Indemnifying Party shall not relieve the Indemnifying Party from any liability that it may have to such Indemnified Party, except to the extent that Indemnifying Party has been actually prejudiced by such failure. If the Indemnifying Party does not notify the Indemnified Party within fifteen (15) Business Days following its receipt of such notice that the Indemnifying Party disputes such claim, such claim specified by the Indemnifying Party in such notice shall be conclusively deemed a liability of the Indemnifying Party under this Article VIII and the Indemnifying Party shall pay the amount of such liability to the Indemnified Party on demand, or in the case of any notice in which the amount of the claim is estimated, on such later date when the amount of such claim is finally determined. If the Indemnifying Party disputes its liability with respect to such claim in a timely manner, Sugarmade and the Indemnified Party shall proceed in good faith to negotiate a resolution of such dispute and, if not resolved through negotiations, such dispute shall be resolved pursuant to Section 10.10.
Section 8.4 Limitations on Indemnification
. No claim for indemnification under this Article VIII shall be asserted by, and no liability for such indemnify shall be enforced against, the Indemnifying Party to the extent the Indemnified Party has theretofore received indemnification or otherwise been compensated for such Claim. In the event that an Indemnified Party shall later collect any such amounts recovered under insurance policies with respect to any Claim for which it has previously received payments under this Article VIII from the Indemnifying Party, such Indemnified Party shall promptly repay to the Indemnifying Party such amount recovered.
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Section 9.1 Termination
. This Agreement may be terminated at any time prior to the Closing:
(a)
by mutual consent of DVOP and Sugarmade;
(b)
by Sugarmade, upon written notice to DVOP, if the Closing shall not have occurred on or before April 30, 2011 or if any of the conditions to the Closing set forth in Section 7.1 shall have become incapable of fulfillment by April 30, 2011 and shall not have been waived in writing by Sugarmade; provided, however, that the right to terminate this Agreement under this Section 9.1(b) shall not be available to Sugarmade if its action or failure to act has been a principal cause of or resulted in the failure of the Exchange to occur on or before such date and such action or failure to act constitutes a breach of this Agreement;
(c)
by DVOP, upon written notice to Sugarmade, if the Closing shall not have occurred on or before April 30, 2011 or if any of the conditions to the Closing set forth in Section 7.2 shall have become incapable of fulfillment by April 30, 2011 and shall not have been waived in writing by DVOP; provided, however, that the right to terminate this Agreement under this Section 9.1(c) shall not be available to DVOP if its action or failure to act has been a principal cause of or resulted in the failure of the Exchange to occur on or before such date and such action or failure to act constitutes a breach of this Agreement;
(d)
by DVOP or Sugarmade if any Governmental or judicial Authority shall have issued an injunction, order, decree or ruling or taken any other action restraining, enjoining or otherwise prohibiting any material portion of the Exchange and such injunction, order, decree, ruling or other action shall have become final and nonappealable;
Section 9.2 Procedure and Effect of Termination
. In the event of termination of this Agreement pursuant to Section 9.1 hereof, written notice thereof shall forthwith be given by the terminating party to the other party, and, except as set forth below, this Agreement shall terminate and be void and have no effect and the Exchange shall be abandoned without any further action by the parties hereto. Neither DVOP nor Sugarmade shall have any liability to the other for any termination under this Article IX. If this Agreement is terminated as provided herein:
(a)
each party hereto shall redeliver, and shall cause its agents (including, without limitation, attorneys and accountants) to redeliver, all documents, work papers and other material of each party hereto relating to the Exchange, whether obtained before or after the execution hereof; and
(b)
each party agrees that all Confidential Information received by DVOP or Sugarmade with respect to the other party, this Agreement or the Exchange shall be kept confidential notwithstanding the termination of this Agreement.
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Section 10.1 Entire Agreement
. This Agreement and the Schedules and Exhibits hereto contain the entire agreement between the parties and supersede all prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof.
Section 10.2 Amendment and Modifications
. This Agreement may not be amended, modified or supplemented except by an instrument or instruments in writing signed by the party against whom enforcement of any such amendment, modification or supplement is sought.
Section 10.3 Extensions and Waivers
. At any time prior to the Closing, the parties hereto entitled to the benefits of a term or provision may (a) extend the time for the performance of any of the obligations or other acts of the parties hereto, (b) waive any inaccuracies in the representations and warranties contained herein or in any document, certificate or writing delivered pursuant hereto, or (c) waive compliance with any obligation, covenant, agreement or condition contained herein. Any agreement on the part of a party to any such extension or waiver shall be valid only if set forth in an instrument or instruments in writing signed by the party against whom enforcement of any such extension or waiver is sought. No failure or delay on the part of any party hereto in the exercise of any right hereunder shall impair such right or be construed to be a waiver of, or acquiescence in, any breach of any representation, warranty, covenant or agreement.
Section 10.4 Successors and Assigns
. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, provided, however, that no party hereto may assign its rights or delegate its obligations under this Agreement without the express prior written consent of the other party hereto. Except as provided in Article VIII, nothing in this Agreement is intended to confer upon any person not a party hereto (and their successors and assigns) any rights, remedies, obligations or liabilities under or by reason of this Agreement.
Section 10.5 Survival of Representations, Warranties and Covenants
. The representations and warranties contained herein shall survive the Closing and shall thereupon terminate two (2) years from the Closing. All covenants and agreements contained herein which by their terms contemplate actions following the Closing shall survive the Closing and remain in full force and effect in accordance with their terms.
Section 10.6 Headings; Definitions
. The Section and Article headings contained in this Agreement are inserted for convenience of reference only and will not affect the meaning or interpretation of this Agreement. All references to Sections or Articles contained herein mean Sections or Articles of this Agreement unless otherwise stated. All capitalized terms defined herein are equally applicable to both the singular and plural forms of such terms.
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Section 10.7 Specific Performance
. The parties hereto agree that in the event that any party fails to consummate the Exchange in accordance with the terms of this Agreement, irreparable damage would occur, no adequate remedy at law would exist and damages would be difficult to determine. It is accordingly agreed that the parties shall be entitled to specific performance in such event, without the necessity of proving the inadequacy of money damages as a remedy, in addition to any other remedy at law or in equity.
Section 10.8 Notices
. All notices hereunder shall be sufficiently given for all purposes hereunder if in writing and delivered personally, sent by documented overnight delivery service or, to the extent receipt is confirmed, telecopy, telefax, email or other electronic transmission service to the appropriate address or number as set forth below (or any other address duly notified by a party hereto pursuant to the provisions of this Section 10.8).
If to DVOP: | with a copy to: |
Diversified Opportunities, Inc. | Steven J. Davis |
1042 N. El Camino Real #261 | 1042 N. El Camino Real #261 |
Encinitas, CA 92024 | Encinitas, CA 92024 |
Attn: Kevin Russeth |
|
Phone: (858) 342-8155 | Phone: (619) 788-2383 |
Fax: [•] | Fax: (858) 367-8138 |
| Email: steve@sjdavislaw.com |
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If to Sugarmade or a Seller: | with a copy to: |
Sugarmade, Inc. | Sheppard, Mullin, Richter & Hampton LLP |
2280 Lincoln Avenue | 12275 El Camino Real, Suite 200 |
San Jose, CA 95125 | San Diego, CA 92130 |
Attn: Scott Lantz | Attn: James A. Mercer III, Esq. |
Phone: (408) 375-8839 | Phone: (858) 720-7469 |
Fax: | Fax: (858) 523-6705 |
Email: scott@Sugarmade.com | Email: jamercer@sheppardmullin.com |
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Section 10.9 Governing Law
. This Agreement shall be governed by and construed in accordance with the laws of the State of California, without regard to the laws that might otherwise govern under applicable principles of conflicts of laws thereof.
Section 10.10 Consent to Jurisdiction
. Any action, suit or other legal proceeding which is commenced to resolve any matter arising under or relating to any provision of this Agreement shall be commenced only in a state or federal court of competent jurisdiction the State of California, County of San Francisco, and the parties hereto each consents to the jurisdiction of such a court.
Section 10.11 Counterparts
. This Agreement may be executed in two or more counterparts and may be delivered by facsimile or electronic/PDF transmission, each of which
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shall be deemed to be an original, but all of which together shall constitute one and the same agreement.
Section 10.12 Certain Definitions
. As used herein:
(a)
"Affiliate" shall have the meanings ascribed to such term in Rule 12b-2 of the Exchange Act;
(b)
"Business Day" shall mean any day other than a Saturday, Sunday or a day on which federally chartered financial institutions are not open for business in the City of San Francisco, California;
(c)
"Confidential Information" shall mean the existence and contents of this Agreement and the Schedules and Exhibits hereto, and all proprietary technical, economic, environmental, operational, financial and/or business information or material of one party which, prior to or following the Closing Date, has been disclosed by Sugarmade, on the one hand, or DVOP, on the other hand, in written, oral (including by recording), electronic, or visual form to, or otherwise has come into the possession of, the other;
(d)
"Contract" shall mean any oral, written or implied contracts, agreements, licenses, instruments, indentures leases, powers of attorney, guaranties, surety arrangements or other commitments of any kind;
(e)
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder;
(f)
"GAAP" shall mean generally accepted accounting principles in the United States as in effect on the date or for the period with respect to which such principles are applied;
(g)
"Governmental Authority" shall mean any nation or government, any state, municipality or other political subdivision thereof and any entity, body, agency, commission or court, whether domestic, foreign or multinational, exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government and any executive official thereof;
(h)
"Knowledge" shall mean (i) with respect to an individual, knowledge of a particular fact or other matter, if such individual is aware of such fact or other matter, and (ii) with respect to a Person that is not an individual, knowledge of a particular fact or other matter if any individual who is serving, or who has at any time served, as a director, officer, partner, executor, or trustee of such Person (or in any similar capacity) has, or at any time had, knowledge of such fact or other matter;
(i)
"Lien" shall mean any security or other property interest or right, claim, lien, pledge, option, charge, security interest, contingent or conditional sale, or proxy, pre-emptive rights, first refusal rights, participation rights, or other title claim or retention agreement, interest or other right or claim of third parties, whether perfected or not perfected, voluntarily
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incurred or arising by operation of law, and including any agreement (other than this Agreement) to grant or submit to any of the foregoing in the future;
(j)
"Material Adverse Effect" shall mean any adverse effect on the business, condition (financial or otherwise) or results of operation of the applicable entity;
(k)
"Material Contract" shall mean any Contract, other than equipment and furniture leases entered into in the ordinary course of business, where the liabilities or commitments associated therewith exceed $10,000 individually or $50,000 in the aggregate;
(l)
"Person" shall mean any individual, corporation, partnership, association, trust or other entity or organization, including a governmental or political subdivision or any agency or institution thereof;
(m)
"SEC" shall mean the Securities and Exchange Commission;
(n)
"Securities Act" shall mean the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder; and
(o)
"Taxes" shall mean all taxes (whether U.S. federal, state, local or other non-U.S.) based upon or measured by income and any other tax whatsoever, including, without limitation, gross receipts, profits, sales, levies, imposts, deductions, charges, rates, duties, use, occupation, value added, ad valorem, transfer, franchise, withholding, payroll and social security, employment, excise, stamp duty or property taxes, together with any interest, penalties, charges or fees imposed with respect thereto.
IN WITNESS WHEREOF, each of the parties have caused this Agreement to be signed by their respective officers hereunto duly authorized, all as of the date first written above.
DIVERSIFIED OPPORTUNITIES, INC. | SUGARMADE, INC. |
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By: _____________________________ | By: _____________________________ |
Name: Kevin Russeth | Name: Scott Lantz |
Title: Chief Executive Officer | Title: Chief Executive Officer |
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[Signature Page to Exchange Agreement]
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Counterpart Signature Page to
Exchange Agreement between
Diversified Opportunities, Inc.
and
Sugarmade, Inc.
(Each Seller must also complete Schedule III)
____________________________
(Print Name of Seller)
By:___________________________
Name:
Title:
Number of Shares: _______________
______________________________
Address
______________________________
(City, State and Zip Code/Postal Code)
______________________________
Country
______________________________
For US persons: taxpayer id number
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Schedule III
Investor Questionnaire
Please check the applicable box –
The undersigned is an accredited investor by reason of coming within one of the following categories:
___ 1.
A natural person whose net worth, either individually or jointly with such person's spouse, at the time of the undersigned's receipt the shares exceeds $1,000,000;
___ 2.
A natural person who had an individual income in excess of $200,000, or joint income with that person's spouse in excess of $300,000, in the two most recent years and reasonably expects to have individual income reaching the same level in the current year;
___ 3.
A bank as defined in Section 3(a)(2) of the Securities Act, or any savings and loan association or other institution as defined in Section 3)(a)(5)(A) of the Securities Act. whether acting in its individual or fiduciary capacity;
___ 4.
A broker or dealer registered pursuant to Section 15 of the Securities Exchange Act of 1934;
___ 5.
An insurance company as defined in Section 2(13) of the Securities Act:
___ 6.
An investment company registered under the Investment Company Act of 1940 or a business development company as defined in Section 2(a)(48) of that Act;
___ 7.
A Small Business Investment Company licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958;
___ 8.
A plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees. if such plan has total assets in excess of $5,000,000;
___ 9.
An employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974, if the investment decision is made by a plan fiduciary, as defined in Section 3(21) of such act, which is either a bank, savings and loan association, insurance company, or registered investment adviser, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors;
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___ 10.
A private business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940;
___ 11.
An organization described in Section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the shares, with total assets in excess of $5,000,000;
___ 12.
An executive officer or director of Sugarmade.
___ 13.
A trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the shares, whose purchase is directed by a sophisticated person who has such knowledge and experience in financial and business matters that such person is capable of evaluating the merits and risks of investing in Sugarmade; or
___ 14.
An entity in which all of the equity owners qualify under any of the above subparagraphs. If the undersigned belongs to this category only, a list of the equity owners of the undersigned, and each such equity owner should complete a copy of this questionnaire.
The undersigned has executed this Investor Questionnaire this ____ day of ______, 2011.
_____________________________
(Print Name of Investor)
By:___________________________
Name:
Title:
______________________________
Address
______________________________
(City, State and Zip Code/Postal Code)
______________________________
Country
______________________________
For US Persons: taxpayer identification number
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EXHIBIT A
Share Cancellation Agreement
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EXHIBIT B
Form of DVOP Officer and Director Release
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EXHIBIT C
Form of Notice of Exchange (Common Stock)
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EXHIBIT D
Form of Notice of Exchange (Warrants)
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EXHIBIT E
Form of Registration Rights Agreement
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FORM OF WARRANT
THIS WARRANT, AND ALL SHARES OF STOCK ISSUABLE UNDER THIS WARRANT, HAVE BEEN AND WILL BE ISSUED WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM.
COMMON STOCK PURCHASE WARRANT
DIVERSIFIED OPPORTUNITIES, INC.
(doing business as Sugarmade)
Warrant Shares: [●]
Issue Date: May 9, 2011
THIS COMMON STOCK PURCHASE WARRANT (the “Warrant”) certifies that, for value received, [●] (the “Holder”) is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after Issue Date above and on or prior to the close of business on the second anniversary of the Initial Exercise Date (the “Termination Date”) but not thereafter, to subscribe for and purchase from Diversified Opportunities, Inc., a Delaware corporation (the “Company”), up to [●] shares (the “Warrant Shares”) of Common Stock. The purchase price of one share of Common Stock under this Warrant shall be equal to the Exercise Price, as defined in Section 2(b).
1.
Definitions. As used in this Agreement, the following terms shall have the meanings ascribed below:
"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 of 1933, as amended.
"Business Days" 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 New York are authorized or required by law or other governmental action to close.
"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.
"Trading Market" means means any of the following markets or exchanges on which the Common Stock is listed or quoted for trading on the date in question: the NYSE
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AMEX, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, or the New York Stock Exchange (or any successors to any of the foregoing).
"Transfer Agent" means any transfer agent hired by the Company to hold and maintain the Company's register for holders of its Common Stock.
“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 4:00 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 for trading on the OTC Bulletin Board and if prices for the Common Stock are then reported in the “Pink Sheets” published by Pink OTC Markets, Inc. (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 Holders 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.
2.
Exercise.
(a)
Exercise of Warrant. This Warrant may be exercised, in whole or in part, at any time or times on or after the Issue Date and on or before the Termination Date by delivery to the Company (or such other office or agency of the Company as it may designate by notice in writing to the registered Holder at the address of the Holder appearing on the books of the Company) of (1) a duly executed facsimile copy of the Notice of Exercise Form annexed hereto and (2) delivering payment of the aggregate Exercise Price of the shares purchased in the Notice of Exercise Form by wire transfer or cashier’s check drawn on a United States bank. The Holder shall not be required to physically surrender this Warrant to the Company until the Holder has purchased all of the Warrant Shares available hereunder and the Warrant has been exercised in full, in which case, the Holder shall surrender this Warrant to the Company for cancellation. Partial exercises of this Warrant resulting in purchases of a portion of the total number of Warrant Shares available hereunder shall have the effect of lowering the outstanding number of Warrant Shares purchasable hereunder in an amount equal to the applicable number of Warrant Shares purchased. The Holder and the Company shall maintain records showing the number of Warrant Shares purchased and the date of such purchases. The Company shall deliver any objection to any Notice of Exercise Form within two Business Days of receipt of such notice. In the event of any dispute or discrepancy, the records of the Holder shall be controlling and determinative in the absence of manifest error. The Holder and any assignee, by acceptance of this Warrant, acknowledge and agree that, by reason of the provisions of this paragraph, following the purchase of a portion of the Warrant Shares hereunder, the number of Warrant Shares available for purchase hereunder at any given time may be less than the amount stated on the face hereof.
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(b)
Exercise Price. The exercise price per share of the Common Stock under this Warrant shall be $1.50, subject to adjustment hereunder (the “Exercise Price”).
(c)
Mechanics of Exercise.
i.
Delivery of Certificates Upon Exercise. Certificates for shares purchased hereunder shall be transmitted by the Transfer Agent to the Holder by crediting the account of the Holder’s prime broker with the Depository Trust Company through its Deposit Withdrawal Agent Commission (“DWAC”) system if the Company is then a participant in such system and there is an effective Registration Statement permitting the issuance of the Warrant Shares to or resale of the Warrant Shares by Holder, and otherwise by physical delivery to the address specified by the Holder in the Notice of Exercise by the date that is three (3) Trading Days after the latest of (A) the delivery to the Company of the Notice of Exercise Form, (B) surrender of this Warrant (if required) and (C) payment of the aggregate Exercise Price as set forth above (such date, the “Warrant Share Delivery Date”). This Warrant shall be deemed to have been exercised on the first date on which all of the foregoing have been delivered to the Company. The Warrant Shares shall be deemed to have been issued, and Holder or any other person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the Warrant has been exercised, with payment to the Company of the Exercise Price and all taxes required to be paid by the Holder, if any, pursuant to Section 2(c)(v) prior to the issuance of such shares, having been paid.
ii.
Delivery of New Warrants Upon Exercise. If this Warrant shall have been exercised in part, the Company shall, at the request of a Holder and upon surrender of this Warrant certificate, at the time of delivery of the certificate or certificates representing Warrant Shares, deliver to Holder a new Warrant evidencing the rights of Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.
iii.
Rescission Rights. If the Company fails to cause the Transfer Agent to transmit to the Holder a certificate or the certificates representing the Warrant Shares pursuant to Section 2(c)(i) by the Warrant Share Delivery Date, then, the Holder will have the right to rescind such exercise.
iv.
No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. As to any fraction of a share which the Holder would otherwise be entitled to purchase upon such exercise, 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 Exercise Price or round up to the next whole share.
v.
Charges, Taxes and Expenses. Issuance of certificates for Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided, however, that in the event certificates for Warrant Shares are to be issued in a name other than the name of the Holder, this
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Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto.
vi.
Closing of Books. The Company will not close its stockholder books or records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof.
(d)
Holder’s Exercise Limitations. The Company shall not effect any exercise of this Warrant, and a Holder shall not have the right to exercise any portion of this Warrant, pursuant to Section 2 or otherwise, to the extent that after giving effect to such issuance after exercise as set forth on the applicable Notice of Exercise, the Holder (together with the Holder’s Affiliates, and any other Persons acting as a group together with the Holder or any of the Holder’s Affiliates), would beneficially own in excess of the Beneficial Ownership Limitation (as defined below). For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which such determination is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (i) exercise of the remaining, nonexercised portion of this Warrant beneficially owned by the Holder or any of its Affiliates and (ii) exercise or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any other Common Stock Equivalents) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its Affiliates. Except as set forth in the preceding sentence, for purposes of this Section 2(d), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder, it being acknowledged by the Holder that the Company is not representing to the Holder that such calculation is in compliance with Section 13(d) of the Exchange Act and the Holder is solely responsible for any schedules required to be filed in accordance therewith. To the extent that the limitation contained in this Section 2(d) applies, the determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates) and of which portion of this Warrant is exercisable shall be in the sole discretion of the Holder, and the submission of a Notice of Exercise shall be deemed to be the Holder’s determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates) and of which portion of this Warrant is exercisable, in each case subject to the Beneficial Ownership Limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination. Upon the written or oral request of a Holder, the Company shall within two Business 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 Warrant, 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 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon exercise of this Warrant. The Holder, upon not less than 61 days’ prior notice to the Company, may increase or decrease the Beneficial Ownership Limitation provisions of this Section 2(d), provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of the number of shares of the Common Stock
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outstanding immediately after giving effect to the issuance of shares of Common Stock upon exercise of this Warrant held by the Holder and the provisions of this Section 2(d) shall continue to apply. Any such increase or decrease will not be effective until the 61st day after such notice is delivered to the Company. The provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 2(d) 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 Warrant.
3.
Certain Adjustments.
(a)
Stock Dividends and Splits. If the Company, at any time while this Warrant is outstanding: (i) pays a stock dividend or otherwise makes a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in shares of Common Stock (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company upon exercise of this Warrant or any other warrant or option issued by the Company), (ii) subdivides outstanding shares of Common Stock into a larger number of shares, (iii) combines (including by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares, or (iv) issues by reclassification of shares of the Common Stock any shares of capital stock of the Company, then in each case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event, and the number of shares issuable upon exercise of this Warrant shall be proportionately adjusted such that the aggregate Exercise Price of this Warrant shall remain unchanged. Any adjustment made pursuant to this Section 3(a) 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)
Pro Rata Distributions. If the Company, at any time while this Warrant is outstanding, shall distribute to all holders of Common Stock (and not to the Holders) evidences of its indebtedness or assets (including cash and cash dividends other than regular cash dividends paid out of earnings or earned surplus, determined in accordance with GAAP) or rights or warrants to subscribe for or purchase any security other than the Common Stock), then in each such case the Exercise Price shall be adjusted by multiplying the Exercise Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the VWAP determined as of the record date mentioned above, and of which the numerator shall be such VWAP on such record date less the then per share fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of the Common Stock as determined by the Board of Directors in good faith. In either case the adjustments shall be described in a statement provided to the Holder of the portion of assets or evidences of indebtedness so distributed or such subscription rights applicable to one share of Common Stock. Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date mentioned above.
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(c)
Fundamental Transaction. If, at any time while this Warrant is outstanding, (i) the Company, directly or indirectly, in one or more related transactions effects any merger or consolidation of the Company with or into another Person, (ii) the Company, directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Stock, (iv) the Company, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or recapitalization 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, (v) the Company, directly or indirectly, in one or more related transactions consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person whereby such other Person acquires more than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock or share purchase agreement or other business combination) (each a “Fundamental Transaction”), then, upon any subsequent exercise of this Warrant, the Holder shall have the right to receive, for each Warrant Share that would have been issuable upon such exercise immediately prior to the occurrence of such Fundamental Transaction, at the option of the Holder (without regard to any limitation in Section 2(d) on the exercise of this Warrant), the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and any additional consideration (the “Alternate Consideration”) receivable as a result of such Fundamental Transaction by a holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such Fundamental Transaction (without regard to any limitation in Section 2(d) on the exercise of this Warrant). For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Exercise Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common 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 exercise of this Warrant following such Fundamental Transaction. .
(d)
Calculations. All calculations under this Section 3 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 3, 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.
(e)
Notice to Holder.
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i.
Adjustment to Exercise Price. Whenever the Exercise Price is adjusted pursuant to any provision of this Section 3, the Company shall promptly mail to the Holder a notice setting forth the Exercise Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment.
ii.
Notice to Allow Exercise 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 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, or 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 mailed to the Holder at its last address as it shall appear upon the Warrant Register of the Company, at least 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 mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. To the extent that any notice provided hereunder constitutes, or contains, material, non-public information regarding the Company or any of the Subsidiaries, the Company shall simultaneously file such notice with the Commission pursuant to a Current Report on Form 8-K. The Holder shall remain entitled to exercise this Warrant during the period commencing on the date of such notice to the effective date of the event triggering such notice except as may otherwise be expressly set forth herein.
4.
Transfer of Warrant.
(a)
Transferability. This Warrant and all rights hereunder (including, without limitation, any registration rights) are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company or its designated agent, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees, as applicable, and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. The Warrant, if properly assigned
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in accordance herewith, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued.
(b)
New Warrants. This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 4(a), as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. All Warrants issued on transfers or exchanges shall be dated the initial issuance date set forth on the first page of this Warrant and shall be identical with this Warrant except as to the number of Warrant Shares issuable pursuant thereto.
(c)
Warrant Register. The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the “Warrant Register”), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary.
(d)
Understandings or Arrangements.
Such Holder is acquiring this Warrant as principal for its own account and has no direct or indirect arrangement or understandings with any other persons to distribute or regarding the distribution of such Warrant (this representation and warranty not limiting such Holder’s right to sell the Warrant pursuant to the Registration Statement or otherwise in compliance with applicable federal and state securities laws.) Such Holder is acquiring this Warrant hereunder in the ordinary course of its business.
5.
Miscellaneous.
(a)
No Rights as Stockholder Until Exercise. This Warrant does not entitle the Holder to any voting rights, dividends or other rights as a stockholder of the Company prior to the exercise hereof as set forth in Section 2(c)(i).
(b)
Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall include the posting of a bond if reasonably required by the Company), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate.
(c)
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.
(d)
Authorized Shares. The Company covenants that, during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a
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sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the Trading Market upon which the Common Stock may be listed. The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant and payment for such Warrant Shares in accordance herewith, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges created by the Company in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue).
(e)
No Impairment. Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment.
(f)
Jurisdiction. This Agreement shall be governed by and construed in accrodance with the laws of the State of Delaware, without reference to conflict of laws provisions.
(g)
Restrictions. The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered, will have restrictions upon resale imposed by state and federal securities laws. Under no circumstances will this warrant be settled on a net cash basis.
(h)
Nonwaiver and Expenses. No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice Holder’s rights, powers or remedies. Without limiting any other provision of this Warrant or the Purchase Agreement, if the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys’ fees, including those of appellate proceedings, incurred by Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder.
(i)
Notices. All notices, requests, demands and other communications provided for herein shall be in writing, shall be delivered facsimile transmission (with printed confirmation of receipt); shall be deemed given when received; and shall be addressed to the Company at its principal corporate offices and to the Holder at the address on the Company's records, or to such other persons or addresses as the relevant party shall designate as to itself from time to time in writing delivered in like manner.
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(j)
Successors and Assigns. Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors and permitted assigns of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of any Holder from time to time of this Warrant and shall be enforceable by the Holder or holder of Warrant Shares.
(k)
Amendment. This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company and Holder.
********************
(Signature Pages Follow)
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IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized as of the date first above indicated.
DIVERSIFIED OPPORTUNITIES, INC. |
By:__________________________________________ Scott Lantz Chief Executive Officer |
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NOTICE OF EXERCISE
TO:
DIVERSIFIED OPPORTUNITIES, INC.
(1)
The undersigned hereby elects to purchase ________ Warrant Shares of the Company pursuant to the terms of the attached Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any. Payment shall take be in lawful money of the United States
(2)
Please issue a certificate or certificates representing said Warrant Shares in the name of the undersigned or in such other name as is specified below:
_______________________________
The Warrant Shares shall be delivered to the following DWAC Account Number or by physical delivery of a certificate to:
_______________________________
_______________________________
_______________________________
[SIGNATURE OF HOLDER]
Name of Investing Entity: _______________________________________________________
Signature of Authorized Signatory of Investing Entity: _________________________________
Name of Authorized Signatory: ___________________________________________________
Title of Authorized Signatory: ____________________________________________________
Date:_________________________________________________________________________
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ASSIGNMENT FORM
(To assign the foregoing warrant, execute
this form and supply required information.
Do not use this form to exercise the warrant.)
FOR VALUE RECEIVED, [____] all of or [_______] shares of the foregoing Warrant and all rights evidenced thereby are hereby assigned to
_______________________________________________ whose address is
_______________________________________________________________.
_______________________________________________________________
Dated: ______________, _______
Holder’s Signature:
_____________________________
Holder’s Address:
_____________________________
_____________________________
Signature Guaranteed: ___________________________________________
NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank or trust company. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.
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THIS WARRANT, AND ALL SHARES OF STOCK ISSUABLE UNDER THIS WARRANT, HAVE BEEN AND WILL BE ISSUED WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM.
COMMON STOCK PURCHASE WARRANT
DIVERSIFIED OPPORTUNITIES, INC.
(doing business as Sugarmade)
Warrant Shares: [●]
Issue Date: May 9, 2011
THIS COMMON STOCK PURCHASE WARRANT (the “Warrant”) certifies that, for value received, [●] (the “Holder”) is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after Issue Date above and on or prior to the close of business on the second anniversary of the Initial Exercise Date (the “Termination Date”) but not thereafter, to subscribe for and purchase from Diversified Opportunities, Inc., a Delaware corporation (the “Company”), up to [●] shares (the “Warrant Shares”) of Common Stock. The purchase price of one share of Common Stock under this Warrant shall be equal to the Exercise Price, as defined in Section 2(b).
1.
Definitions. As used in this Agreement, the following terms shall have the meanings ascribed below:
"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 of 1933, as amended.
"Business Days" 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 New York are authorized or required by law or other governmental action to close.
"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.
"Trading Market" means means any of the following markets or exchanges on which the Common Stock is listed or quoted for trading on the date in question: the NYSE
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AMEX, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, or the New York Stock Exchange (or any successors to any of the foregoing).
"Transfer Agent" means any transfer agent hired by the Company to hold and maintain the Company's register for holders of its Common Stock.
“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 4:00 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 for trading on the OTC Bulletin Board and if prices for the Common Stock are then reported in the “Pink Sheets” published by Pink OTC Markets, Inc. (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 Holders 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.
2.
Exercise.
(a)
Exercise of Warrant. This Warrant may be exercised, in whole or in part, at any time or times on or after the Issue Date and on or before the Termination Date by delivery to the Company (or such other office or agency of the Company as it may designate by notice in writing to the registered Holder at the address of the Holder appearing on the books of the Company) of (1) a duly executed facsimile copy of the Notice of Exercise Form annexed hereto and (2) delivering payment of the aggregate Exercise Price of the shares purchased in the Notice of Exercise Form by wire transfer or cashier’s check drawn on a United States bank. The Holder shall not be required to physically surrender this Warrant to the Company until the Holder has purchased all of the Warrant Shares available hereunder and the Warrant has been exercised in full, in which case, the Holder shall surrender this Warrant to the Company for cancellation. Partial exercises of this Warrant resulting in purchases of a portion of the total number of Warrant Shares available hereunder shall have the effect of lowering the outstanding number of Warrant Shares purchasable hereunder in an amount equal to the applicable number of Warrant Shares purchased. The Holder and the Company shall maintain records showing the number of Warrant Shares purchased and the date of such purchases. The Company shall deliver any objection to any Notice of Exercise Form within two Business Days of receipt of such notice. In the event of any dispute or discrepancy, the records of the Holder shall be controlling and determinative in the absence of manifest error. The Holder and any assignee, by acceptance of this Warrant, acknowledge and agree that, by reason of the provisions of this paragraph, following the purchase of a portion of the Warrant Shares hereunder, the number of Warrant Shares available for purchase hereunder at any given time may be less than the amount stated on the face hereof.
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(b)
Exercise Price. The exercise price per share of the Common Stock under this Warrant shall be $1.25, subject to adjustment hereunder (the “Exercise Price”).
(c)
Cashless Exercise. If at the time of exercise hereof there is no effective registration statement registering, or the prospectus contained therein is not available for the issuance of the Warrant Shares to the Holder and all of the Warrant Shares are not then registered for resale by Holder into the market at market prices from time to time on an effective registration statement for use on a continuous basis (or the prospectus contained therein is not available for use), then this Warrant may also be exercised, in whole or in part, at such time by means of a “cashless exercise” in which the Holder shall be entitled to receive a certificate for the number of Warrant Shares equal to the quotient obtained by dividing [(A-B) (X)] by (A), where:
(A) = the VWAP on the Trading Day immediately preceding the date on which Holder elects to exercise this Warrant by means of a “cashless exercise,” as set forth in the applicable Notice of Exercise;
(B) = the Exercise Price of this Warrant, as adjusted hereunder; and
(X) = the number of Warrant Shares that would be issuable upon exercise of this Warrant in accordance with the terms of this Warrant if such exercise were by means of a cash exercise rather than a cashless exercise.
(d)
Mechanics of Exercise.
i.
Delivery of Certificates Upon Exercise. Certificates for shares purchased hereunder shall be transmitted by the Transfer Agent to the Holder by crediting the account of the Holder’s prime broker with the Depository Trust Company through its Deposit Withdrawal Agent Commission (“DWAC”) system if the Company is then a participant in such system and there is an effective Registration Statement permitting the issuance of the Warrant Shares to or resale of the Warrant Shares by Holder, and otherwise by physical delivery to the address specified by the Holder in the Notice of Exercise by the date that is three (3) Trading Days after the latest of (A) the delivery to the Company of the Notice of Exercise Form, (B) surrender of this Warrant (if required) and (C) payment of the aggregate Exercise Price as set forth above (such date, the “Warrant Share Delivery Date”). This Warrant shall be deemed to have been exercised on the first date on which all of the foregoing have been delivered to the Company. The Warrant Shares shall be deemed to have been issued, and Holder or any other person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the Warrant has been exercised, with payment to the Company of the Exercise Price and all taxes required to be paid by the Holder, if any, pursuant to Section 2(c)(v) prior to the issuance of such shares, having been paid.
ii.
Delivery of New Warrants Upon Exercise. If this Warrant shall have been exercised in part, the Company shall, at the request of a Holder and upon surrender of this Warrant certificate, at the time of delivery of the certificate or certificates representing Warrant Shares, deliver to Holder a new Warrant evidencing the rights of Holder to purchase the
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unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.
iii.
Rescission Rights. If the Company fails to cause the Transfer Agent to transmit to the Holder a certificate or the certificates representing the Warrant Shares pursuant to Section 2(c)(i) by the Warrant Share Delivery Date, then, the Holder will have the right to rescind such exercise.
iv.
No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. As to any fraction of a share which the Holder would otherwise be entitled to purchase upon such exercise, 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 Exercise Price or round up to the next whole share.
v.
Charges, Taxes and Expenses. Issuance of certificates for Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided, however, that in the event certificates for Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto.
vi.
Closing of Books. The Company will not close its stockholder books or records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof.
(e)
Holder’s Exercise Limitations. The Company shall not effect any exercise of this Warrant, and a Holder shall not have the right to exercise any portion of this Warrant, pursuant to Section 2 or otherwise, to the extent that after giving effect to such issuance after exercise as set forth on the applicable Notice of Exercise, the Holder (together with the Holder’s Affiliates, and any other Persons acting as a group together with the Holder or any of the Holder’s Affiliates), would beneficially own in excess of the Beneficial Ownership Limitation (as defined below). For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which such determination is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (i) exercise of the remaining, nonexercised portion of this Warrant beneficially owned by the Holder or any of its Affiliates and (ii) exercise or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any other Common Stock Equivalents) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its Affiliates. Except as set forth in the preceding sentence, for purposes of this Section 2(d), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder, it being acknowledged by the Holder that
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the Company is not representing to the Holder that such calculation is in compliance with Section 13(d) of the Exchange Act and the Holder is solely responsible for any schedules required to be filed in accordance therewith. To the extent that the limitation contained in this Section 2(d) applies, the determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates) and of which portion of this Warrant is exercisable shall be in the sole discretion of the Holder, and the submission of a Notice of Exercise shall be deemed to be the Holder’s determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates) and of which portion of this Warrant is exercisable, in each case subject to the Beneficial Ownership Limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination. Upon the written or oral request of a Holder, the Company shall within two Business 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 Warrant, 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 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon exercise of this Warrant. The Holder, upon not less than 61 days’ prior notice to the Company, may increase or decrease the Beneficial Ownership Limitation provisions of this Section 2(d), provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock upon exercise of this Warrant held by the Holder and the provisions of this Section 2(d) shall continue to apply. Any such increase or decrease will not be effective until the 61st day after such notice is delivered to the Company. The provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 2(d) 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 Warrant.
3.
Certain Adjustments.
(a)
Stock Dividends and Splits. If the Company, at any time while this Warrant is outstanding: (i) pays a stock dividend or otherwise makes a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in shares of Common Stock (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company upon exercise of this Warrant or any other warrant or option issued by the Company), (ii) subdivides outstanding shares of Common Stock into a larger number of shares, (iii) combines (including by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares, or (iv) issues by reclassification of shares of the Common Stock any shares of capital stock of the Company, then in each case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event, and the number of shares issuable upon exercise of this Warrant shall be proportionately adjusted such that the aggregate Exercise Price of this
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Warrant shall remain unchanged. Any adjustment made pursuant to this Section 3(a) 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)
Pro Rata Distributions. If the Company, at any time while this Warrant is outstanding, shall distribute to all holders of Common Stock (and not to the Holders) evidences of its indebtedness or assets (including cash and cash dividends other than regular cash dividends paid out of earnings or earned surplus, determined in accordance with GAAP) or rights or warrants to subscribe for or purchase any security other than the Common Stock), then in each such case the Exercise Price shall be adjusted by multiplying the Exercise Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the VWAP determined as of the record date mentioned above, and of which the numerator shall be such VWAP on such record date less the then per share fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of the Common Stock as determined by the Board of Directors in good faith. In either case the adjustments shall be described in a statement provided to the Holder of the portion of assets or evidences of indebtedness so distributed or such subscription rights applicable to one share of Common Stock. Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date mentioned above.
(c)
Fundamental Transaction. If, at any time while this Warrant is outstanding, (i) the Company, directly or indirectly, in one or more related transactions effects any merger or consolidation of the Company with or into another Person, (ii) the Company, directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Stock, (iv) the Company, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or recapitalization 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, (v) the Company, directly or indirectly, in one or more related transactions consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person whereby such other Person acquires more than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock or share purchase agreement or other business combination) (each a “Fundamental Transaction”), then, upon any subsequent exercise of this Warrant, the Holder shall have the right to receive, for each Warrant Share that would have been issuable upon such exercise immediately prior to the occurrence of such Fundamental Transaction, at the option of the Holder (without regard to any limitation in Section 2(d) on the exercise of this Warrant), the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and any additional consideration (the “Alternate Consideration”) receivable as a
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result of such Fundamental Transaction by a holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such Fundamental Transaction (without regard to any limitation in Section 2(d) on the exercise of this Warrant). For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Exercise Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common 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 exercise of this Warrant following such Fundamental Transaction. .
(d)
Calculations. All calculations under this Section 3 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 3, 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.
(e)
Notice to Holder.
i.
Adjustment to Exercise Price. Whenever the Exercise Price is adjusted pursuant to any provision of this Section 3, the Company shall promptly mail to the Holder a notice setting forth the Exercise Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment.
ii.
Notice to Allow Exercise 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 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, or 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 mailed to the Holder at its last address as it shall appear upon the Warrant Register of the Company, at least 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
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share exchange; provided that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. To the extent that any notice provided hereunder constitutes, or contains, material, non-public information regarding the Company or any of the Subsidiaries, the Company shall simultaneously file such notice with the Commission pursuant to a Current Report on Form 8-K. The Holder shall remain entitled to exercise this Warrant during the period commencing on the date of such notice to the effective date of the event triggering such notice except as may otherwise be expressly set forth herein.
4.
Transfer of Warrant.
(a)
Transferability. This Warrant and all rights hereunder (including, without limitation, any registration rights) are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company or its designated agent, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees, as applicable, and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. The Warrant, if properly assigned in accordance herewith, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued.
(b)
New Warrants. This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 4(a), as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. All Warrants issued on transfers or exchanges shall be dated the initial issuance date set forth on the first page of this Warrant and shall be identical with this Warrant except as to the number of Warrant Shares issuable pursuant thereto.
(c)
Warrant Register. The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the “Warrant Register”), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary.
(d)
Understandings or Arrangements.
Such Holder is acquiring this Warrant as principal for its own account and has no direct or indirect arrangement or understandings with any other persons to distribute or regarding the distribution of such Warrant (this representation and warranty not limiting such Holder’s right to sell the Warrant pursuant to the Registration Statement or otherwise in compliance with applicable federal and state securities laws.) Such Holder is acquiring this Warrant hereunder in the ordinary course of its business.
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5.
Miscellaneous.
(a)
No Rights as Stockholder Until Exercise. This Warrant does not entitle the Holder to any voting rights, dividends or other rights as a stockholder of the Company prior to the exercise hereof as set forth in Section 2(c)(i).
(b)
Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall include the posting of a bond if reasonably required by the Company), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate.
(c)
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.
(d)
Authorized Shares. The Company covenants that, during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the Trading Market upon which the Common Stock may be listed. The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant and payment for such Warrant Shares in accordance herewith, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges created by the Company in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue).
(e)
No Impairment. Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment.
(f)
Jurisdiction. This Agreement shall be governed by and construed in accrodance with the laws of the State of Delaware, without reference to conflict of laws provisions.
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(g)
Restrictions. The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered, will have restrictions upon resale imposed by state and federal securities laws. Under no circumstances will this warrant be settled on a net cash basis.
(h)
Nonwaiver and Expenses. No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice Holder’s rights, powers or remedies. Without limiting any other provision of this Warrant or the Purchase Agreement, if the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys’ fees, including those of appellate proceedings, incurred by Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder.
(i)
Notices. All notices, requests, demands and other communications provided for herein shall be in writing, shall be delivered facsimile transmission (with printed confirmation of receipt); shall be deemed given when received; and shall be addressed to the Company at its principal corporate offices and to the Holder at the address on the Company's records, or to such other persons or addresses as the relevant party shall designate as to itself from time to time in writing delivered in like manner.
(j)
Successors and Assigns. Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors and permitted assigns of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of any Holder from time to time of this Warrant and shall be enforceable by the Holder or holder of Warrant Shares.
(k)
Amendment. This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company and Holder.
********************
(Signature Pages Follow)
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IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized as of the date first above indicated.
DIVERSIFIED OPPORTUNITIES, INC. |
By:__________________________________________ Scott Lantz Chief Executive Officer |
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NOTICE OF EXERCISE
TO:
DIVERSIFIED OPPORTUNITIES, INC.
(1)
The undersigned hereby elects to purchase ________ Warrant Shares of the Company pursuant to the terms of the attached Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any. Payment shall take be in lawful money of the United States
(2)
Please issue a certificate or certificates representing said Warrant Shares in the name of the undersigned or in such other name as is specified below:
_______________________________
The Warrant Shares shall be delivered to the following DWAC Account Number or by physical delivery of a certificate to:
_______________________________
_______________________________
_______________________________
[SIGNATURE OF HOLDER]
Name of Investing Entity: _______________________________________________________
Signature of Authorized Signatory of Investing Entity: _________________________________
Name of Authorized Signatory: ___________________________________________________
Title of Authorized Signatory: ____________________________________________________
Date:_________________________________________________________________________
W02-WEST:6JAM1\403524281.1 | -12- |
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ASSIGNMENT FORM
(To assign the foregoing warrant, execute
this form and supply required information.
Do not use this form to exercise the warrant.)
FOR VALUE RECEIVED, [____] all of or [_______] shares of the foregoing Warrant and all rights evidenced thereby are hereby assigned to
_______________________________________________ whose address is
_______________________________________________________________.
_______________________________________________________________
Dated: ______________, _______
Holder’s Signature:
_____________________________
Holder’s Address:
_____________________________
_____________________________
Signature Guaranteed: ___________________________________________
NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank or trust company. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.
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THIS WARRANT, AND ALL SHARES OF STOCK ISSUABLE UNDER THIS WARRANT, HAVE BEEN AND WILL BE ISSUED WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM.
COMMON STOCK PURCHASE WARRANT
DIVERSIFIED OPPORTUNITIES, INC.
Warrant Shares: ________
Issue Date: May __, 2011
THIS COMMON STOCK PURCHASE WARRANT (the “Warrant”) certifies that, for value received, ______________________ (the “Holder”) is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after Issue Date above and on or prior to the close of business on the third anniversary of the Initial Exercise Date (the “Termination Date”) but not thereafter, to subscribe for and purchase from Diversified Opportunities, Inc., a Delaware corporation (the “Company”), up to _________ shares (the “Warrant Shares”) of Common Stock. The purchase price of one share of Common Stock under this Warrant shall be equal to the Exercise Price, as defined in Section 2(b).
1.
Definitions. As used in this Agreement, the following terms shall have the meanings ascribed below:
"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 of 1933, as amended.
"Business Days" 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 New York are authorized or required by law or other governmental action to close.
"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.
"Trading Market" means any of the following markets or exchanges on which the Common Stock is listed or quoted for trading on the date in question: the NYSE AMEX, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, or the New York Stock Exchange (or any successors to any of the foregoing).
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"Transfer Agent" means any transfer agent hired by the Company to hold and maintain the Company's register for holders of its Common Stock.
“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 4:00 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 for trading on the OTC Bulletin Board and if prices for the Common Stock are then reported in the “Pink Sheets” published by Pink OTC Markets, Inc. (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 Holders 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.
2.
Exercise.
(a)
Exercise of Warrant. This Warrant may be exercised, in whole or in part, at any time or times on or after the Issue Date and on or before the Termination Date by delivery to the Company (or such other office or agency of the Company as it may designate by notice in writing to the registered Holder at the address of the Holder appearing on the books of the Company) of (1) a duly executed facsimile copy of the Notice of Exercise Form annexed hereto and (2) delivering payment of the aggregate Exercise Price of the shares purchased in the Notice of Exercise Form by wire transfer or cashier’s check drawn on a United States bank. The Holder shall not be required to physically surrender this Warrant to the Company until the Holder has purchased all of the Warrant Shares available hereunder and the Warrant has been exercised in full, in which case, the Holder shall surrender this Warrant to the Company for cancellation. Partial exercises of this Warrant resulting in purchases of a portion of the total number of Warrant Shares available hereunder shall have the effect of lowering the outstanding number of Warrant Shares purchasable hereunder in an amount equal to the applicable number of Warrant Shares purchased. The Holder and the Company shall maintain records showing the number of Warrant Shares purchased and the date of such purchases. The Company shall deliver any objection to any Notice of Exercise Form within two Business Days of receipt of such notice. In the event of any dispute or discrepancy, the records of the Holder shall be controlling and determinative in the absence of manifest error. The Holder and any assignee, by acceptance of this Warrant, acknowledge and agree that, by reason of the provisions of this paragraph, following the purchase of a portion of the Warrant Shares hereunder, the number of Warrant Shares available for purchase hereunder at any given time may be less than the amount stated on the face hereof.
(b)
Exercise Price. The exercise price per share of the Common Stock under this Warrant shall be $1.25, subject to adjustment hereunder (the “Exercise Price”).
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(c)
Mechanics of Exercise.
i.
