ex10-1
EXCHANGE AGREEMENT, CONSENT AND WAIVER
This
Exchange Agreement, Consent and Waiver (this “Agreement”) is dated as of July
9, 2020, by and among ImageWare Systems, Inc., a Delaware
corporation (the “Company”), and each of the
signatories to this Agreement (each, a “Stockholder” and, collectively,
the “Stockholders”).
RECITALS
WHEREAS, the Stockholders previously
purchased shares of the Company’s Series A Convertible
Preferred Stock (“Series A
Preferred”) on or about September 15, 2017
(“Original Issue
Date”), which Series A Preferred are entitled to a
dividend payable quarterly by the Company (“Quarterly Dividends”);
and
WHEREAS, the Company paid Quarterly
Dividends through December 31, 2019, and is delinquent in paying
Quarterly Dividends for the quarters ended March 31, 2020 and June
30, 2020;
WHEREAS, in consideration for the
Stockholders agreement to waive Quarterly Dividends for the
quarters ended March 31, 2020, June 30, 2020, September 30, 2020
and December 31, 2020, and to provide the Company with the ability
to obtain necessary working capital, each of the Stockholders
agrees to (i) waive the Quarterly Dividends payable for the
quarters ended March 31, 2020, June 30, 2020, September 30, 2020
and December 31, 2020; (ii) exchange one-half of the Series A
Preferred beneficially owned by each Stockholder on the date hereof
for an equivalent number of newly created Series A-1 Convertible
Preferred Stock (“Series A-1
Preferred”); and (iii) to consent to the creation of
senior securities that rank senior to the Series A Preferred and
Series A-1 Preferred, each on the terms and conditions particularly
set forth in this Agreement.
NOW, THEREFORE, for good and valuable
consideration, the receipt and sufficiency of which are hereby
agreed and acknowledged, the parties hereby agree as
follows:
AGREEMENT
1. Securities
Exchange.
(a) In consideration of
and in express reliance upon the representations, warranties,
covenants, terms and conditions of this Agreement, each Stockholder
agrees to return to the Company that number of shares of the
Company’s Series A Preferred appearing on their respective
signature page to this Agreement (the “Exchange Shares”), which Exchange
Shares represent one-half (½) of the Series A Preferred
beneficially owned by such Stockholder on the date of this
Agreement, in exchange for the same number of shares of Series A-1
Preferred, the terms and conditions of which are set forth in the
Certificate of Designations of Rights, Preferences, Privileges and
Limitations of Series A-1 Convertible Preferred Stock attached
hereto as Exhibit A
(“Series A-1
Certificate”). In consideration for the foregoing, the
Company agrees to issue and deliver the Series A-1 Preferred to
each Stockholder (the “Exchange”).
(b) Consummation of the
Exchange, and the other agreements of the parties under the terms
of this Agreement (the “Closing”), shall take place upon
the satisfaction of each of the conditions set forth in Sections 8
and 9 hereof (the “Closing
Date”)
(c) Within five
business days after the Closing, the Company shall issue and
deliver to each Stockholder a certificate evidencing the Series A-1
Preferred. To the extent not otherwise returned to the Company on
or before the Closing, the Exchange Shares shall be deemed
forfeited by the Stockholders and cancelled on the books and
records of the Company effective as of the Closing
Date.
2. Waiver.
Effective upon Closing, the Quarterly Dividends required to be paid
by the Company to each Stockholder pursuant to the terms of Section
2(a) of the Certificate of Designations, Preferences and Rights of
Series A Preferred for the quarters ended March 31, 2020, June 30,
2020, September 30, 2020 and December 31, 2020 shall be waived. The
parties agree and acknowledge that, as a result of the foregoing,
Quarterly Dividends required to be paid to each of the Stockholders
by the Company on each of March 31, 2020, June 30, 2020, September
30, 2020 and December 31, 2020 shall terminate and be of no further
force and effect.
3. Consent
and Agreement.
(a) Effective at
Closing, and by executing this Agreement below, each Stockholder
agrees to the following: (i) in the event the closing volume
weighted average closing price (“VWAP”) of the Company’s
common stock, par value $0.001 per share (“Common Stock”), for the five (5)
trading days immediately preceding each Quarterly Dividend payment
date, is $0.35 or above, the Company would have the right and
option to either (y) pay the Stockholders the Quarterly Dividend
according to the terms of the Series A Certificate, or (z) by
delivering written notice to each Stockholder (“Notice”) require that each
Stockholder convert at least one quarter (¼) of the Series A
Preferred beneficially owned by each Stockholder into the same
number of Series A-1 Preferred, and upon receipt of such Notice,
each Stockholder agrees to surrender to the Company for
cancellation on the books and records of the Company such Series A
Preferred cancelled as a result of the foregoing; (ii) in the event
the closing VWAP of the Company’s Common Stock for the five
(5) trading days immediately preceding each Quarterly Dividend
payment date, is less than $0.35, each Stockholder agrees to
convert at least one quarter (¼) of the Series A Preferred
beneficially by such Stockholder into the same number of Series A-1
Preferred, which conversion shall occur automatically without
further action required by each such Stockholder; and (iii) the
creation of (A) Series A-1 Preferred that ranks pari passu with the
Series A Preferred, (B) Series C-1 Convertible Preferred Stock
(“Series C-1
Preferred”), the terms and conditions of which are set
forth in Certificate of Designations of Rights, Preferences,
Privileges and Limitations of Series C-1 Preferred attached hereto
as Exhibit B
(“Series C-1
Certificate”), and (C) a newly created series of
Preferred Stock (“Senior
Preferred”), which Senior Preferred shall rank senior
to the Series A Preferred and Series A-1 Preferred, provided that
such Senior Preferred is only created and issued upon or concurrent
with the consummation of a financing resulting in gross proceeds to
the Company of at least $10.0 million (“Qualified Financing”). In the
event the Company consummates a Qualified Financing, the Company
may continue to offer such Senior Preferred until December 31,
2020; provided, however,
the stated value of such Senior Security that may be offered and
sold by the Company in connection with a Qualified Financing shall
not exceed $15.0 million (“QF Maximum”); provided, further, that such QF Maximum
shall not include any Senior Preferred issued to beneficial owners
of Series C Preferred or Series C-1 Preferred issued by the Company
in connection with the exercise of the Series C Option defined in
Section 3(b) below.
(b) The parties agree
and acknowledge that, by executing this Agreement below, and
conditioned upon the execution of this Agreement by the holders of
one-half (1/2) of the Series A
Preferred issued and outstanding on the date of this Agreement, (i)
the Company’s obligation to pay Quarterly Dividends on the
Series A Preferred beneficially owned by each Stockholder for the
remainder of 2020 shall terminate and be of no further force and
effect; and (ii) the Company shall be authorized to (A) create a
series of Preferred Stock, entitled Series A-1 Preferred, which
Series A-1 Preferred shall rank pari-passu with the Series A
Preferred and shall contain the other terms and conditions set
forth in the Series A-1 Certificate, (B) create a series of
Preferred Stock entitled Series C-1 Preferred, which Series C-1
Preferred shall rank senior to the Series A Preferred and Series
A-1 Preferred, and shall contain the other terms and conditions set
forth in the Series C-1 Certificate and, (C) subject to the
consummation of a Qualified Financing, create a Senior Preferred
that shall rank prior to the Series A Preferred. The parties
further agree and acknowledge that, conditioned upon the beneficial
owners of the Series C Convertible Preferred Stock
(“Series C
Preferred”) and Series C-1 Preferred investing at
least an aggregate of $7.5 million in the Qualified Financing, each
beneficial owner of Series C Preferred and Series C-1 Preferred
shall have the right and option to exchange such Series C Preferred
and Series C-1 Preferred beneficially owned by such owners into
Senior Preferred, calculated based on the liquidation value of such
Series C Preferred and Series C-1 Preferred actually exchanged for
Senior Preferred (the “Series C Option”). By way of
example, a beneficial owner of Series C Preferred with a stated
value of $100,000 that elects to exercise the Series C Option will
have the right and option to exchange such Series C Preferred into
Senior Preferred with a stated value of $100,000.
4. Termination
of Warrants. At
Closing, one-half (½) of the warrants originally issued to the
Stockholders on the Original Issue Date in connection with the
issuance of the Series A Preferred (“Cancelled Warrants”), entitling
such Stockholders to purchase an aggregate of up to 1.7 million
shares of Common Stock, shall be cancelled and be of no further
force and effect. In the event additional Series A Preferred are
converted into Series A-1 Preferred per the terms of the Series A-1
Certificate, that number of additional warrants equal to the
percentage of Series A Preferred converted into Series A-1
Preferred shall be cancelled and be of no further force and effect,
and shall constitute additional Cancelled Warrants
hereunder.
5. Registration
Rights. The Company
shall file with the Securities and Exchange Commission
(“SEC”) a
registration statement on Form S-1 to register under the Securities
Act of 1933 the shares of Common Stock issuable upon conversion of
the Series A Preferred and Series A-1 Preferred, which registration
statement shall be filed with the SEC on or before thirty (30) days
following the Closing Date. Thereafter, the Company shall use its
best efforts to the registration statement declared effective under
the Securities Act of 1933, as amended (“Securities Act”).
6. Representations,
Warranties and Covenants of the Stockholders. The Stockholders, individually and not
jointly, hereby make the following representations and warranties
to the Company, and covenants for the benefit of the
Company:
(a) This Agreement has
been duly authorized, validly executed and delivered by each
Stockholder and is a valid and binding agreement and obligation of
each Stockholder enforceable against them in accordance with its
terms, subject to limitations on enforcement by general principles
of equity and by bankruptcy or other laws affecting the enforcement
of creditors’ rights generally, and each Stockholder has full
power and authority to execute and deliver the Agreement and the
other agreements and documents contemplated hereby and to perform
its obligations hereunder and thereunder.
(b) Each Stockholder
understands that the Series A-1 Preferred are being offered and
sold in reliance on specific provisions of Federal and state
securities laws, and that the Company is relying upon the truth and
accuracy of the representations, warranties, agreements,
acknowledgments and understandings of each Stockholder set forth
herein for purposes of qualifying for exemptions from registration
under the Securities Act and applicable state securities
laws.
(c) Each Stockholder is
an “accredited investor” as defined under Rule 501 of
Regulation D, promulgated under the Securities Act.
(d) Each Stockholder
will be acquiring the Series A-1 Preferred for their own account,
for investment purposes, and not with a view to any resale or
distribution in whole or in part, in violation of the Securities
Act or any applicable securities laws; provided, however, that notwithstanding
the foregoing, each Stockholder does not covenant to hold the
Series A-1 Preferred for any minimum period of time.
(e) The offer and sale
of the Series A-1 Preferred are intended to be exempt from
registration under the Securities Act, by virtue of Section 3(a)(9)
and/or 4(2) thereof. Each Stockholder understands that the Series
A-1 Preferred acquired hereunder are “restricted
securities,” as that term is defined in the Securities Act
and the rules thereunder, have not been registered under the
Securities Act, and that none of the Series A-1 Preferred can be
sold or transferred unless they are first registered under the
Securities Act and such state and other securities laws as may be
applicable or the Company receives an opinion of counsel reasonably
acceptable to the Company that an exemption from registration under
the Securities Act is available (and then the Series A-1 Preferred
may be sold or transferred only in compliance with such exemption
and all applicable state and other securities laws).
(f) Each Stockholder
owns and holds, beneficially and of record, the entire right,
title, and interest in and to the Exchange Shares and Cancelled
Warrants free and clear of all rights and Encumbrances (as defined
below), and each Stockholder has full power and authority to
transfer and dispose of the Exchange Shares and Cancelled Warrants
free and clear of any right or Encumbrance. Other than the
transactions contemplated by this Agreement, there is no
outstanding plan, pending proposal, or other right of any person to
acquire all or any of the Exchange Shares or Cancelled Warrants.
Encumbrances shall mean any
security or other property interest or right, claim, lien, pledge,
option, charge, security interest, contingent or conditional sale,
or other title claim or retention agreement, interest or other
right or claim of third parties, whether perfected or not
perfected, voluntarily incurred or arising by operation of law, and
including any agreement (other than this Agreement) to grant or
submit to any of the foregoing in the future.
7. Representations,
Warranties and Covenants of the Company. The Company represents and warrants
the Stockholders, and covenants for the benefit of the
Stockholders, as follows:
(a) The Company has
been duly incorporated and is validly existing and in good standing
under the laws of the state of Delaware, with full corporate power
and authority to own, lease and operate its properties and to
conduct its business as currently conducted, and is duly registered
and qualified to conduct its business and is in good standing in
each jurisdiction or place where the nature of its properties or
the conduct of its business requires such registration or
qualification, except where the failure to register or qualify
would not have a Material Adverse Effect. For purposes of this
Agreement, “Material Adverse
Effect” shall mean any material adverse effect on the
business, operations, properties, prospects, or financial condition
of the Company and its subsidiaries and/or any condition,
circumstance, or situation that would prohibit or otherwise
materially interfere with the ability of the Company to perform any
of its obligations under this Agreement in any material
respect.
(b) The Series A-1
Preferred have been duly authorized by all necessary corporate
action and, when paid for or issued in accordance with the terms
hereof, the Series A-1 Preferred shall be validly issued and
outstanding, fully paid and nonassessable, free and clear of all
liens, encumbrances and rights of refusal of any kind.
(c) This Agreement has
been duly authorized, validly executed and delivered on behalf of
the Company and is a valid and binding agreement and obligation of
the Company enforceable against the Company in accordance with its
terms, subject to limitations on enforcement by general principles
of equity and by bankruptcy or other laws affecting the enforcement
of creditors’ rights generally, and the Company has full
power and authority to execute and deliver the Agreement and the
other agreements and documents contemplated hereby and to perform
its obligations hereunder and thereunder.
(d) The Company has
complied and will comply with all applicable federal and state
securities laws in connection with the offer, issuance and delivery
of the Series A-1 Preferred hereunder.
8. Conditions
Precedent to the Obligation of the Company to Consummate the
Exchange and Other Transactions Contemplated by this
Agreement. The obligation hereunder of the Company to issue
and deliver the Series A-1 Preferred to each Stockholder,
consummate the Exchange and the other transactions contemplated by
this Agreement is subject to the satisfaction or waiver, at or
before the Closing Date, of each of the conditions set forth below.
These conditions are for the Company’s sole benefit and may
be waived by the Company at any time in its sole
discretion.
(a) Stockholders
representing not less than one-half (1/2) of the then
outstanding shares of Series A Preferred (“Required Holders”) shall have
executed and delivered this Agreement.
(b) The Stockholders
shall have performed, satisfied and complied in all material
respects with all covenants, agreements and conditions required by
this Agreement to be performed, satisfied or complied with by each
Stockholder at or prior to the Closing Date, including, but not
limited to delivering the Exchange Shares and Cancelled Warrants to
the Company.
(c) The representations
and warranties of each Stockholder shall be true and correct in all
material respects as of the date when made and as of the Closing
Date as though made at that time, except for representations and
warranties that are expressly made as of a particular date, which
shall be true and correct in all material respects as of such
date.
(d) No action or suit
shall have been instituted by any holder of Series A Preferred or
any other stockholder of the Company challenging the Exchange or
any other transaction contemplated by this Agreement.