Delivery of Certificates Upon Exercise. Certificates for shares purchased hereunder shall be transmitted by the Transfer Agent to the Holder by crediting the account of the Holder’s prime broker with the Depository Trust Company through its Deposit Withdrawal Agent Commission (“DWAC”) system if the Company is then a participant in such system and there is an effective Registration Statement permitting the issuance of the Warrant Shares to or resale of the Warrant Shares by Holder, and otherwise by physical delivery to the address specified by the Holder in the Notice of Exercise by the date that is three (3) Trading Days after the latest of (A) the delivery to the Company of the Notice of Exercise Form, (B) surrender of this Warrant (if required) and (C) payment of the aggregate Exercise Price as set forth above (such date, the “Warrant Share Delivery Date”). This Warrant shall be deemed to have been exercised on the first date on which all of the foregoing have been delivered to the Company. The Warrant Shares shall be deemed to have been issued, and Holder or any other person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the Warrant has been exercised, with payment to the Company of the Exercise Price and all taxes required to be paid by the Holder, if any, pursuant to Section 2(c)(v) prior to the issuance of such shares, having been paid.
ii.
Delivery of New Warrants Upon Exercise. If this Warrant shall have been exercised in part, the Company shall, at the request of a Holder and upon surrender of this Warrant certificate, at the time of delivery of the certificate or certificates representing Warrant Shares, deliver to Holder a new Warrant evidencing the rights of Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.
iii.
Rescission Rights. If the Company fails to cause the Transfer Agent to transmit to the Holder a certificate or the certificates representing the Warrant Shares pursuant to Section 2(c)(i) by the Warrant Share Delivery Date, then, the Holder will have the right to rescind such exercise.
iv.
No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. As to any fraction of a share which the Holder would otherwise be entitled to purchase upon such exercise, 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 Exercise Price or round up to the next whole share.
v.
Charges, Taxes and Expenses. Issuance of certificates for Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided, however, that in the event certificates for Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto.
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vi.
Closing of Books. The Company will not close its stockholder books or records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof.
(d)
Holder’s Exercise Limitations. The Company shall not effect any exercise of this Warrant, and a Holder shall not have the right to exercise any portion of this Warrant, pursuant to Section 2 or otherwise, to the extent that after giving effect to such issuance after exercise as set forth on the applicable Notice of Exercise, the Holder (together with the Holder’s Affiliates, and any other Persons acting as a group together with the Holder or any of the Holder’s Affiliates), would beneficially own in excess of the Beneficial Ownership Limitation (as defined below). For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which such determination is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (i) exercise of the remaining, nonexercised portion of this Warrant beneficially owned by the Holder or any of its Affiliates and (ii) exercise or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any other Common Stock Equivalents) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its Affiliates. Except as set forth in the preceding sentence, for purposes of this Section 2(d), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder, it being acknowledged by the Holder that the Company is not representing to the Holder that such calculation is in compliance with Section 13(d) of the Exchange Act and the Holder is solely responsible for any schedules required to be filed in accordance therewith. To the extent that the limitation contained in this Section 2(d) applies, the determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates) and of which portion of this Warrant is exercisable shall be in the sole discretion of the Holder, and the submission of a Notice of Exercise shall be deemed to be the Holder’s determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates) and of which portion of this Warrant is exercisable, in each case subject to the Beneficial Ownership Limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination. Upon the written or oral request of a Holder, the Company shall within two Business 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 Warrant, 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 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon exercise of this Warrant. The Holder, upon not less than 61 days’ prior notice to the Company, may increase or decrease the Beneficial Ownership Limitation provisions of this Section 2(d), provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock upon exercise of this Warrant held by the Holder and the provisions of this Section 2(d) shall continue to apply. Any such increase or decrease will not be effective until the 61st day after such notice is delivered to the Company. The provisions of this paragraph shall be construed and
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implemented in a manner otherwise than in strict conformity with the terms of this Section 2(d) 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 Warrant.
3.
Certain Adjustments.
(a)
Stock Dividends and Splits. If the Company, at any time while this Warrant is outstanding: (i) pays a stock dividend or otherwise makes a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in shares of Common Stock (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company upon exercise of this Warrant or any other warrant or option issued by the Company), (ii) subdivides outstanding shares of Common Stock into a larger number of shares, (iii) combines (including by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares, or (iv) issues by reclassification of shares of the Common Stock any shares of capital stock of the Company, then in each case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event, and the number of shares issuable upon exercise of this Warrant shall be proportionately adjusted such that the aggregate Exercise Price of this Warrant shall remain unchanged. Any adjustment made pursuant to this Section 3(a) 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)
Pro Rata Distributions. If the Company, at any time while this Warrant is outstanding, shall distribute to all holders of Common Stock (and not to the Holders) evidences of its indebtedness or assets (including cash and cash dividends other than regular cash dividends paid out of earnings or earned surplus, determined in accordance with GAAP) or rights or warrants to subscribe for or purchase any security other than the Common Stock), then in each such case the Exercise Price shall be adjusted by multiplying the Exercise Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the VWAP determined as of the record date mentioned above, and of which the numerator shall be such VWAP on such record date less the then per share fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of the Common Stock as determined by the Board of Directors in good faith. In either case the adjustments shall be described in a statement provided to the Holder of the portion of assets or evidences of indebtedness so distributed or such subscription rights applicable to one share of Common Stock. Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date mentioned above.
(c)
Fundamental Transaction. If, at any time while this Warrant is outstanding, (i) the Company, directly or indirectly, in one or more related transactions effects any merger or consolidation of the Company with or into another Person, (ii) the Company,
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directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Stock, (iv) the Company, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or recapitalization 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, (v) the Company, directly or indirectly, in one or more related transactions consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person whereby such other Person acquires more than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock or share purchase agreement or other business combination) (each a “Fundamental Transaction”), then, upon any subsequent exercise of this Warrant, the Holder shall have the right to receive, for each Warrant Share that would have been issuable upon such exercise immediately prior to the occurrence of such Fundamental Transaction, at the option of the Holder (without regard to any limitation in Section 2(d) on the exercise of this Warrant), the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and any additional consideration (the “Alternate Consideration”) receivable as a result of such Fundamental Transaction by a holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such Fundamental Transaction (without regard to any limitation in Section 2(d) on the exercise of this Warrant). For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Exercise Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common 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 exercise of this Warrant following such Fundamental Transaction. .
(d)
Calculations. All calculations under this Section 3 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 3, 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.
(e)
Notice to Holder.
i.
Adjustment to Exercise Price. Whenever the Exercise Price is adjusted pursuant to any provision of this Section 3, the Company shall promptly mail to the Holder a notice setting forth the Exercise Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment.
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ii.
Notice to Allow Exercise 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 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, or 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 mailed to the Holder at its last address as it shall appear upon the Warrant Register of the Company, at least 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 mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. To the extent that any notice provided hereunder constitutes, or contains, material, non-public information regarding the Company or any of the Subsidiaries, the Company shall simultaneously file such notice with the Commission pursuant to a Current Report on Form 8-K. The Holder shall remain entitled to exercise this Warrant during the period commencing on the date of such notice to the effective date of the event triggering such notice except as may otherwise be expressly set forth herein.
4.
Transfer of Warrant.
(a)
Transferability. This Warrant and all rights hereunder (including, without limitation, any registration rights) are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company or its designated agent, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees, as applicable, and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. The Warrant, if properly assigned in accordance herewith, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued.
(b)
New Warrants. This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a
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written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 4(a), as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. All Warrants issued on transfers or exchanges shall be dated the initial issuance date set forth on the first page of this Warrant and shall be identical with this Warrant except as to the number of Warrant Shares issuable pursuant thereto.
(c)
Warrant Register. The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the “Warrant Register”), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary.
(d)
Understandings or Arrangements.
Such Holder is acquiring this Warrant as principal for its own account and has no direct or indirect arrangement or understandings with any other persons to distribute or regarding the distribution of such Warrant (this representation and warranty not limiting such Holder’s right to sell the Warrant pursuant to the Registration Statement or otherwise in compliance with applicable federal and state securities laws.) Such Holder is acquiring this Warrant hereunder in the ordinary course of its business.
5.
Miscellaneous.
(a)
No Rights as Stockholder Until Exercise. This Warrant does not entitle the Holder to any voting rights, dividends or other rights as a stockholder of the Company prior to the exercise hereof as set forth in Section 2(c)(i).
(b)
Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall include the posting of a bond if reasonably required by the Company), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate.
(c)
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.
(d)
Authorized Shares. The Company covenants that, during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the Trading Market upon
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which the Common Stock may be listed. The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant and payment for such Warrant Shares in accordance herewith, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges created by the Company in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue).
(e)
No Impairment. Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment.
(f)
Jurisdiction. This Agreement shall be governed by and construed in accordance with the laws of the State of California, without reference to conflict of laws provisions.
(g)
Restrictions. The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered, will have restrictions upon resale imposed by state and federal securities laws. Under no circumstances will this warrant be settled on a net cash basis.
(h)
Nonwaiver and Expenses. No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice Holder’s rights, powers or remedies. Without limiting any other provision of this Warrant or the Purchase Agreement, if the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys’ fees, including those of appellate proceedings, incurred by Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder.
(i)
Notices. All notices, requests, demands and other communications provided for herein shall be in writing, shall be delivered facsimile transmission (with printed confirmation of receipt); shall be deemed given when received; and shall be addressed to the Company at its principal corporate offices and to the Holder at the address on the Company's records, or to such other persons or addresses as the relevant party shall designate as to itself from time to time in writing delivered in like manner.
(j)
Successors and Assigns. Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors and permitted assigns of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of
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any Holder from time to time of this Warrant and shall be enforceable by the Holder or holder of Warrant Shares.
(k)
Amendment. This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company and Holder.
********************
(Signature Pages Follow)
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IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized as of the date first above indicated.
DIVERSIFIED OPPORTUNITIES, INC. |
By:__________________________________________ Scott Lantz Chief Executive Officer |
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NOTICE OF EXERCISE
TO:
DIVERSIFIED OPPORTUNITIES, INC.
(1)
The undersigned hereby elects to purchase ________ Warrant Shares of the Company pursuant to the terms of the attached Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any. Payment shall take be in lawful money of the United States
(2)
Please issue a certificate or certificates representing said Warrant Shares in the name of the undersigned or in such other name as is specified below:
_______________________________
The Warrant Shares shall be delivered to the following DWAC Account Number or by physical delivery of a certificate to:
_______________________________
_______________________________
_______________________________
[SIGNATURE OF HOLDER]
Name of Investing Entity: _______________________________________________________
Signature of Authorized Signatory of Investing Entity: _________________________________
Name of Authorized Signatory: ___________________________________________________
Title of Authorized Signatory: ____________________________________________________
Date:_________________________________________________________________________
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ASSIGNMENT FORM
(To assign the foregoing warrant, execute
this form and supply required information.
Do not use this form to exercise the warrant.)
FOR VALUE RECEIVED, [____] all of or [_______] shares of the foregoing Warrant and all rights evidenced thereby are hereby assigned to
_______________________________________________ whose address is
_______________________________________________________________.
_______________________________________________________________
Dated: ______________, _______
Holder’s Signature:
_____________________________
Holder’s Address:
_____________________________
_____________________________
Signature Guaranteed: ___________________________________________
NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank or trust company. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.
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THE SECURITIES REPRESENTED BY THIS INSTRUMENT AND THE SHARES ISSUABLE ON EXERCISE OF THIS INSTRUMENT HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”) OR ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
CONVERTIBLE PROMISSORY NOTE
January 11, 2010
$_________ San Francisco, California
1. Principal and Interest.
1.1
FOR VALUE RECEIVED, Simple Earth, Inc., a California corporation (the "Company"), hereby promises to pay to ____________("Lender") the principal sum of ________________ on the earlier of December 31, 2015 (“Due Date”) or upon Lender's demand made any time after December 31, 2012 (“Demand Date”) at the offices of the Company, or at such other address as Lender may specify in writing, unless converted into shares of the Company’s Common Stock as provided for in Section 1.3 below. If no demand or conversion shall be made or occur prior to December 31, 2015, principal of this note shall on such date be due and payable in full, together with all interest accrued but unpaid as of such date.
1.2 Interest on this Note shall be payable as follows:
a) Mandatory Interest: Mandatory Interest shall accrue at the rate of fourteen percent (14%) simple interest from the date hereof until the date principal is paid or converted as provided herein. Mandatory Interest shall be payable in arrears on or before the tenth (10th) day of each month, commencing March 1, 2010, and continuing each month until principal is paid in full, or until this Note is converted, whichever shall first occur; and
b) Bonus Interest: In addition to Mandatory Interest, the Company shall pay Lender Bonus Interest for each complete calendar year this Note is outstanding, beginning in 2010, in the amount which shall be equal to TWO percent (2.00%) of the Company’s Earnings Before Interest, Depreciation, Taxes and Amortization (“EBIDTA”), if any, for each calendar year.
1
EBIDTA shall be computed on the basis of Generally Accepted Accounting Principles consistently applied as determined by the Company’s auditor appointed for the applicable calendar year. Bonus interest shall be payable on or before March 15 of the year following the year for which Bonus Interest is being calculated.
1.3
The Lender may elect, in its sole discretion, to convert the principal amount of this Note (the “Conversion”) into shares of the Company’s Common Stock. The number of shares issuable upon conversion of this Note shall be _______________, subject to adjustment for any stock split, reverse stock split or other similar event affecting the Company’s Common Stock (the “Conversion Shares”), which shall be equal to ____ percent (___%) of the Company’s issued and outstanding Common Stock as of the Completion Date (as defined in the Sale Agreement). The price per share of the Conversion Shares shall be Two Dollars Seventy Cents ($2.70).
Upon the Conversion, Lender shall tender this Note to the Company for cancellation. Upon the Conversion, the Company shall pay to the Lender all accrued and unpaid interest on the principal amount of this Note in cash or by check.
1.4
The Company shall pay to the Lender, within Fifteen (15) days following the Demand Date or the Due Date, as applicable, the following amounts: (a) the then unpaid principal amount of this Note; and (b) all accrued and unpaid interest on the principal amount of this Note through the Demand Date or Due Date, as applicable; provided however that if on such date Bonus Interest has been accrued but is unpaid, such Bonus Interest shall be paid on or before the due date for such Bonus Interest as specified in paragraph 1.2(b) above.
1.5 In the event that the Lender elects to convert the principal of this Note into the Securities as provided for in Section 1.3 above, then the certificate representing such shares of the Company’s Common Stock shall be issued and delivered by the Company within fifteen (15) days of the Conversion to the Lender’s address on the Company’s records or to such other address as the Lender may designate in writing.
2. Representations and Warranties of the Company. The Company hereby covenants and agrees that the Conversion Shares which may be issued upon the Conversion will, upon issuance, be duly authorized and validly issued.
2
3. Representations and Warranties of the Lender. The Lender hereby represents and warrants that:
3.1 Authorization. The Lender has full power and authority to purchase this Note.
3.2 Purchase Entirely for Own Account. This Note is being issued to the Lender by the Company in reliance upon such Lender’s representation to the Company, which by such Lender’s execution of this Note, such Lender hereby confirms, that the Note to be issued to the Lender and the Common Stock issuable upon conversion thereof (collectively, the "Securities") will be acquired for investment for such Lender's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that such Lender has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Note, the Lender further represents that such Lender does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Securities.
3.3 Reliance Upon Lenders' Representations. The Lender understands that the Note, and the Securities acquired on conversion thereof, may not be, registered under the Securities Act on the ground that the sale of securities reflected by this Note and issuance of Securities upon conversion of the Note are exempt from registration under the Securities Act pursuant to section 4(2) thereof, and that the Company's reliance on such exemption is based on the Lenders' representations set forth herein.
3.4 Receipt of Information. The Lender acknowledges and agrees that it has received all the information it considers necessary or appropriate for deciding whether to purchase the Note and Securities. The Lender further represents that it has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Note and the business, properties, prospects and financial condition of the Company and to obtain additional information (to the extent the Company possessed such information or could acquire it without unreasonable effort or expense) necessary to verify the accuracy of any information furnished to it or to which it had access.
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3.5 Investment Experience. The Lender is experienced in evaluating and investing in securities of companies in the development stage and acknowledges that it is able to fend for itself, can bear the economic risk of its investment, and has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the investment in the Note and the Securities to be issued upon conversion of the Note. If other than an individual, Lender also represents it has not been organized for the purpose of acquiring the Notes or the Securities to be issued upon conversion of the Note.
3.6 Accredited Investor.
(a) The term "Accredited Investor" as used herein refers to:
(i) A person or entity who is a director or executive officer of the Company;
(ii) Any bank as defined in section 3(a)(2) of the Act, or any savings and loan association or other institution as defined in section 3(a)(5)(A) of the Act whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to section 15 of the Securities Exchange Act of 1934; insurance company as defined in section 2(13) of the Act; any investment company registered under the Investment Company Act of 1940 or a business development company as defined in section 2(a)(48) of that Act; any Small Business Investment Company licensed by the U.S. Small Business Administration under section 301(c) or (d) of the Small Business Investment Act of 1958; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5,000,000; any employee benefit plan within the meaning of Title I of the Employee Retirement Income Security Act of 1974, if the investment decision is made by a plan fiduciary, as defined in section 3(21) of such Act, which is either a bank, savings and loan association, insurance company or registered investment adviser, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a
4
self-directed plan, with investment decisions made solely by persons that are accredited investors;
(iii) Any private business development company as defined in section 202(a)(22) of the Investment Advisers Act of 1940;
(iv) Any organization described in section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000;
(v) Any natural person whose individual net worth, or joint net worth with that person's spouse, at the time of his purchase exceeds $1,000,000;
(vi) Any natural person who had an individual income in excess of $200,000 in each of the two (2) most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year;
(vii) Any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a person who has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment; or
(viii) Any entity in which all of the equity owners are accredited investors.
As used in this Section 3.6(a), the term "net worth" means the excess of total assets over total liabilities. For the purpose of determining a person's net worth, the principal residence owned by an individual should be valued at fair market value, including the cost of improvements, net of current encumbrances. As used in this Section 3.6(a), "income" means actual economic income, which may differ from adjusted gross income for income tax purposes. Accordingly, the undersigned should consider whether it should add any or all of the following items to its adjusted gross income for income tax
5
purposes in order to reflect more accurately its actual economic income: any amounts attributable to tax-exempt income received, losses claimed as a limited partner in any limited partnership, deductions claimed for depletion, contributions to an IRA or Keogh retirement plan, and alimony payments.
(b) The Lender represents and warrants that except as otherwise disclosed to the Company, in writing, prior to its execution hereof, such Lender is either:
(i) an Accredited Investor; or
(ii) not an Accredited Investor and neither such Lender nor any beneficiary of any trust or any investment client for whose account such Lender is purchasing is a citizen or resident of the United States or Canada, or any state, territory or possession thereof, including but not limited to any estate of any such person, or any corporation, partnership, trust or other entity created or existing under the laws thereof, or any entity controlled or owned by any of the foregoing (a "U.S. Person").
3.7 Restricted Securities. The Lender understands that the Note (and the Securities to be issued upon conversion thereof) may not be sold, transferred or otherwise disposed of without registration under the Securities Act or an exemption therefrom, and that in the absence of an effective registration statement covering the Note (or the Securities to be issued on conversion thereof) or an available exemption from registration under the Securities Act, the Note (and any Securities to be issued on conversion thereof) must be held indefinitely. In particular, the Lender is aware that the Note (and any Securities to be issued on conversion thereof) may not be sold pursuant to Rule 144 promulgated under the Securities Act unless all of the conditions of that Rule are met. Among the conditions for use of Rule 144 is the availability of current information to the public about the Company. Such information is not now available and the Company has no present plans to make such information available.
3.8 Legends.
To the extent applicable, each certificate or other document evidencing the Note or any Securities to be issued upon conversion thereof shall be endorsed with the legends set forth below, and the Lender covenants that, except to the extent such restrictions are waived by the Company, such
6
Lender shall not transfer the shares represented by any such certificate without complying with the restrictions on transfer described in the legends endorsed on such certificate:
(a) The following legend under the Act:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE, AND MAY BE OFFERED AND SOLD ONLY IF REGISTERED AND QUALIFIED PURSUANT TO THE RELEVANT PROVISIONS OF FEDERAL AND STATE SECURITIES LAWS OR IF THE COMPANY IS PROVIDED AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION AND QUALIFICATION UNDER FEDERAL AND STATE SECURITIES LAWS IS NOT REQUIRED."
(b) In the case of a Lender that is not a U.S. Person and is not an Accredited Investor:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AND MAY NOT BE TRANSFERRED OR OTHERWISE DISPOSED OF PRIOR TO ONE YEAR FROM THE DATE OF THE CLOSING AT WHICH SUCH SHARES WERE PURCHASED, WITHIN THE UNITED STATES, CANADA, THEIR TERRITORIES AND POSSESSIONS OR ANY AREA SUBJECT TO THEIR JURISDICTION OR TO ANY CITIZEN OR RESIDENT OF THE UNITED STATES OR CANADA, OR ANY STATE, TERRITORY OR POSSESSION THEREOF, INCLUDING ANY ESTATE OF SUCH PERSON OR ANY CORPORATION, PARTNERSHIP, TRUST OR OTHER ENTITY CREATED OR EXISTING UNDER THE LAWS THEREOF, AND THEREAFTER MAY NOT BE SO TRANSFERRED ABSENT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR COMPLIANCE WITH RULE 144 PROMULGATED UNDER SUCH ACT, OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED."
4. Attorney's Fees. If the indebtedness represented by this Note or any part thereof is collected in bankruptcy, receivership or other judicial proceedings or if this Note is placed in the hands of attorneys for collection after default, Company agrees to pay, in addition to the principal and interest payable hereunder, reasonable attorneys' fees and costs incurred by the Lender.
5. No Voting or Dividend Rights. Nothing contained in
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this Note shall be construed as conferring upon the Lender hereof the right to vote or to consent or to receive notice as a shareholder of the Company or any other matters or any rights whatsoever as a shareholder of the Company.
6. Assignment. This note may be assigned, in whole but not in part, by the original Lender subject to the approval of such assignment by the Company’s Board of Directors, which consent shall not be reasonably withheld. Upon such assignment the assignee thereof shall thereafter be deemed to be the Lender.
7. Notices. Any notice, other communication or payment required or permitted hereunder shall be in writing and shall be deemed to have been given upon delivery if personally delivered or three business days after deposit if deposited in the United States mail for mailing by certified mail, postage prepaid, and addressed as follows:
If to Lender:
____________________
____________________
____________________
If to Company:
_____________________
_____________________
_____________________
Each of the above addressees may change its address for purposes of this paragraph by giving to the other addressee notice of such new address in conformance with this paragraph.
8. Governing Law. This Note is being delivered in and shall be construed in accordance with the laws of the State of California, without regard to the conflicts of laws provisions thereof.
8
IN WITNESS WHEREOF, Simple Earth, Inc. has caused this Note to be executed in its corporate name and this Note to be dated, issued and delivered, all on the date first above written.
SIMPLE EARTH, INC.
By
_________________
Scott Lantz, CEO
Lender- As to Paragraph Three Hereof:
_____________________________________
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10
IN WITNESS WHEREOF, Simple Earth, Inc. has caused this Note to be executed in its corporate name and this Note to be dated, issued and delivered, all on the date first above written.
SIMPLE EARTH, INC.
By
COPY_________________
Scott Lantz, CEO
Lender- As to Paragraph Three Hereof:
_____________________________________
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Simple Earth, Inc.
UP TO $1,000,000
CONVERTIBLE 14% PROMISSORY NOTES
SUBSCRIPTION AGREEMENT
This document should be read and responded to in its entirety. (Please Type or Print in Ink)
Subscriber
Full Name:
___________________
___________________
Subscription Amount:
_______________
The exact spelling of the name(s) to be on the certificate representing the shares issued upon conversion:
Same as above
GENERAL INSTRUCTIONS FOR SUBSCRIBERS
IF, AFTER YOU HAVE CAREFULLY REVIEWED COMPANY'S CONFIDENTIAL DISCLOSURE DOCUMENTS (THE “DISCLOSURE DOCUMENTS”) AND ALL OTHER MATERIALS PROVIDED TO YOU BY SIMPLE EARTH, INC., (THE “COMPANY”), YOU WISH TO SUBSCRIBE TO PURCHASE THE COMPANY’S CONVERTIBLE
1
PROMISSORY NOTES (THE “NOTES”), PLEASE FOLLOW CAREFULLY THE INSTRUCTIONS BELOW.
THE INFORMATION REQUESTED IN THIS SUBSCRIPTION AGREEMENT IS REQUIRED IN CONNECTION WITH THE COMPANY’S INTENDED RELIANCE UPON CERTAIN EXEMPTIONS FROM THE REGISTRATION AND QUALIFICATION REQUIREMENTS OF FEDERAL AND STATE SECURITIES LAWS. SUBSCRIPTION AGREEMENTS THAT ARE MISSING REQUESTED INFORMATION AND/OR SIGNATURES CANNOT AND WILL NOT BE ACCEPTED UNLESS AND UNTIL SUCH INFORMATION AND/OR SIGNATURES ARE PROVIDED. SUCH INFORMATION IS CONFIDENTIAL AND WILL NOT BE REVIEWED BY ANYONE OTHER THAN THE COMPANY AND ITS ADVISORS.
ALL SUBSCRIBERS:
Carefully read this Subscription Agreement. Sections I - IV contain certain important notices, understandings as to certain matters, subscriber representations and warranties, and registration information. These sections pertain to ALL SUBSCRIBERS. Section V requests information regarding the financial condition and experience of prospective investors that are entities (“Entity Subscribers”, together with Subscribers who are individuals, “Subscribers”) and should be completed only by Entity Subscribers.
One copy of the Subscription Agreement must be filled out completely and signed by each Subscriber. All parties involved in reviewing and evaluating your Subscription Agreement will be relying on the representations and warranties you make and on the information you supply. Any Subscriber may be required to furnish additional information to enable the Company to determine whether the Subscriber is a qualified investor.
JOINT SUBSCRIBERS:
In the case of joint Subscribers, where such Subscribers are husband and wife or relatives and have the same principal residence, only the Subscriber primarily responsible for evaluating the investment and making the decision to invest must complete Section IV of this Agreement. In the case of joint Subscribers who are not husband and wife or relatives or do not have the same principal residence, each joint Subscriber must complete a Subscription Agreement. Joint Subscribers must take title to the Shares jointly and shall supply instructions to the Company as to the form of ownership desired.
ENTITY SUBSCRIBERS:
The Company may request that each Entity Subscriber submit with its Subscription Agreement the form of certificate corresponding to its form of organization together with a copy of its most recent financial statements. The Company reserves the right to require, at its sole discretion, an opinion of legal counsel from any Entity Subscriber.
When used herein, the terms “I”, “you”, “your” and “the undersigned” shall mean the Subscriber executing this Agreement below.
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I.
IMPORTANT NOTICES CONCERNING THE OFFERING
There is no minimum funding in this Offering; the total Offering, if fully subscribed, is for one million dollars ($1,000,000). The minimum investment by any one subscriber is $50,000, however, the Company reserves the right to accept subscriptions for lesser amounts in its sole discretion.
THE NOTES, AND THE SECURITIES ISSUABLE UPON CONVERSION OF THE NOTES, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY STATE “BLUE SKY” OR SECURITIES LAWS. THESE SECURITIES CANNOT BE SOLD, TRANSFERRED, ASSIGNED OR OTHERWISE DISPOSED OF EXCEPT IN COMPLIANCE WITH APPLICABLE FEDERAL AND STATE SECURITIES LAWS AND WILL NOT BE TRANSFERRED OF RECORD EXCEPT IN COMPLIANCE WITH SAID LAWS. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON OR ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
THIS OFFERING INVOLVES A NUMBER OF MATERIAL RISKS. THESE RISKS INCLUDE: THE RISKS COMMONLY ASSOCIATED WITH EARLY STAGE COMPANIES WHICH HAVE NOT ESTABLISHED SIGNIFICANT RECURRING REVENUES; THE FACT THAT THE COMPANY’S COMPETITORS ARE HUGE AND WELL-ESTABLISHED PAPER MANUFACTURERS WITH ESSENTIALLY UNLIMITED RESOURCES; THE COMPANY’S DEPENDENCE UPON ITS ABILITY TO RAISE ADDITIONAL CAPITAL; AND THE RISKS ASSOCIATED WITH PRODUCTS THAT HAVE NOT YET BEEN TESTED IN THE MARKET. IN ADDITION, THERE MAY BE A NUMBER OF OTHER MATERIAL RISKS TO OUR BUSINESS, AND YOUR INTEREST IN OUR BUSINESS. PLEASE REFER TO THE DISCLOSURE DOCUMENTS FOR ADDITIONAL RISKS KNOWN TO THE COMPANY, AND A FULLER DESCRIPTION OF SUCH RISKS.
IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE ISSUER AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED.
THERE CURRENTLY IS NO TRADING MARKET FOR THE SECURITIES OF THE COMPANY, AND NONE IS EXPECTED TO DEVELOP FOLLOWING THIS OFFERING. SUBSCRIBERS MUST BE ABLE TO BEAR THE ECONOMIC RISK OF THE INVESTMENT FOR AN INDEFINITE PERIOD OF TIME, BECAUSE THE SECURITIES CANNOT BE SOLD OR TRANSFERRED EXCEPT AS PERMITTED BY THE SECURITIES ACT AND APPLICABLE PROVISIONS OF STATE SECURITIES LAWS. IF, AS A RESULT OF SOME CHANGE OF CIRCUMSTANCES ARISING FROM AN EVENT NOT NOW IN CONTEMPLATION, OR FOR ANY OTHER REASON, AN INVESTOR WISHES TO TRANSFER HIS OR HER SECURITIES, SUCH INVESTOR MAY FIND NO MARKET FOR THOSE SECURITIES.
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PRIOR TO THE ISSUANCE OF ANY SECURITIES, SUBSCRIBERS SHALL BE GIVEN THE OPPORTUNITY TO ASK QUESTIONS AND RECEIVE ANSWERS CONCERNING ANY ASPECT OF THE INVESTMENT, AND TO OBTAIN ANY ADDITIONAL INFORMATION, TO THE EXTENT THE COMPANY POSSESSES SUCH INFORMATION OR CAN ACQUIRE IT WITHOUT UNREASONABLE EFFORT OR EXPENSE, NECESSARY TO VERIFY THE ACCURACY OF THE INFORMATION CONTAINED IN THE DISCLOSURE DOCUMENTS OR IN ANY OTHER MATERIAL PROVIDED TO THE SUBSCRIBER BY THE COMPANY.
SUBSCRIBERS ARE NOT TO CONSTRUE THE CONTENTS OF THIS SUBSCRIPTION AGREEMENT AS LEGAL, TAX OR INVESTMENT ADVICE. EACH INVESTOR SHOULD CONSULT HIS, HER OR ITS OWN LEGAL COUNSEL, ACCOUNTANT OR BUSINESS ADVISOR AS TO LEGAL, TAX AND RELATED MATTERS CONCERNING A POSSIBLE INVESTMENT IN THE SECURITIES OFFERED HEREBY. THE DELIVERY OF THIS SUBSCRIPTION AGREEMENT AT ANY TIME DOES NOT IMPLY THE INFORMATION CONTAINED HEREIN OR IN THE SUMMARY IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
II.
AGREEMENTS AND UNDERSTANDINGS
I agree and understand as follows:
A.
Except as may be provided under state securities laws, this Subscription Agreement is irrevocable; provided, however, that the execution and delivery of this Subscription Agreement will not constitute an agreement between the Company and me until this Subscription Agreement is accepted by the Company. I understand that the Company may request any other information, whether or not specifically called for in this Subscription Agreement, that it deems desirable in evaluating my subscription. Furthermore, I understand that the Company has the right to reject my subscription with or without cause, for any or no reason.
B.
Although I realize that the Company will make a good faith effort to sell the Notes without undue delay, I understand that some time may pass after my execution and submission of this Subscription Agreement before any decision to accept or reject my subscription is made. I understand that a delay in deciding whether to accept or reject my subscription, even if such delay involves not including my subscription in a given closing or in any closing, can in no way be interpreted as limiting the discretion of the Company to accept or reject my subscription.
C.
I will make such representations and warranties and furnish such additional information as to my investment experience and financial position as the Company may reasonably request, and if there should be any material change in the information set forth herein prior to the closing of the sale of Notes to me, I will immediately furnish such revised or corrected information to the Company.
D.
I understand that in the event that my Subscription Agreement is not accepted for whatever reason, my subscription funds will be returned to me without interest.
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E.
I recognize that in accepting my subscription to purchase Notes, the Company will rely on the accuracy and completeness of my statements, representations and warranties set forth herein. I hereby agree to defend, to indemnify and to hold harmless the Company and each of its officers, directors, principals, or agents from and against any and all loss, damage, liability or expense, including reasonable attorneys’ fees and costs, which they or any of them may incur or become liable for by reason of, or in any way connected with, any misrepresentation or omission of relevant information, whether negligent or intentional, made by me in this Subscription Agreement, any breach of my warranties or my failure to perform any of my covenants or agreements set forth in the Subscription Agreement, or arising out of any sale or distribution by me of any Shares in violation of the Securities Act, or any other applicable securities or “Blue Sky” laws.
F.
Legend on Note. I acknowledge that a legend to the following effect will appear upon the Note:
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE FEDERAL SECURITIES ACT OF 1933, AS AMENDED (“THE ACT”) OR ANY STATE SECURITIES LAW. THE NOTE HAS BEEN ACQUIRED FOR INVESTMENT AND NEITHER SAID NOTE NOR ANY INTEREST THEREIN MAY BE TRANSFERRED, SOLD OR OFFERED FOR SALE UNLESS (1) THERE IS AN EFFECTIVE REGISTRATION STATEMENT FOR THE NOTE AS SECURITIES UNDER THE ACT AND QUALIFICATION UNDER ANY APPLICABLE STATE SECURITIES LAW, (2) SUCH TRANSFER IS MADE IN COMPLIANCE WITH RULE 144 UNDER THE ACT AND PURSUANT TO QUALIFICATION UNDER ANY APPLICABLE STATE SECURITIES LAW OR EXEMPTION THEREFROM, OR (3) THERE IS AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION AND QUALIFICATION ARE NOT REQUIRED AS TO SAID TRANSFER, SALE OR OFFER.
I agree promptly to deliver the Note to the Company if and when the Company, in its discretion, decides to recall the Note and reissue the same bearing a new or different legend or legends reflecting appropriately any requirements of the exemptions from the state and federal securities laws pursuant to which Note has been sold to me.
REPRESENTATIONS AND WARRANTIES
I represent and warrant to the Company that:
A.
I have received and reviewed the Disclosure Documents and have been given full access to information appropriate to my determination of whether to invest in the Company, and I am familiar with the terms and provisions thereof. I have also reviewed the risk factors set forth herein and in the Disclosure Documents, which should be considered when determining whether to invest in the Notes.
B.
I have further had an opportunity to meet with principals of the Company and discuss issues relevant to my determination of whether to invest in the Notes.
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C.
I have full legal capacity to enter into this Subscription Agreement and, if not an individual, have duly authorized the execution of this Subscription Agreement in accordance with my constitutive documents.
D.
I have carefully reviewed the merits and risks of, and other considerations relating to, investment in the Company.
E.
I have read and understood the notices set forth in Section I and I understand that the transfer of the Notes is subject to various restrictions; that, as the Notes have not been registered under the Securities Act, or under the securities laws of any state, the Notes cannot be sold unless they are registered under said Act and qualified under said state laws or are exempt from registration or qualification thereunder; that the Company will not record the sale or other transfer of any Notes without compliance with said securities laws; and that I must bear the economic risk of ownership of Notes for an indefinite period of time. I shall not sell, assign, transfer or otherwise dispose of all or any part of my Notes or my interests therein except in compliance with applicable federal and state securities laws. I further understand that the same restrictions and considerations will apply to the securities issuable upon conversion of the Note.
F.
I understand that my investment in the Company is not liquid. I have adequate means of providing for my current needs and personal contingencies and I have no need for liquidity in this investment.
G.
Except for the Disclosure Documents and any other information that my advisors or I may have requested and received directly from the Company, neither my advisors nor I have been furnished any other offering material or literature upon which I have relied in connection with my determination of whether or not to purchase Notes.
H.
I have been advised that I and my advisors, if any, would have an opportunity to review all the pertinent facts, to ask questions, and to obtain any additional information, to the extent possessed or obtainable without unreasonable effort and expense, regarding the Company, its key employees, its business, the offering of the Notes, the risks of investment in the Company and any other matters relating to any of the above or anything set forth in the Summary, and any additional information necessary to verify the accuracy of any representation or information set forth in the Disclosure Documents. The Company has supplied all material requested, if any, and has given complete and satisfactory answers to all inquiries, if any, that my advisors and I have put to it concerning the matters listed above.
I.
All financial and other data that I have supplied in this Subscription Agreement is true, accurate, and complete and fairly reflects my financial condition and investment experience to the best of my knowledge and belief.
J.
I have been advised to consult with my own attorney regarding legal matters concerning an investment in the Company and regarding tax and other financial consequences of investing in the Company. I understand that the information provided to me by the Company in connection with my purchase of the Notes does not constitute legal, investment, tax or other advice.
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K.
I am acquiring the Notes for my own account, as principal, for investment and not with a view to or for sale in connection with any distribution of such Notes or any interest therein.
L.
I understand and acknowledge that the Disclosure Documents contain certain statements of anticipated or expected financial results and certain projected financial statement information which constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act. Such forward-looking statements are subject to various risks and uncertainties. I understand and further acknowledge that those forward-looking statements depend on certain assumptions about the Company, its market, the competition it faces, and its revenue model, and I acknowledge that those assumptions may prove to be inaccurate and, as a result, the projected financial statement information and related information may not prove to be accurate statements of the actual financial results or the financial condition of the Company. I have had an opportunity to discuss those projected financial statements, and the assumptions underlying such projected financial statements, with the Company’s management.
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III.
FINANCIAL CONDITION AND EXPERIENCE OF ALL SUBSCRIBERS:
I further represent and warrant to the Company, as follows:
A.
I am an “accredited investor” as defined in Rule 501 of Regulation D promulgated under the Securities Act. My qualification is based on the following (each “accredited investor” must initial the appropriate item or items):
_______ 1.
I had an individual income (exclusive of the income of my spouse) in excess of $200,000 for each of the two most recent years, or joint income with my spouse in excess of $300,000 in each of those years, and reasonably expect the same income level for the current year; or
_______ 2.
As of the date of this Subscription Agreement, I (either individually or with my spouse) have a net worth in excess of $1,000,000; or
I am:
_______ 3.
An officer or director of the Company;
_______ 4.
A bank or savings and loan institution, whether acting in its individual or fiduciary capacity;
_______ 5.
An insurance company;
_______ 6.
An investment company registered under the Investment Company Act of 1940;
_______ 7.
A business development company as defined in the Investment Company Act of 1940;
_______ 8.
A private business development company as defined in the Investment Advisors Act of 1940;
_______ 9.
A Small Business Investment Company licensed by the U.S. Small Business Administration;
_______ 10.
An employee benefit plan within the meaning of Title I of the Employment Retirement Income Security Act of 1974 (ERISA), if the investment decision with respect to this investment is made by a plan fiduciary which is either a bank, savings and loan association, insurance company, or registered investment advisor, or if the employee benefit plan has total assets in excess of $5,000,000;
_______ 11.
An employee benefit plan established and maintained by a state or state agency, if the plan has total assets in excess of $5,000,000;
_______ 12.
Any tax exempt organization as defined in Section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business
8
trust or partnership not formed for specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000;
_______ 13.
An entity of which the owners are (a) institutional investors described in the foregoing subparagraphs (1)-(12), (b) “Individuals” who meet certain suitability standards1/, or (c) or a combination of both;
_______ 14.
A trust with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities, whose purchase is directed by a person with knowledge and experience in financial matters, capable of evaluating the merits and risks of the prospective investment.
B.
_______
I am not an “accredited investor” (initial, if appropriate).
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IV.
AUTHORITY AND FINANCIAL CONDITION OF ENTITY SUBSCRIBERS:
THE REQUESTED FINANCIAL INFORMATION SHOULD BE FURNISHED ONLY WITH RESPECT TO THE ENTITY SUBSCRIBER, AND NOT WITH RESPECT TO ANY OF THE OWNERS OF THE BENEFICIAL INTERESTS THEREIN, EXCEPT AS INDICATED.
GRANTOR TRUST SUBSCRIBERS: IF THE SUBSCRIBER IS A GRANTOR TRUST, THAT IS, A TRUST AMENDABLE AND REVOCABLE BY THE GRANTOR AT ANY TIME, PLEASE COMPLETE THIS SECTION V WITH RESPECT TO THE TRUST AND ITS ASSETS ALONE. PLEASE ALSO COMPLETE SECTION IV WITH RESPECT TO THE GRANTOR INCLUDING THE ASSETS HELD IN THE TRUST.
A.
REPRESENTATIONS AND WARRANTIES
The Entity Subscriber represents and warrants to the Company as follows:
(1)
The Entity Subscriber has been duly formed and is validly existing in good standing under the laws of the state in which it was founded with full power and authority to enter into the transactions contemplated by this Subscription Agreement.
(2)
The execution of this Agreement has been duly and validly authorized, and, when delivered on behalf of the undersigned, will constitute a valid, binding and enforceable agreement and obligation of the Entity Subscriber.
(3)
The Entity Subscriber has not been formed, reformed or recapitalized for the specific purpose of purchasing Shares.
(4)
The Entity Subscriber acknowledges that all representations, warranties, agreements and notices set forth in Sections I - IV apply to the Entity Subscriber and acknowledges having read and understood them. Where appropriate in the context, the words “I” and “me” have been read to mean the Entity Subscriber.
B.
FINANCIAL POSITION AND EXPERIENCE
Type of entity: ___________________________________________________________
Date of Organization: ______________________________________________________
State of Organization: _____________________________________________________
Number of equity owners (partners, beneficiaries, etc.): __________________________
10
If one or more of these equity owners owns individually or collectively more than fifty percent (50%) of the equity interest of the Subscriber and is (are) also purchasing Notes, please identify such equity owner(s):
______________________________________________________________________________
______________________________________________________________________________
The net worth of the Entity Subscriber, as set forth in greater detail on the financial statements submitted herewith (if the Company so requests) is:
$________________________
The Entity Subscriber’s principal activities are:
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
C.
INVESTMENT EVALUATION
Please certify the truth of the following statement by initialing where indicated:
The individuals authorizing this investment on behalf of Subscriber have such knowledge and experience in financial and business matters so as to be capable of evaluating the merits and risks of an investment in the Company.
_____________ (Initials)
11
IN WITNESS WHEREOF, the undersigned has executed this Subscription Agreement as of the date indicated below.
__________________________________________
(Print Name Here)
Accepted as of January 11, 2010
Simple Earth, Inc.
By _____________________________________________
Scott Lantz, CEO
1/ For purposes of paragraph (13) above, “Individuals” shall mean natural persons, each of whom: (i) has a net worth individually, or jointly with his or her spouse, of more than $1,000,000; or (ii) has had individual annual gross income from all sources in excess of $200,000, or joint income with a spouse in excess of $300,000, in each of the two most recent years and a reasonable expectation of reaching the same income level in the current year; or (iii) is an Officer or Director of the Company; or (iv) is a broker or dealer registered pursuant to Section 15 of the Securities Exchange Act of 1934; or (v) in most cases, may reasonably be deemed by the Company to have such knowledge and experience in financial and business matters that he or she is capable of evaluating the merits and risks of the prospective investment.
12
CANCELLATION AGREEMENT
This Cancellation Agreement, dated April 23, 2011 (this "Agreement"), is made and entered into by and among Diversified Opportunities, Inc., a Delaware corporation (the "Company"), and Kevin Russeth, Jonathan Shultz and Steven J. Davis (together, the "Canceling Parties"), with respect to the following facts:
A. On or about the date hereof, the Company has entered into a Share Exchange Agreement (the “Share Exchange Agreement”) with Sugarmade, Inc., a California corporation ("Sugarmade"), and the shareholders of Sugarmade (the "Shareholders"), pursuant to which the Company will acquire from the Shareholders all of the issued and outstanding capital stock of Sugarmade in exchange for shares of the Company's common stock (the "Share Exchange Transaction"), and all capitalized terms not otherwise defined herein shall have the meaning given to them in the Share Exchange Agreement.
B. The Cancelling Parties hold, as of the date of this Agreement, 9,000,000 restricted shares of the Company's outstanding common stock and as a condition to the Share Exchange transaction Sugarmade has required that the Cancelling Parties reduce the aggregate number of shares held by them to no more than 500,000 shares.
C. Sugarmade has also agreed that in connection with the Share Exchange Transaction, the Cancelling Parties can elect to have all or any portion of the 500,000 shares redeemed by the Company for a pro rata portion of $400,000.
D. The Canceling Parties are entering into this Agreement to, among other things, induce Sugarmade and the Shareholders to enter into the Share Exchange Transaction and each of the Canceling Parties acknowledges that Sugarmade and the Shareholders would not consummate the transactions contemplated by the Share Exchange Transaction unless the transactions contemplated hereby are effectuated in accordance herewith.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants contained herein, and intending to be legally bound, the parties hereto agree as follows:
1.
Cancellation of Shares. At the Closing of the Share Exchange Agreement, the Canceling Parties shall deliver to the Company for cancellation stock certificates representing the share of the Company's common stock held by each of them as set out below along with duly executed medallion guaranteed stock powers covering the shares (or such other documents acceptable to the Company's transfer agent) and hereby irrevocably instructs the Company and the Company's transfer agent to cancel the shares in the following amounts:
1
Register Holder | Share Certificate | Shares Cancelled | Shares Remaining after cancellation |
Kevin Russeth |
| 4,250,000 | 250,000 |
Jonathan Shultz | 9271 | 2,125,500 | 125,000 |
Steven J. Davis | 9272 | 2,125,000 | 125,000 |
Following such cancellation the shares common stock will no longer be outstanding on the stock ledger of the Company and the Canceling Parties shall no longer have any interest in the shares whatsoever. The Company shall immediately deliver to the Company's transfer agent irrevocable instructions providing for the cancellation of the shares.
2.
Share Redemption. At the Closing of the Share Exchange Agreement, the Cancelling Parties agree to have the Company redeem, and the Company agrees to redeem from the Cancelling Parties, the following shares of the Company's common stock held by each of them, in exchange for the redemption payment specified:
Register Holder | Share Redeemed | Cash Payment | Shares After Redemption |
Kevin Russeth | 200,000 | $160,000 | 50,000 |
Jonathan Shultz | 62,500 | $50,000 | 62,500 |
Steven J. Davis | 0 | $0 | 125,000 |
Such redemption shall be effective upon, and such cash payment shall be due and payable at the Closing of the Share Exchange Transaction. Following such redemption the redeemed shares will no longer be outstanding on the stock ledger of the Company and the Canceling Parties shall no longer have any interest in the redeemed shares whatsoever. The Company shall immediately deliver to the Company's transfer agent irrevocable instructions providing for the cancellation of the redeemed shares. The Canceling Parties’ obligations hereunder are conditioned upon the Company (i) entering into a Registration Rights Agreement with each Canceling Party to register the Company shares held by each Canceling Party after redemption, and to register the Company shares underlying the Warrants, in a form of Registration Rights Agreement as entered into with the investors in the Capital Raise (as defined in the Share Exchange Agreement); and (ii) issuing the Canceling Parties’ a total of 200,000 warrants (the “Warrants”) to purchase Company common stock at an exercise price of $1.25 and a term of 3 years, in the form of warrant as issued to the investors in the Capital Raise, with such individual warrants and denomination as directed in writing by the Canceling Parties.