9. Conditions
Precedent to the Obligation of the Stockholders to Consummate the
Exchange and Other Transactions Contemplated by this
Agreement. The obligation hereunder of the Stockholders to
accept the Series A-1 Preferred, consummate the Exchange and other
transactions contemplated by this Agreement is subject to the
satisfaction or waiver, at or before the Closing Date, of each of
the conditions set forth below. These conditions are for each
Stockholder’s sole benefit and may be waived by any
Stockholder at any time in their sole discretion.
(a) The Company shall
have executed and delivered this Agreement.
(b) The Company shall
have performed, satisfied and complied in all material respects
with all covenants, agreements and conditions required by the
Agreement to be performed, satisfied or complied with by the
Company at or prior to the Closing Date.
(c) Each of the
representations and warranties of the Company shall be true and
correct in all material respects as of the date when made and as of
the Closing Date as though made at that time, except for
representations and warranties that speak as of a particular date,
which shall be true and correct in all material respects as of such
date.
(d) The Required
Stockholders shall have executed and delivered this
Agreement.
10. Governing
Law; Consent to Jurisdiction. This Agreement shall be governed by
and interpreted in accordance with the laws of the State of
Delaware without giving effect conflicts of law principles that
would result in the application of the substantive laws of another
jurisdiction. Each of the parties consents to the exclusive
jurisdiction of the courts whose districts encompass any part of
the State of Delaware in connection with any dispute arising under
this Agreement and hereby waives, to the maximum extent permitted
by law, any objection, including any objection based on
forum non conveniens, to
the bringing of any such proceeding in such jurisdictions. Each
party waives its right to a trial by jury. Each party to this
Agreement irrevocably consents to the service of process in any
such proceeding by the mailing of copies thereof by registered or
certified mail, postage prepaid, to such party at its address set
forth herein. Nothing herein shall affect the right of any party to
serve process in any other manner permitted by law.
11. Entire
Agreement. This
Agreement constitutes the entire understanding and agreement of the
parties with respect to the subject matter hereof and supersedes
all prior and/or contemporaneous oral or written proposals or
agreements relating thereto all of which are merged herein. This
Agreement may not be amended or any provision hereof waived in
whole or in part, except by a written amendment signed by both of
the parties.
12. Counterparts.
This Agreement may be executed by facsimile signature and in
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same
instrument.
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IN WITNESS WHEREOF, this Agreement was
duly executed on the date first written above.
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IMAGEWARE SYSTEMS, INC.
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By:______________________________________
Name:Jonathan Morris
Title: Chief Financial Officer
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STOCKHOLDER:
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By:______________________________________
Name:
Title:
No. of
Exchange Shares to be delivered to the Company:
_______________
No. of
Series A-1 Preferred to be issued to the Stockholder:
_____________
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EXHIBIT
A
CERTIFICATE
OF DESIGNATIONS, PREFERENCES AND RIGHTS OF SERIES A-1 CONVERTIBLE
PREFERRED STOCK
OF
IMAGEWARE SYSTEMS, INC.
The undersigned,
the Chief Executive Officer of ImageWare Systems, Inc., a Delaware
corporation (the “Company”), does hereby certify
that, pursuant to the authority conferred upon the Board of
Directors by the Certificate of Incorporation of the Company, as
amended, the following resolution creating a series of Series A-1
Convertible Preferred Stock, was duly adopted on July 1,
2020.
RESOLVED, that pursuant to the authority
expressly granted to and vested in the Board of Directors of the
Company by provisions of the Certificate of Incorporation of the
Company, as amended (the “Certificate of Incorporation”),
there hereby is created out of the Company’s shares of
Preferred Stock, par value $0.01 per share (the “Preferred Stock”), authorized for
issuance in Section 4(a) of the Company’s Certificate of
Incorporation, a series of Preferred Stock, to be named
“Series A-1 Convertible Preferred Stock,” consisting of
Thirty One Thousand TwentyOne (31,021) shares, which series
shall have the following designations, powers, preferences and
relative and other special rights and the following qualifications,
limitations and restrictions:
1.
Designation and
Rank.
(a) The
designation of such series of the Preferred Stock shall be the
Series A-1 Convertible Preferred Stock, par value $0.01 per share
(the “Series A-1
Preferred”). The maximum number of shares of Series
A-1 Preferred shall be Thirty One Thousand Twenty One
(31,021) shares. The Series A-1 Preferred shall rank senior to the
Company’s common stock, par value $0.01 per share (the
“Common
Stock”), and except as provided in Section 1(b) below,
to all other classes and series of equity securities of the Company
which by their terms rank junior to the Series A-1 Preferred
(“Junior
Stock”). The Series A-1 Preferred shall rank
pari-passu to the Company’s Series A Convertible Preferred
Stock (“Series A
Preferred”).
(b) )
The Series A-1 Preferred shall be subordinate to and rank junior to
(i) the Company’s Series B Convertible Redeemable Preferred
Stock (“Series B
Preferred”); (ii) Series C Preferred; (iii) the Series
C-1 Convertible Preferred Stock (“Series C-1 Preferred”); and (iv)
any Preferred Stock created and issued upon or concurrent with the
consummation of a financing resulting in gross proceeds to the
Company of at least $10.0 million (“Qualified Financing”)
(“New
Preferred”), provided such Qualified Financing occurs
on or before December 31, 2020. In the event the Company
consummates a Qualified Financing, the Company may continue to
offer such New Preferred until December 31, 2020; provided, however, the stated value of
such New Preferred offered and sold by the Company in connection
with a Qualified Financing shall not exceed $15.0 million,
excluding New Preferred issued by the Company in exchange for
Series C Preferred or Series C-1 Preferred; and (v) all
indebtedness of the Company now or hereafter outstanding. The date
of original issuance of the Series A-1 Preferred is referred to
herein as the “Issuance
Date”.”
2.
Dividends.
(a)
Payment
of Dividends.
(i)
The
holders of record of shares of Series A-1 Preferred shall be
entitled to receive, out of any assets at the time legally
available therefor, cumulative dividends at the Specified Rate per
share per annum, commencing March 31, 2021, and payable quarterly
in arrears thereafter on each of March 31, June 30, September 30
and December 31 (each, a “Dividend Payment Date”), at the
option of the Company in cash or through the issuance of shares of
Common Stock. provided,
however, that should the
Company elect to pay dividends in cash, the Company may only use
proceeds received from positive cash flows resulting from
operations. In the event that the Company elects to pay dividends
in shares of Common Stock, the number of shares of Common Stock to
be issued to each applicable holder shall be determined by dividing
the total dividend then being paid to such holder in shares of
Common Stock by the Price Per Share (as defined below) as of the
applicable Dividend Payment Date, and rounding up to the nearest
whole share (the “Dividend
Shares”). As used herein, “Price Per Share” means, with
respect to a share of Common Stock, the VWAP (as defined below) for
the five (5) trading days immediately preceding the applicable
Dividend Payment Date.
“Specified Rate” means (i)
in the event the Company elects to pay a dividend payable on any
Dividend Payment Date in cash, the cumulative dividend rate of
eight percent (8%) of the stated Liquidation Preference Amount (as
defined in Section 4 hereof) per share per annum, and (ii) in the
event the Company elects to pay a dividend payable on any Dividend
Payment Date in Dividend Shares, the cumulative dividend rate of
ten percent (10%) of the stated Liquidation Preference Amount per
share per annum.
“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 (defined below), the daily volume weighted average
price of the Common Stock for such date on the Trading Market on
which the Common Stock is then listed or quoted as reported by
Bloomberg L.P. (based on a Trading Day from 9:30
a.m.
(New York City time) to 4:02 p.m. (New York City time)), (b) if the
Common Stock is not then listed or quoted for trading on OTCQB or
OTCQX and if prices for the Common Stock are then reported in the
“Pink Sheets” published by OTC Markets Group, Inc. (or
a similar organization or agency succeeding to its functions of
reporting prices), the daily mean between the closing bid and asked
quotations per share of the Common Stock so reported, or (c) 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 Purchasers of a majority in interest of the
Securities then outstanding and reasonably acceptable to the
Company, the fees and expenses of which shall be paid by the
Company.
“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 MKT, the
Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global
Select Market, the New York Stock Exchange, the OTCQX or OTCQB (or
any successors to any of the foregoing).
(ii)
The
Company will: (a) prepare and file with the Securities and Exchange
Commission (the “SEC”), within thirty (30)
days after the Issuance Date, a Form S3 (or, if such form is
not available to the Company, a Form S1) to register under
the Securities Act of 1933, as amended (the “Securities Act”), the
resale, by the holders of shares of Series A-1 Preferred, of any
Conversion Shares (as defined below) and Dividend Shares issuable
hereunder and not otherwise eligible for resale under Rule 144
promulgated under the Securities Act (“Rule 144”), without volume or
mannerofsale restrictions or current public information
requirements (the “Registration Statement”).
(b) use its best efforts to cause the Registration Statement to
become effective as soon as reasonably practicable after such
filing. (c) use its best efforts to cause the Registration
Statement to remain effective at all times thereafter until the
earlier of (i) the date as of which such holders of Series A-1
Preferred may sell all of such Conversion Shares and/or Dividend
Shares without restriction pursuant to Rule 144, without volume or
mannerofsale restrictions or current public information
requirements, as determined by counsel to the Company as set forth
in a written opinion letter to such effect, addressed and
acceptable to the Company’s transfer agent and the holders of
Series A-1 Preferred, or (ii) the date when all of the Conversion
Shares and Dividend Shares registered thereunder have been disposed
of by such holders of Series A-1 Preferred. and (d) prepare and
file with the SEC such amendments and supplements to the
Registration Statement (including documents filed pursuant to the
Securities Exchange Act of 1934, as amended, and incorporated by
reference into the Registration Statement) and the prospectus used
in connection therewith as may be necessary to keep such
Registration Statement effective for the period specified in this
sentence above.
(b)
In the
event of a Voluntary Conversion (as defined in Section 5(a) below),
all accrued but unpaid dividends on the Series A-1 Preferred being
converted shall be payable in cash or shares of Common Stock within
five (5) business days of such Voluntary Conversion Date (as
defined in Section 5(b)(i) below). Dividends on the Series A-1
Preferred are prior and in preference to any declaration or payment
of any distribution on any outstanding shares of Junior Stock. Such
dividends shall accrue on each share of Series A-1 Preferred from
day to day, whether or not earned or declared, so that if such
dividends with respect to any previous dividend period have not
been paid on, or declared and set apart for, all shares of Series
A-1 Preferred at the time outstanding, the deficiency shall be
fully paid on, or declared and set apart for, such shares on a pro
rata basis with all other equity securities of the Company ranking
on a parity with the Series A-1 Preferred as to the payment of
dividends before any distribution shall be paid on, or declared and
set apart for Junior Stock.
(c)
So long
as any shares of Series A-1 Preferred are outstanding, the Company
shall not declare, pay or set apart for payment any dividend or
make any distribution on any Junior Stock (other than dividends or
distributions payable in additional shares of Junior Stock), unless
at the time of such dividend or distribution the Company shall have
paid all accrued and unpaid dividends on the outstanding shares of
Series A-1 Preferred.
(d)
In the
event of a dissolution, liquidation or winding up of the Company,
all accrued and unpaid dividends on the Series A-1 Preferred shall
be payable on the day immediately preceding the date of payment of
the Liquidation Preference Amount payable to the holders of Series
A-1 Preferred, in accordance with Section 4 below. In the event of
the Company’s exercise of its optional redemption right set
forth in Section 7 below or conversion of Series A-1 Preferred in
accordance with Section 5 below, all accrued and unpaid dividends
on the Series A-1 Preferred shall be payable on the day immediately
preceding the date of such redemption or conversion, as the case
may be.
(e)
For
purposes hereof, unless the context otherwise requires,
“distribution” shall mean the transfer of cash or
property without consideration, whether by way of dividend or
otherwise, payable other than in shares of Common Stock or other
Junior securities, or the purchase or redemption of shares of the
Company (other than redemptions set forth in Section 7 below or
repurchases of Common Stock held by employees or consultants of the
Company upon termination of their employment or services pursuant
to agreements providing for such repurchase or upon the cashless
exercise of options held by employees or consultants) for cash or
property.
3.
Voting Rights.
(a)
On any
matter presented to the stockholders of the Company for their
action or consideration at any meeting of stockholders of the
Company (or by written consent of stockholders in lieu of meeting),
each holder of outstanding shares of Series A-1 Preferred shall be
entitled to cast the number of votes equal to the number of whole
shares of Common Stock into which the shares of Series A-1
Preferred held by such holder are convertible as of the record date
for determining stockholders entitled to vote on such matter.
Except as provided by law or by Section 3(b) below, holders of
Series A-1 Preferred shall vote together with the holders of Common
Stock, and with the holders of any other series of Preferred Stock
the terms of which so provide, as a single class.
(b)
So long
as shares of the Series A-1 Preferred representing at least fifty
percent (50%) of the total number of shares of Series A-1 Preferred
issued on the Issuance Date remain issued and outstanding, the
holders of record of the shares of Series A-1 Preferred,
exclusively and as a separate class, shall be entitled to elect two
directors of the Company (the “Series A Directors”). Any
director elected as provided in the preceding sentence may be
removed without cause by, and only by, the affirmative vote of the
holders of the shares of Series A-1 Preferred, given either at a
special meeting of such stockholders duly called for that purpose
or pursuant to a written consent of stockholders. The holders of
record of the shares of Common Stock and of any other class or
series of voting stock (including the Series A-1 Preferred),
exclusively and voting together as a single class, shall be
entitled to elect the balance of the total number of directors of
the Company. At any meeting held for the purpose of electing a
Series A Director, the presence in person or by proxy of the
holders of a majority of the outstanding shares of Series A-1
Preferred shall constitute a quorum for the purpose of electing
such director. A vacancy in any directorship filled by the holders
of Series A-1 Preferred shall be filled only by vote or written
consent in lieu of a meeting of the holders of Series A-1 Preferred
or by any remaining director or directors elected by the holders of
such class or series pursuant to this Section 3(b).
4.
Liquidation, Dissolution, WindingUp or
Distribution.
(a)
In the event of the
liquidation, dissolution, winding up of the affairs of the Company
or any other event that causes the Company to make a distribution
(as such term is used in Section 2(e) above), whether voluntary or
involuntary, the holders of shares of the Series A-1 Preferred then
outstanding shall be entitled to receive, out of the assets of the
Company available for distribution to its stockholders, an amount
equal to the greater of (i) $1,000 per share plus all accrued and
unpaid dividends, or (ii) such amount per share as would have been
payable had each such share been converted into Common Stock
pursuant to Section 5 immediately prior to such liquidation,
dissolution or winding up (the amount payable pursuant to the
foregoing is referred to herein as the “Liquidation Preference
Amount”) before any payment shall be made or any
assets distributed to the holders of the Common Stock or any other
Junior Stock. If the assets of the Company are not sufficient to
pay in full the Liquidation Preference Amount payable to the
holders of outstanding shares of Series A-1 Preferred and any other
series of Preferred Stock ranking on a parity, as to rights on
liquidation, dissolution or winding up, with the Series A-1
Preferred, then all of said assets will be distributed among the
holders of the Series A-1 Preferred and the holders of the other
Preferred Stock on a parity with the Series A-1 Preferred, if any,
ratably in accordance with the respective amounts that would be
payable on such shares if all amounts payable thereon were paid in
full. The liquidation payment with respect to each outstanding
fractional share of Series A-1 Preferred shall be equal to a
ratably proportionate amount of the liquidation payment with
respect to each whole outstanding share of Series A-1 Preferred.
All payments for which this Section 4(a) provides shall be in cash,
property (valued at its fair market value as determined reasonably
and in good faith by the Board of Directors of the Company) or a
combination thereof. provided, however, that no cash shall be paid to
holders of Junior Stock unless each holder of the outstanding
shares of Series A-1 Preferred has been paid in cash the full
Liquidation Preference Amount to which such holder is entitled, as
provided herein. After payment of the full Liquidation Preference
Amount to which each holder is entitled, such holders of shares of
Series A-1 Preferred will not be entitled to any further
participation as such in any distribution of the assets of the
Company.
(b)
Written
notice of any voluntary or involuntary liquidation, dissolution or
winding up of the affairs of the Company, stating a payment date
and the place where the distributable amounts shall be payable,
shall, to the extent possible, be given by mail, postage prepaid,
no less than twenty (20) days prior to the payment date stated
therein, to the holders of record of the Series A-1 Preferred at
their respective addresses as recorded on the books of the
Company.
5.
Conversion. The holders of Series A-1 Preferred shall have the
following conversion rights (the “Conversion Rights”):
(a)
Voluntary
Conversion. At any time on or after the Issuance Date, the holder
of any shares of Series A-1 Preferred may, at such holder's option,
elect to convert (a “Voluntary Conversion”) all or any
portion of the shares of Series A-1 Preferred held into a number of
fully paid and nonassessable shares of Common Stock equal to the
quotient of (i) the Liquidation Preference Amount of the shares of
Series A-1 Preferred being converted, divided by (ii) the
Conversion Price (as defined in Section 5(c) below) in effect as of
the date the holder delivers to the Company their notice of
election to convert (the “Conversion Shares”). In the event
the Company issues a notice of redemption pursuant to Section 7
hereof, the Conversion Rights of the shares designated for
redemption shall terminate at the close of business on the last
full day preceding the date fixed for redemption, unless the
redemption price is not paid on such redemption date, in which case
the Conversion Rights for such shares shall continue until the
redemption price is paid in full. In the event of such a
redemption, the Company shall provide to each holder of shares of
Series A-1 Preferred notice of such redemption or liquidation,
dissolution or winding up, which notice shall (i) be given at least
fifteen (15) days prior to the termination of the Conversion Rights
and (ii) state the amount per share of Series A-1 Preferred that
will be paid or distributed on such redemption or liquidation,
dissolution or winding up, as the case may be.
(b)
Mandatory
Conversion. If, at any time, (i) the Common Stock is registered
pursuant to Section 12(b) or (g) under the Exchange Act. (ii) there
are sufficient authorized but unissued shares (which have not
otherwise been reserved or committed for issuance) to permit the
issuance of Conversion Shares. (iii) upon issuance, the Conversion
Shares will be either (A) covered by an effective registration
statement under the Securities Act, which is then available for the
immediate resale of such Conversion Shares by the recipients
thereof, and the Board of Directors reasonably believes that such
effectiveness will continue uninterrupted for the foreseeable
future, or (B) freely tradable without restriction pursuant to Rule
144 promulgated under the Securities Act without volume or
mannerof sale restrictions or current public
information requirements, as determined by the counsel to the
Company as set forth in a written opinion letter to such effect,
addressed and acceptable to the Transfer Agent and the affected
holders. and (iv) the VWAP of the Common Stock is at least $1.00
per share (subject to appropriate adjustment in the event of any
stock dividend, stock split, combination or other similar
recapitalization affecting such shares) for twenty (20) consecutive
trading days, then the Company shall have the right, subject to the
terms and conditions of this Section 5, to convert onehalf of
the issued and outstanding shares of Series A-1 Preferred into
Conversion Shares, on a prorata basis among all holders of
Series A-1 Preferred at such time. Provided that the requirements
of subsections (i), (ii), (iii) and (iv) of the preceding sentence
are satisfied, and the VWAP of the Common Stock is at least $1.00
per share (subject to appropriate adjustment in the event of any
stock dividend, stock split, combination or other similar
recapitalization affecting such shares) for at least eighty (80)
consecutive trading days, then the Company shall have the right,
subject to the terms and conditions of this Section 5, to convert
all issued and outstanding shares of Series A-1 Preferred into
Conversion Shares.
(c)
Mechanics of Conversion. Conversions of Series A-1 Preferred shall
be conducted in the following manner:
(i)
Voluntary
Conversion. To convert Series A-1 Preferred into Conversion Shares
on any date (the “Voluntary
Conversion Date”), the holder thereof shall transmit
by facsimile (or otherwise deliver), for receipt on or prior to
5:00 p.m., New York time on such date, a copy of a fully executed
notice of conversion in the form attached hereto as Exhibit I (the
“Conversion
Notice”), to the Company. As soon as practicable
following such Voluntary Conversion Date, the holder shall
surrender to a common carrier for delivery to the Company the
original certificates representing the shares of Series A-1
Preferred being converted (or an indemnification undertaking with
respect to such shares in the case of their loss, theft or
destruction) (the “Preferred
Stock Certificates”) and the originally executed
Conversion Notice.
(ii)
Mandatory
Conversion. In the event the Company elects to convert outstanding
shares of Series A-1 Preferred into Conversion Shares in pursuant
to Section 5(b) above, the Company shall give written notice (the
“Mandatory Conversion
Notice”) to all holders of the Series A-1 Preferred of
its intention to require the conversion of the shares of Series A-1
Preferred identified therein. The Mandatory Conversion Notice shall
set forth the number of Series A-1 Preferred being converted, the
date on which such conversion shall be effective (the
“Mandatory Conversion
Date”), and shall be given to the holders of the
Series A-1 Preferred not less than fifteen (15) days prior to the
Mandatory Conversion Date. The Mandatory Conversion Notice shall be
delivered to each holder at the address as it appears on the stock
transfer books of the Company. In order to receive the Conversion
Shares into which the Series A-1 Preferred is convertible pursuant
to Section 5(b), each holder of the Series A-1 Preferred shall
surrender to the Company at the place designated in the Mandatory
Conversion Notice the certificates(s) representing the number of
shares of Series A-1 Preferred specified in the Mandatory
Conversion Notice. Upon the Mandatory Conversion Date, such
converted Series A-1 Preferred shall no longer be deemed to be
outstanding, and all rights of the holder with respect to such
shares shall immediately terminate, except the right to receive the
shares of Common Stock into which the Series A-1 Preferred is
convertible pursuant to Section 5(b).
Company's Response.
Upon receipt by the Company of a copy of the fully executed
Conversion Notice or upon giving a Mandatory Conversion Notice, the
Company or its designated transfer agent (the “Transfer Agent”), as applicable,
shall within five (5) business days following the date of receipt
by the Company of a copy of the fully executed Conversion Notice or
the Mandatory Conversion Date, as the case may be, issue and
deliver to the Depository Trust Company (“DTC”) account on each applicable
holder's behalf via the Deposit Withdrawal Agent Commission System
(“DWAC”) as
specified in the Conversion Notice, registered in the name of each
such holder or its designee, for the number of Conversion Shares to
which such holder shall be entitled. Notwithstanding the foregoing
to the contrary, the Company or its Transfer Agent shall only be
required to issue and deliver the Conversion Shares to DTC on a
holder's behalf via DWAC if (i) the Conversion Shares may be issued
without restrictive legends and (ii) the Company and the Transfer
Agent are participating in DTC through the DWAC system. If all of
the conditions set forth in clauses (i) and (ii) above are not
satisfied, the Company shall deliver physical certificates to each
such holder or its designee. If the number of shares of Series A
Preferred represented by the Preferred Stock Certificate(s)
submitted for conversion is greater than the number of shares of
Series A-1 Preferred being converted, then the Company shall, as
soon as practicable and in no event later than five (5) business
days after receipt of the Preferred Stock Certificate(s) and at the
Company's expense, issue and deliver to the applicable holder a new
Preferred Stock Certificate representing the number of shares of
Series A-1 Preferred not converted.
(iii)
Dispute
Resolution. In the case of a dispute as to the arithmetic
calculation of the number of Conversion Shares to be issued upon
conversion, the Company shall cause its Transfer Agent to promptly
issue to the holder the number of Conversion Shares that is not
disputed and shall submit the arithmetic calculations to the holder
via electronic mail or facsimile as soon as possible, but in no
event later than two (2) business days after receipt of such
holder's Conversion Notice. If such holder and the Company are
unable to agree upon the arithmetic calculation of the number of
Conversion Shares to be issued within two (2) business days of such
disputed arithmetic calculation being submitted to the holder, then
the Company shall, within two (2) business days, submit via
electronic mail or facsimile the disputed arithmetic calculation of
the number of Conversion Shares to be issued to the Company's
independent, outside accountant (the “Accountant”). The Company shall
cause the Accountant to perform the calculations and notify the
Company and the holder of the results no later than five (5)
business days from the time it receives the disputed calculations.
The Accountant's calculation shall be binding upon all parties
absent manifest error. The reasonable expenses of such Accountant
in making such determination shall be paid by the Company, in the
event the holder's calculation was correct, or by the holder, in
the event the Company's calculation was correct, or equally by the
Company and the holder in the event that neither the Company's or
the holder's calculation was correct. The period of time in which
the Company is required to effect conversions or redemptions under
this Certificate of Designations shall be tolled with respect to
the subject conversion or redemption pending resolution of any
dispute by the Company made in good faith and in accordance with
this Section 5(c)(iv).
(iv)
Record
Holder. The person or persons entitled to receive Conversion Shares
shall be treated for all purposes as the record holder or holders
of such shares of Series A-1 Preferred on the Conversion
Date.
(d)
Conversion Price.
(i)
The
term “Conversion Price” shall mean $0.65 per share,
subject to adjustment under Section 5(e) hereof.
(ii)
Notwithstanding the
foregoing to the contrary, if during any period (a
“BlackOut
Period”), a holder of Series A-1 Preferred is unable
to trade any Conversion Shares immediately because the Company has
informed such holder that an existing prospectus cannot be used at
that time in the sale or transfer of such Conversion Shares
(provided that such postponement, delay, suspension or fact that
the prospectus cannot be used is not due to factors solely within
the control of the holder of Series A-1 Preferred) such holder of
Series A-1 Preferred shall have the option but not the obligation
on any Conversion Date within ten (10) trading days following the
expiration of the BlackOut Period of using the Conversion
Price applicable on such Conversion Date or any Conversion Price
selected by such holder of Series A-1 Preferred that would have
been applicable had such Conversion Date been at any earlier time
during the BlackOut Period.
(e)
Adjustments of Conversion Price.
(i)
Adjustments for
Stock Splits and Combinations. If the Company shall at any time or
from time to time after the Issuance Date, effect a stock split of
its outstanding Common Stock, the Conversion Price shall be
proportionately decreased. If the Company shall at any time or from
time to time after the Issuance Date, combine its outstanding
shares of Common Stock, the Conversion Price shall be
proportionately increased. Any adjustments under this Section
5(e)(i) shall be effective at the close of business on the date the
stock split or combination becomes effective.
(ii)
Adjustments for
Certain Dividends and Distributions. If the Company shall at any
time or from time to time after the Issuance Date, make or issue or
set a record date for the determination of holders of Common Stock
entitled to receive a dividend or other distribution payable in
shares of Common Stock, then, and in each event, the Conversion
Price shall be decreased as of the time of such issuance or, in the
event such record date shall have been fixed, as of the close of
business on such record date, by multiplying the Conversion Price
then in effect by a fraction:
(1)
the
numerator of which shall be the total number of shares of Common
Stock issued and outstanding immediately prior to the time of such
issuance or the close of business on such record date.
and
(2)
the
denominator of which shall be the total number of shares of Common
Stock issued and outstanding immediately prior to the time of such
issuance or the close of business on such record date, plus the
number of shares of Common Stock issuable in payment of such
dividend or distribution. provided, however, that no such adjustment shall
be made if the holders of Series A-1 Preferred simultaneously
receive (i) a dividend or other distribution of shares of Common
Stock in a number equal to the number of shares of Common Stock as
they would have received if all outstanding shares of Series A-1
Preferred had been converted into Conversion Shares on the date of
such event or (ii) a dividend or other distribution of shares of
Series A-1 Preferred which are convertible, as of the date of such
event, into Conversion Shares as is equal to the number of
additional shares of Common Stock being issued with respect to each
share of Common Stock in such dividend or
distribution.
(iii)
Adjustment for
Other Dividends and Distributions. If the Company shall at any time
or from time to time after the Issuance Date, make or issue or set
a record date for the determination of holders of Common Stock
entitled to receive a dividend or other distribution payable in
securities of the Company other than shares of Common Stock, then,
and in each event, an appropriate revision to the applicable
Conversion Price shall be made and provision shall be made (by
adjustments of the Conversion Price or otherwise) so that the
holders of Series A-1 Preferred shall receive upon conversions
thereof, in addition to the Conversion Shares receivable thereon,
the number of securities of the Company which they would have
received had their Series A-1 Preferred been converted into
Conversion Shares on the date of such event and had thereafter,
during the period from the date of such event to and including the
Conversion Date, retained such securities (together with any
distributions payable thereon during such period), giving
application to all adjustments called for during such period under
this Section 5(e)(iii) with respect to the rights of the holders of
the Series A-1 Preferred. provided, however, that if such record date shall
have been fixed and such dividend is not fully paid or if such
distribution is not fully made on the date fixed therefor, the
Conversion Price shall be adjusted pursuant to this paragraph as of
the time of actual payment of such dividends or
distributions.
(iv)
Adjustments for
Reclassification, Exchange or Substitution. If the Conversion
Shares issuable upon conversion of the Series A-1 Preferred at any
time or from time to time after the Issuance Date shall be changed
to the same or different number of shares of any class or classes
of stock, whether by reclassification, exchange, substitution or
otherwise (other than by way of a stock split or combination of
shares or stock dividends provided for in Sections 5(e)(i), (ii)
and (iii), or a reorganization, merger, consolidation, or sale of
assets provided for in Section 5(e)(v)), then, and in each event,
an appropriate revision to the Conversion Price shall be made and
provisions shall be made (by adjustments of the Conversion Price or
otherwise) so that the holder of each share of Series A-1 Preferred
shall have the right thereafter to convert such share of Series A-1
Preferred into the kind and amount of shares of stock and other
securities receivable upon reclassification, exchange, substitution
or other change, by holders of the number of Conversion Shares into
which such share of Series A-1 Preferred might have been converted
immediately prior to such reclassification, exchange, substitution
or other change, all subject to further adjustment as provided
herein.
(v)
Adjustments for
Reorganization, Merger, Consolidation or Sales of Assets. If at any
time or from time to time after the Issuance Date there shall be a
capital reorganization of the Company (other than by way of a stock
split or combination of shares or stock dividends or distributions
provided for in Section 5(e)(i), (ii) and (iii), or a
reclassification, exchange or substitution of shares provided for
in Section 5(e)(iv)), or a merger or consolidation of the Company
with or into another corporation where the holders of outstanding
voting securities prior to such merger or consolidation do not own
over fifty percent (50%) of the outstanding voting securities of
the merged or consolidated entity, immediately after such merger or
consolidation, or the sale of all or substantially all of the
Company's properties or assets to any other person (an
“Organic
Change”), then as a part of such Organic Change an
appropriate revision to the Conversion Price shall be made if
necessary and provision shall be made if necessary (by adjustments
of the Conversion Price or otherwise) so that the holder of each
share of Series A-1 Preferred shall have the right thereafter to
convert such share of Series A-1 Preferred into the kind and amount
of shares of stock and other securities or property which such
holder would have had the right to receive had such holder
converted its shares of Series A-1 Preferred immediately prior to
the consummation of such Organic Change. In any such case,
appropriate adjustment shall be made in the application of the
provisions of this Section 5(e)(v) with respect to the rights of
the holders of the Series A-1 Preferred after the Organic Change to
the end that the provisions of this Section 5(e)(v) (including any
adjustment in the Conversion Price then in effect and the number of
shares of stock or other securities deliverable upon conversion of
the Series A-1 Preferred) shall be applied after that event in as
nearly an equivalent manner as may be practicable.