3.
Representations by the Canceling Parties.
2
(a)
Each of the Canceling Parties owns the shares of common stock being cancelled or redeemed hereunder, of record and beneficially, free and clear of all liens, claims, charges, security interests, and encumbrances of any kind whatsoever. Each of the Canceling Parties has sole control over such shares or sole discretionary authority over any account in which they are held. Except for this Agreement, no person has any option or right to purchase or otherwise acquire the shares, whether by contract of sale or otherwise, nor is there a "short position" as to the shares.
(b)
Each of the Canceling Parties has full right, power and authority to execute, deliver and perform this Agreement and to carry out the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by the Canceling Parties and constitutes a valid, binding obligation of the Canceling Parties, enforceable against it in accordance with its terms (except as such enforceability may be limited by laws affecting creditor's rights generally).
4.
Further Assurances. Each party to this Agreement will use his or its commercially reasonable efforts to take all action and to do all things necessary, proper, or advisable in order to consummate and make effective the transactions contemplated by this Agreement (including the execution and delivery of such other documents and agreements as may be necessary to effectuate the cancellation or redemption of the shares).
5.
Amendment and Waiver. Any term, covenant, agreement or condition of this Agreement may be amended, with the written consent of the Company and the Canceling Parties, or compliance therewith may be waived (either generally or in a particular instance and either retroactively or prospectively), by one or more substantially concurrent written instruments signed by the Company and the Canceling Parties.
6.
Survival of Agreements, Representations and Warranties, etc. All representations and warranties contained herein shall survive the execution and delivery of this Agreement.
7.
Successors and Assigns. This Agreement shall bind and inure to the benefit of and be enforceable by the Company and the Canceling Parties, and their respective successors and assigns.
8.
Governing Law. This Agreement (including the validity thereof and the rights and obligations of the parties hereunder and thereunder) and all amendments and supplements hereof and thereof and all waivers and consents hereunder and thereunder shall be construed in accordance with and governed by the internal laws of the State of California without regard to its conflict of laws rules, except to the extent the laws of Delaware are mandatorily applicable.
9.
Miscellaneous. This Agreement embodies the entire agreement and understanding between the parties hereto and supersedes all prior agreements and understandings relating to the subject matter hereof. This Agreement may be executed in any number of counterparts and may be delivered by facsimile transmission or electronic mail in portable document format or other means intended to preserve the original graphic content of a signature.
3
Each such counterpart shall constitute an original but all such counterparts shall together constitute but one and the same instrument.
10.
Effectiveness of Agreement. Notwithstanding any other provision contained herein, this Agreement shall become effective, and the obligations of the Company and Canceling Parties contained herein shall arise only upon, the occurrence of the Closing under the Share Exchange Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.
Diversified Opportunities, Inc.
By: /s/ Kevin Russeth
Name: Kevin Russeth
Title: Chief Executive Officer and Chief Financial Officer
/s/ Kevin Russeth
Kevin Russeth
/s/ Jonathan Shultz
Jonathan Shultz
/s/ Steven J. Davis
Steven J. Davis
4
[Signature Page to Cancellation Agreement]
5
Investor: _________________________
Subscription and Escrow Agreement For
SUGARMADE, INC.
Private Placement of
Shares of Common Stock and Warrants
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THE SHARES OF COMMON STOCK AND WARRANTS TO BE ISSUED HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE APPLICABLE SECURITIES LAWS OF ANY STATE, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS SUBSCRIPTION AGREEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF COMMON STOCK AND WARRANTS TO BE ISSUED MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.
THE PURCHASE OF THE SHARES OF COMMON STOCK AND WARRANTS TO BE ISSUED INVOLVES A HIGH DEGREE OF RISK AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN BEAR THE RISK OF LOSING THEIR ENTIRE INVESTMENT.
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SUBSCRIPTION AND ESCROW AGREEMENT
To:
Scott Lantz, Chief Executive Officer
Sugarmade, Inc.
2280 Lincoln Avenue, Suite 200
San Jose, California 95125
Email: scott@sugarmade.com
Facsimile: 408-521-0145
c/o
Steven James Davis, APC, Escrow Agent
1042 N. El Camino Real, Suite 261
Encinitas, California 92024
Email: steve@sjdavislaw.com
Facsimile: 858.367.8138
Gentlemen:
.
Description of Offering and Subscription.
(a)
Offering. This Subscription Agreement (the “Agreement”) relates to the offering (the "Offering") by Sugarmade, Inc., a California corporation (the "Company"), of units of its securities at a price of $1.25 per unit. The Offering is for a minimum of 1,500,000 units (the “Minimum Offering”) and up to a maximum of 2,000,000 units (the “Maximum Offering”). Each unit consists of one share of the Company's common stock (the (the “Common Stock”), and one two-year warrant (the “Warrant”, and collectively with the Common Stock, the “Securities”) to purchase one share of Common Stock at an exercise price of $1.50 per share, in the form of Warrant attached hereto as Exhibit A. The Company intends to conduct an initial closing (the “Initial Closing”) of the offering and accept this subscription from the undersigned investor (the “Investor”) at such time as (i) the Company has received subscriptions for the Minimum Offering; and (ii) all of the closing conditions of the Public Company Transaction (as defined below) have been satisfied.
(b)
Investor Subscription. The undersigned Investor subscribes for and agrees to purchase the Securities issued by the Company for $1.25 per unit in the amount set forth on the signature page below. The Investor's subscription is contingent upon (the “Offering Closing Conditions”) (i) the Company receiving and accepting subscriptions for the Minimum Offering and (ii) all of the closing conditions of the Public Company Transaction (as defined below) have been satisfied, at which date Investor’s subscription shall be accepted. If the Offering Closing Conditions do not occur prior to May 31, 2011, then the subscription funds shall be returned to the Investor as provided in Section 8 below. The Investor acknowledges that this subscription is
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irrevocable, except as otherwise expressly provided herein, and may be accepted or rejected in whole or in part by the Company in its sole discretion.
.
Public Company Transaction. The Company intends to enter into an agreement with a public company (“PubCo”) that trades on the OTC Bulletin board pursuant to which PubCo shall acquire 100% of the outstanding equity of the Company and all shareholders of the Company (including the Investor) shall become shareholders of PubCo (the “Public Company Transaction”). The closing conditions of the Public Company Transaction shall include a requirement that the Company has received subscriptions for the Minimum Offering and that each investor in the Offering (including the Investor) shall have executed the definitive agreement for the Public Company Transaction. The Company intends that the Public Company Transaction shall be conducted on a 1:1 exchange basis in which the Investor shall receive 1 PubCo share for each 1 share of the Company, and in no event shall PubCo have more than 9,700,000 shares outstanding at the closing of the Public Company Transaction. The definitive agreement for the Public Company Transaction shall provide that the investors in the Offering (including the Investor) shall have the right to demand the registration of their PubCo shares on a registration statement to be prepared and filed by the Company within 90 days after the closing of the Public Company Transaction. These registration rights shall be set forth in the definitive agreement and shall contain such other customary provisions as agreed upon by the parties including the obligation of Investor to provide certain information to PubCo. Any Public Company Transaction shall include provisions for the Warrants to be exchanged for warrants issued by PubCo with the same term, exercise price and other material terms.
3.
Representations and Warranties of Investor. To induce the Company to accept this subscription, the Investor represents and warrants as follows:
()
The Investor has had adequate opportunity to obtain information from and ask questions of the Company concerning the Company business, and all the Investor's questions concerning these matters have been answered to the Investor's satisfaction. The Investor has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of an investment in the Company, is able to bear the risks of an investment in the Company and understands the risks of, and other considerations relating to, the purchase of the Securities.
()
The Securities to be acquired hereunder are being acquired by the Investor for the Investor's own account for investment purposes only and not with a view to resale or distribution.
(c)
Investor either has a pre-existing personal or business relationship with the Company, or by reason of Investor’s business or financial experience, or the business or financial experience of their professional advisors who are unaffiliated with and who are not compensated by the Company, directly or indirectly, have the capacity to protect their own interests in connection with the purchase of the Securities.
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(d)
Investor is not aware of the publication of any advertisement in connection with the offer or sale of the Securities.
(e)
The Investor understands that the Securities have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), the securities laws of any state thereof or the securities laws of any other jurisdiction, nor is such registration contemplated. The Investor understands and agrees further that the Securities must be held indefinitely unless they are subsequently registered under the Securities Act and appropriate state securities laws or an exemption from registration under the Securities Act and appropriate state securities laws covering the sale of the Securities, as applicable, is available. The Investor understands that legends stating that the Securities have not been registered under the Securities Act and state securities laws and setting out or referring to the restrictions on the transferability and resale of the Securities will be placed on the certificates representing the Securities. The Investor's overall commitment to the Company and other investments that are not readily marketable is not disproportionate to the Investor's net worth and the Investor has no need for immediate liquidity in the Investor's investment in the Company.
(f)
The Investor has made no reliance upon any literature other than the “Sugarmade, Inc. Business Plan” dated March 2011 (the “Business Plan”) and is not relying on any information, representation or warranty by the Company, the Company, the Escrow Agent or any of its affiliates or agents, other than information contained in the Business Plan, in determining whether to purchase the Securities. To the full satisfaction of the Investor, the Investor has been furnished any materials the Investor has requested relating to the Company business and the Offering and the Investor has been afforded the opportunity to ask questions of the Company concerning the terms and conditions of the Offering.
(g)
The Investor understands that certain forward-looking statements and projections that may be contained in the Business Plan by their nature involve significant elements of subjective judgment and analysis that may or may not be correct; that there can be no assurance that such statements or projections will be accurate; and that such statements or projections should not be relied on as a promise or representation of the future performance of the Company business or Company.
(h)
The Investor has consulted to the extent deemed appropriate by the Investor with the Investor's own advisers as to the financial, tax, legal and related matters concerning an investment in the Company and on that basis believes that an investment in the Company is suitable and appropriate for the Investor.
(i)
If the Investor is a natural person, he or she has the legal capacity and all requisite authority to enter into, execute and deliver this Agreement, to purchase the Securities and to perform all the obligations required to be performed by the Investor hereunder. If the Investor is a corporation, partnership, trust or other entity, it is authorized to purchase the Securities and otherwise to comply with its obligations under this Agreement. The person signing this Agreement on behalf of such entity is duly authorized by such entity to do so. This Agreement is
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the valid and binding agreement of the Investor and enforceable against the Investor in accordance with its terms. Such execution, delivery and compliance by or on behalf of the Investor does not conflict with, or constitute a default under, any instruments to which the Investor is bound, any law, regulation or order to which the Investor is subject, or any agreement to which the Investor is a party or by which the Investor is or may be bound.
(j)
The principal residence of the Investor is in the jurisdiction indicated below the Investor's signature hereto, or if the Investor is a corporation, partnership, trust or other entity, such Investor is organized and qualified under the law of the state indicated below.
(k)
The Investor acknowledges that legal counsel to the Company and PubCo do not represent any Investor, and that legal counsel to the Company and PubCo shall owe no duties directly to that Investor. The Investor acknowledges that legal counsel to the Company and PubCo have not represented the interests of any Investor in the preparation of any documents or agreements related to the Offering, including this Agreement. The Investor represents and warrants that it has either engaged independent legal counsel to represent them with respect to the Offering, or has had the opportunity to do so.
(l)
The Investor acknowledges the risks related to an investment in the Company, which risks include, without limitation, the following:
Limited operating history. The Company was formed in 2009 to pursue opportunities in the “green” paper industry and has a limited operating history. The Company does not have significant operating revenues to date. The Company does not have any historical financial data upon which to base planned operations or financial forecasting. Because the Company has a limited operating history, its historical financial information is not a reliable indicator of future performance. Therefore, it is difficult to evaluate the business and prospects of the Company. The Company has limited experience as to whether its products will be popular with consumers. Failure to correctly evaluate the Company’s prospects could result in an investor’s loss of a significant portion or all of his investment in the Company.
The Company’s failure to obtain additional adequate financing would materially and adversely affect the Company's business. The Company may require additional capital in the future. There is no assurance that the Company could obtain additional financing or capital from any other sources, or that such financing or capital would be available to the Company on acceptable terms. Under such circumstances, investors in the Securities could lose their entire investment in the Company.
The Company faces competition from other companies. The Company will face competition from other companies with similar “green” product offerings and from the recycled paper industry. Many of these companies have longer operating histories, greater name recognition and substantially greater financial, technical and marketing resources than us. Many of these companies also have more extensive customer bases, broader customer relationships and broader industry alliances than us, including
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relationships with many of the Company's potential customers. Increased competition from any of these sources could result in the Company's failure to achieve and maintain an adequate level of customers and market share to support the cost of operations.
The Company will rely on a third-party supplier and third party distributors. The Company will be dependent on other companies to provide necessary products and services in connection with key elements of its business, including The Sugar Cane Paper Co., Ltd., a Hong Kong limited company (“SCPC”) located in The People’s Republic of China for the supply of its paper products. The continued supply of paper products from China is subject to risk of interruption due to a variety of factors including, without limitation, any cessation of business by SCPC, the inability of SCPC to export the products, or disruptions in shipping due to strikes, war, weather, Acts of God, or government action. Any interruption in the Company’s ability to obtain these products from SCPC would severely harm business and results of operations and could result in the Investor’s complete loss of his or her investment. Additionally, the Company’s current business model includes plans to have the products sold through third party retailers. The Company will be dependent on these third party retailers to sell its products. Any discontinuation by these third party retailers for any reason to sell the products would severely harm business and results of operations and could result in the Investor’s complete loss of his or her investment.
Limited Transferability of Securities. Each purchaser of Securities is required to represent that he or she is acquiring such securities for investment and not with a view to distribution or resale, that he or she understands such securities are not freely transferable and, in any event, that he or she must bear the economic risk of investment in such securities for an indefinite period of time because such securities have not been registered under the Securities Act or applicable state securities laws, and that such securities cannot be sold unless they are subsequently registered or an exemption from such registration is available.
No Market For Common Stock. There currently is no market for the Securities. There can be no assurance that an active or liquid trading market will develop, or if initially developed, that such a market will be sustained. Accordingly, investors may be required to retain ownership of the Securities and bear the economic risk of this investment for an indefinite period.
Speculative Investment. The Company’s business objectives must be considered highly speculative, and there is no assurance it will satisfy those objectives. No assurance can be given that the investors will realize a substantial return on their purchase of the Securities, if any, or that the investors will not lose their investment completely. For this reason, each prospective investor should read the Business Plan and this Agreement and all exhibits and should consult with their attorney or business advisor before purchasing Securities.
No Registration with Securities and Exchange Commission or State Securities
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Authorities. The Securities have not been registered with the SEC under the Securities Act, or with the securities agency of any state, and the Securities are being offered in reliance upon an exemption from the registration provisions of the Securities Act and state securities laws applicable only to offers and sales to investors meeting the suitability requirements set forth herein.
Private Offering - Lack of Agency Review. Since this Offering is a non-public offering and, as such, is not registered under federal or state securities laws, prospective investors will not have the benefit of review by the Securities and Exchange Commission (the “SEC”) or any state securities commission.
Projected Aggregate Cash Flow. Any projections of cash flow included in the Business Plan and all other materials or documents supplied by the Company’s management are necessarily speculative and are qualified in their entirety by the assumptions, information and risks disclosed in the Business Plan and this Agreement. The projections included in the Business Plan are based upon assumptions made by the Company's management and consultants regarding future events. Actual results for any period will vary from those projections for a number of reasons, including the risks outlined in the Business Plan and this Agreement. Potential investors are advised to consult with their tax and business advisors concerning the validity and reasonableness of the factual, accounting and tax assumptions. Company management does not make any representation or warranty as to the Company's future profitability or of an investment in the Securities.
Possible Dilution of Ownership. If the Company requires additional funding for its operations or product development, the Company may secure such funding through the sale of additional stock of the Company to third parties. The terms of any such sale of securities cannot be predicted, and may be less favorable to the Company than the terms of this Offering of Securities. If in the future, the Company sells securities to third parties at a price lower than the offering price of the Securities in this Offering, purchasers of Securities in this Offering may incur a dilution of the value of their investment in the Company.
Public Company Transaction. As discussed above, the Company has held preliminary discussions with a public company regarding the potential for an acquisition or merger of the Company by the public company. However as of the time of this Agreement, the Company may have yet to have entered into any agreement for a Public Company Transaction, and there can be no assurances that such a Public Company Transaction will be completed, or if completed, will be on terms which are advantageous to the Company or its shareholders. If the Company completes (or has completed) a Public Company Transaction, the Company may not directly inform the Investor of such Transaction or the terms thereof. Also, if the Company completes a Public Company Transaction, the Company would become subject to the regulatory, accounting and reporting burdens associated with operating as a public company under the Securities Exchange Act of 1934, as amended and related regulations. The Company’s senior management has
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limited experience with publicly-traded companies and may not be fully familiar with the requirements of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) and other laws, rules and regulations that apply to companies required to file reports with the SEC. If the Company becomes publicly traded, it may be time consuming, difficult and costly for the Company to develop and implement the internal controls and reporting procedures required by the SEC and the Sarbanes-Oxley Act. The Company would need to hire additional financial reporting, internal controls and other finance staff in order to develop and implement appropriate internal controls and reporting procedures. If the Company becomes publicly-traded, and is unable to comply with the SEC reporting and accounting requirements, or the internal controls requirements of the Sarbanes-Oxley Act, the Company may not be able to obtain the independent accountant certifications that the Sarbanes-Oxley Act requires publicly-traded companies to obtain, or to remain eligible to have the Company’s Securities trade on a public exchange or quotation system such at the OTC Bulletin Board. The Investor also understands that PubCo will likely be a “shell” company with no or nominal assets and operations.
(m)
The Investor is an "accredited investor" within the meaning of Rule 501 of Regulation D under the Securities Act, such that one of the following qualifications applies:
()
The Investor is: a bank as defined in section 3(a)(2) of the Securities Act, or a savings and loan association or other institution as defined in section 3(a)(5)(A) of the Securities Act, whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to Section 15 of the Securities Exchange Act of 1934; an insurance company as defined in Section 2(13) of the Securities Act; an investment company registered under the Investment Company Act of 1940 or a business development company as defined in Section 2(a)(48) of that Act; a Small Business Investment Company licensed by the U.S. Small Business Administration under section 301(c) or (d) of the Small Business Investment Act of 1958; a plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5,000,000; an employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974 if the investment decision is made by a plan fiduciary, as defined in Section 3(21) of such Act, which is either a bank, savings and loan association, insurance company, or registered investment adviser, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors;
()
The Investor is a private business development company as defined in Section 202(a) 22 of the Investment Advisers Act of 1940;
()
The Investor is an organization described in Section 501(c)3 of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000;
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()
The Investor is a director or an executive officer of the Company. For the purposes of this item, "executive officer" means the president, any vice president in charge of a principal business unit, division or function (such as sales, administration or finance), any other officer who performs a policy making function, or any other person who performs similar policy making functions for the Company;
()
The Investor is a natural person with individual net worth (or joint net worth with spouse) in excess of $1 million. For purposes of this item, "net worth" means the excess of total assets at fair market value, including home, home furnishings and automobiles (and including property owned by a spouse), over total liabilities;
()
The Investor is a natural person with individual income (without including any income of the Investor's spouse) in excess of $200,000, or joint income with spouse of $300,000, in each of the two most recent years and who reasonably expects to reach the same income level in the current year;
()
The Investor is a trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person as described in Rule 506(b)(2)(ii); or
()
The Investor is an entity in which all of the equity owners are accredited investors.
4.
Tax Information. The Investor certifies under penalties of perjury that (A)(i) the Investor's name, taxpayer identification or social security number and address provided on the signature pages hereto is correct and (ii) the Investor will complete and return with this Subscription Agreement IRS Form W-9, Payer's Request for Taxpayer Identification Number and Certification, and (B)(i) the Investor is not a non-resident alien individual, foreign corporation, foreign partnership, foreign trust or foreign estate (as defined in the Code) and (ii) the Investor will notify the Company within 60 days of a change to foreign status. The Investor agrees to properly execute and provide to the Company in a timely manner any tax documentation that may be reasonably required by the Company.
5.
Further Advice and Assurances. All information that the Investor has provided to the Company is correct and complete as of the date hereof, and the Investor agrees to notify the Company immediately if any representation or warranty contained in this Agreement becomes untrue prior to the Company's acceptance of the Investor's subscription. The Investor agrees to provide such information and execute and deliver such documents as the Company may reasonably request to verify the accuracy of the Investor's representations and warranties herein or to comply with any law or regulation to which the Company may be subject.
6.
Indemnity. The Investor agrees to indemnify and hold harmless the Company and its officers, directors, employees, agents and representatives from and against any loss, damage or liability due to or arising out of a breach of any representation, warranty or agreement
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of the Investor contained in this Agreement or in any other document provided by the Investor to the Company or its agents in connection with the Investor's investment in the Company. Notwithstanding any provision of this Agreement, the Investor does not waive any rights granted to it under applicable securities laws.
7.
Payment of Subscription. The Investor shall pay the amount of the Investor's subscription hereunder by delivery of readily available funds prior to the acceptance of this Agreement. If the Investor's subscription is rejected in whole or in part, the amount rejected shall be promptly returned by check without interest to the Investor.
8.
Escrow and Closing.
(a)
Appointment of Escrow Agent; Establishment of Escrow Account; Escrow Period. The Company and the Investor hereby appoint Steven James Davis, A Professional Corporation (the “Escrow Agent”) as escrow agent in accordance with the terms and conditions set forth herein, and the Escrow Agent hereby accepts such appointment. The Escrow Agent shall establish an escrow account for the subscriptions, which shall be delivered by the Investor as provided in this Section 8 (the “Escrow Account”). The escrow period shall begin on the date of this Agreement and shall terminate on the final disposition of the monies held in the Escrow Account hereunder.
(b)
Delivery of Subscription Amount. The Investor shall deliver to the Escrow Agent (i) the fully-executed Agreement and (ii) the Subscription Amount on the signature page hereto (the “Subscription Amount”), for deposit in the Escrow Account, by check of immediately available funds payable as follows: “Steven James Davis APC Trust Account” and the memo shall note “Sugarmade”. The Escrow Account shall be maintained at the following bank:
Bank of America
1340 Encinitas Blvd.
Encinitas, California 92024-2889
Telephone (760) 943-6172
Prior to the distribution of funds from the Escrow Account in accordance with this Section 8, the Company and the Investor agree that no amounts deposited in the Escrow Account shall become the property of the Company.
(c)
Escrow Agent to Hold and Disburse Funds. The Escrow Agent will hold and disburse funds received by it pursuant to the terms of this Agreement, as follows:
(A)
The Investor authorizes the Escrow Agent to release to the Company in exchange for the Securities the Subscription Amount held in escrow upon the satisfaction of the Offering Closing Conditions. Additionally, in the sole discretion of the Escrow Agent, before releasing the Subscription Amount held in escrow, the Escrow Agent may require a written disbursement authorization (in a form prepared by the Escrow Agent) from the Investor
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authorizing the Escrow Agent to release the Subscription Amount to the Company in exchange for the Securities.
(B)
No interest will be paid on the monies held in the Escrow Account hereunder.
(C)
If the Closing does not occur by 5:00 P.M. Pacific Standard Time on or before May 31, 2011, the Escrow Agent will promptly return the Subscription Amount to the Investor, without interest, and the Escrow Agent shall notify the Company and the Investor of the distribution of such funds.
(D)
The Escrow Agent may deduct from the Subscription Amount any wire transaction fees which may be assessed by Bank of America for incoming and outgoing wire transfers.
(F)
The Investor acknowledges and agrees that under the terms of the definitive agreement for the Public Company Transaction it may not receive a physical certificate for Company Shares or Warrant Agreement for the Warrants at the Closing, but may instead receive a physical certificate for any equivalent amount of shares of PubCo common stock and warrant agreement for PubCo warrants, in which event and all references in this Agreement to receiving “Securities” shall be for shares of PubCo common stock and warrants to purchase PubCo common stock.
(d)
No Implied Duties of the Escrow Agent. It is expressly agreed and understood that (i) the Escrow Agent is serving as escrow agent solely as an accommodation to the Company and the Investor, and each of the Company and the Investor agrees that the Escrow Agent shall not be liable to the Investor, the Company or any other person for any error of judgment, mistake or act of omission hereunder or any matter or thing arising out of its conduct hereunder, except for the Escrow Agent’s willful misconduct or gross negligence, (ii) the Escrow Agent shall have, and be under, no other duties or obligations and shall not be required to perform any tasks other than those expressly described in this Agreement, (iii) the Escrow Agent is acting hereunder as a depository only and is not responsible or liable in any manner whatsoever for the identity, authority or rights of any person claiming to have rights to the funds held in the Escrow Account or for the terms and conditions of any instrument pursuant to which the Company and the Investor may act, and (iv) the Escrow Agent is acting, and may continue to act, as counsel to the Company in connection with various legal matters, including but not limited to, the Public Transaction, and any disputes or litigation which may arise in connection with the Public Transaction and/or any document(s) or instrument(s) delivered in connection therewith.
(e)
Reliance of the Escrow Agent on Documents. The Escrow Agent may (i) act in reliance upon any writing or instrument or signature which it, in good faith, believes to be genuine; (ii) assume the validity and accuracy of any statement or assertion contained in such a writing or instrument; and (iii) assume that any person purporting to give any writing, notice, advice, or instructions in connection with the provisions of this Agreement has been duly authorized to do so. The Escrow Agent shall not be liable in any manner for the sufficiency or
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correctness as to form, execution, or validity of any instrument or copy of any instrument deposited in escrow, nor as to the identity, authority, or right of any person executing the same, and its duties shall be limited to those specifically provided in this Agreement.
(f)
Indemnification of the Escrow Agent. Unless the Escrow Agent discharges any of its duties under this Agreement in a grossly negligent manner or is guilty of willful misconduct with regard to its duties under this Agreement, (i) the Escrow Agent shall not be liable to any person for any action taken or loss suffered by such person, nor for any mistake of fact, error of judgment, or for any actions or omissions of any kind or any matter or thing arising out of its conduct hereunder; (ii) the Company and the Investor shall, jointly and severally, indemnify the Escrow Agent and hold it harmless against and in respect of any and all claims, liabilities, losses, actions, suits or proceedings, or other expenses, fees, or charges of any character or nature, public or private, which it may incur or with which it may be threatened by reason of its acting as escrow agent under this Agreement; and (iii) the Company and the Investor shall indemnify the Escrow Agent against any and all reasonable expenses, including reasonable attorneys’ fees and the cost of defending any action, suit or proceeding or resisting any claim in such capacity, both at the trial and appellate levels; provided that any fees payable to the Escrow Agent for professional services rendered in connection with discharging its duties hereunder shall be paid by the Company. The Company shall cause PubCo to provide the Escrow Agent the same indemnity as provided by the Company under this Section 8(f).
(g)
Discretion of the Escrow Agent to File an Interpleader Action. The Escrow Agent is acting as a stakeholder only with respect to the funds held in the Escrow Account. If there is any dispute as to whether the Escrow Agent is obligated to deliver any of the funds held in the Escrow Account or as to whom any of said funds are to be delivered, the Escrow Agent shall not be required to make any delivery, but in such event the Escrow Agent may hold the same until receipt by the Escrow Agent of an authorization in writing, signed by the Company and the Investor, directing the disposition of the such funds, or in the absence of such authorization, the Escrow Agent may hold the funds held in the Escrow Account until the final determination of the rights of the Investor and the Company in an appropriate proceeding. The Escrow Agent may at any time, but shall not be required to, file an action in interpleader to resolve any disagreement in a court of competent jurisdiction. The Escrow Agent shall be indemnified, jointly and severally, by the Company and the Investor for all reasonable costs and reasonable attorneys’ fees (both trial and appellate) incurred in its capacity as escrow agent in connection with any such interpleader action and shall be fully protected in suspending all or part of its activities under this Agreement until a judgment in the interpleader action is entered and becomes final.
(h)
Consultation with Counsel. The Escrow Agent may consult with counsel of its own choice and shall have full and complete authorization and protection to act in accordance with the opinion of such counsel as to any matters in connection with this Agreement to the extent that any act or failure to act undertaken on the advice of counsel is undertaken in good faith and is not contrary to the specific provisions of this Agreement. The Escrow Agent shall not be liable for (i) any action taken in reliance upon the advice of counsel and in good faith or (ii) any mistakes of fact or errors of judgment, or for any acts or omissions of any kind or any
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matter or thing arising out of its conduct hereunder, unless any of such actions, omissions or mistakes are caused by its gross negligence or willful misconduct.
(i)
Termination of Agreement and Resignation of Escrow Agent.
(A)
This Agreement shall terminate on the final disposition of the monies and property held in the Escrow Account hereunder, provided that the rights of the Escrow Agent and the obligations of the other parties hereto under Sections 8 (d), (e), (f), (g) and (h) shall survive the termination hereof.
(B)
The Escrow Agent may resign at any time and be discharged from its duties as escrow agent hereunder by giving the Company and the Investor at least 3 days’ prior written notice thereof, provided that, except as set forth below, a new escrow agent is appointed by the Investor with the consent of the Company, which shall not be unreasonably withheld. As soon as practicable after its resignation, the Escrow Agent shall turn over to a successor escrow agent appointed by the Investor all funds held hereunder upon presentation of the document appointing the new escrow agent and its acceptance thereof. If no new escrow agent is so appointed within the 10-day period following such notice of resignation, the Escrow Agent may deposit the aforesaid funds with any court it deems appropriate and shall so notify the Company and the Investor.
(j)
Form of Payments by Escrow Agent. All amounts referred to herein are expressed in United States Dollars and all payments by the Escrow Agent shall be made in such dollars.
(k)
Compensation of Escrow Agent. No fee shall be paid to the Escrow Agent for the services to be rendered as an escrow agent by the Escrow Agent hereunder.
(l)
Notices. All notices, requests, demands and other communications provided for herein shall be in writing, shall be delivered facsimile transmission (with printed confirmation of receipt); shall be deemed given when received; and shall be addressed to the parties hereto at their respective address listed above or on the signature page hereto, or to such other persons or addresses as the relevant party shall designate as to itself from time to time in writing delivered in like manner.
(m)
Further Assurances. From time to time on and after the date hereof, the Company and/or the Investor shall deliver or cause to be delivered to the Escrow Agent such further documents and instruments and shall do and cause to be done such further acts as the Escrow Agent shall reasonably request (it being understood that the Escrow Agent shall have no obligation to make any such request) to carry out more effectively the provisions and purposes of this Agreement, to evidence compliance herewith or to assure itself that it is protected in acting hereunder.
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(n)
Closing. The closing (the "Closing") of the Offering shall take place on the date which the Offering Closing Conditions are satisfied. The date upon which the Closing actually occurs is referred to herein as the “Closing Date”.
9.
Miscellaneous. This Agreement is not assignable by the Investor without the consent of the Company. The representations and warranties made by the Investor in this Subscription Agreement shall survive the closing of the transactions contemplated hereby and any investigation made by the Company or its agents. This Agreement may be executed in one or more counterparts and my be delivered by facsimile transmission or by email transmission in PDF format, all of which together shall constitute one instrument, and shall be governed by and construed in accordance with the laws of the State of California.
IN WITNESS WHEREOF, the undersigned has executed this Subscription Agreement on the date set forth below.
Date: _____________, 2011
Amount of Subscription:
$____________________________
Number of Units: ____________
INVESTOR:
__________________________________________
(Signature)
__________________________________________
(Print Name; First, Middle, Last)
Address of Investor:
_____________________________
_____________________________
_____________________________
Telephone Number:
(_____) _______________
Facsimile Number:
(_____) _______________
U.S. Taxpayer Identification or
Social Security Number:
_____-_____-_____
[Sugarmade, Inc. Subscription Agreement Signature Page]
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ACCEPTANCE OF SUBSCRIPTION
Sugarmade, Inc., a California corporation, hereby accepts the above subscription for $________________/_____________ units of the Company.
______________________________________
Scott Lantz, Chief Executive Officer
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FORM W-9
TO BE COMPLETED AND SIGNED BY OR ON BEHALF OF ALL SUBSCRIBERS:
SUBSTITUTE FORM W-9
Department of the Treasury
Internal Revenue Service
Request for Taxpayer
Identification Number ("TIN")
Part 1 -
Please provide your TIN below and certify by signing and dating below.
Social Security Number or Employer Identification Number:
Part 2 -
Check the box if you are NOT subject to backup withholding under the provisions of Section 3406(a)(1)(C) of the Internal Revenue Code because (1) you have not been notified that you are subject to backup withholding as a result of failure to report all interest or dividends or (2) the Internal Revenue Service has notified you that you are no longer subject to backup withholding.
Part 3 -
Check the box if you are awaiting your TIN.
CERTIFICATION -- Under penalties of perjury, I certify that the information provided on this form is true, correct and complete.
Signature
Date:
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ENTITY CERTIFICATE
TO BE COMPLETED AND SIGNED ON BEHALF OF A SUBSCRIBER THAT IS A CORPORATION, PARTNERSHIP, LIMITED LIABILITY COMPANY, TRUST, ESTATE OR OTHER ENTITY ONLY:
ENTITY CERTIFICATE
Name of corporation, partnership, limited liability company, trust, estate or other entity:
_________________________________ ("Subscriber")
The undersigned, a duly authorized director, officer, general partner, trustee, executor or other similar functionary of Subscriber, acting for and on behalf of Subscriber, being thereunto duly authorized, hereby certifies to the Company, as follows:
.
Subscriber has been duly formed, is validly existing, and has full power and authority to invest in the Securities issued by the Company, to execute and deliver the Sugarmade, Inc. Subscription Agreement (the "Agreement") to which this Entity Certificate is attached, and to perform its obligations thereunder.
.
Subscriber has taken all action necessary to authorize the execution and delivery of the Agreement and the performance of its obligations thereunder.
.
The Agreement has been executed and delivered by a duly authorized director, officer, general partner, member, manager, trustee, executor or other similar functionary of Subscriber and upon acceptance by the Company, the Agreement will be a valid and binding agreement of Subscriber, enforceable against Subscriber in accordance with its terms.
.
Attached hereto is a true and complete copy of the articles or certificate of incorporation (if Subscriber is a corporation), the partnership agreement (if Subscriber is a partnership), the limited liability company agreement (if Subscriber is a limited liability company), the trust agreement (if Subscriber is a trust), the letters testamentary (if Subscriber is an estate), or other organizational document (if Subscriber is any other entity), and such organizational document is in full force and effect on the date hereof.
.
There are no pending or contemplated proceedings for the merger, consolidation, liquidation, sale of all or substantially all of the assets, or dissolution of Subscriber.
.
The execution and delivery of the Agreement and compliance by such Subscriber with its respective obligations thereunder, do not and will not conflict with or constitute a breach of, or a default under, or result in the creation or imposition of any
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lien, charge or encumbrance upon any property or assets of such Subscriber pursuant to, any contract, indenture, mortgage, loan agreement, note, lease or other instrument to which such Subscriber is a party or by which it may be bound or to which any of the property or assets of such Subscriber is subject, nor will such action result in any violation of the provisions of the organizational document of such Subscriber or any law, administrative regulation or administrative or court order or decree, and no authorization, approval, consent, registration, qualification, decree or order of or with any court or governmental authority, agency or official is required in connection with the execution, delivery or performance by such Subscriber of the Agreement.
.
Subscriber hereby voluntarily evidences its knowledge of the existence and contents of the Agreement and acknowledges that the Agreement and its investment in the Company is in the best interests of Subscriber and all persons having a beneficial interest therein.
This Entity Certificate is executed and delivered by Subscriber on ________________, 2011.
__________________________________________
Print name of entity
By:
Name:
Title:
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EXHIBIT A
FORM OF WARRANT
THIS WARRANT, AND ALL SHARES OF STOCK ISSUABLE UNDER THIS WARRANT, HAVE BEEN AND WILL BE ISSUED WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM.
COMMON STOCK PURCHASE WARRANT
SUGARMADE, INC.
Warrant Shares: _________
Issue Date: _________, 2011
THIS COMMON STOCK PURCHASE WARRANT (the “Warrant”) certifies that, for value received, __________________ (the “Holder”) is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after Issue Date above and on or prior to the close of business on the second anniversary of the Initial Exercise Date (the “Termination Date”) but not thereafter, to subscribe for and purchase from SugarMade, Inc., a California corporation (the “Company”), up to _______ shares (the “Warrant Shares”) of Common Stock. The purchase price of one share of Common Stock under this Warrant shall be equal to the Exercise Price, as defined in Section 2(b).
1.
Definitions. As used in this Agreement, the following terms shall have the meanings ascribed below:
"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 of 1933, as amended.
"Business Days" 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 New York are authorized or required by law or other governmental action to close.
"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.
"Trading Market" means any of the following markets or exchanges on which the Common Stock is listed or quoted for trading on the date in question: the NYSE AMEX, the
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NASDAQ Capital Market, the NASDAQ Global Market, the NASDAQ Global Select Market, or the New York Stock Exchange (or any successors to any of the foregoing).
"Transfer Agent" means any transfer agent hired by the Company to hold and maintain the Company's register for holders of its Common Stock.
“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 4:00 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 for trading on the OTC Bulletin Board and if prices for the Common Stock are then reported in the “Pink Sheets” published by Pink OTC Markets, Inc. (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 Holders 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.
2.
Exercise.
(a)
Exercise of Warrant. This Warrant may be exercised, in whole or in part, at any time or times on or after the Issue Date and on or before the Termination Date by delivery to the Company (or such other office or agency of the Company as it may designate by notice in writing to the registered Holder at the address of the Holder appearing on the books of the Company) of (1) a duly executed facsimile copy of the Notice of Exercise Form annexed hereto and (2) delivering payment of the aggregate Exercise Price of the shares purchased in the Notice of Exercise Form by wire transfer or cashier’s check drawn on a United States bank. The Holder shall not be required to physically surrender this Warrant to the Company until the Holder has purchased all of the Warrant Shares available hereunder and the Warrant has been exercised in full, in which case, the Holder shall surrender this Warrant to the Company for cancellation. Partial exercises of this Warrant resulting in purchases of a portion of the total number of Warrant Shares available hereunder shall have the effect of lowering the outstanding number of Warrant Shares purchasable hereunder in an amount equal to the applicable number of Warrant Shares purchased. The Holder and the Company shall maintain records showing the number of Warrant Shares purchased and the date of such purchases. The Company shall deliver any objection to any Notice of Exercise Form within two Business Days of receipt of such notice. In the event of any dispute or discrepancy, the records of the Holder shall be controlling and determinative in the absence of manifest error. The Holder and any assignee, by acceptance of this Warrant, acknowledge and agree that, by reason of the provisions of this paragraph, following the purchase of a portion of the Warrant Shares hereunder, the number of Warrant Shares available for purchase hereunder at any given time may be less than the amount stated on the face hereof.
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(b)
Exercise Price. The exercise price per share of the Common Stock under this Warrant shall be $1.50, subject to adjustment hereunder (the “Exercise Price”).
(c)
Mechanics of Exercise.
i.
Delivery of Certificates Upon Exercise. Certificates for shares purchased hereunder shall be transmitted by the Transfer Agent to the Holder by crediting the account of the Holder’s prime broker with the Depository Trust Company through its Deposit Withdrawal Agent Commission (“DWAC”) system if the Company is then a participant in such system and there is an effective Registration Statement permitting the issuance of the Warrant Shares to or resale of the Warrant Shares by Holder, and otherwise by physical delivery to the address specified by the Holder in the Notice of Exercise by the date that is three (3) Trading Days after the latest of (A) the delivery to the Company of the Notice of Exercise Form, (B) surrender of this Warrant (if required) and (C) payment of the aggregate Exercise Price as set forth above (such date, the “Warrant Share Delivery Date”). This Warrant shall be deemed to have been exercised on the first date on which all of the foregoing have been delivered to the Company. The Warrant Shares shall be deemed to have been issued, and Holder or any other person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the Warrant has been exercised, with payment to the Company of the Exercise Price and all taxes required to be paid by the Holder, if any, pursuant to Section 2(c)(v) prior to the issuance of such shares, having been paid.
ii.
Delivery of New Warrants Upon Exercise. If this Warrant shall have been exercised in part, the Company shall, at the request of a Holder and upon surrender of this Warrant certificate, at the time of delivery of the certificate or certificates representing Warrant Shares, deliver to Holder a new Warrant evidencing the rights of Holder to purchase the un-purchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.
iii.
Rescission Rights. If the Company fails to cause the Transfer Agent to transmit to the Holder a certificate or the certificates representing the Warrant Shares pursuant to Section 2(c)(i) by the Warrant Share Delivery Date, then, the Holder will have the right to rescind such exercise.
iv.
No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. As to any fraction of a share which the Holder would otherwise be entitled to purchase upon such exercise, 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 Exercise Price or round up to the next whole share.
v.
Charges, Taxes and Expenses. Issuance of certificates for Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided, however, that in the event certificates for Warrant Shares are to be issued in a name other than the name of the Holder, this
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Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto.
vi.
Closing of Books. The Company will not close its stockholder books or records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof.
(d)
Holder’s Exercise Limitations. The Company shall not effect any exercise of this Warrant, and a Holder shall not have the right to exercise any portion of this Warrant, pursuant to Section 2 or otherwise, to the extent that after giving effect to such issuance after exercise as set forth on the applicable Notice of Exercise, the Holder (together with the Holder’s Affiliates, and any other Persons acting as a group together with the Holder or any of the Holder’s Affiliates), would beneficially own in excess of the Beneficial Ownership Limitation (as defined below). For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which such determination is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (i) exercise of the remaining, non-exercised portion of this Warrant beneficially owned by the Holder or any of its Affiliates and (ii) exercise or conversion of the unexercised or non-converted portion of any other securities of the Company (including, without limitation, any other Common Stock Equivalents) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its Affiliates. Except as set forth in the preceding sentence, for purposes of this Section 2(d), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder, it being acknowledged by the Holder that the Company is not representing to the Holder that such calculation is in compliance with Section 13(d) of the Exchange Act and the Holder is solely responsible for any schedules required to be filed in accordance therewith. To the extent that the limitation contained in this Section 2(d) applies, the determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates) and of which portion of this Warrant is exercisable shall be in the sole discretion of the Holder, and the submission of a Notice of Exercise shall be deemed to be the Holder’s determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates) and of which portion of this Warrant is exercisable, in each case subject to the Beneficial Ownership Limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination. Upon the written or oral request of a Holder, the Company shall within two Business 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 Warrant, 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 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon exercise of this Warrant. The Holder, upon not less than 61 days’ prior notice to the Company, may increase or decrease the Beneficial Ownership Limitation provisions of this Section 2(d), provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of the number of shares of the Common Stock
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outstanding immediately after giving effect to the issuance of shares of Common Stock upon exercise of this Warrant held by the Holder and the provisions of this Section 2(d) shall continue to apply. Any such increase or decrease will not be effective until the 61st day after such notice is delivered to the Company. The provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 2(d) 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 Warrant.
3.
Certain Adjustments.
(a)
Stock Dividends and Splits. If the Company, at any time while this Warrant is outstanding: (i) pays a stock dividend or otherwise makes a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in shares of Common Stock (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company upon exercise of this Warrant or any other warrant or option issued by the Company), (ii) subdivides outstanding shares of Common Stock into a larger number of shares, (iii) combines (including by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares, or (iv) issues by reclassification of shares of the Common Stock any shares of capital stock of the Company, then in each case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event, and the number of shares issuable upon exercise of this Warrant shall be proportionately adjusted such that the aggregate Exercise Price of this Warrant shall remain unchanged. Any adjustment made pursuant to this Section 3(a) 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)
Pro Rata Distributions. If the Company, at any time while this Warrant is outstanding, shall distribute to all holders of Common Stock (and not to the Holders) evidences of its indebtedness or assets (including cash and cash dividends other than regular cash dividends paid out of earnings or earned surplus, determined in accordance with GAAP) or rights or warrants to subscribe for or purchase any security other than the Common Stock), then in each such case the Exercise Price shall be adjusted by multiplying the Exercise Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the VWAP determined as of the record date mentioned above, and of which the numerator shall be such VWAP on such record date less the then per share fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of the Common Stock as determined by the Board of Directors in good faith. In either case the adjustments shall be described in a statement provided to the Holder of the portion of assets or evidences of indebtedness so distributed or such subscription rights applicable to one share of Common Stock. Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date mentioned above.
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(c)
Fundamental Transaction. If, at any time while this Warrant is outstanding, (i) the Company, directly or indirectly, in one or more related transactions effects any merger or consolidation of the Company with or into another Person, (ii) the Company, directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Stock, (iv) the Company, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or recapitalization 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, (v) the Company, directly or indirectly, in one or more related transactions consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person whereby such other Person acquires more than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock or share purchase agreement or other business combination) (each a “Fundamental Transaction”), then, upon any subsequent exercise of this Warrant, the Holder shall have the right to receive, for each Warrant Share that would have been issuable upon such exercise immediately prior to the occurrence of such Fundamental Transaction, at the option of the Holder (without regard to any limitation in Section 2(d) on the exercise of this Warrant), the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and any additional consideration (the “Alternate Consideration”) receivable as a result of such Fundamental Transaction by a holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such Fundamental Transaction (without regard to any limitation in Section 2(d) on the exercise of this Warrant). For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Exercise Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common 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 exercise of this Warrant following such Fundamental Transaction. .
(d)
Calculations. All calculations under this Section 3 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 3, 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.
(e)
Notice to Holder.
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i.
Adjustment to Exercise Price. Whenever the Exercise Price is adjusted pursuant to any provision of this Section 3, the Company shall promptly mail to the Holder a notice setting forth the Exercise Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment.
ii.
Notice to Allow Exercise 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 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, or 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 mailed to the Holder at its last address as it shall appear upon the Warrant Register of the Company, at least 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 mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. To the extent that any notice provided hereunder constitutes, or contains, material, non-public information regarding the Company or any of the Subsidiaries, the Company shall simultaneously file such notice with the Commission pursuant to a Current Report on Form 8-K. The Holder shall remain entitled to exercise this Warrant during the period commencing on the date of such notice to the effective date of the event triggering such notice except as may otherwise be expressly set forth herein.
4.
Transfer of Warrant.
(a)
Transferability. This Warrant and all rights hereunder (including, without limitation, any registration rights) are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company or its designated agent, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees, as applicable, and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. The Warrant, if properly assigned
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in accordance herewith, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued.
(b)
New Warrants. This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 4(a), as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. All Warrants issued on transfers or exchanges shall be dated the initial issuance date set forth on the first page of this Warrant and shall be identical with this Warrant except as to the number of Warrant Shares issuable pursuant thereto.
(c)
Warrant Register. The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the “Warrant Register”), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary.
(d)
Understandings or Arrangements.
Such Holder is acquiring this Warrant as principal for its own account and has no direct or indirect arrangement or understandings with any other persons to distribute or regarding the distribution of such Warrant (this representation and warranty not limiting such Holder’s right to sell the Warrant pursuant to the Registration Statement or otherwise in compliance with applicable federal and state securities laws.) Such Holder is acquiring this Warrant hereunder in the ordinary course of its business.
5.
Miscellaneous.
(a)
No Rights as Stockholder Until Exercise. This Warrant does not entitle the Holder to any voting rights, dividends or other rights as a stockholder of the Company prior to the exercise hereof as set forth in Section 2(c)(i).
(b)
Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall include the posting of a bond if reasonably required by the Company), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate.
(c)
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.
(d)
Authorized Shares. The Company covenants that, during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a
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sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the Trading Market upon which the Common Stock may be listed. The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant and payment for such Warrant Shares in accordance herewith, be duly authorized, validly issued, fully paid and non-assessable and free from all taxes, liens and charges created by the Company in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue).