(vi)
Consideration for
Stock. In case any shares of Common Stock or Convertible Securities
other than the Series A-1 Preferred, or any rights or warrants or
options to purchase any such Common Stock or Convertible
Securities, shall be issued or sold:
(1)
in
connection with any merger or consolidation in which the Company is
the surviving corporation (other than any consolidation or merger
in which the previously outstanding shares of Common Stock of the
Company shall be changed to or exchanged for the stock or other
securities of another corporation), the amount of consideration
therefore shall be deemed to be the fair value, as determined
reasonably and in good faith by the Board of Directors of the
Company, of such portion of the assets and business of the
nonsurviving corporation as such Board may determine to be
attributable to such shares of Common Stock, Convertible
Securities, rights or warrants or options, as the case may be.
or
(2)
in the
event of any consolidation or merger of the Company in which the
Company is not the surviving corporation or in which the previously
outstanding shares of Common Stock of the Company shall be changed
into or exchanged for the stock or other securities of another
corporation, or in the event of any sale of all or substantially
all of the assets of the Company for stock or other securities of
any corporation, the Company shall be deemed to have issued a
number of shares of its Common Stock for stock or securities or
other property of the other corporation computed on the basis of
the actual exchange ratio on which the transaction was predicated,
and for a consideration equal to the fair market value on the date
of such transaction of all such stock or securities or other
property of the other corporation. If any such calculation results
in adjustment of the applicable Conversion Price, or the number of
shares of Conversion Shares issuable upon conversion of the Series
A-1 Preferred, the determination of the applicable Conversion Price
or the number of Conversion Shares issuable upon conversion of the
Series A-1 Preferred immediately prior to such merger,
consolidation or sale, shall be made after giving effect to such
adjustment of the number of Conversion Shares issuable upon
conversion of the Series A-1 Preferred. In the event any
consideration received by the Company for any securities consists
of property other than cash, the fair market value thereof at the
time of issuance or as otherwise applicable shall be as determined
in good faith by the Board of Directors of the Company. In the
event Common Stock is issued with other shares or securities or
other assets of the Company for consideration which covers both,
the consideration computed as provided in this Section 5(e)(vi)
shall be allocated among such securities and assets as determined
in good faith by the Board of Directors of the
Company.
(vii)
Record
Date. In case the Company shall take record of the holders of its
Common Stock or any other Preferred Stock for the purpose of
entitling them to subscribe for or purchase Common Stock or
Convertible Securities, then the date of the issue or sale of the
shares of Common Stock shall be deemed to be such record
date.
(1) No
Impairment. The Company shall not, by amendment of its Certificate
of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or
any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed
hereunder by the Company, but will at all times in good faith,
assist in the carrying out of all the provisions of this Section 5
and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the
holders of the Series A-1 Preferred against impairment. In the
event a holder shall elect to convert any shares of Series A-1
Preferred as provided herein, the Company cannot refuse conversion
based on any claim that such holder or any one associated or
affiliated with such holder has been engaged in any violation of
law, unless (i) an order from the Securities and Exchange
Commission prohibiting such conversion or (ii) an injunction from a
court, on notice, restraining and/or adjoining conversion of all or
of said shares of Series A-1 Preferred shall have been issued and
the Company posts a surety bond for the benefit of such holder in
an amount equal to 100% of the Liquidation Preference Amount of the
Series A-1 Preferred such holder has elected to convert, which bond
shall remain in effect until the completion of
arbitration/litigation of the dispute and the proceeds of which
shall be payable to such holder in the event it obtains judgment.
If the Company is the prevailing party in any legal action or other
legal proceeding relating to the Conversion Rights of the holders
of the Series A-1 Preferred, then the Company shall be entitled to
recover from the holders of Series A-1 Preferred reasonable
attorneys’ fees, costs and disbursements (in addition to any
other relief to which the Company may be entitled).
(b)
Certificates as to
Adjustments. Upon occurrence of each adjustment or readjustment of
the Conversion Price or number of Conversion Shares issuable upon
conversion of the Series A-1 Preferred pursuant to this Section 5,
the Company at its expense shall promptly compute such adjustment
or readjustment in accordance with the terms hereof and furnish to
each holder of such Series A-1 Preferred a certificate setting
forth such adjustment and readjustment, showing in detail the facts
upon which such adjustment or readjustment is based. The Company
shall, upon written request of the holder of such affected Series
A-1 Preferred, at any time, furnish or cause to be furnished to
such holder a like certificate setting forth such adjustments and
readjustments, the Conversion Price in effect at the time, and the
number of Conversion Shares and the amount, if any, of other
securities or property which at the time would be received upon the
conversion of a share of such Series A-1 Preferred. Notwithstanding
the foregoing, the Company shall not be obligated to deliver a
certificate unless such certificate would reflect an increase or
decrease of at least one percent of such adjusted
amount.
(c)
Issue
Taxes. The Company shall pay any and all issue, stock transfer,
documentary stamp and other taxes, excluding federal, state or
local income taxes, that may be payable in respect of any issue or
delivery of the Series A-1 Preferred Stock, Conversion Shares,
Dividend Shares or shares of Common Stock or other securities
issued on account of Series A-1 Preferred Stock pursuant hereto or
certificates representing such shares or securities. provided, however, that the Company shall not be
obligated to pay any transfer taxes resulting from any transfer of
Conversion Shares requested by any holder to a person other than
such holder, but only to the extent such transfer taxes exceed the
transfer taxes that would have been payable had the Conversion
Shares been delivered to such holder.
(d)
Notices. All
notices and other communications hereunder shall be in writing and
shall be deemed given if delivered personally, by electronic mail,
by facsimile or three (3) business days following being mailed by
certified or registered mail, postage prepaid, returnreceipt
requested, addressed to the holder of record at its address
appearing on the books of the Company. The Company will give
written notice to each holder of Series A-1 Preferred at least
thirty (30) days prior to the date on which the Company closes its
books or takes a record (i) with respect to any dividend or
distribution upon the Common Stock, (ii) with respect to any pro
rata subscription offer to holders of Common Stock or (iii) for
determining rights to vote with respect to any Organic Change,
dissolution, liquidation or windingup and in no event shall
such notice be provided to such holder prior to such information
being made known to the public. The Company will also give written
notice to each holder of Series A-1 Preferred at least twenty (20)
days prior to the date on which any Organic Change, dissolution,
liquidation or windingup will take place and in no event
shall such notice be provided to such holder prior to such
information being made known to the public.
(e)
Fractional Shares.
No fractional shares of Common Stock shall be issued upon
conversion of the Series A Preferred. In lieu of any fractional
shares to which the holder would otherwise be entitled, the Company
shall pay cash equal to the product of such fraction multiplied by
the average of the closing sales price of the Common Stock, as
reported on the applicable Trading Market for the five (5)
consecutive trading days immediately preceding the Voluntary
Conversion Date.
(f)
Reservation of
Common Stock. The Company shall, so long as any shares of Series
A-1 Preferred are outstanding, reserve and keep available out of
its authorized and unissued Common Stock, solely for the purpose of
effecting the conversion of the Series A-1 Preferred, such number
of shares of Common Stock as shall from time to time be sufficient
to effect the conversion of all of the Series A-1 Preferred then
outstanding. provided that the number of shares of Common Stock so
reserved shall at no time be less than 100% of the number of shares
of Common Stock for which the shares of Series A-1 Preferred are at
any time convertible. The initial number of shares of Common Stock
reserved as Conversion Shares and each increase in the number of
shares so reserved shall be allocated pro rata among the holders of
the Series A-1 Preferred based on the number of shares of Series
A-1 Preferred held by each holder of record at the time of issuance
of the Series A-1 Preferred or increase in the number of reserved
shares, as the case may be. In the event a holder shall sell or
otherwise transfer any of such holder's shares of Series A-1
Preferred, each transferee shall be allocated a pro rata portion of
the number of reserved shares of Common Stock reserved for such
transferor. Any shares of Common Stock reserved and which remain
allocated to any person or entity which does not hold any shares of
Series A-1 Preferred shall be allocated to the remaining holders of
Series A-1 Preferred, pro rata based on the number of shares of
Series A-1 Preferred then held by such holder.
(g)
Retirement of
Series A-1 Preferred. Conversion of shares of Series A-1 Preferred
shall be deemed to have been effected on the applicable Conversion
Date. Upon conversion of only a portion of the number of shares of
Series A-1 Preferred represented by a certificate surrendered for
conversion, the Company shall issue and deliver to such holder, at
the expense of the Company, a new certificate covering the number
of shares of Series A-1 Preferred representing the unconverted
portion of the certificate so surrendered as required by Section
5(c)(i) or Section 5(c)(ii), as the case may be.
(h)
Regulatory
Compliance. If any shares of Common Stock to be reserved as
Conversion Shares require registration or listing with or approval
of any governmental authority, stock exchange or other regulatory
body under any federal or state law or regulation or otherwise
before such shares may be validly issued or delivered upon
conversion, the Company shall, at its sole cost and expense, in
good faith and as expeditiously as possible, endeavor to secure
such registration, listing or approval, as the case may
be.
(i)
Validity of Shares.
All Series A-1 Preferred Stock, Conversion Shares, Dividend Shares
and shares of Common Stock or other securities issued on account of
Series A-1 Preferred Stock pursuant hereto or certificates
representing such shares or securities will, upon issuance by the
Company, be validly issued, fully paid and nonassessable and free
from all taxes, liens or charges with respect thereto.
6.
No
Preemptive Rights. Except as provided in Section 5 hereof, no
holder of the Series A-1 Preferred shall be entitled to rights to
subscribe for, purchase or receive any part of any new or
additional shares of any class, whether now or hereinafter
authorized, or of bonds or debentures, or other evidences of
indebtedness convertible into or exchangeable for shares of any
class, but all such new or additional shares of any class, or any
bond, debentures or other evidences of indebtedness convertible
into or exchangeable for shares, may be issued and disposed of by
the Board of Directors on such terms and for such consideration (to
the extent permitted by law), and to such person or persons as the
Board of Directors in their absolute discretion may deem
advisable.
7.
Redemption.
(a)
Redemption Option
Upon Change of Control. In addition to any other rights of the
Company or the holders of Series A-1 Preferred contained herein,
simultaneous with the occurrence of a Change of Control (as defined
below), the Company, at its option, shall have the right to redeem
all or a portion of the outstanding Series A-1 Preferred in cash at
a price per share of Series A-1 Preferred equal to 115% of the
Liquidation Preference Amount plus all accrued and unpaid dividends
(the “Change of Control
Redemption Price”). Notwithstanding the foregoing to
the contrary, the Company may effect a redemption pursuant to this
Section 7(a) only if the Company is in material compliance with the
terms and conditions of this Certificate of
Designations.
(b)
“Change of
Control”. A “Change of
Control” shall be deemed to have occurred at such time
as a third party not affiliated with the Company on the Issuance
Date or any holders of the Series A-1 Preferred shall have
acquired, in one or a series of related transactions, equity
securities of the Company representing more than fifty percent 50%
of the outstanding voting securities of the Company.
(c)
Mechanics of
Redemption at Option of Company Upon Change of Control. At any time
within ten (10) days prior to the consummation of a Change of
Control transaction, the Company may elect to redeem, effective
immediately prior to the consummation of such Change of Control,
all of the Series A-1 Preferred then outstanding by delivering
written notice thereof via facsimile and overnight courier
(“Notice of Redemption at
Option of Company Upon Change of Control”) to each
holder of Series A-1 Preferred, which Notice of Redemption at
Option of Company Upon Change of Control shall indicate (i) the
number of shares of Series A-1 Preferred that the Company is
electing to redeem from such holder and (ii) the Change of Control
Redemption Price, as calculated pursuant to Section 7(a) above. The
Change of Control Redemption Price shall be paid in cash in
accordance with Section 7(a) of this Certificate of Designations.
On or prior to the Change of Control, the holders of Series A-1
Preferred shall surrender to the Company the certificate or
certificates representing such shares, in the manner and at the
place designated in the Notice of Redemption at Option of Company
Upon Change of Control. The Company shall deliver the Change of
Control Redemption Price immediately prior to or simultaneously
with the consummation of the Change of Control. provided that a
holder's Preferred Stock Certificates shall have been so delivered
to the Company (or an indemnification undertaking with respect to
such Preferred Stock Certificates in the event of their loss, theft
or destruction). From and after the Change of Control transaction,
unless there shall have been a default in payment of the Change of
Control Redemption Price, all rights of the holders of Series A-1
Preferred as a holder of such Series A-1 Preferred (except the
right to receive the Change of Control Redemption Price without
interest upon surrender of their certificate or certificates) shall
cease with respect to any redeemed shares of Series A-1 Preferred,
and such shares shall not thereafter be transferred on the books of
the Company or be deemed to be outstanding for any purpose
whatsoever. Notwithstanding the foregoing to the contrary, nothing
contained herein shall limit a holder’s ability to convert
its shares of Series A-1 Preferred following the receipt of the
Notice of Redemption at Option of Company Upon Change of Control
and prior to the consummation of the Change of Control
transaction.
8.
Inability to Fully
Convert.
(a)
Holder's Option if
Company Cannot Fully Convert. In addition to any other right that a
holder of Series A Preferred Stock might have, if, upon the
Company's receipt of a Conversion Notice, the Company cannot issue
Conversion Shares issuable pursuant to such Conversion Notice
because the Company (x) does not have a sufficient number of shares
of Common Stock authorized and available or (y) is otherwise
prohibited by applicable law or by the rules or regulations of any
stock exchange, interdealer quotation system or other
selfregulatory organization with jurisdiction over the
Company or its securities from issuing all of the Conversion Shares
to be issued to a holder of Series A-1 Preferred pursuant to a
Conversion Notice, then the Company shall issue as many Conversion
Shares as it is able to issue in accordance with such holder's
Conversion Notice and pursuant to Section 5(c)(iii) above and, with
respect to the unconverted Series A-1 Preferred, the holder, solely
at such holder's option, can elect, within five (5) business days
after receipt of notice from the Company thereof to:
(i)
if the
Company's inability to fully convert Series A-1 Preferred is
pursuant to Section 8(a)(y) above, require the Company to issue
restricted shares of Common Stock in accordance with such holder's
Conversion Notice and pursuant to Section 5(c) (iii)
above. or
(ii) void
its Conversion Notice with respect to all or a portion of the
Conversion Shares covered by such Conversion Notice and retain or
have returned, as the case may be, the shares of Series A-1
Preferred that were to be converted pursuant to such holder's
Conversion Notice (provided that a holder's voiding its Conversion
Notice shall not effect the Company's obligations to make any
payments which have accrued prior to the date of such
notice).
(b)
Mechanics of
Fulfilling Holder's Election. The Company shall promptly send via
electronic mail or facsimile to a holder of Series A-1 Preferred,
upon receipt of electronic mail or facsimile copy of a Conversion
Notice from such holder which cannot be fully satisfied as
described in Section 8(a) above, a notice of the Company's
inability to fully satisfy such holder's Conversion Notice (the
“Inability to Fully Convert
Notice”). Such Inability to Fully Convert Notice shall
indicate (i) the reason why the Company is unable to fully satisfy
such holder's Conversion Notice, and (ii) the number of Series A-1
Preferred which cannot be converted. Such holder shall notify the
Company of its election pursuant to Section 8(a) above by
delivering written notice via facsimile to the Company
(“Notice in Response to
Inability to Convert”).
(c)
ProRata
Conversion and Redemption. In the event the Company receives a
Conversion Notice from more than one holder of Series A-1 Preferred
on the same day and the Company can convert and redeem some, but
not all, of the Series A-1 Preferred pursuant to this Section 8,
the Company shall convert and redeem from each holder of Series A-1
Preferred electing to have Series A-1 Preferred converted and
redeemed at such time an amount equal to such holder's
prorata amount (based on the number shares of Series A-1
Preferred held by such holder relative to the number shares of
Series A-1 Preferred outstanding) of all shares of Series A-1
Preferred being converted and redeemed at such time.
9.
Protective
Provisions. So long as shares of the Series A-1 Preferred
representing at least fifty percent (50%) of the total number of
shares of Series A-1 Preferred issued on the Issuance Date remain
issued and outstanding, the Company shall not, without obtaining
the approval (by vote or written consent) of the holders of more
than fifty percent (50%) of the issued and outstanding shares of
Series A-1 Preferred:
(a)
create,
or authorize the creation of, any class or series, or issue, or
authorize the issuance of, any shares of capital stock that ranks
senior to on a parity with the Series A-1 Preferred, other than
Series C-1 Preferred and New Preferred.
(b)
sell,
lease or otherwise dispose of intellectual property rights owned by
or licensed to the Company or any subsidiary of the Company.
and
(c)
create,
or authorize the creation of, or incur, or authorize the incurrence
of, any Indebtedness, other than Permitted Indebtedness, or permit
any subsidiary to take any such action.
“Indebtedness” means (x) any
liabilities for borrowed money or amounts owed in excess of
$500,000 (other than trade accounts payable incurred in the
ordinary course of business) and (y) all guaranties, endorsements
and other contingent obligations in respect of indebtedness of
others, whether or not the same are or should be reflected in the
Company's consolidated balance sheet (or the notes thereto), except
guaranties by endorsement of negotiable instruments for deposit or
collection or similar transactions in the ordinary course of
business.
“Permitted Indebtedness” means (x)
all indebtedness of the Company outstanding on the Issuance Date or
thereafter that does not constitute Indebtedness for purposes of
this Section 9. and (y) monies borrowed under credit lines of the
Company existing on the Issuance Date in an amount not to exceed
$6.0 million.
10.
Vote to Change the Terms
of or Issue Preferred Stock. The affirmative vote at a
meeting duly called for such purpose, or the written consent
without a meeting, of the holders of not less than twothirds
(2/3rds) of the then outstanding shares of Series A-1 Preferred,
shall be required for any change to this Certificate of
Designations or the Company's Certificate of Incorporation which
would amend, alter, change or repeal, or otherwise adversely
affect, any of the powers, designations, preferences and rights of
the Series A-1 Preferred.
11.
Lost or Stolen
Certificates. Upon receipt by the Company of evidence
satisfactory to the Company of the loss, theft, destruction or
mutilation of any Preferred Stock Certificates representing the
shares of Series A-1 Preferred, and, in the case of loss, theft or
destruction, of an indemnification undertaking by the holder to the
Company (in form and substance satisfactory to the Company) and, in
the case of mutilation, upon surrender and cancellation of the
Preferred Stock Certificate(s), the Company shall execute and
deliver new Preferred Stock Certificate(s) of like tenor and date.
provided, however, the Company shall not be obligated to
reissue Preferred Stock Certificates if the holder
contemporaneously requests the Company to convert such shares of
Series A-1 Preferred into Common Stock and complies with its
obligations to issue Conversion Shares set forth
herein.
12.
Remedies,
Characterizations, Other Obligations, Breaches and Injunctive
Relief. The remedies provided in this Certificate of
Designations shall be cumulative and in addition to all other
remedies available under this Certificate of Designations, at law
or in equity (including a decree of specific performance and/or
other injunctive relief), no remedy contained herein shall be
deemed a waiver of compliance with the provisions giving rise to
such remedy and nothing herein shall limit a holder's right to
pursue actual damages for any failure by the Company to comply with
the terms of this Certificate of Designations. Amounts set forth or
provided for herein with respect to payments, conversion and the
like (and the computation thereof) shall be the amounts to be
received by the holder thereof and shall not, except as expressly
provided herein, be subject to any other obligation of the Company
(or the performance thereof). The Company acknowledges that a
breach by it of its obligations hereunder will cause irreparable
harm to the holders of the Series A-1 Preferred and that the remedy
at law for any such breach may be inadequate. The Company therefore
agrees that, in the event of any such breach, the holders of the
Series A-1 Preferred shall be entitled, in addition to all other
available remedies, to an injunction restraining any breach or the
Series A-1 Preferred holders' reasonable perception of a threatened
breach by the Company of the provisions of this Certificate of
Designations, without the necessity of showing economic loss and
without any bond or other security being required.
13.
Specific Shall Not
Limit General. Construction. No specific provision contained
in this Certificate of Designations shall limit or modify any more
general provision contained herein. This Certificate of Designation
shall be deemed to be jointly drafted by the Company and all
initial purchasers of the Series A-1 Preferred and shall not be
construed against any person as the drafter hereof.
14.
Failure or Indulgence Not
Waiver. No failure or delay on the part of a holder of
Series A-1 Preferred in the exercise of any power, right or
privilege hereunder shall operate as a waiver thereof, nor shall
any single or partial exercise of any such power, right or
privilege preclude other or further exercise thereof or of any
other right, power or privilege.
IN WITNESS WHEREOF,
the undersigned has executed and subscribed this Certificate and
does affirm the foregoing as true this 14th day of July,
2020.
IMAGEWARE SYSTEMS,
INC.
By: /s/ Jonathan
Morris
Name: Jonathan
Morris
Title: Chief
Financial Officer
IMAGEWARE SYSTEMS,
INC.
CONVERSION
NOTICE
Reference is made
to the Certificate of Designations, Preferences and Rights of the
Series A-1 Convertible Preferred Stock (“Series A-1 Preferred”) of
ImageWare Systems, Inc. (the “Certificate of Designations”). In
accordance with and pursuant to the Certificate of Designations,
the undersigned hereby elects to convert the number of shares of
Series A-1 Preferred, par value $0.01 per share (the
“Preferred
Shares”), of ImageWare Systems, Inc., a Delaware
corporation (the “Company”), indicated below into
shares of Common Stock, par value $0.01 per share (the
“Common
Stock”), of the Company, by tendering the stock
certificate(s) representing the share(s) of Series A-1 Preferred
specified below as of the date specified below.
Date of
Conversion:
Number of shares of
Series A-1 Preferred to be converted:
Stock certificate
no(s). of Series A-1 Preferred to be converted:
Please confirm the
following information: Conversion Price:
Number of shares of
Common Stock to be issued:
Number of shares of
Common Stock beneficially owned or deemed beneficially owned by the
Holder on the Date of Conversion:
Please issue the
Common Stock into which the Preferred Shares are being converted
and, if applicable, any check drawn on an account of the Company in
the following name and to the following address:
Issue
to:
Facsimile
Number:
Name of bank/broker
due to receive the underlying Common Stock:
Bank/broker's
fourdigit “DTC” participant number (obtained from
the receiving bank/broker):
Authorization:
By:
Title:
Dated:
EXHIBIT B
CERTIFICATE
OF DESIGNATIONS, PREFERENCES AND RIGHTS OF SERIES C-1 CONVERTIBLE
PREFERRED STOCK
OF
IMAGEWARE SYSTEMS, INC.
The
undersigned, the Chief Executive Officer of ImageWare Systems,
Inc., a Delaware corporation (the “Company”), does hereby certify
that, pursuant to the authority conferred upon the Board of
Directors by the Certificate of Incorporation of the Company, as
amended, the following resolution creating a series of Series C-1
Convertible Preferred Stock, was duly adopted on July _,
2020.
RESOLVED, that pursuant to the authority
expressly granted to and vested in the Board of Directors of the
Company by provisions of the Certificate of Incorporation of the
Company, as amended (the “Certificate of Incorporation”), there hereby is
created out of the Company’s shares of Preferred Stock, par
value $0.01 per share (the “Preferred Stock”), authorized for
issuance in Section 4(a) of the Company’s Certificate of
Incorporation, a series of Preferred Stock, to be named
“Series C-1 Convertible Preferred Stock,” consisting of
One Thousand (1,000) shares, which series shall have the following
designations, powers, preferences and relative andother special
rights and the following qualifications, limitations and
restrictions:
1. Designation and
Rank.
(a) The designation of
such series of the Preferred Stock shall be the Series C-1
Convertible Preferred Stock, par value $0.01 per share (the
“Series C-1
Preferred”). The maximum numberof shares of Series C-
1 Preferred shall be One Thousand (1,000) shares. The Series C-1
Preferred shall rank senior to the Company’s common stock,
par value $0.01 per share (the “Common Stock”), Series A
Convertible Preferred Stock (the “Series A Preferred”),
Series A-1 Convertible Preferred Stock (“Series A-1 Preferred”),
and,except as provided in Section 1(b) below, toall other classes
and series of equity securities ofthe Company which by their terms
donot expressly provide that such equity securities ranksenior to
or on parity withthe Series C-1 Preferred (collectively,
“Junior
Stock”). The Series C-1 Preferred shall rank
pari-passu to the Company’s Series C Convertible Preferred
Stock (“Series C
Preferred”).
(b) The Series C-1
Preferred shall rank junior to (i) the Company’s Series B
Convertible Redeemable Preferred Stock (“Series B Preferred”) solely with
respect to (y) dividend rights of the Series B Preferred on the
terms expressly provided in paragraph i of Section 4(d) of the
Certificate of Incorporation as in effect as of the Issuance Date
(as defined below) and (z) distribution rights of the Series B
Preferred upon a liquidation, dissolution or winding up provided in
paragraph ii of Section 4(d) of the Certificate of Incorporation as
in effect as of the Issuance Date;provided, however, that nothing in the Series B
Preferred shall have any effect on the rights of the Series C-1
Preferred with respect to rights on redemption or conversion; and
(ii) all indebtedness of the Company now or hereafter outstanding.
The date of original issuance of the Series C-1 Preferred is
referred to herein as the “Issuance Date”.
2. Dividends.
(a) Payment of
Dividends.
(i) The holders of
record of shares of Series C-1 Preferred shall be entitled to
receive, and the Company shall be required to declare and pay, out
of any assets at the time legally available therefor, cumulative
dividends at the Specified Rate per share per annum, commencing
March 31, 2021, and payable quarterly in arrears on each of March
31, June 30, September 30 andDecember 31 (each, a
“Dividend Payment
Date”), at theoption of the Company in cash or through
the issuance of shares of Common Stock. Dividends on each
outstanding share of Series C-1 Preferred will accrue whether or
not such dividends have been declared and whether or not there are
profits, surplus or other funds of the Company legally available
for the payment of dividends. In the event that the Company elects
(or is deemed to have elected) to pay dividends in shares of Common
Stock, the number of shares of Common Stock to be issued to each
applicable holder shall be determined by dividing the total
dividend then being paid to such holder in shares of
Common Stock by the Price Per Share (as defined below) as of
theapplicable Dividend Payment Date, and rounding up to the nearest
whole share (the “Dividend
Shares”). With respect to any Dividend Payment Date,
to the extent that dividends on the shares of Series C-1 Preferred
arenot declared and paid in cash on any such Dividend Payment Date,
the Company shall be deemed to have elected to declare and pay
dividends with respect to such Dividend Payment Date through the
issuance of Dividend Shares on such Dividend Payment Date. If the
Company shall elect to declare andpay dividends hereunder in a form
that consists of a combination of cash and an issuance of Dividend
Shares, each holder of the Series C-1 Preferred shall receive the
same proportion of cash and Dividend Shares. As used herein,
“Price Per
Share” means, with respect to a share of Common Stock,
the VWAP (as defined below) for the five (5) Trading Days (as
defined below) immediately preceding the applicable Dividend
Payment Date.
“Specified Rate” means (i)
in the event the Company elects to pay a dividend payable on any
Dividend Payment Date in cash, the cumulative dividend rate of
eight percent (8%) of the Stated Value (as defined in Section 4
hereof) per share perannum, and (ii) in the event theCompany
elects, or is deemed to have elected, to pay a dividend payable on
any Dividend Payment Date in Dividend Shares, the cumulative
dividend rate of ten percent (10%) of the Stated Value per share
per annum.
“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 (defined below),
the daily volume weighted average price of the Common Stock for
such date on the Trading Market on which the Common Stock is then
listed or quoted as reported by Bloomberg L.P. (based on a Trading
Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City
time)), (b) if the Common Stock is not then listed or quoted for
trading on any Trading Market and if prices for the Common Stock
are then reported on the OTC Bulletin Board or in the “Pink
Sheets” published by OTC Markets Group, Inc. (or a similar
organization or agency succeeding to its functions of reporting
prices), the daily mean between the closing bid and asked
quotations per share of the Common Stock so reported, or (c) 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 Majority Holders (as defined below) and reasonably acceptable
to the Company, the fees and expenses of which shall be paid by the
Company.
“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 MKT, the
Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global
Select Market, the New York Stock Exchange, the OTCQX or OTCQB (or
any successors to any of the foregoing).
“Trading Day” means a day on which
the principal Trading Market is open for trading.
“Majority
Holders” means, as of any date of determination, the
holder or holders of more than fifty
percent
(50%) of the total number of issued and outstanding shares of
Series C-1 Preferred as of such date.
(ii) The
Company will: (a) prepare andfile with the Securities and Exchange
Commission (the “SEC”), within thirty (30)
days after the Issuance Date, a Form S3 (or, if such form is not
available to the Company, a Form S1) to register under the
Securities Act of 1933, as amended (the “Securities Act”), the
resale, by the holders of shares of Series C-1 Preferred, of any
Conversion Shares (as defined below) and Dividend Shares issuable
hereunder and nototherwise eligible for resale under Rule
144promulgated under the Securities Act (“Rule 144”), without volume or
manner of sale restrictions or current public information
requirements (the “Registration Statement”).
(b) use its best efforts to cause the Registration Statement to
become effective as soon as practicableafter such filing. (c) use
its best efforts to cause the Registration Statement to remain
effective at alltimes thereafter until the earlier of (i) the date
as of which such holders of Series C-1 Preferred may sell all of
such Conversion Shares and/or Dividend Shares without restriction
pursuant to Rule 144, without volume or manner of sale restrictions
or current public information requirements, and (ii) the date when
all of the Conversion Shares and Dividend Shares registered
thereunder have been disposed of by such holders of Series C-1
Preferred. and (d) prepare and file with the SEC such amendments
and supplements to the Registration Statement (including documents
filed pursuant to the Securities Exchange Actof 1934, as amended
(the “Exchange
Act”), and incorporated by reference into the
Registration Statement) and the prospectus used in connection
therewith as may be necessary to keep such Registration Statement
effective for the period specified in this sentence
above.