(e)
No Impairment. Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment.
(f)
Jurisdiction. This Agreement shall be governed by and construed in accordance with the laws of the State of California, without reference to conflict of laws provisions.
(g)
Restrictions. The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered, will have restrictions upon resale imposed by state and federal securities laws. Under no circumstances will this warrant be settled on a net cash basis.
(h)
Non-waiver and Expenses. No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice Holder’s rights, powers or remedies. Without limiting any other provision of this Warrant or the Purchase Agreement, if the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys’ fees, including those of appellate proceedings, incurred by Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder.
(i)
Notices. All notices, requests, demands and other communications provided for herein shall be in writing, shall be delivered facsimile transmission (with printed confirmation of receipt); shall be deemed given when received; and shall be addressed to the Company at its principal corporate offices and to the Holder at the address on the Company's records, or to such other persons or addresses as the relevant party shall designate as to itself from time to time in writing delivered in like manner.
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(j)
Successors and Assigns. Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors and permitted assigns of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of any Holder from time to time of this Warrant and shall be enforceable by the Holder or holder of Warrant Shares.
(k)
Amendment. This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company and Holder.
********************
(Signature Pages Follow)
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IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized as of the date first above indicated.
SUGARMADE, INC. |
By:__________________________________________ Scott Lantz Chief Executive Officer |
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NOTICE OF EXERCISE
TO:
SUGARMADE, INC.
(1)
The undersigned hereby elects to purchase ________ Warrant Shares of the Company pursuant to the terms of the attached Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any. Payment shall take be in lawful money of the United States
(2)
Please issue a certificate or certificates representing said Warrant Shares in the name of the undersigned or in such other name as is specified below:
_______________________________
The Warrant Shares shall be delivered to the following DWAC Account Number or by physical delivery of a certificate to:
_______________________________
_______________________________
_______________________________
[SIGNATURE OF HOLDER]
Name of Investing Entity: _______________________________________________________
Signature of Authorized Signatory of Investing Entity: _________________________________
Name of Authorized Signatory: ___________________________________________________
Title of Authorized Signatory: ____________________________________________________
Date:_________________________________________________________________________
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ASSIGNMENT FORM
(To assign the foregoing warrant, execute
this form and supply required information.
Do not use this form to exercise the warrant.)
FOR VALUE RECEIVED, [____] all of or [_______] shares of the foregoing Warrant and all rights evidenced thereby are hereby assigned to
_______________________________________________ whose address is
_______________________________________________________________.
_______________________________________________________________
Dated: ______________, _______
Holder’s Signature:
_____________________________
Holder’s Address:
_____________________________
_____________________________
Signature Guaranteed: ___________________________________________
NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank or trust company. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.
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CONVERSION AGREEMENT
This CONVERSION AGREEMENT ("Agreement") is entered into effective the __ day of ___________, 2011 ("Effective Date"), by and between Sugarmade, Inc., a privately held California corporation (the "Company"), and ___________________ ("Investor"), with reference to the following facts:
1)
Investor loaned to the Company the amount of $________ as evidenced by a Promissory Note dated _______, 200__ in the principal amount of $________ in favor of the Investor (the "Note"). As of March 31, 2011, the outstanding principal balance under the Note owed to Investor is $_______________ (the "Outstanding Balance"). Investor understands that interest earned under the Note through the Closing Date (as defined below) will be paid to Investor in cash upon the Closing (as defined below), and will not be converted into equity of the Company.
2)
Investor wishes to convert the Outstanding Balance into equity of the Company, and the Company is willing to issue shares of its Common Stock in return for the conversion of the Outstanding Balance under the Note and as complete satisfaction of all obligations and amounts payable pursuant to the Note.
C.
The Company intends to enter into an agreement with a public company (“PubCo”) that trades on the OTC Bulletin board pursuant to which PubCo shall acquire 100% of the outstanding equity of the Company and all shareholders of the Company (including the Investor) shall become shareholders of PubCo (the “Public Company Transaction”). The Company intends that the Public Company Transaction shall be conducted on a 1:1.765 exchange basis in which the Investor shall receive 1.765 PubCo share for each 1 Share of the Company.
NOW, THEREFORE, the Company and Investor agree as follows:
AGREEMENT
1.
Conversion
. Investor hereby elects to convert the entire Outstanding Balance in exchange for _______________ (___________) shares of Common Stock of the Company (the "Shares") calculated as the Outstanding Balance divided by $2.70 per share, and the Company agrees to sell and convey the Shares to Investor, subject to the terms and conditions set forth in this Agreement.
Upon the Closing, Investor hereby acknowledges and agrees that such conversion shall constitute payment in full of all amounts owed to Investor by the Company under the Note, and the Note shall be cancelled and be of no further force or effect.
2.
Closing
. The closing of the transaction contemplated by this Agreement ("Closing") shall be held at the principal offices of the Company at a time agreed upon by the Company and Investor at any time on or before April 30, 2011 (the "Closing Date"). At the Closing, the Company shall deliver to Investor share certificate(s) representing the Shares, against delivery by Investor to the Company of the Note marked "Paid in Full".
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3.
Risk Factors
. Investor understands and acknowledges that the Company is subject to the types of risks applicable to any business of the nature of the Company’s business including, but not limited to, the following:
3.1
No Commitments for Additional Financing. Additional capital may be required in order to further expand the business of the Company as may be envisioned. The Company may choose to raise additional capital from financing activities. For this purpose, the Company may undertake additional private offerings of equity securities or debt. The Company has no current commitments from underwriters or investors for any such offerings and no assurance can be given that the Company will be able to raise capital if needed.
3.2
Dividends. The directors of the Company have the authority to determine the amount and timing of all dividends. Payment of dividends, if any, will depend, among other factors, on earnings, capital requirements and the general operating and financial conditions of the Company, as well as legal limitations on the payment of dividends.
3.3
Limited Operating History. The Company was formed in 2009 and has a limited operating history. The Company has limited historical financial data upon which to base planned operating expenses and forecasted revenues. Because the Company has a limited operating history, its historical financial information is not a reliable indicator of future performance. Therefore, it is difficult to evaluate the Company’s business and prospects.
3.4
Reliance on Intellectual Property. The Company is a party to the Exclusive License and Supply Agreement dated January 1, 2011 with The Sugar Cane Paper Co., Ltd. (the "License Agreement") pursuant to which it licenses certain intellectual property which includes the United States Patent Application No. CN 201686902 U entitled "A mould to be used for moulding plant fiber into the desired shape," filed on March 25, 2010. The License Agreement is valid for a term of twenty (20) years, and can be renewed for subsequent years subject to certain terms contained therein. The Company has made the License Agreement available for Investor’s review on a confidential basis. The Company’s success depends in part on its ability to continue to license the above described intellectual property and obtain intellectual property protection for its products, preserve its trade secrets, defend and enforce its rights against infringement, and operate without infringing the proprietary rights of third parties, and the ability to preserve these intellectual property rights cannot be guaranteed by the Company. Despite efforts by the Company to protect its proprietary rights, unauthorized parties may attempt to obtain, copy, or use that proprietary intellectual property in violation of the License Agreement. There can be no assurance that pending applications and issuance of patents will be granted to the Company, that the scope of any patents issued will be as broad as the scope of the patent applications, that the scope of any patent protection will exclude competitors or provide competitive advantages to the Company, or that others will not claim rights in or ownership of the patents and other proprietary rights held or licensed by the Company. As of the Effective Date, the Company has no actual knowledge of any conflicts with third parties over intellectual property rights as described herein.
3.5
Dependence On Key Personnel. The Company will depend on the services of its founders, which, if not available, might have a material adverse effect on the business. The Company’s future success depends on its ability to identify, attract, hire, train,
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retain and motivate skilled managerial, marketing and customer service personnel. At the present time the Company does not carry any key person life insurance. The Company may attempt to secure key person life insurance covering key personnel as determined by the Board of Directors prior to the end of the current year.
3.6
Absence of Public Market. As of the Effective Date, there is no established trading market for the Shares of the Company. Accordingly, an investor may be unable to liquidate an investment in the shares for an indefinite period, whether in the event of an emergency or for any other reason. In addition, Investor must be able to withstand a total loss of its investment in the Shares.
3.7
Lack of Diversification. The Company’s business is manufacture of paper. In view of the limited scope of its limited business, it may have greater risks from casualties, competition, economic problems and similar matters than would be the case with a more diversified company.
4.
Representations, Warranties and Agreements by Investor
. Investor hereby represents, warrants and agrees as follows:
4.1
The Shares are being purchased by Investor and not by any other person, solely by conversion of the Outstanding Balance under the Note and not with the funds of any other person, and for the account of Investor, not as a nominee or agent and not for the account of any other person. No other person will have any interest, beneficial or otherwise, in the Shares. Investor is not obligated to transfer Shares to any other person nor does Investor have any agreement or understanding to do so. Investor is purchasing the Shares for investment for an indefinite period not with a view to the sale or distribution of any part or all thereof by public or private sale or other disposition. Investor has no intention of selling, granting any participation in or otherwise distributing or disposing of any Shares. Investor does not intend to subdivide Investor’s purchase of Shares with any person.
4.2
Investor has been advised that the Shares have not been registered under the Securities Act of 1933, as amended (the "Act"), or qualified under the California Corporate Securities Law of 1968, as amended (the "Law"), on the ground, among others, that no distribution or public offering of the Shares is to be effected, and the Shares will be issued by the Company in connection with a transaction that is exempt under the Act and that does not involve any public offering within the meaning of the Act or the Law, under the respective rules and regulations of the Securities and Exchange Commission and the California Commissioner of Corporations. Investor understands that the Shares will be "restricted securities" as that term is defined in Rule 144 under the Act and, accordingly, that the Shares must be held indefinitely unless they are subsequently registered under the Act and qualified under the Law and any other applicable securities law or exemptions from such registration and qualification are available. Investor understands that the Company is under no obligation to so register Shares under the Act, to qualify Shares under any securities law, or to comply with Regulation A or any other exemption under the Act, the Law or any other law. Investor understands that Rule 144 is not available for any sale of Shares. Investor understands that the Company is relying in part on Investor’s representations as set forth herein for purposes of claiming such exemptions and that the basis for such exemptions may not be present if, notwithstanding Investor’s representations,
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Investor intends to acquire Shares for resale on the occurrence or nonoccurrence of some predetermined event. Investor has no such intention.
4.3
Investor is knowledgeable concerning the Company’s business, and has had unrestricted access to all information relating to the Company prior to this transaction. Investor acknowledges that it has been afforded the opportunity to consider, inspect, and review to its satisfaction the financial, economic, and legal condition of the Company, and all files and information relating to the Company and its assets, as it has deemed necessary or advisable with respect to the purchase of the Shares. It is acknowledged by Investor that the scope and duration of its investigation was determined by it, and was not limited in any respect by the Company.
4.4
Investor has a preexisting personal or business relationship with one or more of the founding shareholders and directors of the Company who control the Company, consisting of personal or business contacts of a nature and duration sufficient to enable Investor, as a reasonably prudent investor, to be aware of the character, business acumen and general business and financial circumstances of the persons with whom such relationship exists; or by reason of Investor’s business and financial experience or the business or financial experience of Investor’s professional advisers who are unaffiliated with and who are not compensated by the Company or any affiliate or selling agent of the Company, directly or indirectly, Investor has the capacity to protect Investor’s own interests in connection with Investor’s purchase of Shares.
4.5
Investor understands that Regulation D, promulgated under the Act, defines "accredited investor" as any person coming within any of the following categories:
4.5.1
Any natural person whose individual net worth, or joint net worth with that person’s spouse, at the time of his/her purchase exceeds $1,000,000;
4.5.2
Any natural person who had an individual income in excess of $200,000 in each of the two most recent years, or joint income with that person’s spouse in excess of $300,000 in each of those years, and has a reasonable expectation of reaching the same income level in the current year;
4.5.3
A revocable trust, each grantor of which qualifies under 4.5.1 or 4.5.2 above;
4.5.4
Any entity in which all of the equity owners are accredited investors;
4.5.5
A corporation or partnership, or an organization described in section 501(c)(3) of the Internal Revenue Code, or a Massachusetts or similar business trust, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000;
4.5.6
A trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a "sophisticated person," meaning a person who has such knowledge and experience in financial and business matters that he or she is capable of evaluating the merits and risks of the prospective investment; or
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4.5.7
Any private business development company as defined in Section 202(a)(22) of the Investment Advisors Act of 1940.
4.6
Investor hereby represents to the Company that Investor is an "accredited investor" within the meaning of Regulation D, and is included within the accredited investor category or categories defined in Section 4.5.1 to 4.5.7 above.
4.7
Investor acknowledges that the term "net worth" means the excess of total assets over total liabilities. In computing net worth, such Investor’s principal residence must be valued either at (A) cost, including the cost of improvements, net of current encumbrances upon the property or (B) the appraised value of the property as determined upon a written appraisal used by an institutional lender making a loan to the individual secured by the property, including the cost of subsequent improvements, net of current encumbrances upon the property. In determining income, Investor should add to Investor’s adjusted gross income any amounts attributable to tax exempt income received, losses claimed as a limited partner in any limited partnership, deductions claimed for depletion, contributions to an IRA or Keogh retirement plan, alimony payments, and any amount by which income from long-term capital gains has been reduced in arriving at adjusted gross income.
4.8
Investor is able to bear the economic risk of an investment in the Company, has the ability to hold the Shares indefinitely, Investor’s overall commitment to investments which are not readily marketable (such as the Shares) is not disproportionate to Investor’s net worth, and Investor has the financial ability to suffer a complete loss of Investor’s investment in the Shares.
4.9
Investor has all requisite power, authority, and capacity to purchase and hold the Shares and to execute, deliver, and comply with the terms of this Agreement, and such execution, delivery, and compliance does not conflict with or constitute a default under any instruments governing Investor, any law, regulation, or order, or any agreement to which Investor is a party or by which Investor may be bound.
4.10
Investor understands the meaning and legal consequences of Investor’s representations, warranties, covenants, and other agreements contained in this Agreement, and Investor understands that the Company has relied upon such representations, warranties, covenants, and agreements, including those with respect to compliance with applicable securities laws, rules, and regulations.
4.11
Investor has been afforded the opportunity to consult with Investor’s own legal, accounting, tax, investment and other advisers with respect to the tax treatment of an investment by Investor in the Shares and the merits and risks of an investment in the Shares.
5.
Certificates Representing Shares to be Legended
. Investor understands and agrees that any certificates representing Shares or relating to Shares will bear such legends as the Company may consider necessary or advisable to facilitate compliance with the Act, the Law and any other securities law, including without limitation legends stating that the Shares have not been registered under the Act or qualified under the Law and setting forth the limitations on dispositions imposed hereby.
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6.
Company May Refuse to Transfer
. Notwithstanding the foregoing, if, in the opinion of counsel for the Company, Investor has acted in a manner inconsistent with the representations and warranties in this Agreement, the Company may delay the transfer of Investor’s Shares until such time as counsel for the Company is of the opinion that such transfer will not require registration of Shares under the Act or qualification of Shares under the Law or any other securities law.
7.
Indemnification
. Investor hereby agrees to indemnify and defend the Company and its directors and officers and hold them harmless from and against any and all liability, damage, cost or expense incurred on account of or arising out of: (i) any breach of or inaccuracy in Investor’s representations, warranties or agreements herein; or (ii) any disposition of any Shares contrary to any of Investor’s representations, warranties or agreements herein; or (iii) any action, suit or proceeding based on (a) a claim that any of said representations, warranties or agreements were inaccurate or misleading or otherwise cause for obtaining damages or redress from the Company or any director or officer of the Company under the Act, or (b) any disposition of any Shares.
8.
Successors
. The representations, warranties and agreements contained in this Agreement shall be binding on Investor’s successors, assigns, heirs and legal representatives and shall inure to the benefit of the respective successors and assigns of the Company and its directors and officers.
9.
Modification
. This Agreement may be modified or rescinded only by a writing signed by all parties to this Agreement or by their duly authorized agents.
10.
Arbitration
. Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by binding arbitration in San Jose, California, before a single, neutral arbitrator administered by the American Arbitration Association in accordance with its Commercial Arbitration Rules, and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.
11.
Counterparts
. This Agreement may be signed in counterparts, each of which will be deemed an original, and delivered by facsimile transmission and shall have the same force and effect as if all parties executed one document.
12.
Entire Agreement
. This Agreement constitutes the entire agreement between the parties hereto pertaining to the subject matter hereof, and the final, complete and exclusive expression of the terms and conditions thereof. All prior agreements, representations, negotiations and understandings of the parties hereto, oral or written, express or implied, are hereby superseded and are of no further force or effect. Any agreements, understandings, warranties or representations not expressly contained in this Agreement shall in no way bind any party. To the maximum extent permitted by law, each party expressly waives any right of rescission and all claims for damages by reason of any statement, representation, warranty, promise and/or agreement, if any, not contained in or attached to this Agreement.
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13.
California Law
. This Agreement is made and entered into in the State of California and shall be interpreted, construed and enforced in accordance with the laws of the State of California without giving effect to its conflict of laws principles.
14.
Interpretation
. This Agreement shall not be interpreted against a party by virtue of such party’s participation in the drafting of the Agreement or any provisions herein.
Signature Page to Follow
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THE UNDERSIGNED INVESTOR HEREBY AFFIRMS THAT IT HAS READ THE FOREGOING AND IS FAMILIAR WITH THE CONTENTS OF THIS AGREEMENT AND THAT THE REPRESENTATIONS AND STATEMENTS OF THE INVESTOR CONTAINED HEREIN ARE TRUE AND ACCURATE.
| INVESTOR: [ ] [Name] By: Name: Title: Address: |
| SUGARMADE, INC. By: Name:__________________________ Title:___________________________ |
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Confidential |
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REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (this “Agreement”) is made and entered into as of April 27, 2011, by and among Diversified Opportunities, Inc., a Delaware corporation (the “Company”) and the investors signatory hereto (each, including their respective successors and assigns, an “Investor” and collectively, the “Investors”) with respect to the following facts:
A.
In connection with the Share Exchange Agreement by and among the parties hereto and the other parties signatory thereto dated April 23, 2011 (the “Exchange Agreement”), the Company has agreed, upon the terms and subject to the conditions set forth in the Exchange Agreement, to exchange all of the Sugarmade Shares owned by the Investors for the issuance and delivery by the Company of one (1) share of Common Stock, par value $0.001 per share, of the Company (the “Exchange Shares”), for each one (1) Sugarmade Share, and all of the Sugarmade Warrants owned by Investors, in exchange for the issuance of warrants (the “Company Warrants”) of the Company on substantially identical terms and conditions (the shares of Company Common Stock underlying the Company Warrants are the “Warrant Shares”).
B.
In accordance with the terms of the Exchange 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 intending to be legally bound, the Company and each of the Investors hereby agree as follows:
1.
Definitions. Capitalized terms used and not otherwise defined herein that are defined in the Exchange Agreement will have the respective meanings given such terms in the Exchange Agreement. As used in this Agreement, the following terms have the respective meanings set forth in this Section 1:
“Advice” has the meaning set forth in Section 8(d).
“ Commission Comments ” means written comments pertaining solely to Rule 415 which are received by the Company from the Commission to a filed Registration Statement, a copy of which shall have been provided by the Company to the Holders, which either (i) requires the Company to limit the number of Registrable Securities which may be included therein to a number which is less than the number sought to be included thereon as filed with the Commission or (ii) requires the Company to either exclude Registrable Securities held by specified Holders or deem such Holders to be underwriters with respect to Registrable Securities they seek to include in such Registration Statement.
“Cut Back Shares” has the meaning set forth in Section 2(b).
“Effective Date” means, as to a Registration Statement, the date on which such Registration Statement is first declared effective by the Commission.
“Effectiveness Date” means (a) with respect to the initial Registration Statement required to be filed pursuant to Section 2(a), the earlier of: (i) the 150th day following the Closing
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Date and (ii) the fifth Trading Day following the date on which the Company is notified by the Commission that the initial Registration Statement will not be reviewed or is no longer subject to further review and comments; and (b) with respect to any additional Registration Statements required to be filed pursuant to Section 2(a), the earlier of: (i) the 90th day following the applicable Filing Date for such additional Registration Statement(s) and (ii) the fifth Trading Day following the date on which the Company is notified by the Commission that such additional Registration Statement(s) will not be reviewed or is no longer subject to further review; provided, that, if the Commission reviews and has written comments to such filed Registration Statement that would require the filing of a pre-effective amendment thereto with the Commission, then the Effectiveness Date under this clause (b)(i) shall be the 120th day following the applicable Filing Date.
“Effectiveness Period” means, as to any Registration Statement required to be filed pursuant to this Agreement, the period commencing on the Effective Date of such Registration Statement and ending on (a) the date that all of the Registrable Securities covered by such Registration Statement have been publicly sold by the Holders of the Registrable Securities included therein, or (b) such time as all of the Registrable Securities covered by such Registration Statement may be sold by the Holders without volume restrictions pursuant to Rule 144 as determined by the counsel to the Company pursuant to a written opinion letter to such effect, addressed and acceptable to the Company's transfer agent and the affected Holders.
“Exchange Act” means the Securities Exchange Act of 1934, as amended.
“Filing Date” means the 90th day following (a) with respect to the initial Registration Statement required to be filed pursuant to Section 2(a), the Closing Date; and (b) with respect to any additional Registration Statements required to be filed pursuant to Section 2(a), the Effective Date for the last Registration Statement filed pursuant to this Agreement under Section 2(a); (c) with respect to any additional Registration Statements required to be filed due to SEC Restrictions, the applicable Restriction Termination Date; (d) with respect to a Registration Statement required to be filed under Section 2(c), the date on which the Company becomes eligible to utilize Form S-3 to register the resale of Registrable Securities, (e) with respect to the Registration Statement required to be filed under Section 2(d), the 2010 Delivery Date, and (f) with respect to the Registration Statement required to be filed under Section 2(e), the 2011 Delivery Date.
“FINRA” means the Financial Industry Regulatory Authority, Inc.
“Holder” or “Holders” means the holder or holders, as the case may be, from time to time of Registrable Securities and, if other than an Investor, a Person to whom the rights hereunder have been properly assigned pursuant to Section 7 hereof.
“Indemnified Party” has the meaning set forth in Section 5(c).
“Indemnifying Party” has the meaning set forth in Section 5(c).
“Losses” has the meaning set forth in Section 5(a).
“Delaware Courts” means the state and federal courts sitting in the state of Delaware.
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“Proceeding” means an action, claim, suit, investigation or proceeding (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or threatened.
“Prospectus” means the prospectus included in a Registration Statement (including, without limitation, a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by a Registration Statement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus.
“Registrable Securities” means: (i) the Exchange Shares, (ii) the Warrant Shares, and (iii) any securities issued or issuable upon any stock split, dividend or other distribution, recapitalization or similar event, or any price adjustment as a result of such stock splits, reverse stock splits or similar events with respect to any of the securities referenced in (i) – (iii) above. Notwithstanding the foregoing, a security shall cease to be a Registrable Security for purposes of this Agreement from and after such time as the Holder of such security may resell such security without volume restrictions under Rule 144, as determined by the counsel to the Company pursuant to a written opinion letter to such effect, addressed and acceptable to the Company’s transfer agent and the affected Holders.
“Registration Statement” means the initial registration statement required to be filed in accordance with Section 2(a) and any additional registration statements required to be filed under this Agreement, including in each case the Prospectus, amendments and supplements to such registration statements or Prospectus, including pre- and post- effective amendments, all exhibits thereto, and all material incorporated by reference or deemed to be incorporated by reference therein.
“Restriction Termination Date” has the meaning set forth in Section 2(b).
“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.
“Rule 415” means Rule 415 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.
“Rule 424” means Rule 424 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.
“SEC Restrictions” has the meaning set forth in Section 2(b).
“Selling Holder Questionnaire” means the selling security holder notice and questionnaire attached as Annex B hereto.
“Trading Market” means any of the New York Stock Exchange, the NYSE AMEX, the NASDAQ Global Select Market, the NASDAQ Global Market, the NASDAQ
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Capital Market, the OTCBB or any other market on which the Common Stock is listed or quoted for trading on the date in question.
2.
Registration.
(a)
On or prior to the applicable Filing Date, the Company shall prepare and file with the Commission a Registration Statement covering the resale of all Registrable Securities (other than in the case of the initial Registration Statement to be filed under this Section 2(a)) not already covered by an existing and effective Registration Statement for an offering to be made on a continuous basis pursuant to Rule 415. Each Registration Statement required to be filed under this Agreement shall be filed on Form S-1 (or on such other form appropriate for such purpose) and contain (except if otherwise required pursuant to written comments received from the Commission upon a review of such Registration Statement, other than as to the characterization of any Holder as an underwriter, which shall not occur unless such characterization is consistent with written information provided by the Holder in the Selling Holder Questionnaire) the “Plan of Distribution” attached hereto as Annex A. The Company shall cause each Registration Statement required to be filed under this Agreement to be declared effective under the Securities Act as soon as possible but, in any event, no later than its Effectiveness Date, and shall use its reasonable best efforts to keep each such Registration Statement continuously effective during its entire Effectiveness Period. If for any reason other than due solely to SEC Restrictions, a Registration Statement is effective but not all outstanding Registrable Securities are registered for resale pursuant thereto, then the Company shall prepare and file by the applicable Filing Date an additional Registration Statement to register the resale of all such unregistered Registrable Securities for an offering to be made on a continuous basis pursuant to Rule 415.
(b)
Notwithstanding anything to the contrary contained in this Section 2, if the Company receives Commission Comments, and following discussions with and responses to the Commission in which the Company uses its reasonable best efforts and time to cause as many Registrable Securities for as many Holders as possible to be included in the Registration Statement filed pursuant to Section 2(a) without characterizing any Holder as an underwriter unless such characterization is consistent with written information provided by the Holder in the Selling Holder Questionnaire (and in such regard uses its reasonable best efforts to cause the Commission to permit the affected Holders or their respective counsel to participate in Commission conversations on such issue together with the Company’s counsel, and timely conveys relevant information concerning such issue with the affected Holders or their respective counsel) (the day that such discussions and responses are concluded shall be referred to as the “Tolling Date”), the Company is unable to cause the inclusion of all Registrable Securities, then the Company may, following not less than three (3) Trading Days prior written notice to the Holders (i) remove from the Registration Statement such Registrable Securities (the “Cut Back Shares”) and/or (ii) agree to such restrictions and limitations on the registration and resale of the Registrable Securities, in each case as the Commission may require in order for the Commission to allow such Registration Statement to become effective; provided, that in no event may the Company characterize any Holder as an underwriter unless such characterization is consistent with written information provided by the Holder in the Selling Holder Questionnaire (collectively, the “SEC Restrictions”). Unless the SEC Restrictions otherwise require, any cut-back imposed pursuant to this Section 2(b) shall be allocated: (i) first, upon the holders of any other securities of the Company who have the right to have such securities included in the Registration Statement and (ii) second, among the Registrable Securities of the Holders on a pro
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rata basis. No liquidated damages under Section 2(d) shall accrue on or as to any Cut Back Shares, and the required Effectiveness Date for such Registration Statement will be tolled until such time as the Company is able to effect the registration of the Cut Back Shares in accordance with any SEC Restrictions if such Registrable Securities cannot at such time be resold by the Holders thereof without volume limitations pursuant to Rule 144 (such date, the “Restriction Termination Date”). From and after the Restriction Termination Date, all provisions of this Section 2 shall again be applicable to the Cut Back Shares (which, for avoidance of doubt, retain their character as “Registrable Securities”) if such Registrable Securities cannot at such time be resold by the Holders thereof without volume limitations pursuant to Rule 144 so that the Company will be required to file with and cause to be declared effective by the Commission such additional Registration Statements in the time frames set forth herein as necessary to ultimately cause to be covered by effective Registration Statements all Registrable Securities. For the avoidance of doubt, the time period starting from the Tolling Date and ending with the Restriction Termination Date shall be excluded in calculating the applicable Effectiveness Date.
(c)
Promptly following any date on which the Company becomes eligible to use a registration statement on Form S-3 to register Registrable Securities for resale, the Company shall file a Registration Statement on Form S-3 covering all Registrable Securities (or a post-effective amendment on Form S-3 to the then effective Registration Statement) and shall cause such Registration Statement to be filed by the Filing Date for such Registration Statement and declared effective under the Securities Act as soon as possible thereafter, but in any event prior to the Effectiveness Date therefor. Such Registration Statement shall contain (except if otherwise required pursuant to written comments received from the Commission upon a review of such Registration Statement, other than as to the characterization of any Holder as an underwriter, which shall not occur unless such characterization is consistent with written information provided by the Holder in the Selling Holder Questionnaire) the “Plan of Distribution” attached hereto as Annex A. The Company shall use its reasonable best efforts to keep such Registration Statement continuously effective under the Securities Act during the entire Effectiveness Period.
(d)
If: (i) a Registration Statement is not filed on or prior to its Filing Date covering the Registrable Securities required under this Agreement to be included therein, or (ii) a Registration Statement is not declared effective by the Commission on or prior to its required Effectiveness Date or if the Company does not promptly file a “final” prospectus for the Registration Statement with the Commission under Rule 424(b) following the Effectiveness Date, or (iii) after its Effective Date such Registration Statement ceases for any reason to be effective and available to the Holders as to the Registrable Securities to which it is required to cover at any time prior to the expiration of its Effectiveness Period for more than an aggregate of 30 Trading Days (which need not be consecutive) (any such failure or breach being referred to as an “Event,” and for purposes of clauses (i) or (ii) the date on which such Event occurs, or for purposes of clause (iii) the date which such 30 Trading Day-period is exceeded, being referred to as “Event Date”), then in addition to any other rights the Holders may have hereunder or under applicable law, on each such Event Date and on each monthly anniversary of each such Event Date (if the applicable Event shall not have been cured by such date) until the applicable Event is cured, the Company shall pay to each Holder an amount in cash, as partial liquidated damages and not as a penalty, equal to 0.5% of the aggregate Investment Amount paid by such Holder pursuant to the Exchange Agreement. The parties agree that in no event will the Company be liable for liquidated damages under this Agreement in excess of 0.5% of the aggregate Investment Amount of the Holders in any single month and the maximum aggregate liquidated damages payable to a Holder under this Agreement shall be five percent (5%) of the aggregate
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Investment Amount paid by such Holder pursuant to the Exchange Agreement. The partial liquidated damages pursuant to the terms hereof shall apply on a daily pro-rata basis for any portion of a month prior to the cure of an Event (except in the case of the first Event Date), and shall cease to accrue (unless earlier cured) upon the expiration of the Effectiveness Period. For purposes of this Section 2(d), the “Investment Amount” shall be the number of Exchange Shares held by the Holder multiplied by $1.25. For example, if the Holder has 100,000 Exchange Shares, then the Investment Amount is $125,000. However, the Investment Amount for calculating any liquidated damages paid to the Holder under this Section 2(d) for an Event under clauses (i) or (ii) above shall not include the Cut Back Shares held by the Holder which are not included in the Registration Statement.
(e)
Each Holder agrees to furnish to the Company a completed Questionnaire in the form attached to this Agreement as Annex B (a “Selling Holder Questionnaire”). The Company shall not be required to include the Registrable Securities of a Holder in a Registration Statement and shall not be required to pay any liquidated or other damages under Section 2(d) to any Holder who fails to furnish to the Company a fully completed Selling Holder Questionnaire at least two Trading Days prior to the applicable Filing Date (subject to the requirements set forth in Section 3(a)); provided, that the Company shall have furnished a copy of Selling Holder Questionnaire to such Holder and requested a completed Selling Holder Questionnaire from such Holder ten Trading Days prior to each applicable Filing Date.
3.
Registration Procedures.
In connection with the Company’s registration obligations hereunder:
(a)
Not less than two Trading Days prior to the filing of a Registration Statement or any related Prospectus or any amendment or supplement thereto, the Company shall furnish to each Holder copies of the “Selling Stockholders” section of such document, the “Plan of Distribution” and any risk factor contained in such document that addresses specifically this transaction or the Selling Stockholders, as proposed to be filed, which documents will be subject to the review of such Holder. The Company shall not file a Registration Statement, any Prospectus or any amendments or supplements thereto in which the “Selling Stockholder” section thereof differs from the disclosure received from a Holder in its Selling Holder Questionnaire (as amended or supplemented). The Company shall not file a Registration Statement, any Prospectus or any amendments or supplements thereto in which it (i) characterizes any Holder as an underwriter, unless such characterization is consistent with written information provided by the Holder in the Selling Holder Questionnaire, (ii) excludes a particular Holder due to such Holder refusing to be named as an underwriter, or (iii) reduces the number of Registrable Securities being registered on behalf of a Holder except pursuant to, in the case of subsection (iii), the Commission Comments, without, in each case, such Holder’s express written authorization, unless such reduction is made pursuant to Section 2(b) hereof. The Company shall also 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 (i) prepare and file with the Commission such amendments, including post-effective amendments, to each Registration Statement and the Prospectus used in connection therewith as may be necessary to keep such Registration Statement continuously effective as to the applicable Registrable Securities for its Effectiveness
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Period and prepare and file with the Commission such additional Registration Statements in order to register for resale under the Securities Act all of the Registrable Securities; (ii) cause the related Prospectus to be amended or supplemented by any required Prospectus supplement, and as so supplemented or amended to be filed pursuant to Rule 424; (iii) respond as promptly as reasonably possible to any comments received from the Commission with respect to each Registration Statement or any amendment thereto and, as promptly as reasonably possible; and (iv) comply in all material respects with the provisions of the Securities Act and the Exchange Act with respect to the Registration Statement(s) and the disposition of all Registrable Securities covered by each Registration Statement.
(c)
The Company shall notify the Holders as promptly as reasonably possible (i) with respect to each Registration Statement or any post-effective amendment, when the same has become effective; (ii) of the issuance by the Commission of any stop order suspending the effectiveness of a Registration Statement covering any or all of the Registrable Securities or the initiation of any Proceedings for that purpose; (iii) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any Proceeding for such purpose; and (iv) of the occurrence of any event or passage of time that makes the financial statements included in a Registration Statement ineligible for inclusion therein or any statement made in such Registration Statement or Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires any revisions to such Registration Statement, Prospectus or other documents so that, in the case of such Registration Statement or the Prospectus, as the case may be, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.
(d)
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 the Holders of the issuance of such order and the resolution thereof or its receipt of actual notice of the initiation or threat of any proceeding for such purpose.
(e)
The Company shall furnish to each Holder, without charge and at the option of the Company in electronic format, at least one conformed copy of each Registration Statement and each amendment thereto and all exhibits, as well as a copy of each Prospectus and each amendment or supplement thereto, to the extent requested by such Holder (including those previously furnished) promptly after the filing of such documents with the Commission.
(f)
Prior to any public offering of Registrable Securities, the Company shall register or qualify such Registrable Securities for offer and sale under the securities or Blue Sky laws of all jurisdictions within the United States as any Holder may reasonably request, to keep each such registration or qualification (or exemption therefrom) effective during the Effectiveness Period and to do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Registrable Securities covered by the Registration Statements; provided, however, in connection with any such registration or qualification, the Company shall not be required to (i) qualify to do business in any jurisdiction where the Company would not otherwise be required to qualify, (ii) subject itself to general taxation in any
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such jurisdiction, (iii) file a general consent to service of process in any jurisdiction, or (iv) make any change to the Company’s articles of incorporation or bylaws.
(g)
The Company shall cooperate with the Holders to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be delivered to a transferee pursuant to the Registration Statement(s), which certificates shall be free, to the extent permitted by the Exchange Agreement, of all restrictive legends, and to enable such Registrable Securities to be in such denominations and registered in such names as any such Holders may request.
(h)
Upon the occurrence of any event contemplated by Section 3(c)(v), as promptly as reasonably possible, the Company shall prepare a supplement or amendment, including a post-effective amendment, to the affected Registration Statements or a supplement to the related Prospectus or any document incorporated or deemed to be incorporated therein by reference, and file any other required document so that, as thereafter delivered, no Registration Statement nor any Prospectus will contain an 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 light of the circumstances under which they were made, not misleading.
(i)
The Company shall notify each Holder in writing of the happening of any event, as promptly as practicable after becoming aware of such event, as a result of which the prospectus included in a Registration Statement, as then in effect, includes an untrue statement of a material fact or omission to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading (provided that in no event shall such notice contain any material, nonpublic information), and promptly prepare a supplement or amendment to such Registration Statement to correct such untrue statement or omission. The Company shall also promptly notify each Holder in writing 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.
(j)
If any Holder is required under applicable securities laws to be described in the Registration Statement as an underwriter, at the reasonable request of such Holder, the Company shall furnish to such Holder, on the date of the effectiveness of the Registration Statement and thereafter from time to time on such dates as a Holder 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 Holders, 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 reasonably acceptable to such counsel and as is customarily given in an underwritten public offering, addressed to the Holders.
(k)
The Company shall hold in confidence and not make any disclosure of information concerning a Holder provided to the Company unless: (i) disclosure of such information is necessary to comply with federal or state securities laws, (ii) the disclosure of such information is necessary to avoid or correct a misstatement or omission in any Registration Statement, (iii) the release of such information is ordered pursuant to a subpoena or other final, non-appealable order from a court or governmental body of competent jurisdiction, or (iv) such information has been made generally available to the public other than by disclosure in violation of this Agreement or any other agreement. The Company agrees that it shall, upon learning that disclosure of such information concerning an Holder is sought in or by a court or governmental
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body of competent jurisdiction or through other means, give prompt written notice to such Holder and allow such Holder, at the Holder’s expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, such information.
(l)
The Company shall use its reasonable best efforts to cause all of the Registrable Securities covered by a Registration Statement to be listed on each national 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. The Company shall pay all fees and expenses in connection with satisfying its obligation under this Section 3(l).
(m)
If requested by a Holder, the Company shall as soon as practicable: (i) incorporate in a prospectus supplement or post-effective amendment such information as a Holder 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) 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) supplement or make amendments to any Registration Statement if reasonably requested by a Holder holding any Registrable Securities.
4.
Registration Expenses. All fees and expenses incident to the performance of or compliance with this Agreement by the Company shall be borne by the Company whether or not any Registrable Securities are sold pursuant to a Registration Statement. The fees and expenses referred to in the foregoing sentence shall include, without limitation, (i) all registration and filing fees (including, without limitation, fees and expenses (A) with respect to filings required to be made with any Trading Market on which the Common Stock is then listed for trading, (B) with respect to filings with FINRA for compensation review pursuant to FINRA Rule 5110, and (C) in compliance with applicable state securities or Blue Sky laws), (ii) printing expenses (including, without limitation, expenses of printing certificates for Registrable Securities and of printing prospectuses if the printing of prospectuses is reasonably requested by the holders of a majority of the Registrable Securities included in the Registration Statement), (iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of counsel for the Company, (v) Securities Act liability insurance, if the Company so desires such insurance, and (vi) fees and expenses of all other Persons retained by the Company in connection with the consummation of the transactions contemplated by this Agreement. In addition, the Company shall be responsible for all of its internal expenses incurred in connection with the consummation of the transactions contemplated by this Agreement (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit and the fees and expenses incurred in connection with the listing of the Registrable Securities on any securities exchange as required hereunder.
5.
Indemnification.
(a)
Indemnification by the Company. The Company shall, notwithstanding any termination of this Agreement, indemnify and hold harmless each Holder, the officers, directors, agents, investment and legal advisors, partners, members and employees of each of them, each Person who controls any such Holder (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) and the officers, directors, agents and employees of each such controlling Person, to the fullest extent permitted by applicable law,
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from and against any and all losses, claims, damages, liabilities, costs (including, without limitation, reasonable costs of preparation and reasonable attorneys' fees) and expenses (collectively, “Losses”), as incurred, arising out of or relating to any untrue or alleged untrue statement of a material fact contained in any Registration Statement, any Prospectus or any form of prospectus or in any amendment or supplement thereto or in any preliminary prospectus, or arising out of or relating to any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein (in the case of any Prospectus or form of prospectus or supplement thereto, in light of the circumstances under which they were made) not misleading, except to the extent, but only to the extent, that (1) such untrue statements or omissions are based solely upon information regarding such Holder furnished in writing to the Company by such Holder expressly for use therein, or to the extent that such information relates to such Holder or such Holder's proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in the Registration Statement, such Prospectus or such form of Prospectus or in any amendment or supplement thereto (it being understood that the Holder has approved Annex A hereto for this purpose) or (2) in the case of an occurrence of an event of the type specified in Section 3(c)(ii)-(v), the use by such Holder of an outdated or defective Prospectus after the Company has notified such Holder in writing that the Prospectus is outdated or defective and prior to the receipt by such Holder of an Advice or an amended or supplemented Prospectus, but only if and to the extent that following the receipt of the Advice or the amended or supplemented Prospectus the misstatement or omission giving rise to such Loss would have been corrected. The Company shall notify the Holders promptly of the institution, threat or assertion of any Proceeding of which the Company is aware in connection with the transactions contemplated by this Agreement.
(b)
Indemnification by Holders. Each Holder shall, severally and not jointly, indemnify and hold harmless the Company, its directors, officers, agents and employees, each Person who controls the Company (within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the directors, officers, agents or employees of such controlling Persons, to the fullest extent permitted by applicable law, from and against all Losses, as incurred, arising solely out of or based solely upon: (x) such Holder's failure to comply with the prospectus delivery requirements of the Securities Act or (y) any untrue statement of a material fact contained in any Registration Statement, any Prospectus, or any form of prospectus, or in any amendment or supplement thereto, or arising solely out of or based solely upon any omission of a material fact required to be stated therein or necessary to make the statements therein not misleading to the extent, but only to the extent that, (1) such untrue statements or omissions are based solely upon information regarding such Holder furnished in writing to the Company by such Holder expressly for use therein, or to the extent that such information relates to such Holder or such Holder's proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in the Registration Statement (it being understood that the Holder has approved Annex A hereto for this purpose), such Prospectus or such form of Prospectus or in any amendment or supplement thereto or (2) in the case of an occurrence of an event of the type specified in Section 3(c)(ii)-(v), the use by such Holder of an outdated or defective Prospectus after the Company has notified such Holder in writing that the Prospectus is outdated or defective and prior to the receipt by such Holder of an Advice or an amended or supplemented Prospectus, but only if and to the extent that following the receipt of the Advice or the amended or supplemented Prospectus the misstatement or omission giving rise to such Loss would have been corrected. In no event shall the aggregate liability of any selling Holder under the Transaction Documents (as defined in the Exchange Agreement) be greater in amount than the
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dollar amount of the net proceeds received by such Holder upon the sale of the Registrable Securities giving rise to such indemnification obligation.
(c)
Conduct of Indemnification Proceedings. If any Proceeding shall be brought or asserted against any Person entitled to indemnity hereunder (an “Indemnified Party”), such Indemnified Party shall promptly notify the Person from whom indemnity is sought (the “Indemnifying Party”) in writing, and the Indemnifying Party shall assume the defense thereof, including the employment of counsel reasonably satisfactory to the Indemnified Party and the payment of all fees and expenses incurred in connection with defense thereof; provided, that the failure of any Indemnified Party to give such notice shall not relieve the Indemnifying Party of its obligations or liabilities pursuant to this Agreement, except (and only) to the extent that it shall be determined by a court of competent jurisdiction that such failure shall have proximately and materially adversely prejudiced the Indemnifying Party.
An Indemnified Party shall have the right to employ separate counsel in any such Proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed in writing to pay such fees and expenses; (2) the Indemnifying Party shall have failed promptly to assume the defense of such Proceeding and to employ counsel reasonably satisfactory to such Indemnified Party in any such Proceeding; or (3) the named parties to any such Proceeding (including any impleaded parties) include both such Indemnified Party and the Indemnifying Party, and such Indemnified Party shall have been advised by counsel that a conflict of interest is likely to exist if the same counsel were to represent such Indemnified Party and the Indemnifying Party (in which case, if such Indemnified Party notifies the Indemnifying Party in writing that it elects to employ separate counsel at the expense of the Indemnifying Party, the Indemnifying Party shall not have the right to assume the defense thereof and such counsel shall be at the expense of the Indemnifying Party). The Indemnifying Party shall not be liable for any settlement of any such Proceeding effected without its written consent, which consent shall not be unreasonably withheld. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement of any pending Proceeding in respect of which any Indemnified Party is a party, unless such settlement includes an unconditional release of such Indemnified Party from all liability on claims that are the subject matter of such Proceeding.
All fees and expenses of the Indemnified Party (including reasonable fees and expenses to the extent incurred in connection with investigating or preparing to defend such Proceeding in a manner not inconsistent with this Section) shall be paid to the Indemnified Party, as incurred, within ten Trading Days of written notice thereof to the Indemnifying Party (regardless of whether it is ultimately determined that an Indemnified Party is not entitled to indemnification hereunder; provided, that the Indemnifying Party may require such Indemnified Party to undertake to reimburse all such fees and expenses to the extent it is judicially determined that such Indemnified Party is not entitled to indemnification hereunder).
(d)
Contribution. If a claim for indemnification under Section 5(a) or 5(b) is unavailable to an Indemnified Party (by reason of public policy or otherwise), then each Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Losses, in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and Indemnified Party in connection with the actions, statements or omissions that resulted in such Losses as well as any other relevant equitable considerations. The relative fault of such Indemnifying Party and
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Indemnified Party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission of a material fact, has been taken or made by, or relates to information supplied by, such Indemnifying Party or Indemnified Party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action, statement or omission. The amount paid or payable by a party as a result of any Losses shall be deemed to include, subject to the limitations set forth in Section 5(c), any reasonable attorneys' or other reasonable fees or expenses incurred by such party in connection with any Proceeding to the extent such party would have been indemnified for such fees or expenses if the indemnification provided for in this Section was available to such party in accordance with its terms.
The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 5(d) were determined by pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to in the immediately preceding paragraph. Notwithstanding the provisions of this Section 5(d), (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) no Holder shall be required to contribute, in the aggregate, any amount in excess of the amount by which the proceeds actually received by such Holder from the sale of the Registrable Securities subject to the Proceeding exceeds the amount of any damages that such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission.
The indemnity and contribution agreements contained in this Section are in addition to any liability that the Indemnifying Parties may have to the Indemnified Parties.
6.
Reports Under the Exchange Act. With a view to making available to the Holders the benefits of Rule 144 or any other similar rule or regulation of the SEC that may at any time permit the Holders to sell Registrable Securities of the Company to the public without registration, the Company agrees, for so long as Registrable Securities are outstanding and held by the Holders, to:
(a)
make and keep public information available, as those terms are understood, defined and required 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 Holder so long as such Holder owns Registrable Securities, promptly upon request, such information as may be reasonably and customarily requested to permit the Holders to sell such securities pursuant to Rule 144 without registration.
7.
Assignment of Registration Rights. The rights under this Agreement shall be automatically assignable by the Investors to any permitted 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 five (5) Business Days after such assignment; (ii) the Company is, within five (5) Business Days after such transfer or assignment, furnished with written notice of (a) the name and address of
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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 Exchange Agreement.
8.
Miscellaneous.
(a)
Remedies. In the event of a breach by the Company or by a Holder, of any of their obligations under this Agreement, each Holder or the Company, as the case may be, in addition to being entitled to exercise all rights granted by law and under this Agreement, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. The Company and each Holder agree that monetary damages would not provide adequate compensation for any losses incurred by reason of a breach by it of any of the provisions of this Agreement and hereby further agrees that, in the event of any action for specific performance in respect of such breach, it shall waive the defense that a remedy at law would be adequate.