(b)
In the event of a Voluntary Conversion (as defined in Section 5(a)
below) or Mandatory Conversion (as defined in Section 5(b) below),
all accrued but unpaid dividends on the Series C-1 Preferred being
converted shall be payable, at the election of the Company, in cash
or shares of Common Stock within five (5) business days after the
Voluntary Conversion Date (as defined in Section 5(c)(i) below) or
Mandatory Conversion Date (as defined in Section 5(c)(ii) below),
as applicable.
(c) So long as any
shares of Series C-1 Preferred are outstanding, the Company shall
not, and shall not permit any subsidiary of the Company or any
other Person (as defined below) directly or indirectly controlled
by the Company to, declare, pay or set apart for payment any
dividend or make any distribution (as defined below) on or with
respect to the Common Stock, the Series A Preferred or any other
Junior Stock, except that (i) the Company may pay dividends on the
Series A Preferred at the “Specified Rate” (as defined
in the Certificate of Designations, Preferences and Rights of
Series A Convertible Preferred Stock of ImageWare Systems, Inc.
(the “Series A
Certificate”) as in effect on the Issuance Date) on
the terms expressly set forth in Section 2 of the Series A
Certificate as in effect on the Issuance Date, and (ii) the Company
may pay dividends on the Common Stock solely in shares of Common
Stock. “Person”
means an individual, partnership, corporation, unincorporated
organization, joint stock company, limited liability company,
association, trust, joint venture or any other entity, or a
governmental agency or political subdivision thereof.
(d) In the event of a
Liquidation Event (as defined below) or a Deemed Liquidation Event
(as defined below), all accrued and unpaid dividends on the Series
C-1 Preferred shall be payable in cash on the day immediately
preceding the date of payment of the Liquidation Preference Amount
payable to the holders of Series C- 1 Preferred, in accordance with
Section 4 below. In the event of theCompany’s exercise of its
optional redemption right set forth in Section 7(b) below, all
accrued and unpaid dividends on the Series C-1 Preferred shall be
payable in cash on the day immediately preceding the date of such
redemption.
(e) For purposes
hereof, unless the context otherwise requires,
“distribution” shall mean the transfer of cash,
property, securities, indebtedness, obligations or any other thing
of value, whether by way of dividend or otherwise, on or with
respect to, or the purchase, redemption, retirement or other
acquisition of, shares of the Company (other than repurchases of
Common Stock held by employees or consultants of the Company upon
termination of their employment or services pursuant to agreements
providing for such repurchase or upon the cashless exercise of
options held by employees or consultants) for cash, property,
securities, indebtedness, obligations or any other thing of
value.
3. Voting Rights.
On any
matter presented to the stockholders of the Company for their
action or consideration at any meeting of stockholders of the
Company (or by written consent of stockholders in lieu of meeting),
each holder of outstanding shares of Series C-1 Preferred shall be
entitled to cast the number of votes equal to the number of whole
shares of Common Stock into which the shares of Series C-1
Preferred held by such holder are convertible as of the record date
for determining stockholders entitled to vote on such matter, or if
no record date is established, at the date such vote is taken or
any written consent of stockholders is solicited. Except as
provided by law or by Sections 9 and 10 below, holders of Series
C-1 Preferred shall vote together with the holders of Common Stock,
and with the holders of any other series of Preferred Stock the
terms of which so provide, as a single class.
4. Liquidation, Dissolution, Winding Up
or Distribution.
(a) In the event of the
liquidation, dissolution, winding up of the affairs of the Company
or any other event that causes the Company to make a distribution
(as such term is used in Section 2(e) above), whether voluntary or
involuntary (each, a “Liquidation Event”) or a Deemed
Liquidation Event, the holders of shares of the Series C-1
Preferred then outstanding shall be entitled to receive, out of the
assets of the Company available for distribution to its
stockholders, before any payment shall be made or any assets
distributed to the holders of the Common Stock or any other Junior
Stock, an amount equal to the greater of (i) $10,000 per share
(such amount, subject to appropriate adjustment in the event of any
stock split, combination or other similar recapitalization
affecting the shares of Series C-1 Preferred, the
“Stated Value”)
plus all accrued and unpaid dividends, and (ii) such amount per
share as would have been payable had each such share been converted
into Common Stock pursuant to Section 5 immediately prior to such
Liquidation Event or Deemed Liquidation Event (the amount payable
pursuant to the foregoing is
referred to herein as the “Liquidation Preference
Amount”). If the assets of the Company are not
sufficient to pay in full the Liquidation Preference Amount payable
to the holders of outstanding shares of Series C-1 Preferred and
any other series of Preferred Stock ranking on a parity with the
Series C-1 Preferred as to distribution rights upon a Liquidation
Event or Deemed Liquidation Event (“Parity Stock”), then all of said
assets will be distributed among the holders of the Series C-1
Preferred and the holders of the Parity Stock, if any, ratably in
accordance with the respective amounts that would be payable on
such shares if all amounts payable thereon were paid in full. The
payment with respect to each outstanding fractional share of Series
C-1 Preferred shall be equal to a ratably proportionate amount of
the payment with respect to each whole outstanding share of Series
C-1 Preferred. All payments for which this Section 4(a) provides
shall be in cash, property (valued at its fair market value as
determined reasonably and in good faith by the Board of Directors
of the Company) or a combination thereof. provided, that, in the case of a
payment consisting of a combination of cash and property, the
holders of the Series C-1 Preferred and the holders of any Parity
Stock shall each receive the same proportion of cash and property;
and provided, further, that no cash shall be paid to
holders of Junior Stock unless each holder of the outstanding
shares of Series C-1 Preferred has been paid in cash the full
Liquidation Preference Amount to which such holder is entitled, as
provided herein. After payment of the full Liquidation Preference
Amount to which each holder is entitled, such holders of shares of
Series C-1 Preferred will not be entitled to any further
participation on account of such shares in any distribution of the
assets of the Company.
(b) Written notice of
any Liquidation Event or Deemed Liquidation Event, stating a
payment date and the place where the distributable amounts shall be
payable, shall, to the extent possible, be given by mail, postage
prepaid, no less than twenty (20) days prior to the payment date
stated therein, to the holders of record of the Series C-1
Preferred at their respective addresses as recorded on the books of
the Company.
(c) Nothing contained
in this Section 4 shall limit the right of the holder of any shares
of Series C-1 Preferred to convert such shares of Series C-1
Preferred pursuant to and in accordance with Section 5
hereof.
5. Conversion.
(a) Voluntary
Conversion. At any time on or after the Issuance Date, the holder
of any shares of Series C-1 Preferred may, at such holder's option,
elect to convert (a “Voluntary Conversion”) all or any
portion of the shares of Series C-1 Preferred held by such holder
into a number of fully paid and nonassessable shares of Common
Stock equal to the quotient of (i)the Stated Value of the shares of
Series C-1 Preferred being converted, divided by
(ii)
the Conversion Price (as defined in Section 5(d) below) in effect
as of the date the holder delivers to the Company its notice of
election to convert (the “Conversion Shares”). In the event
the Company issues a notice of redemption pursuant to Section 7
hereof, the rights of the holders of Series C-1 Preferred to elect
a Voluntary Conversion pursuant to this Section 5(a)
(“Conversion
Rights”) shall terminate at the close of business on
the last full day preceding the date fixed for redemption, unless
the redemption price is not paid on such redemption date, in which
case the Conversion Rights for all shares of Series C-1 Preferred
shall continue until the redemption price is paid in full. In the
event of such a redemption, the Company shall provide to each
holder of shares of Series C-1 Preferred notice of such redemption,
which notice shall (i) be given at least fifteen (15) days prior to
the termination of the Conversion Rights and (ii) state the amount
per share of Series C-1 Preferred that will be paid or distributed
on such redemption.
(b) Mandatory
Conversion. If (i) the Common Stock is registered pursuant to
Section 12(b) or (g) under the Exchange Act. (ii) there are
sufficient authorized but unissued shares of Common Stock (which
have not otherwise been reserved or committed for issuance) to
permit the issuance of all Conversion Shares issuable upon
conversion of all outstanding shares of Series C-1 Preferred. (iii)
upon issuance, the Conversion Shares will be either
(A)
covered by an effective registration statement under the Securities
Act, which is then available for the immediate resale of such
Conversion Shares by the recipients thereof, and the Board of
Directors reasonably believes that such effectivenesswill continue
uninterrupted for the foreseeable future, or (B) freely tradable
without restriction pursuant to Rule 144 promulgated under the
Securities Act without volume or manner of sale restrictions or
current public information requirements, as determined by the
counsel to the Company as set forth in a written opinion letter to
such effect, addressed and acceptable tothe Transfer Agent and the
affected holders. and (iv) the VWAP of the Common Stock is at least
$1.77 per share (subject to appropriate adjustment in the event of
any stock dividend, stock split, combination or other similar
recapitalization affecting such shares) for a period of twenty (20)
consecutive Trading Days ending on the Trading Day immediately
preceding the day on which the Company delivers the Mandatory
Conversion Notice (as defined below), then the Company shall have
the right, subject to the terms and conditions
of
this
Section 5, to convert (a “Mandatory Conversion”) all, but
not less than all, of theissued and outstanding shares of Series
C-1 Preferred into Conversion Shares.
(c) Mechanics of
Conversion. Conversions of Series C-1 Preferred shall be conducted
in the following manner:
(i) Voluntary
Conversion. To convert Series C-1 Preferred into Conversion Shares
on any date (the “Voluntary
Conversion Date”), the holder thereof shall transmit
by facsimile or electronic mail (or otherwise deliver), for receipt
on or prior to 5:00 p.m., New York time on such date, a copy of a
fully executed notice of conversion in the form attached hereto as
Exhibit I (the “Conversion
Notice”), to the Company. As soon as practicable
following such Voluntary Conversion Date, the holder shall
surrender to a common carrier for delivery to the Company the
original certificates representing the shares of Series C-1
Preferred being converted (or an indemnification undertaking with
respect to such shares in the case of their loss, theft or
destruction) (the “Preferred
Stock Certificates”) and the originally executed
Conversion Notice.
(ii) Mandatory
Conversion. In the event the Company elects to convert outstanding
shares of Series C-1 Preferred into Conversion Shares pursuant to
Section 5(b) above, the Company shall give written notice (the
“Mandatory Conversion
Notice”) to all holders of the Series C-1 Preferred of
its intention to require the conversion of allof the shares of
Series C-1 Preferred. The Mandatory Conversion Notice shall set
forth the number of Series C-1 Preferred being converted (which
shall be all, and not less than all, issued and outstanding shares
of Series C-1 Preferred), the date on which such conversion shall
be effective (the “Mandatory
Conversion Date”), and shall be given to the holders
of the Series C-1 Preferred not less than fifteen (15) days prior
to the Mandatory Conversion Date. The Mandatory Conversion Notice
shall be delivered to each holder at its address as it appears on
the stock transfer books of the Company. In order to receive the
Conversion Shares into which the Series C-1 Preferred is
convertible pursuant to Section 5(b), each holder of the Series C-1
Preferred shall surrender to the Company at the place designated in
the Mandatory Conversion Notice the Preferred Stock Certificates(s)
representing the shares of Series C-1 Preferred owned by such
holder. Upon the Mandatory Conversion Date, such converted Series
C-1 Preferred shall no longer be deemed to be outstanding, and
allrights of the holder with respect to such shares shall
immediately terminate, except the right to receive (x) the shares
of Common Stock into which the shares of Series C- 1 Preferred are
convertible pursuant to Section 5(b), (y) all accrued and unpaid
dividends on such shares of Series C- 1 Preferred pursuant to
Section 2(b), and (z) any cash in lieu of a fractional share of
Common Stock pursuant to Section 2(j).
(iii) Company's
Response. Upon receipt by the Company of a copy of the fully
executed Conversion Notice or upon giving a Mandatory Conversion
Notice, the Company or its designated transfer agent (the
“Transfer
Agent”), as applicable, shall within five (5) business
days following the date of receipt by the Company of a copy of the
fully executed Conversion Notice or the Mandatory Conversion Date,
as the case may be, issue and deliver to the Depository Trust
Company (“DTC”)
account on each applicable holder's behalf via the Deposit
Withdrawal Agent Commission System (“DWAC”) as specified in the
Conversion Notice or, in the case of a Mandatory Conversion, as
otherwise provided to the Company or the Transfer Agent by (or on
behalf of) a holder, registered in the name of each such holder or
its designee, forthe number of Conversion Shares to which such
holder shall be entitled. Notwithstanding the foregoing to the
contrary, the Company or its Transfer Agent shall only be required
to issue and deliver the Conversion Shares to DTC on a holder's
behalf via DWAC if (i) the Conversion Shares may be issued without
restrictive legends and (ii) the Company and the Transfer Agent are
participating in DTC through the DWAC system. If anyof the
conditions set forth in clauses (i) and (ii) above are not
satisfied, the Company shall deliver physical certificates to each
such holder or its designee. In the case of a Voluntary Conversion,
if the number of shares of Series C-1 Preferred represented by the
Preferred Stock Certificate(s) submitted for conversion is greater
than the number of shares of Series C-1 Preferred being converted,
then the Company shall, as soon as practicable and in no event
later than five (5) business days after receipt of the Preferred
Stock Certificate(s) and at the Company's expense, issue and
deliver to the applicable holder a new Preferred Stock Certificate
representing the number of shares of Series C-1 Preferred not
converted. For purposes of this Section 5(c)(iii), the term
“Conversion Shares” shall include any shares of Common
Stock which the Company elects toissue, pursuant to Section 2(b),
as payment of accrued and unpaid dividends on shares of Series C-1
Preferred being converted.
(iv) Dispute
Resolution. In the case of a dispute as to the arithmetic
calculation of the number of Conversion Shares to be issued upon
conversion, the Company shall cause its Transfer Agent to promptly
issue to the holder the
number of Conversion Shares that is not disputed and shall submit
the arithmetic calculations to the holder via electronic mail or
facsimile as soon as possible, but in no event later than two (2)
business days after receipt of such holder's Conversion Notice. If
such holder and the Company are unable to agree upon the arithmetic
calculationof the number of Conversion Shares to be issued within
two (2) business days of such disputed arithmetic calculation being
submitted to the holder, then the Company shall, within two (2)
business days, submit via electronic mail or facsimile the disputed
arithmetic calculation of the number of Conversion Shares to be
issued to the Company's independent, outside accountant (the
“Accountant”).
The Company shall cause the Accountant to perform the calculations
and notify the Company and the holder of the results no later than
five (5) business days from the time it receives the disputed
calculations. The Accountant's calculation shall be binding upon
all parties absent manifest error. The reasonable expenses of such
Accountant in making such determination shall be paid by the
Company. The period of time in which the Company is required to
effect conversions under this Certificate of Designations shall be
tolled with respect to the subject conversion pending resolution of
anydispute by the Company made in good faith and in accordance with
this Section 5(c)(iv).
(v) Record Holder. The
person or persons entitled to receive Conversion Shares shall be
treated for all purposes as the record holder or holders of such
Conversion Shares as of the close of business on the Voluntary
Conversion Date or Mandatory Conversion Date, as
applicable.
(d) Conversion
Price.
(i) The term
“Conversion
Price” shall mean $0.59 per share, subject to
adjustment under Section 5(e) hereof.
(ii) Notwithstanding
the foregoing to the contrary, if during any period (a
“Blackout
Period”), a holder of Series C-1 Preferred is unable
to trade any Conversion Shares immediately because the Company has
informed such holder that an existing prospectus cannot be used at
that time in the sale or transfer of such Conversion Shares
(provided that such postponement, delay, suspension or fact that
the prospectus cannot be used is not due to factors solely within
the control of the holder of Series C-1 Preferred) such holder of
Series C-1 Preferred shall have the option but not the obligation
on any Voluntary Conversion Date or Mandatory Conversion Date, as
applicable, within ten (10) Trading Days following the expiration
of the Blackout Period of using the Conversion Price applicable on
such Voluntary Conversion Date or Mandatory Conversion Date, as
applicable, or any Conversion Price selected by such holder of
Series C-1 Preferred that would have been applicable had such
Voluntary Conversion Date or Mandatory Conversion Date, as
applicable, been at any earlier time during the Blackout
Period.
(e) Adjustments of
Conversion Price.
(i) Adjustments for
Stock Splits and Combinations. If the Company shall at any time or
from time to time after the Issuance Date, effect a stock split of
its outstanding Common Stock, the Conversion Price shall be
proportionately decreased. If the Company shall at any time or from
time to time after the Issuance Date, combine its outstanding
shares of Common Stock, the Conversion Price shall be
proportionately increased. Any adjustments under this Section
5(e)(i) shall be effective at the close of business on the date the
stock split or combination becomes effective.
(ii) Adjustments
for Certain Dividends and Distributions. If the Company shall at
any time or from time to time after the Issuance Date, make or
issue or set a record date for the determination of holders of
Common Stock entitled to receive a dividend or other distribution
payable in shares of Common Stock, then, and in each event, the
Conversion Price shall be decreased as of the time of such issuance
or,in the event such record date shall have been fixed, as of the
close of business on such record date, by multiplying the
Conversion Price then in effect by a fraction:
(1) the numerator of
which shall be the total number of shares of Common Stock issued
and outstanding immediately prior to the time of such issuance or
the close of business on such record date. and
(2) the denominator of
which shall be the total number of shares of Common Stock issued
and outstanding immediately prior to the time of such issuance or
the close of business on such record date, plus the number of
shares of Common Stock issuable in payment of such dividend or
distribution. provided,
however, that no such
adjustment shall be made if the holders of Series C-1 Preferred
simultaneously receive a dividend or other distribution of shares
of Common Stock in a number equal to the number of shares of Common
Stock as they would have received if all outstanding shares of
Series C-1 Preferred had been converted into Conversion Shares on
the date of such event.
(iii) Adjustment
for Other Dividends and Distributions. If, subject to Section 2(c),
the Company shall at any time or from time to time after the
Issuance Date, make or issue or set a record date for the
determination of holders of Common Stock entitled to receive a
dividend or other distribution payable in securities, cash,
indebtedness, or other property (other than a dividend or
distribution of shares of Common Stock referred to inSection
5(e)(ii)), then, and in each event, on the same date on which
holders of Common Stock receive such dividend or other
distribution,the holders of Series C-1 Preferred shall receive the
number or amount of securities, cash, indebtedness, or other
property which they would have received had their Series C-1
Preferred been converted into Conversion Shares immediately prior
to such event.
(iv) Adjustments
for Reclassification, Exchange or Substitution. If the Conversion
Shares issuable upon conversion of the Series C-1 Preferred at any
time or from time to time after the Issuance Date shall be changed
to the same or different number of shares of any class or classes
of stock, whether by reclassification, exchange, substitution or
otherwise (other than by way of a stock split or combination of
shares or stock dividends provided for in Sections 5(e)(i) and(ii),
an Organic Change (as defined below) provided for in Section
5(e)(v) or a Liquidation Event or Deemed Liquidation Event), then,
and in each event, an appropriate revision to the Conversion Price
shall be made and provisions shall be made (by adjustments of the
Conversion Price or otherwise) so that the holder of each share of
Series C-1 Preferred shall have the right thereafter to convert
such share of Series C-1 Preferred into the kind and amount of
shares of stock and other securities receivable upon such
reclassification, exchange, substitution or other change, by
holders of the number of Conversion Shares into which such share of
Series C-1 Preferred might have been converted immediately prior to
such reclassification, exchange, substitution or other change, all
subject to further adjustment as provided herein.
(v) Adjustments for
Organic Changes. If at any time or from time to time after the
Issuance Date there shall be a capital reorganization, merger or
consolidation of the Company (other than by way of a stock split or
combination of shares or stock dividends or distributions provided
for in Sections 5(e)(i) and (ii), or a reclassification, exchange,
substitution or change of shares provided for in Section 5(e)(iv),
or a Liquidation Event or Deemed Liquidation Event), and the
Company is not thesurviving, acquiring or resulting entity in
anysuch merger, consolidation or other reorganization (any such
merger, consolidation or other reorganization, a
“Organic
Change”), then lawful and adequate provision shall be
made so that each share of Series C-1 Preferred outstanding
immediately prior to the consummation or effectiveness of such
Organic Change shall be converted into, or exchanged for, a
security of the surviving, acquiring or resulting entity of such
Organic Change having preferences, rights, and privileges that are
equivalent to such share of Series C-1 Preferred (any such
security, a “New
Security”), except that inlieu of being able to
convert into shares of Common Stock or shares of common stock of
the surviving, acquiring or resulting entity of such Organic
Change, the holders of such New Securities shall thereafter be
entitled to receive upon conversion of such New Securities the
shares of capital stock, securities, cash, assets or other property
to which a holder of the number of shares of Common Stock into
which a share of Series C-1 Preferred would have been convertible
immediately prior to such Organic Change would have been entitled
to receive upon the consummation or effectiveness of such Organic
Change. In any such case, appropriate provisions shall be made with
respect to the rights of the holders of such New Security to the
end that the provisions of this Section 5 (including, without
limitation, provisions for adjustment of the Conversion Price)
shall thereafter be applicable, as nearly as may be, with respect
to any shares of capital stock, securities, cash, assets or other
property to be deliverable thereafter upon the conversion of such
New Security.
(f) No Impairment. The
Company shall not, by amendment of its Certificate of Incorporation
or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or
performance of any of the terms tobe observed or performed
hereunder by the Company, but will at all times in good faith,
assist in the carrying out of all the provisions of this Section 5
and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the
holders of the Series C-1 Preferred against impairment. In the
event a holder shall elect to convert any shares of Series C-1
Preferred as provided herein, the Company cannot refuse conversion
based on any claim that such
holder or anyone associated or affiliated with such holder has been
engaged in any violation of law, unless (i) an order from the
Securities and Exchange Commission prohibiting such conversion or
(ii) an injunction from a court, on notice, restraining and/or
enjoining conversion of all or of said shares of Series C-1
Preferred shall have been issued and the Company posts a surety
bond for the benefit of such holder in an amount equal to 100% of
the Liquidation Preference Amount of the Series C-1 Preferred such
holder has elected to convert, which bond shall remain in effect
until the completion of arbitration/litigation of the dispute and
the proceeds of which shall be payable to such holder in the event
it obtains judgment.
(g) Certificates as to
Adjustments. Upon occurrence of each adjustment or readjustment of
the Conversion Price or number of Conversion Shares issuable upon
conversion of the Series C-1 Preferred pursuant to this Section 5,
the Company at its expense shall promptly compute such adjustment
or readjustment in accordance with the terms hereof and furnish to
each holder of such Series C-1 Preferred a certificate setting
forth such adjustment and readjustment, showing in detail the facts
upon which such adjustment or readjustment is based. The Company
shall, upon written request of any holder of Series C-1 Preferred
at any time, furnish or cause to be furnished to such holder a like
certificate setting forth such adjustments and readjustments, the
Conversion Price in effect at the time, and the number of
Conversion Shares and the amount, if any, of other shares of
capital stock, securities, cash, assets or other property which at
the time would be received upon the conversion of a share of Series
C-1 Preferred.
(h) Issue Taxes. The
Company shall pay any and all issue, stock transfer, documentary
stamp and other taxes, excluding federal, state or local income
taxes, that may be payable in respect of any issue or delivery of
the Series C-1 Preferred, Conversion Shares, Dividend Shares or
shares of Common Stock or other securities issued on account of
Series C-1 Preferred pursuant hereto or certificates representing
such shares or securities. provided, however, that the Company shall not be
obligated to pay any transfer taxes resulting from any transfer of
Conversion Shares requested by any holder to a person other than
such holder, but only to the extent such transfer taxes exceed the
transfer taxes that would have been payable had the Conversion
Shares been delivered to such holder.
(i) Notices. All
notices and other communications hereunder shall be in writing and
shall be deemed given if delivered personally, by electronic mail,
by facsimile or three (3) business days following being mailed by
certified or registered mail, postage prepaid, return receipt
requested, addressed to theholder of record at its address
appearing on the books of the Company. The Company will give
written notice to each holder of Series C- 1 Preferred at least
thirty (30) days prior to the date on which the Company closes its
books or takes a record (i) with respect to any dividend or
distribution upon the Common Stock, (ii) with respect to any pro
rata subscription offer to holders of Common Stock or (iii) for
determining rights to vote with respect to any Organic Change,
Liquidation Event or Change of Control and in no event shall such
notice be provided to such holder prior to such information being
made known to the public. The Company will also give written notice
to each holder of Series C-1 Preferred at least twenty (20) days
prior to the date on which any Organic Change, Liquidation Event or
Change of Control will take place and in no event shall such notice
be provided to such holder prior to such information being made
known to the public.
(j) Fractional Shares.
No fractional shares of Common Stock shall be issued upon
conversion of the Series C-1 Preferred. In lieu of any fractional
shares to which the holder would otherwise be entitled, the Company
shall pay cash equal to the product of such fraction multiplied by
the average of the closing sales price of the Common Stock, as
reported on the applicable Trading Market for the five (5)
consecutive Trading Days immediately preceding the Voluntary
Conversion Date or Mandatory Conversion Date, as
applicable.
(k) Reservation of
Common Stock. The Company shall, so long as any shares of Series
C-1 Preferred are outstanding, reserve and keep available out of
its authorized and unissued Common Stock, solely for the purpose of
effecting the conversion of the Series C-1 Preferred and paying
dividends on the Series C-1 Preferred (assuming the Company elects
to pay all dividends in shares of Common Stock), such number of
shares of Common Stock as shall from time to time be sufficient to
effect the conversion of all of the Series C-1 Preferred then
outstanding and payment of dividends hereunder (assuming the
Company elects to pay all dividends in shares of Common Stock).
provided that the number of
shares of Common Stock so reserved shall at no time be less than
100% of the number of shares of Common Stock for which the shares
of Series C-1 Preferred are at any time convertible. The initial
number of shares of Common Stock reserved as Conversion Shares
andeach increase in the number of shares so reserved shall be
allocated pro rata among the holders of the Series C-1 Preferred
based on the number of shares of Series C-1 Preferred held by each
holder of record at the time of issuance of the Series C-1
Preferred or increase in the number of reserved shares, as the case
may be.In the event a holder shall sell or otherwise transfer any
of such holder's shares of Series C-1 Preferred, each transferee
shall be allocated a pro rata portion of the number of reserved
shares of Common Stock reserved for such transferor. Any shares of
Common Stock reserved and which remain allocated to any Person
which does not hold any shares of Series C-1 Preferred shall be
allocated to the remaining holders of Series C-1 Preferred, pro
rata based on the number of shares of Series C-1 Preferred then
held by such holder. If at any time the number of authorized but
unissued shares of Common Stock shall not be sufficient to effect
the conversion of all then-outstanding shares of Series C-1
Preferred and payment of dividends on the Series C-1 Preferred
(assuming the Company elects to pay all dividends in shares of
Common Stock), the Company shall take such corporate action as may
be necessary to increase its authorized but unissued shares of
Common Stock to such number of shares as shall be sufficient for
such purposes.
(l) Retirement of
Series C-1 Preferred. Conversion of shares of Series C-1 Preferred
shall be deemed to have been effected on the Voluntary Conversion
Date or Mandatory Conversion Date, as applicable. In the case of a
Voluntary Conversion, upon conversion of only a portion of the
number of shares of Series C-1 Preferred represented by a
certificate surrendered for conversion, the Company shall issue and
deliver to such holder, at the expense of the Company, a new
certificate covering the number of shares of Series C-1 Preferred
representing the unconverted portion of the certificate so
surrendered as required by Section 5(c)(i).
(m) Regulatory
Compliance. If any shares of Common Stock to be reserved as
Conversion Shares or Dividend Shares require registration or
listing with or approval of any governmental authority, stock
exchange or other regulatory body under any federal or state law or
regulation or otherwise before such shares may be validly issued or
delivered upon conversion, the Company shall, at its sole cost and
expense, in good faith and as expeditiously as possible, endeavor
to secure such registration, listing or approval, as the case may
be.
(n) Validity of Shares.
All Series C-1 Preferred, Conversion Shares, Dividend Shares and
shares of Common Stock or other securities issued on account of
Series C-1 Preferred pursuant hereto or certificates representing
such shares or securities will, upon issuance by the Company, be
validly issued, fully paid and nonassessable and free from all
taxes, liens or charges with respect thereto.
6. No Preemptive
Rights. Except as provided in Section 5 hereof, no holder of the
Series C-1 Preferred shall be entitled to rights to subscribe for,
purchase or receive any part of any new or additional shares of any
class, whether now or hereinafter authorized, or of bonds or
debentures, or other evidences of indebtedness convertible into or
exchangeable for shares of any class, but all such new or
additional shares of any class, or any bond, debentures or other
evidences of indebtedness convertible into or exchangeable for
shares, may be issued and disposed of by the Board of Directors on
such terms (subject to Section 9 hereof) and for such consideration
(to the extent permitted by law), and to such person or persons as
the Board of Directors in their absolute discretion may deem
advisable.
7. Redemption.
(a) Redemption at
Option of Holders. At any time and from time to time from and after
the third (3rd) anniversary of the Issuance Date, or in the event
of the consummation of a Change of Control (as defined in Section
7(c) below), if any shares of Series C-1 Preferred are outstanding,
then each holder of Series C-1 Preferred shall have the right (the
“Holder Redemption
Right”), at such holder’s option, to require the
Company to redeem all or any portion of such holder’s shares
of Series C-1 Preferred at the Liquidation Preference Amount per
share of Series C-1 Preferred, plus an amount equal to all accrued
but unpaid dividends, if any, on the Holder Redemption Date (as
defined below) (such price, the “Holder Redemption Price”), which
Holder Redemption Price shall be paid in cash.
(b) Redemption Option
Upon Change of Control. In addition to any other rights of the
Company or the holders of Series C-1Preferred contained herein,
simultaneous with the occurrence of a Change ofControl, the
Company, at its option, shall have the right to redeem all, but not
less than all, of the outstanding Series C-1 Preferred in cash at a
price per share of Series C-1 Preferred equal to 115% of the
LiquidationPreference Amount plus all accrued and unpaid dividends,
if any, as of the date of delivery of the Notice of Redemption at
Option of Company Upon Change of Control (as defined below) (the
“Change of Control
Redemption Price”). Notwithstanding the foregoing to
the contrary, the Company may effect a redemption pursuant to this
Section 7(b) only if the Company is in material compliance with the
terms and conditions of this Certificate of
Designations.