(b)
No Piggyback on Registrations. Except for the shares identified on Annex C hereto, which shall be included in the Registration Statement (“Permissible Piggyback Shares”), neither the Company nor any of its security holders (other than the Holders in such capacity pursuant hereto) have the contractual right to include securities of the Company in a Registration Statement other than the Registrable Securities, and the Company shall not during the Effectiveness Period enter into any agreement providing any such right to any of its security holders.
(c)
Compliance. Each Holder covenants and agrees that it will comply with the prospectus delivery requirements of the Securities Act as applicable to it in connection with sales of Registrable Securities pursuant to the Registration Statement.
(d)
Discontinued Disposition. Each Holder agrees by its acquisition of such Registrable Securities that, upon receipt of a notice from the Company of the occurrence of any event of the kind described in Section 3(c), such Holder will forthwith discontinue disposition of such Registrable Securities under the Registration Statement until such Holder's receipt of the copies of the supplemented Prospectus and/or amended Registration Statement or until it is advised in writing (the “Advice”) by the Company that the use of the applicable Prospectus may be resumed, and, in either case, has received copies of any additional or supplemental filings that are incorporated or deemed to be incorporated by reference in such Prospectus or Registration Statement. The Company may provide appropriate stop transfer orders to enforce the provisions of this paragraph.
(e)
Piggy-Back Registrations. If at any time during the Effectiveness Period there is not an effective Registration Statement covering all of the Registrable Securities and the Company shall determine to prepare and file with the Commission a registration statement relating to an offering for its own account or the account of others under the Securities Act of any of its equity securities, other than on Form S-4 or Form S-8 (each as promulgated under the Securities Act) or their then equivalents relating to equity securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in
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connection with stock option or other employee benefit plans, then the Company shall send to each Holder written notice of such determination and, if within fifteen calendar days after receipt of such notice, any such Holder shall so request in writing, the Company shall include in such registration statement all or any part of such Registrable Securities such holder requests to be registered, subject to customary underwriter cutbacks applicable to all holders of registration rights.
(f)
Amendments and Waivers. 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 Holders of no less than a majority in interest of the then outstanding Registrable Securities. No such amendment shall be effective to the extent that it applies to less than all of the Holders. No consideration shall be offered or paid to any Person to amend or consent to a waiver or modification of any provision of this Agreement unless the same consideration also is offered to all of the parties to this Agreement. Notwithstanding the foregoing, a waiver or consent to depart from the provisions hereof with respect to a matter that relates exclusively to the rights of certain Holders and that does not directly or indirectly affect the rights of other Holders may be given by Holders of at least a majority of the Registrable Securities to which such waiver or consent relates; provided, further that no amendment or waiver to any provision of this Agreement relating to naming any Holder or requiring the naming of any Holder as an underwriter may be effected in any manner without such Holder’s prior written consent. Section 2(a) may not be amended or waived except by written consent of each Holder affected by such amendment or waiver.
(g)
Notices. 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 if delivered in accordance with Section 6.3 of the Exchange Agreement.
(h)
Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of each of the parties and shall inure to the benefit of each Holder. The Company may not assign its rights or obligations hereunder without the prior written consent of each Holder. Each Holder may assign their respective rights hereunder in the manner and to the Persons as permitted under the Exchange Agreement.
(i)
Execution and Counterparts. 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 or email transmission, such signature shall create a valid binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile or email signature were the original thereof.
(j)
Governing Law. 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 Delaware, without regard to the principles of conflicts of law thereof. Each party agrees that all Proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Agreement (whether brought against a party hereto or its respective Affiliates, employees or agents) will be commenced in the Delaware Courts. Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the Delaware Courts for the adjudication of any dispute hereunder or in
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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 Delaware Court, or that such Proceeding has been commenced in an improper or inconvenient forum. 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 Proceeding arising out of or relating to this Agreement or the transactions contemplated hereby. If either 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 attorney’s fees and other costs and expenses incurred with the investigation, preparation and prosecution of such Proceeding.
(k)
Cumulative Remedies. The remedies provided herein are cumulative and not exclusive of any remedies provided by law.
(l)
Entire Agreement. This Agreement, the other Transaction Documents (as defined in the Exchange Agreement) 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.
(m)
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 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.
(n)
Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof.
(o)
Independent Nature of Investors' Obligations and Rights. The obligations of each Investor under this Agreement are several and not joint with the obligations of each other Investor, and no Investor shall be responsible in any way for the performance of the obligations of any other under this Agreement. Nothing contained herein or in any Transaction Document, and no action taken by any Investor pursuant thereto, 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 by this Agreement or any other Transaction Document. Each Investor acknowledges that no other Investor will be acting as agent of such Investor in enforcing its rights under this Agreement. Each Investor shall be entitled to independently protect and enforce its rights, including without limitation the rights arising out of
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this Agreement, and it shall not be necessary for any other Investor to be joined as an additional party in any Proceeding for such purpose. The Company acknowledges that each of the Investors has been provided with the same Registration Rights Agreement for the purpose of closing a transaction with multiple Holders and not because it was required or requested to do so by any Investor.
[Signature Page Follows]
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IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above.
COMPANY:
DIVERSIFIED OPPORTUNITIES, INC.
By:
Name:
Title:
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IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above.
NAME OF INVESTOR
By:
Name:
Title:
ADDRESS FOR NOTICE
Company:
Address:
Tel:
Fax:
Email:
Attention:
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Annex A
Plan of Distribution
The Selling Stockholders and any of their pledgees, donees, transferees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of Common Stock on any stock exchange, market or trading facility on which the shares are traded or quoted or in private transactions. These sales may be at fixed or negotiated prices. The Selling Stockholders may use any one or more of the following methods when selling shares:
·
ordinary brokerage transactions and transactions in which the broker-dealer solicits Investors;
·
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;
·
through the writing of options on the shares;
·
to cover short sales made after the date that this Registration Statement is declared effective by the Commission;
·
broker-dealers may agree with the Selling Stockholders to sell a specified number of such shares at a stipulated price per share; and
·
a combination of any such methods of sale.
The Selling Stockholders may also sell shares under Rule 144 of the Securities Act of 1933, as amended (the “Securities Act”), if available, rather than under this prospectus. The selling stockholders shall have the sole and absolute discretion not to accept any purchase offer or make any sale of shares if it deems the purchase price to be unsatisfactory at any particular time.
The Selling Stockholders or their respective pledgees, donees, transferees or other successors in interest, may also sell the shares directly to market makers acting as principals and/or broker-dealers acting as agents for themselves or their customers. Such broker-dealers may receive compensation in the form of discounts, concessions or commissions from the Selling Stockholders and/or the purchasers of shares for whom such broker-dealers may act as agents or to whom they sell as principal or both, which compensation as to a particular broker-dealer might be in excess of customary commissions. Market makers and block purchasers purchasing the shares will do so for their own account and at their own risk. It is possible that a selling stockholder will attempt to sell shares of common stock in block transactions to market makers or other purchasers at a price per share which may be below the then existing market price. We cannot assure that all or any of the shares offered in this prospectus will be issued to, or sold by, the Selling Stockholders. The Selling Stockholders and any brokers, dealers or agents, upon effecting the sale of any of the shares offered in this prospectus, may be deemed to be “underwriters” as that term is defined under the Securities Act, the Exchange Act and the
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rules and regulations of such acts. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act.
We are required to pay all fees and expenses incident to the registration of the shares, including fees and disbursements of counsel to the Selling Stockholders, but excluding brokerage commissions or underwriter discounts.
The Selling Stockholders, alternatively, may sell all or any part of the shares offered in this prospectus through an underwriter. The Selling Stockholders have not entered into any agreement with a prospective underwriter and there is no assurance that any such agreement will be entered into.
The Selling Stockholders may pledge their shares to their brokers under the margin provisions of customer agreements. If a Selling Stockholder defaults on a margin loan, the broker may, from time to time, offer and sell the pledged shares. The Selling Stockholders and any other persons participating in the sale or distribution of the shares will be subject to applicable provisions of the Exchange Act, and the rules and regulations under such act, including, without limitation, Regulation M. These provisions may restrict certain activities of, and limit the timing of purchases and sales of any of the shares by, the Selling Stockholders or any other such person. In the event that any of the Selling Stockholders are deemed an affiliated purchaser or distribution participant within the meaning of Regulation M, then the Selling Stockholders will not be permitted to engage in short sales of common stock. Furthermore, under Regulation M, persons engaged in a distribution of securities are prohibited from simultaneously engaging in market making and certain other activities with respect to such securities for a specified period of time prior to the commencement of such distributions, subject to specified exceptions or exemptions. In addition, if a short sale is deemed to be a stabilizing activity, then the Selling Stockholders will not be permitted to engage in a short sale of our common stock. All of these limitations may affect the marketability of the shares.
If a Selling Stockholder notifies us that it has a material arrangement with a broker-dealer for the resale of the common stock, then we would be required to amend the registration statement of which this prospectus is a part, and file a prospectus supplement to describe the agreements between the Selling Stockholder and the broker-dealer.
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Annex B
DIVERSIFIED OPPORTUNITIES, INC.
Selling Stockholder Notice and Questionnaire
The undersigned beneficial owner of common stock (the “Common Stock”), of Diversified Opportunities, Inc., a Delaware corporation (the “Company”), understands that the Company has filed or intends to file with the Securities and Exchange Commission (the “Commission”) a Registration Statement for the registration and resale of the Registrable Securities, in accordance with the terms of the Registration Rights Agreement, dated as of April 27, 2011 (the “Registration Rights Agreement”), among the Company and the Investors named therein. A copy of the Registration Rights Agreement is available from the Company upon request at the address set forth below. All capitalized terms used and not otherwise defined herein shall have the meanings ascribed thereto in the Registration Rights Agreement.
The undersigned hereby provides the following information to the Company and represents and warrants that such information is accurate:
QUESTIONNAIRE
1.
Name.
(a)
Full Legal Name of Selling Stockholder
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(b)
Full Legal Name of Registered Holder (if not the same as (a) above) through which Registrable Securities Listed in Item 3 below are held:
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(c)
Full Legal Name of Natural Control Person (which means a natural person who directly or indirectly alone or with others has power to vote or dispose of the securities covered by the questionnaire):
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2. Address for Notices to Selling Stockholder:
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Telephone: |
Fax: |
Contact Person: |
3. Beneficial Ownership of Registrable Securities:
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Type and Principal Amount of Registrable Securities beneficially owned:
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4. Broker-Dealer Status:
(a)
Are you a broker-dealer?
Yes ¨
No ¨
Note:
If yes, the Commission’s staff has indicated that you should be identified as an underwriter in the Registration Statement.
(b)
Are you an affiliate of a broker-dealer?
Yes ¨
No ¨
(c)
If you are an affiliate of a broker-dealer, do you certify that you bought the Registrable Securities in the ordinary course of business, and at the time of the purchase of the Registrable Securities to be resold, you had no agreements or understandings, directly or indirectly, with any person to distribute the Registrable Securities?
Yes ¨
No ¨
Note:
If no, the Commission’s staff has indicated that you should be identified as an underwriter in the Registration Statement.
5. Beneficial Ownership of Other Securities of the Company Owned by the Selling Stockholder.
Except as set forth below in this Item 5, the undersigned is not the beneficial or registered owner of any securities of the Company other than the Registrable Securities listed above in Item 3.
Type and Amount of Other Securities beneficially owned by the Selling Stockholder:
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6. Relationships with the Company:
Except as set forth below, neither the undersigned nor any of its affiliates, officers, directors or principal equity holders (owners of 5% of more of the equity securities of the undersigned) has held any position or office or has had any other material relationship with the Company (or its predecessors or affiliates) during the past three years.
State any exceptions here:
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7. The Company has advised each Selling Stockholder that it is the view of the Commission that it may not use shares registered on the Registration Statement to cover short sales of Common Stock made prior to the date on which the Registration Statement is declared effective by the Commission, in accordance with 1997 Securities and Exchange Commission Manual of Publicly Available Telephone Interpretations Section A.65. If a Selling Stockholder uses the prospectus for any sale of the Common Stock, it will be subject to the prospectus delivery requirements of the Securities Act. The Selling Stockholders will be responsible to comply with the applicable provisions of the Securities Act and Exchange Act, and the rules and regulations thereunder promulgated, including, without limitation, Regulation M, as applicable to such Selling Stockholders in connection with resales of their respective shares under the Registration Statement.
The undersigned agrees to promptly notify the Company of any inaccuracies or changes in the information provided herein that may occur subsequent to the date hereof and prior to the Effective Date for the Registration Statement.
Certain legal consequences arise from being named as a Selling Stockholder in the Registration Statement and related prospectus. Accordingly, the undersigned is advised to consult their own securities law counsel regarding the consequence of being named or not being named as a Selling Stockholder in the Registration Statement and the related prospectus.
By signing below, the undersigned consents to the disclosure of the information contained herein in its answers to Items 1 through 6 and the inclusion of such information in the Registration Statement and the related prospectus. The undersigned understands that such information will be relied upon by the Company in connection with the preparation or amendment of the Registration Statement and the related prospectus. The undersigned hereby elects to include the Registrable Securities owned by it and listed above in Item 3 (unless otherwise specified in Item 3) in the Registration Statement.
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IN WITNESS WHEREOF the undersigned, by authority duly given, has caused this Notice and Questionnaire to be executed and delivered either in person or by its duly authorized agent.
Dated:
Beneficial Owner:
By:
Name:
Title:
PLEASE FAX OR EMAIL A COPY OF THE COMPLETED AND EXECUTED NOTICE AND QUESTIONNAIRE, AND RETURN THE ORIGINAL BY OVERNIGHT MAIL, TO:
Sheppard, Mullin, Richter & Hampton LLP
12275 El Camino Real, Suite 200
San Diego, CA 92130
jmercer@sheppardmullin.com
US Fax: (858) 720-8900
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Annex C
Schedule of Holders of Permissible Piggyback Shares
Name of Holders of Permissible Piggyback Shares | Number of Permissible Piggyback Shares | Contact Information |
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Dated the 26th day of October 2009.
AGREEMENT
FOR SALE OF SHARES
THIS AGREEMENT is made on the 26th day of October 2009
BETWEEN
(1)
Leung, Kwok-wai Clifton, holder of [identity card number xxxxx] of [address] (the
"Seller");and
(2)
Simple Earth, Inc., a corporation established under ·the laws of USA whose registered
office is situated at 35 Amber Drive, San Francisco, California 94131 (the "Purchaser"). WHEREAS:
(A)
As at the date of this Agreement, the Seller is the owner of the Sale Shares, representing
100 per cent of the issued share capital of the Company.
(B) The Seller has agreed to sell to the Purchaser and the Purchaser has agreed to purchase from the Seller the Sale Shares for the consideration and otherwise upon and subject to the terms and conditions of this Agreement (the "Acquisition").
IT IS HEREBY AGREED as follows:
1.
DEFINITIONS AND INTERPRETATION
(A) In this Agreement (including the Recitals) the following expressions shall (unless the context otherwise requires) have the following meanings:
"Business" means the business of marketing, distribution or sale of bagasse-based paper products, which business has been conducted throughout the United States of America, Canada and Europe;
"Business Day'' means a day (other than a Saturday or Sunday) on which commercial banks in the USA are open for the transaction of general banking business by members of the public;
"Company" means SugarMade, Inc., a California corporation with a principal place of business located at 2429 Francisco St., San Francisco, CA 94123;
"Completion" means performance by the Seller and the Purchaser of their respective obligations under Clause 4;
"Completion Date" means the date of Completion as referred to in Clause 4{A);
-"Covenants" means the covenants set out in Clause 6;
"Convertible Promissory Notes" means those certain convertible promissory notes issued in a series and executed as at the date of Completion (or reasonably thereafter) by the Purchaser in favour of Stephen Pinto and certain other investors in the aggregate principal amount of five hundred forty thousand dollars ($540,000), the form of which is attached as Exhibit 3 hereto. For purposes of this Agreement, each such convertible promissory note shall .be defined as a "Convertible Note” and together, the "Convertible Promissory Notes".
"US$" means USA dollars;
"USA" means the United States of America;
"Sale Shares" means the Shares, representing 100 per cent of the issued and outstanding share capital of the common stock of the Company as at the date of this Agreement;
"Shares" means ordinary shares of capital of the Company and "Share" shall be construed accordingly;
"Stock Consideration" means collectively the 72,973 shares, representing 10 percent of the issued and outstanding capital stock of the Purchaser as at the date of this Agreement;
"Stock Option Plan" means the Company's 2009 Stock Option/Stock Issuance Plan pursuant to which 150,000 shares of the Company's Common Stock have been reserved for future issuance to the Company's employees, contractors and advisors, and pursuant to which no options have been granted or shares issued as of the Completion Date;
"Warranties" means the representations and warranties set out in Clause 5.
(B)
In this Agreement, unless the context otherwise requires, any reference to:
(i) a Clause, Recital or Exhibit is to a clause of or a recital or exhibit to this Agreement, as the case may be, and a reference to this Agreement includes each Exhibit;
(ii) “writing", or any cognate expression, includes a reference to any communication effected by telex, facsimile transmission, email correspondence or similar means; and
(iii) a document "in the agreed form" is a reference to the form of the relevant document agreed between the parties and initialed by them for the purpose of identification.
(C)
The headings in this Agreement are for convenience only and shall not affect the
construction of this Agreement.
2.
CONDITION PRECEDENT
(A)
Completion shall be conditional upon the following:
(i) the Bill of Sale in the form attached hereto as Exhibit I is subsisting and valid as of the Completion Date;
(ii) the Exclusive Supplier Agreement in the form attached hereto as Exhibit 2 is subsisting and valid as at the Completion Date;
(iii)
there being no breach of the Warranties at any time up to (and including) the
Completion Date;
(iv) termination of that certain letter agreement dated May 1, 2009, by and among The MarketSource Companies, Sugar Cane paper Company-Hong Kong and Suagar Cane Paper Company-Asia Ltd, a copy of which is attached hereto as Exhibit 5.
(B) If the conditions precedent referred to in Clause 2(A) shall not have been fulfilled (or waived by the Seller or the Purchaser, as the case may be) by the Completion Date, this Agreement shall become null and void ad initio and no Party shall have any liability or obligation to any other Party howsoever or whatsoever, save in respect of any failure to use best endeavors as aforesaid.
3.
SALE AND P'URCHASE OF THE SALE SHARES
(A) The Seller shall sell free from all encumbrances and together with all rights attached thereto as at the date of this Agreement (and all rights hereafter becoming attached or accruing thereto) and the Purchaser shall purchase the Sale Shares with effect from Completion in accordance with the terms and conditions of this Agreement together with all rights, charges, adverse claims and interests past, now and hereafter attached hereto.
(B)
The consideration for the Sale Shares shall comprise of the following:
(i)
an aggregate sw11 of 'US$400,000.00 which shall be paid by the Purchaser to the
Seller on Completion in accordance with the provisions of Clause 4(A)(vii & viii).
(ii)
the Stock Consideration which shall be paid by the Purchaser to the Seller on
Completion in accordance with the provisions of Clause 4(A)(ix).
(C)
Any stamp duty payable on the sale and purchase of the Sale Shares shall be borne by the
Seller and the Purchaser in equal shares.
4.
COMPLETION
(A)
Subject to the terms and conditions of this Agreement, Completion shall take place at the
offices of Niesar & Whyte LLP, 90 New Montgomery Street, 9
Floor, San Francisco,
California 94105 on October 26, 2009 or such other place or date as the Parties hereto may mutually agree in writing, when, except as indicated below, all but not part only of the business referred to below shall be transacted:
(i) the Purchaser shall deliver to the Seller a copy of the certificate of incorporation and the by-laws (or other constitutional documents) of the Purchaser and minutes of a meeting of the board of directors or other governing body of the Purchaser approving the execution of this Agreement and issuance of the Stock Consideration by the Purchaser and the performance of the Purchaser's obligations under this Agreement certified as true, complete and correct copies by a director or the secretary of the Purchaser;
(ii) the Seller shall deliver to the Purchaser a transfer of the Sale Shares, in the agreed form, duly executed in favour of the Purchaser together with the share certificates in respect of the Sale Shares;
(iii) the Seller shall cause a board meeting of the Company to be held at which the Seller shall resign as director of the Company with effect from the later of the date of Completion. Alternatively, such action may be taken by execution of a letter of resignation of the sole director of the Company, with effect from the later of the date of Completion;
(iv) the Seller shall cause a board meeting of the Company to be held at which the transfer of the Sale Shares shall, subject to the relevant Instrument of Transfer being duly stamped be passed for registration and registered and the Company shall issue and deliver to the Purchaser a new share certificate representing the Sale Shares. Alternatively, such action may be taken by execution of an action by written consent of the sole director of the Company;
(v) the Seller shall deliver to the Purchaser the written resignation as director of the
Company in the agreed form of the directors referred to in (iii) above;
(vi) the statutory books, books of account, title deeds, all insurance policies and receipts and other records and contracts and licenses and other documents, chops, seals and cheque books and other items belonging or relating to the Company as may be requested by the Purchaser and which are in the possession and control of the Seller;
(vii)
the Purchaser shall pay to the Seller (or as the Seller may direct by written notice) US$300,000.00 in cash in immediately available funds in part payment and
consideration for the sale and purchase of the Sale Shares, by electronic transfer to such bank account(s) as may be notified by the Seller to the Purchaser in writing not less than 3 Business Days before the Completion Date (and if more than one such bank account is so notified, in such proportions as the Seller may specify in such notification) or by way of a bank draft issued by a licensed bank in USA;
(viii)
the Purchaser shall issue and deliver a promissory note in the sum of US$60,000.00
in favour of the Seller payable on the 30th day of June 2010;
(ix) the Purchaser shall issue and deliver to the Seller share certificate, representing the Stock Consideration, issued and fully paid and duly registered in the name of the Seller;
(x) the Seller shall pay to the Purchaser in cash in immediately available funds by electronic transfer to such bank account(s) as may be notified by the Purchaser to the Seller in writing not less than 3 Business Days before the Completion Date or by way of a bank draft drawn on a licensed bank in USA in favour of the Government of USA an amount representing any stamp duty payable by the Seller pursuant to Clause 3(C);
(xi) Stephan Pinto shall pay to Purchaser US$15,000.00 in cash in immediately available funds by way of a bank draft issued by a licensed bank in USA;
(xii) within 30 days of the Completion Date, Stephan Pinto, alone or in conjunction with other investors, shall pay to Purchaser US$185,000.00 in cash in immediately available funds by way of a bank draft issued by a licensed bank in USA;
(xiii) within 5 days of Purchaser's receipt of the funds described in Section 4(A)(xii) above, Purchaser shall pay to Seller US$40,000.00 in cash in immediately available funds by way of a bank draft issued by a licensed bank in USA;
(xiv) the Seller shall transfer and assign all of Seller's right t title and interest in and to the mark "Sugar Made", Serial Number 77625286, to Purchaser, including, without limitation, the filing of an assignment of such mark from the Seller to Purchaser within a reasonable time after the Completion Date, but in no event later than 15 days following the Completion Date.
(13)
If the Seller (on the one hand) or the Purchaser or the Purchaser on the other hand shall fail or be unable to comply with any of their respective obligations under Clause 4(A) despite the Completion becoming unconditional in accordance with the provisions hereof, then the Purchaser (in the case of any such noncompliance by the Seller) or the Seller (in the case of any such non-compliance by the Purchaser) shall not be obliged to perform any of their respective obligations under Clause 4(A) and shall be entitled (in addition to and without prejudice to any other rights or remedies available to it) to rescind this Agreement whereupon this Agreement shall be rescinded and shall cease to have effect. Witl1out
prejudice to the generality of the foregoing, the Purchaser shall not be required to complete the purchase of any of the Sale Shares unless the purchase of all of the Sale Shares is completed simultaneously. Save as aforesaid, neither the Seller or the Purchaser shall be entitled to rescind this Agreement, whether before or after Completion, for any reason whatsoever.
5.
THE WARRANTIES
(A)
The Seller represents and warrants to the Purchaser that:-
(i) it has full power to enter into and perform this Agreement and this Agreement constitutes its legally valid and binding obligations;
(ii) it has the full power, authority and legal right to own its assets and to carry on its business and is not in receivership or bankruptcy;
(iii) it has taken no steps to enter into bankruptcy or analogous proceedings and no petition has been presented for its winding up or similar proceedings taken and there are no grounds on which a petition or application could be based for the bankruptcy of or appointment of a receiver or the levy of distress or execution or the taking of analogous proceedings against it;
(iv) it is the sole legal and beneficial owner of the Sale Shares;
(v) save for the pre-emption and other provisions contained in the by-laws of the Company, there is no option, right to acquire, mortgage, charge, pledge, lien or other form of security or encumbrance or equity on, over or affecting the Sale Shares and there is no agreement or commitment to give or create any of the foregoing and no claim has been made by any person to be entitled to any of the foregoing; and
(vi) At the time of Completion, there shall be no liability for taxes, contract obligations or any other type of claim that may be asserted against the Company; including, without limitation, any obligation that the Company may have with respect to any income tax or Franchise tax arising out of the net taxable income of the Company from the date of the Company’s inception to the date of Completion.
(13)
The Purchaser represents and warrants to the Seller that:
(i) The Purchaser is a corporation duly organized, validly existing and in good standing w1der the laws of the USA. The Purchaser is duly authorized to conduct business and is in good standing under the laws of the USA and ahs full corporate power and authority and all licenses, permits and authorizations necessary to carry on the
businesses in which it is engaged, to own and use the properties owned and used by it and to execute, deliver and perform this Agreement. The execution and delivery of this Agreement and the consummation of the Acquisition and the issuance of the Stock Consideration and the other transactions contemplated hereby by the Purchaser have duly and validly authorized by all necessary corporate action. No other corporate acts or proceedings on the part of the Purchaser are necessary to authorize this Agreement or the transactions contemplated hereby;
(ii) This Agreement has been duly executed and delivered by the Purchaser and constitutes the legal valid and binding obligations of the Purchaser enforceable against it;
(iii) The entire-issued and outstanding capital stock of the Purchaser consists of 656,756 shares of common stock, no par value, which has been duly authorized and are validly issued and fully paid and free from encumbrances;
(iv) Save the Convertible Promissory Notes and the Stock Option Plan, there is no subscription, warrant, option, convertible security, or other right (contingent or other) to purchase or otherwise acquire equity securities of the Purchaser is authorized or outstanding and there is no commitment by the Purchaser to issue shares, subscriptions, warrants, options, convertible securities or other such rights or to distribute to holders of any of its equity securities any evidence of indebtedness and there is no written or oral agreement by the Purchaser to sell or transfer any common stocks of the Purchaser to any third person and there is no obligation (contingent or other) to purchase, redeem or otherwise acquire any of its equity security or any interest therein, or to pay any dividend or to pay any dividend or make any other distribution in respect of the common stock of the Purchaser;
(v) The shares of the common stock of the Purchaser that constitute the Stock Consideration are and/or will be duly authorized and validly issue, and as of the date of issuance shall be fully paid and free of all liens, charges, claims, encumbrance and liabilities whatsoever.
(C) The Parties represent and warrant to each other that the Warranties will be true at and fulfilled down to Completion in all respects as if they had been made or given at Completion and on the basis that a reference to the actual time of Completion were substituted for any express or implied reference to the time of this Agreement.
(D) The Parties undertake that they shall not, prior to Completion, do any act or thing or omit to do any act or thing the commission or omission of which would constitute a breach of the Warranties as if they were given at Completion or which would make any of the Warranties inaccurate or misleading if they were so given on the basis referred to in Clause
5(B).
(E) In addition to the rights of the Parties to damages or any other rights at common law in respect of any breach of the Warranties, each party agrees to fully indemnify and keep the other party fully indemnified and harmless against any loss or liability arising out of this Agreement suffered as a result of any breach of any of the Warranties of the indemnifying party, together with all costs, charges, interest, penalties and expenses incidental or relating thereto.
(F) The Parties shall be entitled to claim each other after Completion that any of the Warranties is or was untrue or misleading or has or had been breached at the date of Completion.
(G) The Parties undertake to do or procure to be done all such acts and things as may be necessary to ensure that the Warranties are true and correct in all respects as at the date of Completion, including, without limiting the generality of the foregoing, all such acts and things as may be required to perfect the title to the Sale Shares (on the part of the Seller) and to the Stock Consideration (on the part of the Purchaser) and/or to discharge any option, right to acquire, mortgage, charge, pledge, lien or other form of security or encumbrance or equity on, over or affecting the Sale Shares or any agreement or commitment to give or create any of the foregoing referred to in sub-Clause 5(A)(v) and sub-Clause 5(B)(v) respectively.
(6)
THE COVENANTS
(A) From and after the date of this Agreement through the Completion Date, except as expressly contemplated or permitted by this Agreement, the Parties shall conduct their businesses in the ordinary course of business, and use reasonable efforts to maintain and preserve its business organizations, assets, employees and advantageous business relationship;
(B) The Parties will use their best efforts to bring about the fulfillment of each of the conditions precedent to the obligations of the other patty to close the tra11sactions contemplated by this Agreement, and will render reasonable assistance to the other party as requested by such other party to enable it to fulfill its obligations hereunder. The Parties shall give notice to the other party, when they, respectively, have satisfied all of the conditions to the other party's obligation to close for which they, respectively, are responsible;
(C) Prior to Completion, neither the Seller, on the one hand, nor the Purchaser, the other hand, shall, without prior written consent of the other party:
(i) except in the ordinary course of business, enter into, amend or tem1inate any material contracts or agreements, including, without limitation, any agreements of employment, stock or asset sale, acquisition, merger, consolidation or other business acquisition, disposition, or combination, or make any change in any material contracts;
(ii)
amend its certificate of incorporation or by-laws;
(D) The Parties shall promptly advise the other party of any change or event having a material adverse effect on it or which it believes would or would be reasonably likely to cause or constitute a material breach of their respective representations, warranties or covenants hereunder;
(E) Prior to the date that is three (3) years after the date of this Agreement, the Seller shall not own or operate any Business in competition to that of the Purchaser or solicit its employees and/or enter into any advertising agreements with the Purchaser's competitors at any location in the United States or Europe;
(F) The Purchaser undertakes to honour the promissory note under Clause 4(A)(viii) and to pay an interest of 4 per cent per annum from the due day to the date of the final payment and agrees that the Seller may offset the same for any unfulfilled obligations, adjustments or breaches pursuant to this Agreement and undertakes that such adjustment report shall be issued to the Seller no later than 28th February 2011 along with the amount of offset to the promissory note.
(G) The Seller shall use its good faith best efforts to ensure that the terms of the Exclusive Supplier Agreement are honoured by Sugarcane Paper Co., Ltd., a Hong Kong entity, for the entire term of that Agreement;
(H) The Seller covenants with the Purchaser that the Seller shall use its good faith best efforts to cause the assets of Sugarcane Paper Co., Ltd., as described in the Bill of Sale at1ached hereto as Exhibit 1, be transferred to either the Company or to Purchaser, free and clear of all claims as at the Completion Date.
(I) The Purchaser covenants with the Seller that in the event that the holders, or any of them, of the Convertible Promissory Notes exercise his, her, its or their right to convert such note(s) into shares of the common stock of the Purchaser pursuant to the terms of such Convertible Promissory Notes, then, within 7 days following such conversion, the Purchaser shall issue to Seller additional shares of the common stock of the Purchaser such that the total number of shares owned by Seller shall be equal to or not less than 10 percent of the combination of(i) the issued and outstanding capital stock of the Purchaser as at the Completion Date; and (ii) the aggregate of shares that the Purchaser issues to the holder(s) of the Convertible Promissory Note(s) following such conversion.
(J) The Purchaser covenants with the Seller that the Purchaser shall pay an earned payment in the aggregate sum of US$600,000.00, to which the Seller is entitled pursuant to the terms and conditions described in Exhibit 4 hereto, to the Seller in three equal annual payments in the fiscal year of 2010, 2011 and 2012 and within 30 days after the filing of the annual
financial statements by the Purchaser in each of the said respective fiscal years.
7.
LIMITATIONS ON CLAIMS
The Purchaser agrees that the aggregate liability of the Seller under this Agreement shall not exceed the aggregate of the amounts received by the Seller under this Agreement by way of consideration for the sale and purchase of the Sale Shares under Clause 3(B). The liability of the Seller in relation to the Warranties shall cease on the date four (4) years from the date of Completion, save as regards any alleged specific breach of which notice in writing has been given to the Seller prior to that date.
8.
CONFIDENTIALITY
The Seller shall and shall procure that its officers, employees, agents and advisors of each of them shall keep secret and confidential and not without the prior written consent of the Purchaser disclose to any party or make use of for its own purposes (otherwise than in the context of an addition to its general experience, knowledge or expertise) any of the confidential information, reports and documents received by it relating to any Group Company including, without limitation to the generality of the foregoing, all trade secrets, know-how, data, customer lists and information, business plans and forecasts, accounting and tax records and correspondence, save where disclosure is required either by reason of . law or if the relevant information comes to the public domain otherwise than by reason of the default of the Seller or officers, employees, agents or advisors of any of them.
9.
PURCHASER'S DECLARATION
The Purchaser hereby declares and confirms that it has full knowledge of and is satisfied that all the accounting, financial and trading positions, management affairs, and other affairs of the Company and the Purchaser hereby waives and abandons its rights, if any, to request the Seller to give any warranty, make any disclosure, procure any assistance or provide with any information in respect of the Company for the Purchaser to carry out any due diligence in respect of the above matters of the Company prior to Completion provided, however, that nothing in this Section 9 shall operate in derogation of Seller's warranty obligation set forth in Paragraph 5(A) and the corresponding indemnification obligations set forth in Paragraph 5(E).
10.
NATURE OF AGREEMENT
(A) This Agreement is personal to the parties and neither party may assign, mortgage, charge or sublicense any of its rights hereunder, or sub-contract or otherwise delegate any of its obligations hereunder, except with the prior written consent of the other party.
(B)
Nothing in this Agreement shall create, or be deemed to create, a partnership, or the
relationship of principal and agent, between the parties or any of them.
(C) This Agreement and documents referred to herein contains the entire agreement between the parties with respect to its subject matter (no party having relied on any representation or warranty made by any other party which is not a term of this Agreement) and may not be modified except by an instrument in writing signed by the parties and supersedes all and any previous agreements or arrangements between the parties hereto or any of them relating to the transactions contemplated hereby and all or any such previous agreements or arrangements (if any) shall cease and determine with effect from the date of execution of this Agreement.
(D) If any provision of this Agreement is held to be invalid, illegal or unenforceable, then such provision shall (so far as it is invalid, illegal or unenforceable) be given no effect and shall be deemed not to be included in this Agreement but without invalidating any of the remaining provisions of this Agreement. The parties shall nevertheless negotiate in good faith in order to agree the terms of a mutually satisfactory provision, achieving so nearly as possible the same commercial effect, to be substituted for the provision so found to be invalid, illegal or unenforceable.
(E) No failure or delay by any party in exercising any of its rights under this Agreement shall be deemed to be a waiver thereof nor shall a waiver of a breach of any provision of this Agreement be deemed to be a waiver of any subsequent breach of the same or any other provision.
(F)
Time shall be of the essence in this Agreement.
11.
NOTICES AND SERVICE
(A) Any notice or other communication required to be given under this Agreement shall be deemed duly served if left at or sent by registered or recorded delivery post, facsimile transmission or email correspondence to the addresses, the fax numbers or email addresses set out in Clause 11(B) or to such other address, fax number or email address as may have been last notified in writing by or on behalf of the relevant party to the other parties hereto. Any such notice shall be deemed to be served at the time when the same is left at the address of the party to be served and if served by post on the second Business Day next following the day of posting. Any notice served by facsimile transmission or email correspondence shall be deemed to have been served when sent provided that !he transmission was confirmed as sent by the originating machine or computer, as applicable.
(B)
Each notice or other communication given or made hereunder shall be in writing and delivered or sent to the relevant party at its address, fax number or email address set out below (or such other address, fax number or email address as the addressee has by five Business Days' prior written notice specified to the other parties):-
To the Seller
Name Address Attention Fax Number
Email Address
Leung, Kwok-wai Clifton
________________________
______________________
Clifton@sugarmade.com
To the Purchaser
Name Address Attention Fax Number
Email Address
Simple Earth Inc.
35 Amber Dr., San Francisco, CA 94131
Chief Executive Officer
____________________
farid@simpleearthpaper.com
With a copy to (which shall not constitute notice):
Name
Address
Niesar & Vestal LLP
90 New Montgomery Street, 9
Floor, San Francisco, CA
Attention Fax Number Email Address
12.
MISCELLANEOUS
94114
Gerald V. Niesar or Oscar E. Escobar
415.882.5400
gniesar@nvlawllp.com; oescobar@nvlawllp.com
(A) This Agreement may be signed or executed in one or more parts and where signed or executed in more than one part each part shall be deemed to constitute an integral part of the one Agreement.
(B) Each of the Parties shall pay its own costs, charges and expenses incurred in connection with the negotiation, preparation and implementation of tins Agreement.
13.
PROPER LAW AND JURISDICTION
This Agreement shall be governed by and construed and enforced in accordance with Inc. laws of the State of California, without reference to conflicts of laws rules. The federal and
state courts located within San Francisco, California shall have exclusive jurisdiction to adjudicate any dispute arising out of-this Agreement.
AS WITNESS whereof this Agreement is entered into the day and year first above written.
SIGNED by
the Seller
) /s/ Leung, Kwok-wai Clifton
)
)
in the presence of:-
)
SIGNED by Ethan Farid Jinian
) /s/ Ethan Farid Jinian
)
for and on behalf of the Purchaser
)
)
in the presence of:-
)
Bill of Sale
Exclusive Supplier Agreement
Form of Convertible Promissory Note
Earned Payment Criteria
In each of the three fiscal years commencing after the Completion Date upon the Purchaser achieving (a) an net income of US$9Million, US$10Million and US$11Million in the fiscal year 2010, 2011 and 2012 respectively; and (b) an average gross profit margin of not less than 6 per cent; and such earned payment shall be due for payment 30 days after the filing of the annual financial statements by the Purchaser in the each of the respective fiscal year;
MarketSource Companies Letter Agreement
May 1,2009
Letter of Agreement
This agreement is between The MarketSource Companies (TMS) located at 5425 Peachtree Parkway, Norcross, GA 30092 and Sugar Cane Paper Company-Hong Kong (SCPC-HK) and Sugar Cane Paper Company-Asia Ltd. (SCPC-A), located l6B, 8 Hart Avenue, Tsimshatsui, Hong Kong, China.
Whereas The Sugar Cane Paper Company-Hong Kong is the parent company and administrative arm of
The Sugar Cane Paper Company's administrative operations.
Whereas The Sugar Cane Paper Company-Asia is a wholly owned subsidiary of The Sugar Cane Paper
Company-HK and is the manufacturing entity of SCPC-HK , manufacturing it's bagasse paper products in
Taishan, China and California.
Whereas 1l1e MarketSource Company (TMS) or it's associated entity, MarketSource Paper Company (MSPC) is a sales, marketing, and distribution company, exclusively representing and distributing bagasse based product for SCPC-HK and/or SCPC-A.
Effective immediately, The MarketSource Companies is the exclusive distributor and agent of SCPC-HK and SCPC-A for all bagasse-based products, specifically copy paper for all market channels in North America, Central America and Europe (US based companies).
Disagreement will be contingent on the ability for TMS to deliver a viable customer of bagasse-based product (copy paper) that can purchase a significant available amount of production capacity of 8.5 x 11" and/or A4 size bagasse based copy paper by the end of 2009, based on production capacity of 11 metric tons of US size and 21 MT of A4 size.
Price
Base price:
$2.60 per ream, FOB Shenzhen, China.
Price guarantee:
Not to exceed 5% year, with a 3 month notice in writing.
Capacity Guarantee (11st year - 2009)
Size | Composition | Capacity (annual rate) | |
8.5" X II" (US) | 100% re-cycled, 70% bagasse 30% bamboo | 11K metric tons | |
A4 | 100% re-cycled,70% bagasse, 30% bamboo | 21 K metric tons | |
8.5" X I 1" (US-SF) | 100% recycled | d 70% bagasse, 30% bamboo | IOK metric tons |
Other necessary requirements will be a mutual right to examine any agreements, contracts or commitments to associated parties that are in place, or future agreements, contracts or commitments that may be agreed to between associated parties, customers, factory etc., for example, SCPC-HK and Guangdong Paper Company (factory), TMS/Customer- or other Contracts.
Clifton Lueng
Chief Executive Officer
Sugar Cane Paper Company USA
Sugar Cane Paper Company Asia
_______________________
Michael Nilian
Chief Executive Officer
The Market Source Companies
MarketSource Paper Company
EXCLUSIVE LICENSE AND SUPPLY AGREEMENT
This Exclusive License and Supply Agreement (“Agreement”) is made and entered into as of January 1, 2011, by and between The Sugar Cane Paper Co., Ltd., a Hong Kong limited company (“SCP”), and SugarMade, Inc., a California corporation (“SugarMade”) with respect to the following facts:
A.
SCP has been granted an exclusive license under a China Patent No. CN 201686902 U, which is concerned with technologies for making pulp and manufacturing paper products without the use of tree fibers (the “Pulp”).
B.
SugarMade desires to acquire, and SCP wishes to provide, an exclusive license under the China Patent No. CN 201686902 U, applications, know how and proprietary information to commercialize the Product in certain specified countries, and SCP is willing to supply such products to SugarMade, all on the terms and conditions as set forth in this Agreement
ACCORDINGLY, the parties, intending to be legally bound, agree as follows.
1.
DEFINITIONS
1.1
“Confidential Information” means written or other information concerning a party, not generally known to the public; and, to the extent consistent with the foregoing definition, includes historical financial statements, financial projections and budgets, historical and projected sales, capital spending budgets and plans, the names and backgrounds of key personnel, personnel training techniques and materials, and any information that is marked “confidential” or in some comparable manner.
1.2
“Intellectual Property Rights” shall mean, collectively, the Licensed Patents, the Know How, and any other intellectual property rights owned, held or controlled by SCP that SugarMade may require or use in fully exercising its rights under this agreement.
1.3
“Know-How” shall mean all inventions (whether or not patentable) and all confidential, technical, or proprietary information, trade secrets, documents, materials and knowledge owned or controlled by SCP that would be necessary or useful in order to enable SugarMade to utilize fully the rights granted by SCP under this Agreement; including, without limitation, information and knowledge regarding inventions, discoveries, techniques, systems, formulae, algorithms, methods and processes of any type, technical data, drawings, designs, manufacturing and design information, computer programs, and other information, relating to the Process.
1.4
“Licensed Patents” shall mean: (a) the patents listed on Exhibit B hereto; (b) any and all patents issuing or claiming priority from such patents described in (a), including continuations, continuations-in-part, divisionals, reexaminations and reissues thereof; and (c) foreign counterparts to the patents described in (a) and (b).
1.5
“Licensed Products” shall mean paper and paper products manufactured using the Pulp without the use of tree fibers, or any other products that SCP develops, manufactures or licenses to SugarMade's specifications.
1.6
“Net Sales” shall mean the gross amounts invoiced by SugarMade on account of sales of Licensed Products to third parties (including third party distributors and wholesalers), less the total of:
(a)
Trade, cash and/or quantity discounts actually allowed or accrued which are not already reflected in the amount invoiced;
(b)
Excise, sales and other consumption taxes and custom duties to the extent included in the invoice price and to the extent such taxes are remitted to the applicable taxing authority;
(c)
Freight, insurance and other transportation charges to the extent included in the invoice price and separately identified on the invoice or other documentation maintained in the ordinary course of business;
(d)
Amounts repaid, credited or accrued by reason of returns, rejections, defects or recalls or because of chargebacks, retroactive price reductions, refunds or billing errors;
(e)
Payments and rebates directly related to the sale of Licensed Products accrued, paid or deducted in a manner consistent with generally accepted accounting principles; and
(f)
Any other similar and customary deductions taken.
1.7
“Representatives” means a party's directors, officers, employees, agents, consultants, advisors or other representatives, including legal counsel, accountants and financial advisors, including the Representatives of a party's affiliates.
1.8
“Supplied Products” shall mean paper and paper products manufactured with and without the use of tree fibers as more fully described in Exhibit A attached hereto, as amended from time to time by the mutual consent of the parties.
1.9
"Territory" shall mean the territories of North America, Central America, South America, Europe, Australia and New Zealand.
2.
LICENSE
2.1
License Grant. SCP hereby grants to SugarMade a license under the Licensed Patent, with the right to sublicense, to import, export, use, sell, offer for sale, have sold, or otherwise dispose of, and otherwise commercialize Licensed Products, in the Territory.
2.2
Exclusive Grant of Rights. The rights granted to SugarMade are exclusive in the Territory. During the term of this Agreement, (a) SCP shall discontinue any direct sales into the Territory and shall deliver to SugarMade all of SCP's contacts and leads for customers and prospective customers in the Territory; (b) SCP shall not develop, have developed, make, have made, import, export, use, sell, offer for sale, have sold, or otherwise dispose of, and otherwise commercialize Licensed Products, directly or indirectly, in the Territory, except for sales to SugarMade; (c) SCP shall not own any interest in any other company or carry on or be engaged,
concerned or interested directly or indirectly whether as shareholder, director, employee, partner, agent or otherwise in carrying on any business similar to or competing with SugarMade anywhere in the Territory; and (d) SCP shall not, either on its own account or in conjunction with or on behalf of any other person, solicit or entice away or attempt to solicit or entice away from SugarMade any customer for the Products in the Territory.
2.3
Right of First Refusal on Additional Territories. SCP hereby grants to SugarMade a right of first refusal to acquire exclusive rights to any other territory in the world, with the exception of the Peoples Republic of China. If SCP intends to grant any third party rights to commercialize any of the Licensed Products in any region or territory of the world, SCP will provide to SugarMade written notice of such intended grant, including the name of the third party, the region or territory, and the terms of the grant. SugarMade shall have a period of thirty (30) days from the date of the notice to accept the grant on the terms offered to the third party. If SugarMade does not elect to accept the grant, then SCP shall be free for a period of ninety (90) days to complete the grant to the third party on terms no less favorable than those contained in the notice to SugarMade. If the grant is not consummated in such 90 day period, then it will once again be subject to SugarMade's right of first refusal as contained in this Section.
3.
CONSIDERATION
3.1
Beginning on the date hereof and until the termination date of this Agreement specified in Article 12 for each Licensed Product subject to Royalty, SugarMade shall pay a royalty in an amount computed based on the following Royalty Schedule for the Licensed Products under this Agreement by SugarMade.
Royalty Payment Schedule of Licensed Products
3.2
The Minimum Annual Royalty Amount (MARA) from the date of this Agreement until December 31st 2011 will be no more than US$100.00. Beginning calendar year 2012 the MARA will be no more than US$250.00.
3.3
Payment for the royalty shall be made quarterly by SugarMade no later than thirty (30) days following the last day of each calendar quarter (“Royalty Period”) to an account specified by SCP. The first Royalty Period will commence on April 1st 2011 and will end on June 30th 2011 and subsequent Royalty Periods will coincide with calendar quarterly periods as follows July 1st thru September 30th, October 1st thru December 31st, January 1st thru March 31st and April 1st thru June 30th.
4.
INTELLECTUAL PROPERTY RIGHTS
4.1
Ownership of Processes. SCP shall retain ownership of the Intellectual Property Rights. SugarMade shall have only those license rights specifically granted in this Agreement.
4.2
Modifications initiated by SCP. During the term of this Agreement, SCP may modify the Supplied Products and the Processes without SugarMade's consent, provided that the Supplied Products continue to conform to the applicable specifications set forth in Exhibit A (“Permitted Modification”). SCP shall provide SugarMade with written notice of any Permitted Modification to the Supplied Product of the Processes not less than thirty (30) days
prior to the release of such modification. SCP shall provide SugarMade with any documentation related to any modifications of the Supplied Products, including any and all documentation as may be required by SugarMade to exercise its license rights under this Agreement.
4.3
Modifications initiated by SugarMade. During the term of this Agreement, SugarMade may request that SCP make modifications to the Supplied Product, which modifications shall be subject to the parties' mutual agreement as to the scope of services, milestones, deliverables and compensation; provided, however, that SCP shall not unreasonably withhold its consent to any such agreement and will use reasonable commercial efforts to deliver any modifications requested by SugarMade if SugarMade underwrites the cost of the development. In the event SugarMade, without SCP's participation, develops any modification (hereinafter referred to as “SugarMade Modification”) to the Licensed Products, SugarMade shall own all rights, title, and interest in such SugarMade Modification.
4.4
Maintenance and Prosecution of Patents.
(a)
SCP shall file counterpart applications to the Licensed Patents in jurisdictions in China as requested by SugarMade.
(b)
During the term of the Agreement, SCP shall have the right, at its sole option and expense, and within its sole discretion, to pursue, prosecute, maintain and defend all patent applications and issued patents included in the Licensed Patents from time to time and to pay all costs and expenses associated therewith. Notwithstanding the preceding, at SugarMade’s request SCP shall provide SugarMade with updates on the status of the prosecution and maintenance of the Licensed Patent Rights.
(c)
At least (30) days prior to a deadline on any patent or application of the Licensed Patents, SCP shall notify SugarMade if it will not be taking any action thereby allowing any patent or application of the Licensed Patents to lapse or go abandoned before their natural expiration, including allowing a patent right to issue or grant without filing a continuing application thereon (any or all of the above, an “Abandonment”). If SCP provides SugarMade with notice of an impending Abandonment, SugarMade shall have the right, but not the obligation, to take any such action at its sole cost and expense and, upon the request of SugarMade, shall assign such Licensed Patent to SugarMade, prior to such Licensed Patent's expiration. If SugarMade takes action in the event of an Abandonment, SCP shall provide reasonable cooperation to SugarMade at SugarMade’s expense.
4.5
Branding. The Supplied Products will bear only the labels and logos of SugarMade or its designees. SugarMade hereby grants SCP a license to use its trademarks, insignias, logos or other proprietary marks (“Marks”) solely in connection with the Supplied Product in accordance with this Agreement, subject to any trademark usage guidelines that SugarMade may publish from time to time. Except for this limited license set forth herein, this Agreement does not provide SCP, any rights, title or interest in respect of the Marks.
4.6
Infringement of Intellectual Property Rights. In the event that either party becomes aware of any third party infringing any of the Licensed Patent Rights in the Territory it shall
notify the other party of such infringement immediately. In the event of infringement of any of the Licensed Patent Rights in the Territory, SugarMade shall have the right to take such actions as it may deem reasonable to stop the infringing activity in the Territory, including without limitation initiating legal proceedings against any infringing person, and SugarMade shall have sole control over such actions and proceedings, including over the settlement thereof. SCP shall cooperate with and provide reasonable assistance to SugarMade in the prosecution of any claim against a person in the Territory for infringement of the Intellectual Property Rights, and agrees to be named as a party to any legal proceedings related thereto as may be necessary. SugarMade shall retain any proceeds derived from the settlement or prosecution of any such actions or proceedings provided that SugarMade shall bear responsibility for all costs associated with such actions or proceedings.
5.
ORDERING OF PRODUCT
5.1
Purchase Orders. SugarMade shall have the right to order Supplied Products from SCP and SCP will supply Supplied Products to SugarMade under the terms of this Agreement. SugarMade will order Supplied Products for delivery pursuant to this Agreement by issuing a written purchase order (“P.O.”) to SCP by telefax or e-mail. Each P.O. will identify: item(s) ordered, quantity, shipping date, destination, and total price. Unless otherwise agreed by SCP each P.O. must be received ten (10) calendar days in advance of the requested shipping date.
5.2
Acceptance of P.O.s. SCP shall accept or reject each P.O. in writing within three (3) business days of receipt of the P.O., after which SCP will be deemed to have accepted the P.O. in its entirety. Once accepted, a P.O. will be binding on both SugarMade and SCP. SCP will use commercially reasonable efforts to accept and fulfill all P.O.s submitted by SugarMade.
5.3
Rescheduling. SugarMade may reschedule delivery of a P.O. at any time prior to shipment for up to thirty (30) calendar days. After thirty calendar (30) days, SCP may invoice SugarMade for the Product and storage costs incurred and damages suffered by SCP. If SCP for any reason anticipates difficulty in complying with the acknowledged delivery date or in meeting any of the other requirements of any P.O., SCP will promptly notify SugarMade in writing. SugarMade shall have the option to cancel the P.O. without liability to SCP, or to extend the delivery schedule and waive the other deficiencies in which case an equitable reduction in the price of the Licensed Product will be negotiated.
6.
PRICES AND TERMS OF PAYMENT
6.1
Prices. The price for the Supplied Products will be in United States dollars as set forth on Exhibit A. Unless otherwise specified on a P.O., prices are quoted FOB SCP's shipping port in China. Prices for the Supplied Products may be changed by SCP; provided that any increase in price will be effective only upon 30 days' prior written notice to SugarMade.
6.2
Payment. SCP shall invoice SugarMade on delivery. SCP will provide to SugarMade a production credit line in an initial amount of $2 million. Upon demonstration of performance and need, SCP shall increase production credit line up to a maximum of $20 million. SugarMade may place P.O.'s on open account with SCP in an amount up to the credit limit in effect from time to time. Sugarmade will remit payment for Supplied Product to SCP within 30 days of
SugarMade's receipt of payment from its customer. Payment for the Supplied Products will be made by wire transfer.
6.3
Most Favored Customer Pricing. During the term of this Agreement, SCP agrees that it shall sell the Supplied Products to SugarMade at prices and on payment and warranty terms that are no less favorable than the prices, payment and warranty terms offered or given by SCP to any other customer of substantially similar products and volumes. If SCP provides more favorable pricing or terms to any customer, it shall immediately apply such price and terms to pending SugarMade P.O.s and offer such lower price and favorable terms for all future purchases of Supplied Products.
7.
PACKING, SHIPPING AND DELIVERY
7.1
Packing. The Product shall be packaged by SCP in a manner suitable for commercial shipment and so as to be ready for sale to customers.
7.2
Shipping. SugarMade reserves the right to designate means of shipping the Supplied Products. Shipping methods will be as stated on the applicable P.O. No shipping changes will be made unless authorized in writing by SugarMade.
7.3
Delivery. Title and risk of loss will pass from SCP to SugarMade as designated on the applicable P.O. from SugarMade. Unless otherwise specified, delivery shall be FOB SCP's designated shipping port.
7.4
Export Authorization. SCP will be responsible for obtaining any required export authorizations necessary to export the Product purchased pursuant to this Agreement.
8.
WARRANTIES
8.1
Mutual Warranties. Each party warrants to the other party that:
(a)
it has the right to enter into this Agreement, and that it has not and shall not make any commitments to or agreements with others inconsistent with this Agreement. Each party acknowledges that no other party or agent or attorney of the other party or any other person or entity has made any promise, representation of fact or law, or warranty whatsoever, not contained within this Agreement, concerning the subject matter hereof, to induce the execution of this Agreement, and each signatory to this Agreement hereby acknowledges that it has not executed this instrument in reliance on any such promise, representation or warranty not contained herein.
(b)
the execution, delivery and performance by it of this Agreement and its compliance with the terms and provisions of this Agreement does not and will not violate, conflict with or result in a breach of any of the terms or provisions of (i) any other contractual or other agreements or obligations of such party, (ii) the provisions of its charter, operating documents or bylaws, or (iii) any order, writ, injunction or decree of any court or governmental authority entered against it or by which it or any of its property is bound except where such breach or conflict would not materially impact the party's ability to meet its obligations hereunder; and
(c)
it shall comply in all material respects with all laws, rules and regulations applicable to its performance under this Agreement.
8.2
Licensed Intellectual Property Rights.
(a)
SCP warrants that it holds good title to the Intellectual Property Rights, free and clear of all liens, claims, security interests, charges and other encumbrances of any kind.
(b)
The Intellectual Property Rights constitute all of SCP’s intellectual property rights that are necessary or useful for SugarMade to develop, have developed, make, have made, import, export, use, sell, offer for sale, have sold, or otherwise dispose of, and otherwise commercialize Licensed Products and to otherwise exercise its rights under this Agreement.
8.3
Intellectual Property Infringement. SCP warrants that it has the right to transfer to SugarMade the Licensed Products. As far as SCP is aware, the Licensed Products and the Intellectual Property Rights do not infringe patent, trademark, copyright or other proprietary rights of any third party, nor has any claim (whether or not embodied in an action, past or present) of such infringement been threatened or asserted, nor is such a claim pending, against SCP.
8.4
Product Warranty. SCP warrants that the Supplied Products: (a) will conform to applicable specifications; (b) will be free from defects in design, materials and workmanship; (c) will be suitable for the purpose for which they are intended, for a period ending two (2) years from the date Product is delivered to SugarMade or its customer (the “Warranty Period”), and (d) if designated as "tree free," will be manufactured entirely without the use of tree fibers. SCP will promptly replace any Supplied Products that fail to meet this warranty.
8.5
Capacity. SCP warrants to SugarMade that it has existing agreements with the government of the Peoples Republic of China to provide enough raw material (bagasse fiber) to supply SugarMade with a minimum of 200,000 metric tons of copy paper annually, with the potential for further expansion.
9.
INDEMNIFICATION
9.1
Indemnification by SCP. SCP will indemnify and hold harmless SugarMade and its directors, officers, employees, agents, successors and assigns from and against any and all liability, damages, losses, claims, demands, judgments, costs and expenses of every nature and kind by reason of (a) breach of any representation or warranty contained in this Agreement, (b) breach of any covenant of this Agreement, or (c) injury to or death of any person or damage to or destruction of property arising out of or incidental to or in any way resulting from the acts or omissions, whether negligent or otherwise, of SCP, its employees, subcontractors or agents in performance under this Agreement.
9.2
Indemnification by SugarMade. SugarMade will indemnify and hold harmless SCP, its directors, officers, employees, agents, successors and assigns from and against any and all liability, damages, losses, claims, demands, judgments, costs and expenses of every nature and kind by reason of (a) breach of any representation or warranty contained in this Agreement, (b)
breach of any covenant of this Agreement or (c) injury to or death of any person or damage to or destruction of property arising out of or incidental to or in any way resulting from the acts or omissions, whether negligent or otherwise, of SugarMade, its employees, subcontractors or agents in performance under this Agreement.
9.3
Procedure for Indemnification—Third Party Claims.
(a)
Notice. Promptly after receipt by a person entitled to indemnification of notice of the commencement of any legal proceeding against it, the indemnified person will, if a claim is to be made against an indemnifying party, give notice to the indemnifying party of the commencement of the claim; except the failure to notify the indemnifying party will not relieve the indemnifying party of any liability that it may have to any indemnified person, except to the extent that the indemnifying party demonstrates that the defense of the proceeding is prejudiced by the indemnified person’s failure to give the notice timely.
(b)
Participation. If any proceeding referred to in Section 9.3(a) is brought against an indemnified person and the indemnified person gives notice to the indemnifying party of the commencement of the proceeding, the indemnifying party may (i) participate in the proceeding and (ii) elect by notice to the indemnified person to assume the defense of the proceeding with counsel reasonably satisfactory to the indemnified person unless (A) the indemnifying party is also a party to the proceeding and the indemnified person determines in good faith that joint representation would be inappropriate or (B) the indemnifying party fails to provide, promptly after giving notice to the indemnified person, reasonable assurance to the indemnified person of its financial capacity to defend the proceeding and provide indemnification with respect to the proceeding. If the indemnifying party assumes the defense of the proceeding, the indemnifying party will not, as long as it diligently conducts the defense, be liable to the indemnified person under this Section for any fees of other counsel or any other expenses with respect to the defense of the proceeding subsequently incurred by the indemnified person in connection with the defense of the proceeding, other than reasonable costs of investigation. If the indemnifying party assumes the defense of a proceeding, no compromise or settlement of the claims may be effected by the indemnifying party without the indemnified person’s written consent (which consent will not be unreasonably withheld or delayed) unless (1) there is no finding or admission of any violation of legal requirements or any violation of the rights of any person and no effect on any other claims that may be made against the indemnified Person and (2) the sole relief provided is monetary damages that are paid in full by the indemnifying party.
(c)
Right of Indemnified Person to Defend. Notwithstanding the foregoing, if an indemnified person determines in good faith that there is a reasonable probability that a proceeding may adversely affect it or its affiliates other than as a result of monetary damages for which it would be entitled to indemnification under this Agreement, the indemnified person may, by notice to the indemnifying party, assume the exclusive right to defend, compromise, or settle the proceeding, but the indemnifying party will not be bound by any determination of a proceeding so defended or any compromise or settlement effected without its consent (which may not be unreasonably withheld or
delayed).
9.4
Procedure for Indemnification—Other Claims. A claim for indemnification for any matter not involving a third-party claim will be asserted by notice to the party from whom indemnification is sought promptly after becoming aware of the acts or omissions or facts and circumstances on which the claim is based, but the failure to notify the indemnifying party will not relieve the indemnifying party of any liability that it may have to any indemnified person, except to the extent that the indemnifying party demonstrates that it is materially prejudiced by the failure.
9.5
Effect of Knowledge. The right to indemnification based upon representations, warranties, covenants and agreements in this Agreement and in any certificate or document delivered pursuant to this Agreement will not be affected by any investigation (including any environmental investigation or assessment) conducted with respect to, or any knowledge acquired (or capable of being acquired) at any time, whether before or after the execution of this Agreement, with respect to the accuracy of any such representation, warranty, covenant or agreement, so that if a party proceeds to close, even though it has knowledge as to the accuracy or inaccuracy of or non-compliance with any such representation, warranty, covenant or agreement, the party still will be entitled to indemnification under this Article.
9.6
Duty to Mitigate. A party must use its best efforts to mitigate its Damages for which it will seek indemnification or other recovery against the other party.
10.
CONFIDENTIAL INFORMATION AND DISCLOSURES
10.1
Confidentiality—This Agreement. Except as otherwise expressly permitted by this Article 10, each party will keep confidential, will not disclose and will otherwise retain in strictest confidence the terms of this Agreement; except that either party may make announcements or give notices concerning this Agreement that are (i) required by law (including the federal securities laws of the United States or (ii) are otherwise expressly permitted by this Article 10.
10.2
Confidentiality—Proprietary Information. Except as otherwise expressly permitted by this Article 10, each party will keep confidential, will not disclose, will not use, and will otherwise retain the strictest confidence over the Confidential Information of the other party. Without limiting the foregoing, each Party will use no less than the same degree of care, and no less than a reasonable degree of care, to protect the Confidential Information of the other party as it uses to protect its own trade secrets and confidential information.
10.3
Certain Exceptions. The prohibitions in Sections 10.1 and 10.2 will not apply only to the extent that:
(a)
Previously in Possession. The disclosing party (i) demonstrates through written records that the same Confidential Information was in its possession before disclosure to it and (ii) the disclosing party provided the other party with written notice of prior possession either (A) before the execution and delivery of this Agreement or (B) if the disclosing party later becomes aware of some aspect of the Confidential Information as to which it had prior possession, promptly upon its becoming aware of the Confidential
Information;
(b)
Becomes Public. The disclosing party demonstrates (i) that the same information is currently publicly available or has become publicly available and (ii) that public availability does not result from (A) the misappropriation or improper disclosure of that Confidential Information by the disclosing party or (B) the obtaining of that Confidential Information by improper means of the disclosing party;
(c)
Independently Developed. The disclosing party demonstrates that the same information was developed independently by the disclosing Person without the use of the Confidential Information;
(d)
Legal Obligation to Disclose. The disclosing party demonstrates that applicable law requires it to disclose the Confidential Information, but then only (i) to the extent disclosure is required and (ii) after giving the other party notice of the obligation so that it may seek a protective order or other similar or appropriate relief. In the absence of an order or relief, the disclosing party must use reasonable efforts to have the disclosed information treated confidentially consistent with this Article;
(e)
Enforcement of Agreement. It is reasonably necessary for a party to make the disclosure to enforce this Agreement, and then only if the disclosing party undertakes in good faith to limit the manner and extent of that disclosure to the extent practicable including obtaining protective orders from the court or arbitrator from whom enforcement is sought;
(f)
Stock Exchange Rules and Securities Laws. Disclosure is, in the written opinion of counsel to the disclosing party, necessary or desirable in order to comply with applicable stock exchange rules or the rules and regulations of the U.S. Securities and Exchange Commission; or
(g)
Sale of Interest. Disclosure is made by a party in connection with the sale, transfer or other disposition, in whole or in part, of a controlling interest in that party's capital or capital stock or a sale of substantially all of the assets of that party (but then only if disclosure is subject to a non-disclosure agreement then customary in such transactions and as to which the other party and each of its affiliates is a third party beneficiary).
10.4
Permitted Disclosures to Representatives. Notwithstanding the prohibitions of this Article, each party may disclose the terms of this Agreement and Confidential Information to its Representatives but:
(a)
only to the extent necessary for each Representative to accomplish his assigned tasks and otherwise strictly on a need to know basis; and
(b)
only if the Representative (i) is provided a copy of this Article and (ii) is advised in writing by the disclosing party (A) that he is obligated to keep confidential, not disclose and retain in strictest confidence the terms of this Agreement and the Confidential Information strictly in accordance with terms of this Article and (B) that
either party may directly enforce the obligation.
Each disclosing party will be responsible for violations of this Article by its Representatives regardless of whether the other party has rights against the Representative.
10.5
Disclosure to Non-Representatives. Any disclosure of the terms of this Agreement or Confidential Information may be made to a non-Representative only if the receiving party executes and delivers a confidentiality agreement with terms no less restrictive than the terms of this Agreement.
10.6
Remedies. Each party recognizes that the activities proscribed by this Article will result in irreparable damage and harm to the other party, and that the other party and its affiliates may be without an adequate remedy at law in the event of any such activities. Therefore, each party agrees that, if any of the foregoing Sections of this Article is breached or is threatened to be breached, a party and its affiliates may: (a) obtain specific performance; (b) enjoin any person that has breached or threatens to breach from engaging in any activity proscribed by this Article; and (c) pursue any one or more of the foregoing or any other remedy available to it under applicable law, including actual and/or punitive damages and set-off rights. A person seeking or obtaining any such relief will not be deemed to be precluded from obtaining any other relief to which that person may be entitled. Each party waives on behalf of itself and each of its affiliates any requirement that a person seeking to enforce the provisions of this Article post any bond or other security in connection therewith.
10.7
Continuing Obligations. The obligations in this Article will be effective from the date of this Agreement and will bind each party, its affiliates and Representatives for so long as the information remains Confidential Information under the terms of this Agreement.
11.
DEFAULT AND REMEDIES
11.1
Event of Default. The following shall constitute an “Event of Default” under this Agreement:
(a)
any party breaches or defaults in the performance of any material term, condition or covenant of its Agreement or any P.O. placed pursuant to this Agreement and such breach or default continues for a period of 60 days after the giving of written notice to the party in breach specifying the failure;
(b)
any party ceases their business operations with respect to the Licensed Product.
11.2
Remedies. Upon the occurrence of an Event of Default the aggrieved party may avail itself of any and all remedies at law or in equity, except as specifically provided below:
(a)
in the event that an Event of Default occurs as a result of SugarMade's default under Section 11.1(a) above, and the amount of default is in excess of $2 million, then in addition to its right to pursue legal action to collect all damages owed, SCP shall have the right, but not the obligation, to terminate the exclusivity provisions of Section 2.2 by delivery written notice to SugarMade. SCP shall not have the right to terminate the Agreement based on an Event of Default under Section 11.1(a).
(b)
in the event that an Event of Default occurs as a result of SugarMade's cessation of business operations under Section 11.1(b) above, then SCP shall have the right to terminate this Agreement.
(c)
in the event that an Event of Default occurs as a result of SCP's default under Section 11.1(a) then the license grants in Section 2.2 above shall be expanded to include the rights to develop, have developed, make, and have made the Licensed Products anywhere in the world for commercialization in the Territory.
(d)
in the event that an Event of Default occurs as a result of SCP's cessation of business operations under Section 11.1(b) above, then all of the Intellectual Property Rights shall automatically be assigned to SugarMade, and SCP shall cooperate with SugarMade to made any requisite filings or notices to effect the transition of the Intellectual Property Rights to SugarMade.
12.
TERM
12.1
Term. This Agreement is effective as of the date hereof and will continue for an initial term of twenty (20) years. SugarMade shall have the an option to extend the term for an additional period of twenty years, by providing notice to SCP not less than ninety days prior to expiration of the initial term. Notwithstanding the foregoing, the parties may terminate this Agreement at any time by mutual written consent.
12.2
Effect of Termination. The parties will continue to perform their respective obligations at the time of termination of this Agreement. Expiration or termination of this Agreement for any reason will not relieve either party of any liability or payment obligation or other performance obligation arising out of this Agreement that will have accrued and remain to be performed as of the date of such termination.
13.
MISCELLANEOUS
13.1
Further Assurances. The parties will (i) furnish upon request to each other further information, (ii) execute and deliver to each other documents, and (iii) do other acts and things, all as the other party may reasonably request for the purpose of carrying out the intent of this Agreement and the documents referred to in this Agreement. SCP will cooperate with SugarMade and its customers' requests for due diligence on the content of the Supplied Products and SCP's manufacturing capacity, including providing reasonable access to facilities and personnel.
13.2
Notices. All notices or requests required to be given pursuant to this Agreement and all other communications related to the Agreement will be in writing signed by the party making it and will be deemed to have been duly given if personally delivered or sent by telefax (with a confirmation of receipt), or overnight delivery courier service as follows:
If to SugarMade:
SugarMade, Inc.
1702 Meridian Ave., Suite-L No. 240
San Jose, CA 95125 Attn: Scott Lantz, CEO
Facsimile: (408) 521-0145
With copy to:
Sheppard, Mullin, Richter & Hampton LLP
Attn: James A. Mercer III, Esq.
12275 El Camino Real, Suite 200
San Diego, California 92130
Facsimile: (858) 523-6705
If to SCP:
The Sugar Cane Paper Co., Ltd.
16B, 8 Hart Avenue,
Tsim Sha Tsui,
Hong Kong Attn: Clifton Leung
Facsimile: (852) 2301-1559
Notice will be given to such other representatives or at such other addresses as a party may furnish to the other party entitled to notice pursuant to the foregoing. If notice is given pursuant to this Section of a permitted successor or assign of a party, then notice will thereafter be given as set forth above also to such successor or assign of such party.
13.3
Compliance with Laws, Regulatory Approvals. Each of the parties will comply with the provisions of all laws and all orders, rules and regulations applicable to their performance under this Agreement, including applicable labor laws. SCP will, at its expense, obtain and maintain the governmental authorizations, registrations and filings that may be required under all applicable laws to execute or perform this Agreement. SCP will not use any payment or other benefit derived from SugarMade to offer, promise or pay any money, gift or any other thing of value to any person for the purpose of influencing official actions or decisions affecting this Agreement, while knowing or having reason to know that any portion of this money, gift or thing will, directly or indirectly, be given, offered or promised to (a) an employee, officer or other person acting in an official capacity for any government or its instrumentalities or (b) any political party, party official or candidate for political office.
13.4
Legal Relationships. SugarMade and SCP are, and at all times during the effective period of this Agreement will remain, independent contractors. At no time will either party represent to any third party that it is the agent of the other for any reason whatsoever. In no event will either party at any time have authority to make any contracts or commitments on behalf of or as an agent of the other party.
13.5
Assignment. Neither party will assign this Agreement or any rights, responsibilities, or obligations in this Agreement, without the express written approval of the other. However, either SugarMade or SCP will have the right, without prior notice or consent of SCP, to assign, all or part of this Agreement, to any affiliated company or in connection with the sale of a controlling interest of SugarMade or substantially all of SugarMade's assets.
13.6
No Third Party Rights. Nothing expressed or referred to in this Agreement will be construed to give any person other than the parties any legal or equitable right, remedy or claim under or with respect to this Agreement or any provision of this Agreement. This Agreement and all of its provisions and conditions are for the sole and exclusive benefit of the parties and their permitted successors and assigns.
13.7
Waiver. Neither the failure nor any delay by any party in exercising any right, power or privilege under this Agreement or the documents referred to in this Agreement will operate as a waiver of the right, power or privilege, and no single or partial exercise of any right, power or privilege will preclude any other or further exercise of the right, power or privilege or the exercise of any other right, power or privilege. To the extent permitted by Applicable Law: (a) no claim or right arising out of this Agreement or the documents referred to in this Agreement can be discharged by one party, in whole or in part, by a waiver or renunciation of the claim or right unless in writing signed by the other party; (b) no waiver that may be given by a party will be applicable except in the specific instance for which it is given; and (c) no notice to or demand on one party will be deemed to be a waiver of any obligation of that party or of the right of the party giving the notice or demand to take further action without notice or demand as provided in this Agreement or the documents referred to in this Agreement.
13.8
Expenses. Each party will bear its own expenses incurred in connection with the negotiation, drafting, implementation and performance of this Agreement except as provided in Section 13.10 (Dispute Resolution).
13.9
Governing Law. Except for the application of the United States Arbitration Act (9 U.S.C. §§ 1-16) to dispute resolution as provided in this Agreement, this Agreement will be governed by the laws of the State of California without regard to conflicts of laws principles.
13.10
Dispute Resolution.
(a)
Applies Only to Legal Claims. This Section 13.10 governs only those disputes that arises under this Agreement, the outcome of which depends solely on whether a or any of its affiliates is in default of its contractual or other legal obligations (a “Legal Claim”). “Legal Claims” includes (i) disputes as to indemnification under Article 9 (Indemnification) and (ii) the formation, validity, binding effect, applicability, scope, interpretation, performance, breach or termination of this Agreement.
(b)
Negotiation. Either party may give notice of a Legal Claim to the other party. For a period of 30 days from receipt of the notice, the parties will consult with each other in a good faith effort to resolve the Legal Claim.
(c)
Binding Arbitration. If within 30 days after receipt of the notice for negotiation, the negotiation does not result in settlement of the Legal Claim, then the Legal Claim will be finally resolved by arbitration administered by the American Arbitration Association, in accordance with the AAA Commercial Arbitration Rules. A party may initiate arbitration by notice to the other party any time after expiration of 60 days from receipt of notice of the Legal Claim provided for in Section 13.10(a), whether or not negotiation has been initiated or completed.
(d)
Arbitration Terms. Any arbitration will comply with the following terms:
(i)
Formation of Tribunal. The arbitration tribunal will consist of three arbitrators. One arbitrator will be appointed by each party and the third will be appointed by the first two. If the first two arbitrators fail to agree on the third arbitrator within 30 days after their appointment, the third arbitrator will be appointed by the American Arbitration Association. The arbitrators will be familiar with the commercial and manufacturing practices of the paper industry.
(ii)
Conduct of Arbitration. The arbitration will take place in San Francisco, California and will exclude any right of application or appeal to any court in connection with any question of law or fact arising in the course of the arbitration or with respect to any award made. The United States Arbitration Act (9 U.S.C. §§ 1-16) will apply and the arbitrators will otherwise apply the law specified in Section 13.9 (Governing Law).
(iii)
Awards. The arbitration award will be final and binding on the party, will not be subject to judicial appeal, will not include any punitive damages and will deal with the allocation of costs of arbitration, including legal fees and all related matters. Any monetary award will stipulate a rate of interest, deemed appropriate by the arbitrators, which will run from the date notice of Legal Claim was given until the date when the award is fully satisfied. The arbitration award will be promptly satisfied by the party against whom it is granted, free of any deduction or offset. Any cost or fee incident to enforcing the award will, to the maximum extent permitted by law, be charged against the party resisting enforcement. Judgment upon the award rendered may be entered in any court having jurisdiction, or application may be made to that court for a judicial recognition of the award or an order of enforcement thereof, as applicable.
13.11
Entire Agreement and Modification. This Agreement, the Exhibits to this Agreement and accepted P.O.s issued under this Agreement are made a part of and are hereby incorporated into this Agreement. This Agreement represents the entire agreement between the parties with respect to the subject matter hereof and supersedes any previous discussions, negotiations or arrangements of the parties with respect to the matters contained in this Agreement. No amendment, modification, or waiver of any provisions of this Agreement or consent will be effective unless in writing signed by duly authorized officers or representatives of both parties. Any inconsistency between this Agreement and other documents will be resolved by giving precedence to those documents in the following order: the handwritten provisions of any P.O. which is issued and accepted between the parties, the terms of any written amendment to this Agreement, this Agreement, the preprinted terms of any P.O., and the pre-printed terms of any invoice.
13.12
English Language. Each of SCP and SugarMade has reviewed this Agreement in its original English language. All reports, data, information, notices, schedules, plans, records and other information required to be provided pursuant to this Agreement by either party to this Agreement will be in the English language. In the event this Agreement is translated to another language, the English version shall control between the different language versions.
13.13
Counterparts and Facsimile Signatures. The Agreement may be executed in two or more counterparts and may be delivered by facsimile or by electronic mail in portable document format or other means intended to preserve the original graphic content of a signature. Each of such counterparts shall be deemed an original, but all of which shall constitute one and the same instrument.
[Signature Page Follows]
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by their duly authorized representatives as of the date first set forth above.
The Sugar Cane Paper Co., Ltd. By: /s/ Leung, Kwok-wai Clifton | SugarMade, Inc. By: /s/ Scott Lantz
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[SIGNATURE PAGE]
EXHIBIT A
PRODUCT DESCRIPTION AND PRICING
All bagasse based paper products, FOB Yan Tien, China, including but not limited to the following:
Product Description | Price |
1 Ton Bagasse based pulp per ton |
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Copy Paper (8.5” x 11”) ,75 GSM, 92 bright, 500 sheet ream ,10 ream per case | $22.50USD per case FOB Yan Tien China |
Roll stock per ton | $900USD |
Roll stock for corrugate per ton |
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Dry sheet pulp per ton | $850USD |
EXHIBIT B
LICENSED PATENTS
Patent number | Patent Issue date | Filing date | Normal Expiry | Title |
CN 201686902 U | December 29th 2010 | March 25th 2010 | December 28th 2020 | Pulp to be used for molding plant fiber into the desired shape. |
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AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE – NET
__________________________________________________
1.
Basic Provisions ("Basic Provisions").
1.1
Parties
: This Lease ("Lease"), dated for reference purposes only, January 10, 2011, is made by and between Michael Franges ("Lessor") and Sugarmade ("Lessee"), (collectively the "Parties," or individually a "Party").
1.2
Premises
: That certain real property, including all improvements therein or to be provided by Lessor under the terms of this Lease, and commonly known as 2280 Lincoln #200 Ave., San Jose, located in the County of Santa Clara, State of California, and generally described as (describe briefly the nature of the property and, if applicable, the "Project", if the property is located within a Project) 1560 Sq. Ft. of north side of building ("Premises"). (See also Paragraph 2)
1.3
Term
: 3 years and 2 months ("Original Term") commencing February 1, 2011 ("Commencement Date") and ending 38 months after fully executed ("Expiration Date"). (See also Paragraph 3)
1.4
Early Possession
: Two weeks ("Early Possession Date") (See also Paragraphs 3.2 and 3.3).
1.5
Base Rent
: $3,697 per month ("Base Rent"), payable on the first day of each month commencing (2) months from date of lease commencement. (See also Paragraph 4)
If this box is checked, there are provisions in this Lease for the Base Rent to be adjusted.
1.6
Base Rent Paid Upon Execution
: $ (See Attachment) as Base Rent for the period ____________________________.
1.7
Security Deposit
: $3,994 ("Security Deposit"). (See also Paragraph 5)
1.8
Agreed Use
: Administrative Offices (See also Paragraph 6).
1.9
Insuring Party
: Lessor is the "Insuring Party" unless otherwise stated herein. (See also Paragraph 8)
1.10
Real Estate Brokers
: (See also Paragraph 15)
(a)
Representation: The following real estate brokers (the "Brokers") and brokerage relationships exist in this transaction (check applicable boxes):
___________________________________________________________________________ represents Lessor exclusively ("Lessor's Broker(s)");
________________________________________________________________________ represents Lessee exclusively ("Lessee's Broker(s)"); or
CB Richard Ellis – Michael Machado, Associate_____________________________________ represents both Lessor and Lessee ("Dual Agency").
(b)
Payment to Brokers: Upon execution and delivery of this Lease by both Parties, Lessor shall pay to the Broker the fee agreed to in their separate written agreement (or if there is no such agreement, the sum of 5% of the total Base Rent) for the brokerage services rendered by the Brokers.
1.11
Guarantor
. The obligations of the Lessee under this Lease are to be guaranteed by Scott Lantz ("Guarantor(s)"). (See also Paragraph 37)
1.12
Addendums and Exhibits
. Attached hereto is an Addendum or Addenda consisting of Paragraphs 50 through 58 and Exhibits Scheme A, all of which constitute a part of this Lease:
2.
Premises
.
2.1
Letting
. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of size set forth in this Lease, or that may have been used in calculating rental, is an approximation which the Parties agree is reasonable and the rental based thereon are not subject to revision whether or not the actual size is more or less.
2.2
Condition
. Lessor shall deliver the Premises to Lessee broom clean and free of debris on the Commencement Date or the Early Possession Date, whichever first occurs ("Start Date"), and, so long as the required service contracts described in Paragraph 7.1(b) below are obtained by Lessee and in effect within thirty days following the Start Date, warrants that the existing electrical, plumbing, fire sprinkler, lighting, heating, ventilating and air conditioning systems ("HVAC"), loading doors, sump pumps, if any, and all other such elements in the Premises, other than those constructed by Lessee, shall be in good operating condition on said date and that the structural elements of the roof, bearing walls and foundation of any buildings on the Premises (the "Building") shall be free of material defects. If a non-compliance with said warranty exists as of the Start Date, Lessor shall, as Lessor's sole obligation with respect to such matter, except as otherwise provided in this Lease, promptly after receipt of written notice from
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Lessee setting forth with specificity the nature and extent of such non-compliance, rectify same at Lessors expense if, after the Start Date, Lessee does not give Lessor written notice of any non-compliance with this warranty within: (i) one year as to the surface of the roof and the structural portions of the roof, foundations and bearing walls, (ii) six (6) months as to the HVAC systems, and (iii) thirty (30) days as to the remaining systems and other elements of the Building, correction of any such non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense.
2.3
Compliance
. Lessor warrants that the improvements on the Premises comply with all applicable laws, covenants or restrictions of record, building codes, regulations, and ordinances ("Applicable Requirements") in effect on the Start Date. Said warranty does not apply to the use to which Lessee will put the Premises or to any Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made or to be made by Lessee. NOTE: Lessee is responsible for determining whether or not the zoning, are appropriate for Lessee's intended use, and acknowledges that past uses of the Premises may no longer be allowed. If the Premises do not comply with said warranty, Lessor shall, except as otherwise provided, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify the same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within six (6) months following the Start Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. If the Applicable Requirements are hereafter changed (as opposed to being in existence at the Start Date, which is addressed in Paragraph 6.2(e) below) so as to require during the term of this Lease the construction of an addition to or an alteration of the Premises and/or Building, the remediation of any Hazardous Substance, or the reinforcement or other physical modification of the Building ("Capital Expenditure"), Lessor and Lessee shall allocate the cost of such work as follows:
(a)
Subject to Paragraph 2.3(c) below, if such Capital Expenditures are required as a result of the specific and unique use of the Premises by Lessee as compared with uses by tenants in general, Lessee shall be fully responsible for the cost thereof, provided, however that if such Capital Expenditure is required during the last two (2) years of this Lease and the cost thereof exceeds six (6) months' Base Rent, Lessee may instead terminate this Lease unless Lessor notifies Lessee, in writing, within ten (10) days after receipt of Lessee's termination notice that Lessor has elected to pay the difference between the actual cost thereof and an amount equal to six (6) months' Base Rent. If Lessee elects termination, Lessee shall immediately cease the use of the Premises which requires such Capital Expenditure and deliver to Lessor written notice specifying a termination date at least ninety (90) days thereafter. Such termination date shall, however, in no event be earlier than the last day that Lessee could legally utilize the Premises without commencing such Capital Expenditure.
(b)
If such Capital Expenditure is not the result of the specific and unique use of the Premises by Lessee (such as, governmentally mandated seismic modifications), then Lessor and Lessee shall allocate the obligation to pay for such costs pursuant to the provisions of Paragraph 7.1(d); provided, however, that if such Capital Expenditure is required during the last two years of this Lease or if Lessor reasonably determines that it is not economically feasible to pay its share thereof, Lessor shall have the option to terminate this Lease upon ninety (90) days prior written notice to Lessee unless Lessee notifies Lessor, in writing, within ten (10) days after receipt of Lessor's termination notice that Lessee will pay for such Capital Expenditure. If Lessor does not elect to terminate, and fails to tender its share of any such Capital Expenditure, Lessee may advance such funds and deduct same, with Interest, from Rent until Lessor's share of such costs have been fully paid. If Lessee is unable to finance Lessor's share, or if the balance of the Rent due and payable for the remainder of this Lease is not sufficient to fully reimburse Lessee on an offset basis, Lessee shall have the right to terminate this Lease upon thirty (30) days written notice to Lessor.
(c)
Notwithstanding the above, the provisions concerning Capital Expenditures are intended to apply only to non-voluntary, unexpected, and new Applicable Requirements. If the Capital Expenditures are instead triggered by Lessee as a result of an actual or proposed change in use, change in intensity of use, or modification to the Premises then, and in that event, Lessee shall by fully responsible for the cost thereof, and Lessee shall not have any right to terminate this Lease.
2.4
Acknowledgements
. Lessee acknowledges that: (a) it has been advised by Lessor and/or Brokers to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical, HVAC and fire sprinkler systems, security, environmental aspects, and compliance with Applicable Requirements), and their suitability for Lessee's intended use, (b) Lessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to its occupancy of the Premises, and (c) neither Lessor, Lessor's agents, nor Brokers have made any oral or written representations or warranties with respect to said matters other than as set forth in this Lease. In addition, Lessor acknowledges that: (a) Broker has made no representations, promises or warranties concerning Lessee's ability to honor the Lease or suitability to occupy the Premises, and (b) it is Lessor's sole responsibility to investigate the financial capability and/or suitability of all proposed tenants.
2.5
Lessee as Prior Owner/Occupant
. The warranties made by Lessor in Paragraph 2 shall be of no force or effect if immediately prior to the Start Date Lessee was the owner or occupant of the Premises. In such event, Lessee shall be responsible for any necessary corrective work.
3.
Term
.
3.1
Term
. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3.
3.2
Early Possession
. If Lessee totally or partially occupies the Premises prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early possession. All other terms of this Lease (including but not limited to the obligations to pay Real Property Taxes and insurance premiums and to maintain the Premises) shall, however, be in effect during such period. Any such early possession shall not affect the Expiration Date.
3.3
Delay In Possession
. Lessor agrees to use its best commercially reasonable efforts to deliver possession of the Premises to Lessee by the Commencement Date. If, despite said efforts, Lessor is unable to deliver possession as agreed, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease. Lessee shall not, however, be obligated to pay Rent or perform its other obligations until Lessor delivers possession of the Premises. If possession is not delivered within sixty (60) days after the Commencement Date, Lessee may, at its option, by notice in writing within ten (10) days after the end of such sixty (60) day period, cancel this Lease, in which event the Parties shall be discharged from all obligations hereunder. If such written notice is not received by Lessor within said ten (10) day period, Lessee's right to cancel shall
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terminate. Except as otherwise provided, if possession of the Premises is not tendered to Lessee by the Start Date and Lessee does not terminate this Lease, as aforesaid, any period of rent abatement that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to what Lessee would otherwise have enjoyed under the terms hereof, but minus any days of delay caused by acts or omissions of Lessee. If possession of the Premises is not delivered within four (4) months after the Commencement Date, this Lease shall terminate unless other agreements are reached between Lessor and Lessee, in writing.
3.4
Lessee Compliance
. Lessor shall not be required to deliver possession of the Premises to Lessee until Lessee complies with its obligation to provide evidence of insurance (Paragraph 8.5). Pending delivery of such evidence, Lessee shall be required to perform all of its obligations under this Lease from and after the Start Date, including the payment of Rent, notwithstanding Lessor's election to withhold possession pending receipt of such evidence of insurance. Further, if Lessee is required to perform any other conditions prior to or concurrent with the Start Date, the Start Date shall occur but Lessor may elect to withhold possession until such conditions are satisfied.
4.
Rent
.
4.1
Rent Defined
. All monetary obligations of Lessee to Lessor under the terms of this Lease (except for the Security Deposit) are deemed to be rent ("Rent").
4.2
Payment
. Lessee shall cause payment of Rent to be received by Lessor in lawful money of the United States, without offset or deduction (except as specifically permitted in this Lease), on or before the day on which it is due Rent for any period during the term hereof which is for less than one (1) full calendar month shall be prorated based upon the actual number of days of said month. Payment of Rent shall be made to Lessor at its address stated herein or to such other persons or place as Lessor may from time to time designate in writing. Acceptance of a payment, which is less than the amount then due shall not be a waiver of Lessor's rights to the balance of such Rent, regardless of Lessor's endorsement of any check so stating.
5.
Security Deposit
. Lessee shall deposit with Lessor upon execution hereof the Security Deposit as security for Lessee's faithful performance of its obligations under this Lease. If Lessee fails to pay Rent, or otherwise Defaults under this Lease, Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, expense, loss or damage which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of the Security Deposit, Lessee shall within ten (10) days after written request therefor deposit monies with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. If the Base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional moneys with Lessor so that the total amount of the Security Deposit shall at all times bear the same proportion to the increased Base Rent as the initial Security Deposit bore to the initial Base Rent. Should the Agreed Use be amended to accommodate a material change in the business of Lessee or to accommodate a sublessee or assignee, Lessor shall have the right to increase the Security Deposit to the extent necessary, in Lessor's reasonable judgment, to account for any increased wear and tear that the Premises may suffer as a result thereof. If a change in control of Lessee occurs during this Lease and following such change the financial condition of Lessee is, in Lessor's reasonable judgment, significantly reduced, Lessee shall deposit such additional monies with Lessor as shall be sufficient to cause the Security Deposit to be at a commercially reasonable level based on such change in financial condition. Lessor shall not be required to keep the Security Deposit separate from its general accounts. Within fourteen (14) days after the expiration or termination of this Lease, if Lessor elects to apply the Security Deposit only to unpaid Rent, and otherwise within thirty (30) days after the Premises have been vacated pursuant to Paragraph 7.4(c) below, Lessor shall return that portion of the Security Deposit not used or applied by Lessor. No part of the Security Deposit shall be considered to be held in trust, to bear interest or to be prepayment for any monies to be paid by Lessee under this Lease.
6.
Use
.
6.1
Use
. Lessee shall use and occupy the Premises only for the Agreed Use, or any other legal use which is reasonably comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that is unlawful, creates damage, waste or a nuisance, or that disturbs occupants of, or causes damage to neighboring properties. Lessor shall not unreasonably withhold or delay its consent to any written request for a modification of the Agreed Use, so long as the same will not impair the structural integrity of the improvements on the Premises or the mechanical or electrical systems therein, is not significantly more burdensome to the Premises. If Lessor elects to withhold consent, Lessor shall within five (5) business days after such request give written notification of same, which notice shall include an explanation of Lessor's objections to the change in use.
6.2
Hazardous Substances
.
(a)
Reportable Uses Require Consent. The term "Hazardous Substance" as used in this Lease shall mean any product, substance, or waste whose presence, use, manufacture, disposal, transportation, or release, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for potential liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substances shall include, but not be limited to, hydrocarbons, petroleum, gasoline, and/or crude oil or any products, by-products or fractions thereof. Lessee shall not engage in any activity in or on the Premises which constitutes a Reportable Use of Hazardous Substances without the express prior written consent of Lessor and timely compliance (at Lessee's expense) with all Applicable Requirements. "Reportable Use" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority, and/or (iii) the presence at the Premises of a Hazardous Substance with respect to which any Applicable Requirements requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may use any ordinary and customary materials reasonably required to be used in the normal course of the Agreed Use, so long as such use is in compliance with all Applicable Requirements, is not a Reportable Use, and does not expose the Premises or neighboring property to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may condition its consent to any Reportable Use upon receiving such additional assurances as Lessor reasonably deems necessary to protect itself, the public, the Premises and/or the environment against damage, contamination, injury and/or liability, including, but not limited to, the installation (and removal on or before Lease expiration or termination) of protective modifications (such as concrete encasements) and/or increasing the Security Deposit.
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(b)
Duty to Inform Lessor. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor, and provide Lessor with a copy of any report, notice, claim or other documentation which it has concerning the presence of such Hazardous Substance.
(c)
Lessee Remediation. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under, or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee's expense, take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of the Premises or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance brought onto the Premises during the term of this Lease, by or for Lessee, or any third party.
(d)
Lessee Indemnification. Lessee shall indemnify, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, claims, expenses, penalties, and attorneys' and consultants' fees arising out of or involving any Hazardous Substance brought onto the Premises by or for Lessee, or any third party (provided, however, that Lessee shall have no liability under this Lease with respect to underground migration of any Hazardous Substance under the Premises from adjacent properties). Lessee's obligations shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances, unless specifically so agreed by Lessor in writing at the time of such agreement.
(e)
Lessor Indemnification. Lessor and its successors and assigns shall indemnify, defend, reimburse and hold Lessee, its employees and lenders, harmless from and against any and all environmental damages, including the cost of remediation, which existed as a result of Hazardous Substances the Premises prior to the Start Date or which are caused by the gross negligence or willful misconduct of Lessor, its agents or employees. Lessor's obligations, as and when required by the Applicable Requirements, shall include, but not be limited to, the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease.
(f)
Investigations and Remediations. Lessor shall retain the responsibility and pay for any investigations or remediation measures required by governmental entities having jurisdiction with respect to the existence of Hazardous Substances on the Premises prior to the Start Date, unless such remediation measure is required as a result of Lessee's use (including 'Alterations', as defined in Paragraph 7.3(a) below) of the Premises, in which event Lessee shall be responsible for such payment. Lessee shall cooperate fully in any such activities at the request of Lessor, including allowing Lessor and Lessor's agents to have reasonable access to the Premises at reasonable times in order to carry out Lessor's investigative and remedial responsibilities.
(g)
Lessor Termination Option. If a Hazardous Substance Condition occurs during the term of this Lease, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by the Applicable Requirements and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 6.2(d) and Paragraph 13), Lessor may, at Lessor's option, either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to remediate such condition exceeds twelve (12) times the then monthly Base Rent or $100,000, whichever is greater, give written notice to Lessee, within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition, of Lessor's desire to terminate this Lease as of the date sixty (60) days following the date of such notice. In the event Lessor elects to give a termination notice, Lessee may, within ten (10) days thereafter, give written notice to Lessor of Lessee's commitment to pay the amount by which the cost of the remediation of such Hazardous Substance Condition exceeds an amount equal to twelve (12) times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within thirty (30) days following such commitment. In such event, this Lease shall continue in full force and effect, and Lessor shall proceed to make such remediation as soon as reasonably possible after the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the time provided, this Lease shall terminate as of the date specified in Lessor's notice of termination.
6.3
Lessee's Compliance with Applicable Requirements
. Except as otherwise provided in this Lease, Lessee shall, at Lessee's sole expense, fully, diligently and in a timely manner, materially comply with all Applicable Requirements, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessor's engineers and/or consultants which relate in any manner to the Premises, without regard to whether said requirements are now in effect or become effective after the Start Date. Lessee shall, within ten (10) days after receipt of Lessor's written request, provide Lessor with copies of all permits and other documents, and other information evidencing Lessee's compliance with any Applicable Requirements specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving the failure of lessee or the Premises to comply with any Applicable Requirements.
6.4
Inspection; Compliance
. Lessor and Lessor's "Lender" (as defined in Paragraph 30 below) and consultants shall have the right to enter into Premises at any time, in the case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee With this Lease. The cost of any such inspections shall be paid by Lessor, unless a violation of Applicable Requirements, or a contamination is found to exist or be imminent, or the inspection is requested or ordered by a governmental authority. In such case, Lessee shall upon request reimburse Lessor for the cost of such inspections, so long as such inspection is reasonably related to the violation or contamination.
7.
Maintenance; Repairs, Utility Installations; Trade Fixtures and Alterations
.
7.1
Lessee's Obligations.
(a)
In General. Subject to the provisions of Paragraph 2.2 (Condition), 2.3 (Compliance), 6.3 (Lessee's Compliance with Applicable Requirements), 7.2 (Lessor's Obligations), 9 (Damage Or Destruction), and 14 (Condemnation), Lessee shall, at Lessee's sole expense,
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keep the Premises, Utility Installations, and Alterations in good order, condition and repair (whether or not the portion of the Premises requiring repairs, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's use, any prior use, the elements or the age of such portion of the Premises), including, but not limited to, all equipment or facilities, such as plumbing, heating, ventilating, air-conditioning, electrical, lighting facilities, boilers, pressure vessels, fire protection system, fixtures, walls (interior and exterior), foundations, ceilings, roofs, floors, windows, doors, plate glass, skylights, landscaping, driveways, parking, lots, fences, retaining walls, signs, sidewalks and parkways located in, on, or adjacent to the Premises. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices, specifically including the procurement and maintenance of the service contracts required by Paragraph 7.1(b) below. Lessee's obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair. Lessee shall, during the term of this Lease, keep the exterior appearance of the Building in a first-class condition consistent with the exterior appearance of other similar facilities of comparable age and size in the vicinity, including, when necessary, the exterior repainting of the Building.
(b)
Service Contracts. Lessee shall, at Lessee's sole expense, procure and maintain contracts, with copies to Lessor, in customary form and substance for, and with contractors specializing and experienced in the maintenance 01 the following equipment and improvements ("Basic Elements"), if any, if and when installed on the Premises: (i) HVAC equipment, (ii) boiler, and pressure vessels, (iii) fire extinguishing systems, including fire alarm and/or smoke detection, (iv) landscaping and irrigation systems, (v) roof covering and drains, (vi) driveways and parking lots, (vii) clarifiers (viii) basic utility feed to the perimeter of the Building, and (ix) any other equipment, if reasonably required by Lessor.
(c)
Replacement. Subject to Lessee's indemnification of Lessor as set forth in Paragraph 8.7 below, and without relieving Lessee of liability resulting from Lessee's failure to exercise and perform good maintenance practices, if the Basic Elements described in Paragraph 7.1(b) cannot be repaired other than at a cost which is in excess of 50% of the cost of replacing such Basic Elements, then such Basic Elements shall be replaced by Lessor, and the cost thereof shall be prorated between the Parties and Lessee shall only be obligated to pay, each month during the remainder of the term of this Lease, on the date on which Base Rent is due, an amount equal to the product of multiplying the cost of such replacement by a fraction, the numerator of which is one, and the denominator of which is the number of months of the useful life of such replacement as such useful life is specified pursuant to Federal income tax regulations or guidelines for depreciation thereof (including interest on the unamortized balance as is then commercially reasonable in the judgment of Lessor's accountants), with Lessee reserving the right to prepay its obligation at any time.
7.2
Lessor's Obligations
. Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance), 9 (Damage or Destruction) and 14 (Condemnation), it is intended by the Parties hereto that Lessor have no obligation, in any manner whatsoever, to repair and maintain the Premises, or the equipment therein, all of which obligations are intended to be that of the Lessee. It is the intention of the Parties that the terms of this Lease govern the respective obligations of the Parties as to maintenance and repair of the Premises, and they expressly waive the benefit of any statute now or hereafter in effect to the extent it is inconsistent with the terms of this Lease.
7.3
Utility Installations; Trade Fixtures; Alterations
.
(a)
Definitions; Consent Required. The term "Utility Installations" refers to all floor and window coverings, air lines, power panels, electrical distribution, security and fire protection systems, communication systems, lighting fixtures, HVAC equipment, plumbing, and fencing in or on the Premises. The term "Trade Fixtures" shall mean Lessee's machinery and equipment that can be removed without doing material damage to the Premises. The term "Alterations" shall mean any modification of the improvements, other than Utility Installations or Trade Fixtures, whether by addition or deletion. "Lessee Owned Alterations and/or Utility Installations" are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4{a). Lessee shall not make any Alterations or Utility Installations to the Premises without Lessor's prior written consent. Lessee may, however, make non-structural Utility Installations to the interior of the Premises (excluding the roof) without such consent but upon notice to Lessor, as long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof or any existing Walls, and the cumulative cost thereof during this Lease as extended does not exceed $50,000 in the aggregate or $10.000 in any one year.
(b)
Consent. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with detailed plans. Consent shall be deemed conditioned upon Lessee's: (i) acquiring all applicable governmental permits, (ii) furnishing Lessor with copies of both the permits and the plans and specifications prior to commencement of the work, and (iii) compliance with all conditions of said permits and other Applicable Requirements in a prompt and expeditious manner. Any Alterations or Utility Installations shall be performed in a workmanlike manner with good and sufficient materials. Lessee shall promptly upon completion furnish Lessor with as-built plans and specifications. For work which costs an amount equal to the greater of one month's Base Rent, or $10,000, Lessor may condition its consent upon Lessee providing a lien and completion bond in an amount equal to one and one-half times the estimated cost of such Alteration or Utility Installation and/or upon Lessee's posting an additional Security Deposit with Lessor.
(c)
Indemnification. Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanic's or materialmen's lien against the Premises or any interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in, on or about the Premises, and Lessor shall have the right to post notices of non-responsibility. If Lessee shall contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof. If Lessor shall require, Lessee shall furnish a surety bond in an amount equal to one and one-half times the amount of such contested lien, claim or demand, indemnifying Lessor against liability for the same. If Lessor elects to participate in any such action, Lessee shall pay Lessor's attorneys' fees and costs.
7.4
Ownership; Removal; Surrender; and Restoration
.
(a)
Ownership. Subject to Lessor's right to require removal or elect ownership as hereinafter provided, all Alterations and Utility Installations made by Lessee shall be the property of Lessee, but considered a part of the Premises. Lessor may, at any time, elect in writing to be the owner of all or any specified part of the Lessee Owned Alterations and Utility Installations. Unless otherwise instructed per Paragraph 7.4(b) hereof, all Lessee Owned Alterations and Utility Installations shall, at the expiration or termination of this Lease, become the property of Lessor and be surrendered by Lessee with the Premises.
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(b)
Removal. By delivery to Lessee of written notice from Lessor not earlier than ninety (90) and not later than thirty (30) days prior to the end of the term of this Lease, Lessor may require that any or all Lessee Owned Alterations or Utility Installations be removed by the expiration or termination of this Lease. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent.
(c)
Surrender/Restoration. Lessee shall surrender the Premises by the Expiration Date or any earlier termination date, with all of the improvements, parts and surfaces thereof broom clean and free of debris, and in good operating order, condition and state of repair, ordinary wear and tear excepted. "Ordinary wear and tear" shall not include any damage or deterioration that would have been prevented by good maintenance practice. Lessee shall repair any damage occasioned by the installation, maintenance or removal of Trade Fixtures, Lessee Owned Alterations and/or Utility Installations, furnishings, and equipment as well as the removal of any storage tank installed by or for Lessee, and the removal, replacement, or remediation of any soil, material or groundwater contaminated by Lessee. Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee. The failure by Lessee to timely vacate the Premises pursuant to this Paragraph 7.4(c) without the express written consent of Lessor shall constitute a holdover under the provisions of Paragraph 26 below.
8.
Insurance; Indemnity
.
8.1
Payment For Insurance
. Lessee shall pay for all insurance required under Paragraph 8 except to the extent of the cost attributable to liability insurance carried by Lessor under Paragraph 8.2(b) in excess of $2,000,000 per occurrence. Premiums for policy periods commencing prior to or extending beyond the Lease term shall be prorated to correspond to the Lease term. Payment shall be made by Lessee to Lessor within ten (10) days following receipt of an invoice.
8.2
Liability Insurance
.
(a)
Carried by Lessee. Lessee shall obtain and keep in force a Commercial General Liability Policy of Insurance protecting Lessee and Lessor against claims for bodily injury, personal injury and property damage based upon or arising out or the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $2,000,000 per occurrence with an "Additional Insured-Managers or Lessors of Premises Endorsement" and contain the "Amendment of the Pollution Exclusion Endorsement" for damage caused by heat, smoke or fumes from a hostile fire. The Policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "insured contract" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only.
(b)
Carried by Lessor. Lessor shall maintain liability insurance as described in Paragraph 8.2(a), in addition to, and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein.
8.3
Property Insurance - Building, Improvements and Rental Value
.
(a)
Building and Improvements. The Insuring Party shall obtain and keep in force a policy or policies in the name of Lessor, with loss payable to Lessor, any groundlessor, and to any Lender(s) insuring loss or damage to the Premises. The amount of such insurance shall be equal to the full replacement cost of the Premises, as the same shall exist from time to time, or the amount required by any Lenders, but in no event more than the commercially reasonable and available insurable value thereof. If Lessor is the Insuring Party, however, Lessee Owned Alterations and Utility Installations, Trade Fixtures, and Lessee's personal property shall be insured by Lessee under Paragraph 8.4 rather than by Lessor. If the coverage is available and commercially appropriate, such policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender), including coverage for debris removal and the enforcement of any Applicable Requirements requiring the upgrading, demolition, reconstruction or replacement of any portion of the Premises as the result of a covered loss. Said policy or policies shall also contain an agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. If such insurance coverage has a deductible clause, the deductible amount shall not exceed $1,000 per occurrence, and Lessee shall be liable for such deductible amount in the event of an Insured Loss.
(b)
Rental Value. The Insuring Party shall obtain and keep in force a policy or policies in the name of Lessor with loss payable to Lessor and any Lender, insuring the loss of the full Rent for one (1) year. Said insurance shall provide that in the event the Lease is terminated by reason of an insured loss, the period of indemnity for such coverage shall be extended beyond the date of the completion of repairs or replacement of the Premises, to provide for one full year's loss of Rent from the date of any such loss. Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected Rent otherwise payable by Lessee, for the next twelve (12) month period. Lessee shall be liable for any deductible amount in the event of such loss.
(c)
Adjacent Premises. If the Premises are part of a larger building, or of a group of buildings owned by Lessor which are adjacent to the Premises, the Lessee shall pay for any increase in the premiums for the property insurance of such building or buildings if said increase is caused by Lessee's acts, omissions, use or occupancy of the Premises.
8.4
Lessee's Property/Business Interruption Insurance
.
(a)
Property Damage. Lessee shall obtain and maintain insurance coverage on all of Lessee's personal property, Trade Fixtures, and Lessee Owned Alterations and Utility Installations. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property, Trade Fixtures and Lessee Owned Alterations and Utility Installations. Lessee shall provide Lessor with written evidence that such insurance is in force.
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(b)
Business Interruption. Lessee shall obtain and maintain loss of income and extra expense insurance in amounts as will reimburse Lessee for direct or indirect loss of earnings attributable to all perils commonly insured against by prudent Lessees in the business of Lessee or attributable to prevention of access to the Premises as a result of such perils.
(c)
No Representation of Adequate Coverage. Lessor makes no representation that the limits or forms of coverage of insurance specified herein are adequate to cover Lessee's properly, business operations or obligations under this Lease.
8.5
Insurance Policies
. Insurance required herein shall be by companies duly licensed or admitted to transact business in the state where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at least B+, V, as set forth in the most current issue of "Best's Insurance Guide", or such other rating as may be required by a Lender. Lessee shall not do or permit to be done anything which invalidates the required insurance policies. Lessee shall, prior to the Start Date, deliver to Lessor certified copies of policies of such insurance or certificates evidencing the existence and amounts of the required insurance. No such policy shall be cancelable or subject modification except after thirty (30) days prior written notice to Lessor. Lessee shall, at least thirty (30) days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "insurance binders" evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. Such policies shall be for a term of at least one year, or the length of the remaining term of this Lease, whichever is less. If either Party shall fail to procure and maintain the insurance required to be carried by it, the other Party may, but shall not be required to, procure and maintain the same.
8.6
Waiver of Subrogation
. Without affecting any other rights or remedies, Lessee and Lessor each hereby release and relieve the other, and waive their entire right to recover damages against the other, for loss of or damage to its property arising out of or incident to the perils required to be insured against herein. The effect of such releases and waivers is not limited by the amount of insurance carried or required, or by any deductibles applicable hereto. The Parties agree to have their respective property damage insurance carriers waive any right to subrogation that such companies may have against Lessor or Lessee, as the case may be, so long as the insurance is not invalidated thereby.
8.7
Indemnity
. Except for Lessor's gross negligence or willful misconduct, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's master Of ground Lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, liens, judgments, penalties, attorneys' and consultants' fees, expenses and/or liabilities arising out of, involving, or in connection with the use and/or occupancy of the Premises by Lessee. If any action or proceeding is brought against Lessor by reason of any of the foregoing matters, Lessee shall upon notice defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be defended or indemnified.
8.8
Exemption of Lessor from Liability
. Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, Wires, appliances, plumbing, HVAC or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of the Building of which the Premises are a part, or from other sources or places. Lessor shall not be liable for any damages arising from any act or neglect of any other tenant of Lessor. Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under no circumstances be liable for injury to Lessee's business or for any loss of income or profit therefrom.
9.
Damage or Destruction
.
9.1
Definitions
.
(a)
"Premises Partial Damage" shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, which can reasonably be repaired in six (6) months or less from the date of the damage or destruction. Lessor shall notify Lessee in writing within thirty (30) days from the date of the damage or destruction as to whether or not the damage is Partial or Total.
(b)
"Premises Total Destruction" shall mean damage or destruction to the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which cannot reasonably be repaired in six (6) months or less from the date of the damage or destruction. Lessor shall notify Lessee in writing within thirty (30) days from the date of the damage or destruction as to whether or not the damage is Partial or Total.
(c)
"Insured loss" shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits involved.
(d)
"Replacement Cost" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of Applicable Requirements, and without deduction for depreciation.
(e)
"Hazardous Substance Condition" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises.
9.2
Partial Damage - Insured Loss
. If a Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in lull force and effect; provided, however, that Lessee shall, at Lessor's election, make the repair of any damage or destruction the total cost to repair of which is $10,000 or less, and, in such event, Lessor shall make any applicable insurance proceeds available to Lessee on a reasonable basis for that purpose. Notwithstanding the foregoing, if the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair, the Insuring Party shall promptly contribute the shortage in proceeds (except as to the deductible which is Lessee's
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responsibility) as and when required to complete said repairs. In the event, however, such shortage was due to the fact that, by reason of the unique nature of the improvements, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects 01 the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within ten (10) days following receipt of written notice of such shortage and request therefor. If Lessor receives said funds or adequate assurance thereof within said ten (10) day period, the party responsible for making the repairs shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If such funds or assurance are not received, Lessor may nevertheless erect by written notice to Lessee within ten (10) days thereafter to: (i) make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect; or (ii) have this Lease terminate thirty (30) days thereafter. Lessee shall not be entitled to reimbursement of any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party.
9.3
Partial Damage - Uninsured Loss
. If a Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense), Lessor may either: (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) terminate this Lease by giving written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such damage. Such termination shall be effective sixty (60) days following the date of such notice. In the event Lessor elects to terminate this Lease, Lessee shall have the right within ten (10) days after receipt of the termination notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage without reimbursement from Lessor. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within thirty (30) days after making such commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible after the required funds are available. If Lessee does not make the required commitment, this Lease shall terminate as of the date specified in the termination notice.
9.4
Total Destruction
. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs, this Lease shall terminate sixty (60) days following such Destruction. If the damage or destruction was caused by the gross negligence or willful misconduct of Lessee, Lessor shall have the right to recover Lessor's damages from Lessee, except as provided in Paragraph 8.6.
9.5
Damage Near End of Term
. If at any time during the last six (6) months of this Lease there is damage for which the cost to repair exceeds one (1) month's Base Rent, whether or not an Insured Loss, Lessor may terminate this Lease effective sixty (60) days following the date of occurrence of such damage by giving a written termination notice to Lessee within thirty (30) days after the date of occurrence of such damage. Notwithstanding the foregoing, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, (a) exercising such option and (b) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs on or before the earlier of (i) the date which is ten days after Lessee's receipt of Lessor's written notice purporting to terminate this Lease, or (ii) the day prior to the date upon which such option expires. If Lessee duly exercises such option during such period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's commercially reasonable expense, repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during such period, then this Lease shall terminate on the dale specified in the termination notice and Lessee's option shall be extinguished.
9.6
Abatement of Rent; Lessee's Remedies
.
(a)
Abatement. In the event of Premises Partial Damage or Premises Total Destruction or a Hazardous Substance Condition for which Lessee is not responsible under this Lease, the Rent payable by Lessee for the period required for the repair, remediation or restoration of such damage shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired, but not to exceed the proceeds received from the Rental Value insurance. All other obligations of Lessee hereunder shall be performed by Lessee, and Lessor shall have no liability for any such damage, destruction, remediation, repair or restoration except as provided herein.
(b)
Remedies. If Lessor shall be obligated to repair or restore the Premises and does not commence, in a substantial and meaningful way, such repair or restoration within ninety (90) days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice, of Lessee's election to terminate this Lease on a dale not less than sixty (60) days following the giving of such notice. If Lessee gives such notice and such repair or restoration is not commenced within thirty (30) days thereafter, this Lease shall terminate as of the date specified in said notice. If the repair or restoration is commenced within said thirty (30) days, this Lease shall continue in full force and effect. "Commence" shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs.
9.7
Termination-Advance Payments
. Upon termination of this Lease pursuant to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit as has not been, or is not then required to be, used by Lessor.
9.8
Waive Statutes
. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent inconsistent herewith.
10.
Real Property Taxes.
10.1
Definition of "Real Property Taxes."
As used herein, the term "Real Property Taxes" shall include any form of assessment; real estate, general, special, ordinary or extraordinary, or rental levy or tax (other than inheritance, personal income or estate taxes); improvement bond; and/or license fee imposed upon or levied against any legal or equitable interest of Lessor in the Premises, Lessor's right to other income therefrom, and/or Lessor's business of leasing, by any authority having the direct or indirect power to tax and where the funds are generated with reference to the
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Building address and where the proceeds so generated are to be applied by the city, county or other local taxing authority of a jurisdiction within which the Premises are located. The term "Real Property Taxes" shall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring during the term of this Lease, including but not limited to a change in the ownership of the Premises.
10.2
(a)
Payment of Taxes. Lessee shall pay the Real Property Taxes applicable to the Premises during the term of this Lease. Subject to Paragraph 10.2(b), all such payments shall be made at least ten (10) days prior to any delinquency date. Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes have been paid. If any such taxes shall cover any period of time prior to or after the expiration or termination of this Lease, Lessee's share of such taxes shall be prorated to cover only that portion of the tax bill applicable to the period that this Lease is in effect, and Lessor shall reimburse Lessee for any overpayment. If Lessee shall fail to pay any required Real Property Taxes, Lessor shall have the right to pay the same, and Lessee shall reimburse Lessor therefor upon demand.
(b)
Advance Payment. In the event Lessee incurs a late charge on any Rent payment, Lessor may, at Lessor's option, estimate the current Real Property Taxes, and require that such taxes be paid in advance to Lessor by Lessee, either: (i) in a lump sum amount equal to the installment due, at least twenty (20) days prior to the applicable delinquency date, or (ii) monthly in advance with the payment of the Base Rent. If Lessor elects to require payment monthly in advance, the monthly payment shall be an amount equal to the amount of the estimated installment of taxes divided by the number of months remaining before the month in which said installment becomes delinquent. When the actual amount of the applicable tax bill is known, the amount of such equal monthly advance payments shall be adjusted as required to provide the funds needed to pay the applicable taxes. If the amount collected by Lessor is insufficient to pay such Real Property Taxes when due, Lessee shall pay Lessor, upon demand, such additional sums as are necessary to pay such obligations. All moneys paid to Lessor under this Paragraph may be intermingled with other moneys of Lessor and shall not bear interest. In the event of a breach by Lessee in the performance of its obligations under this Lease, then any balance of funds paid to Lessor under the provisions of this Paragraph may at the option of Lessor, be treated as an additional Security Deposit.
10.3
Joint Assessment
. If the Premises are not separately assessed, Lessee's liability shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be conclusively determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available.
10.4
Personal Property Taxes
. Lessee shall pay, prior to delinquency, all taxes assessed against and levied upon Lessee Owned Alterations, Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee. When possible, Lessee shall cause such property to be assessed and billed separately from the real property of Lessor. If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee's property within ten (10) days after receipt of a written statement.
11.
Utilities
. Lessee shall pay for all water, gas, heat, light, power, telephone, trash disposal and other utilities and services supplied to the Premises, together with any taxes thereon. If any such services are not separately metered to lessee, Lessee shall pay a reasonable proportion, to be determined by Lessor, of all charges jointly metered.
12.
Assignment and Subletting
.
12.1
Lessor's Consent Required.
(a)
Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or encumber (collectively, "assign or assignment") or sublet all or any part of Lessee's interest in this lease or in the Premises without Lessor's prior written consent.
(b)
A change in the control of lessee shall constitute an assignment requiring consent. The transfer, on a cumulative basis, of twenty-five percent (25%) or more of the voting control of Lessee shall constitute a change in control for this purpose.
(c)
The involvement of lessee or its assets in any transaction, or series of transactions (by way of merger, sale, acquisition, financing, transfer, leveraged buy-out or otherwise), whether or not a formal assignment or hypothecation of this Lease or Lessee's assets occurs, which results or will result in a reduction of the Net Worth of Lessee by an amount greater than twenty-five percent (25%) of such Net Worth as it was represented at the time of the execution of this Lease or at the time of the most recent assignment to which Lessor has consented, or as it exists immediately prior to said transaction or transactions constituting such reduction, whichever was or is greater, shall be considered an assignment of this lease to which lessor may withhold its consent. "Net Worth of Lessee" shall mean the net worth of Lessee (excluding any guarantors) established under generally accepted accounting principles.
(d)
An assignment or subletting without consent shall, at Lessor's option, be a Default curable after notice per Paragraph 13.1(c), or a noncurable Breach without the necessity of any notice and grace period if Lessor elects to treat such unapproved assignment or subletting as a noncurable Breach, Lessor may either: (i) terminate this lease, or (ii) upon thirty (30) days written notice, increase the monthly Base Rent to one hundred ten percent (110%) of the Base Rent then In effect. Further, in the event of such Breach and rental adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to one hundred ten percent (110%) of the price previously in effect, and (ii) all fixed and non-fixed rental adjustments scheduled during the remainder of the Lease term shall be increased to One Hundred Ten Percent (110%) of the scheduled adjusted rent.
(e)
Lessee's remedy for any breach of Paragraph 12.1 by Lessor shall be limited to compensatory damages and/or injunctive relief.
12.2
Terms and Conditions Applicable to Assignment and Subletting
.
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(a)
Regardless of Lessor's consent, any assignment or subletting shall not: (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this lease, (ii) release Lessee of any obligations hereunder, or (iii) alter the primary liability of Lessee for the payment of Rent or for the performance of any other obligations to be performed by Lessee.
(b)
Lessor may accept Rent or performance of Lessee's obligations from any person other than lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of Rent or performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for Lessee's Default or Breach.
(c)
Lessor's consent to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting.
(d)
In the event of any Default or Breach by Lessee, Lessor may proceed directly against Lessee, any Guarantors or anyone else responsible for the performance of Lessee's obligations under this Lease, including any assignee or sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefore to Lessor, or any security held by Lessor.
(e)
Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any, together with a fee of $1,000 or ten percent (10%) of the current monthly Base Rent applicable to the portion of the Premises which is the subject of the proposed assignment or sublease, whichever is greater, as consideration for Lessor's considering and processing said request Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested.
(f)
Any assignee of, or sublessee under, this lease shall, by reason of accepting such assignment or entering into such sublease, be deemed to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented to in writing.
12.3
Additional Terms and Conditions Applicable to Subletting
. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this lease whether or not expressly incorporated therein:
(a)
Lessee hereby assigns and transfers to Lessor all of lessee's interest in all Rent payable on any sublease, and Lessor may collect such Rent and apply same toward Lessee's obligations under this Lease; provided, however, that until a Breach shall occur in the performance of Lessee's obligations, Lessee may collect said Rent. Lessor shall not, by reason of the foregoing or any assignment of such sublease, nor by reason of the collection of Rent, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor all Rent due and to become due under the sublease. Sublessee shall rely upon any such notice from Lessor and shall pay all Rents to Lessor without any obligation or right to inquire as to whether such Breach exists, notwithstanding any claim from Lessee to the contrary.
(b)
In the event of a Breach by Lessee, Lessor may, at its option, require sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any prior Defaults or Breaches of such sublessor.
(c)
Any matter requiring the consent of the sublessor under a sublease shall also require the consent of Lessor.
(d)
No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent.
(e)
Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee.
13.
Default; Breach; Remedies.
13.1
Default; Breach
. A "Default" is defined as a failure by the Lessee to comply with or perform any of the terms, covenants, conditions or rules under this Lease. A "Breach" is defined as the occurrence of one or more of the following Defaults, and the failure of Lessee to cure such Default within any applicable grace period:
(a)
The abandonment of the Premises; or the vacating of the Premises without providing a commercially reasonable level of security, or where the coverage of the property insurance described in Paragraph 8.3 is jeopardized as a result thereof, or without providing reasonable assurances to minimize potential vandalism.
(b)
The failure of Lessee to make any payment of Rent or any Security Deposit required to be made by Lessee hereunder, whether to Lessor or to a third party, when due, to provide reasonable evidence of insurance or surety bond, or to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of three (3) business days following written notice to Lessee.
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(c)
The failure by Lessee to provide (i) reasonable written evidence of compliance with Applicable Requirements, (Ii) the service contracts, (iii) the rescission of an unauthorized assignment or subletting, (iv) a Estoppel Certificate, (v) a requested subordination, (vi) evidence concerning any guaranty and/or Guarantor, (vii) any document requested under Paragraph 42 (easements), or (viii) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of ten (10) days following written notice to Lessee.
(d)
A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof, other than those described in subparagraphs 13.1(a), (b) or (c), above, where such Default continues for a period of thirty (30) days after written notice; provided, however, that if the nature of Lessee's Default is such that more than thirty (30) days are reasonably required for its cure, then it shall not be deemed to be a Breach if Lessee commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion.
(e)
The occurrence of any of the following events: (i) the making of any general arrangement or assignment for the benefit of creditors; (ii) becoming a "debtor" as defined in 11 U.S.C. § 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located al the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days, provided, however, in the event that any provision of this subparagraph (e) is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions.
(f)
The discovery that any financial statement of Lessee or of any Guarantor given to Lessor was materially false.
(g)
If the performance of Lessee's obligations under this Lease is guaranteed: (i) the death of a Guarantor, (ii) the termination of a Guarantor's liability with respect to this Lease other than in accordance with the terms of such guaranty, (iii) a Guarantor's becoming insolvent or the subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the guaranty, or (v) a Guarantor's breach of its guaranty obligation on an anticipatory basis, and Lessee's failure, within sixty (60) days following written notice of any such event, to provide written alternative assurance or security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the Guarantors that existed at the time of execution of this Lease.
13.2
Remedies
. If Lessee fails to perform any of its affirmative duties or obligations, within ten (10) days after written notice (or in case of an emergency, without notice), Lessor may, at its option, perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee upon receipt of invoice therefor. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its option, may require all future payments to be made by Lessee to be by cashier's check. In the event of a Breach, Lessor may, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy, which Lessor may have by reason of such Breach:
(a)
Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Lessee shall immediately surrender possession to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the unpaid Rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion of any leasing commission paid by Lessor in connection with this Lease applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the immediately preceding sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of the District within which the Premises are located at the time of award plus one percent (1%). Efforts by Lessor to mitigate damages caused by Lessee's Breach of this Lease shall not waive Lessor's right to recover damages under Paragraph 12. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding any unpaid Rent and damages as are recoverable therein, or Lessor may reserve the right to recover all or any part thereof in a separate suit. If a notice and grace period required under Paragraph 13.1 was not previously given, a notice to pay rent or quit, or to perform or quit given to Lessee under the unlawful detainer statute shall also constitute the notice required by Paragraph 13.1. In such case, the applicable grace period required by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this lease and/or by said statute.
(b)
Continue the Lease and Lessee's right to possession and recover the Rent as it becomes due, in which event Lessee may sublet or assign, subject only to reasonable limitations. Acts of maintenance, efforts to relet, and/or the appointment of a receiver to protect the Lessor's interests, shall not constitute a termination of the Lessee's right to possession.
(c)
Pursue any other remedy now or hereafter available under the laws or judicial decisions of the state wherein the Premises are located. The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises.
13.3
Inducement Recapture
. Any agreement for free or abated rent or other charges, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee's entering into this Lease, all of which concessions are hereinafter referred to as "Inducement Provisions," shall be deemed conditioned upon Lessee's full and faithful performance of all of the terms, covenants and conditions of this Lease. Upon Breach of this Lease by Lessee, any such Inducement Provision shall automatically be deemed deleted from this Lease and of no
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further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an Inducement Provision shall be immediately due and payable by Lessee to Lessor, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of the Breach which initiated the operation of this paragraph shall not be deemed a waiver by Lessor of the provisions of this paragraph unless specifically so stated in writing by Lessor at the time of such acceptance.
13.4
Late Charges
. Lessee hereby acknowledges that late payment by Lessee of Rent will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent shall not be received by Lessor within five (5) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a one-time late charge equal to ten percent (10%) of each such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of such late payment. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent the exercise of any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of Base Rent, then notwithstanding any provision of this Lease to the contrary, Base Rent shall, at Lessor's option, become due and payable quarterly in advance.
13.5
Interest
. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor, when due as to scheduled payments (such as Base Rent) or within thirty (30) days following the date on which it was due for non-scheduled payment, shall bear interest from the date when due, as to scheduled payments, or the thirty-first (31st) day after it was due as to non-scheduled payments, The interest ("Interest") charged shall be equal to the prime rate reported in the Wall Street Journal as published closest prior to the date when due plus four percent (4%), but shall not exceed the maximum rate allowed by law. Interest is payable in addition to the potential late charge provided for in Paragraph 13.4.
13.6
Breach by Lessor
.
(a)
Notice of Breach. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph, a reasonable time shall in no event be less than thirty (30) days after receipt by Lessor, and any Lender whose name and address shall have been furnished Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days are reasonably required for its performance, then Lessor shall not be in breach if performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion.
(b)
Performance by Lessee on Behalf of Lessor. In the event that neither Lessor nor Lender cures said breach within thirty (30) days after receipt of said notice, or if having commenced said cure they do not diligently pursue it to completion, then Lessee may elect to cure said breach at Lessee's expense and offset from Rent an amount equal to the greater of one month's Base Rent or the Security Deposit, and to pay an excess of such expense under protest, reserving Lessee's right to reimbursement from Lessor. Lessee shall document the cost of said cure and supply said documentation to Lessor.
14.
Condemnation
. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (collectively "Condemnation"), this Lease shall terminate as to the part taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than ten percent (10%) of any building portion of the premises, or more than twenty-five percent (25%) of the land area portion of the premises not occupied by any building, is taken by Condemnation, Lessee may, at Lessee's option, to be exercised in writing within ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in proportion to the reduction in utility of the Premises caused by such Condemnation. Condemnation awards and/or payments shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold, the value of the part taken, or for severance damages; provided, however, that Lessee shall be entitled to any compensation for Lessee's relocation expenses, loss of business goodwill and/or Trade Fixtures, without regard to whether or not this Lease is terminated pursuant to the provisions of this Paragraph. All Alterations and Utility Installations made to the Premises by Lessee, for purposes of Condemnation only, shall be considered the property of the Lessee and Lessee shall be entitled to any and all compensation which is payable therefor. In the event that this Lease is not terminated by reason of the Condemnation, Lessor shall repair any damage to the Premises caused by such Condemnation.
15.
Brokers' Fee
.
15.1
Additional Commission
. In addition to the payments owed pursuant to Paragraph 1.10 above, and unless Lessor and the Brokers otherwise agree in writing, Lessor agrees that (a) if Lessee exercises any Option, (b) if Lessee acquires any rights to the Premises or other premises owned by Lessor and located within the same Project, if any, within which the Premises is located, (c) if Lessee remains in possession of the Premises, with the consent of Lessor, after the expiration of this Lease, or (d) if Base Rent is increased, whether by agreement or operation of an escalation clause herein, then, lessor shall pay Brokers a fee in accordance with the schedule of said Brokers in effect at the time of the execution of this Lease.
15.2
Assumption of Obligations
. Any buyer or transferee of Lessor's interest in this Lease shall be deemed to have assumed Lessor's obligation hereunder. Each Broker shall be a third party beneficiary of the provisions of Paragraphs 1.10, 15, 22 and 31. If Lessor fails to pay to a Broker any amounts due as and for commissions pertaining to this Lease when due, then such amounts shall accrue Interest. In addition, if Lessor fails to pay any amounts to Lessee's Broker when due, Lessee's Broker may send written notice to Lessor and Lessee of such failure and if Lessor fails to pay such amounts within ten (10) days after said notice, Lessee shall pay said monies to its Broker and offset such amounts against Rent. In addition, Lessee's Broker shall be deemed to be a third party beneficiary of any commission agreement entered into by and/or between Lessor and Lessor's Broker.
15.3
Representations and Indemnities of Broker Relationships
. Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder (other than the Brokers, if any) in connection with this Lease, and that no one other than said
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named Brokers is entitled to any commission or finder's fee in connection herewith. Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying Party, including any costs, expenses, attorneys' fees reasonably incurred with respect thereto.
16.
Estoppel Certificates
.
(a)
Each Party (as "Responding Party") shall within ten (10) days after written notice from the other Party (the "Requesting Party") execute, acknowledge and deliver to the Requesting Party a statement in writing in form similar to the then most current "Estoppel Certificate" form published by the American Industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party.
(b)
If the Responding Party shall fail to execute or deliver the Estoppel Certificate within such ten day period, the Requesting Party may execute an Estoppel Certificate stating that: (i) the Lease is in full force and effect without modification except as may be represented by the Requesting Party, (ii) there are no uncured defaults in the Requesting Party's performance, and (iii) if Lessor is the Requesting Party, not more than one month's rent has been paid in advance. Prospective purchasers and encumbrancers may rely upon the Requesting Party's Estoppel Certificate, and the Responding Party shall be estopped from denying the truth of the facts contained in said Certificate.
(c)
If Lessor desires to finance, refinance, or sell the Premises, or any part thereof, Lessee and all Guarantors shall deliver to any potential lender or purchaser designated by Lessor such financial statements as may be reasonably required by such lender or purchaser, including but not limited to Lessee's financial statements for the past three (3) years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth.
17.
Definition of Lessor
. The term "Lessor" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises, or, if this is a sublease, of the Lessee's interest in the prior Lease. In the event of a transfer of Lessor's title or interest in the Premises or this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor. Except as provided in Paragraph 15, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. Notwithstanding the above, and subject to the provisions of Paragraph 20 below, the original Lessor under this Lease, and all subsequent holders of the Lessor's interest in this Lease shall remain liable and responsible with regard to the potential duties and liabilities of Lessor pertaining to Hazardous Substances as outlined in Paragraph 6 above.
18.
Severability
. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof.
19.
Days
. Unless otherwise specifically indicated to the contrary, the word "days" as used in this Lease shall mean and refer to calendar days.
20.
Limitation on Liability
. Subject to the provisions of Paragraph 17 above, the obligations of Lessor under this Lease shall not constitute personal obligations of Lessor, the individual partners of Lessor or its or their individual partners, directors, officers or shareholders, and Lessee Shall look to the Premises, and to no other assets of Lessor, for the satisfaction of any liability of Lessor with respect to this Lease, and shall not seek recourse against the individual partners of Lessor, or its or their individual partners, directors, officers or shareholders, or any of their personal assets for such satisfaction.
21.
Time of Essence
. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease.
22.
No Prior or Other Agreements; Broker Disclaimer
. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Lessor and Lessee each represents and warrants to the Brokers that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to this Lease and as to the nature, quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party. The liability (including court costs and attorneys' fees), of any Broker with respect to negotiation, execution, delivery or performance by either Lessor or Lessee under this Lease or any amendment or modification hereto shall be limited to an amount up to the fee received by such Broker pursuant to this Lease; provided, however, that the foregoing limitation on each Broker's liability shall not be applicable to any gross negligence or willful misconduct of such Broker.
23.
Notices
.
23.1
Notice Requirements
. All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by courier) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission, and shall be deemed sufficiently given if sent in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notices. Either Party may by written notice to the other specify a different address for notice, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for notice. A copy of all notices to Lessor shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate in writing.
23.2
Date of Notice
. Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail, the notice shall be deemed given forty-eight (48) hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or
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overnight courier that guarantee next day delivery shall be deemed given twenty-four (24) hours alter delivery of the same to the Postal Service or courier. Notices transmitted by facsimile transmission or similar means shall be deemed delivered upon telephone confirmation of receipt, provided a copy is also delivered via delivery or mail. If notice is received on a Saturday, Sunday or legal holiday, it shall be deemed received on the next business day.
24.
Waivers
. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or of any other term, covenant or condition hereof. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. The acceptance of Rent by Lessor shall not be a waiver of any Default or Breach by Lessee. Any payment by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment.
25.
Recording
. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a short form memorandum of this Lease for recording purposes. The Party requesting recordation shall be responsible for payment of any fees applicable thereto.
26.
No Right To Holdover
. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or termination of this Lease. In the event that Lessee holds over, then the Base Rent shall be increased to one hundred fifty percent (150%) of the Base Rent applicable during the month immediately preceding the expiration or termination. Nothing contained herein shall be construed as consent by Lessor to any holding over by Lessee.
27.
Cumulative Remedies
. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity.
28.
Covenants and Conditions; Construction of Agreement
. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. In construing this Lease, all headings and titles are for the convenience of the parties only and shall not be considered a part of this Lease. Whenever required by the context, the singular shall include the plural and vice versa. This Lease shall not be construed as if prepared by one of the parties, but rather according to its fair meaning as a whole, as if both parties had prepared it.
29.
Binding Effect; Choice of Law
. This Lease shall be binding upon the parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located.
30.
Subordination; Attornment; Non-Disturbance
.
30.1
Subordination
. This Lease and any Option granted hereby shall be subject and subordinate to any ground Lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "Security Device"), now or hereafter placed upon the Premises, to any and all advances made on the security thereof, and to all renewals, modifications, and extensions thereof. Lessee agrees that the holders of any such Security Devices (in this Lease together referred to as "lender") shall have no liability or obligation to perform any of the obligations of Lessor under this Lease. Any Lender may elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device by giving written notice thereof to Lessee, whereupon this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof.
30.2
Attornment
. Subject to the non-disturbance provisions of Paragraph 30.3, Lessee agrees to attorn to a lender or any other party who acquires ownership of the Premises by reason of a foreclosure of a Security Device, and that in the event of such foreclosure, such new owner shall not: (i) be liable for any act or omission of any prior Lessor or with respect to events occurring prior to acquisition of ownership; (ii) be subject to any offsets or defenses which Lessee might have against any prior Lessor, or (iii) be bound by prepayment of more than one (1) month's rent.
30.3
Non~Disturbance
. With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee's subordination of this Lease shall be subject to receiving a commercially reasonable non-disturbance agreement (a "Non-Disturbance Agreement") from the Lender which Non-Disturbance Agreement provides that Lessee's possession of the Premises, and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. Further, within sixty (60) days after the execution of this Lease, Lessor shall use its commercially reasonable efforts to obtain a Non-Disturbance Agreement from the holder of any pre-existing Security Device which is secured by the Premises. In the event that Lessor is unable to provide the Non-Disturbance Agreement within said sixty (60) days, then Lessee may, at Lessee's option, directly contact Lessor's lender and attempt to negotiate for the execution and delivery of a Non-Disturbance Agreement.
30.4
Self-Executing
. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that, upon written request from Lessor or a lender in connection with a sale, financing or refinancing of the Premises. Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any subordination, attornment and/or Non-Disturbance Agreement provided for herein.
31.
Attorneys' Fees
. If any Party or Broker brings an action or proceeding involving the Premises to enforce the terms hereof or to declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorneys' fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term, "Prevailing Party" shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorneys' fees award shall not be computed in accordance with any court tee schedule, but shall be such as to fully reimburse all attorneys' fees reasonably
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incurred. In addition, Lessor shall be entitled to attorneys' fees, costs and expenses incurred in the preparation and service of notices of default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach.
32.
Lessor's Access; Showing Premises; Repairs
. Lessor and Lessor's agents shall have the right to enter the Premises at any lime, in the case of an emergency, and otherwise at reasonable times for the purpose of showing the same to prospective purchasers, lenders, or Lessees, and making such alterations, repairs, improvements or additions to the Premises as Lessor may deem necessary. All such activities shall be without abatement of rent or liability to Lessee. Lessor may at any time place on the Premises any ordinary "For Sale" signs and Lessor may during the last six (6) months of the term hereof place on the Premises any ordinary "For Lease" signs. Lessee may at any time place on or about the Premises any ordinary "For SubLease" sign.
33.
Auctions
. Lessee shall not conduct, nor permit to be conducted, any auction upon the Premises without Lessor's prior written consent. Lessor shall not be obligated to exercise any standard of reasonableness in determining Whether to permit an auction.
34.
Signs
. Except for ordinary for SubLease signs, Lessee shall not place any sign upon the Premises without Lessor's prior written consent. All signs must comply with all Applicable Requirements.
35.
Termination; Merger
. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, that Lessor may elect to continue anyone or all existing subtenancies. Lessor's failure within ten (10) days following any such event to elect to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have such event constitute the termination of such interest.
36.
Consents
. Except as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including but not limited to architects', attorneys', engineers' and other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent, including but not limited to consents to an assignment, a subletting or the presence or use of a Hazardous Substance, shall be paid by Lessee upon receipt of an invoice and supporting documentation therefor. Lessor's consent to any act, assignment or subletting shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. The failure to specify herein any particular condition to Lessor's consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. In the event that either Party disagrees with any determination made by the other hereunder and reasonably requests the reasons for such determination, the determining party shall furnish its reasons in writing and in reasonable detail within ten (10) business days following such request.
37.
Guarantor
.
37.1
Execution
. The Guarantors, if any, shall each execute a guaranty in the form most recently published by the American Industrial Real Estate Association, and each such Guarantor shall have the same obligations as Lessee under this Lease.
37.2
Default
. It shall constitute a Default of the Lessee if any Guarantor fails or refuses, upon request to provide: (a) evidence of the execution of the guaranty, including the authority of the party signing on Guarantor's behalf to obligate Guarantor, and in the case of a corporate Guarantor, a certified copy of a resolution of its board of directors authorizing the making of such guaranty, (b) current financial statements, (c) a Estoppel Certificate, or (d) written confirmation that the guaranty is still in effect.
38.
Quiet Possession
. Subject to payment by Lessee of the Rent and performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease. Lessee shall have quiet possession and quiet enjoyment of the Premises during the term hereof.
39.
Options
.
39.1
Definition
. "Option" shall mean: (a) the right to extend the term of or renew this Lease or to extend or renew any Lease that Lessee has on other property of Lessor; (b) the right of first refusal or first offer to Lease either the Premises or other property of Lessor; (c) the right to purchase or the right of first refusal to purchase the Premises or other property of Lessor.
39.2
Options Personal To Original Lessee
. Each Option granted to Lessee in this Lease is personal to the original Lessee, and cannot be assigned or exercised by anyone other than said original Lessee and only while the original Lessee is in full possession of the Premises and, if requested by Lessor, with Lessee certifying that Lessee has no intention of thereafter assigning or subletting.
39.3
Multiple Options
. In the event that Lessee has any multiple Options to extend or renew this Lease, a later Option cannot be exercised unless the prior Options have been validly exercised.
39.4
Effect of Default on Options
.
(a)
Lessee shall have no right to exercise an Option: (i) during the period commencing with the giving of any notice of Default and continuing until said Default is cured, (ii) during the period of time any Rent is unpaid (without regard to whether notice thereof is given Lessee), (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessee has been given three (3) or more notices of separate Default, whether or not the Defaults are cured, during the twelve (12) month performed immediately preceding the exercise of the Option.
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(b)
The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a).
(c)
An Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and prior to the commencement of the extended term, (i) Lessee fails to pay Rent for a period of thirty (30) days after such Rent becomes due (without any necessity of Lessor to give notice thereof), (ii) Lessor gives to Lessee three (3) or more notices of separate Default during any twelve (12) month period, whether or not the Defaults are cured, or (iii) if Lessee commits a Breach of this Lease.
40.
Multiple Buildings
. If the Premises are a part of a group of buildings controlled by Lessor, Lessee agrees that it will observe all reasonable rules and regulations which Lessor may make from time to time for the management, safety, and care of said properties, including the care and cleanliness of the grounds and including the parking, loading and unloading of vehicles, and that Lessee wilt pay its fair share of common expenses incurred in connection therewith.
41.
Security Measures
. Lessee hereby acknowledges that the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties.
42.
Reservations
. Lessor reserves to itself the right, from time to time, to grant, without consent or joinder of Lessee, such easements, rights and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications, maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions.
43.
Performance Under Protest
. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay.
44.
Authority
. If either Party hereto is a corporation, trust, limited liability company, partnership, or similar entity, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. Each party shall, within thirty (30) days after request, deliver to the other party satisfactory evidence of such authority.
45.
Conflict
. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions.
46.
Offer
. Preparation of this Lease by either Party or their agent and submission of same to the other Party shall not be deemed an offer to Lease to the other Party. This Lease is not intended to be binding until executed and delivered by all Parties hereto.
47.
Amendments
. This Lease may be modified only in writing, signed by the Parties in interest at the time of the modification. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by a lender in connection with the obtaining of normal financing or refinancing of the Premises.
48.
Multiple Parties
. If more than one person or entity is named herein as either Lessor or Lessee, such multiple Parties shall have joint and several responsibility to comply with the terms of this Lease.
49.
Mediation and Arbitration of Disputes
. An Addendum requiring the Mediation and/or the Arbitration of all disputes between the Parties and/or Brokers arising out of this Lease is not attached to this Lease.
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LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO, THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TEAMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES
ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES THE PARTIES ARE URGED TO: 1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. 2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE PREMISES, SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE SUITABILITY OF THE PREMISES FOR LESSEE'S INTENDED USE. WARNING: IF THE PREMISES IS LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE STATE IN WHICH THE PREMISES IS LOCATED. |
The parties hereto have executed this Lease at the place and 00 the dates specified above their respective signatures.
Executed at: _______________________________________________ on: _______________________________________________________ | Executed at _______________________________________________ on:_______________________________________________________ |
By LESSOR | By LESSEE: |
/s/ Michael Franges Title:_______________________________________________________ | /s/ Scott Lantz Title:_______________________________________________________ |
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By: ________________________________________________________ Title: Owner Address: 1671 Juanita Telephone: 408-242-2242 Facsimile: __________________________________________________ Federal ID No.: ______________________________________________ | By: ________________________________________________________ Title: CEO Address: 1702 Meridian Telephone: 408-375-8839 Facsimile:___________________________________________________ Federal ID No.:_______________________________________________ |
NOTE: These forms are often modified to meet changing requirements of law and industry needs. Always write or call to make sure you are utilizing the most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 So. Flower Street, Suite 600, Los Angeles, California 90017.
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SUGARMADE
CONTRACT FOR CONSULTING SERVICES
Name of Consultant:
Joseph Abrams
February 1, 2011
Address:
Daytime Telephone #:
SUGARMADE and Consultant agree as follows:
1.
Services and Fees: The Description of Work, which is Exhibit A to this Contract for Consulting Services ("Contract"), describes the services that Consultant will perform and the fees which SUGARMADE, Inc will pay in return. If SUGARMADE and Consultant anticipate working beyond the scope of this agreement, additional exhibits may be made a part of this contract for such additional projects, although each additional exhibit must be approved by each party by signature on each exhibit. Consultant is an independent contractor, not an employee of. SUGARMADE No employment relationship is created by this Contract.
2.
Term: Consultant will begin work on the date of the completion of a public offering or reverse merger , and unless terminated sooner, the Contract will end 25 months after that date.
3.
Work: The scope of work shall be found in the Description of Work in Exhibit A.
4.
Relationship of Parties:
(a)
Consultant, as used in this Contract, means the person or entity that signs this Contract and all its employees and agents.
(b)
Consultant shall retain independent professional status throughout this Contract and shall use its own discretion in performing the tasks assigned.
(c)
Consultant has never been a SUGARMADE employee and, in either case, is ineligible for any SUGARMADE employee benefits. As Consultant is not a SUGARMADE employee, Consultant is responsible for paying all required state and federal taxes.
(d)
SUGARMADE shall determine the method, details and means of performing the services hereunder. Consultant shall remain responsible for performing all tasks contemplated by this Contract.
(e)
Consultant shall perform the services required by this Contract at any place or location and at such times as Consultant and SUGARMADE shall determine.
5.
Indemnification: Consultant agrees to be responsible for its own actions. SUGARMADE agrees to be responsible for its own actions. Each party agrees to indemnify each other against claims made which either party has had no action in including but not limited to the following:
- Any negligent act, omission, or willful misconduct of Consultant or SUGARMADE in the performance of this Contract.
- Consultant's or SUGARMADE’s failure to comply with federal, state or local law.
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6.
Confidentiality:
(a)
Consultant agrees not to disclose any SUGARMADE Confidential Information and to take all reasonable precautions to prevent its unauthorized dissemination, both during and after the Contract. Without limiting the scope of this duty, Consultant agrees to limit its internal distribution of SUGARMADE Confidential Information to its employees and agents who have a need to know, and to take steps to ensure that the dissemination is so limited. Consultant agrees not to use any SUGARMADE Confidential Information for its own benefit or for the benefit of anyone other than SUGARMADE. Without limiting the scope of this duty, Consultant agrees not to design or manufacture any products which incorporate any SUGARMADE Confidential Information. SUGARMADE agrees to keep the terms of the agreement confidential accept as it may required by law or under due diligence for capital raising or mergers and acquisition. Any Confidential Information given to SUGARMADE by Consultant is for the use of SUGARMADE and its employees but may not be used for the benefit of any others.
(b)
SUGARMADE Confidential Information means information relating to the research, development, products, methods of manufacture, trade secrets, business plans, customers, finances, and personnel data related to the business or affairs of SUGARMADE. SUGARMADE Confidential Information does not include any information (i) which Consultant knew before SUGARMADE disclosed it to Consultant; (ii) which has become publicly known through no wrongful act of Consultant; or (iii) which Consultant developed independently.
(c)
All SUGARMADE Confidential Information remains the property of SUGARMADE and no license or other rights in the Confidential Information is granted hereby. All information is provided "AS IS" and without any warranty, express, implied, or otherwise, regarding its accuracy or performance.
7.
No Conflict: Consultant represents and warrants that its performance of this Contract will not conflict with any other contract to which Consultant is bound, and while working on this Contract, Consultant will not engage in any such consulting services or enter into any Contract that would materially interfere with the commitment of time and energy required by Consultant to timely complete Consultant’s obligations under this Contract.
8.
Miscellaneous:
(a)
Assignment. Consultant may not assign or delegate its rights or obligations under this Contract without SUGARMADE written consent except to its principals, and Joseph Abrams.
(b)
Governing Law; Severability. California law shall govern this Contract. If any provision of this Contract is found by a court of competent jurisdiction to be unenforceable for any reason, the remainder of this Contract shall continue in full force and effect.
(c) Arbitration. The parties agree to submit any dispute arising out of or in connection with this Contract to binding arbitration in California before the American Arbitration Association pursuant to the provisions of this Section 12(d), and, to the extent not inconsistent with this Section
10 (d), the rules of the American Arbitration Association. The parties agree that such arbitration will be in lieu of either party's rights to assert any claim, demand or suit in any court action, provided that either party may elect either binding arbitration or a court action with respect to a breach by the other party of such party's proprietary rights, including without limitation any trade secrets, copyrights or trademarks. Any arbitration shall be final and binding and the arbitrator's order will be enforceable in any court of competent jurisdiction.
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(d) Survival of Terms. The provisions of paragraphs 5, 6, 7, and 8, thereof shall survive termination of this Contract.
(e) Complete Understanding; Modification. This Contract and the attached exhibit or exhibits constitute the full and complete understanding and Contract of the parties relating to the subject matter hereof and supersede all prior understandings and Contracts relating to such subject matter. Any waiver, modification, or amendment of any provision of this Contract shall be effective only if in writing and signed by both parties. The provisions of this Contract shall prevail over any conflicting provisions in a purchase order, invoice, acceptance notice or other document.
(f) Signature. This Contract may be executed in several counterparts, each of which will be deemed to be an original, and each of which alone and all of which together, shall constitute one and the same instrument, but in making proof of this Contract it shall not be necessary to produce or account for each copy of any counterpart other than the counterpart signed by the party against whom this Contract is to be enforced. This Contract may be transmitted by facsimile, and it is the intent of the parties for the facsimile (or a photocopy thereof) of any autograph printed by a receiving facsimile machine to be an original signature and for the facsimile (or a photocopy thereof) and any complete photocopy of the Contract to be deemed an original counterpart.
(g) Limitation of Liability. Neither party shall under any circumstances be liable for any consequential, indirect, special, incidental or exemplary damages, including without limitation, any loss of revenues, profits, or business or other economic loss arising out of or in connection with the services provided hereunder.
(h) Liability. Under any conditions, the Consultant liability for any breach under this agreement shall be limited to his earned compensation under this agreement. The company’s liability shall be limited to its contractual obligation under this agreement.
SUGARMADE
CONSULTANT
By: /s/ Scott Lantz
By: /s/ Joseph Abrams
signature
signature
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EXHIBIT A
DESCRIPTION OF WORK
(Consulting Services agreement between SUGARMADE and Joseph Abrams, Consultant.)
1. Services to be Provided: Consultant shall render such services as may be necessary to complete in a professional manner the project described as follows:
a) Help in defining and communication the Company message
b) Identification of Strategic Growth Areas
c) Identification of Potential Merger and acquisition candidates.
d) Identify Potential Exit Strategies
e) Help introduce the company to potential business development partners
f) Help with due diligence and negotiations with potential M & A candidates.
g) Introduce the company to potential Capital partners
h) Help in defining marketing and sales opportunities
i) Evaluate potential public market opportunities
j) Advise management on any additional operational or strategic decisions as needed.
2.
Compensation:
a)
Consultant shall be due 500,000 unregistered shares of company common stock, which shall be represented by 25 certificates each representing 20,000 shares, upon the completion of a public offering or reverse merger.
b)
480,000 shares shall have a repurchase option from the company. The balance of the shares shall be available for repurchase by the company for a TOTAL PRICE of $15 except as follows:
Each month the contract is in force a stock certificate in the amount of 20,000 shares shall be issued from the 25 certificates from 2(a) and shall no longer be available for repurchase by the company for any reason.
c)
Consultant agrees that should he take any consultancy with a competing company in the treeless paper business term of this contract he will forfeit all shares. In addition, Consultant agrees not to take any consultancy with a competing company in the treeless paper business for a period of 180 days following the termination or expiration of this agreement.
3.
Expenses: Although the above stock constitutes Consultant's entire remuneration for the services under this Contract Consultant will be reimbursed for any expenses incurred in connection with this Contract with prior approval of SUGARMADE. If a change in the scope of the work results in a material increase or decrease in the cost or time for completion of the services, the fees and schedule may, upon the mutual written Contract of the parties, be renegotiated.
4.
Termination: This contract may not be terminated for 90 days. In addition, the company may terminate the contract for any reason after 90 days provided that the Company notifies consultant with 30 days written notice.
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SUGARMADE
CONSULTANT
By: /s/ Scott Lantz
By: /s/ Joseph Abrams
Signature
signature
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DIVERSIFIED OPPORTUNITIES, INC.
2011 STOCK OPTION/STOCK ISSUANCE PLAN
ARTICLE ONE
GENERAL PROVISIONS
I.
PURPOSE OF THE PLAN
This 2011 Stock Option/Stock Issuance Plan is intended to promote the interests of the Corporation, by providing eligible persons with the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Corporation as an incentive for them to remain in the service of the Corporation. Capitalized terms herein shall have the meanings assigned to such terms in the attached Appendix.
The 2011 Stock Option/Stock Issuance Plan was adopted by the board of directors of Diversified Opportunities, Inc., a Delaware corporation, on May 5, 2011.
II.
STRUCTURE OF THE PLAN
A.
The Plan shall be divided into two (2) separate equity programs:
(i)
the Option Grant Program under which eligible persons may, at the discretion of the Plan Administrator, be granted stock options to purchase shares of Common Stock, and
(ii)
the Stock Issuance Program under which eligible persons may, at the discretion of the Plan Administrator, be issued shares of Common Stock directly, either through the immediate purchase of such shares or as a bonus for Services rendered to the Corporation (or any Parent or Subsidiary).
B.
The provisions of Article One and Article Four shall apply to both equity programs under the Plan and shall accordingly govern the interests of all persons under the Plan.
C.
The Plan in aggregate, including both the Option Grant Program and Stock Issuance Program will have a maximum number of shares issued not to exceed 1,500,000 shares.
III.
ADMINISTRATION OF THE PLAN
A.
The Plan shall be administered by the Board. However, any or all administrative functions otherwise exercisable by the Board may be delegated to the Committee. Members of the Committee shall serve for such periods of time as the Board may determine and shall be subject to removal by the Board at any time. The Board may also at any time terminate the functions of the Committee and reassume all powers and authority previously delegated to the Committee.
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B.
The Plan Administrator shall have full power and authority (subject to the provisions of the Plan) to establish such rules and regulations as it may deem appropriate for proper administration of the Plan and to make such determinations under, and issue such interpretations of, the Plan and any outstanding stock options or stock issuances thereunder as it may deem necessary or advisable. Decisions of the Plan Administrator shall be final and binding on all parties who have an interest in the Plan or any stock option or stock issuance thereunder.
C.
The Plan Administrator shall have full authority to determine, (i) with respect to the stock option grants under the Option Grant Program, which eligible persons are to receive stock option grants, the time or times when such stock option grants are to be made, the number of shares to be covered by each such grant, the status of the granted stock option as either an Incentive Option or a Non-Statutory Option, the time or times at which each stock option is to become exercisable, the vesting schedule (if any) applicable to the stock option shares and the maximum term for which the stock option is to remain outstanding, and (ii) with respect to stock issuances under the Stock Issuance Program, which eligible persons are to receive stock issuances, the time or times when such issuances are to be made, the number of shares to be issued to each Participant, the vesting schedule (if any) applicable to the issued shares and the consideration to be paid by the Participant for such shares. The Plan Administrator shall also have fully authority and discretion to:
1.
correct any defect, supply any omission, or reconcile or clarify any inconsistency in the Plan or any Stock Option Award Agreement or Stock Issuance Agreement;
2.
accelerate the vesting, or extend the post-termination exercise term, or waive restrictions, of stock option or stock awards at any time and under such terms and conditions as it deems appropriate;
3.
interpret the Plan and any Stock Option Award Agreement or Stock Issuance Agreement;
4.
make all other decisions relating to the operation of the Plan; and
5.
grant stock option or stock awards to Employees, non-employee members of the Board or the board of directors of any Parent or Subsidiary or consultants who are foreign nationals on such terms and conditions different from those specified in the Plan, which may be necessary or desirable to foster and promote achievement of the purposes of the Plan, and adopt such modifications, procedures, and/or subplans (with any such subplans attached as appendices to the Plan) and the like as may be necessary or desirable to comply with provisions of the laws or regulations of other countries or jurisdictions to ensure the viability of the benefits from stock option or stock awards granted to Optionees or Participants employed in such countries or jurisdictions, or to meet the requirements that permit the Plan to operate in a qualified or tax efficient manner, and/or comply with applicable foreign laws or regulations.
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IV.
ELIGIBILITY
A.
The persons eligible to participate in the Plan are as follows:
(i)
Employees,
(ii)
non-employee members of the Board or the non-employee members of the board of directors of any Parent or Subsidiary, and
(iii)
consultants and other independent advisors who provide services to the Corporation (or any Parent or Subsidiary).
V.
STOCK SUBJECT TO THE PLAN
A.
The stock issuable under the Plan shall be shares of authorized but unissued or reacquired Common Stock. The maximum number of shares of Common Stock which may be issued:
1.
under the Plan shall not exceed One Million Five Hundred Thousand (1,500,000) shares of Common Stock (the "Share Limit"); and
2.
pursuant to the exercise of Incentive Options granted under this Plan shall not exceed One Million Five Hundred Thousand (1,500,000) shares of Common Stock (the "ISO Limit").
3.
pursuant to the Plan, including any shares that could be issued under the Option Grant Program in addition to any stock issued under the Stock Issuance Program combined together shall not exceed 1,500,000 shares.
B.
Shares of Common Stock subject to outstanding stock options shall be available for subsequent issuance under the Plan to the extent (i) the stock options expire or terminate for any reason prior to exercise in full or (ii) the stock options are cancelled in accordance with the cancellation-regrant provisions of Article Two. Unvested shares issued under the Plan and subsequently repurchased by the Corporation, at the stock option exercise price paid per share, pursuant to the Corporation’s repurchase rights under the Plan shall be added back to the number of shares of Common Stock reserved for issuance under the Plan and shall accordingly be available for reissuance through one or more subsequent stock option grants or direct stock issuances under the Plan.
C.
Should any change be made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation’s receipt of consideration, appropriate adjustments shall be made to (i) the Share Limit and ISO Limit, (ii) the number and/or class of outstanding securities issuable under the Plan, (iii) the number and/or class of securities available for awards, (iv) the number and/or class of securities covered by each outstanding award and (v) the number and/or class of securities and the exercise price per share in effect under each outstanding stock option in order to prevent the dilution or enlargement of benefits thereunder. The adjustments determined by the Plan Administrator shall be final,
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binding and conclusive. In no event shall any such adjustments be made in connection with the conversion of one or more outstanding shares of the Corporation’s preferred stock into shares of Common Stock. Any adjustment of shares of Common Stock pursuant to this Article One, Section V(C) shall be rounded down to the nearest whole number of shares of Common Stock. Under no circumstances shall the Corporation be required to authorize or issue fractional shares. To the extent permitted by applicable law, no consideration shall be provided as a result of any fractional shares not being issued or authorized.
VI.
INDEMNIFICATION
To the maximum extent permitted by applicable law, each member of the Plan Administrator, or of the Board, or any persons (including without limitation Employees and officers) who are delegated by the Board or Plan Administrator to perform administrative functions in connection with the Plan, shall be indemnified and held harmless by the Corporation against and from (i) any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by him or her in connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action taken or failure to act under the Plan or any award agreement, and (ii) from any and all amounts paid by him or her in settlement thereof, with the Corporation’s approval, or paid by him or her in satisfaction of any judgment in any such claim, action, suit, or proceeding against him or her, provided he or she shall give the Corporation an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Corporation’s articles of incorporation or bylaws, by contract, as a matter of law, or otherwise, or under any power that the Corporation may have to indemnify them or hold them harmless.
VII.
BENEFICIARIES
An Optionee or Participant may designate one or more beneficiaries with respect to an award by timely filing the prescribed form with the Corporation. A beneficiary designation may be changed by filing the prescribed form with the Corporation at any time before the Participant’s or Optionee's death. If no beneficiary was designated or if no designated beneficiary survives the Participant or Optionee, then after a Participant’s or Optionee's death any vested award(s) shall be transferred or distributed to the Participant’s or Optionee's estate.
VIII.
CALIFORNIA PARTICIPANTS
Awards to California Participants shall also be subject to the following terms regarding the time period to exercise vested stock options after termination of Service. These additional terms shall apply until such time that the shares of Common Stock are publicly traded and/or the Corporation is subject to the reporting requirements of the 1934 Act: In the event of termination of an Optionee's Service, (i) if such termination was for reasons other than death or Disability or cause, the Optionee shall have at least 30 days after the date of such termination to exercise any of his/her vested outstanding stock options (but in no event later than the expiration of the term of such stock options established by the Plan Administrator as of the award date) or (ii) if such termination was due to death or Disability, the Optionee shall have at least six months
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after the date of such termination to exercise any of his/her vested outstanding stock options (but in no event later than the expiration of the term of such stock options established by the Plan Administrator as of the award date).
IX.
CODE SECTION 409A
Notwithstanding anything in the Plan to the contrary, the Plan and awards granted hereunder are intended to comply with the requirements of Code Section 409A and shall be interpreted in a manner consistent with such intention. In the event that any provision of the Plan or an award agreement is determined by the Plan Administrator to not comply with the applicable requirements of Code Section 409A or the Treasury Regulations or other guidance issued thereunder, the Plan Administrator shall have the authority to take such actions and to make such changes to the Plan or an award agreement as the Plan Administrator deems necessary to comply with such requirements. Each payment to a Participant or Optionee made pursuant to this Plan shall be considered a separate payment and not one of a series of payments for purposes of Code Section 409A. Notwithstanding the foregoing or anything elsewhere in the Plan or an award agreement to the contrary, if upon a Participant’s or Optionee's Separation From Service he/she is then a “specified employee” (as defined in Code Section 409A), then solely to the extent necessary to comply with Code Section 409A and avoid the imposition of taxes under Code Section 409A, the Corporation shall defer payment of “nonqualified deferred compensation” subject to Code Section 409A payable as a result of and within six (6) months following such Separation From Service under this Plan until the earlier of (i) the first business day of the seventh month following the Participant’s or Optionee's Separation From Service, or (ii) ten (10) days after the Corporation receives written confirmation of the Participant’s or Optionee's death. Any such delayed payments shall be made without interest. In no event whatsoever shall the Corporation be liable for any additional tax, interest or penalties that may be imposed on a Participant or Optionee by Code Section 409A or any damages for failing to comply with Code Section 409A.
X.
GENERAL
A.
Electronic Communications. Subject to compliance with applicable law and/or regulations, an award agreement or other documentation or notices relating to the Plan and/or awards may be communicated to Participants and Optionees by electronic media.
B.
Unfunded Plan. Insofar as it provides for awards, the Plan shall be unfunded. Although bookkeeping accounts may be established with respect to Participants or Optionees who are granted awards under this Plan, any such accounts will be used merely as a bookkeeping convenience. The Corporation shall not be required to segregate any assets which may at any time be represented by awards, nor shall this Plan be construed as providing for such segregation, nor shall the Corporation or the Plan Administrator be deemed to be a trustee of stock or cash to be awarded under the Plan.
C.
Liability of Corporation Plan. The Corporation (or members of the Board or Plan Administrator) shall not be liable to a Participant or Optionee or other persons as to: (i) the non-issuance or sale of shares of Common Stock as to which the Corporation has been unable to obtain from any regulatory body having jurisdiction the authority deemed by the
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Corporation's counsel to be necessary to the lawful issuance and sale of any shares of Common Stock hereunder; and (ii) any unexpected or adverse tax consequence or any tax consequence expected, but not realized, by any Participant or Optionee or other person due to the grant, receipt, exercise or settlement of any award granted under this Plan.
D.
Reformation. In the event any provision of this Plan shall be held illegal or invalid for any reason, such provisions will be reformed by the Board if possible and to the extent needed in order to be held legal and valid. If it is not possible to reform the illegal or invalid provisions then the illegality or invalidity shall not affect the remaining parts of this Plan, and this Plan shall be construed and enforced as if the illegal or invalid provision had not been included.
E.
Successor Provision. Any reference to a statute, rule or regulation, or to a section of a statute, rule or regulation, is a reference to that statute, rule, regulation, or section as amended from time to time, both before and after the date the Plan was adopted and including any successor provisions.
F.
Governing Law. This Plan, and (unless otherwise provided in the Stock Option Award Agreement or Stock Issuance Agreement) all awards, shall be construed in accordance with and governed by the laws of the State of California, but without regard to its conflict of law provisions. The Plan Administrator may provide that any dispute as to any award shall be presented and determined in such forum as the Plan Administrator may specify, including through binding arbitration. Unless otherwise provided in the Stock Option Award Agreement or Stock Issuance Agreement, recipients of an award under the Plan are deemed to submit to the exclusive jurisdiction and venue of the federal or state courts of California to resolve any and all issues that may arise out of or relate to the Plan or any related Stock Option Award Agreement or Stock Issuance Agreement.
ARTICLE TWO
OPTION GRANT PROGRAM
I.
STOCK OPTION TERMS
Each stock option shall be evidenced by a Stock Option Award Agreement between the Optionee and the Corporation in a form approved by the Plan Administrator; provided, however, that each such agreement shall comply with the terms specified below. Each document evidencing an Incentive Option shall, in addition, be subject to the provisions of the Plan applicable to such stock options. The provisions of the various Stock Option Award Agreements entered into under the Plan need not be identical. The Stock Option Award Agreement shall also specify whether the stock option is an Incentive Option and if not specified then the stock option shall be a Non-Statutory Option. Additionally the Stock Option Award Agreement shall specify the number of shares of Common Stock that are subject to the stock option, set forth the stock option's exercise price (pursuant to the terms specified below), specify the date when all or any installment of the stock option is to become vested and/or exercisable and specify the term of the stock option.
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A.
Exercise Price.
1.
The exercise price per share shall be fixed by the Plan Administrator in accordance with the following provisions:
(i)
The exercise price per share shall not be less than one hundred percent (100%) of the Fair Market Value per share of Common Stock on the stock option grant date.
(ii)
If the person to whom an Incentive Option is granted is a 10% Shareholder, then the exercise price per share shall not be less than one hundred ten percent (110%) of the Fair Market Value per share of Common Stock on the Incentive Option grant date.
2.
The exercise price shall become immediately due upon exercise of the stock option and shall, subject to the documents evidencing the stock option, be payable in cash or check made payable to the Corporation or by a promissory note as described in Section I of Article Four. Should the Common Stock be registered under Section 12(g) of the 1934 Act at the time the stock option is exercised, then the exercise price may also be paid as follows:
(i)
in shares of Common Stock held for the requisite period necessary to avoid a charge to the Corporation’s earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date, or
(ii)
to the extent the stock option is exercised for vested shares, through a special sale and remittance procedure pursuant to which the Optionee shall concurrently provide irrevocable written instructions to the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale.
Except to the extent such sale and remittance procedure is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date.
B.
Exercise and Term of Stock Options. Each stock option shall be exercisable at such time or times, during such period and for such number of shares as shall be determined by the Plan Administrator and set forth in the documents evidencing the stock option grant. However, no stock option shall have a term in excess of ten (10) years measured from the stock option grant date.
C.
Effect of Termination of Service.
1.
Unless the applicable Stock Option Award Agreement or employment agreement provides otherwise (and in such case, the Stock Option Award Agreement or employment agreement shall govern as to the consequences of a termination of Service for such stock option awards subject to the subsection (C)), the following provisions shall govern the exercise of any stock options held by the Optionee at the time of cessation of Service or death:
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(i)
Should the Optionee cease to remain in Service for any reason other than Disability or death, then the Optionee shall have a period of three (3) months following the date of such cessation of Service during which to exercise the vested portion of each outstanding stock option held by such Optionee and all unvested portions of any outstanding stock option award shall be forfeited without consideration as of the termination of Service date.
(ii)
Should Optionee’s Service terminate by reason of Disability, then the Optionee shall have a period of twelve (12) months following the date of such cessation of Service during which to exercise the vested portion of each outstanding stock option held by such Optionee and all unvested portions of any outstanding stock option award shall be forfeited without consideration as of the termination of Service date.
(iii)
If the Optionee dies while holding an outstanding stock option, then the personal representative of his or her estate or the person or persons to whom the stock option is transferred pursuant to the Optionee’s will or the laws of inheritance shall have a twelve (12)-month period following the date of the Optionee’s death to exercise the vested portion of such stock option and all unvested portions of any outstanding stock option award shall be forfeited without consideration as of the date of death.
(iv)
Under no circumstances, however, shall any such stock option be exercisable after the specified expiration of the stock option term.
(v)
During the applicable post-Service exercise period, the stock option may not be exercised in the aggregate for more than the number of vested shares for which the stock option is exercisable on the date of the Optionee’s cessation of Service. Upon the expiration of the applicable exercise period or (if earlier) upon the expiration of the stock option term, the stock option shall terminate and cease to be outstanding for any vested shares for which the stock option has not been exercised.
2.
The Plan Administrator shall have the discretion, either at the time a stock option is granted or at any time while the stock option remains outstanding, provided that such time is prior to the forfeiture of the stock option, to:
(i)
extend the period of time for which the stock option is to remain exercisable following Optionee’s cessation of Service or death from the limited period otherwise in effect for that stock option to such greater period of time as the Plan Administrator shall deem appropriate, but in no event beyond the expiration of the stock option term, and/or
(ii)
permit the stock option to be exercised, during the applicable post-Service exercise period, not only with respect to the number of vested shares of Common Stock for which such stock option is exercisable at the time of
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the Optionee’s cessation of Service but also with respect to one or more additional installments in which the Optionee would have vested under the stock option had the Optionee continued in Service.
D.
Shareholder Rights. The holder of a stock option shall have no shareholder rights with respect to the shares subject to the stock option until such person shall have exercised the stock option, paid the exercise price and any applicable withholding taxes and become a holder of record of the purchased shares.
E.
Unvested Shares. The Plan Administrator shall have the discretion to grant stock options which are exercisable for unvested shares of Common Stock. Should the Optionee cease Service while holding such unvested shares, the Corporation shall have the right to repurchase, at the exercise price paid per share, all or (at the discretion of the Corporation and with the consent of the Optionee) any of those unvested shares. The terms upon which such repurchase right shall be exercisable (including the period and procedure for exercise and the appropriate vesting schedule for the purchased shares) shall be established by the Plan Administrator and set forth in the document evidencing such repurchase right.
F.
First Refusal Rights. Until such time as the Common Stock is first registered under Section 12(g) of the 1934 Act, the Corporation shall have the right of first refusal with respect to any proposed disposition by the Optionee (or any successor in interest) of any shares of Common Stock issued under the Plan. Such right of first refusal shall be exercisable in accordance with the terms established by the Plan Administrator and set forth in the document evidencing such right.
G.
Limited Transferability of Stock Options. During the lifetime of the Optionee, the stock option shall be exercisable only by the Optionee and shall not be assignable or transferable other than by will or by the laws of descent and distribution following the Optionee’s death.
H.
Withholding. The Corporation’s obligation to deliver shares of Common Stock upon the exercise of any stock options granted under the Plan shall be subject to the satisfaction of all applicable federal, state and local income and employment tax withholding requirements.
II.
INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive Options. Except as modified by the provisions of this Section II, all the provisions of the Plan shall be applicable to Incentive Options. Stock options which are specifically designated as Non-Statutory Options shall not be subject to the terms of this Section II.
A.
Eligibility. Incentive Options may only be granted to Employees.
B.
Exercise Price. The exercise price per share shall not be less than one hundred percent (100%) of the Fair Market Value per share of Common Stock on the stock option grant date.
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C.
Dollar Limitation. The aggregate Fair Market Value of the shares of Common Stock (determined as of the respective date or dates of grant) for which one or more stock options granted to any Employee under the Plan (or any other stock option plan of the Corporation or any Parent or Subsidiary) may for the first time become exercisable as Incentive Options during any one (1) calendar year shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the Employee holds two (2) or more such stock options which become exercisable for the first time in the same calendar year, the foregoing limitation on the exercisability of such stock options as Incentive Options shall be applied on the basis of the order in which such stock options are granted. If and to the extent that any shares of Common Stock are issued under a portion of any Incentive Option that exceeds the $100,000 limitation of Section 422 of the Code, such shares shall not be treated as issued under an Incentive Option notwithstanding any designation otherwise. Certain decisions, amendments, interpretations and actions by the Plan Administrator and certain actions by an Employee may cause an Incentive Option to cease to qualify as an Incentive Option pursuant to the Code and by accepting an Incentive Option the Employee agrees in advance to such disqualifying action taken by either the Employee, the Plan Administrator or the Corporation.
D.
10% Shareholder. If any Employee to whom an Incentive Option is granted is a 10% Shareholder, then the stock option term shall not exceed five (5) years measured from the stock option grant date.
III.
CORPORATE TRANSACTION
A.
The shares subject to each stock option outstanding under the Plan at the time of a Corporate Transaction shall automatically vest in full so that each such stock option shall, immediately prior to the effective date of the Corporate Transaction, become fully exercisable for all of the shares of Common Stock at the time subject to that stock option and may be exercised for any or all of those shares as fully vested shares of Common Stock. However, the shares subject to an outstanding stock option shall not vest on such an accelerated basis if and to the extent: (i) such stock option is assumed by the successor corporation (or parent thereof) in the Corporate Transaction and the Corporation’s repurchase rights with respect to the unvested stock option shares are concurrently assigned to such successor corporation (or parent thereof) or (ii) such stock option is to be replaced with a cash incentive program of the successor corporation which preserves the spread existing on the unvested stock option shares at the time of the Corporate Transaction and provides for subsequent payout in accordance with the same vesting schedule applicable to those unvested stock option shares or (iii) the acceleration of such stock option is subject to other limitations imposed by the Plan Administrator at the time of the stock option grant.
B.
All outstanding repurchase rights shall also terminate automatically, and the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event of any Corporate Transaction, except to the extent: (i) those repurchase rights are assigned to the successor corporation (or parent thereof) in connection with such Corporate Transaction or (ii) such accelerated vesting is precluded by other limitations imposed by the Plan Administrator at the time the repurchase right is issued.
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C.
Immediately following the consummation of the Corporate Transaction, all outstanding stock options shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof).
D.
Each stock option which is assumed in connection with a Corporate Transaction shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to the Optionee in consummation of such Corporate Transaction, had the stock option been exercised immediately prior to such Corporate Transaction. Appropriate adjustments shall also be made to (i) the number and class of securities available for issuance under the Plan following the consummation of such Corporate Transaction and (ii) the exercise price payable per share under each outstanding stock option, provided the aggregate exercise price payable for such securities shall remain the same.
E.
The Plan Administrator shall have the discretion, either at the time the stock option is granted or at any time while the stock option remains outstanding, to provide for the automatic acceleration (in whole or in part) of one or more outstanding stock options (and the automatic termination of one or more outstanding repurchase rights, with the immediate vesting of the shares of Common Stock subject to those terminated rights) upon the occurrence of a Corporate Transaction, whether or not those stock options are to be assumed or replaced (or those repurchase rights are to be assigned) in the Corporate Transaction.
F.
The Plan Administrator shall also have full power and authority, either at the time the stock option is granted or at any time while the stock option remains outstanding, to structure such stock option so that the shares subject to that stock option will automatically vest on an accelerated basis should the Optionee’s Service terminate by reason of an Involuntary Termination within a designated period (not to exceed eighteen (18) months) following the effective date of any Corporate Transaction in which the stock option is assumed and the repurchase rights applicable to those shares do not otherwise terminate. Any such stock option shall remain exercisable for the fully vested stock option shares until the earlier of (i) the expiration of the stock option term or (ii) the expiration of the one (1)-year period measured from the effective date of the Involuntary Termination. In addition, the Plan Administrator may provide that one or more of the outstanding repurchase rights with respect to shares held by the Optionee at the time of such Involuntary Termination shall immediately terminate on an accelerated basis, and the shares subject to those terminated rights shall accordingly vest.
G.
The portion of any Incentive Option accelerated in connection with a Corporate Transaction shall remain exercisable as an Incentive Option only to the extent the applicable One Hundred Thousand Dollar limitation is not exceeded. To the extent such dollar limitation is exceeded, the accelerated portion of such stock option shall be exercisable as a Non-Statutory Option under the Federal tax laws.
H.
The grant of stock options under the Plan shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.
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IV.
CANCELLATION AND REGRANT OF STOCK OPTIONS
The Plan Administrator shall have the authority to effect, at any time and from time to time, with the consent of the affected stock option holders, the cancellation of any or all outstanding stock options under the Plan and to grant in substitution therefor new stock options covering the same or different number of shares of Common Stock but with an exercise price per share based on the Fair Market Value per share of Common Stock on the new stock option grant date.
ARTICLE THREE
STOCK ISSUANCE PROGRAM
I.
STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance Program through direct and immediate issuances without any intervening stock option grants. Each such stock issuance shall be evidenced by a Stock Issuance Agreement which complies with the terms specified below.
A.
Purchase Price.
1.
The purchase price per share shall be fixed by the Plan Administrator but shall not be less than eighty-five percent (85%) of the Fair Market Value per share of Common Stock on the issue date. However, the purchase price per share of Common Stock issued to a 10% Shareholder shall not be less than one hundred and ten percent (110%) of such Fair Market Value.
2.
Shares of Common Stock may be issued under the Stock Issuance Program for any of the following items of consideration which the Plan Administrator may deem appropriate in each individual instance:
(i)
cash or check made payable to the Corporation;
(ii)
past services rendered to the Corporation (or any Parent or Subsidiary); or
(iii)
a promissory note as described in Section I of Article Four.
B.
Vesting Provisions.
1.
Shares of Common Stock issued under the Stock Issuance Program may, in the discretion of the Plan Administrator, be fully and immediately vested upon issuance or may vest in one or more installments over the Participant’s period of Service or upon attainment of specified performance objectives.
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2.
Any new, substituted or additional securities or other property (including money paid other than as a regular cash dividend) which the Participant may have the right to receive with respect to the Participant’s unvested shares of Common Stock by reason of any stock dividend, stock split, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation’s receipt of consideration shall be issued subject to (i) the same vesting requirements applicable to the Participant’s unvested shares of Common Stock and (ii) such escrow arrangements as the Plan Administrator shall deem appropriate.
3.
The Participant shall have full shareholder rights with respect to any shares of Common Stock issued to the Participant under the Stock Issuance Program, whether or not the Participant’s interest in those shares is vested. Accordingly, the Participant shall have the right to vote such shares and to receive any regular cash dividends paid on such shares.
4.
Should the Participant cease to remain in Service while holding one or more unvested shares of Common Stock issued under the Stock Issuance Program or should the performance objectives not be attained with respect to one or more such unvested shares of Common Stock, then those shares shall be immediately surrendered to the Corporation for cancellation, and the Participant shall have no further shareholder rights with respect to those shares. To the extent the surrendered shares were previously issued to the Participant for consideration paid in cash or cash equivalent (including the Participant’s purchase-money indebtedness), the Corporation shall repay to the Participant the cash consideration paid for the surrendered shares and shall cancel the unpaid principal balance of any outstanding purchase-money note of the Participant attributable to such surrendered shares.
5.
The Plan Administrator may in its discretion waive the surrender and cancellation of one or more unvested shares of Common Stock (or other assets attributable thereto) which would otherwise occur upon the non-completion of the vesting schedule applicable to such shares. Such waiver shall result in the immediate vesting of the Participant’s interest in the shares of Common Stock as to which the waiver applies. Such waiver may be effected at any time, whether before or after the Participant’s cessation of Service or the attainment or non-attainment of the applicable performance objectives.
C.
First Refusal Rights. Until such time as the Common Stock is first registered under Section 12(g) of the 1934 Act, the Corporation shall have the right of first refusal with respect to any proposed disposition by the Participant (or any successor in interest) of any shares of Common Stock issued under the Stock Issuance Program. Such right of first refusal shall be exercisable in accordance with the terms established by the Plan Administrator and set forth in the document evidencing such right.
II.
CORPORATE TRANSACTION
A.
Upon the occurrence of a Corporate Transaction, all outstanding repurchase rights under the Stock Issuance Program shall terminate automatically, and the shares of Common Stock subject to those terminated rights shall immediately vest in full, except to the extent: (i) those repurchase rights are assigned to the successor corporation (or parent thereof) in
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connection with such Corporate Transaction or (ii) such accelerated vesting is precluded by other limitations imposed by the Plan Administrator at the time the repurchase right is issued.
B.
The Plan Administrator shall have the discretionary authority, exercisable either at the time the unvested shares are issued or any time while the Corporation’s repurchase rights with respect to those shares remain outstanding, to provide that those rights shall automatically terminate on an accelerated basis, and the shares of Common Stock subject to those terminated rights shall immediately vest, in the event the Participant’s Service should subsequently terminate by reason of an Involuntary Termination within a designated period (not to exceed eighteen (18) months) following the effective date of any Corporate Transaction in which those repurchase rights are assigned to the successor corporation (or parent thereof).
III.
SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator’s discretion, be held in escrow by the Corporation until the Participant’s interest in such shares vests or may be issued directly to the Participant with restrictive legends on the certificates evidencing those unvested shares.
I.
FINANCING
The Plan Administrator may permit any Optionee or Participant to pay the stock option exercise price or the purchase price for shares issued to such person under the Plan by delivering a full-recourse, interest-bearing promissory note payable in one or more installments and secured by the purchased shares. However, any promissory note delivered by a consultant must be secured by property in addition to the purchased shares of Common Stock. In no event shall the maximum credit available to the Optionee or Participant exceed the sum of (i) the aggregate stock option exercise price or purchase price payable for the purchased shares plus (ii) any federal, state and local income and employment tax liability incurred by the Optionee or the Participant in connection with the stock option exercise or share purchase.
II.
EFFECTIVE DATE AND TERM OF PLAN
A.
The Plan shall become effective when adopted by the Board, but no stock option granted under the Plan may be exercised, and no shares shall be issued under the Plan, until the Plan is approved by the Corporation’s shareholders. If such shareholder approval is not obtained within twelve (12) months after the date of the Board’s adoption of the Plan, then all stock options previously granted under the Plan shall terminate and cease to be outstanding, and no further stock options shall be granted and no shares shall be issued under the Plan. Subject to such limitation, the Plan Administrator may grant stock options and issue shares under the Plan at any time after the effective date of the Plan and before the date fixed herein for termination of the Plan.
B.
The Plan shall terminate upon the earliest of (i) the expiration of the ten (10) year period measured from the date the Plan is adopted by the Board, (ii) the date on
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which all shares available for issuance under the Plan shall have been issued or (iii) the termination of all outstanding stock options in connection with a Corporate Transaction. All stock options and unvested stock issuances outstanding at that time under the Plan shall continue to have full force and effect in accordance with the provisions of the documents evidencing such stock options or issuances.
III.
AMENDMENT OF THE PLAN
A.
The Board shall have complete and exclusive power and authority to amend or modify the Plan in any or all respects. However, no such amendment or modification shall adversely affect the rights and obligations with respect to stock options or unvested stock issuances at the time outstanding under the Plan unless the Optionee or the Participant consents to such amendment or modification. In addition, certain amendments may require shareholder approval pursuant to applicable laws and regulations.
B.
To the extent permitted by applicable law, stock options may be granted under the Option Grant Program and shares may be issued under the Stock Issuance Program which are in each instance in excess of the number of shares of Common Stock then available for issuance under the Plan, provided any excess shares actually issued under those programs shall be held in escrow until there is obtained shareholder approval of an amendment sufficiently increasing the number of shares of Common Stock available for issuance under the Plan. If such shareholder approval is not obtained within twelve (12) months after the date the first such excess issuances are made, then (i) any unexercised stock options granted on the basis of such excess shares shall terminate and cease to be outstanding and (ii) the Corporation shall promptly refund to the Optionees and the Participants the exercise or purchase price paid for any excess shares issued under the Plan and held in escrow, together with interest (at the applicable Short Term Federal Rate) for the period the shares were held in escrow, and such shares shall thereupon be automatically cancelled and cease to be outstanding.
IV.
USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of shares of Common Stock under the Plan shall be used for general corporate purposes.
V.
WITHHOLDING
The Corporation’s obligation to deliver shares of Common Stock upon the exercise of any stock options or upon the issuance or vesting of any shares issued under the Plan shall be subject to the satisfaction of all applicable federal, state and local income and employment tax withholding requirements.
VI.
LIMITATIONS ON RIGHTS
A.
Retention Rights. Neither the Plan nor any award granted under the Plan shall be deemed to give any individual a right to remain in Service as an Employee, consultant, or non-employee director of the Corporation, a Parent or a Subsidiary or to receive any future awards under the Plan. The Corporation and its Parents and Subsidiaries reserve the right to terminate the Service of any person at any time, and for any reason, subject to applicable
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laws, the Corporation's articles of incorporation and bylaws and a written employment agreement (if any).
B.
Regulatory Approvals. The implementation of the Plan, the granting of any stock options under the Plan and the issuance of any shares of Common Stock (i) upon the exercise of any stock option or (ii) under the Stock Issuance Program shall be subject to the Corporation’s procurement of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the stock options granted under it and the shares of Common Stock issued pursuant to it.
C.
Clawback Policy. The Corporation may (i) cause the cancellation of any award, (ii) require reimbursement of any award by a Participant or Optionee and (iii) effect any other right of recoupment of equity or other compensation provided under this Plan or otherwise in accordance with Corporation policies and/or applicable law (each, a “Clawback Policy”). In addition, a Participant or Optionee may be required to repay to the Corporation certain previously paid compensation, whether provided under this Plan or an award agreement or otherwise, in accordance with the Clawback Policy.
VII.
NO EMPLOYMENT OR SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the Participant any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining such person) or of the Optionee or the Participant, which rights are hereby expressly reserved by each, to terminate such person’s Service at any time for any reason, with or without cause.
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APPENDIX
The following definitions shall be in effect under the Plan:
A.
Board shall mean the Corporation’s Board of Directors.
B.
California Participants shall mean a Participant or Optionee whose award under the Plan was issued in reliance on Section 25102(o) of the California Corporation Code.
C.
Code shall mean the Internal Revenue Code of 1986, as amended.
D.
Committee shall mean a committee of two (2) or more Board members appointed by the Board to exercise one or more administrative functions under the Plan.
E.
Common Stock shall mean the Corporation’s common stock.
F.
Corporate Transaction shall mean either of the following shareholder-approved transactions to which the Corporation is a party:
(i)
a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation’s outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or
(ii)
the sale, transfer or other disposition of all or substantially all of the Corporation’s assets in complete liquidation or dissolution of the Corporation.
G.
Corporation shall mean Diversified Opportunities, Inc. a Delaware corporation.
H.
Disability shall mean the inability of the Optionee or the Participant to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can expected to last for a continuous period of not less than twelve (12) months and shall be determined by the Plan Administrator on the basis of such medical evidence as the Plan Administrator deems warranted under the circumstances.
I.
Employee shall mean an individual who is in the employ of the Corporation (or any Parent or Subsidiary), subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance.
J.
Exercise Date shall mean the date on which the Corporation shall have received written notice of the stock option exercise.
K.
Fair Market Value per share of Common Stock on any relevant date shall be determined in accordance with the following provisions:
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(i)
If the Common Stock is at the time traded on the Nasdaq National Market, quoted on the OTCBB, quoted on the OTCQB, quoted on the pink sheets then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question, as such price is reported by the National Association of Securities Dealers on the Nasdaq National Market or any successor system, or at the last price traded in the over-the-counter market that is reported by the OTCBB, OTCQB or pink sheets. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists.
(ii)
If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists.
(iii)
If the Common Stock is at the time neither listed on any Stock Exchange nor traded on the Nasdaq National Market, nor quoted on the OTCBB, nor quoted on the OTCQB, nor quoted on the pink sheets then the Fair Market Value shall be determined by the Plan Administrator after taking into account such factors as the Plan Administrator shall deem appropriate including the pricing of any recent capital raising the company has completed or is proposed to complete.
L.
Incentive Option shall mean a stock option which satisfies the requirements of Code Section 422.
M.
Involuntary Termination shall mean the termination of the Service of any individual which occurs by reason of:
(i)
such individual’s involuntary dismissal or discharge by the Corporation for reasons other than Misconduct, or
(ii)
such individual’s voluntary resignation following (A) a change in his or her position with the Corporation which materially reduces his or her level of responsibility, (B) a reduction in his or her level of compensation (including base salary, fringe benefits and target bonuses under any corporate-performance based bonus or incentive programs) by more than fifteen percent (15%) or (C) a relocation of such individual’s place of employment by more than fifty (50) miles, provided and only if such change, reduction or relocation is effected without the individual’s consent.
N.
Misconduct shall mean the commission of any act of fraud, embezzlement or dishonesty by the Optionee or Participant, any unauthorized use or disclosure by such person of
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confidential information or trade secrets of the Corporation (or any Parent or Subsidiary), or any other intentional misconduct by such person adversely affecting the business or affairs of the Corporation (or any Parent or Subsidiary) in a material manner. The foregoing definition shall not be deemed to be inclusive of all the acts or omissions which the Corporation (or any Parent or Subsidiary) may consider as grounds for the dismissal or discharge of any Optionee, Participant or other person in the Service of the Corporation (or any Parent or Subsidiary).
O.
1934 Act shall mean the Securities Exchange Act of 1934, as amended.
P.
Non-Statutory Option shall mean a stock option that is not an Incentive Option.
Q.
Option Grant Program shall mean the stock option grant program in effect under the Plan.
R.
Optionee shall mean any person to whom a stock option is granted under the Plan.
S.
Parent shall mean any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.
T.
Participant shall mean any person who is issued shares of Common Stock under the Stock Issuance Program.
U.
Plan shall mean this Diversified Opportunities, Inc. 2011 Stock Option/Stock Issuance Plan as it may be amended from time to time.
V.
Plan Administrator shall mean either the Board or the Committee acting in its capacity as administrator of the Plan.
W.
Service shall mean the provision of services to the Corporation (or any Parent or Subsidiary) by a person in the capacity of an Employee, a non-employee member of the board of directors or a consultant, except to the extent otherwise specifically provided in the documents evidencing the stock option grant.
X.
Stock Exchange shall mean either the American Stock Exchange or the New York Stock Exchange.
Y.
Stock Issuance Agreement shall mean the written agreement entered into by the Corporation and the Participant at the time of issuance of shares of Common Stock under the Stock Issuance Program.
Z.
Stock Issuance Program shall mean the stock issuance program in effect under the Plan.
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AA.
Stock Option Award Agreement shall mean the written agreement described in Article Two, Section I evidencing each award of a stock option under the Plan.
BB.
Subsidiary shall mean any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation, provided each corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.
CC.
10% Shareholder shall mean the owner of stock (as determined under Code Section 424(d)) possessing more than ten percent (10%) of the total combined voting power of all classes of outstanding stock of the Corporation (or any Parent or Subsidiary).
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Exhibit 21.1
Diversified Opportunities, Inc., a Delaware Corporation
Listing of Subsidiaries
Sugarmade, Inc., a California corporation