Issuance
Date:
(c) “Change
of Control”. “Change
of Control” shall mean anyof the following occurring
after the
(i)
a sale, conveyance or disposition of all or substantially all of
the assets of the Company and any direct and/or indirect
subsidiaries of the Company, taken as a whole (including by or
through the sale, conveyance or other disposition of the capital
stock of, or reorganization, merger, share exchange, consolidation
or other business combination involving, any direct and/or indirect
subsidiary or subsidiaries of the Company, if substantially all of
theassets of the Company and any direct and/or indirect
subsidiaries of the Company, taken as a whole, are held by such
subsidiary or subsidiaries);
(ii) a
reorganization, merger, share exchange, consolidation or other
business combination of the Company with or into any other entity
in which transaction the Persons who hold more than fifty percent
(50%) of the total voting power of the voting securities of the
Company (or, if the Company is not the acquiring, resulting or
surviving entity in such transaction, such acquiring, resulting or
surviving entity) immediately after such transaction are not
Persons who, immediately prior to such transaction, held more than
fifty percent (50%) of the total voting power of the voting
securities of the Company; or
(iii) an
acquisition (in one transaction or a series of related
transactions) of voting securities ofthe Company representing in
the aggregate more than fifty percent (50%) of the total voting
power of the voting securities of the Company (after giving effect
to such acquisition) by any Person or “group” (as such
term is used in Section 13(d)(3) of the Exchange Act) of
Persons;provided,
however, that any
transaction pursuant to which Neal Goldman, on his own and not part
of a group, acquires more than fifty percent (50%) of the total
voting power of the voting securities of the Company (after giving
effect to such acquisition) shall not constitute a “Change of
Control” hereunder.
Any
Change of Control shall be deemed a Liquidation Event hereunder (a
“Deemed Liquidation
Event”), unless such treatment is waived in writing by
the Majority Holders, and in the event of any such Deemed
Liquidation Event, each holder of Series C-1 Preferred shall
receive payment of the Liquidation Preference Amount in accordance
with Section 4.
(d) Mechanics of
Redemption at Option of Company Upon Change of Control. At any time
within ten (10) days prior to the consummation of a Change of
Control, theCompany may elect to redeem, effective immediately
prior to the consummation of such Change of Control, all (but not
less than all) of the Series C-1 Preferred then outstanding by
delivering written notice thereof viafacsimile and overnight
courier (“Notice of
Redemption at Option of Company Upon Change of
Control”) to each holder of Series C-1 Preferred,
which Notice of Redemption at Option of Company Upon Change of
Control shall indicate (i) the number of shares of Series C-1
Preferred that the Company is electing to redeem from such holder
(which shall not be less than all of the shares of Series C-1
Preferred owned by such holder) and (ii) the Change of Control
Redemption Price, as calculated pursuant to Section 7(b) above. The
Change of Control Redemption Price shall be paid in cash in
accordance with Section 7(b) of this Certificate of Designations.
On or prior to the Change of Control, the holders of Series C-1
Preferred shall surrender to the Company the certificate or
certificates representing such shares, in the manner and at the
place designated in the Notice of Redemption at Option of Company
Upon Change of Control. The Company shall deliver the Change of
Control Redemption Price immediately prior to or simultaneously
with the consummation of the Change of Control. provided that a holder's Preferred
Stock Certificates shall have been so delivered to the Company (or
an indemnification undertaking with respect to such Preferred Stock
Certificates in the event of their loss, theft or destruction).
From andafter the Change of Control transaction, unless there shall
have been a default in payment of the Change of Control Redemption
Price, all rights of the holders of Series C-1 Preferred as a
holder of such Series C-1 Preferred (except the right to receive
the Change of Control Redemption Price without interest upon
surrender of their certificate or certificates) shall cease with
respect to shares of Series C-1 Preferred, and such shares shall
not thereafter be transferred on the books of the Company or be
deemed to be outstanding for any purpose whatsoever.
Notwithstanding the foregoing to the contrary, nothing contained
herein shall limit a holder’s ability to convert its shares
of Series C-1 Preferred following the receipt of the Notice of
Redemption at Option of Company Upon Change of Control and prior to
the consummation of the Change of Control transaction.
(e) Mechanics of
Redemption at Option of Holders Upon Change of Control. From and
after the third (3rd) anniversary of the Issuance Date or at any
time within ten (10) days prior to, or at any time after,
the consummation of a
Change of Control, any holder of Series C-1 Preferred may elect to
exercise its Holder Redemption Right by delivering a written notice
(a “Holder Redemption
Notice”) to the Company of such election. The date
upon which such Holder Redemption Notice is delivered to the
Company is the “Holder
Redemption Notice Date”. The Company shall, on the
date proposed in the Holder Redemption Notice for the redemption of
the Series C-1 Preferred (which date shall not be less than ten
(10) days after the Holder Redemption Notice Date, except that if a
Holder Redemption Notice is delivered in connection with and prior
to the consummation of a Change of Control, then such date shall be
the date on which such Change of Control is consummated) (the
“Holder Redemption
Date”), redeem each outstanding share of Series C-1
Preferred set forth in the Holder Redemption Notice at the Holder
Redemption Price. The Holder Redemption Price for each share of
Series C-1Preferred owned by a holder who has exercised its Holder
Redemption Right shall be paid to such holder by delivering a check
or by wire transfer of immediately available funds to such holder
at the address or in accordance with the wire transfer instructions
(as applicable) of such holder as set forth in the Holder
Redemption Notice.
8. Inability to Fully
Convert.
(a) Holder's Option if
Company Cannot Fully Convert. In addition to any other right that a
holder of Series C-1 Preferred might have, if, upon the Company's
receipt of a Conversion Notice, the Company cannot issue Conversion
Shares issuable pursuant to such Conversion Notice because the
Company (x) notwithstanding Section 5(k), does not have a
sufficient number of shares of Common Stock authorized and
available or (y) is otherwise prohibited by applicable law or by
the rules or regulations of any stock exchange, interdealer
quotation system or other self- regulatory organization with
jurisdiction over the Company or its securities from issuing all of
the Conversion Shares to be issued to a holder of Series C-1
Preferred pursuant to a Conversion Notice, then the Company shall
issue as many Conversion Shares as it is able to issue in
accordance with such holder's Conversion Notice and pursuant to
Section 5(c)(iii) above and, with respect to the unconverted Series
C-1 Preferred, the holder, solely at such holder's option, can
elect, within five (5)business days after receipt of an Inability
to Fully Convert Notice (as defined below) from the Company thereof
to:
(i) if the Company's
inability to fully convert Series C-1 Preferred is pursuant to
Section 8(a)(y) above, require the Company to issue restricted
shares of Common Stock in accordance with such holder's Conversion
Notice and pursuant to Section 5(c)(iii) above. or
(ii) void
its Conversion Notice with respect to all or a portion of the
Conversion Shares covered by such Conversion Notice and retain or
have returned, as the case may be, the shares of Series C-1
Preferred that were to be converted pursuant to such holder's
Conversion Notice (provided that a holder's voiding its Conversion
Notice shall not effect the Company's obligations to make any
payments which have accrued prior to the date of such
notice).
(b) Mechanics of
Fulfilling Holder's Election. The Company shall promptly send via
electronic mail or facsimile to a holder of Series C-1 Preferred,
upon receipt of electronic mail or facsimile copy of a Conversion
Notice from such holder which cannot be fully satisfied as
described in Section 8(a) above, a notice of the Company's
inability to fully satisfy such holder's Conversion Notice (the
“Inability to Fully Convert
Notice”). Such Inability to Fully Convert Notice shall
indicate (i) the reason why the Company is unable to fully satisfy
such holder's Conversion Notice, and (ii) the number of shares of
Series C-1 Preferred which cannot be converted. Such holder shall
notify the Company of its election pursuant to Section 8(a) above
by delivering written notice via electronic mail or facsimile to
the Company (“Notice in
Response to Inability to Convert”).
(c) Pro Rata
Conversion. In the event the Company receives a Conversion Notice
from more than one holder of Series C-1 Preferred on the same day
and the Company can convert some, but not all, of the Series C-1
Preferred pursuant to this Section 8, the Company shall convert
from each holder of Series C-1 Preferred electing to have Series
C-1 Preferred converted at such time an amount equal to such
holder's prorata amount (based on the number of shares of Series
C-1 Preferred held each such holder who desires to convert such
shares on such date relative to the total number of shares of
Series C-1 Preferred held by all such holders who desire to convert
such shares on such date) of all shares of Series C-1 Preferred
being converted at such time.
9. Protective Provisions.
Notwithstanding anything herein to the contrary, the Company shall
not, without obtaining the approval (by vote or written consent) of
the Majority Holders:
(a)
create, or
authorize the creation of, any class or series of shares of capital
stock or other securities, or issue, or authorize the issuance of,
any class or series of shares of capital stock or other securities
that ranks senior to or on a parity with the Series C-1 Preferred
in any respect;
(b) amend, supplement
or otherwise modify any class or series of shares of capital stock
or other securities so that such shares or securities, after giving
effect to such amendment, supplement or modification, rank senior
to or on a parity with the Series C-1 Preferred in any
respect;
(c) issue, or authorize
the issuance of, any additional shares of Series B Preferred, or
amend, supplement or otherwise modify any of the powers,
designations, preferences, privileges, rights, terms or conditions
of the Series B Preferred;
(d) permit any
subsidiary of the Company to issue any shares of capital stock or
other securities, other than issuances of shares of capital stock
or other securities to the Company or to a wholly-owned subsidiary
of the Company;
(e) sell, lease or
otherwise dispose of intellectual property rights owned by or
licensed to the Company or any subsidiary of the Company;
and
(f) create, or
authorize the creation of,or incur, or authorize the incurrence of,
any Indebtedness, other than Permitted Indebtedness, or permit any
subsidiary of the Company to take any such action.
“Indebtedness” means (x) any
liabilities for borrowed money or amounts owed in excess of
$500,000 in the aggregate for all such liabilities and amounts
(other than trade accounts payable incurred in the ordinary course
of business) and (y) all guaranties, endorsements and other
contingent obligations in respect of indebtedness of others,
whether or not the same are or should be reflected in the Company's
consolidated balance sheet (or the notes thereto), except
guaranties by endorsement of negotiable instruments for deposit or
collection or similar transactions in the ordinary course of
business.
“Permitted Indebtedness” means all
indebtedness of the Company outstanding on the Issuance Date and
set forth on the“Disclosure Schedule” to the Securities
Purchase Agreement, dated as of the Issuance Date, by and among the
Company and the initial purchasers of the Series C-1
Preferred.
10. Vote to Change the Terms of or Issue
Preferred Stock. The affirmative vote at a meeting duly
called for such purpose, or the written consent without a meeting,
of the Majority Holders shall be required forany amendment,
supplement, modification or other change (including any amendment,
supplement, modification, alteration, repeal or other change that
is made pursuant to or in connection with a merger, consolidation
or other business combination of or involving the Company) to (i)
the Company's Certificate of Incorporation which would amend,
alter, change or repeal, or otherwise adversely affect, any of the
powers, designations, preferences, privileges and rights of the
Series C-1Preferred or (ii) this Certificate of Designations
(including any amendment, supplement, modification or other change
that results in the authorization, creation or designation of
additional shares of Series C- 1 Preferred).
11. Lost or Stolen Certificates.
Upon receipt by the Company of evidence satisfactory to the Company
of theloss, theft, destruction or mutilation of any Preferred Stock
Certificates representing the shares of Series C-1 Preferred, and,
in the case of loss, theft or destruction, of an indemnification
undertaking by the holder to the Company (in form and substance
satisfactory to the Company) and, in the case of mutilation, upon
surrender and cancellation of the Preferred Stock Certificate(s),
the Company shall execute and deliver new Preferred Stock
Certificate(s) of like tenor and date. provided, however, the
Company shall not be obligated to reissue Preferred Stock
Certificates if the holder contemporaneously requests the Company
to convert such shares of Series C-1 Preferred into Common Stock
and complies with its obligations to issue Conversion Shares set
forth herein.
12. Remedies, Characterizations, Other
Obligations, Breaches and Injunctive Relief. The remedies
provided in this Certificate of Designations shall be cumulative
and in addition to all other remedies available under this
Certificate of Designations, at law or in equity (including a
decree of specific performance and/or other injunctive relief), no
remedy contained herein shall be deemed a waiver of compliance with
the provisions giving rise to such remedy and nothing
herein shall limit a holder's right to pursue actual damages for
any failure by the Company to comply with the terms of this
Certificate of Designations.Amounts set forth or provided for
herein with respect to payments, conversion and the like (and the
computation thereof) shall be the amounts to be received by the
holder thereof and shall not, except as expressly provided herein,
be subject to any other obligation of the Company (or the
performance thereof). The Company acknowledges that a breach by it
of its obligations hereunder will cause irreparable harm to the
holders of the Series C-1 Preferred and that the remedy at law for
any such breach may be inadequate. The Company therefore agrees
that, in the event of any such breach, the holders of the Series
C-1 Preferred shall be entitled, in addition to allother available
remedies, to an injunction restraining any breach or the Series C-1
Preferred holders' reasonable perception of a threatened breach by
the Company of the provisions of this Certificate of Designations,
without the necessity of showing economic loss and without any bond
or other security being required.
13. Specific Shall Not Limit General.
Construction. No specific provision containedin this
Certificate of Designations shall limit or modify any more general
provision contained herein. This Certificate of Designations shall
be deemed to be jointly drafted by the Company andall initial
purchasers of the Series C-1 Preferred and shall not be construed
against any person as the drafter hereof.
14. Failure or Indulgence Not
Waiver. No failure or delay on the part of a holder of
Series C-1 Preferred in the exercise of any power, right or
privilege hereunder shall operate as a waiver thereof, nor shall
any single or partial exercise of any such power, right or
privilege preclude other or further exercise thereof or of any
other right, power or privilege.
[Remainder of Page Intentionally Left
Blank]
IN
WITNESS WHEREOF, the undersigned has executed and subscribed this
Certificate of Designations and does affirm the foregoing as true
this th day of July, 2020.
IMAGEWARE SYSTEMS,
INC.
By:
Name:
Jonathan Morris
Title:
Chief Financial Officer
EXHIBIT
I
IMAGEWARE SYSTEMS,
INC. CONVERSION NOTICE
Reference is made
to the Certificate of Designations, Preferences and Rights of the
Series C-1 Convertible Preferred Stock (“Series C-1 Preferred”) of
ImageWare Systems, Inc. (the “Certificate of Designations”). In
accordance with and pursuant to the Certificate of Designations,
the undersigned hereby elects to convert the number of shares of
Series C-1 Preferred, parvalue $0.01 per share (the
“Preferred
Shares”), of ImageWare Systems, Inc., a Delaware
corporation (the “Company”), indicated below into
shares of Common Stock, par value $0.01 per share (the
“Common
Stock”), of the Company, by tendering the stock
certificate(s) representing the share(s) of Series C-1 Preferred
specified below as of the date specified below.
Date of
Conversion:
Number
of shares of Series C-1 Preferred to be converted: Stock
certificate no(s). of Series C-1 Preferred to be converted: Please
confirm the following information: Conversion Price: Number of
shares of Common Stock to be issued:
Number
of shares of Common Stock beneficially owned or deemed beneficially
owned by the Holder on the Date of Conversion:
Please
issue the Common Stock into which the shares of Series C-1
Preferred are being converted and, if applicable, any check drawn
on an account of the Company in the following name and to the
following address:
Issue
to:
Facsimile
Number:
Name of
bank/broker due to receive the underlying Common
Stock:
Bank/broker's four
digit “DTC” participant number (obtained from the
receiving bank/broker):
Authorization:
By:
Title:
Dated:
