Numerex Corp.
NUMEREX CORP /PA/ (Form: 10-Q, Received: 08/08/2017 16:55:58)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the quarterly period ended June 30, 2017
   
or
 
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the transition period from __________ to __________

 

Commission file number: 000-22920

 

NUMEREX CORP.

(Exact name of registrant as specified in its charter)

 

Pennsylvania 11-2948749
(State or other jurisdiction ( I.R.S. Employer
of incorporation or organization ) Identification No.)

 

400 Interstate Parkway, Suite 1350
Atlanta, GA 30339-2119
(Address of principal executive offices) (Zip Code)

 

(770) 693-5950
(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  þ      No  ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.

Yes  þ      No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

  Large accelerated filer   ¨ Accelerated filer   þ
  Non-accelerated filer   ¨ (Do not check if a smaller reporting company) Smaller reporting company   ¨
  Emerging growth company   ¨  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).                                                                                         Yes  ¨      No  þ

 

As of August 7, 2017, 19,675,128 shares of the registrant's Class A common stock, no par value (being the registrant's only class of common stock outstanding) were outstanding.

 

 

 

 

 

 

NUMEREX CORP. AND SUBSIDIARIES

TABLE OF CONTENTS

 

    Page
  PART I—FINANCIAL INFORMATION  
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk 25
Item 4. Controls and Procedures 25
     
  PART II—OTHER INFORMATION  
Item 1. Legal Proceedings 26
Item 1A. Risk Factors 26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Mine Safety Disclosures 26
Item 5. Other Information 26
Item 6. Exhibits 26
  SIGNATURES 27

 

  2  

 

 

NUMEREX CORP. AND SUBSIDIARIES

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

Index to Financial Statements Page
   
Unaudited Condensed Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016 4
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2017 and 2016 5
Unaudited Condensed Consolidated Statement of Shareholders' Equity for the six months ended June 30, 2017 6
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016 7
Unaudited Condensed Notes to Consolidated Financial Statements 8

 

  3  

 

 

NUMEREX CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

 

    June 30,     December 31,  
    2017     2016  
ASSETS                
CURRENT ASSETS                
Cash and cash equivalents   $ 5,354     $ 9,285  
Restricted cash     221       221  
Accounts receivable, less allowance for doubtful accounts of $686 and $767     8,141       9,436  
Financing receivables, current     1,606       1,778  
Inventory, net of reserves     8,566       9,011  
Prepaid expenses and other current assets     1,329       1,421  
TOTAL CURRENT ASSETS     25,217       31,152  
                 
Financing receivables, less current portion     1,785       2,227  
Property and equipment, net of accumulated depreciation and amortization     5,727       6,022  
Software, net of accumulated amortization     5,818       6,530  
Other intangible assets, net of accumulated amortization     11,121       11,519  
Goodwill     33,554       33,554  
Other assets     241       474  
TOTAL ASSETS   $ 83,463     $ 91,478  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY                
CURRENT LIABILITIES                
Accounts payable   $ 13,775     $ 15,894  
Accrued expenses and other current liabilities     2,524       3,209  
Deferred revenues     1,411       1,882  
Current maturities of long-term debt, net of debt issuance costs     4,799       1,275  
Current obligations under capital lease     309       291  
TOTAL CURRENT LIABILITIES     22,818       22,551  
                 
Long-term debt, net of debt issuance costs, less current maturities     10,266       14,885  
Obligations under capital lease, noncurrent     671       797  
Deferred tax liabilities, noncurrent     626       468  
Other liabilities     1,346       1,512  
TOTAL LIABILITIES     35,727       40,213  
                 
SHAREHOLDERS’ EQUITY                
Preferred stock, no par value; 3,000 authorized; none issued     -       -  
Class A common stock, no par value; 30,000 authorized;
21,034 and 20,935 issued; 19,571 and 19,608 outstanding
 
 
 
 
 
-
 
 
 
 
 
 
 
-
 
 
Class B common stock, no par value; 5,000 authorized; none issued     -       -  
Additional paid-in capital     108,985       105,112  
Treasury stock, at cost, 1,463 and 1,327 shares     (5,773 )     (5,466 )
Accumulated other comprehensive loss     (104 )     (110 )
Accumulated deficit     (55,372 )     (48,271 )
TOTAL SHAREHOLDERS' EQUITY     47,736       51,265  
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY   $ 83,463     $ 91,478  

 

The accompanying notes are an integral part of these financial statements

 

  4  

 

 

NUMEREX CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE LOSS INCOME

(In thousands, except per share data)

 

    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2017     2016     2017     2016  
Net revenues:                                
Subscription and support revenues   $ 12,680     $ 14,810     $ 26,150     $ 29,794  
Embedded devices and hardware     1,300       2,796       4,216       5,862  
Total net revenues     13,980       17,606       30,366       35,656  
Cost of sales                                
Subscription and support revenues     5,364       5,713       10,828       11,414  
Embedded devices and hardware     1,312       3,314       4,344       6,432  
Gross profit     7,304       8,579       15,194       17,810  
Operating expenses:                                
Sales and marketing     2,693       3,270       5,835       6,215  
General and administrative     2,431       3,859       5,377       7,988  
Engineering and development     1,704       2,444       3,919       4,691  
Depreciation and amortization     1,443       1,677       2,966       3,335  
Impairment of goodwill and other intangible assets     -       4,172       -       4,172  
Restructuring charges     355       1,243       780       1,243  
Operating loss     (1,322 )     (8,086 )     (3,683 )     (9,834 )
Interest expense     742       460       1,363       727  
Loss on extinguishment of debt     861       -       1,089       290  
Other expense (income), net     70       (22 )     801       (65 )
Loss before income taxes     (2,995 )     (8,524 )     (6,936 )     (10,786 )
Income tax expense (benefit)     81       (234 )     165       (170 )
Net loss     (3,076 )     (8,290 )     (7,101 )     (10,616 )
Other items of comprehensive loss, net of income taxes:                                
Foreign currency translation adjustment     -       1       (6 )     (14 )
Comprehensive loss   $ (3,076 )   $ (8,291 )   $ (7,095 )   $ (10,602 )
                                 
                                 
Loss per share:                                
Basic   $ (0.16 )   $ (0.43 )   $ (0.36 )   $ (0.55 )
Diluted   $ (0.16 )   $ (0.43 )   $ (0.36 )   $ (0.55 )
Weighted average shares outstanding used in per share calculation:                                
Basic     19,555       19,449       19,539       19,413  
Diluted     19,555       19,449       19,539       19,413  

 

The accompanying notes are an integral part of these financial statements.

 

  5  

 

 

NUMEREX CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED

STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

(in thousands)

 

                      Accumulated Other           Total  
    Common     Additional     Treasury     Comprehensive     Accumulated     Shareholders'  
    Shares     Paid-in Capital     Stock     Loss     Deficit     Equity  
Balance at January 1, 2017     20,935     $ 105,112     $ (5,466 )   $ (110 )   $ (48,271 )     51,265  
Equity-based compensation expense     -       1,034       -       -       -       1,033  
Exercises, vesting and other equity- based compensation plan activity, net     99               (289 )     -       -       (289 )
Value of shares retained to pay employee taxes     -       (184 )     (18 )     -       -       (202 )
Warrants issued     -       3,023       -       -       -       3,023  
Translation adjustment     -       -       -       6       -       6  
Net loss     -       -       -       -       (7,101 )     (7,101 )
Balance at June 30, 2016     21,034     $ 108,985     $ (5,773 )   $ (104 )   $ (55,372 )   $ 47,736  

 

The accompanying notes are an integral part of these financial statements.

 

  6  

 

 

NUMEREX CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

    Six Months Ended  
    June 30,  
    2017     2016  
Cash flows from operating activities:                
Net loss   $ (7,101 )   $ (10,616 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization     3,874       3,968  
Impairment of goodwill and other intangible assets     -       4,172  
Non-cash restructuring charges     -       370  
Equity-based compensation expense     745       1,451  
Loss on extinguishment of debt     1,089       290  
Deferred income taxes     157       (179 )
Bad debt expense     144       228  
Provision for inventory reserves     (96 )     487  
Other non-cash expense     294       72  
Changes in assets and liabilities:                
Accounts and financing receivables     1,765       (1,004 )
Inventory, net     (604 )     (844 )
Accounts payable     (2,124 )     421  
Deferred revenue     (566 )     (454 )
Other     (429 )     253  
Net cash used in operating activities     (2,852 )     (1,385 )
Cash flows from investing activities:                
Purchases of property and equipment     (213 )     (509 )
Capitalized software development and purchases of software     (1,101 )     (1,280 )
Net cash used in investing activities     (1,314 )     (1,789 )
Cash flows from financing activities:                
Proceeds from long-term debt     18,591       17,000  
Principal payments on debt     (17,000 )     (19,349 )
Principal payments on capital lease obligations     (108 )     -  
Exercises, vesting and other equity- based compensation plan activity     -       386  
Payment of taxes on equity-based awards     (202 )     (173 )
Deferred financing costs paid     (1,046 )     (1,038 )
Net cash provided by (used in) financing activities     235       (3,174 )
Net decrease in cash and cash equivalents     (3,931 )     (6,348 )
Cash and cash equivalents at beginning of period     9,285       16,237  
Cash and cash equivalents at end of period   $ 5,354     $ 9,889  
                 
Supplemental disclosures of cash flow information:                
Cash paid for interest   $ 1,147     $ 645  
Net cash paid for income taxes     16       6  
Disclosure of non-cash investing and financing activities:                
Capital expenditures in accounts payable     189       274  
Warrants issued to Kenneth Rainin Foundation     595       -  
Warrants issued to Hale Capital     2,428       -  
Transfer of inventory to monitoring equipment     1,143       1,454  

 

The accompanying notes are an integral part of these financial statements.

 

  7  

 

 

NUMEREX CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

 

NOTE A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Business

 

Numerex Corp. (NASDAQ: NMRX) (the “Company”) is a holding company incorporated in Pennsylvania, and through its subsidiaries, is a single source, leading provider of managed enterprise solutions enabling the Internet of Things (IoT). An IoT solution is generally viewed as a combination of devices, software and services that operate with little or no human interaction. Our managed IoT solutions are simple, innovative, scalable and secure. Our solutions incorporate each of the four key IoT building blocks – Device, Network, Application and Platform. We provide our technology and service solutions through our integrated IoT horizontal platforms, which are generally sold on a subscription basis. Foreign operations were not significant to us for the three and six months ended June 30, 2017 or 2016.

 

Basis of Presentation

 

We prepared the accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, referred to as GAAP, for interim financial information and the Rules and Regulations issued by the Securities Exchange Commission, or SEC, as applicable. These financial statements include all of our accounts and those of our wholly-owned subsidiaries. We have eliminated intercompany transactions and balances in consolidation. Certain prior period amounts in the condensed consolidated financial statements and notes thereto have been reclassified to conform to the current period’s presentation.

 

Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted, although we believe that the disclosures made are adequate to make the information not misleading. In the opinion of management, the accompanying financial statements reflect all adjustments, which consist of normal recurring adjustments unless otherwise disclosed, considered necessary for a fair presentation of our financial position as of June 30, 2017 and our operating results and cash flows for the interim periods presented. The accompanying condensed consolidated balance sheet as of December 31, 2016 was derived from our audited financial statements, but does not include all disclosures required by GAAP. The financial information presented herein should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2016 which includes information and disclosures not included in this quarterly report.

 

  8  

 

 

NUMEREX CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

 

Estimates and Assumptions

 

The preparation of financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Actual results may differ materially from these estimates. Operating results for the three or six months ended June 30, 2017 may not be indicative of the results that may be expected for the year ending December 31, 2017 or any future periods.

 

Liquidity

 

The Company incurred an operating loss totaling $3.7 million and cash used in operations was $2.9 million for the six months ended June 30, 2017. The Company also incurred an operating loss totaling $22.8 million and cash used in operations totaled $0.5 million for the year ended December 31, 2016. As of June 30, 2017, the Company has an accumulated deficit of $55.4 million, and cash and cash equivalents of $5.6 million. The Company’s cash flow requirements during the fiscal year 2016 and to date in 2017 were financed by cash on hand, cash generated by operations, and proceeds from the recent financing with Hale Capital Partners LP described in Note F below. The Company had total term debt (net of deferred financing costs), including current portion, of $15.1 million as of June 30, 2017. The Company’s ability to continue in business is dependent on its ability to continue to generate operating cash flows, to maintain sufficient cash on hand, to raise additional capital, and to control expenditures. Management believes that the Company will maintain sufficient liquidity through at least August 2018. The consolidated financial statements do not include any adjustments that might result from this uncertainty.

 

Restricted Cash

 

As of June 30, 2017, and 2016, cash of $0.2 million was held in escrow related to certain vendor obligations.

 

NOTE B - INVENTORY

 

Inventory consisted of the following (in thousands):

 

    June 30,     December 31,  
    2017     2016  
Raw materials   $ 2,313     $ 2,953  
Finished goods     7,918       8,504  
Inventory reserves     (1,665 )     (2,446 )
    $ 8,566     $ 9,011  

 

During the three and six months ended June 30, 2017, we transferred $0.6 million and $1.1 million of inventory, respectively, to monitoring equipment within property and equipment, respectively, and disposed of $0.3 million of fully reserved inventory.

 

NOTE C – PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following (in thousands):

 

    June 30,     December 31,  
    2017     2016  
Computer, network and other equipment   $ 8,840     $ 8,805  
Monitoring equipment     6,836       5,692  
Furniture and fixtures     486       486  
Leasehold improvements     254       264  
Total property and equipment     16,416       15,247  
Accumulated depreciation and amortization     (10,689 )     (9,225 )
    $ 5,727     $ 6,022  

 

During the three and six months ended June 30, 2017, we transferred $0.6 million and $1.1 million of inventory to monitoring equipment as part of our managed services business. Depreciation and amortization related to property and equipment was $0.3 million and $0.6 million for the three and six months ended June 30, 2017, respectively. Depreciation and amortization related to property and equipment was $0.4 million and $0.8 million for the three and six months ended June 30, 2016, respectively.

 

NOTE D – INTANGIBLE ASSETS

 

Impairment Charges

 

We recorded $4.2 million in impairment charges for trade names, technology and goodwill as of June 30, 2016. The Omnilink and Do-It-Yourself (DIY) product lines and reporting units had not generated results of operations consistent with our expectations and forecasts for the three months ended June 30, 2016. The lower operating results and future expectations for Omnilink were principally related to strategic changes and delays associated with the launch of a new personal tracking product line. We also continue to evaluate different strategic options for the DIY reporting unit. These factors were triggering events that indicated that it was more likely than not that the fair value of the Omnilink and DIY reporting units were less than their carrying amounts. As a result, we performed initial assessments of goodwill for impairment, along with other intangible assets of the reporting units, as of June 30, 2016. No triggering events were identified as of June 30, 2017.

 

  9  

 

 

NUMEREX CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

 

We estimated the fair value of the reporting units using a combination of market and income approaches and concluded that the estimated fair value of the Omnilink and DIY reporting units were less than their carrying values. We assessed the implied fair value of goodwill in the same manner as if we were acquiring the reporting units in a business combination. Specifically, we allocated the estimated fair value of the reporting units to all of the assets and liabilities of those units, including any unrecognized intangible assets, in a hypothetical calculation, referred to as Step Two. We assessed the amortizing long-lived assets for impairment based on undiscounted cash flows and concluded that, with the exception of DIY technology, the carrying values of other amortizing long-lived assets and intangible assets were recoverable.

 

Based on Step Two calculations, we recorded non-cash impairment charges as of June 30, 2016 of $1.6 million for indefinite-lived trade names and $2.3 million for goodwill of the Omnilink reporting unit, and $0.1 million for technology and $0.2 million for goodwill of the DIY reporting unit.

 

    Omnilink     DIY     Total  
    Trade Names     Goodwill     Technology     Goodwill     Impairment  
January 1, 2016   $ 2,972     $ 17,580     $ 245     $ 1,656          
Amortization     -       -       (18 )     -          
Impairment     (1,612 )     (2,264 )     (81 )     (215 )   $ (4,172 )
June 30, 2016   $ 1,360     $ 15,316     $ 146     $ 1,441          

 

Intangible Assets Other Than Goodwill

 

Intangible assets other than goodwill are summarized as follows (dollars in thousands):

 

    As of June 30, 2017     As of December 31, 2016  
    Remaining
Useful Lives
    Gross
Carrying
Amount
    Accumulated
Amortization
    Net Book
Value
    Gross
Carrying
Amount
    Accumulated
Amortization
    Net Book
Value
 
Purchased and developed software     1.9     $ 19,043     $ (14,391 )   $ 4,652     $ 18,205     $ (12,806 )   $ 5,399  
Software in development     n/a       1,166       -       1,166       1,131       -       1,131  
Total software             20,209       (14,391 )     5,818       19,336       (12,806 )     6,530  
Licenses     2.5       13,215       (12,787 )     428       13,215       (12,534 )     681  
Customer relationships     6.9       8,167       (3,416 )     4,751       8,167       (3,039 )     5,128  
Technologies     10.3       4,235       (899 )     3,336       4,235       (822 )     3,413  
Patents and trademarks     1.6       4,256       (2,568 )     1,688       3,747       (2,368 )     1,379  
Trade names     Indefinite       918       -       918       918       -       918  
Total other intangible assets             30,791       (19,670 )     11,121       30,282       (18,763 )     11,519  
            $ 51,000     $ (34,061 )   $ 16,939     $ 49,618     $ (31,569 )   $ 18,049  

 

Remaining useful lives in the preceding table were calculated on a weighted average basis as of June 30, 2017. We did not incur significant costs to renew or extend the term of acquired intangible assets during the three or six months ending June 30, 2017.

 

Amortization expense related to intangible assets was $1.2 million and $2.3 million for the three and six months ended June 30, 2017, respectively. Amortization expense related to intangible assets was $1.3 million and $2.6 million for the three and six months ended June 30, 2016, respectively. Amortization expense recorded in cost of subscription revenues was $0.4 million and $0.8 million, respectively, for the three and six months ended June 30, 2017, compared to $0.3 million and $0.6 million, respectively, for the three and six months ended June 30, 2016. Additionally, we have capitalized approximately $0.7 million and $1.3 million of internally generated software development costs for the three and six months ended June 30, 2017, respectively, and $0.3 million and $0.6 million for the three and six months ended June 30, 2016, respectively.

 

  10  

 

 

NUMEREX CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

 

NOTE E – INCOME TAXES

 

We calculate our interim income tax provision in accordance with the accounting guidance for income taxes in interim periods. At the end of each interim period, we make our best estimate of the annual expected effective tax rate and apply that rate to our ordinary year-to-date income or loss.  In addition, we calculate a year-to-date adjustment to increase or decrease our income tax provision to take into account our current expected effective tax rate.  The tax or benefit related to significant, unusual, or extraordinary items are individually computed and recognized in the interim period in which those items occur.

 

In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We consider projections of future taxable income, tax planning strategies and the reversal of temporary differences in making this assessment.

 

During 2015, we determined that we would not meet the criteria of “more likely than not” that our federal and state net operating losses and certain other deferred tax assets would be recoverable. This determination was based on our assessment of both positive and negative evidence regarding realization of our deferred tax assets, in particular, the strong negative evidence associated with our cumulative loss over the past three years. Accordingly, we recorded a valuation allowance against these items. The deferred tax assets consist of federal net operating losses, state net operating losses, tax credits, and other deferred tax assets, most of which expire between 2017 and 2036. We will maintain the valuation allowance against the net deferred tax assets until sufficient positive evidence outweighs any negative evidence to support reversal. Income tax expense recorded in the future will be reduced or increased to the extent of offsetting decreases or increases to the valuation allowance.

 

As a result of recording a valuation allowance, we recognized deferred tax expense of less than $0.1 million and $0.2 million, representing an effective tax rate of (2.2%), for the three months and six months ended June 30, 2017. The deferred tax expense recognized on a net loss before income taxes, and the difference in the effective tax rate from the federal statutory rate, is due primarily to the book and tax basis and accounting differences for certain long and indefinite lived intangible assets. We have also recognized a provision for income tax expense for certain state income taxes that cannot utilize offsetting net operating losses. Income tax expense recorded in the future will be reduced or increased to the extent of offsetting decreases or increases to the valuation allowance.

 

We file U.S., state and foreign income tax returns in jurisdictions with varying statutes of limitation. The 2012 through 2016 tax years generally remain subject to examination by federal and most state tax authorities. However, certain returns from earlier years in which net operating losses have arisen are still open for examination by the tax authorities.

 

  11  

 

 

NUMEREX CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

 

NOTE F – DEBT

 

Debt consisted of the following (dollars in thousands):

 

    June 30,     December 31,  
    2017     2016  
             
Notes payable to Hale Capital   $ 13,595     $ -  
Note payable to Kenneth Rainin Foundation (a related party)     5,000       -  
Note payable to Crystal Financial LLC, with interest at LIBOR plus margin     -       17,000  
Less deferred financing costs     (3,530 )     (840 )
      15,065       16,160  
Less current portion of long-term debt (net of deferred financing costs)     (4,799 )     (1,275 )
Noncurrent portion of long-term debt   $ 10,266     $ 14,885  

 

Hale Capital Note Purchase Agreement

 

On June 7, 2017 (the "Closing Date"), the Company entered into a Note Purchase Agreement (the “Note Purchase Agreement”) by and among the Company, as borrower, certain subsidiaries of the Company, as guarantors, the purchasers from time to time party thereto, and HCP-FVF, LLC, an affiliate of Hale Capital Partners LP, as collateral agent and as purchaser ("Hale Capital"). Pursuant to the Note Purchase Agreement, the Company issued and sold to Hale Capital senior secured promissory notes in an aggregate original principal amount of $13.5 million (the "Notes"), the proceeds of which were used to repay the outstanding term loans and other obligations under the Term Loan Agreement, dated as of March 9, 2016, by and among the Company, certain subsidiaries of the Company, the lenders party thereto and Crystal Financial LLC (the “Crystal Loan Agreement”). We recorded a charge of $0.8 million to loss on extinguishment of debt, of which $0.5 million related to unamortized deferred financing costs related to the Crystal Loan Agreement, and $0.3 million related to prepayment penalties and other extinguishment related costs, which is recorded as a separate line item on the consolidated statement of operations and comprehensive loss for the three month period ended June 30, 2017.

 

The Notes are secured by a first priority security interest in substantially all assets of the Company and its subsidiaries. The Notes bear interest at a rate equal to the prime rate plus 700 (currently 11% per year), payable monthly in arrears. From June 7, 2017 until June 29, 2018, the monthly interest payment will be in the form of additional Notes. Thereafter, the interest will be payable monthly in cash in arrears. Interest on the Notes will be computed on the basis of a 360-day year comprising twelve 30-day months. The Notes will bear interest at a rate five percent (5%) above the otherwise applicable interest rate during the continuance of a default or event of default.

 

The maturity date of the Notes is March 31, 2021. Beginning June 30, 2018, the Company is required to prepay the Notes in principal installments of $250,000 per month. In addition, the Company will be required to redeem all of the Notes upon a change of control and will be required to make mandatory prepayments on the Notes with the net proceeds of (i) any voluntary or involuntary sale or disposition of assets (including casualty losses and condemnation awards, subject to certain exceptions) and (ii) the issuance or sale of any equity, except for a portion of which may be used to pay down the Company's existing subordinated note. The Company may also prepay to Notes in whole or in part at any time.

 

All prepayments of the Notes (whether mandatory, optional or as result of the acceleration of the Notes) are subject to a prepayment penalty as follows: (A) if prepayment is on or before the second anniversary of the Closing Date, 5% of the principal prepaid; (B) if prepayment is after the second anniversary but on or before the third anniversary of the Closing Date, 3% of the principal prepaid; and (C) if prepayment is after the third year anniversary but before the maturity date, 1% of the principal prepaid.

 

Pursuant to the terms of the Notes, the Company is required to meet certain financial and other restrictive covenants customary with this type of facility, including maintaining a minimum EBITDA, Minimum Total Liquidity, Minimum Liquidity and minimum Monthly Recurring Revenue, as defined in the Note Purchase Agreement. The Company was in compliance with these covenants as of June 30, 2017. Additionally, the Company is also prohibited from taking certain actions during the term of the Notes without consent of the purchasers, including, without limitation, incurring additional indebtedness, entering into certain mergers or other business combination transactions, disposing of or permitting liens or other encumbrances on the Company's assets and making restricted payments, including cash dividends on shares of the Company's common stock, except as expressly permitted under the Note Purchase Agreement.

 

  12  

 

 

NUMEREX CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

 

The Note Purchase Agreement contains customary events of default. If a default occurs and is not cured within the applicable cure period or is not waived, any outstanding obligations under the Note Purchase Agreement may be accelerated. The Note Purchase Agreement and related Note documents also contain additional representations and warranties, covenants, indemnities and conditions, in each case customary for transactions of this type.

 

In connection with the execution of the Note Purchase Agreement, the Company issued to Hale Capital detachable warrants to purchase up to 895,944 shares of common stock (subject to adjustment) at an exercise price equal to $4.14 per share. The exercise price of the warrants is subject to adjustment upon certain events, including a down round provision, and the term of the warrants is ten years from the Closing Date. The warrants were valued using a Monte Carlo valuation model and had a fair value at grant date of $ 2.4 million. The warrants have been recorded as deferred financing costs, and are being amortized over the term of the Notes.

 

Senior Subordinated Promissory Note

 

On March 31, 2017, the Kenneth Rainin Foundation, a California corporation, and the Company entered into a Senior Subordinated Promissory Note (the “KRF Note”) in the aggregate principal amount of $5.0 million , with a maturity date of April 1, 2018, and an annual interest rate of 12%, which was used to pay down a portion of the outstanding term loans under the Crystal Loan Agreement on March 31, 2017.

 

In connection with the KRF Note, the Company issued to Kenneth Rainin Foundation a warrant to purchase 125,000 shares of our common stock at a warrant price of $0.01 per share. The warrants had a fair value of $0.6 million at the grant date, have been recorded as deferred financing costs, and are being amortized over the term of the KRF Note. Brian Igoe, a director of the Company, is the Chief Investment Officer of the Kenneth Rainin Foundation.

 

Crystal Term Loan Agreement - Amendment, Waiver and Repayment

 

On March 31, 2017, we entered into an amendment to the Crystal Loan Agreement which, among other things, (i) required a $5.0 million prepayment of the term loans with the proceeds of the KRF Note, (ii) required the payment of an amendment fee in the amount of $2.0 million, half of which was paid upon execution of the amendment, with the remainder due only if certain events did not occur by June 1, 2017 (which date was subsequently extended to June 7, 2017), (iii) modified the covenants related to minimum adjusted EBITDA, minimum fixed charge coverage ratio, maximum net leverage, and maximum subscriber churn, (iv) waived certain specified events of default, including financial covenant defaults, (v) increased the interest rate payable on the term loans from 8.5% to 10.5%, and (vi) required a prepayment in the amount of $2.0 million if certain events did not occur by June 1, 2017 (which date was subsequently extended to June 7, 2017).

 

As a result of the $5.0 million prepayment of the term loans with the proceeds of the KRF Note, we recorded a $0.2 million loss on partial extinguishment of the Crystal Loan Agreement, which is recorded as a separate line item on the consolidated statement of operations for the three month period ending March 31, 2017.

 

One June 7, 2017, all outstanding term loans and other obligations under the Crystal Loan Agreement were repaid in full with the proceeds of the Notes issued pursuant to the Note Purchase Agreement.  

 

NOTE G – NET LOSS PER SHARE

 

Basic (loss) earnings per share attributable to common shareholders is based on the weighted-average number of common shares outstanding excluding the dilutive impact of common stock equivalents. Diluted (loss) earnings per share include the effect of all potentially dilutive securities on earnings per share. The dilutive effect of outstanding equity-based compensation awards is computed using the treasury stock method. The computation of diluted earnings per shares does not assume exercise of securities that would have an anti-dilutive effect on earnings. Diluted (loss) earnings per share is not presented separately because there are no adjustments to the numerator in calculating dilutive net loss per share and all potentially dilutive common stock equivalents would be antidilutive. The following table presents a reconciliation of the shares used in the calculation of basic and dilutive (loss) earnings per share and anti-dilutive equity based compensation awards (in thousands):

 

  13  

 

 

NUMEREX CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

 

    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2017     2016     2017     2016  
Weighted average common shares outstanding:                        
Basic     19,555       19,449       19,539       19,413  
Dilutive effect of common stock equivalents     -       -       -       -  
Diluted     19,555       19,449       19,539       19,413  
                                 
Anti-dilutive equity-based compensation awards     1,178       2,158       1,122       2,158  

 

NOTE H – RESTRUCTURING

 

We recorded a restructuring charge of $0.8 million, which included $0.4 million of severance costs for the six months ended June 30, 2017. The other costs recorded as restructuring are comprised of $0.2 million for the loss on sublease of our Dallas office, and $0.2 million in legal costs.

 

NOTE I – FAIR VALUE MEASUREMENTS

 

We account for certain assets at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

 

Level 1  – Valuations based on quoted prices for identical assets and liabilities in active markets.

 

Level 2  – Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

 

Level 3  – Valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.

 

We have no assets measured at fair value on a recurring basis. We do not have any liabilities measured at fair value on a recurring basis.

 

  14  

 

 

NUMEREX CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

 

The following table summarizes assets measured at fair value on a nonrecurring basis during the six months ended June 30, 2016 (in thousands):

 

    Fair           Total  
    Value     Level 3     Losses  
April 1, 2016                        
Omnilink Reporting Unit                        
Indefinite lived trade names   $ 1,360     $ 1,360     $ 1,612  
Goodwill     15,316       15,316       2,264  
DIY Reporting Unit                        
Technology     146       146       81  
Goodwill     1,441       1,441       215  
Total nonrecurring fair value measurements   $ 18,263     $ 18,263     $ 4,172  

 

NOTE J – RECENT ACCOUNTING PRONOUNCEMENTS

 

In January 2017, the Financial Accounting Standards Board (FASB) issued guidance simplifying the test for goodwill impairment. The guidance eliminates step two from the goodwill impairment test and instead requires an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The updated guidance requires a prospective adoption, with early adoption permitted. The guidance is effective for the Company beginning in 2020. The Company is in the process of evaluating the effects of the provisions of this guidance on our financial statements.

 

In January 2017, the FASB issued guidance to assist entities in evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The updated guidance requires a prospective adoption. Early adoption is permitted. This update will be effective for the Company beginning in 2018. The Company does not expect the provisions of this guidance to have a material impact on our financial statements.

 

In November 2016, the FASB issued guidance impacting restricted cash presentation on the statement of cash flows. The guidance requires that a statement of cash flows explain the change during the period of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This standard becomes effective for the Company during the first quarter of 2018 and will be applied using a retrospective approach for each period presented. The Company does not expect the provisions of this guidance to have a material impact on our financial statements.

 

In February 2016, the FASB issued guidance that requires lessees to recognize most leases as assets and liabilities on the balance sheet. Qualitative and quantitative disclosures will be enhanced to better understand the amount, timing and uncertainty of cash flows arising from leases. The guidance is effective for annual and interim periods beginning after December 15, 2018. The updated standard mandates a modified retrospective transition method with early adoption permitted. We are currently evaluating the effect that the updated standard will have on our financial statements.

 

In May 2014, the FASB issued guidance which amends the existing accounting standards for revenue recognition. In August 2015, the FASB issued additional guidance which delays the effective date by one year. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. In March 2016, the FASB issued guidance which clarifies the implementation guidance on principal versus agent considerations. The guidance includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customers. We currently anticipate adopting the new standard effective January 1, 2018. The new standard also permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). We currently anticipate adopting the standard using the modified retrospective method. We are concluding the assessment phase of implementing this guidance. We have evaluated each of the five steps in the new revenue recognition model, which are as follows: 1) Identify the contract with the customer; 2) Identify the performance obligations in the contract; 3) Determine the transaction price; 4) Allocate the transaction price to the performance obligations; and 5) Recognize revenue when (or as) performance obligations are satisfied. Our preliminary conclusion is that the determination of what constitutes a contract with our customers (step 1), our performance obligations under the contract (step 2), and the determination and allocation of the transaction price (steps 3 and 4) and recognizing revenue when performance obligations are satisfied (step 5) under the new revenue recognition model will not result in material changes in comparison to our current revenue recognition for our contracts with customers entered into in the normal course of operations. However, we have not yet finalized our analysis.

 

  15  

 

 

NUMEREX CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

 

Effective January 1, 2017, the Company adopted guidance which simplifies the measurement of inventory. The guidance changed the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value and eliminates the requirement to consider replacement cost or net realizable value less an approximately normal profit margin when measuring inventory. The provisions of this standard were adopted on a prospective basis and adoption of this standard did not have an impact on the Company's financial position, results of operations or cash flows.

 

In July 2017, the Company adopted guidance which changes the classification analysis of certain equity-linked instruments with down round features. The guidance changed the requirement that a down round feature precluded equity classification when assessing whether the instrument is indexed to an entity’s own stock. The provisions of this standard were early adopted as of June 30, 2017. As of June 30, 2017, the only equity linked instruments with down-round features for the Company were the warrants issued in connection with the Note Purchase Agreement (see Note F- Debt).

 

NOTE K - SUBSEQUENT EVENTS

 

On August 2, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Sierra Wireless, Inc., a Canadian corporation (“Sierra”), and Wireless Acquisition Sub, Inc., a Delaware corporation and a direct, wholly-owned subsidiary of Sierra (“Merger Sub”). The Merger Agreement provides that, subject to the terms and conditions set forth therein, Merger Sub will merge with and into the Company, with the Company surviving as a wholly-owned subsidiary of Sierra (the “Merger”). The Merger Agreement was unanimously approved and adopted by the board of directors of each of the Company and Sierra.

 

Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), the Company’s shareholders will have the right to receive 0.1800 common shares, no par value, of Sierra (“Sierra Common Stock”) for each share of Class A common stock, no par value, of the Company (“Company Common Stock”) (such consideration, the “Merger Consideration”). Additionally, each outstanding restricted stock unit, in-the-money option and in-the-money stock appreciation right will be cancelled in exchange for the right to receive the Merger Consideration in accordance with the terms of the Merger Agreement. Except as described below and specified in the Merger Agreement, if exercised following notice of the Merger, each outstanding warrant issued by the Company will be cancelled in exchange for the right to receive the Merger Consideration or, if not exercised, will be cancelled at the Effective Time.

 

The Merger Agreement contains customary representations and warranties from each of the Company and Sierra, and each party to the Merger Agreement has agreed to customary covenants, including, among others, covenants relating to (1) the conduct of the Company’s and Sierra’s businesses during the interim period between the execution of the Merger Agreement and the Effective Time, (2) the obligation of the Company to call a meeting of its shareholders to adopt the Merger Agreement, and, subject to certain exceptions, to recommend that its shareholders adopt the Merger Agreement and (3) the Company’s non-solicitation obligations relating to alternative acquisition proposals. Each of the Company and Sierra has also agreed to apply for, or otherwise seek, and use its respective commercially reasonable efforts to obtain, all consents and approvals of governmental entities required to be obtained by it for the consummation of the transactions contemplated by the Merger Agreement.

 

The completion of the Merger is subject to customary conditions, including (1) the adoption of the Merger Agreement by the Company’s shareholders, (2) the receipt of conditional approval of the shares of Sierra Common Stock to be issued in the Merger for listing on the Toronto Stock Exchange, subject only to customary post-closing deliverables, and on The NASDAQ Global Market, subject only to official notice of issuance, (3) the expiration or early termination of all applicable waiting periods applicable to the consummation of the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (4) the effectiveness of the registration statement on Form F-4 by the Securities and Exchange Commission for the Sierra Common Stock to be issued in the Merger, (5) the absence of any order, injunction or other legal restraint preventing the completion of the Merger or making the completion of the Merger illegal and (6) the absence of any pending legal proceeding instituted by any governmental entity seeking to restrain, enjoin or otherwise prohibit the consummation of the transactions contemplated by the Merger Agreement. Each party’s obligation to complete the Merger is also subject to certain additional customary conditions, including (1) subject to certain exceptions, the accuracy of the representations and warranties of the other party, (2) performance in all material respects by the other party of its obligations under the Merger Agreement, (3) the absence of a material adverse effect with respect to the other party and (4) receipt by such party of a tax opinion to the effect that the Merger will qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986.

 

The Merger Agreement also provides certain termination rights for each of the Company and Sierra and further provides that a termination fee equal to 3.75% of the aggregate equity value of the Merger as of the date of the Merger Agreement will be payable by the Company upon termination of the Merger Agreement under certain circumstances specified in the Merger Agreement. In addition, upon termination of the Merger Agreement by Sierra as a result of either Numerex’s shareholders not approving the transaction or Numerex’s fraud or willful and material breach of a representation, warranty or covenant, Numerex may be required to reimburse Sierra for its out-of-pocket costs and expenses incurred in connection with the Merger in an amount not to exceed $850,000 in the event of a no vote and $2 million in the event of fraud or a willful and material breach.

 

In connection with entering into the Merger Agreement, the Company agreed to repurchase the Hale Capital warrants for a purchase price of $4.0 million, immediately prior to, and contingent upon, the consummation of the Merger. In addition, Hale Capital has agreed to waive any event of default under the Note Purchase Agreement that may be caused by the execution of the Merger Agreement or the consummation of the Merger; provided that (i) the repurchase price for the warrant and all principal, interest and other amounts owed under the Notes are paid in full substantially concurrently with the Effective Time of the Merger and (ii) the Effective Time of the Merger occurs on or before August 1, 2018.

 

  16  

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Forward Looking Statements

 

This document contains, and other statements may contain, forward-looking statements with respect to Numerex future financial or business performance, conditions or strategies and other financial and business matters, including expectations regarding growth trends and activities. Forward-looking statements are typically identified by words or phrases such as "believe," "expect," "anticipate," "intend," "estimate," "assume," "strategy," "plan," "outlook," "outcome," "continue," "remain," "trend," and variations of such words and similar expressions, or future or conditional verbs such as "will," "would," "should," "could," "may," or similar expressions. Numerex cautions that these forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. These forward-looking statements speak only as of the date of this filing, and Numerex assumes no duty to update forward-looking statements. Actual results could differ materially from those anticipated in these forward-looking statements and future results could differ materially from historical performance.

 

The following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance: our inability to reposition our platform to capture greater recurring subscription revenues; the risks that a substantial portion of revenues derived from contracts may be terminated at any time; the risks that our strategic suppliers materially change or disrupt the flow of products or services; variations in quarterly operating results; delays in the development, introduction, integration and marketing of new products and services; customer acceptance of services; economic conditions resulting in decreased demand for our products and services; the risk that our strategic alliances, partnerships and/or wireless network operators will not yield substantial revenues; changes in financial and capital markets, and the inability to raise growth capital; the inability to attain revenue and earnings growth; changes in interest rates; inflation; the introduction, withdrawal, success and timing of business initiatives and strategies; competitive conditions; the inability to realize revenue enhancements; disruption in key supplier relationships and/or related services; and extent and timing of technological changes.

 

Overview

 

As used herein, except as otherwise indicated by context, references to “we,” “us,” “our,” or “Numerex” refers to Numerex Corp. and subsidiaries.

 

The following Management’s Discussion and Analysis is intended to help the reader understand our results of operations and financial condition. This discussion and analysis is provided as a supplement to, and should be read in conjunction with, our unaudited condensed consolidated financial statements and the accompanying notes included in this Quarterly Report on Form 10-Q for the period ended June 30, 2017.

 

Numerex Corp. (“Numerex,” the “Company” or “we”) is headquartered in Atlanta, Georgia, and is a corporation organized under the laws of the Commonwealth of Pennsylvania. We are a single source, leading provider of managed enterprise solutions enabling the Internet of Things (IoT). We empower enterprise operations with world-class, managed IoT solutions that are simple, innovative, scalable and secure.

 

During the quarter ended June 30, 2017, we had revenues of $14.0 million, and a net loss of $3.1 million; compared with revenues and a net loss of $17.6 million and $8.3 million, respectively for the quarter ended June 30, 2016.

 

Our core strategy is to generate long term and sustainable recurring revenue through a portfolio of managed, end-to-end IoT solutions which are generally sold on a subscription basis and built on our horizontal, integrated platform. Our solutions incorporate the key IoT building blocks – Device, Network, Application and Platform. Our solutions also simplify the implementation and improve the speed to market for enterprise users in select, targeted verticals in the asset monitoring and optimization, asset tracking, and safety and security markets.

 

Our strategy requires significant capital investment to develop and enhance our use of technology and to maintain our leadership position and competitive advantage in the markets we serve.

 

  17  

 

 

Subscription and support revenue is recognized monthly as services are provided and sales of embedded devices and hardware are recognized when title passes. Other upfront payment revenue is deferred and amortized on a straight line basis.

 

Due to fluctuations of the commencement of new contracts and renewal of existing contracts, we expect variability of sequential quarterly trends in revenues, margins and cash flows. Other factors contributing to sequential quarterly trends include usage, rate changes, and re-pricing of contract renewals and technology changes.

 

Historically, our revenues and expenses in the first quarter have been modestly affected by slowing of customer purchase activities during the holidays. As a result, historical quarterly fluctuations may not be indicative of future operating results.

 

As part of our effort to build and enhance our core business, we conduct ongoing business strategy reviews. During our reviews, we consider opportunities for growth in existing and new markets that may involve growth derived from both existing operations as well as from future acquisitions, if any. To the extent existing business lines and service offerings are not considered to be compatible with delivery of our core business services or with meeting our financial objectives, we may exit non-core lines of business or stop offering these services in part or in whole.

 

Results of Operations

 

Three Months Ended June 30, 2017 and 2016

 

The following table sets forth selected consolidated results of operations for the periods indicated, including comparative information between the periods (dollars in thousands):

 

    Three Months Ended June 30,     Change from  
    2017     2016     2016 to 2017  
Net revenues:                                                
Subscription and support revenues   $ 12,680       90.7 %   $ 14,810       84.1 %   $ (2,130 )     -14.4 %
Embedded devices and hardware     1,300       9.3 %     2,796       15.9 %     (1,496 )     -53.5 %
Total net revenues     13,980       100.0 %     17,606       100.0 %     (3,626 )     -20.6 %
Cost of sales                                                
Subscription and support revenues     5,364       38.4 %     5,713       32.4 %     (349 )     -6.1 %
Embedded devices and hardware     1,312       9.4 %     3,314       18.8 %     (2,002 )     -60.4 %
Gross profit     7,304       52.2 %     8,579       48.7 %     (1,275 )     -14.9 %
Operating expenses:                                                
Sales and marketing     2,693       19.3 %     3,270       18.6 %     (577 )     -17.6 %
General and administrative     2,431       17.4 %     3,859       21.9 %     (1,428 )     -37.0 %
Engineering and development     1,704       12.2 %     2,444       13.9 %     (740 )     -30.3 %
Depreciation and amortization     1,443       10.3 %     1,677       9.5 %     (234 )     -14.0 %
Impairment of goodwill and other                                                
other intangible assets     -       0.0 %     4,172       23.7 %     (4,172 )     -100.0 %
Restructuring charges     355       2.5 %     1,243       7.1 %     (888 )     -71.4 %
Operating loss     (1,322 )     -9.5 %     (8,086 )     -45.9 %     6,764       -83.7 %
Interest expense     742       5.3 %     460       2.6 %     282       61.3 %
Loss on extinguishment of debt     861       6.2 %     -       0.0 %     861       100.0 %
Other income (expense), net     70       0.5 %     (22 )     -0.1 %     92       -418.2 %
Loss before income taxes     (2,995 )     -21.4 %     (8,524 )     -48.4 %     5,529       -64.9 %
Income tax expense (benefit)     81       0.6 %     (234 )     -1.3 %     315       -134.6 %
Net loss   $ (3,076 )     -22.0 %   $ (8,290 )     -47.1 %   $ 5,214       -62.9 %
Adjusted EBITDA (1)   $ 1,403       10.0 %   $ 627       3.6 %   $ 776       123.7 %

 

 

(1) – Adjusted EBITDA is not a financial measure prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). See further discussion, including reconciliation to the most comparable GAAP measure, under the caption Non-GAAP Financial Measures below.

 

  18  

 

 

Total revenue decreased $3.6 million, or 20.6%, for the three months ended June 30, 2017 to $14.0 million from $17.6 million for the same period in 2016. The decrease in total revenue is related to the decrease in subscription and support revenue as well as embedded devices and hardware revenue, which is discussed below.


Subscription and support revenues decreased $2.1million, or 14.4%, to $12.7 million from $14.8 million in 2016. The decrease is driven by 2G disconnects associated with the AT&T 2G network sunset that occurred on December 31, 2016. Embedded devices and hardware revenue decreased $1.5 million, or 53.5%, to $1.3 million from $2.8 million in 2016. The decrease in revenue is driven by customer’s replacement of their 2G products in 2016 in anticipation of the AT&T 2G network sunset that occurred on December 31, 2016.

Total cost of sales for the three months ended June 30, 2017 decreased $2.4 million, or 26.0%, to $6.7 million compared to $9.0 million for the same period in 2016. Comprising that decrease, the cost of sales for subscription and support services decreased $0.3 million, or 6.12%, to $5.4 million for the three months ended June 30, 2017 compared to $5.7 million for the same period in 2016. Cost of sales for embedded devices and hardware decreased $2.0 million, or 60.4% to $1.3 million for the three months ended June 30, 2017 compared to $3.3 million for the same period in 2016.

 

Total gross profit for the period ended June 30, 2017 decreased $1.3 million, or 14.9% to $7.3 million compared to $8.6 million for the same period in 2016 for the reasons stated above. Gross profit margin percentage increased to 52.2% for the three months ended June 30, 2017 from 48.7% for the same period in 2016. The increase in gross margin was driven primarily by a reduction in carrier fees and the sale of fully reserved inventory during the three months ended June 30, 2017.

 

Sales and marketing expense decreased $0.6 million, or 17.6%, for the three months ended June 30, 2017 to $2.7 million compared to $3.3 million for the same period in 2016. The decrease is primarily attributable to a decline in promotional activities during the quarter and reduced travel costs.

 

General and administrative expense decreased $1.4 million, or 37.1%, to $2.4 million for the three months ended June 30, 2017, compared to $3.9 million for the same period in 2016. The decrease is driven primarily by reduced general and administrative salary cost resulting from a reduction in headcount and lower travel costs.

 

Engineering and development expenses decreased $0.7 million, or 30.3% to $1.7 million for the three months ended June 30, 2017, compared to $2.4 million for the same period in 2016. The decrease is primarily related to reduced headcount in engineering and development, and lower travel costs.

 

Depreciation and amortization expense decreased $0.2 million, or 14.0% to $1.4 million for the three months ended June 30, 2017, compared to $1.7 million for the same period in 2016.

 

Restructuring charges were $0.4 million for the three months ended June 30, 2017, compared to $1.2 million for the same period in 2016. The decrease is due to $0.8 million in facility charges recorded in June 2016 related to the relocation of our corporate headquarters.

 

Loss on the extinguishment of debt of $0.9 million for the three months ended June 30, 2017 was related to repayment of the outstanding term loans and other obligations under the Crystal Loan Agreement which took place on June 7, 2017.

 

Interest expense was $0.7 million in expense for the three months ended June 30, 2017 compared to $0.5 million in interest expense for the same period in 2016. The increase is due to interest expense on our subordinated debt.

 

  19  

 

 

We recorded tax expense of $0.1 million and a tax benefit of $0.2 million for the three months ended June 30, 2017, and 2016 respectively. The effective tax rates were (2.2%) and 2.7% for the three months ended June 30, 2017 and 2016, respectively. For both periods, the difference in the effective tax rate compared to the federal statutory rate, and the reason we recorded deferred income tax expense while generating a net loss before income taxes, are due primarily to the book and tax basis and accounting difference for certain long and indefinite lived assets. We have also recognized a provision for income tax expense for certain state income taxes that cannot utilize offsetting net operating losses.

 

Six Months Ended June 30, 2017 and 2016

 

The following table sets forth selected consolidated results of operations for the periods indicated, including comparative information between the periods (dollars in thousands):

 

    Six Months Ended June 30,     Change from  
    2017     2016     2016 to 2017  
Net revenues:                                                
Subscription and support revenues   $ 26,150       86.1 %   $ 29,794       83.6 %   $ (3,644 )     -12.2 %
Embedded devices and hardware     4,216       13.9 %     5,862       16.4 %     (1,646 )     -28.1 %
Total net revenues     30,366       100.0 %     35,656       100.0 %     (5,290 )     -14.8 %
Cost of sales                                                
Subscription and support revenues     10,828       35.7 %     11,414       32.0 %     (586 )     -5.1 %
Embedded devices and hardware     4,344       14.3 %     6,432       18.0 %     (2,088 )     -32.5 %
Gross profit     15,194       50.0 %     17,810       49.9 %     (2,616 )     -14.7 %
Operating expenses:                                                
Sales and marketing     5,835       19.2 %     6,215       17.4 %     (380 )     -6.1 %
General and administrative     5,377       17.7 %     7,988       22.4 %     (2,611 )     -32.7 %
Engineering and development     3,919       12.9 %     4,691       13.2 %     (772 )     -16.5 %
Depreciation and amortization     2,966       9.8 %     3,335       9.4 %     (369 )     -11.1 %
Impairment of goodwill and other                                                
other intangible assets     -       0.0 %     4,172       11.7 %     (4,172 )     -100.0 %
Restructuring charges     780       2.6 %     1,243       3.5 %     (463 )     -37.2 %
Operating loss     (3,683 )     -12.1 %     (9,834 )     -27.6 %     6,151       -62.5 %
Interest expense     1,363       4.5 %     727       2.0 %     636       87.5 %
Loss on extinguishment of debt     1,089       3.6 %     290       0.8 %     799       75.5 %
Other expense (income), net     801       2.6 %     (65 )     -0.2 %     866       -1332.3 %
Loss before income taxes     (6,936 )     -22.8 %     (10,786 )     -30.3 %     3,850       -35.7 %
Income tax expense (benefit)     165       0.5 %     (170 )     -0.5 %     335       -197.1 %
Net loss   $ (7,101 )     -23.4 %   $ (10,616 )     -29.8 %   $ 3,515       -33.1 %
Adjusted EBITDA (1)   $ 1,938       6.4 %   $ 1,484       4.2 %   $ 454       30.6 %

 

 

(1) – Adjusted EBITDA is not a financial measure prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). See further discussion, including reconciliation to the most comparable GAAP measure, under the caption Non-GAAP Financial Measures below.

 

Total revenue decreased $5.3 million, or 14.8%, for the six months ended June 30, 2017 to $30.4 million from $35.7 million for the same period in 2016. The decrease in total revenue is primarily related to the decreases in subscription and support revenue and embedded devices and hardware revenue, which is discussed below.

 

Subscription and support revenues decreased $3.6 million, or 12.2%, to $26.1 million from $29.8 million in 2016. The decrease is driven by 2G disconnects associated with the AT&T 2G network sunset that occurred on December 31, 2016. Embedded devices and hardware revenue decreased $1.7 million, or 28.1%, to $4.2 million from $5.9 million in 2016. The decrease is driven by customer’s replacement of their 2G products in 2016 in anticipation of the AT&T 2G network sunset that occurred on December 31, 2016.

 

  20  

 

 

Total cost of sales for the six months ended June 30, 2017 decreased $2.6 million, or 14.7%, to $15.2 million compared to $17.9 million for the same period in 2016. Comprising that decrease, the cost of sales for subscription and support services decreased $0.6 million, or 5.1%, to $10.8 million for the six months ended June 30, 2017 compared to $11.4 million for the same period in 2016. Cost of sales for embedded devices and hardware decreased $2.1 million, or 32.5% to $4.4 million for the six months ended June 30, 2017 compared to $6.4 million for the same period in 2016. The total decrease in cost of sales is primarily related to a reduction of embedded devices and hardware sales in 2017 versus the comparable period in 2016.

 

Total gross profit for the period ended June 30, 2017 decreased $2.6 million, or 14.7% to $15.2 million compared to $17.8 million for the same period in 2016 for the reasons stated above. Gross profit margin percentage increased to 50.0% for the six months ended June 30, 2017 from 49.9% for the same period in 2016.

 

Sales and marketing expense decreased $0.4 million, or 6.1%, for the six months ended June 30, 2017 to $5.8 million compared to $6.2 million for the same period in 2016. The decrease is primarily attributable to a decline in promotional activities during the quarter, as well as reduced headcount and lower travel costs.

 

General and administrative expense decreased $2.6 million, or 32.7%, to $5.4 million for the six months ended June 30, 2017, compared to $8.0 million for the same period in 2016. The decrease is driven primarily by reduced general and administrative salary cost resulting from a reduction in headcount and lower travel costs.

 

Engineering and development expenses decreased $0.8 million, or 16.5% to $3.9 million for the six months ended June 30, 2017, compared to $4.7 million for the same period in 2016. The decrease is driven primarily by reduced engineering and development salary costs resulting from a reduction in headcount, and lower travel costs.

 

Depreciation and amortization expense decreased $0.4 million, or 11.1% to $3.0 million for the six months ended June 30, 2017, compared to $3.3 million for the same period in 2016.

 

Restructuring charges were $0.8 million for the six months ended June 30, 2017, compared to $1.2 million for the same period in 2016. The decrease is primarily related to severance and the sublease loss recorded in June 2016 for the relocation of our corporate headquarters.

 

Loss on the extinguishment of debt of $1.1 million for the six months ended June 30, 2017 was related to the refinancing of our debt with Crystal which took place on June 7, 2017. Loss on the extinguishment of debt of $0.3 million for the six months ended June 30, 2016 was related to the refinancing of our debt with Silicon Valley Bank which took place in March 2016.

 

Interest expense was $1.4 million in expense for the six months ended June 30, 2017 compared to $0.7 million in interest expense for the same period in 2016. The increase is due to interest expense on our subordinated debt, as well higher interest rates on our debt.

 

Other expense (income), net was $0.8 million in expense for the six months ended June 30, 2017, and was primarily due to non-capitalizable finance and legal charges related to our debt.

 

We recorded tax expense of $0.2 million and a tax benefit of $0.2 million for the six months ended June 30, 2017, and 2016 respectively. The effective tax rates were (2.2%) and 1.6% for the six months ended June 30, 2017 and 2016, respectively. For both periods, the difference in the effective tax rate compared to the federal statutory rate, and the reason we recorded deferred income tax expense while generating a net loss before income taxes, are due primarily to the book and tax basis and accounting difference for certain long and indefinite lived assets. We have also recognized a provision for income tax expense for certain state income taxes that cannot utilize offsetting net operating losses.

 

Segment Information

 

We have one reportable segment, providing interactive and on-demand Machine to Machine (M2M) enterprise solutions enabling the Internet of Things (IoT).

 

  21  

 

 

Non-GAAP Financial Measures

Earnings before interest, taxes, depreciation and amortization expenses (EBITDA) and Adjusted EBITDA, which are presented below, are non-GAAP measures and do not purport to be alternatives to operating income as a measure of operating performance. We believe EBITDA and Adjusted EBITDA are useful to and used by investors and other users of the financial statements in evaluating our operating performance because it provides them with an additional tool to compare business performance across periods.

 

We believe that:

 

· EBITDA is widely used by investors to measure a company’s operating performance without regard to items such as interest, income tax, and depreciation and amortization expenses, which can vary substantially from company-to-company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired; and

 

· Investors commonly adjust EBITDA information to eliminate the effect of equity-based compensation and other unusual or infrequently occurring items which vary widely from company-to-company and impair comparability.

 

We use EBITDA and Adjusted EBITDA:

 

· as a measure of operating performance to assist in comparing performance from period-to-period on a consistent basis;

 

· as a measure for planning and forecasting overall expectations and for evaluating actual results against such expectations; and

 

· in communications with the board of directors, analysts and investors concerning our financial performance.

 

Although we believe, for the foregoing reasons, that the presentation of non-GAAP financial measures provides useful supplemental information to investors regarding our results of operations, the non-GAAP financial measures should only be considered in addition to, and not as a substitute for, or superior to, any measure of financial performance prepared in accordance with GAAP.

 

Use of non-GAAP financial measures is subject to inherent limitations because they do not include all the expenses that must be included under GAAP and because they involve the exercise of judgment of which charges should properly be excluded from the non-GAAP financial measure. Management accounts for these limitations by not relying exclusively on non-GAAP financial measures, but only using such information to supplement GAAP financial measures. The non-GAAP financial measures may not be the same non-GAAP measures, and may not be calculated in the same manner, as those used by other companies.

 

EBITDA is calculated by adding depreciation and amortization expense, impairment of non-current assets, interest expense, other net non-operating expense and income tax expense and subtracting other net non-operating income and income tax benefit to net (loss) income. Adjusted EBITDA is calculated by excluding the effect of equity-based compensation and additional non-cash and other charges from the calculation of EBITDA. Management believes that this measure provides additional relevant and useful information to investors and other users of our financial data, including our lender, in evaluating the effectiveness of our operations and underlying business trends in a manner that is consistent with management’s evaluation of business performance.

 

We believe that excluding depreciation and amortization expenses of property, equipment and intangible assets to calculate EBITDA and Adjusted EBITDA provides supplemental information and an alternative presentation that is useful to our lender and investors’ understanding of our core operating results and trends. Not only are depreciation and amortization expenses based on historical costs of assets that may have little bearing on present or future replacement costs, but also they are based on our estimates of remaining useful lives.

 

We believe that excluding the effects of equity-based compensation from non-GAAP financial measures provides supplemental information and an alternative presentation useful to investors’ understanding of our core operating results and trends. Investors have indicated that they consider financial measures of our results of operations excluding equity-based compensation as important supplemental information useful to their understanding of our historical results and estimating our future results.

 

  22  

 

 

Equity-based compensation is an important part of total compensation, especially from the perspective of employees. We believe, however, that supplementing GAAP income from continuing operations by providing income from continuing operations, excluding the effect of equity-based compensation in all periods, is useful to investors because it enables additional and more meaningful period-to-period comparisons.

 

Restructuring, non-cash and other charges, includes severance, one-time facility costs, inventory reserves, one-time legal costs for transaction related work, and other one-time items. We believe these costs are unusual costs that we do not expect to recur on a regular basis, and consequently, we do not consider these charges as a component of ongoing operations.

 

EBITDA and Adjusted EBITDA are not measures of liquidity calculated in accordance with GAAP, and should be viewed as a supplement to – not a substitute for – results of operations presented on the basis of GAAP. EBITDA and Adjusted EBITDA do not purport to represent cash flow provided by operating activities as defined by GAAP. Furthermore, EBITDA and Adjusted EBITDA are not necessarily comparable to similarly-titled measures reported by other companies.

 

The following table reconciles the specific items excluded from GAAP in the calculation of EBITDA and Adjusted EBITDA for the periods indicated below (in thousands, except per share amounts):

 

    Three Months     Six Months  
    Ended June 30,     Ended June 30,  
    2017     2016     2017     2016  
Net loss   $ (3,076 )   $ (8,290 )   $ (7,101 )   $ (10,616 )
Depreciation and amortization expense     1,835       2,005       3,808       3,969  
Impairment of goodwill and other intangible assets     -       4,172       -       4,172  
Interest expense and other non- operating expense, net     1,673       438       3,253       952  
Income tax expense (benefit)     81       (234 )     165       (170 )
EBITDA (non-GAAP)     513       (1,909 )     125       (1,693 )
Equity-based compensation expense     515       830       745       1,451  
Restructuring, non-cash and other charges     375       1,706       1,068       1,726  
Adjusted EBITDA (non-GAAP)   $ 1,403     $ 627     $ 1,938     $ 1,484  

 

Restructuring, non-cash and other charges, includes severance, one-time facility costs, inventory reserves, one-time legal costs for transaction related work, and other one-time items. We believe these costs are unusual costs that we do not expect to recur on a regular basis, and consequently, we do not consider these charges as a component of ongoing operations.

 

Liquidity and Capital Resources

 

We use the net cash generated from our operations to fund new product development, upgrades to our technology and to invest in new businesses. Our sources of funds, principally from operations and, to the extent necessary, from external financing arrangements, are sufficient to meet ongoing operations and investing requirements through at least June 2018.

 

We had working capital of $2.4 million as of June 30, 2017, compared to $8.6 million as of December 31, 2016. We had cash balances of $5.6 million as of June 30, 2017 compared to $9.5 million at December 31, 2016. The Company does not have any additional borrowing capacity under the Note Purchase Agreement with Hale Capital.

 

  23  

 

 

Net cash used in operating activities for the six month period ended June 30, 2017 was $2.9 million and net cash used in operations was $1.4 million for the six month period ended June 30, 2016.

 

Net cash used in investing activities for the six month period ended June 30, was $1.3 million, representing expenditures of $0.2 million for tangible assets and $1.1 million for software and capitalization of internally developed software, compared to $1.8 million for the six month period ended June 30, 2016.

 

Net cash provided by financing activities for the six month period ended June 30, 2017 was $0.3 million, primarily due to the refinancing of our term debt under the Crystal Loan Agreement with the Notes issued under the Note Purchase Agreement. Net cash used in financing activities was $3.1million for the six month period ended June 30, 2016.

 

Off-Balance Sheet Arrangements

 

As of June 30, 2017, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

 

Critical Accounting Policies

 

There have been no material changes in our critical accounting policies, estimates and judgments during the three months ended June 30, 2017, compared to the disclosures in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2016, except for the early adoption of guidance which changes the classification analysis of certain equity-linked instruments with down round features., which is discussed in Note J – Recent Accounting Pronouncements.

 

  24  

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risks.

 

The market risk in our financial instruments represents the potential loss arising from adverse changes in financial rates. We are exposed to market risk in the area of interest rates. These exposures are directly related to our normal funding and investing activities.

 

We also hold cash balances in accounts with commercial banks in the United States and foreign countries. These cash balances represent operating balances only and are invested in short-term time deposits of the local bank. Such operating cash balances held at banks outside the United States are denominated in the local currency and are minor. We held $0.3 million in foreign bank accounts as of June 30, 2017 and December 31, 2016, respectively.

 

Foreign Currency

 

The assets and liabilities of our foreign operations are translated into U.S. dollars at current exchange rates, and revenues and expenses are translated at the ending exchange rate from the prior period which materially approximates the average exchange rates for each period. Resulting translation adjustments are reflected as other comprehensive (loss) income within shareholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. Except for transactions with customers and vendors in Canada, substantially all other transactions are denominated in U.S. dollars. Foreign operations were not significant to us for the quarter or year to date ended June 30, 2017.

 

Interest Rate Risk

 

We are exposed to changes in interest rates on our long term debt that carries variable rate interest. The impact of a 100 basis point change in interest rates would result in a change in annual interest expense of $0.2 million.

 

Item 4. Controls and Procedures.

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in the Securities Exchange Act Rules 13a – 15(f). Our internal control system is designed to provide reasonable assurance to our management and the Board of Directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance as to the reliability of financial statement preparation and presentation. Our management assessed the effectiveness of our internal control over financial reporting as of June 30, 2017. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control – Integrated Framework , issued in 2013. Based on this assessment, management concludes that, as of June 30, 2017, our internal control over financial reporting is effective based on those criteria.

 

Changes in Internal Control Over Financial Reporting

 

During the quarter ended June 30, 2017, there were no significant changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

  25  

 

 

PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

We currently are not involved in any pending material litigation.

 

Item 1A. Risk Factors.

 

For information regarding factors that could affect our results of operations, financial condition and liquidity, see the risk factors discussion set forth in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 as previously filed with the SEC, and the information under “Forward-Looking Statements” included in this Quarterly Report on Form 10-Q.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None - not applicable

 

Item 3. Defaults Upon Senior Securities.

 

None - not applicable.

 

Item 4. Mine Safety Disclosures.

 

None - not applicable.

 

Item 5. Other Information.

 

None - not applicable.

 

Item 6. Exhibits.

 

Exhibit
Number
  Description
     
4.1  

Warrant to Purchase Stock issued to HCP-FVF, LLC

     
10.1++   Note Purchase Agreement by and among Numerex Corp., as borrower, the other parties thereto designated as Borrowers and Guarantors, and HCP-FCF, LLC as Collateral Agent, dated as of June 7, 2017 (including the form of Note attached thereto as Exhibit A)
     
10.2   Guaranty and Collateral Agreement
     
31.1   Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a)
     
31.2   Certification of Chief Financial Officer, Executive Vice President, and Principal Financial and Accounting Officer Pursuant to Exchange Act Rule 13a-14(a)
     
32.1   Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
32.2   Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
101   The following financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, formatted in eXtensible Business Reporting Language (XBRL): (i) the Unaudited Condensed Consolidated Balance Sheets, (ii) Unaudited Condensed Consolidated Statement of Operations and Comprehensive (Loss) Income, (iii) Unaudited Consolidated Statements of Cash Flows, (iv) Unaudited Condensed Consolidated Statement of Shareholders Equity and (v) Unaudited Condensed Notes to Consolidated Financial Statements*

 

 

* This exhibit is furnished and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (15 U.S.C. 78r), or otherwise subject to the liability of that section. Such exhibit will not be deemed to be incorporated by reference into any filing under the Securities Act or Securities Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.

 

++ Confidential treatment has been requested as to certain portions of this exhibit, which portions have been omitted and submitted separately to the Securities and Exchange Commission.

 

 

  26  

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  NUMEREX CORP.
  (Registrant)
   
August 8, 2017 /s/ Kenneth L. Gayron
  Kenneth L. Gayron
  Interim Chief Executive Officer, Chief Financial Officer and Principal Financial and Accounting Officer

 

  27  

 

 

Exhibit 4.1

 

EXECUTION VERSION

 

NEITHER THIS WARRANT NOR THE SECURITIES FOR WHICH THIS WARRANT IS EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES OR BLUE SKY LAWS.

 

NUMEREX CORP.

 

WARRANT

 

Warrant No. HC-1 Dated: June 7, 2017

 

NUMEREX CORP, a Pennsylvania corporation (the “ Company ”), hereby certifies that, for value received, HCP-FVF, LLC or its registered assigns (the “ Holder ”), is entitled to purchase from the Company up to a total of 895,944 (subject to adjustment as provided herein) fully paid and non-assessable shares of common stock, no par value per share (the “ Common Stock ”), of the Company (each such share, a “ Warrant Share ” and all such shares, the “ Warrant Shares ”) at an exercise price equal to $4.14 per share (as adjusted from time to time as provided in Section 9 , the “ Exercise Price ”), at any time and from time to time from and after the date hereof (the “ Issuance Date ”) and through and including June 7, 2027 (the “ Expiration Date ”), and subject to the following terms and conditions. This Warrant (this “ Warrant ”) is being issued pursuant to Section 3.6 of that certain Note Purchase Agreement, dated as of the date hereof (as amended, amended and restated, supplemented, or otherwise modified from time to time, the “ Note Purchase Agreement ”), by and among the Company, the Guarantors (as defined therein) from time to time party thereto, the Purchasers (as defined therein) from time to time party thereto, and the Holder, as collateral agent for itself and the Purchasers (in such capacity and together with its successors and assigns, the “ Collateral Agent ”).

 

1.              Definitions . In addition to the terms defined elsewhere in this Warrant, capitalized terms that are not otherwise defined herein shall have the meanings set forth below:

 

(a)          “ Business Day ” means a day, other than a Saturday or Sunday, on which banks in New York City are open for the general transaction of business.

 

 

 

 

(b)           “Change of Control” means the occurrence of any of the following in one or a series of related transactions: (i) an acquisition after the Issuance Date by an individual or legal entity or “group” (as described in Rule 13d-5(b)(1) under the Exchange Act) of more than fifty percent (50%) of the voting rights or equity interests in the Company; (ii) a replacement of more than fifty percent (50%) of the members of the Company’s board of directors that is not approved by those individuals who are members of the board of directors on the Issuance Date; (iii) a merger or consolidation of the Company or a sale of all or substantially all of the assets of the Company in one or a series of related transactions, unless following such transaction or series of transactions, the holders of the Company’s securities prior to the first such transaction continue to hold at least fifty percent (50%) of the voting rights and equity interests in the surviving entity or acquirer of such assets, as applicable; (iv) a recapitalization, reorganization or other transaction involving the Company that constitutes or could result in a transfer of more than fifty percent (50%) of the voting rights or equity interests in the Company; (v) consummation of a “Rule 13e-3 transaction” as defined in Rule 13e-3 under the Exchange Act with respect to the Company; or (vi) the execution by the Company or its controlling shareholders of an agreement providing for or that will result in any of the foregoing events.

 

(c)          “ Closing Date ” means June 7, 2017.

 

(d)          “ Closing Price ” 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 an Eligible Market or any other national securities exchange, the closing bid price per share of Common Stock for such date (or the nearest preceding date) on the primary Eligible Market or exchange on which the Common Stock is then listed or quoted; (b) if the Common Stock is then listed or quoted on the OTC Bulletin Board, the most recent closing bid price per share of Common Stock so reported; (c) 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 most recent bid price per share of Common Stock so reported; or (d) in all other cases, the fair market value of a share of Common Stock as mutually determined by the Company and the Holder in their sole discretion. If the Company and the Holder are unable to so agree upon the fair market value of a share of Common Stock, then such dispute shall be resolved in accordance with the procedures in Section 17(f).

 

(e)          “ Commission ” means the U.S. Securities and Exchange Commission.

 

(f)           “ Convertible Securities ” means any stock or securities (other than Options) directly or indirectly convertible into or exercisable or exchangeable for Common Stock.

 

(a)          “ Effective Date ” means the date that a Registration Statement or Registration Statements covering the Registrable Securities has been declared effective by the Commission.

 

(b)          “ Eligible 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 NASDAQ Global Market, The NASDAQ Global Select Market, The NASDAQ Capital Market, the New York Stock Exchange, NYSE Arca or the NYSE MKT (or any successor to any of the foregoing).

 

(c)          “ Exchange Act ” means the Securities Exchange Act of 1934, as amended, or any successor statute, and the rules and regulations promulgated thereunder.

 

  2  

 

 

(d)          “ Excluded Stock ” means the issuance of (i) Common Stock upon the conversion of any Convertible Securities or Options outstanding as of the Closing Date, pursuant to the terms (including price) of such Convertible Securities or Options, as applicable, as of the Closing Date, (ii) Common Stock as a dividend on the Common Stock distributed pro rata to the holders thereof, (iii) Options (and the issuance of Common Stock upon exercise thereof) or restricted stock of the Company to employees, officers, directors or consultants of the Company pursuant to a stock option plan, restricted stock agreement or other incentive stock plan or pursuant to any employee benefit plan, in each case as in effect on the Closing Date, (iv) Options (and the issuance of Common Stock upon exercise thereof) or restricted stock of the Company to employees, officers, directors or consultants of the Company pursuant to a stock option plan, restricted stock agreement or other incentive stock plan or pursuant to any employee benefit plan, in each case, if not in effect on the Closing Date, as approved by the Company’s Board of Directors, in an aggregate amount not to exceed six percent (6%) of the outstanding Common Stock on a fully diluted basis in any 12 month period and (v) the Underlying Shares.

 

(e)          “ Filing Date ” means, with respect to (i) the initial Registration Statement required to be filed pursuant to Section 11(a)(i) of this Warrant, the ninetieth (90 th ) day following the Issuance Date and (ii) any additional Registration Statement required to be filed pursuant to Section 11 of this Warrant, the ninetieth (90 th ) day following the date thereof.

 

(f)           “ Holder Counsel ” means Proskauer Rose LLP.

 

(g)           “Losses” means any and all damages, fines, penalties, deficiencies, liabilities, claims, losses (including loss of value), judgments, awards, settlements, taxes, actions, obligations and costs and expenses in connection therewith (including, without limitation, interest, court costs and fees and expenses of attorneys, accountants and other experts, or any other expenses of litigation or other Proceedings or of any default or assessment).

 

(h)          “ Options ” means any rights, warrants or options to, directly or indirectly, subscribe for or purchase Common Stock or Convertible Securities.

 

(a)          “ Person ” means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind.

 

(b)           “Proceeding” means an action, claim, suit, investigation or proceeding (including, without limitation, an investigation or partial proceeding, such as a deposition).

 

(c)           “Prospectus” means the prospectus included in the Registration Statement (including, without limitation, a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by the Registration Statement, and all other amendments and supplements to the Prospectus including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus.

 

  3  

 

 

(d)           “Registrable Securities” means the Warrant Shares (including any Warrant Shares issuable pursuant to the anti-dilution provisions hereof), together with any securities issued or issuable in exchange for the Warrant Shares or upon any stock split, dividend or other distribution, recapitalization or similar event with respect to the foregoing.

 

(e)           “Registration Statement” means the initial registration statement required to be filed under Section 11(a)(i) of this Warrant and any additional registration statements contemplated by Section 11 of this Warrant, including (in each case) the Prospectus, amendments and supplements to such registration statement or Prospectus, including pre- and post-effective amendments, all exhibits thereto, and all material incorporated by reference or deemed to be incorporated by reference in such registration statement.

 

(f)          “ Required Effectiveness Date ” means with respect to (i) the initial Registration Statement required pursuant to Section 11(a)(i) of this Warrant, the one hundred eightieth (180 th ) day following the Issuance Date and (ii) any additional Registration Statement required pursuant to Section 11 of this Warrant, the 180 th day following the date thereof; provided , however , in the event the Company is notified by the Commission that the Registration Statement will not be reviewed or is no longer subject to further review and comments, the Required Effectiveness Date as to such Registration Statement shall be the fifth (5 th ) Trading Day following the date on which the Company is so notified if such date precedes the dates required above.

 

(g)           “Rule 144,” “Rule 415,” and “Rule 424” means Rule 144, Rule 415 and Rule 424, respectively, promulgated by the Commission pursuant to the Securities Act, as such Rules may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule.

 

(h)           “Securities Act” means the Securities Act of 1933, as amended, or any successor statute, and the rules and regulations promulgated thereunder.

 

(i)          “ Trading Day ” means (a) any day on which the Common Stock is listed or quoted and traded on its primary Trading Market, or (b) if the Common Stock is not then listed or quoted and traded on any Trading Market, then any Business Day.

 

(j)          “ Trading Market ” means The NASDAQ Global Select Market or any other primary Eligible Market or national securities exchange on which the Common Stock is then listed or quoted.

 

(k)          “ Underlying Shares ” means the shares of Common Stock issued or issuable upon exercise of the Warrants, and any securities issued or issuable in exchange for or in respect of such securities.

 

(l)           “ VWAP ” means, on any particular Trading Day or for any particular period, the volume weighted average trading price per share of Common Stock on such Trading Day or for such particular period on the Eligible Market on which the Common Stock is then traded as reported by Bloomberg L.P., through its “Volume at Price” functions, or any successor performing similar functions, or, if the foregoing does not apply, the average of the highest Closing Price and the lowest closing ask price of the Common Stock on the OTC Bulletin Board or, if none of the foregoing applies, the average of the highest Closing Price and the lowest closing ask price of the Common Stock of any of the market makers for the Common Stock as reported in the “pink sheets” by OTC Markets Group Inc.; provided, however , that during any period the VWAP is being determined, the VWAP shall be subject to adjustment from time to time for stock splits, stock dividends, combinations and similar events as applicable.

 

  4  

 

 

 

2.              Registration of Warrant . The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the “ Warrant Register ”), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary.

 

3.              Registration of Transfers . This Warrant and all rights hereunder are transferable in whole or in part upon the books of the Company by the Holder hereof; provided, however, that the transferee shall agree in writing to be bound by the terms and subject to the conditions of this Warrant. The Company shall register the transfer of any portion of this Warrant in the Warrant Register, upon surrender of this Warrant, with the Form of Assignment attached hereto duly completed and signed, to the Company at its address specified herein. Upon any such registration or transfer, a new warrant to purchase Common Stock, in substantially the form of this Warrant (any such new warrant, a “ New Warrant ”), evidencing the portion of this Warrant so transferred shall be issued to the transferee and a New Warrant evidencing the remaining portion of this Warrant not so transferred, if any, shall be issued to the transferring Holder. The acceptance of the New Warrant by the transferee thereof shall be deemed the acceptance by such transferee of all of the rights and obligations of a holder of a Warrant.

 

4.              Exercise and Duration of Warrants .

 

(a)          Subject to the limitations set forth in Section 12 hereof, this Warrant shall be exercisable by the registered Holder at any time and from time to time on or after the Issuance Date to and including the Expiration Date. At 6:30 P.M., New York City time on the Expiration Date, the portion of this Warrant not exercised prior thereto shall be and become void and of no value; provided that, if the Current Market Price on the Expiration Date exceeds the Exercise Price on the Expiration Date, then this Warrant shall be deemed to have been exercised in full (to the extent not previously exercised, and subject to the limitations set forth in Section 12 hereof) on a “cashless exercise” basis at 6:30 P.M. New York City time on the Expiration Date. Notwithstanding anything to the contrary herein, the Expiration Date shall be extended for each day following the Effective Date that the Registration Statement is not effective. For U.S. federal income tax purposes, each Holder and the Company shall treat any "cashless exercise" as a reorganization under Section 368(a)(1)(E) of the Internal Revenue Code of 1986, as amended, unless otherwise required by the IRS or a court.

 

  5  

 

 

(b)          A Holder may exercise this Warrant by delivering to the Company (i) an exercise notice, in the form attached hereto (the “ Exercise Notice ”), appropriately completed and duly signed, and (ii) payment of the Exercise Price for the number of Warrant Shares as to which this Warrant is being exercised (which may take the form of a “cashless exercise” if so indicated in the Exercise Notice), and the date such items are delivered to the Company (as determined in accordance with the notice provisions hereof) is an “ Exercise Date .” The Holder shall not be required to deliver the original Warrant in order to effect an exercise hereunder. Execution and delivery of the Exercise Notice shall have the same effect as cancellation of the original Warrant and issuance of a New Warrant evidencing the right to purchase the remaining number of Warrant Shares. The Holder shall deliver the original Warrant to the Company within thirty (30) days after the full exercise of this Warrant, provided , that the Holder’s failure to so deliver the original Warrant shall not affect the validity of such exercise or any of the Company’s obligations under this Warrant and the Company’s sole remedy for the Holder’s failure to deliver the original Warrant shall be to obtain an affidavit of lost warrant from the Holder.

 

5.              Delivery of Warrant Shares .

 

(a)          Subject to Section 5(c) below and the limitations set forth in Section 12 , upon exercise of this Warrant, the Company shall promptly (but in no event later than three (3) Trading Days after the Exercise Date) credit the Holder’s balance account with DTC for the Warrant Shares issuable upon such exercise or at the Holder’s option issue or cause to be issued and cause to be delivered to or upon the written order of the Holder and in such name or names as the Holder may designate, a certificate for the Warrant Shares issuable upon such exercise, in either case, free of restrictive legends unless a Registration Statement covering the resale of the Warrant Shares and naming the Holder as a selling stockholder thereunder is not then effective and the Warrant Shares are not freely transferable without volume restrictions pursuant to Rule 144. The Holder, or any Person so designated by the Holder to receive Warrant Shares, shall be deemed to have become holder of record of such Warrant Shares as of the Exercise Date. If within three (3) Trading Days after the Exercise Date, the Company shall fail to credit the Holder’s balance account with DTC for the number of Warrant Shares to which the Holder is entitled upon the Holder’s exercise hereunder or at the Holder’s option issue and deliver a certificate to the Holder and register such Warrant Shares on the Company’s share register, then, in addition to the rights set forth in Section 5(c) below and the right to obtain specific performance, the Company shall pay in cash to the Holder on each day after such third (3 rd ) Trading Day that the issuance of such Warrant Shares is not timely effected an amount equal to one percent (1%) of the product of (A) the aggregate number of Warrant Shares not issued to the Holder on a timely basis and to which the Holder is entitled and (B) the Closing Price of the Common Stock on the Trading Day immediately preceding the last possible date on which the Company could have issued such Warrant Shares to the Holder without violating Section 5(a) .

 

(b)          Subject to Section 5(c) below and the limitations set forth in Section 12 hereof, this Warrant is exercisable, either in its entirety or, from time to time, for a portion of the number of Warrant Shares. Upon surrender of this Warrant following one or more partial exercises, the Company shall issue or cause to be issued, at its expense, a New Warrant evidencing the right to purchase the remaining number of Warrant Shares.

 

  6  

 

 

(c)          In addition to any other rights available to a Holder, if the Company fails to credit the Holder’s balance account with DTC for the number of Warrant Shares to which the Holder is entitled upon the Holder’s exercise hereunder or at the Holder’s option deliver or cause to be delivered to the Holder a certificate representing Warrant Shares by the third (3 rd ) Trading Day after the Exercise Date, and if after such third (3 rd ) Trading Day the Holder purchases (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Shares that the Holder anticipated receiving from the Company (a “Buy-In” ), then the Company shall, at the option of the Holder (in its sole discretion), either (i) pay cash to the Holder in an amount equal to the Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased by the Holder (the “Buy-In Price” ), at which point the Company’s obligation to deliver such certificate (and to issue such Warrant Shares) shall terminate, or (ii) promptly honor its obligation to credit the Holder’s balance account with DTC for the number of Warrant Shares to which the Holder is entitled upon the Holder’s exercise hereunder or at the Holder’s option deliver to the Holder a certificate or certificates representing such Warrant Shares and pay cash to the Holder in an amount equal to the excess (if any) of the Buy-In Price over the product of (A) such number of Warrant Shares, times (B) the Closing Price on the date such crediting of the Holder’s balance account with DTC should have occurred hereunder or such certificate should have been delivered hereunder.

 

(d)          The Company’s obligations to issue and deliver Warrant Shares in accordance with the terms and subject to the conditions hereof (including, but not limited to the proper exercise of this Warrant) are absolute and unconditional, irrespective of any action or inaction by the Holder to enforce the same, any waiver or consent with respect to any provision hereof, the recovery of any judgment against any Person or any action to enforce the same, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Holder or any other Person of any obligation to the Company or any violation or alleged violation of law by the Holder or any other Person, and irrespective of any other circumstance which might otherwise limit such obligation of the Company to the Holder in connection with the issuance of Warrant Shares (other than such limitations contemplated by this Warrant). Nothing herein shall limit the Holder’s right to pursue a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely deliver certificates representing shares of Common Stock upon exercise of the Warrant as required pursuant to the terms hereof.

 

(e)          Each certificate for Warrant Shares shall bear a restrictive legend only if (i) there is not then an effective Registration Statement covering the resale of the Warrant Shares and naming the Holder as a selling stockholder thereunder and (ii) the Warrant Shares are not freely transferable without volume restrictions pursuant to Rule 144; provided, that, no such restrictive legend shall be required if, in the opinion of counsel for the Holder (which opinion shall be reasonably satisfactory to counsel for the Company) or the Company, the securities represented thereby are not, at such time, required by law to bear such legend.

 

6.              Charges, Taxes and Expenses . Issuance and delivery of certificates for shares of Common Stock upon exercise of this Warrant shall be made without charge (other than any applicable income taxes) to the Holder for any issue or transfer tax transfer agent fee or other incidental expense in respect of the issuance of such certificates, all of which taxes and expenses shall be paid by the Company; provided, however, that the Company shall not be required to pay any tax or governmental charge that may be payable in respect of any transfer involved in the registration of any certificates for Warrant Shares or Warrants in a name other than that of the Holder or an affiliate thereof and the Company shall not be required to issue or deliver such certificates unless or until the Person or Persons requesting the issuance thereof shall have paid to the Company the amount of such tax or governmental charge or shall have established to the satisfaction of the Company that such tax or governmental charge has been paid.

 

  7  

 

 

7.              Replacement of Warrant . If this Warrant is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation hereof, or in lieu of and substitution for this Warrant, a New Warrant, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and customary and reasonable indemnity, if requested. Applicants for a New Warrant under such circumstances shall also comply with such other reasonable regulations and procedures as the Company may prescribe.

 

8.              Reservation of Warrant Shares . The Company covenants that it will at all times reserve and keep available out of the aggregate of its authorized but unissued and otherwise unreserved Common Stock, solely for the purpose of enabling it to issue Warrant Shares upon exercise of this Warrant as herein provided, the number of Warrant Shares which are then issuable and deliverable upon the exercise of this entire Warrant, free from preemptive rights or any other contingent purchase rights of persons other than the Holder (taking into account the adjustments and restrictions of Section 9 ). The Company covenants that all Warrant Shares so issuable and deliverable shall, upon issuance and the payment of the applicable Exercise Price in accordance with the terms hereof, be duly and validly authorized, issued and fully paid and nonassessable. The Company will take all such action as may be necessary to assure that such shares of Common Stock may be issued as provided herein without violation by the Company of any applicable law or regulation, or of any requirements of any securities exchange or automated quotation system upon which the Common Stock may be listed.

 

9.              Certain Adjustments . The Exercise Price and number of Warrant Shares issuable upon exercise of this Warrant are subject to adjustment from time to time as set forth in this Section 9 .

 

(a)           Stock Dividends and Splits . If the Company, at any time while this Warrant is outstanding, (i) pays a stock dividend on its Common Stock or otherwise makes a distribution on any class of capital stock that is payable in shares of Common Stock, (ii) subdivides outstanding shares of Common Stock into a larger number of shares, or (iii) combines outstanding shares of Common Stock into a smaller number of shares, then in each such case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event. Any adjustment made pursuant to clause (i) of this paragraph shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution, and any adjustment pursuant to clause (ii) or (iii) of this paragraph shall become effective immediately after the effective date of such subdivision or combination.

 

  8  

 

 

(b)           Pro Rata Distributions . If the Company, at any time while this Warrant is outstanding, distributes to holders of Common Stock (and not to all Holders of Warrants in respect of their ownership thereof) (i) evidences of its indebtedness, (ii) any security (other than a distribution of Common Stock covered by the preceding paragraph), (iii) rights or warrants to subscribe for or purchase any security, or (iv) cash or any other asset (in each case, “ Distributed Property ”), then in each such case the Exercise Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution shall be adjusted (effective on such record date) to equal the product of such Exercise Price times a fraction of which the denominator shall be the average of the Closing Prices for the five (5) Trading Days immediately prior to (but not including) such record date and of which the numerator shall be such average less the then fair market value of the Distributed Property distributed in respect of one (1) outstanding share of Common Stock, as determined by the Company’s independent certified public accountants that regularly examine the financial statements of the Company (an “ Appraiser ”). In such event, the Holder, after receipt of the determination by the Appraiser, shall have the right to select an additional appraiser (which shall be a nationally recognized accounting firm), in which case such fair market value shall be deemed to equal the average of the values determined by each of the Appraiser and such appraiser. As an alternative to the foregoing adjustment to the Exercise Price, at the request of the Holder delivered before the 90 th day after such record date, the Company will deliver to such Holder, within five (5) Trading Days after such request (or, if later, on the effective date of such distribution), the Distributed Property that such Holder would have been entitled to receive in respect of the Warrant Shares for which this Warrant could have been exercised immediately prior to such record date. If such Distributed Property is not delivered to a Holder pursuant to the preceding sentence, then upon expiration of or any exercise of the Warrant that occurs after such record date, such Holder shall remain entitled to receive, in addition to the Warrant Shares otherwise issuable upon such exercise (if applicable), such Distributed Property.

 

(c)           Fundamental Transactions . If, at any time while this Warrant is outstanding, (i) the Company effects any merger or consolidation of the Company with or into another Person, (ii) the Company effects any sale of (y) assets responsible for 35% or more of the Company’s revenue for the four most recently completed fiscal quarters immediately preceding such sale or (z) the sale of assets for aggregate consideration equal to 35% or more of the Company’s equity market capitalization on the day prior to the announcement of such sale, (iii) any tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of at least 50% of the Common Stock (excluding any shares held by the Person(s) making such tender or exchange offer) tender or exchange their shares for other securities, cash or property, (iv) the Company effects any reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property (other than as a result of a subdivision or combination of shares of Common Stock covered by Section 9(a) above), or (v) there is a Change of Control (in any such case, a “ Fundamental Transaction ”), then the Holder shall have the right thereafter to receive, upon exercise of this Warrant, the same amount and kind of securities, cash or property as it would have been entitled to receive upon the occurrence of such Fundamental Transaction if it had been, immediately prior to such Fundamental Transaction, the holder of the number of Warrant Shares then issuable upon such exercise of this Warrant (the “ Alternate Consideration ”). The aggregate Exercise Price for this Warrant will not be affected by any such Fundamental Transaction, but the Company shall apportion such aggregate Exercise Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any exercise of this Warrant. The Company shall notify the Holder, in writing, of such Fundamental Transaction at least five (5) days prior to the closing of such Fundamental Transaction (the “ Fundamental Transaction Notice ”), which written notice shall describe the economic terms of the Fundamental Transaction (including the Alternate Consideration issuable upon exercise of this Warrant). In the event of a Fundamental Transaction, the Company or the successor or purchasing Person, as the case may be, shall execute with the Holder a written agreement providing that:

 

  9  

 

 

(x)          this Warrant shall thereafter entitle the Holder to purchase the Alternate Consideration in accordance with this Section 9(c) ,

 

(y)          in the case of any such successor or purchasing Person, upon such consolidation, merger, statutory exchange, combination, sale or conveyance such successor or purchasing Person shall be jointly and severally liable with the Company for the performance of all of the Company’s obligations under this Warrant, and

 

(z)          if registration or qualification is required under the Exchange Act or applicable state law for the public resale by the Holder of shares of stock and other securities so issuable upon exercise of this Warrant, such registration or qualification shall be completed prior to such reclassification, change, consolidation, merger, statutory exchange, combination or sale.

 

If, in the case of any Fundamental Transaction, the Alternate Consideration includes shares of stock, other securities, other property or assets of a Person other than the Company or any such successor or purchasing Person, as the case may be, in such Fundamental Transaction, then such written agreement shall also be executed by such other Person and shall contain such additional provisions to protect the interests of the Holder as the Company’s board of directors shall reasonably consider necessary by reason of the foregoing. At the Holder’s request, any successor to the Company or surviving entity in such Fundamental Transaction shall issue to the Holder a New Warrant consistent with the foregoing provisions and evidencing the Holder’s right to purchase the Alternate Consideration for the aggregate Exercise Price upon exercise thereof. The terms of any agreement pursuant to which a Fundamental Transaction is effected shall include terms requiring any such successor or surviving entity to comply with the provisions of this paragraph (c) and insuring that the Warrant (or any such replacement security) will be similarly adjusted upon any subsequent transaction analogous to a Fundamental Transaction.

 

Notwithstanding the foregoing paragraph or anything contained herein to the contrary, in the event of a Fundamental Transaction, at the request of the Holder delivered on or before the later to occur of (y) the end of the fifth day following Holder’s receipt of the Fundamental Transaction Notice and (z) the closing of the Fundamental Transaction, the Company (or any such successor or surviving entity) will purchase this Warrant from the Holder for a purchase price, payable in cash within five (5) Trading Days after such request, equal to the sum of (1) the greater of (A) the Original Issuance Value (as such term is defined in Exhibit A ) in respect of the remaining unexercised portion of this Warrant and (B) the Black-Scholes value of the remaining unexercised portion of this Warrant on the date of the consummation of the Fundamental Transaction, without regard to any limitations on the exercise hereof (including the inability of the Holder to exercise the Warrant following a Fundamental Transaction) and as determined in accordance with Exhibit A attached hereto and (2) any Distributed Property in accordance with the last sentence of Section 9(b) above.

 

  10  

 

 

(d)          Subsequent Equity Sales.

 

(i)              If,

 

A.           At any time prior to the second anniversary of the Closing Date while this Warrant is outstanding the Company or any subsidiary issues additional shares of Common Stock, Convertible Securities or Options (collectively, “ Common Stock Equivalents ”) at an effective price to the Company (net of any rebates, discounts, fees, commissions or expenses, other than customary expenses) per share of Common Stock (the “ Effective Price ”) less than the Exercise Price (as adjusted hereunder to such date), then, the Exercise Price shall be reduced to a price determined by multiplying the Exercise Price by a fraction, the numerator of which shall be the sum of (A) the number of shares of Common Stock outstanding immediately prior to such issuance multiplied by the Exercise Price, plus (B) the Effective Price multiplied by the number of Common Stock Equivalents so issued, and the denominator of which shall be the product of (1) the sum of (A) the total number of shares of Common Stock outstanding immediately prior to such issuance plus (B) the number of Common Stock Equivalents so issued multiplied by (2) the Exercise Price.

 

B.           At any time on or after the second anniversary of the Closing Date while this Warrant is outstanding, the Company or any subsidiary issues any Common Stock Equivalents at an Effective Price less than the Exercise Price (as adjusted hereunder to such date), then the Exercise Price shall be reduced to equal the Effective Price.

 

If any issuance shall require an adjustment to the Exercise Price pursuant to the foregoing provisions of this Section 9(d), including by operation of paragraph (A) or (B) above, then, effective at the time such adjustment is made, the number of shares of Common Stock subject to purchase upon exercise of this Warrant shall be increased to a number determined by multiplying the number of such shares subject to purchase immediately before such adjustment by a fraction, the numerator of which shall be the Exercise Price in effect immediately prior to such event and the denominator of which shall be the Exercise Price as adjusted in accordance with this Section 9(d). The provisions of this Section 9(d), including by operation of paragraph (A) or (B) above, shall not operate to increase the Exercise Price or reduce the number of shares of Common Stock subject to purchase upon exercise of this Warrant and shall not cause the number of Warrant Shares issuable hereunder to be less than as provided in 9(e). For purposes of this paragraph, in connection with any issuance of any Common Stock Equivalents, (A) the maximum number of shares of Common Stock potentially issuable at any time upon conversion, exercise or exchange of such Common Stock Equivalents (the “ Deemed Number ”) shall be deemed to be outstanding upon issuance of such Common Stock Equivalents, (B) the Effective Price applicable to such Common Stock shall equal the minimum dollar value of consideration payable to the Company to purchase such Common Stock Equivalents and to convert, exercise or exchange them into Common Stock (net of any rebates, discounts, fees, commissions and expenses, other than customary expenses), divided by the Deemed Number, and (C) no further adjustment shall be made to the Exercise Price upon the actual issuance of Common Stock upon conversion, exercise or exchange of such Common Stock Equivalents.

 

  11  

 

 

(ii)            If, at any time while this Warrant is outstanding, the Company directly or indirectly issues Common Stock Equivalents with an Effective Price or a number of underlying shares that floats or resets or otherwise varies or is subject to adjustment based (directly or indirectly) on market prices of the Common Stock (a “ Floating Price Security ”), then for purposes of applying the preceding paragraph in connection with any subsequent exercise, the Effective Price will be determined separately on each Exercise Date and will be deemed to equal the lowest Effective Price at which any holder of such Floating Price Security is entitled to acquire Common Stock on such Exercise Date (regardless of whether any such holder actually acquires any shares on such date).

 

(iii)           The Company shall not issue any Common Stock Equivalents at an Effective Price less than the Exercise Price (as adjusted hereunder to such date) unless prior to such issuance the Company shall have obtained all necessary shareholder and other approvals required for the Exercise Price under this Warrant to be reduced to such Effective Price and for sufficient Warrant Shares to be reserved for issuance upon exercise of this Warrant.

 

(iv)           Notwithstanding the foregoing, no adjustment will be made under this paragraph (d) in respect of any issuances of Common Stock or Common Stock Equivalents made pursuant to the definition of Excluded Stock.

 

(e)           Number of Warrant Shares . Simultaneously with any adjustment to the Exercise Price pursuant to paragraphs (a), (b) or (d) of this Section, the number of Warrant Shares that may be purchased upon exercise of this Warrant shall be increased or decreased proportionately, so that after such adjustment the aggregate Exercise Price payable hereunder for the increased or decreased number of Warrant Shares shall be the same as the aggregate Exercise Price in effect immediately prior to such adjustment.

 

(f)           Calculations . All calculations under this Section 9 shall be made to the nearest cent or the nearest 1/100th of a share, as applicable. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common Stock.

 

(g)           Notice of Adjustments . Upon the occurrence of each adjustment pursuant to this Section 9 , the Company at its expense will promptly compute such adjustment in accordance with the terms of this Warrant and prepare a certificate setting forth such adjustment, including a statement of the adjusted Exercise Price and adjusted number or type of Warrant Shares or other securities issuable upon exercise of this Warrant (as applicable), describing the transactions giving rise to such adjustments and showing in detail the facts upon which such adjustment is based. Upon written request, the Company will promptly deliver a copy of each such certificate to the Holder and to the Company’s transfer agent.

 

  12  

 

 

(h)           Notice of Corporate Events . If the Company (i) declares a dividend or any other distribution of cash, securities or other property in respect of its Common Stock, including without limitation any granting of rights or warrants to subscribe for or purchase any capital stock of the Company or any subsidiary, (ii) authorizes or approves, enters into any agreement contemplating or solicits stockholder approval for a Fundamental Transaction, or (iii) authorizes the voluntary dissolution, liquidation or winding up of the affairs of the Company, then the Company shall deliver to the Holder a notice describing the material terms and conditions of such transaction, at least twenty (20) calendar days prior to the applicable record or effective date on which a Person would need to hold Common Stock in order to participate in or vote with respect to such transaction, and the Company will take all steps reasonably necessary in order to insure that the Holder is given the practical opportunity to exercise this Warrant prior to such time so as to participate in or vote with respect to such transaction; provided, however, that the failure to deliver such notice or any defect therein shall not affect the validity of the corporate action required to be described in such notice.

 

10.            Payment of Exercise Price . The Holder, at its election, may either pay the Exercise Price in immediately available funds, or satisfy its obligation to pay the Exercise Price through a “cashless exercise,” in which event the Company shall issue to the Holder the number of Warrant Shares determined as follows:

 

  X = Y [(A-B)/A]
where:  
  X = the number of Warrant Shares to be issued to the Holder.
   
  Y = the number of Warrant Shares with respect to which this Warrant is being exercised.
   
  A = the Current Market Price (as of the date of such calculation) of one share of Common Stock .
   
  B = the Exercise Price (as adjusted to the date of such calculation).

 

For purposes of this Warrant, the “ Current Market Price ” of one share of the Company’s Common Stock as of a particular date shall be determined as follows: (a) if traded on a national securities exchange (including the Nasdaq Stock Market), the Current Market Price shall be deemed to be the arithmetic average of the VWAPs for the ten (10) consecutive Trading Days immediately preceding the applicable date; (b) if traded over-the-counter but not on the Nasdaq Stock Market, the Current Market Price shall be deemed to be the average of the closing bid and asked prices as of ten (10) Business Days immediately prior to the date of exercise indicated in the Notice of Exercise; and (c) if there is no active public market, the Current Market Price shall be the fair market value of a share of Common Stock as mutually determined by the Company and the Holder. If the Company and the Holder are unable to so agree upon the fair market value of a share of Common Stock, then such dispute shall be resolved in accordance with the procedures in Section 17(f).

 

  13  

 

 

For purposes of Rule 144 (as in effect on the Issuance Date), it is intended, understood and acknowledged that the Warrant Shares issued in a cashless exercise transaction shall be deemed to have been acquired by the Holder, and the holding period for the Warrant Shares shall be deemed to have commenced, on the Issuance Date.

 

11.            Registration Rights.

 

(a)           Resale Registration .

 

(i)              As promptly as reasonably possible, and in any event on or prior to the Filing Date, the Company shall prepare and file with the Commission a Registration Statement covering the resale of all Registrable Securities for an offering to be made on a continuous basis pursuant to Rule 415. If for any reason the Commission does not permit all of the Registrable Securities to be included in such Registration Statement, then the Company shall not be obligated to include such Registrable Securities in such Registration Statement but the Company shall prepare and file with the Commission a separate Registration Statement with respect to any such Registrable Securities not included with the initial Registration Statement, as expeditiously as reasonably possible, but in no event later than the date which is thirty (30) days after the date on which the Commission shall indicate as being the first date such filing may be made. The Registration Statement shall be on Form S-3 and shall contain (except if otherwise directed by the Holder) the “Plan of Distribution”, substantially as attached hereto as Exhibit B . In the event the Form S-3 is not available for the registration of the resale of Registrable Securities hereunder, the Company shall (i) register the resale of the Registrable Securities on another appropriate form in accordance herewith as the Holder may consent and (ii) attempt to register the Registrable Securities on Form S-3 as soon as such form is available, provided that the Company shall maintain the effectiveness of the Registration Statement then in effect until such time as a Registration Statement on Form S-3 covering the Registrable Securities has been declared effective by the Commission.

 

(ii)             The Company shall use reasonable best efforts to cause the Registration Statement to be declared effective by the Commission as promptly as reasonable possible after the filing thereof, but in any event prior to the Required Effectiveness Date, and shall use reasonable best efforts to keep the Registration Statement continuously effective under the Securities Act until the earliest of (i) the fifth (5th) anniversary of the Effective Date, (ii) such time as all of the Registrable Securities may be sold to the public pursuant to Rule 144 without any volume or manner-of-sale restrictions and without the requirement for the Company to be in compliance with the current public information requirement under Rule 144(c)(1), or (iii) such time as all Registrable Securities covered by such Registration Statement have been sold publicly (the “Effectiveness Period” ).

 

(iii)            The Company shall notify the Holder in writing promptly (and in any event within one Business Day) after receiving notification from the Commission that the Registration Statement has been declared effective.

 

  14  

 

 

(iv)            Except as contemplated by section 1.7 of the Warrant to Purchase Stock, dated March 31, 2017, issued by the Company to Kenneth Rainin Foundation, the Company shall not, prior to the Effective Date of the Registration Statement, prepare and file with the Commission a registration statement relating to an offering for its own account or the account of others under the Securities Act of any of its equity securities (other than a Registration Statement on Form S-8).

 

(v)             If the Company issues to the Holder any Common Stock pursuant to the Warrant that is not included in the initial Registration Statement, then the Company shall file an additional Registration Statement covering such number of shares of Common Stock on or prior to the Filing Date and shall use reasonable best efforts to cause such additional Registration Statement to become effective by the Commission by the Required Effectiveness Date.

 

(b)           Registration Procedures . In connection with the Company’s registration obligations hereunder, the Company shall:

 

(i)              Not less than four (4) Trading Days prior to the filing of a Registration Statement or any related Prospectus or any amendment or supplement thereto (other than any document that would be incorporated or deemed to be incorporated therein by reference), the Company shall furnish to the Holder and Holder Counsel copies of all such documents proposed to be filed and shall reasonably consider any comments thereto from the Holder and Holder Counsel. The Company shall not file a Registration Statement or any such Prospectus or any amendments or supplements thereto to which Holder shall reasonably object.

 

(ii)             (w) Prepare and file with the Commission such amendments, including post-effective amendments, to each Registration Statement and the Prospectus used in connection therewith as may be necessary to keep the Registration Statement continuously effective as to the applicable Registrable Securities for the Effectiveness Period and prepare and file with the Commission such additional Registration Statements in order to register for resale under the Securities Act all of the Registrable Securities; (x) cause the related Prospectus to be amended or supplemented by any required Prospectus supplement, and as so supplemented or amended to be filed pursuant to Rule 424; (y) respond reasonably promptly, to any comments received from the Commission with respect to the Registration Statement or any amendment thereto and as promptly as reasonably possible provide the Holder true and complete copies of all correspondence from and to the Commission relating to the Registration Statement; provided, however, the Company will not be required to provide copies of any correspondence that would result in the disclosure to the Holder of material and non-public information concerning the Company unless the Holder has executed a confidentiality agreement with the Company; and (z) comply in all material respects with the provisions of the Securities Act and the Exchange Act with respect to the disposition of all Registrable Securities covered by the Registration Statement during the applicable period in accordance with the intended methods of disposition by the Holder thereof set forth in the Registration Statement as so amended or in such Prospectus as so supplemented.

 

  15  

 

 

(iii)            Notify the Holder and Holder Counsel as promptly as reasonably possible, and (if requested by any such Person) confirm such notice in writing no later than one Trading Day thereafter, of any of the following events: (i) the Commission notifies the Company whether there will be a “review” of any Registration Statement; (ii) the Commission comments in writing on any Registration Statement (in which case the Company shall deliver to the Holder a copy of such comments and of all written responses thereto; provided , however , the Company will not be required to provide copies of any responses that would result in the disclosure to the Holder of material and non-public information concerning the Company unless the Holder has executed a confidentiality agreement with the Company); (iii) any Registration Statement or any post-effective amendment is declared effective; (iv) the Commission or any other federal or state governmental authority requests any amendment or supplement to any Registration Statement or Prospectus or requests additional information related thereto; (v) the Commission issues any stop order suspending the effectiveness of any Registration Statement or initiates any Proceedings for that purpose; (vi) the Company receives notice of any suspension of the qualification or exemption from qualification of any Registrable Securities for sale in any jurisdiction, or the initiation or threat of any Proceeding for such purpose; or (vii) the financial statements included or incorporated by reference in any Registration Statement become ineligible for inclusion or incorporation therein or any statement made in any Registration Statement or Prospectus or any document incorporated or deemed to be incorporated therein by reference is untrue in any material respect or any revision to a Registration Statement, Prospectus or other document is required so that it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.

 

(iv)            Use reasonable best efforts to avoid the issuance of or, if issued, obtain the withdrawal of (i) any order suspending the effectiveness of any Registration Statement, or (ii) any suspension of the qualification (or exemption from qualification) of any of the Registrable Securities for sale in any jurisdiction, as soon as practicable.

 

(v)             Furnish or make available to the Holder and Holder Counsel, without charge, at least one conformed copy of each Registration Statement and each amendment thereto, including financial statements (but excluding schedules, all documents incorporated or deemed to be incorporated therein by reference, and all exhibits, unless requested in writing by the Holder or Holder Counsel), and such other documents, as the Holder or Holder Counsel may reasonably request, promptly after the filing of such documents with the Commission.

 

(vi)            Promptly deliver to the Holder and Holder Counsel, without charge, as many copies of the Prospectus or Prospectuses (including each form of prospectus) and each amendment or supplement thereto as such Persons may reasonably request. Subject to Section 11(e), the Company hereby consents to the use of such Prospectus and each amendment or supplement thereto by the Holder in connection with the offering and sale of the Registrable Securities covered by such Prospectus and any amendment or supplement thereto.

 

  16  

 

 

(vii)           (i) Prepare and timely file with each Trading Market an additional shares listing application covering all of the Registrable Securities; (ii) use reasonable best efforts to cause such Registrable Securities to be approved for listing on each Trading Market as soon as practicable thereafter; (iii) provide to the Holder evidence of such listing; and (iv) use reasonable best efforts to maintain the listing of such Registrable Securities on each such Trading Market or another Eligible Market.

 

(viii)          Prior to any public offering of Registrable Securities, use reasonable best efforts to register or qualify or cooperate with the Holder and Holder Counsel in connection with the registration or qualification (or exemption from such registration or qualification) of such Registrable Securities for offer and sale under the securities or Blue Sky laws of such jurisdictions within the United States as the Holder requests in writing, to keep each such registration or qualification (or exemption therefrom) effective during the Effectiveness Period and to do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Registrable Securities covered by a Registration Statement.

 

(ix)            Cooperate with the Holder to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be delivered to a transferee pursuant to a Registration Statement, which certificates shall be free, to the extent permitted by this Warrant, of all restrictive legends, and to enable such Registrable Securities to be in such denominations and registered in such names as the Holder may request.

 

(x)             Upon the occurrence of any event described in clause (vii) of Section 11(b)(iii) of this Warrant, as promptly as reasonably possible, prepare a supplement or amendment, including a post-effective amendment, to the affected Registration Statement or a supplement to the related Prospectus or any document incorporated or deemed to be incorporated therein by reference, and file any other required document so that, as thereafter delivered, neither the Registration Statement nor such Prospectus will contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.

 

(c)           Registration Expenses . The Company shall pay (or reimburse the Holder for) all fees and expenses incident to the performance of or compliance with this Section 11 by the Company, including without limitation (a) all registration and filing fees and expenses, including without limitation those related to filings with the Commission, any Trading Market and in connection with applicable state securities or Blue Sky laws, (b) printing expenses (including without limitation expenses of printing certificates for Registrable Securities and of printing prospectuses requested by the Holder), (c) messenger, telephone and delivery expenses, (d) fees and disbursements of counsel for the Company and the reasonable, actual fees and disbursements of the Holder Counsel up to $25,000, (e) fees and expenses of all other Persons retained by the Company in connection with the consummation of the transactions contemplated by this Section 11 , and (f) all listing fees to be paid by the Company to the Trading Market. Discounts, concessions, commissions and similar selling expenses, if any, payable to an underwriter and specifically attributable to the sale of Registrable Securities by the Holder will be borne by the Holder.

 

  17  

 

 

(d)           Indemnification .

 

(i)               Indemnification by the Company . The Company shall indemnify and hold harmless the Holder, the officers, directors, employees and partners of the Holder, each Person who controls (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) the Holder and the officers, directors, employees and partners of each such controlling person, each underwriter (including any Holder that is deemed to be an underwriter pursuant to any SEC comments or policies), if any, and each Person who controls (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) such underwriter, to the fullest extent permitted by applicable law, from and against any and all Losses, as incurred, arising out of or relating to any untrue or alleged untrue statement of a material fact contained in the Registration Statement, any Prospectus or any form of prospectus or in any amendment or supplement thereto or in any preliminary prospectus, or arising out of or relating to any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein (in the case of any Prospectus or form of prospectus or supplement thereto, in the light of the circumstances under which they were made) not misleading, except to the extent, but only to the extent, that (i) such untrue statements, alleged untrue statements, omissions or alleged omissions are based solely upon information regarding the Holder furnished in writing to the Company by the Holder expressly for use therein, or to the extent that such information relates to the Holder or the Holder’s proposed method of distribution of Registrable Securities contained in Exhibit B or was reviewed and expressly approved in writing by the Holder expressly for use in the Registration Statement, such Prospectus or such form of Prospectus or in any amendment or supplement thereto or (ii) in the case of an occurrence of an event of the type specified in clauses (v)-(vii) of Section 11(b)(iii) of this Warrant, the use by the Holder of an outdated or defective Prospectus after the Company has notified the Holder in writing that the Prospectus is outdated or defective and prior to the receipt by the Holder of the Advice contemplated in Section 11(e) of this Warrant.

 

(ii)              Indemnification by the Holder . The Holder shall, severally and not jointly, indemnify and hold harmless the Company, its directors, officers and employees, each Person who controls the Company (within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the directors, officers or employees of such controlling Persons, to the fullest extent permitted by applicable law, from and against all Losses (as determined by a court of competent jurisdiction in a final judgment not subject to appeal or review) arising solely out of any untrue statement of a material fact contained in the Registration Statement, any Prospectus, or any form of prospectus, or in any amendment or supplement thereto, or arising solely out of any omission of a material fact required to be stated therein or necessary to make the statements therein (in the case of any Prospectus or form of prospectus or supplement thereto, in light of the circumstances under which they were made) not misleading to the extent, but only to the extent, that (i) such untrue statement or omission is based solely upon information regarding the Holder furnished in writing to the Company by the Holder expressly for use in such Registration Statement or Prospectus, or to the extent that such information relates to the Holder or the Holder’s proposed method of distribution of Registrable Securities contained in Exhibit B or such other method of distribution that was reviewed and expressly approved in writing by the Holder expressly for use in the Registration Statement, such Prospectus or such form of Prospectus or in any amendment or supplement thereto or (ii) in the case of an occurrence of an event of the type specified in clauses (v)-(vii) of Section 11(b)(iii) of this Warrant, the use by the Holder of an outdated or defective Prospectus after the Company has notified the Holder in writing that the Prospectus is outdated or defective and prior to the receipt by the Holder of the Advice contemplated in Section 11(e) of this Warrant. In no event shall the liability of the Holder hereunder be greater in amount than the dollar amount of the net proceeds received by the Holder upon the sale of the Registrable Securities giving rise to such indemnification obligation, except in the case of fraud or willful misconduct by the Holder.

 

  18  

 

 

(iii)             Conduct of Indemnification Proceedings . If any Proceeding shall be brought or asserted against any Person entitled to indemnity hereunder (an “Indemnified Party” ), such Indemnified Party shall promptly notify the Person from whom indemnity is sought (the “Indemnifying Party” ) in writing, and the Indemnifying Party shall assume the defense thereof, including the employment of counsel reasonably satisfactory to the Indemnified Party and the payment of all fees and expenses incurred in connection with defense thereof; provided, that the failure of any Indemnified Party to give such notice shall not relieve the Indemnifying Party of its obligations or liabilities pursuant to this Section 11 , except (and only) to the extent that it shall be finally determined by a court of competent jurisdiction (which determination is not subject to appeal or further review) that such failure shall have actually and materially prejudiced the Indemnifying Party.

 

An Indemnified Party shall have the right to employ separate counsel in any such Proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party or Parties unless: (i) the Indemnifying Party has agreed in writing to pay such fees and expenses; or (ii) the Indemnifying Party shall have failed promptly to assume the defense of such Proceeding or to employ counsel reasonably satisfactory to such Indemnified Party in any such Proceeding; or (iii) the Indemnified Party shall have been advised by counsel that a conflict of interest is likely to exist if the same counsel were to represent such Indemnified Party and the Indemnifying Party (in which case, if such Indemnified Party notifies the Indemnifying Party in writing that it elects to employ separate counsel at the expense of the Indemnifying Party, the Indemnifying Party shall not have the right to assume the defense thereof and such counsel shall be at the expense of the Indemnifying Party). The Indemnifying Party shall not be liable for any settlement of any such Proceeding effected without its written consent, which consent shall not be unreasonably withheld. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement of any pending Proceeding in respect of which any Indemnified Party is a party, unless such settlement includes an unconditional release of such Indemnified Party from all liability on claims that are the subject matter of such Proceeding.

 

  19  

 

 

All fees and expenses of the Indemnified Party (including reasonable fees and expenses to the extent incurred in connection with investigating or preparing to defend such Proceeding in a manner not inconsistent with this Section) shall be paid to the Indemnified Party, as incurred, within ten (10) Trading Days of written notice thereof to the Indemnifying Party (provided, that the Indemnifying Party may require such Indemnified Party to undertake to reimburse all such fees and expenses to the extent it is finally judicially determined that such Indemnified Party is not entitled to indemnification hereunder).

 

(iv)             Contribution . If a claim for indemnification under Section 11(d)(i) or (ii) is unavailable to an Indemnified Party (by reason of public policy or otherwise), then each Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Losses, in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and Indemnified Party in connection with the actions, statements or omissions that resulted in such Losses as well as any other relevant equitable considerations. The relative fault of such Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission of a material fact, has been taken or made by, or relates to information supplied by, such Indemnifying Party or Indemnified Party, and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such action, statement or omission. The amount paid or payable by a party as a result of any Losses shall be deemed to include, subject to the limitations set forth in Section 11(d)(iii) , any reasonable attorneys’ or other reasonable fees or expenses incurred by such party in connection with any Proceeding to the extent such party would have been indemnified for such fees or expenses if the indemnification provided for in this Section was available to such party in accordance with its terms.

 

The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 11(d)(iv) were determined by pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to in the immediately preceding paragraph. Notwithstanding the provisions of this Section 11(d)(iv) , the Holder shall not be required to contribute, in the aggregate, any amount in excess of the amount by which the proceeds actually received by the Holder from the sale of the Registrable Securities subject to the Proceeding exceeds the amount of any damages that the Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation.

 

  20  

 

 

The indemnity and contribution agreements contained in this Section 11 are in addition to any liability that the Indemnifying Parties may have to the Indemnified Parties.

 

(e)           Dispositions . The Holder agrees that it will comply with the prospectus delivery requirements of the Securities Act as applicable to it in connection with sales of Registrable Securities pursuant to the Registration Statement. The Holder further agrees that, upon receipt of a notice from the Company of the occurrence of any event of the kind described in clauses (v)-(vii) of Section 11(b)(iii) , the Holder will discontinue disposition of such Registrable Securities under the Registration Statement until the Holder’s receipt of the copies of the supplemented Prospectus and/or amended Registration Statement contemplated by Section 11(b)(x) , or until it is advised in writing (the “ Advice ”) by the Company that the use of the applicable Prospectus may be resumed, and, in either case, has received copies of any additional or supplemental filings that are incorporated or deemed to be incorporated by reference in such Prospectus or Registration Statement. The Company may provide appropriate stop orders to enforce the provisions of this paragraph.

 

(f)           No Piggyback on Registrations . Except with the prior written consent of the Holder or as permitted by Section 11(g) below, neither the Company nor any of its security holders may include securities of the Company in the Registration Statement other than the Registrable Securities, and the Company shall not (i) during the Effectiveness Period enter into any agreement providing any such right to any of its security holders to be included in the Registration Statement for the Registrable Securities or (ii) prior to the effective date of the initial Registration Statement required pursuant to Section 11(a)(i) of this Warrant, register securities of the Company for the account of any third party.

 

(g)           Piggy-Back Registrations . If at any time during the Effectiveness Period there is not an effective Registration Statement covering all of the Registrable Securities and the Company shall determine to prepare and file with the Commission a registration statement relating to an offering for its own account or the account of others under the Securities Act of any of its equity securities, other than on Form S-4 or Form S-8 (each as promulgated under the Securities Act) or their then equivalents relating to equity securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in connection with stock option or other employee benefit plans, then the Company shall send to the Holder written notice of such determination and if, within fifteen (15) days after receipt of such notice, the Holder shall so request in writing, the Company shall include in such registration statement all or any part of such Registrable Securities the Holder requests to be registered, subject to customary underwriter cutbacks applied on a pro rata basis to all holders of registration rights.

 

  21  

 

 

12.            Limitation on Exercise .

 

(i)              Subject to Section 12(ii) , the number of shares of Common Stock that may be acquired by the Holder upon any exercise of this Warrant (or otherwise in respect hereof) shall be limited to the extent necessary to insure that, following such exercise (or other issuance), the total number of shares of Common Stock then beneficially owned by the Holder and its affiliates and any other Persons whose beneficial ownership of Common Stock would be aggregated with the Holder’s for purposes of Section 13(d) of the Exchange Act, does not exceed 4.999% of the total number of issued and outstanding shares of Common Stock (including for such purpose the shares of Common Stock issuable upon such conversion) (the “ Threshold Percentage ”). For such purposes, beneficial ownership shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder.

 

(ii)             Notwithstanding the provisions of Section 12(i) , the Holder shall have the right at any time and from time to time, to waive the provisions of this Section insofar as they relate to the Threshold Percentage or to increase its Threshold Percentage (but not in excess of 9.999% (or such lower percentage if Section 16 of the Exchange Act or the rules promulgated thereunder (or any successor statute or rules) is changed to reduce the beneficial ownership percentage threshold thereunder to a percentage less than 9.999%)) by written instrument delivered to the Company, but any such waiver or increase will not be effective until the 61st day after such notice is delivered to the Company.

 

13.            Fractional Shares . The Company shall not be required to issue or cause to be issued fractional Warrant Shares on the exercise of this Warrant. If any fraction of a Warrant Share would, except for the provisions of this Section, be issuable upon exercise of this Warrant, the number of Warrant Shares to be issued will be rounded up to the nearest whole share or right to purchase the nearest whole share, as the case may be.

 

14.            Notices . Any and all notices or other communications or deliveries hereunder (including without limitation any Exercise Notice) shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section prior to 6:30 p.m. (New York City time) on a Trading Day, (ii) the next Trading Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section on a day that is not a Trading Day or later than 6:30 p.m. (New York City time) on any Trading Day, (iii) the Trading Day following the date of mailing, if sent by a nationally recognized overnight courier service specifying next Business Day delivery, or (iv) upon actual receipt by the party to whom such notice is required to be given, if by hand delivery. The address and facsimile number of a party for such notices or communications shall be as set forth in the Credit Agreement, unless changed by such party by two (2) Trading Days’ prior notice to the other party in accordance with this Section 14 .

 

15.            Extension of Expiration Date . At the option of the Holder, the Expiration Date may be extended for the number of Trading Days during any period occurring after the Required Effectiveness Date in which (i) trading in the Common Stock is suspended by any Trading Market, (ii) the Registration Statement is not effective, or (iii) the prospectus included in the Registration Statement may not be used by the Holder for the resale of Registrable Securities thereunder.

 

  22  

 

 

16.            Furnishing of Information . The Company covenants to timely file (or obtain extensions in respect thereof and file within the applicable grace period) all reports required to be filed by the Company after the date hereof pursuant to the Exchange Act. If the Company is not required to file reports pursuant to such laws, it will prepare and furnish to the Holder and make publicly available in accordance with paragraph (c) of Rule 144 such information as is required for the Holder to sell the Warrant under Rule 144. The Company further covenants that it will take such further action as the Holder may reasonably request to satisfy the provisions of Rule 144 applicable to the issuer of securities relating to transactions for the sale of securities pursuant to Rule 144.

 

17.            Miscellaneous .

 

(a)          The Company will not, by amendment of its governing documents or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder against impairment. Subject to the restrictions on transfer set forth on the first page hereof and in Section 3 , this Warrant may be assigned by the Holder; provided that in no event shall the registration rights be separately assigned from the purchase rights evidenced by this Warrant. This Warrant may not be assigned by the Company except with the prior written consent of the Holder. This Warrant shall be binding on and inure to the benefit of the parties hereto and their respective successors and assigns. Subject to the preceding sentence and except as otherwise provide in Section 11 , nothing in this Warrant shall be construed to give to any Person other than the Company and the Holder any legal or equitable right, remedy or cause of action under this Warrant. This Warrant constitutes the entire agreement of the parties with respect to the subject matter hereof. This Warrant may be amended only in writing signed by the Company and the Holder and their successors and assigns. The restrictions set forth in Section 12 hereof may not be amended or waived.

 

(b)          The Company (i) will not increase the par value of any Warrant Shares above the amount payable therefor on such exercise and (ii) will take all such action as may be reasonably necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares on the exercise of this Warrant.

 

(c)           Governing Law; Venue; Waiver Of Jury Trial . all questions concerning the construction, validity, enforcement and interpretation of this warrant shall be governed by and construed and enforced in accordance with the laws of the state of new york (except for matters governed by corporate law in the commonwealth of pennsylvania). each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the city of new york, borough of manhattan, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is improper. each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this warrant and agrees that such service shall constitute good and sufficient service of process and notice thereof. nothing contained herein shall be deemed to (i) limit in any way any right to serve process in any manner permitted by law or (ii) limit any provision of section 17 (f) . the company hereby waives all rights to a trial by jury.

 

  23  

 

 

 

(d)          The headings herein are for convenience only, do not constitute a part of this Warrant and shall not be deemed to limit or affect any of the provisions hereof.

 

(e)          In case any one or more of the provisions of this Warrant shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Warrant shall not in any way be affected or impaired thereby and the parties will attempt in good faith to agree upon a valid and enforceable provision which shall be a commercially reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Warrant.

 

(f)          

 

(i)              In the case of a dispute relating to the Exercise Price, the Closing Price, the Current Market Price, the Black Scholes value or fair market value or the arithmetic calculation of the Warrant Shares (as the case may be) (including, without limitation, a dispute relating to the determination of any of the foregoing), the Company or the Holder (as the case may be) shall submit the dispute to the other party via facsimile (A) if by the Company, within two (2) Business Days after the occurrence of the circumstances giving rise to such dispute or (B) if by the Holder, at any time after the Holder learned of the circumstances giving rise to such dispute. If the Holder and the Company are unable to promptly resolve such dispute relating to such Exercise Price, Closing Price, Current Market Price, Black Scholes value or fair market value or arithmetic calculation of the Warrant Shares (as the case may be), at any time after the second (2 nd ) Business Day following such initial notice by the Company or the Holder (as the case may be) of such dispute to the Company or the Holder (as the case may be), then the Holder may, at its sole option, select an independent, reputable investment bank to resolve such dispute, it being acknowledged that the Black Scholes value shall be calculated by such investment bank in a manner consistent with Exhibit A .

 

  24  

 

 

(ii)             The Holder and the Company shall each deliver to such investment bank (A) a copy of the initial dispute submission so delivered in accordance with this Section 17(f) and (B) written documentation supporting its position with respect to such dispute, in each case, no later than 5:00 p.m. (New York time) by the fifth (5 th ) Business Day immediately following the date on which the Holder selected such investment bank (the “ Dispute Submission Deadline ”) (the documents referred to in the immediately preceding clauses (A) and (B) are collectively referred to herein as the “ Required Dispute Documentation ”) (it being understood and agreed that if either the Holder or the Company fails to so deliver all of the Required Dispute Documentation by the Dispute Submission Deadline, then the party who fails to so submit all of the Required Dispute Documentation shall no longer be entitled to (and hereby waives its right to) deliver or submit any written documentation or other support to such investment bank with respect to such dispute and such investment bank shall resolve such dispute based solely on the Required Dispute Documentation that was delivered to such investment bank prior to the Dispute Submission Deadline). Unless otherwise agreed to in writing by both the Company and the Holder or otherwise requested by such investment bank, neither the Company nor the Holder shall be entitled to deliver or submit any written documentation or other support to such investment bank in connection with such dispute (other than the Required Dispute Documentation).

 

(iii)            The Company and the Holder shall cause such investment bank to determine the resolution of such dispute and notify the Company and the Holder of such resolution no later than ten (10) Business Days immediately following the Dispute Submission Deadline. The fees and expenses of such investment bank shall be borne solely by the Company, and such investment bank’s resolution of such dispute shall be final and binding upon all parties absent manifest error.

 

  25  

 

 

IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by its authorized officer as of the date first indicated above.

 

  Numerex corp.
   
  By:   /s/ Kenneth L. Gayron  
  Name:  Kenneth L. Gayron 
  Title:  Interim Chief Executive Officer & Chief Financial Officer

 

  26  

 

 

FORM OF EXERCISE NOTICE

 

(To be executed by the Holder to exercise the right to purchase shares of Common Stock under the foregoing Warrant)

 

To: numerex corp

 

The undersigned is the Holder of Warrant No. 1 (the “ Warrant ”) issued by NUMEREX CORP., a Pennsylvania corporation (the “ Company ”). Capitalized terms used herein and not otherwise defined have the respective meanings set forth in the Warrant.

 

1. The Warrant is currently exercisable to purchase a total of ______________ Warrant Shares.

 

2. The undersigned Holder hereby exercises its right to purchase _________________ Warrant Shares pursuant to the Warrant.

 

3. The Holder intends that payment of the Exercise Price shall be made as (check one):

 

____    “Cash Exercise” under Section 10

 

____    “Cashless Exercise” under Section 10

 

4. If the Holder has elected a Cash Exercise, the Holder shall pay the sum of $____________ to the Company in accordance with the terms of the Warrant.

 

5. Pursuant to this exercise, the Company shall deliver to the Holder _______________ Warrant Shares in accordance with the terms of the Warrant.

 

6. Following this exercise, the Warrant shall be exercisable to purchase a total of ______________ Warrant Shares.

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK,
SIGNATURE PAGE FOLLOWS]

 

 

 

 

IN WITNESS WHEREOF, the undersigned has caused this Exercise Notice to be duly executed as of the date indicated below.

 

Dated:___________, ____ Name of Holder:
     
    (Print)  
     
    By:  
    Name:  
    Title:  
     
    (Signature must conform in all respects to name of holder as specified on the face of the Warrant)

 

 

 

 

FORM OF ASSIGNMENT

 

[To be completed and signed only upon transfer of Warrant]

 

FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ________________________________ the right represented by the within Warrant to purchase ____________ shares of Common Stock of NUMEREX CORP. to which the within Warrant relates and appoints ________________ attorney to transfer said right on the books of NUMEREX CORP. with full power of substitution in the premises.

 

Dated:_____________,___    
     
     
  (Signature must conform in all respects to name of holder as specified on the face of the Warrant)  
     
     
  Address of Transferee  
     
     
     
     
     
     
In the presence of:    
     
     

 

 

 

 

EXHIBIT A

 

The “Original Issuance Value” shall mean $2,687,833.

 

For purposes of clause (B) of Section 9(c) of this Warrant, the “ Black Scholes value ” of the remaining unexercised portion of this Warrant through the date of consummation of the Fundamental Transaction shall be determined using the Black Scholes Option Pricing Model (e.g., the “OV” function on Bloomberg Financial Markets (“ Bloomberg ”)) and (i) a price per share of Common Stock equal to the greater of (x) the arithmetic average of the VWAP of the Common Stock for each of the ten (10) consecutive Trading Days immediately preceding the public announcement of the applicable Fundamental Transaction, (y) the arithmetic average of the VWAP of the Common Stock for each of the ten (10) consecutive Trading Days immediately preceding the date of consummation of the applicable Fundamental Transaction and (z) the sum of the price per share being offered in cash in the applicable Fundamental Transaction (if any) plus the per share value of the non-cash consideration being offered in the applicable Fundamental Transaction (if any), (ii) a risk-free interest rate corresponding to the U.S. Treasury rate for a period equal to the remaining term of this Warrant as of the date of consummation of the applicable Fundamental Transaction and (iii) an expected volatility equal to the greater of 100% and the 100 day volatility (e.g., the HVT function on Bloomberg) determined as of the Trading Day immediately following the public announcement of the applicable Fundamental Transaction. The Holder shall have the right to verify the Black Scholes value and ensure that the Black Scholes Pricing Model and the value of the underlying inputs (volatility, risk free rate, conversion price, price per share, etc.) are materially similar to those generated by Bloomberg.

 

 

 

 

EXHIBIT B

 

Plan of Distribution

 

The selling stockholders, which as used herein includes donees, pledgees, transferees or other successors-in-interest selling shares of common stock or interests in shares of common stock received after the date of this prospectus from a selling stockholder as a gift, pledge, partnership distribution or other transfer, may, from time to time, sell, transfer or otherwise dispose of any or all of their shares of common stock or interests in shares of common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These dispositions may be at fixed prices, at prevailing market prices at the time of sale, at prices related to the prevailing market price, at varying prices determined at the time of sale, or at negotiated prices.

 

The selling stockholders may use any one or more of the following methods when disposing of shares or interests therein:

 

- ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;

 

- block trades in which the broker-dealer will attempt to sell the shares as agent, but may position and resell a portion of the block as principal to facilitate the transaction;

 

- purchases by a broker-dealer as principal and resale by the broker-dealer for its account;

 

- an exchange distribution in accordance with the rules of the applicable exchange;

 

- privately negotiated transactions;

 

- short sales;

 

- through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;

 

- broker-dealers may agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share;

 

- a combination of any such methods of sale; and

 

- any other method permitted by applicable law.

 

 

 

 

The selling stockholders may, from time to time, pledge or grant a security interest in some or all of the shares of common stock owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock, from time to time, under this prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act amending the list of selling stockholders to include the pledgee, transferee or other successors in interest as selling stockholders under this prospectus. The selling stockholders also may transfer the shares of common stock in other circumstances, in which case the transferees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this Prospectus.

 

In connection with the sale of our common stock or interests therein, the selling stockholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the common stock in the course of hedging the positions they assume. The selling stockholders may also sell shares of our common stock short and deliver these securities to close out their short positions, or loan or pledge the common stock to broker-dealers that in turn may sell these securities. The selling stockholders may also enter into option or other transactions with broker-dealers or other financial institutions or the creation of one or more derivative securities which require the delivery to such broker-dealer or other financial institution of shares offered by this Prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this Prospectus (as supplemented or amended to reflect such transaction).

 

The aggregate proceeds to the selling stockholders from the sale of the common stock offered by them will be the purchase price of the common stock less discounts or commissions, if any. Each of the selling stockholders reserves the right to accept and, together with their agents from time to time, to reject, in whole or in part, any proposed purchase of common stock to be made directly or through agents.

 

The selling stockholders also may resell all or a portion of the shares in open market transactions in reliance upon Rule 144 under the Securities Act of 1933, provided that they meet the criteria and conform to the requirements of that rule.

 

To the extent required, the shares of our common stock to be sold, the names of the selling stockholders, the respective purchase prices and public offering prices, the names of any agents, dealer or underwriter, any applicable commissions or discounts with respect to a particular offer will be set forth in an accompanying prospectus supplement or, if appropriate, a post-effective amendment to the registration statement that includes this prospectus.

 

In order to comply with the securities laws of some states, if applicable, the common stock may be sold in these jurisdictions only through registered or licensed brokers or dealers. In addition, in some states the common stock may not be sold unless it has been registered or qualified for sale or an exemption from registration or qualification requirements is available and is complied with.

 

We have advised the selling stockholders that the anti-manipulation rules of Regulation M under the Securities Exchange Act of 1934, as amended, may apply to sales of shares in the market and to the activities of the selling stockholders and their affiliates. In addition, to the extent applicable we will make copies of this prospectus (as it may be supplemented or amended from time to time) available to the selling stockholders for the purpose of satisfying the prospectus delivery requirements of the Securities Act. The selling stockholders may indemnify any broker-dealer that participates in transactions involving the sale of the shares against certain liabilities, including liabilities arising under the Securities Act.

 

 

 

 

We have agreed to indemnify the selling stockholders against liabilities, including liabilities under the Securities Act and state securities laws, relating to the registration of the shares offered by this prospectus.

 

We have agreed with the selling stockholders to keep the registration statement of which this Prospectus constitutes a part effective until the earlier of (i) the fifth anniversary of the effective date of such registration statement, (ii) such time as all of the shares of common stock covered by the registration statement have been sold publicly or (iii) such time as all of the shares of common stock covered by the registration statement may be sold by the selling stockholders pursuant to Rule 144 without volume limitations and without the requirement that there be adequate current public information with regards to us.

 

 

 

 

Exhibit 10.1

 

 

CONFIDENTIAL TREATMENT REQUESTED – CONFIDENTIAL PORTIONS OF THIS DOCUMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY FILED WITH THE COMMISSION. THE OMITTED PORTIONS HAVE BEEN REPLACED WITH “****.

 

   

EXECUTION VERSION

 

 

 

NOTE PURCHASE AGREEMENT

 

by and among

 

NUMEREX CORP.,

 

as Borrower,

 

various Guarantors from time to time party hereto,

 

various Purchasers from time to time party hereto,

 

and

 

HCP-FVF, LLC ,

 

as Collateral Agent

 

Dated as of June 7, 2017

 

 

 

   

 

 

Article 1 DEFINITIONS 1
     
1.1 Definitions 1
     
1.2 Accounting Terms 21
     
Article 2 PURCHASE AND SALE OF THE NOTES 22
     
2.1 Purchase and Sale of the Notes 22
     
2.2 Fees Payable 22
     
2.3 Closing 23
     
Article 3 THE NOTES 23
     
3.1 Interest and Related Fees 23
     
3.2 Redemption of Notes 24
     
3.3 Manner of Payment 28
     
3.4 [Intentionally Omitted] 28
     
3.5 Taxes 28
     
3.6 Purchase Price Allocation 30
     
Article 4 CONDITIONS TO THE OBLIGATIONS OF THE PURCHASERS 31
     
4.1 Representations and Warranties 31
     
4.2 Compliance with this Agreement 31
     
4.3 Certificates 31
     
4.4 Solvency 32
     
4.5 Financial Information 32
     
4.6 Documents 32
     
4.7 Purchase of Notes Permitted by Applicable Laws 32
     
4.8 Opinion of Counsel 32
     
4.9 Consents and Approvals 32
     
4.10 No Material Judgment or Order 32
     
4.11 Good Standing Certificates 33
     
4.12 No Litigation 33
     
4.13 Insurance Certificates 33
     
4.14 Fees, Etc 33
     
4.15 Collateral 33
     
4.16 Lien Searches 33
     
4.17 No Material Adverse Effect 33
     
4.18 Structure 34

 

  i  

 

 

4.19 Subordinated Note 34
     
4.20 Quality of Earnings Report 34
     
Article 5 CONDITIONS TO THE OBLIGATIONS OF THE BORROWER 34
     
5.1 Representations and Warranties 34
     
5.2 Compliance with this Agreement 34
     
Article 6 REPRESENTATIONS AND WARRANTIES OF THE BORROWER 34
     
6.1 Existence and Power 34
     
6.2 Authorization; No Contravention 35
     
6.3 Governmental Authorization; Third Party Consents 35
     
6.4 Binding Effect 35
     
6.5 No Legal Bar 35
     
6.6 Litigation 36
     
6.7 Compliance with Laws 36
     
6.8 No Default or Breach 36
     
6.9 Title to Properties 36
     
6.10 Real Property 36
     
6.11 Taxes 37
     
6.12 Financial Condition; SEC Filings 37
     
6.13 Absence of Certain Changes or Events 38
     
6.14 Environmental Matters 38
     
6.15 Investment Company/Government Regulations 39
     
6.16 Subsidiaries 39
     
6.17 Capitalization 40
     
6.18 Private Offering 40
     
6.19 Broker’s, Finder’s or Similar Fees 40
     
6.20 Labor Relations 40
     
6.21 Employee Benefit Plans 41
     
6.22 Patents, Trademarks, Etc 42
     
6.23 Potential Conflicts of Interest 43
     
6.24 Trade Relations 43
     
6.25 Indebtedness 43
     
6.26 Material Contracts 43
     
6.27 Insurance 44

 

  ii  

 

 

6.28 Solvency 44
     
6.29 Licenses and Approvals 44
     
6.30 Change of Control and Similar Payments 44
     
6.31 OFAC; Anti-Terrorism; Patriot Act 45
     
6.32 Disclosure 45
     
6.33 Customers and Suppliers 45
     
6.34 Passive Foreign Investment Company 46
     
6.35 Absence of Certain Practices 46
     
6.36 Internal Controls 46
     
6.37 Accounts and Notes Receivable; Accounts and Notes Payable 46
     
Article 7 REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS 47
     
7.1 Authorization; No Contravention 47
     
7.2 Binding Effect 47
     
7.3 No Legal Bar 47
     
7.4 Securities Laws 47
     
7.5 Governmental Authorization; Third Party Consent 49
     
7.6 Broker’s, Finder’s or Similar Fees 49
     
Article 8 AFFIRMATIVE COVENANTS 49
     
8.1 Delivery of Financial and Other Information 49
     
8.2 Use of Proceeds 52
     
8.3 Notice of Default or Material Adverse Effect 53
     
8.4 Conduct of Business 53
     
8.5 Taxes and Claims 53
     
8.6 Insurance 54
     
8.7 Compliance with Laws and Material Agreements 54
     
8.8 Maintenance of Properties 55
     
8.9 Audits and Inspection 55
     
8.10 Issue Taxes 55
     
8.11 Employee Benefit Plans 55
     
8.12 Environmental Covenants 56
     
8.13 Website Links 56
     
8.14 Further Assurances 56
     
8.15 Board Observation 56

 

  iii  

 

 

8.16 Intellectual Property 57
     
8.17 Replacement of Notes 58
     
8.18 Landlord and Bailee Agreements 58
     
8.19 Foreign Pension Plans and Benefit Plans 58
     
8.20 Post-Closing Obligations 58
     
Article 9 NEGATIVE COVENANTS 59
     
9.1 Distributions 59
     
9.2 Indebtedness 59
     
9.3 Mergers 60
     
9.4 Sales of Assets 61
     
9.5 Investments and Acquisitions 61
     
9.6 Liens 62
     
9.7 Capital Expenditures; Operating Leases 64
     
9.8 Licenses 64
     
9.9 Affiliates 64
     
9.10 Permitted Hedging Arrangements 64
     
9.11 Sale and Leaseback Transactions and Other Off-Balance Sheet Liabilities 65
     
9.12 Contingent Obligations 65
     
9.13 Subsidiaries 65
     
9.14 Real Property 65
     
9.15 Modifications of Charter Documents 66
     
9.16 Fiscal Year 66
     
9.17 Payments on Subordinated Note 66
     
9.18 Restrictive Agreements 66
     
9.19 Use of Purchasers’ Names 66
     
9.20 Financial Covenants 66
     
9.21 Management Fees; Board Fees 68
     
9.22 Deposit Accounts 68
     
9.23 Modifications of Subordinated Note 68
     
9.24 No Negative Pledges 68
     
9.25 Accounts Payable 69
     
9.26 Passive Foreign Investment Company 69

 

  iv  

 

 

Article 10 EVENTS OF DEFAULT 69
     
10.1 Events of Default 69
     
10.2 Acceleration 72
     
10.3 Set-Off 72
     
10.4 Suits for Enforcement 72
     
10.5 License 73
     
Article 11 INDEMNIFICATION 73
     
11.1 Indemnification 73
     
11.2 Procedure; Notification 74
     
Article 12 MISCELLANEOUS 74
     
12.1 Survival of Representations and Warranties 74
     
12.2 Notices 75
     
12.3 Successors and Assigns 76
     
12.4 Amendment and Waiver 77
     
12.5 Signatures; Counterparts 77
     
12.6 Headings 78
     
12.7 GOVERNING LAW 78
     
12.8 JURISDICTION, JURY TRIAL WAIVER, ETC . 78
     
12.9 Severability 79
     
12.10 Rules of Construction 79
     
12.11 Entire Agreement 79
     
12.12 Certain Expenses 79
     
12.13 Publicity 79
     
12.14 Further Assurances 80
     
12.15 No Strict Construction 80
     
12.16 Non-Public Information 80
     
12.17 Confidential Information 80
     
Article 13 COLLATERAL AGENT 81
     
13.1 Appointment of Agent; No Effect on Borrower’s Obligations 81
     
13.2 Powers and Duties 81
     
13.3 Collateral Matters 81
     
13.4 Actions with Respect to Defaults 83
     
13.5 Successor Collateral Agent 83

 

  v  

 

 

SCHEDULES:  
   
Schedule 1 Prohibited Transferees
Schedule 2.1 Allocations
Schedule 6.1 Jurisdictions of Organization and Qualification
Schedule 6.3 Consents and Approvals
Schedule 6.6 Litigation
Schedule 6.7 Investigations, Etc.
Schedule 6.9 Exceptions to Title, Etc.
Schedule 6.10 Real Property Owned and Leased
Schedule 6.11 Taxes
Schedule 6.12 Financial Condition and Liabilities; SEC Documents
Schedule 6.16 Subsidiaries
Schedule 6.17 Capitalization, Etc.
Schedule 6.19 Broker Fees, Etc.
Schedule 6.20 Employment Agreements, Employment Matters
Schedule 6.21 ERISA Plans
Schedule 6.22 Licenses, Etc. Related to Intellectual Property
Schedule 6.23 Conflicts of Interest
Schedule 6.25 Existing Indebtedness & Liens
Schedule 6.26 Material Contracts
Schedule 6.27 Insurance
Schedule 6.33 Customers & Suppliers
Schedule 6.35 Absence of Certain Practices
Schedule 6.36 Internal Controls
Schedule 6.37(a) Accounts and Notes Receivable
Schedule 6.37(b) Accounts and Notes Payable
Schedule 8.6 Minimum Insurance
Schedule 9.2 Existing Indebtedness
Schedule 9.5 Investments
Schedule 9.20(e) Minimum Monthly Recurring Revenue
Schedule 9.24 Negative Pledges
Schedule 9.25 Accounts Payable and Receivable
   
EXHIBITS:  
   
e xhibit A Form of Note
Exhibit B Form of Certificate Regarding Non-Bank Status
Exhibit C Form of Compliance Certificate

 

  vi  

 

  

NOTE PURCHASE AGREEMENT

 

THIS NOTE PURCHASE AGREEMENT, dated as of June 7, 2017 (as amended, restated, supplemented or otherwise modified from time to time in accordance with the terms hereof, this “ Agreement ”), by and among NUMEREX CORP. , a Pennsylvania corporation (the “ Borrower ”), the Guarantors from time to time party hereto, the Purchasers from time to time party hereto, and HCP-FVF, LLC , a Delaware limited liability company (“ Hale Capital ”), as collateral agent for itself and the Purchasers party hereto (in such capacity and together with its successors and assigns, the “ Collateral Agent ”).

 

STATEMENT OF PURPOSE :

 

WHEREAS , the Borrower wishes to sell to the Purchasers, and the Purchasers wish to purchase on the terms and conditions set forth herein, senior secured promissory notes issued by the Borrower on the Closing Date in an aggregate original principal amount of $13,500,000, each substantially in the form of Exhibit A hereto (as amended, restated, supplemented or otherwise modified from time to time in accordance with the terms hereof, each a “ Note ” and collectively the “ Notes ”).

 

NOW, THEREFORE , in consideration of the mutual covenants and agreements set forth herein and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto agree as follows:

 

Article 1

DEFINITIONS

 

1.1           Definitions . As used in this Agreement, and unless the context requires a different meaning, the following terms have the meanings indicated:

 

Account Debtor ” has the meaning given to that term in the UCC.

 

Account or Accounts ” has the meaning given to that term in the UCC.

 

Acquisition ” means any transaction or series of related transactions, consummated on or after the date of this Agreement, by which the Borrower or any Subsidiary, directly or indirectly, (a) acquires any going concern business or all (or substantially all) of the assets of any firm, corporation, limited liability company or other entity, or division thereof, whether through purchase of assets, merger or otherwise or (b) acquires at least a majority (in number of votes) of the securities of an entity which have ordinary voting power for the election of directors or managers or a majority (by percentage or voting power) of the outstanding Capital Stock of any other Person.

 

Affiliate ” of any Person means any other Person directly or indirectly controlling, controlled by or under common control with such Person. A Person shall be deemed to control another Person if the controlling Person owns 10% or more of any class of voting securities (or other ownership interests) of the controlled Person or possesses, directly or indirectly, the power to direct or cause the direction of the management or policies of the controlled Person, whether through ownership of Capital Stock, by contract or otherwise; provided that in no event shall any Purchaser or the Collateral Agent and the Borrower be deemed to be “Affiliates” of one another.

 

  1  

 

 

Agreement ” has the meaning given to that term in the introductory paragraph.

 

Anti-Terrorism Laws ” has the meaning given to that term in Section 6.31(b) .

 

Anti-Terrorism Order ” has the meaning given to that term in Section 6.31(b) .

 

Applicable Insolvency Laws ” means all applicable laws governing bankruptcy, reorganization, arrangement, adjustment of debts, relief of debtors, dissolution, insolvency, fraudulent transfers or conveyances or other similar laws (including, without limitation, 11 U.S.C. Sections 544, 547, 548 and 550 and other “avoidance” provisions of Title 11 of the Code, as amended or supplemented).

 

Applicable Law ” shall mean all laws, rules and regulations applicable to the Person, conduct, transaction, covenant, document or contract in question, including all applicable common law and equitable principles, all provisions of all applicable state, federal and foreign constitutions, statutes, rules, regulations, treaties, directives and orders of any Governmental Authority, and all orders, judgments and decrees of all courts and arbitrators.

 

Applicable Rate ” means the Prime Rate plus seven percent (7%) per annum.

 

Approved Distributors ” means Honeywell International acting through the ADI distribution business, Security Equipment Supply, Inc. and Tri-ED Distribution.

 

Approved Fund ” means (i) any Person (other than a natural person) engaged in making, purchasing, holding, or investing in commercial loans and similar extensions of credit and that is advised, administered, or managed by a Purchaser, an Affiliate of a Purchaser (or an entity or an Affiliate of an entity that administers, advises or manages a Purchaser); (ii) with respect to any Purchaser that is an investment fund, any other investment fund that invests in loans and that is advised, administered or managed by the same investment advisor as such Purchaser or by an Affiliate of such investment advisor; and (iii) any third party which provides “warehouse financing” to a Person described in the preceding clause (i) or (ii) (and any Person described in said clause (i) or (ii) shall also be deemed an Approved Fund with respect to such third party providing such warehouse financing).

 

Board ” has the meaning set forth in Section 8.15 .

 

Borrower ” has the meaning given to that term in the introductory paragraph.

 

Business Combination ” has the meaning set forth in the definition of “Change of Control” below.

 

Business Day ” means any day other than a Saturday, Sunday or other day on which commercial banks in New York are authorized or required by law or executive order to close.

 

  2  

 

 

Capital Expenditure ” means any expenditure (whether paid in cash or accrued as a liability) for any purchase or other acquisition of any asset which would be classified as a fixed or capital asset on a balance sheet prepared in accordance with GAAP, including the cost of assets acquired pursuant to Capital Leases and payments in respect of Capital Lease Obligations, but excluding (a) all Capitalized Software Costs, (b) expenditures of insurance proceeds to rebuild or replace any capital or fixed asset after a casualty loss, (c) leasehold improvement expenditures for which the Person is reimbursed promptly by the lessor, and (d) expenditures made in connection with any Investment permitted pursuant to Section 9.5 .

 

Capital Lease ” of a Person means any lease of Property by such Person as lessee which would be classified as a capital lease on a balance sheet of such Person prepared in accordance with GAAP.

 

Capital Lease Obligations ” of any Person means all obligations (including sales tax obligations) of such Person under Capital Leases.

 

Capitalized Software Costs ” means all costs for the development of software that are appropriately capitalized in accordance with GAAP.

 

Capital Stock ” means (a) any capital stock, partnership, membership, limited liability company, joint venture or other ownership or equity interest or other equivalent, participation or securities (whether voting or non-voting, whether preferred, common or otherwise, whether certificated or uncertificated, and however designated), and (b) any option, warrant, security, appreciation right, profits interests or other right (including Indebtedness securities or other evidence of Indebtedness) directly or indirectly convertible into or exercisable or exchangeable for, or otherwise to acquire directly or indirectly, any capital stock, partnership, membership, limited liability company, joint venture or other ownership or equity interest, participation or security described in clause (a) above.

 

Cash Equivalent Investments ” means (a) short-term obligations of, or fully guaranteed by, the United States, (b) commercial paper rated A-1 or better by Standard & Poor’s Rating Services, a division of The McGraw-Hill Companies, Inc. (or any successor thereto) or P-1 or better by Moody’s Investors Service, Inc. (or any successor thereto) with a duration of not more than nine (9) months, (c) demand deposit accounts maintained in the ordinary course of business, and (d) certificates of deposit issued by, and time deposits with, commercial banks (whether domestic or foreign) having capital and surplus in excess of $100,000,000; provided in each case that the same provides for payment of both principal and interest (and not principal alone or interest alone) and is not subject to any contingency regarding the payment of principal or interest.

 

CERCLA ” means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended.

 

CERCLIS ” means the Comprehensive Environmental Response Compensation Liability Information System List.

 

Certificate Regarding Non-Bank Status ” means a certificate in the form attached hereto as Exhibit B.

 

  3  

 

 

Certification ” has the meaning set forth in Section 6.12(b) .

 

Change in Law ” shall mean the occurrence, after the date of this Agreement, of any of the following: (a) the adoption or taking effect of any law, rule, regulation or treaty, (b) any change in any law, rule, regulation or treaty or in the administration, interpretation, implementation or application thereof by any Governmental Authority or (c) the making or issuance of any request, rule, guideline or directive (whether or not having the force of law) by any Governmental Authority; provided that notwithstanding anything herein to the contrary, (x) the Dodd-Frank Wall Street Reform and Consumer Protection Act and all requests, rules, regulations, guidelines, interpretations or directives thereunder or issued in connection therewith (whether or not having the force of Applicable Law) and (y) all requests, rules, regulations, guidelines, interpretations or directives promulgated by the Bank for International Settlements, the Basel Committee on Banking Supervision (or any successor or similar authority) or the United States or foreign regulatory authorities (whether or not having the force of law) , in each case pursuant to Basel III, shall in each case be deemed to be a Change in Law regardless of the date enacted, adopted, issued, promulgated or implemented.

 

Change of Control ” means the occurrence of any of the following:

 

(a)          The acquisition by any Person or any group of Persons of record or beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 25% or more of (i) the Capital Stock of the Borrower (as determined on a fully-diluted basis) or (ii) the combined voting power of the then-outstanding voting securities of the Borrower (the “ Outstanding Company Voting Securities ”);

 

(b)          Consummation by the Borrower or any of its Subsidiaries of a merger, consolidation, combination, reorganization, or sale of Capital Stock, whether in one or a series of related transactions (a “ Business Combination ”), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 80% of the then outstanding shares of voting Capital Stock of the purchasing or surviving entity in such Business Combination, in substantially the same proportions as its ownership immediately prior to such Business Combination, of the Outstanding Company Voting Securities and (ii) at least a majority of the members of the board of directors (or equivalent governing body) of the purchasing or surviving entity in such Business Combination were members of the Borrower’s or such Subsidiary’s board of directors (or equivalent governing body) at the time of the execution of the initial agreement, or of the action of the Borrower’s or such Subsidiary’s board of directors (or equivalent governing body), providing for such Business Combination;

 

(c)          A sale, assignment, lease, conveyance, exchange, transfer, sale-leaseback or other Disposition of more than 50% of the assets of the Borrower or any Guarantor, whether in one or a series of related transactions (excluding normal inventory sales and financing arrangements associated with inventory or receivables);

 

  4  

 

 

(d)          The Borrower ceases to own and control, directly or indirectly, free and clear of all Liens (other than in favor of the Purchasers) 100% of the Capital Stock of each Guarantor (other than directors’ qualifying shares, as may be required by law, and other than as a result of a Disposition permitted by Section 9.4 );

 

(e)          Approval by the board of directors (or equivalent governing body) of the Borrower or any Guarantor of:

 

(i)          a liquidation or dissolution of the Borrower or any Guarantor;

 

(ii)          an exchange of the Capital Stock of the Borrower for the Capital Stock of any other Person or Persons;

 

(iii)          the sale or Disposition of all or substantially all of the assets of the Borrower or any Guarantor; or

 

(iv)          the merger of consolidation of the Borrower with or into another Person unless permitted by Section 9.3 ; or

 

(f)          During any period of twelve (12) consecutive months, a majority of the members of the Board of the Borrower cease to be composed of individuals (i) who were members of such Board on the first (1st) day of such period, (ii) whose election or nomination to such Board was approved by individuals referred to in clause (i) above constituting at the time of such election or nomination at least a majority of such Board or (iii) whose election or nomination to such Board was approved by individuals referred to in clauses (i) and (ii) above constituting at the time of such election or nomination at least a majority of such Board (excluding, in the case of both clause (ii) and clause (iii), any individual whose initial nomination for, or assumption of office as, a member of such Board occurs as a result of an actual or threatened solicitation of proxies or consents for the election or removal of one or more directors by any Person or group other than a solicitation for the election of one or more directors by or on behalf of such Board).

 

Charter Documents ” means the articles or certificate of incorporation or formation (as applicable), the bylaws or operating or limited liability company agreement (as applicable), and other similar organizational and governing documents of any Person, as amended, restated, supplemented or otherwise modified from time to time.

 

Closing ” has the meaning given to that term in Section 2.3 .

 

Closing Date ” has the meaning given to that term in Section 2.3 .

 

Code ” means the Internal Revenue Code of 1986, as amended.

 

Collateral Agent ” has the meaning given to it in the introductory paragraph of this Agreement.

 

Collateral Access Agreement ” has the meaning assigned thereto in the Guaranty and Collateral Agreement.

 

  5  

 

 

Collateral Documents ” means the Guaranty and Collateral Agreement, the Collateral Access Agreements, the Deposit Account Control Agreements, and each other agreement or writing pursuant to which the Borrower or any Subsidiary purports to pledge or grant a security interest in any property or assets securing the Obligations or any of such Borrower or Subsidiary purports to guarantee the payment and/or performance of the Obligations, in each case, as amended, restated, supplemented or otherwise modified from time to time.

 

Compliance Certificate ” means a Compliance Certificate in the form attached hereto as Exhibit C .

 

Contingent Obligation ” of a Person means any contingent obligation calculated in conformity with GAAP, and in any event shall include any agreement, undertaking or arrangement by which such Person assumes, guarantees, endorses, contingently agrees to purchase or provide funds for the payment of, or otherwise becomes or is contingently liable upon, the obligation or liability of any other Person, or agrees to maintain the net worth or working capital or other financial condition of any other Person, or otherwise assures any creditor of such other Person against loss, including, without limitation, any comfort letter, operating agreement, take or pay contract or the obligations of any such Person as general partner of a partnership with respect to the liabilities of the partnership.

 

Contractual Obligations ” means as to any Person, any provision of any security issued by such Person or of any agreement, undertaking, contract, indenture, mortgage, deed of trust or other instrument or arrangement (whether in writing or otherwise) to which such Person is a party or by which it or any of such Person’s property is bound.

 

CWA ” has the meaning set forth in the definition of “Environmental Laws.”

 

Default ” means any event or condition which upon notice, lapse of time or both would, unless cured or waived, become an Event of Default.

 

Default Rate ” has the meaning given to that term in Section 3.1(b) .

 

Deposit Account Control Agreement ” means each Deposit Account Control Agreement among any Loan Party, the Collateral Agent and the applicable depository bank, as amended, restated, modified, or supplemented from time to time.

 

Disposition ” has the meaning given to that term in Section 9.4 .

 

Distributions ” by a Person means (a) the declaration or payment of dividends or other distributions (whether in cash, securities or other property or assets) on any now or hereafter outstanding Capital Stock of such Person; (b) any payment (whether in cash, securities or other property or assets) on account of the redemption, repurchase, defeasance, sinking fund or other retirement or acquisition of such Capital Stock or of warrants, rights or other options to purchase such Capital Stock made either directly or indirectly; (c) any loans or advances (other than salaries or advances to, or reimbursement of, directors or employees for travel, entertainment, relocation or other business expenses in the ordinary course of business), to any stockholder(s), partner(s) or member(s) of such Person; (d) any payment or prepayment of principal or premium, if any, or interest, fees or other charges on or with respect to, and any redemption, purchase, retirement, defeasance, sinking fund or similar payment and any claim for rescission with respect to any Indebtedness that is subordinated to the Obligations; and (e) setting aside funds for any of the foregoing.

 

  6  

 

 

Disqualified Capital Stock ” means any Capital Stock which, by its terms (or by the terms of any security or other equity interests into which it is convertible or for which it is exchangeable or exercisable), or upon the happening of any event or condition (a) matures or is mandatorily redeemable (other than solely for Capital Stock which are not otherwise Disqualified Capital Stock), pursuant to a sinking fund obligation or otherwise, (b) is redeemable or subject to mandatory repurchase, in either case, at the option of the holder thereof (other than solely for equity interests which are not otherwise Disqualified Capital Stock), in whole or in part, (c) provides for scheduled payments, dividends or distributions in cash or (d) is or becomes convertible into or exchangeable or exercisable for indebtedness or any other equity interests that would constitute Disqualified Capital Stock, in each case, prior to the date that is ninety one (91) days after the Maturity Date.

 

Domestic Subsidiary ” means any Subsidiary that is organized under the laws of any state of the United States or the District of Columbia.

 

EBITDA ” means, for any period in question, the sum of (a) Net Income for such period plus (b) to the extent deducted in determining such Net Income, the sum, without duplication, of (i) Interest Expense during such period, (ii) all federal, state, local and/or foreign income taxes payable by the Borrower and its Subsidiaries during such period, (iii) depreciation expenses of the Borrower and its Subsidiaries during such period, (iv) amortization expenses of the Borrower and its Subsidiaries during such period, (v) non-recurring transaction fees and expenses arising from the Transactions on or prior to the Closing Date and paid within sixty (60) days of the Closing Date in an amount not to exceed $575,000, (vi) prepayment fees in connection with the repayment of the Borrower’s existing term loan facility in an amount not to exceed $340,000, (vii) cash severance paid during the second Fiscal Quarter of 2017 in an amount not to exceed $100,000, (viii) the non-cash write-off of loss and commission during the second Fiscal Quarter of 2017 relating to the sublease of the Borrower’s Dallas, Texas leased office space in an amount not to exceed $135,000; (ix) non-cash equity-based compensation in an aggregate amount not to exceed $2,750,000; and (x) any extraordinary, non-recurring and/or non-cash losses and expenses incurred during such period as may be agreed in writing by the Required Purchasers in their sole discretion, minus (c) any extraordinary, non-recurring and/or non-cash gains or income during such period as may be agreed in writing by the Required Purchasers in their sole discretion, all determined on a consolidated basis and in accordance with GAAP.

 

Eligible Account ” means those Accounts consisting of trade receivables created by each Loan Party in the ordinary course of its business, that arise out of such Loan Party’s goods shipped or rendition of services, and that are not excluded as ineligible by virtue of one or more of the excluding criteria set forth below. In determining the amount to be included, Eligible Accounts shall be calculated net of customer deposits, credits and unapplied cash. Eligible Accounts shall not include the following:

 

(a)          Accounts that the Account Debtor has failed to pay within 90 days of stated due date and Accounts specifically reserved for by the Loan Parties;

 

  7  

 

 

(b)          Accounts with payment terms greater than 90 days from original invoice date; provided that the Accounts of Approved Distributors may have payment terms greater than 90 days from the original invoice date and such Accounts shall be considered to be Eligible Accounts so long as they otherwise would be Eligible Accounts;

 

(c)          Accounts owed by an Account Debtor (or its Affiliates) where any Accounts owed by that Account Debtor (or its Affiliates) are deemed ineligible under clause (a) above (if past due amounts are greater than 10% of the Account Debtor’s Account balance) or clauses (h) or (o) below;

 

(d)          Accounts with respect to which the Account Debtor is an Affiliate of the Borrower or an employee of the Borrower;

 

(e)          Accounts that are not payable in Dollars or Canadian Dollars (provided that such Accounts that are payable in Canadian Dollars shall not constitute more than $500,000 of Eligible Accounts);

 

(f)          Accounts with respect to which the Account Debtor (i) does not maintain its principal place of business in the United States or Canada, (ii) is not organized in the United States or Canada or (iii) is the government of any foreign country or sovereign state, or of any state, province, municipality, or other political subdivision thereof, or of any department, agency, public corporation, or other instrumentality thereof;

 

(g)          Accounts with respect to which the Account Debtor is either (i) the United States or any department, agency, or instrumentality of the United States (exclusive, however, of Accounts with respect to which such Borrower has complied, to the reasonable satisfaction of the Purchaser, with the Assignment of Claims Act, 31 USC §3727), or (ii) any state of the United States;

 

(h)          That portion of Accounts with respect to which the Account Debtor is a creditor of such Borrower, has or has asserted a right of setoff, forensic investigation, or has disputed its obligation to pay all or any portion of the Account;

 

(i)          That portion of Accounts which reflect a reasonable reserve for warranty claims or returns or amounts which are owed to Account Debtors, including those for rebates, allowances, prepayment discounts or other deductions;

 

(j)          Accounts (i) owing by a single Account Debtor or group of Affiliated Account Debtors whose total obligations owing to Borrowers exceed twenty five (25%) percent of the aggregate amount of all otherwise Eligible Accounts;

 

(k)          Accounts with respect to which the Account Debtor, to the knowledge of any Loan Party or the Collateral Agent, is subject to an insolvency or bankruptcy proceeding or any dissolution or liquidation proceeding, is not solvent, has gone out of business, or as to which such Borrower has received notice of an imminent insolvency or bankruptcy proceeding or any dissolution or liquidation or a material impairment of the financial condition of such Account Debtor;

 

  8  

 

 

(l)           Accounts representing credit card sales or “C.O.D.” sales;

 

(m)         Accounts that are not subject to a valid and perfected first priority Lien by the Collateral Agent or that are subject to any other Lien, unless such other Lien is a Permitted Lien and the holder of such Permitted Lien has entered into an intercreditor agreement with the Purchasers reasonably acceptable to the Purchasers;

 

(n)          Accounts that consist of progress billings (such that the obligation of the Account Debtors with respect to such Accounts is conditioned upon such Loan Party’s satisfactory completion of any further performance under the agreement giving rise thereto) or retainage invoices;

 

(o)          that portion of Accounts which represent finance charges, service charges, sales taxes or excise taxes;

 

(p)          that portion of Accounts which has been restructured, extended, amended or otherwise modified;

 

(q)          Accounts which have not been invoiced or not invoiced in accordance with the material terms of the relevant agreement;

 

(r)          Accounts which do not have binding documentary evidence of an underlying transaction with an end user in the event that the transaction giving rise to the Account involves a distributor, partner or other reseller;

 

(s)          Accounts the balance of which is less than $500; and

 

(t)          Accounts or that portion of Accounts otherwise deemed ineligible and not covered by clauses (a) through (s) above by the Collateral Agent in its reasonable discretion exercising reasonable credit judgment.

 

Any Accounts which are not Eligible Accounts shall nonetheless constitute Collateral.

 

Eligible Accounts Adjustment ” means the total amount owed to Borrower with respect to the Accounts of Sentinel Offender Services, LLC (“ Sentinel ”) solely to the extent that (i) Sentinel is current on its payment obligations under the Sentinel Settlement Agreement in an amount not to exceed the lesser of $1,541,143 and the amount currently outstanding under the Sentinel Settlement Agreement and (ii) the Sentinel Settlement Agreement has not been amended.

 

Environmental Laws ” means any and all federal, state, local and foreign statutes, laws, judicial decisions, regulations, ordinances, rules, judgments, orders, decrees, plans, injunctions, Licenses, concessions, grants, franchises, agreements and other governmental restrictions relating to (a) the protection of the environment, (b) the effect of the environment on human health, (c) emissions, discharges or releases of pollutants, contaminants, hazardous substances or wastes into surface water, ground water, air or land, or (d) the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, hazardous substances or wastes or the clean-up or other remediation thereof, including, without limitation, the Clean Air Act, 42 U.S.C. § 7401 et seq., the Clean Water Act, 33 U.S.C. § 1251 et seq. (“ CWA ”), the Solid Waste Disposal Act (as amended by the Resource Conservation and Recovery Act), 42 U.S.C. § 6901 et seq. (“ RCRA ”), and CERCLA.

 

  9  

 

 

ERISA ” means the Employee Retirement Income Security Act of 1974, as amended and the rules and regulations promulgated thereunder.

 

ERISA Affiliate ” means a corporation that is or was a member of a controlled group of corporations with the Borrower within the meaning of Section 4001(a) or (b) of ERISA or Section 414(b) of the Code, a trade or business (including a sole proprietorship, partnership, trust, estate or corporation) that is under common control with the Borrower within the meaning of Section 414(m) of the Code, or a trade or business which together with the Borrower is treated as a single employer under Section 414(o) of the Code.

 

Event of Default ” has the meaning given to that term in Section 10.1 .

 

Exchange Act ” means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the SEC thereunder.

 

Excluded Account ” has the meaning assigned thereto in the Guaranty and Collateral Agreement.

 

Excluded Taxes ” shall mean, with respect to any Purchaser, or any other recipient of any payment to be made by or on account of any Obligations, (a) Taxes imposed on or measured by its Net Income (however denominated), and franchise Taxes imposed on it (in lieu of Net Income taxes), (i) by the jurisdiction (or any political subdivision thereof) under the laws of which such recipient is organized or in which its principal office or applicable lending office is located or (ii) that are Other Connection Taxes, (b) any branch profits Taxes imposed by the United States or any similar Tax imposed by any other jurisdiction in which the applicable Purchaser is located, (c) in the case of a Foreign Purchaser, any withholding Tax that is imposed on amounts payable to such Foreign Purchaser pursuant to a law in effect at the time such Foreign Purchaser becomes a party hereto (or designates a new lending office), except to the extent that such Foreign Purchaser (or its assignor or seller of a participation, if any) was entitled, at the time of designation of a new lending office (or assignment or sale of a participation), to receive additional amounts from Borrower with respect to such withholding Tax pursuant to Section 3.5(a) , (d) Taxes resulting from the failure to comply with Section 3.5(e) , or (e) any U.S. federal withholding Taxes imposed under FATCA.

 

FATCA ” shall mean Sections 1471 through 1474 of the Code, as of the date of this Agreement (or any amended or successor version that is substantively comparable and not materially more onerous to comply with), any current or future regulations promulgated thereunder or official interpretations thereof, any agreement entered into pursuant to Section 1471(b)(1) of the Code, and any applicable intergovernmental agreements with respect thereto and any fiscal or regulatory legislation, rules, practices, or laws adopted pursuant to such intergovernmental agreements.

 

  10  

 

 

Fee Letter ” means that certain Fee Letter, dated as of June 7, 2017, between the Collateral Agent and the Borrower, as amended, restated, amended and restated, supplemented or otherwise modified from time to time.

 

Financial Statements ” has the meaning given to that term in Section 6.12 .

 

Fiscal Quarter ” means a fiscal quarter of the Borrower and its Subsidiaries, ending on March 31, June 30, September 30, and December 31 of each year.

 

Fiscal Year ” means a fiscal year of the Borrower and its Subsidiaries, ending on December 31 of each year.

 

Foreign Benefit Plan ” means each material plan, fund, program or policy established under the law of a jurisdiction other than the United States (or a state or local government thereof), whether formal or informal, funded or unfunded, insured or uninsured, providing employee benefits, including medical, hospital care, dental, sickness, accident, disability, life insurance, pension, retirement or savings benefits, under which one or more of the Loan Parties or their Subsidiaries have any liability with respect to any employee or former employee, but excluding any Foreign Pension Plan.

 

Foreign Pension Plan ” means a pension plan required to be registered under the law of a jurisdiction other than the United States (or a state or local government thereof), that is maintained or contributed to by one or more of the Loan Parties or their Subsidiaries for their employees or former employees.

 

Foreign Purchaser ” shall mean any Purchaser that is organized under the laws of a jurisdiction other than that in which Borrower is resident for tax purposes. For purposes of this definition, the United States, each State thereof, and the District of Columbia shall be deemed to constitute a single jurisdiction.

 

Foreign Subsidiary ” means any Subsidiary that is not a Domestic Subsidiary.

 

GAAP ” means generally accepted accounting principles in effect within the United States from time to time, consistently applied. If there are any changes to GAAP during the term of this Agreement, the parties shall continue to determine compliance with the financial covenants, and make all other financial determinations hereunder, without giving effect to any such changes until such time that the parties hereto can agree to amend the financial covenants and other provisions requiring financial determinations hereunder to take into account the effect of such changes to GAAP in a mutually acceptable manner.

 

Governmental Authority ” means the government of any nation, state, city, locality or other political subdivision of any thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, regulation or compliance, including, without limitation, any federal, state or local public utility commission, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing.

 

  11  

 

 

Guarantor ” or “ Guarantors ” means each Person that guarantees all or any portion of the Obligations. Each of the Domestic Subsidiaries of the Borrower on the Closing Date and each other Domestic Subsidiary of the Borrower required to guarantee all or any portion of the Obligations after the Closing Date shall be a Guarantor.

 

Guaranty and Collateral Agreement ” means that certain Guaranty and Collateral Agreement, dated as of the Closing Date, made by the Loan Parties in favor of the Collateral Agent, as amended, restated, modified, or supplemented from time to time.

 

Hazardous Materials ” means (a) any “hazardous substance”, as defined by CERCLA, (b) any “hazardous waste”, as defined by RCRA, (c) any petroleum product, (d) any “pollutant,” as defined by the CWA, or (e) contaminant or hazardous, dangerous or toxic chemical, material or substance within the meaning of any other Environmental Law.

 

Hazardous Materials Activity ” means any past, current, proposed or threatened activity, event or occurrence involving any Hazardous Materials, including the use, manufacture, possession, storage, holding, presence, existence, location, Release, threatened Release, discharge, placement, generation, transportation, processing, construction, treatment, abatement, removal, remediation, disposal, disposition or handling of any Hazardous Materials, and any corrective action or response action with respect to any of the foregoing.

 

Hedging Agreement ” means any rate protection agreement, foreign currency exchange agreement, commodity price protection agreement or other interest or currency exchange rate or commodity price hedging agreement.

 

Indebtedness ” means, with respect to any Person, without duplication, such Person’s (a) obligations for borrowed money, (b) obligations representing the deferred purchase price of Property or services (other than accounts payable arising in the ordinary course of such Person’s business payable on terms customary in the trade and not outstanding more than 90 days past the date of invoice), (c) obligations, whether or not assumed, secured by Liens or payable out of the proceeds or production from Property now or hereafter owned or acquired by such Person, (d) obligations which are evidenced by bonds, debentures, notes, acceptances, or other similar instruments, (e) obligations of such Person to purchase securities or other Property arising out of or in connection with the sale of the same or substantially similar securities or Property, (f) Capital Lease Obligations and obligations created or arising under any conditional sale or other title retention agreement, (g) Contingent Obligations, (h) net obligations under or relating to Hedging Agreements, (i) Off-Balance Sheet Liabilities, (j) attributable indebtedness related to Sale and Leaseback Transactions, (k) the aggregate undrawn face amount of all letters of credit issued for the account and/or upon the application of such Person together with all unreimbursed drawings with respect thereto, (l) any obligation to repurchase or redeem Disqualified Capital Stock of such Person other than at the sole option of such Person, (m) “earnouts” and similar payment obligations of such Person to the extent such obligations become fixed or are considered liabilities under GAAP, (n) all Indebtedness of others guaranteed by such Person, and (l) any other obligation for borrowed money or other financial accommodation which, in accordance with GAAP, would be shown as a liability on the balance sheet of such Person. The amount of Indebtedness under any Hedging Agreement on any date shall be deemed to be the swap termination value thereof as of such date.

 

  12  

 

 

Indemnified Party ” has the meaning given to that term in Section 11.1 .

 

Indemnified Taxes ” shall mean (a) any Taxes, other than Excluded Taxes, imposed on or with respect to any payment made by or on account of any obligation of any Loan Party under any Note Document and (b) to the extent not otherwise described in (a), Other Taxes.

 

Intellectual Property ” means all intellectual and similar property of a Person, including inventions, designs, patents, copyrights, trademarks, service marks, trade names, trade secrets, confidential or proprietary information, customer lists, know-how, software and databases.

 

Intellectual Property License ” has the meaning assigned thereto in the Guaranty and Collateral Agreement.

 

Intellectual Property Security Agreement ” means a collateral assignment or security agreement pursuant to which the Borrower or any of its Subsidiaries assigns or grants a security interest in its interests in Intellectual Property to the Collateral Agent, as security for the Obligations, as the same may be amended, restated, supplemented or otherwise modified from time to time.

 

Interest Expense ” means, for any period, the net interest expense of the Borrower and its Subsidiaries for the period in question, determined on a consolidated basis and in accordance with GAAP (including, without limitation, all commissions, discounts and/or related amortization and other fees and charges owed by the Borrower and its Subsidiaries with respect to letters of credit or bankers’ acceptances, the net costs associated with any Hedging Agreement of the Borrower and its Subsidiaries, capitalized interest expense, the interest portion of Capital Lease Obligations and the interest portion of any deferred payment obligation).

 

Interest Payment Date ” has the meaning given to that term in Section 3.1(c) .

 

Inventory ” means all of the “inventory” (as that term is defined in the UCC) of the Borrower and its Subsidiaries, whether now existing or hereafter acquired or created.

 

Investment ” means any direct or indirect purchase, acquisition or other investment (including, without limitation, any loan or advance or capital contribution) in or to any Person, whether payment therefor is made in cash or Capital Stock or otherwise, and whether such investment is by acquisition of Capital Stock or Indebtedness, or by loan, advance, transfer of property out of the ordinary course of business, capital contribution, equity or profit sharing interest, extension of credit on terms other than those normal in the ordinary course of business or otherwise. The amount of any Investment shall be the original cost of such Investment plus the cost of all additions thereto, without any adjustments for decreases in value, or write downs or write offs with respect to such Investment.

 

IP Rights ” has the meaning given to that term in Section 6.22 .

 

IRS ” means the United States Internal Revenue Service.

 

  13  

 

 

Knowledge of the Borrower ” or “ Knowledge of a Loan Party ”, or any similar phrases, means the actual knowledge of any director or executive officer of the Borrower or such Loan Party, as applicable, or knowledge that such person would have reasonably obtained in the performance of such person’s duties as a director or executive officer of the Borrower or such Loan Party, as applicable.

 

Liabilities ” has the meaning given to that term in Section 11.1 .

 

Licenses ” means all licenses, permits, authorizations, determinations, and registrations issued by any Governmental Authority to the Borrower or any Subsidiary in connection with the conduct of its business.

 

Lien ” means any lien (statutory or otherwise), security interest, mortgage, pledge, hypothecation, deed of trust, assignment, deposit arrangement, encumbrance, or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, the interest of a vendor or lessor under any conditional sale, Capital Lease, or other title retention agreement (and any lease in the nature thereof)) and any agreement to give any of the foregoing.

 

Loan Party ” means the Borrower and each Guarantor.

 

Material Adverse Effect ” means individually or in the aggregate (a) a material adverse effect on the assets, business, properties, results of operations, financial condition, or prospects of the Borrower and its Subsidiaries (taken as a whole), (b) a material adverse effect upon (i) the legality, validity, binding effect or enforceability against the Borrower or any of its Subsidiaries of any Note Document, (ii) a significant portion of the Collateral or the validity, perfection or priority of the Collateral Agent’s Liens on a significant portion of the Collateral or (iii) the rights, remedies and benefits (taken as a whole) available to, or conferred upon, the Collateral Agent or any Purchaser under any Note Document, or (c) a material adverse effect on the ability of the Borrower or any of its Subsidiaries to perform its obligations under any Note Document.

 

Material Contract ” means any contract, agreement, instrument, permit, lease or License of the Borrower or its Subsidiaries (other than this Agreement and the Note Documents) (i) as to which the termination thereof could reasonably be expected to result in a Material Adverse Effect, (ii) as to which the failure to comply with, or loss of such contract could reasonably be expected to decrease revenue of the Borrower and its Subsidiaries for the most recently ended twelve (12) month period as of the date of determination by more than 10%, (iii) involving a commitment to pay an amount, by any Loan Party or any of its Subsidiaries in excess of $1,000,000 in any twelve-month period following the Closing Date (whether or not in the ordinary course of business) or where any Loan Party or any of its Subsidiaries actually paid in excess of $1,000,000 during the twelve month period preceding the Closing Date; (iv) for a partnership or a joint venture or for the acquisition, sale or lease of any assets or Capital Stock of any Loan Party, its Subsidiaries or any other Person or involving a sharing of profits; (v) that is a mortgage, pledge, hypothecation, conditional sales contract, security agreement, factoring agreement or other similar Contractual Obligation with respect to any tangible and/or intangible personal property of any Loan Party or its Subsidiaries (other than in connection with trade payables incurred in the ordinary course of business); (vi) that is a loan agreement, credit agreement, promissory note, guarantee, subordination agreement, letter of credit or any other similar type of Contractual Obligation (other than this Agreement and the Note Documents or in connection with trade payables incurred in the ordinary course of business); (vii) with any Governmental Authority other than in the ordinary course of business; (viii) which contains any provision that may terminate such contract or require payments to be made by any Loan Party or any of its Subsidiaries upon or following a “change of control”, if such termination or payment under such Contractual Obligation could individually or in the aggregate have a Material Adverse Effect; (ix) with respect to Hazardous Materials Activity; or (x) that is a material binding commitment or agreement to enter into any of the foregoing types of agreements.

 

  14  

 

 

Maturity Date ” has the meaning given to that term in Section 3.2(a) .

 

Maximum Rate ” has the meaning given to that term in Section 3.1(d) .

 

Minimum Liquidity ” means unrestricted cash and Cash Equivalents recorded on the balance sheet of the Loan Parties (in each case, to the extent subject to a first priority perfected security interest in favor of the Collateral Agent arising under a control agreement in favor of the Collateral Agent, but excluding any cash or Cash Equivalents subject to Liens permitted by Section 9.6(m)).

 

Minimum Total Liquidity ” means Minimum Liquidity plus Eligible Accounts plus the Eligible Accounts Adjustment; provided that the Eligible Accounts Adjustment shall not be included in the calculation of Minimum Total Liquidity at any time after March 25, 2018.

 

Monthly Recurring Revenue ” means, with respect to any month, the average amount of monthly revenue for the trailing three month period derived from subscription and support revenues, as reflected on the Borrower’s and its Subsidiaries’ financial statements (provided that revenue generated from professional services cannot be greater than 5% of Monthly Recurring Revenue for purposes of compliance with Section 9.20(e) ).

 

Multiemployer Plan ” means a multiemployer plan within the meaning of Section 3(37) or 4001(a)(3) of ERISA or Section 414(f) of the Code.

 

Net Cash Proceeds ” means, with respect to:

 

(a)          any voluntary or involuntary sale or Disposition (other than a casualty loss or a sale or Disposition permitted under Section 9.4 ), the cash proceeds received (directly or indirectly) from time to time in respect thereof, including any cash received in respect of any non-cash proceeds (including, without limitation, the monetization of notes receivables), but only as and when received;

 

(b)          a casualty loss, insurance proceeds, proceeds of a condemnation award or other compensation payments, in each case net of all reasonable fees and out-of-pocket expenses (including appraisals, and brokerage, legal, advisory, banking, title and recording tax expenses and commissions) paid by any Loan Party to third parties (other than Affiliates) in connection with such event; or

 

  15  

 

 

(c)          the issuance of any Capital Stock, the aggregate amount of cash received (directly or indirectly) from time to time (whether as initial consideration or through the payment or disposition of deferred consideration) in connection with such issuance, after deducting therefrom only (i) reasonable fees, commissions, and expenses related thereto and required to be paid by the applicable Loan Party in connection with such issuance and (ii) Taxes paid or payable to any taxing authorities by such Loan Party in connection with such issuance, in each case to the extent, but only to the extent, that the amounts so deducted are actually paid or payable to a Person that is not an Affiliate of such Loan Party, and are properly attributable to such transaction.

 

Net Income ” means the net income (or loss) of the Borrower and its Subsidiaries for the period in question, determined on a consolidated basis and in accordance with GAAP.

 

Note Documents ” means this Agreement, the Notes, the Collateral Documents, the Fee Letter, the Warrant, and each other agreement, document, form or certificate delivered pursuant to this Agreement or any other Note Document, in each case, as amended, restated, modified or supplemented from time to time.

 

Note ” or “ Notes ” has the meaning set forth in the Statement of Purpose and shall include any Note issued under this Agreement, including, without limitation, any Note issued pursuant to Section 2.1 .

 

Obligations ” means, in each case, whether now in existence or hereafter arising: (a) the principal of and interest on (including interest accruing after the filing of any bankruptcy or similar petition) the Notes, and (b) the Prepayment Fee and all other fees and commissions (including attorneys’ fees), charges, indebtedness, loans, liabilities, financial accommodations, obligations, covenants and duties owing by Borrower and each of its Subsidiaries to the Purchasers or the Collateral Agent under any Note Document of every kind, nature and description, direct or indirect, absolute or contingent, due or to become due, contractual or tortious, liquidated or unliquidated, and whether or not evidenced by any note and including interest and fees that accrue after the commencement by or against the Borrower or any Subsidiary thereof of any proceeding under any federal bankruptcy laws (as now or hereafter in effect) or under any other laws, domestic or foreign, relating to bankruptcy, insolvency, reorganization, winding up or adjustment of debts, naming such Person as the debtor in such proceeding, regardless of whether such interest and fees are allowed claims in such proceeding.

 

Observer ” shall have the meaning set forth in Section 8.15 .

 

OFAC ” means the U.S. Department of the Treasury’s Office of Foreign Assets Control.

 

Off-Balance Sheet Liability ” of a Person means (a) any repurchase obligation or liability of such Person with respect to accounts or notes receivable sold by such Person, (b) any liability under any Sale and Leaseback Transaction which is not a Capital Lease, (c) any liability under any so-called “synthetic lease” transaction entered into by such Person, or (d) any obligation arising with respect to any other transaction which is the functional equivalent of or takes the place of borrowing but which does not constitute a liability on the balance sheets of such Person.

 

  16  

 

 

Other Connection Taxes ” shall mean any Taxes imposed as a result of a former or present connection between the recipient of a payment hereunder and the jurisdiction imposing such Taxes (other than a connection arising from executing, delivering, becoming a party to, the performance of an obligation under, receiving payments under, perfecting a security interest under, or engaging in any other transaction pursuant to, or enforcing, this Agreement or selling or assigning any interest in the Notes).

 

Other Taxes ” shall mean all present or future stamp, court or documentary, intangible, recording, filing or similar Taxes or any other excise or property Taxes, charges or similar levies arising from any payment made hereunder or under any Note Document or from the execution, delivery, performance, enforcement or registration of, from the receipt or perfection of a security interest under, or otherwise with respect to, this Agreement or any Note Document, except any such Taxes that are Other Connection Taxes imposed with respect to an assignment in accordance with the terms hereof.

 

Outstanding Company Voting Securities ” has the meaning set forth in the definition of “Change of Control”.

 

Patriot Act ” means the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, P.L. 107-56, as amended.

 

PBGC ” means the Pension Benefit Guaranty Corporation or any successor agency.

 

Pension Plan ” has the meaning given to that term in Section 6.21(b) .

 

Permitted Liens ” has the meaning given to that term in Section 9.6 .

 

Person ” means any individual, firm, corporation, limited liability company, partnership, trust, incorporated or unincorporated association, joint venture, joint stock company, Governmental Authority or other entity of any kind, and shall include any successor (by merger or otherwise) of such entity.

 

Plans ” has the meaning given to that term in Section 6.21(a) .

 

Prepayment Date ” has the meaning given to that term in Section 3.2(b) .

 

Prepayment Fee ” means an amount determined by multiplying the percentage set forth below corresponding to the date on which the prepayment is, or is required to be, made by the amount of such prepayment (including any prepayment of deferred interest accruing on the Notes):

 

Periods of Prepayment Percentage
   
Closing Date to June 7, 2019 5%
   
June 8, 2019 to June 7, 2020 3%
   
June 8, 2020 to the Maturity Date 1%

  

Prepayment Fee Trigger Event ” means

 

  17  

 

 

(a)          any prepayment, redemption or repurchase by any Loan Party of all, or any part, of the principal balance of the Notes for any reason whether in whole or in part, and whether before or after (i) the occurrence of an Event of Default, or (ii) the commencement of any case or other proceeding by any Loan Party seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar Applicable Law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or such Loan Party shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or such Loan Party shall make a general assignment for the benefit of creditors, or formally admits in writing its inability or shall fail generally to pay its debts as they become due, or such Loan Party shall take any corporate action to authorize any of the foregoing (any of the forgoing items set forth in this clause (ii), an “ Insolvency Proceeding ”), and notwithstanding any acceleration (for any reason) of the Obligations; provided that any payment required to be made pursuant to Section 3.2(a) shall not constitute a Prepayment Fee Trigger Event;

 

(b)          the acceleration of the Obligations for any reason, including, but not limited to, acceleration in accordance with Section 10.1(f) or (g) , including without limitation as a result of the commencement of an Insolvency Proceeding;

 

(c)          the satisfaction, release, payment, restructuring, reorganization, replacement, reinstatement, defeasance or compromise of any of the Obligations in any Insolvency Proceeding, foreclosure (whether by power of judicial proceeding or otherwise) or deed in lieu of foreclosure or the making of a distribution of any kind in any Insolvency Proceeding to the Collateral Agent, for the account of the Purchasers in full or partial satisfaction of the Obligations; or

 

(d)          the termination of this Agreement for any reason.

 

For purposes of the definition of the term Prepayment Fee, if a Prepayment Fee Trigger Event occurs under clauses (a)(ii), (b), (c) or (d) above, the entire outstanding principal amount of the Term Loan shall be deemed to have been prepaid on the date on which such Prepayment Fee Trigger Event occurs.

 

Prime Rate ” means, for any day, the greater of (i) the rate of interest in effect for such day equal to the prime rate in the United States as reported from time to time in The Wall Street Journal (or other authoritative source selected by the Collateral Agent in its sole discretion), or as Prime Rate is otherwise determined by the Collateral Agent in its sole and absolute discretion and (ii) 4.00%. The Collateral Agent’s determination of the Prime Rate shall be conclusive, absent manifest error. Any change in such rate of interest shall take effect at the opening of business on the day of such change. In the event The Wall Street Journal (or such other authoritative source) publishes a range of “prime rates”, the Prime Rate shall be the highest of the “prime rates”.

 

Prohibited Transferee ” shall mean any company that is a direct competitor of Borrower or any of its Subsidiaries, and any Person listed on Schedule 1 attached to this Agreement.

 

  18  

 

 

Property ” of a Person means any and all property, whether real, personal, tangible, intangible, or mixed, of such Person, or other assets owned, leased, or operated by such Person.

 

“Public Purchaser” has the meaning given to that term in Section 8.1 .

 

Purchase Price ” has the meaning given to that term in Section 2.1 .

 

Purchaser ” and “ Purchasers ” means HCP-FVF, LLC, a Delaware limited liability company and shall include its successors and assigns hereunder or under the Notes.

 

RCRA ” has the meaning set forth in the definition of “Environmental Laws.”

 

Release ” means any release, spill, emission, leaking, pumping, pouring, injection, escaping, deposit, disposal, discharge, dispersal, dumping, leaching or migration of Hazardous Materials into the indoor or outdoor environment (including the abandonment or disposal of any barrels, containers or other closed receptacles containing any Hazardous Materials), including the movement of any Hazardous Materials through the air, soil, surface water or groundwater.

 

Reportable Event ” means a reportable event as defined in Section 4043 of ERISA and the regulations issued under such section, with respect to a Plan, excluding, however, such events as to which the PBGC has by regulation waived the requirement of Section 4043(a) of ERISA that it be notified within 30 days of the occurrence of such event; provided, however, that a failure to meet the minimum funding standard of Section 412 of the Code and of Section 302 of ERISA shall be a Reportable Event regardless of the issuance of any such waiver of the notice requirement in accordance with either Section 4043(a) of ERISA or Section 412(d) of the Code.

 

Required Purchasers ” means the Purchasers holding more than 50% of the aggregate outstanding principal balance of the Notes.

 

Requirements of Law ” means as to any Person, provisions of the Charter Documents of such Person, or any law, treaty, code, rule, regulation, right, privilege, qualification, License or franchise, or any determination of an arbitrator or a court or other Governmental Authority, in each case applicable to such Person or any of such Person’s property or to which such Person or any of such Person’s property is subject or pertaining to any or all of the Transactions or other transactions contemplated or referred to in the Note Documents.

 

Sale and Leaseback Transaction ” means any sale or other transfer of Property by any Person with the intent to lease such Property as lessee.

 

Sanctioned Entity ” means (a) an agency of the government of, (b) an organization directly or indirectly controlled by, or (c) a person resident in a country that is subject to a sanctions program identified on the list maintained by OFAC and available at http://www.treas.gov/offices/enforcement/ofac/programs , or as otherwise published from time to time as such program may be applicable to such agency, organization or person.

 

  19  

 

 

Sanctioned Person ” means a person named on the list of Specially Designated Nationals or Blocked Persons maintained by OFAC available at http://www.treas.gov/offices/enforcement/ofac/sdn/index.html , or as otherwise published from time to time.

 

SEC ” means the United States Securities and Exchange Commission or any other governmental authority then having jurisdiction to enforce the Securities Act and/or the Exchange Act, as applicable.

 

SEC Documents ” has the meaning set forth in Section 6.12(b) .

 

Securities Act ” means the Securities Act of 1933, as amended, or any similar federal statute, and the rules and regulations thereunder as the same shall be in effect at the time.

 

Sentinel Settlement Agreement ” means that certain Settlement and Release Agreement dated as of December 30, 2016, by and between the Borrower and Sentinel Offender Services, LLC.

 

Single Employer Plan ” means a Plan maintained by the Borrower, its Subsidiaries or any member of a controlled group of corporations with the Borrower, within the meaning of Section 4001(a) or (b) of ERISA or Section 414(b) of the Code, for employees of the Borrower, any of its Subsidiaries or any of its respective ERISA Affiliates.

 

Solvent ” means, with respect to any Person that (a) the fair value of the assets and the property of such Person exceeds the fair value of the aggregate liabilities (including contingent and unliquidated liabilities) of such Person, (b) after giving effect to the transactions contemplated by this Agreement and the other Note Documents, such Person will not be left with unreasonably small capital, and (c) after giving effect to the transactions contemplated by this Agreement and the other Note Documents, such Person is able to both service and pay its liabilities as they mature. In computing the amount of contingent or unliquidated liabilities at any time, such liabilities will be computed as the amount that, in light of all the facts and circumstances existing at such time, represents the amount that is likely to become an actual or matured liability.

 

Subordinated Note ” means that certain Amended and Restated Senior Subordinated Promissory Note dated as of the date hereof in the stated principal amount of $5,000,000 among Kenneth Rainin Foundation, a California corporation, as Holder (as defined therein), and the Borrower, as Borrower (as defined therein), as amended or otherwise modified from time to time in accordance with the terms thereof.

 

Subordinated Note Obligations ” means all of the indebtedness, obligations and liabilities evidenced by or related to or arising in connection with the Subordinated Note.

 

Subsidiary ” means, with respect to any Person, a corporation or other entity of which more than fifty percent (50%) of the voting power of the voting equity securities or equity interest is owned, directly or indirectly, by such Person. Unless otherwise qualified, all references to a “Subsidiary” or to “Subsidiaries” in this Agreement shall refer to a Subsidiary or Subsidiaries of the Borrower.

 

  20  

 

 

Tax ” means any present or future United States federal, state, local or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental (including taxes under Code §59A), customs duties, capital stock, franchise profits, withholding, social security (or similar), unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add-on-minimum, estimated, or other taxes, levies, assessments, fees or other charges imposed by any Governmental Authority, including any interest, penalty, or addition thereto, whether disputed or not.

 

Tax Return ” means any return, declaration, report, claim for refund, or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof.

 

Transactions ” means the issuance of the Notes hereunder.

 

UCC ” has the meaning set forth in the Guaranty and Collateral Agreement.

 

Unfunded Liabilities ” means the amount (if any) by which the present value of all vested and unvested accrued benefits under all Plans exceeds the fair market value of all such Plan assets allocable to such benefits, all determined as of the then most recent valuation date for such Plans using actuarial assumptions used in determining the Plans’ normal cost for purposes of Section 412(b)(2)(A) of the Code. In each case, the foregoing determination shall be made as of the most recent date prior to the filing of said annual report as of which such actuarial present value of accumulated Plan benefits is determined.

 

Warrant ” means that certain Warrant, dated as of the date hereof, by the Borrower issued to HCP-FVF, LLC, as amended or modified from time to time in accordance with the terms thereof.

 

Wholly-owned ” means, with respect to a Subsidiary, that all of the Capital Stock of such Subsidiary is, directly or indirectly, owned or controlled by the Borrower and/or one or more of its Wholly-owned Subsidiaries.

 

  21  

 

 

1.2           Accounting Terms . All accounting terms used herein and not expressly defined in this Agreement shall have the respective meanings given to them in conformance with GAAP. Where the character or amount of any asset or liability or item of income or expense is required to be determined or any consolidation or other accounting computation is required to be made for the purposes of this Agreement, this shall be done in accordance with GAAP, consistently applied, to the extent applicable, except as otherwise expressly provided in this Agreement. If any changes in accounting principles from those in effect on the date hereof are hereafter occasioned by promulgation of rules, regulations, pronouncements or opinions by or are otherwise required by the Financial Accounting Standards Board or the American Institute of Certified Public Accountants (or successors thereto or agencies with similar functions), and any of such changes results in a change in the method of calculation of, or affects the results of such calculation of, any of the financial covenants, standards or terms found herein, then the parties hereto agree upon the request of any Loan Party or Purchaser to enter into and diligently pursue negotiations in order to amend such financial covenants, standards or terms so as to equitably reflect such changes, with the desired result that the criteria for evaluating financial condition and results of operations of the Borrower and its Subsidiaries shall be the same after such changes as if such changes had not been made; provided that until any such amendments have been agreed upon by the Required Purchasers, the provisions in this Agreement shall be calculated as if no such changes in accounting principles had occurred. Notwithstanding any other provision contained herein, all terms of an accounting or financial nature used herein shall be construed, and all computations of amounts and ratios shall be made, without giving effect to any election under Accounting Standards Codification 825-10 (or any other Financial Accounting Standard having a similar result or effect) to value any Indebtedness or other liabilities of any Loan Party at “fair value.” Notwithstanding any accounting change after the Closing Date that would require lease obligations that would be treated as operating leases as of the Closing Date to be classified and accounted for as capital leases or otherwise reflected on the Borrower’s and its Subsidiaries’ consolidated balance sheet, for the purposes of determining compliance with any covenant contained herein, such obligations shall be treated in the same manner as operating leases are treated as of the Closing Date.

 

Article 2

PURCHASE AND SALE OF THE NOTES

 

2.1           Purchase and Sale of the Notes . Subject to the terms and conditions herein set forth, on the Closing Date, the Borrower will issue and sell to the Purchasers, and the Purchasers severally and not jointly will acquire from the Borrower, on the Closing Date, the Notes in an aggregate principal amount (and for an aggregate purchase price) of $13,500,000 (the “ Purchase Price ”), allocated among the Purchasers as set forth on Schedule 2.1 .

 

2.2           Fees Payable .

 

(a)           Fee Letter . The Borrower shall pay to the Collateral Agent such fees as are specified as owing in the Fee Letter at the times and in the manner and amounts as are set forth therein.

 

(b)           Reimbursement of Expenses . At the Closing, the Borrower shall reimburse all of the Collateral Agent’s and the Purchasers’ reasonable and documented out-of-pocket fees and expenses (including, without limitation, fees, charges and disbursements of outside counsel and other out-of-pocket expenses such as consultant fees, travel expenses, background checks and other expenses) incurred in connection with (i) the negotiation and execution and delivery of this Agreement and the Note Documents, (ii) the Purchasers’ due diligence investigation, and (iii) the other transactions contemplated by this Agreement and the Note Documents (including filings or other actions required to perfect the security interests granted under the Collateral Documents); provided that the Borrower shall not be obligated to pay, without its prior written approval (such approval not to be unreasonably withheld or delayed), any out-of-pocket fees, costs and expenses incurred in excess of (x) $10,000 for due diligence expenses, and (y) $215,000 for travel expense and the fees, disbursements and other charges of legal counsel to the Purchasers incurred prior to the Closing in connection with clause (i) above. The Borrower agrees to promptly pay all reasonable and documented out-of-pocket fees, costs and expenses (including external attorneys’ fees and expenses) incurred by the Purchasers in connection with any action to enforce this Agreement or the Note Documents or to collect any payments due from the Borrower or any of the Guarantors. All fees, costs, and expenses for which the Borrower is responsible under this Section 2.2(b) shall be deemed part of the Obligations when incurred.

 

  22  

 

 

2.3           Closing . The purchase and issuance of the Notes shall take place at the closing (the “ Closing ”) on the date hereof (the “ Closing Date ”), subject to the satisfaction or waiver of the conditions to closing set forth in Article 4 . At the Closing, the Borrower shall deliver the Notes to the Purchasers against delivery by the Purchasers of the Purchase Price, which is payable by wire transfer of immediately available funds.

 

Article 3

THE NOTES

 

3.1           Interest and Related Fees .

 

(a)           Interest . Except as provided in Section 3.1(b) , interest shall accrue and shall be calculated daily on the basis of the actual number of days elapsed and a 360-day year on the unpaid principal amount of the Notes outstanding from time to time and on all other Obligations at the lesser of (i) the Applicable Rate and (ii) the Maximum Rate (as defined below).

 

(b)           Default Rate of Interest . At the written election of the Required Purchasers after the occurrence of an Event of Default (or automatically upon the occurrence of and during the continuance of any Event of Default pursuant to Section 10.1(a) , 10.1(c) (solely with respect to failure to comply with Section 9.20 ), 10.1(f) or Section 10.1(g)) , and for so long as such Event of Default continues, the unpaid principal amount of the Notes outstanding from time to time and the other Obligations shall bear interest at a rate per annum of five percent (5%) (the “ Default Rate ”) in excess of the rates otherwise payable under this Agreement or the Note Documents (but not in any event in excess of the Maximum Rate). The Default Rate shall apply retroactively to the date of occurrence of such Event of Default. All Default Rate interest shall be paid in cash on demand of the Collateral Agent. If, pursuant to the terms of this Agreement or the Note Documents such other Obligations do not bear interest, after the occurrence of an Event of Default and for so long as it continues, such Obligations shall bear interest at the rate per annum from time to time borne by the Notes.

 

(c)           Payment of Interest and Related Fees . Subject to Section 3.1(e) below, the Borrower shall pay accrued interest in arrears on the last day of each calendar month (each such date being an “ Interest Payment Date ”). In addition, accrued and unpaid interest shall be payable on the maturity of the Notes, whether by acceleration or otherwise, and on the date of any prepayment (with respect to the amount prepaid).

 

  23  

 

 

(d)           Excess Interest . It is the intention of the parties to comply strictly with applicable usury laws. Accordingly, notwithstanding any provision to the contrary in this Agreement or any other Note Document or any of the Obligations, in no event shall any Obligations require the payment or permit the payment, taking, reserving, receiving, collection or charging of any sums constituting interest under Applicable Law that exceed the maximum amount permitted by such laws, as the same may be amended or modified from time to time (the “ Maximum Rate ”). If any such excess interest is called for, contracted for, charged, taken, reserved or received in connection herewith or therewith, or in any communication by any Purchasers or any other Person to the Borrower or any other Person, or in the event that all or part of the principal or interest hereof or thereof shall be prepaid or accelerated, so that under any of such circumstances or under any other circumstance whatsoever the amount of interest contracted for, charged, taken, reserved or received on the amount of principal actually outstanding from time to time under any Obligations shall exceed the Maximum Rate, then in such event it is agreed that: (i) the provisions of this paragraph shall govern and control; (ii) neither the Borrower nor any other Person or entity now or hereafter liable for the payment of any Obligations shall be obligated to pay the amount of such interest to the extent it is in excess of the Maximum Rate; (iii) any such excess interest which is or has been received by any Purchasers, notwithstanding this paragraph, shall be credited against the then unpaid principal balance of the Obligations (or, if the principal amount of the Obligations shall have been paid in full, refunded by the Purchasers to the party primarily liable on such Obligation); and (iv) the provisions of this Agreement and the Obligations, and any other communication to the Borrower, shall immediately be deemed reformed and such excess interest reduced, without the necessity of executing any other document, to the Maximum Rate. The right to accelerate the maturity of the Obligations does not include the right to accelerate, collect, or charge unearned interest, but only such interest that has otherwise accrued as of the date of acceleration. Without limiting the foregoing, all calculations of the rate of interest contracted for, charged, taken, reserved or received in connection with any of the Obligations which are made for the purpose of determining whether such rate exceeds the Maximum Rate shall be made to the extent permitted by Applicable Laws by amortizing, prorating, allocating and spreading during the period of the full term of such Obligations, including all prior and subsequent renewals and extensions hereof or thereof, all interest at any time contracted for, charged, taken, reserved or received by any Purchaser. The terms of this paragraph shall be deemed to be incorporated into each of the other Note Documents.

 

(e)           PIK Interest . Notwithstanding any other provision hereof, on any Interest Payment Date occurring on or prior to June 29, 2018 the Borrower shall pay accrued interest in kind (rather than in cash). Any such interest shall be capitalized to the principal amount of the Notes on such Interest Payment Date and shall be considered principal of the Notes for all purposes, including, without limitation, for the calculation of interest on subsequent Interest Payment Dates and of any Prepayment Fee.

 

3.2           Redemption of Notes .

 

(a)           Scheduled Redemptions of Notes . (i) The Borrower shall redeem the Notes issued by it on March 31, 2021 (the “ Maturity Date ”) by payment in cash in full of the entire outstanding principal balance thereof (including all interest that has been added to the outstanding principal amount of such Notes pursuant to Section 3.1(e) ), plus all unpaid interest accrued thereon through the date of redemption, plus all outstanding and unpaid Obligations to the Purchasers of the Notes under the Note Documents through the date of redemption and pay to the Collateral Agent all other outstanding Obligations payable to the Collateral Agent under the Note Documents. (ii) The Borrower shall redeem the Notes issued by it in principal installments of $250,000 payable on the last day of each month end beginning with the month ending June 30, 2018 and continuing through the Maturity Date (and on such other date(s) and in such other amounts as may be required from time to time pursuant to this Agreement).

 

  24  

 

 

(b)           Optional Redemption Initiated by the Borrower . The Borrower shall have the right, at its sole option and election, at any time or from time to time prior to the Maturity Date, to redeem the Notes issued by the Borrower, in whole or in part on not less than five (5) Business Days’ prior written notice of the date of redemption, which shall be a Business Day (any such date, a “ Prepayment Date ”), by payment of an amount equal to the unpaid principal balance thereof to be redeemed, plus all unpaid interest accrued thereon through the Prepayment Date, plus all outstanding and unpaid fees and expenses payable to the Purchasers of each Note under the Note Documents through the Prepayment Date, plus the Prepayment Fee.

 

  25  

 

 

(c)           Mandatory Redemptions .

 

(i)           Change of Control . Upon the occurrence of a Change of Control, the Borrower shall purchase all Notes issued by it in full by payment of an amount equal to (x) the unpaid principal balance thereof plus (y) all other outstanding Obligations payable to the Purchasers of each Note under the Note Documents through the Prepayment Date and all other outstanding Obligations payable to the Collateral Agent under the Note Documents plus (z) the Prepayment Fee. The provisions of this Section 3.2(c)(i) shall not be deemed to be implied consent to any such Change of Control otherwise prohibited by the terms of this Agreement.

 

(ii)           Dispositions; Casualty Losses . Promptly, and in any event within two (2) Business Days of receipt by the Borrower of the proceeds of any voluntary or involuntary sale or Disposition by the Borrower or any Subsidiary of assets (including casualty losses or condemnations but excluding sales or Dispositions which are permitted under Section 9.4 ), the Borrower shall be required to prepay the Notes issued by it in an amount equal to 100% of the Net Cash Proceeds (including condemnation awards and payments in lieu thereof) received by such Person in connection with such sales or Dispositions plus the Prepayment Fee; provided that , so long as (A) no Default or Event of Default shall have occurred and is continuing or would result therefrom, (B) the Borrower shall have given the Purchasers prior written notice of the Borrower’s intention to apply such monies to the costs of replacement of the properties or assets that are the subject of such sale or Disposition or the cost of purchase or construction of other assets useful in the business of the Borrower or its Subsidiaries, (C) the monies are held in a deposit account in which the Purchasers have a perfected security interest (subject only to Permitted Liens) and (D) the Borrower or its Subsidiaries, as applicable, complete such replacement, purchase, or construction within 180 days after the initial receipt of such monies, then the Borrower whose assets were the subject of such Disposition shall have the option to apply such monies in an amount not to exceed $750,000 (with any Net Cash Proceeds in excess of $750,000 to be applied to prepay the Notes) to the costs of replacement of the assets that are the subject of such sale or Disposition or the costs of purchase or construction of other assets useful in the business of the Borrower unless and to the extent that such applicable period shall have expired without such replacement, purchase, or construction being made or completed, in which case, any amounts remaining in the deposit account referred to in clause (C) above shall be immediately paid to the Purchasers and applied in prepayment of the Notes in accordance with Section 3.3 . Nothing contained in this Section 3.2(c) shall permit the Borrower or any Subsidiary to sell or otherwise dispose of any assets other than in accordance with Section 9.4 .

 

(iii)           Equity . Promptly, and in any event within two (2) Business Days of the date of the receipt by the Borrower or any of its Subsidiaries of the proceeds from the issuance and sale of any Capital Stock of the Borrower (other than proceeds of Capital Stock of the Borrower used to repurchase or repay the Subordinated Note pursuant to Section 9.17 at any time in an aggregate amount not to exceed $2,500,000), the Borrower shall be required to prepay the Notes in an amount equal to 100% of the Net Cash Proceeds received by such Person in connection with such issuance plus the Prepayment Fee. The provisions of this Section 3.2(c)(iii) shall not be deemed to be implied consent to any such issuance otherwise prohibited by the terms of this Agreement.

 

  26  

 

 

(iv)           Option to Decline . Any mandatory prepayment required to be made pursuant to Section 3.2(c) may be declined in whole or in part by any Purchaser without prejudice to such Purchaser’s rights hereunder to accept or decline any future payments in respect of any mandatory prepayments, by providing notice to the Collateral Agent no later than 5:00 p.m. (New York City time) one (1) Business Day (or such other date acceptable to the Collateral Agent) prior to the date of such prepayment; provided that the Borrower shall give not less than two (2) Business Days’ prior written notice of the date of any mandatory prepayment. If a Purchaser chooses not to accept payment in respect of a mandatory prepayment in whole or in part the other Purchasers that accept such mandatory prepayment shall have the option to share such proceeds on a pro rata basis on or before the date otherwise due hereunder; provided that , to the extent such mandatory prepayment is declined by all the Purchasers, such prepayment may be retained by the Borrower.

 

(d)           Acceleration . In addition, the Notes shall be subject to acceleration as set forth in Section 10.2 below.

 

(e)           Prepayment Fee Trigger Event . Upon the occurrence of a Prepayment Fee Trigger Event, the Borrower shall pay to the Collateral Agent, for the account of the Purchasers, the Prepayment Fee. THE BORROWER AND THE OTHER LOAN PARTIES EXPRESSLY WAIVE (TO THE EXTENT SUCH WAIVER IS PERMISSIBLE UNDER APPLICABLE LAW) THE PROVISIONS OF ANY PRESENT OR FUTURE STATUTE OR LAW THAT PROHIBITS OR MAY PROHIBIT THE COLLECTION OF THE FOREGOING PREPAYMENT FEE IN CONNECTION WITH ANY ACCELERATION OF THE OBLIGATIONS. The Borrower and the other Loan Parties expressly agree that (A) the Prepayment Fee is reasonable and is the product of an arm’s length transaction between sophisticated business people, ably represented by counsel, (B) the Prepayment Fee shall be payable notwithstanding the then prevailing market rates at the time payment is made, (C) there has been a course of conduct between the Purchasers and the Loan Parties giving specific consideration in this transaction for such agreement to pay the Prepayment Fee, (D) the Loan Parties shall be estopped hereafter from claiming differently than as agreed to in this Section 3.2(e) , (E) their agreement to pay the Prepayment Fee is a material inducement to the Purchasers to purchase the Notes, and (F) the Prepayment Fee represents a good faith, reasonable estimate and calculation of the lost profits or damages of the Purchasers and that it would be impractical and extremely difficult to ascertain the actual amount of damages to the Purchasers or profits lost by the Purchasers as a result of such Prepayment Fee Trigger Event.

 

  27  

 

 

3.3           Manner of Payment . All fees, interest, Prepayment Fee, premium, principal and other amounts payable in respect of any Note Document shall be paid by wire transfer of immediately available funds to an account at a bank designated in writing by the applicable Purchaser or the Collateral Agent, as applicable. All payments made by the Borrower (excluding regular monthly interest payments made when due under Section 3.1(a) ) upon the Obligations relating to the Notes and all net proceeds from the enforcement of the Obligations shall be applied (a) first , to that portion of the Obligations constituting fees, indemnities, and expenses and other amounts (including attorneys’ fees), payable to the Collateral Agent and the Purchasers, (b) second , to the payment of that portion of the Obligations constituting accrued and unpaid interest on the Notes, (c) third , to the payment of that portion of the Obligations constituting unpaid principal of the Notes, and (d) last , the balance, if any, after all of the Obligations have been indefeasibly paid in full, to the Borrower or as otherwise required by any Requirements of Law. All payments made by the Borrower upon the Notes (including, without limitation, payments of principal if prepaid or upon earlier acceleration) shall be paid proportionally among the Purchasers of the Notes based upon the outstanding principal amounts of such Notes held by each Purchaser.

 

3.4          [ Intentionally Omitted ] .

 

3.5           Taxes .

 

(a)          Any and all payments by or on account of any Obligations hereunder or under any Note Document shall be made free and clear of and without deduction or withholding for any Indemnified Taxes; provided that if the Borrower shall be required by Applicable Law (as determined in the good faith discretion of the Borrower) to deduct or withhold any Indemnified Taxes from such payments, then (i) the sum payable shall be increased as necessary so that after making all such deductions or withholding (including such deductions or withholding applicable to additional sums payable under this Section 3.5 ) a Purchaser receives an amount equal to the sum it would have received had no such deductions or withholding been made, (ii) the Borrower shall make such deductions or withholding and (iii) the Borrower shall timely pay the full amount deducted or withheld to the relevant Governmental Authority in accordance with Applicable Law.

 

(b)          Without limiting the provisions of Section 3.5(a) above, the Borrower shall timely pay any Other Taxes to the relevant Governmental Authority in accordance with Applicable Law.

 

(c)          The Borrower shall indemnify each Purchaser for the full amount of any Indemnified Taxes (including Indemnified Taxes imposed or asserted on or attributable to amounts payable under this Section 3.5 ) payable or paid by any Purchaser or required to be withheld or deducted from a payment to such Purchaser and any reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate setting forth in reasonable detail the basis for determining the amount of such payment or liability delivered to Borrower by any Purchaser shall be conclusive absent manifest error. Such payment shall be due within ten (10) days of Borrower’s receipt of such certificate.

 

(d)          As soon as practicable after any payment of Indemnified Taxes or Other Taxes by the Borrower to a Governmental Authority pursuant to this Section 3.5 , Borrower shall deliver to the applicable Purchasers the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to such Purchasers.

 

  28  

 

 

(e)           Status of Purchasers .

 

(i)          Any Purchaser that is entitled to an exemption from or reduction of withholding Tax with respect to payments made hereunder or under any Note Document shall deliver to the Borrower at the time or times reasonably requested by the Borrower such properly completed and executed documentation as reasonably requested by the Borrower as will permit such payments to be made without withholding or at a reduced rate of withholding. In addition, any Purchaser, if requested by the Borrower, shall deliver such other documentation prescribed by Applicable Law or reasonably requested by the Borrower as will enable the Borrower to determine whether or not such Purchaser is subject to backup withholding or information reporting requirements.

 

(ii)          Without limiting the generality of Section 3.5(e)(i) , each Purchaser that is not a United States person (as such term is defined in Section 7701(a)(30) of the Code) for U.S. federal income tax purposes (a “Non-US Purchaser”) shall deliver promptly to the Borrower, on or prior to the Closing Date (in the case of each Purchaser listed on the signature pages hereof on the Closing Date or, if later, on or prior to the date on which such Purchaser becomes a party to this Agreement), and at such other times as the Borrower reasonably requests, (i) two original copies of IRS Form W-8BEN, W-8BEN-E, W-8ECI, W-8EXP and/or W-8IMY (or, in each case, any successor forms), properly completed and duly executed by such Purchaser, and such other documentation prescribed by the Code or reasonably requested by the Borrower to establish, if applicable, that such Purchaser is not subject to (or is subject to a reduced rate of) deduction or withholding of United States federal tax with respect to any payments to such Purchaser of principal, interest, fees or other amounts payable under any of the Note Documents, or (ii) if such Purchaser is not a “bank” or other Person described in Section 881(c)(3) of the Code, a Certificate Regarding Non-Bank Status that is substantially in the form of Exhibit B together with two original copies of IRS Form W-8BEN or W-8BEN-E or W-8IMY (or any successor form), properly completed and duly executed by such Purchaser, and such other documentation prescribed by the Code or reasonably requested by the Borrower to establish, if applicable, that such Purchaser is not subject to (or is subject to a reduced rate of) deduction or withholding of United States federal tax with respect to any payments to such Purchaser of interest payable under any of the Note Documents. Without limiting the generality of Section 3.5(e)(i) , each Purchaser that is a United States person (as such term is defined in Section 7701(a)(30) of the Code) for United States federal income tax purposes (a “U.S. Purchaser”) shall deliver to the Borrower on or prior to the Closing Date (or, if later, on or prior to the date on which such Purchaser becomes a party to this Agreement) and at such other times as the Borrower reasonably requests two original copies of IRS Form W-9 (or any successor form), properly completed and duly executed by such Purchaser, certifying that such U.S. Purchaser is entitled to an exemption from United States backup withholding tax, or otherwise prove that it is entitled to such an exemption. Each Purchaser required to deliver any forms, certificates or other evidence with respect to United States federal tax withholding matters pursuant to this Section 3.5(e) hereby agrees, from time to time after the initial delivery by such Purchaser of such forms, certificates or other evidence, whenever a lapse in time or change in circumstances renders such forms, certificates or other evidence obsolete or inaccurate in any material respect, that such Purchaser shall promptly deliver to the Borrower two new original copies of IRS Form W-8BEN, W-8BEN-E, W-8ECI, W-8EXP, W-8IMY and/or W-9 (or, in each case, any successor form), or a Certificate Regarding Non-Bank Status and two original copies of IRS Form W-8BEN, W-8BEN-E or W-8IMY (or, in each case, any successor form), as the case may be, properly completed and duly executed by such Purchaser, and such other documentation prescribed by the Code or reasonably requested by the Borrower, if applicable, to confirm or establish that such Purchaser is not subject to deduction or withholding of United States federal tax with respect to payments to such Purchaser under the Note Documents, or promptly notify the Borrower of its legal inability to deliver any such forms, certificates or other evidence.

 

  29  

 

 

(iii)          If a payment made to a Purchaser under any Note Document would be subject to U.S. federal withholding Tax imposed by FATCA if such Purchaser were to fail to comply with the applicable reporting requirements of FATCA (including those contained in Section 1471(b) or 1472(b) of the Code, as applicable), such Purchaser shall deliver to the Borrower at the time or times prescribed by law and at such time or times reasonably requested by the Borrower such documentation prescribed by applicable law (including as prescribed by Section 1471(b)(3)(C)(i) of the Code) and such additional documentation reasonably requested by the Borrower as may be necessary for the Borrower to comply with its obligations under FATCA and to determine that such Purchaser has complied with such Purchaser’s obligations under FATCA or to determine the amount to deduct and withhold from such payment. Solely for purposes of this clause (iii), “FATCA” shall include any amendments made to FATCA after the date hereof.

 

(f)          If any party determines, in its sole discretion exercised in good faith, that it has received a refund of any Taxes as to which it has been indemnified pursuant to this Section 3.5 (including additional amounts pursuant to this Section 3.5 ), it shall pay to the indemnifying party an amount equal to such refund (but only to the extent of indemnity payments made under this Section 3.5 with respect to the Taxes giving rise to such refund), net of all out-of-pocket expenses (including Taxes) of such indemnified party and without interest (other than any interest paid by the relevant Governmental Authority with respect to such refund). Such indemnifying party, upon the request of such indemnified party, shall repay to such indemnified party the amount paid over pursuant to this Section 3.5(f) (plus any penalties, interest or other charges imposed by the relevant Governmental Authority) in the event that such indemnified party is required to repay such refund to such Governmental Authority. Notwithstanding anything to the contrary in this Section 3.5(f) , in no event will the indemnified party be required to pay any amount to an indemnifying party pursuant to this Section 3.5(f) the payment of which would place the indemnified party in a less favorable net after-Tax position than the indemnified party would have been in if the Tax subject to indemnification and giving rise to such refund had not been deducted, withheld or otherwise imposed and the indemnification payments or additional amounts with respect to such Tax had never been paid. This paragraph shall not be construed to require any indemnified party to make available its Tax returns (or any other information relating to its Taxes that it deems confidential) to the indemnifying party or any other Person.

 

(g)          Without prejudice to the survival of any other agreement of the Borrower hereunder, the agreements and obligations of the Borrower and any Purchaser under this Section 3.5 shall survive the termination of the Note Documents and the payment in full of the Notes or the assignment of rights by a Purchaser.

 

3.6          Purchase Price Allocation . On the Closing Date, in consideration of the Purchasers purchasing the Notes, the Issuer will issue to the Purchasers for no additional consideration, the Warrant. The Purchasers and the Borrower agree that the Notes and the Warrants constitute an “investment unit” for purposes of Section 1273(c)(2) of the Code. The Purchasers and the Borrower mutually agree that for purpose of the allocation of the issue price of such investment unit among the Notes and the Warrants in accordance with Section 1273(c)(2) of the Code and U.S. Treasury Regulation Section 1.1273-2(h) $1,760,869.57 shall be allocated to the Warrants, and neither the Purchasers nor the Company shall take any position inconsistent with such allocation in any Tax Return unless otherwise required by a tax authority or court.

 

  30  

 

 

Article 4

CONDITIONS TO THE OBLIGATIONS OF THE PURCHASERS

 

The obligation of the Purchasers to purchase the Notes, to pay the Purchase Price at the Closing and to perform any obligations hereunder shall be subject to the satisfaction as determined by, or waived by, the Purchasers of the following conditions on or before the Closing Date; provided that any waiver of a condition shall not be deemed a waiver of any breach of any representation, warranty, agreement, term or covenant, as specifically set forth elsewhere in this Agreement, or of any misrepresentation by the Borrower.

 

4.1           Representations and Warranties . The representations and warranties contained in Article 6 hereof shall be true and correct in all material respects (except to the extent any such representation or warranty is by its terms qualified by reference to materiality, in which case such representation or warranty shall be true and correct in all respects) at and as of the Closing Date (except to the extent such representations and warranties specifically relate to an earlier date, in which case they shall be true and correct as of such earlier date) after giving effect to the Transactions, and the Purchasers shall have received at the Closing a certificate to the foregoing effect, dated the Closing Date, and executed by the chief executive officer or chief financial officer of the Borrower on behalf of the Borrower.

 

4.2           Compliance with this Agreement . The Borrower and the Guarantors shall have performed and complied in all material respects with all of its agreements and conditions set forth or contemplated herein that are required to be performed or complied with by such Loan Party on or before the Closing Date and the Purchasers shall have received at the Closing a certificate to the foregoing effect, dated the Closing Date, and executed by the chief executive officer or chief financial officer on behalf of the Borrower.

 

4.3           Certificates . The Purchasers shall have received certificates from the Borrower and each Guarantor, dated the Closing Date and signed by a manager or an officer of such Loan Party, certifying (i) that the attached copies of the Charter Documents of such Loan Party, and resolutions of the board of directors or similar governing body of such Loan Party approving the Note Documents to which it is a party and the Transactions are all true, complete and correct and remain unamended and in full force and effect, (ii) to the incumbency and specimen signature of each manager or officer of such Loan Party executing any Note Document to which it is a party or any other document delivered in connection herewith and therewith on behalf of such Loan Party, (iii) that the attached list of executive officers and directors or managers, as applicable, of such Loan Party are true, complete, and correct, (iv) that, to the Knowledge of such Loan Party, none of the executive officers and directors or managers, as applicable, included in such attached list have been charged with, indicted for, been part of a proceeding for, been investigated for, arrested for, or convicted of a felony, nor are they engaged in criminal activity, nor have any of them been an officer of a bankrupt company other than as set forth on a schedule attached to such certificate, and (v) that, to the Knowledge of such Loan Party, there are no written or oral side agreements with any individual or business whereby such Loan Party or its management has agreed to incur any obligations other than those contained in formal written contracts or agreements executed by or on behalf of such Loan Party.

 

  31  

 

 

4.4           Solvency . The Purchasers shall have received a certificate, signed by the chief financial officer of the Borrower, certifying that the Borrower and its Subsidiaries, on a consolidated basis, are Solvent both immediately before and immediately after giving effect to the Transactions.

 

4.5           Financial Information . The Purchasers shall have received (i) a set of projections of the Borrower for each Fiscal Year through the Maturity Date, including projected financial statements and Capital Expenditures, and (ii) a pro forma balance sheet of the Borrower, prepared giving effect to the consummation of the transactions contemplated hereby, in each case in form and substance (including as to scope and underlying assumptions) reasonably satisfactory to the Purchasers.

 

4.6           Documents . The Purchasers shall have received true, complete and correct copies of the Note Documents, and such other agreements, schedules, exhibits, certificates, documents, financial information and filings as the Purchasers may request in connection with or relating to the Transactions all in form and substance reasonably satisfactory to the Purchasers, including, without limitation, each of the Note Documents executed by the Borrower and its Subsidiaries as and where applicable.

 

4.7           Purchase of Notes Permitted by Applicable Laws . The acquisition of and payment for the Notes to be acquired by the Purchasers hereunder and the consummation of the transactions contemplated hereby and by the Note Documents (i) shall not be prohibited by any Requirements of Law, and (ii) shall not subject the Purchasers to any penalty or other onerous condition under or pursuant to any Requirements of Law.

 

4.8           Opinion of Counsel . The Purchasers shall have received opinions of outside counsel to the Borrower and its Subsidiaries, dated as of the Closing Date, relating to the Transactions, in form and substance reasonably acceptable to the Purchasers.

 

4.9           Consents and Approvals . All consents, exemptions, authorizations, or other actions by, or notices to, or filings with, Governmental Authorities and other Persons in respect of all Requirements of Law and with respect to those Contractual Obligations of the Borrower and each other Loan Party necessary in connection with the execution, delivery or performance by the Borrower or such other Loan Party, or enforcement against the Borrower, of the Note Documents to which it is a party shall have been made or obtained and be in full force and effect, and the Purchasers shall have been furnished with appropriate evidence thereof.

 

4.10         No Material Judgment or Order . There shall not be on the Closing Date any judgment, injunction or order of a court of competent jurisdiction or any ruling of any Governmental Authority which, in the judgment of the Purchasers, would prohibit the purchase of the Notes hereunder or subject the Purchasers to any penalty or other onerous condition under or pursuant to any Requirement of Law if the Notes were to be purchased hereunder.

 

  32  

 

 

4.11         Good Standing Certificates . The Borrower shall have delivered to the Purchasers as of a date not more than fifteen (15) Business Days before the Closing Date good standing certificates for the Borrower and each Guarantor for its jurisdiction of incorporation or formation and certificates of foreign qualification for all other jurisdictions where its ownership, lease or operation of property or the conduct of its business requires such foreign qualification, except where the failure to be so qualified could not reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect.

 

4.12         No Litigation . No arbitration, action, claim, suit, litigation or proceeding before any court or any Governmental Authority shall have been commenced or threatened against the Borrower or any Subsidiary (including its directors or officers), and no investigation by any Governmental Authority shall have been commenced and no action, suit or proceeding by any Governmental Authority shall have been threatened against any Purchaser, or the Borrower (i) seeking to restrain, prevent or change the transactions contemplated hereby or questioning the validity or legality of any of such Transactions, (ii) in which the amount of damages claimed is $500,000 or more or (iii) which could reasonably be expected to have a Material Adverse Effect, except as set forth on Schedule 6.6.

 

4.13         Insurance Certificates . The Collateral Agent shall have received (i) evidence of insurance complying with the requirements of Section 8.6 and (ii) separate certificates or policy language naming the Collateral Agent as an additional insured on all liability policies and lenders’ loss payee on all property policies for the business and properties of each Loan Party.

 

4.14         Fees, Etc . On the Closing Date, the Borrower shall have paid (i) to the Collateral Agent, all fees due and payable pursuant to the Fee Letter and (ii) to the Collateral Agent and the Purchasers all out-of-pocket costs, fees and expenses (including, without limitation, legal fees and expenses) then due and payable to the Collateral Agent and the Purchasers, as applicable, hereunder.

 

4.15         Collateral . The Collateral Agent shall have received correct, complete fully executed copies of each of the Collateral Documents in a form acceptable to the Collateral Agent, together with such UCC financing statements, original stock certificates, if any, and stock powers, original promissory notes, notices of security interest to be filed in the United States Patent and Trademark Office, and other instruments and documents required to be delivered under the Collateral Documents or as the Collateral Agent may otherwise determine to be necessary or appropriate to perfect the Liens granted thereunder, all in form and substance acceptable to the Collateral Agent.

 

4.16         Lien Searches . The Collateral Agent shall have received (i) searches of the Uniform Commercial Code, judgment, bankruptcy and tax lien filings which may be filed with respect to the Collateral covered by the Collateral Documents and (ii) Lien searches of intellectual property, in each case confirming that all such Property given as collateral is subject to no Liens except Permitted Liens.

 

4.17         No Material Adverse Effect . There shall exist no (a) event, development, or circumstance occurring on or after December 31, 2016, that has had or could be expected to have, individually or in the aggregate, a Material Adverse Effect, or (b) material disruption or material adverse change in the financial, banking or capital markets generally affecting credit facilities similar to the facility herein.

 

  33  

 

 

4.18         Structure. The legal and corporate structure of the Borrower and its Subsidiaries, along with the form and terms of the Charter Documents of the Borrower and its Subsidiaries, shall be satisfactory to the Collateral Agent.

 

4.19         Subordinated Note . The Collateral Agent shall have received a duly executed copy of the Subordinated Note. The Subordinated Note Obligations outstanding under the Subordinated Note on the Closing Date shall not exceed $5,000,000.

 

4.20         Quality of Earnings Report . The Purchasers shall have received the Borrower’s quality of earnings report for the Borrower and its Subsidiaries, the results of which shall be satisfactory to the Purchasers in their sole discretion.

 

Article 5

CONDITIONS TO THE OBLIGATIONS OF THE BORROWER

 

The obligations of the Borrower to issue, or cause to be issued, the Notes and to perform its other obligations hereunder shall be subject to the satisfaction as determined by, or waived by, the Borrower of the following conditions on or before the Closing Date:

 

5.1           Representations and Warranties . The representations and warranties of the Purchasers contained in Article 7 hereof shall be true and correct in all material respects at and as of the Closing Date as if made at and as of such date (except to the extent such representations and warranties specifically relate to an earlier date, in which case they shall be true and correct in all material respects as of such earlier date).

 

5.2           Compliance with this Agreement . The Purchasers shall have performed and complied in all material respects with all of the agreements and conditions set forth or contemplated herein that are required to be performed or complied with by them on or before the Closing Date.

 

Article 6

REPRESENTATIONS AND WARRANTIES OF THE BORROWER

 

The Borrower hereby represents and warrants to the Purchasers as follows:

 

6.1           Existence and Power . The Borrower and each of its Subsidiaries: (a) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or formation, (b) has all requisite corporate or limited liability company power and authority to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently, or is currently proposed to be, engaged; (c) is duly qualified as a foreign entity, licensed and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification, except where the failure to be so qualified could not reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect, and (d) has the corporate or limited liability company power and authority to execute, deliver and perform its obligations under each Note Document to which it is or will be a party and to borrow hereunder. The jurisdictions in which the Borrower and each of its Subsidiaries are organized and qualified to do business as of the Closing Date are listed on Schedule 6.1 .

 

  34  

 

 

6.2           Authorization; No Contravention . The execution, delivery and performance by the Borrower and each Subsidiary of each Note Document to which it is or will be a party and the consummation of the Transactions: (a) have been duly authorized by all necessary corporate or limited liability company action; (b) do not and will not contravene or violate the terms of the Charter Documents of the Borrower or any of its Subsidiaries or any amendment thereto or any material Requirement of Law applicable to the Borrower or such Subsidiary or the Borrower’s or such Subsidiary’s assets, business or properties; (c) do not and will not (i) conflict with, contravene, result in any violation or breach of or default under any material Contractual Obligation of the Borrower or such Subsidiary (with or without the giving of notice or the lapse of time or both) other than any right to consent, which consents have been obtained, (ii) create in any other Person a right or claim of termination or amendment of any material Contractual Obligation of the Borrower or such Subsidiary, or (iii) require modification, acceleration or cancellation of any material Contractual Obligation of the Borrower or such Subsidiary; and (d) do not and will not result in the creation of any Lien (or obligation to create a Lien) against any property, asset or business of the Borrower or such Subsidiary (other than those securing the Notes).

 

6.3           Governmental Authorization; Third Party Consents . Except as set forth on Schedule 6.3 , no approval, consent, compliance, exemption, authorization, or other action by, or notice to, or filing with, any Governmental Authority or any other Person in respect of any Requirement of Law or Material Contract, and no lapse of a waiting period under a Requirement of Law or Material Contract, is necessary or required in connection with the execution, delivery or performance by, or enforcement against, the Borrower of the Note Documents to which it is a party or the consummation of the Transactions, other than filings to perfect Liens granted under the Collateral Documents.

 

6.4           Binding Effect . The Borrower and its Subsidiaries have duly executed and delivered the Note Documents to which it is a party and such Note Documents constitute the legal, valid and binding obligations of the Borrower and such Subsidiary enforceable against the Borrower and such Subsidiary in accordance with its respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors’ rights and by general principles of equity.

 

6.5           No Legal Bar . Neither the Borrower nor any Subsidiary has previously entered into any agreement which is currently in effect or to which the Borrower or any of its Subsidiaries is currently bound granting any rights to any Person which conflict with the rights to be granted by the Borrower in the Note Documents, other than the right to consent, which consents have been obtained.

 

  35  

 

 

6.6           Litigation . Except as set forth on Schedule 6.6 , (a) there are no legal actions, suits, proceedings, claims or disputes pending or, to the Knowledge of the Borrower, threatened, at law, in equity, in arbitration or before any Governmental Authority against or affecting the Borrower or its Subsidiaries that could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect; (b) there is no injunction, writ, temporary restraining order, decree or any order or determination of any nature by any arbitrator, court or other Governmental Authority purporting to enjoin or restrain the execution, delivery or performance of the Note Documents or which relates to the assets or the business of the Borrower or its Subsidiaries; and (c) there is no litigation, claim, audit, dispute, review, proceeding or investigation currently pending or threatened against the Borrower or its Subsidiaries for any violation or alleged violation of any Requirements of Law, and neither the Borrower nor any Subsidiary has received written notice of any threat of any suit, action, claim, dispute, investigation, review or other proceeding pursuant to or involving any Requirements of Law.

 

6.7           Compliance with Laws .

 

(a)          The Borrower and its Subsidiaries are in compliance with all Requirements of Law, except for such noncompliance that could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. Except as set forth on Schedule 6.7 as of the Closing Date, there are no actual or, to the Knowledge of the Borrower, pending appeals, adjustments, audits, inquiries, investigations, proceedings, recoupments or notices of intent to audit or investigate by any Governmental Authority against the Borrower or its Subsidiaries.

 

6.8           No Default or Breach . No event has occurred and is continuing or would result from the incurring of Obligations by the Borrower under the Note Documents which constitutes or, with the giving of notice or lapse of time or both would constitute an Event of Default. To the Knowledge of the Borrower, except as could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect, neither the Borrower nor any Subsidiary is in default with respect to any Contractual Obligation in any Material Contract.

 

6.9           Title to Properties . Except as set forth on Schedule 6.9 , the Borrower and its Subsidiaries has good title to, or a valid leasehold interest in, all Property used by it in its business and none of such Property is subject to any Lien, except for Permitted Liens.

 

6.10         Real Property . Schedule 6.10 sets forth a correct and complete list of all real property owned or leased by the Borrower or its Subsidiaries as of the Closing Date. Each lease relating to such leased real property is in full force and effect and the Borrower and its Subsidiaries enjoy peaceful and undisturbed possession thereunder. There is no material default on the part of the Borrower or its Subsidiaries or any event or condition which (with notice or lapse of time, or both) would constitute a default on the part of the Borrower or its Subsidiaries under any such lease. The Borrower and its Subsidiaries have good and marketable title in fee simple to the real property identified on Schedule 6.10 as owned by the Borrower or its Subsidiaries, free and clear of any Liens other than Permitted Liens. There are no actions, suits or proceedings pending or, to the Knowledge of the Borrower, threatened against the owned real property or the leased real property used in connection with the business of the Borrower or its Subsidiaries, at law or in equity, in arbitration or before any Governmental Authority which would in any way affect title to or the right to use such owned real property or leased real property.

 

  36  

 

 

6.11         Taxes .

 

(a)          The Borrower and each of its Subsidiaries has timely filed all United States federal and material state income and other material Tax Returns that it was required to file, in each case with due regard for any extension of time within which to file such Tax Return. All such Tax Returns were correct and complete in all material respects. All Taxes shown on such Tax Returns to be due and payable by the Borrower or its Subsidiaries have been paid, in each case with due regard for any extension of time within which to file such Tax Return, other than any Taxes the amount or validity of which is being actively contested by Borrower or its Subsidiaries in good faith and by appropriate proceedings and with respect to which adequate reserves or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made or provided therefor. Except as set forth on Schedule 6.11, as of the Closing Date, there are no Liens, other than Permitted Liens, on any of the assets of the Borrower or its Subsidiaries that arose in connection with any failure (or alleged failure) to pay any Tax. No claim has been made by a Governmental Authority in a jurisdiction where the Borrower and its Subsidiaries do not file Tax Returns that the Borrower or any of its Subsidiaries is or may be subject to taxation by that jurisdiction.

 

(b)          Except as set forth on Schedule 6.11 , as of the Closing Date, there is no action, suit, proceeding, investigation, examination, audit, or claim now pending or threatened in writing by any Governmental Authority regarding any Taxes relating to the Borrower or its Subsidiaries. Neither the Borrower nor any Subsidiary has entered into an agreement or waiver or been requested to enter into an agreement or waiver extending any statute of limitations relating to the payment or collection of Taxes of such Person and there are no circumstances that would cause the taxable years of the Borrower or its Subsidiaries not to be subject to the normally applicable statute of limitations.

 

6.12         Financial Condition; SEC Filings .

 

(a)          The Borrower has furnished the Purchasers with true, correct and complete copies of (collectively, the “ Financial Statements ”): (i) the audited consolidated balance sheets of the Borrower and its Subsidiaries as of December 31, 2016, 2015 and 2014, and the related audited consolidated statements of operations and comprehensive (loss) income, shareholders’ equity and cash flows for each of the Fiscal Years in the three-year period ended December 31, 2016, together with the notes thereto and the reports thereon as of December 31, 2016, certified by the Borrower’s independent certified public accountants, and (ii) the unaudited consolidated balance sheet of the Borrower and its Subsidiaries for the Fiscal Quarter ended as of March 31, 2017 and the related unaudited consolidated statements of operations and comprehensive (loss) income, changes in shareholders’ equity and cash flows for such period. The Financial Statements fairly present, in all material respects, the financial position of the Borrower, as of the respective dates thereof, and the results of operations and cash flows thereof, as of the respective dates or for the respective periods set forth therein, and are in conformity with the past historical practices of the Borrower, with GAAP consistently applied during the periods involved. Except as set forth on Schedule 6.12 , as of the dates of the Financial Statements, neither the Borrower nor any Subsidiary had any known obligation, Indebtedness or liability (whether accrued, absolute, contingent or otherwise, and whether due or to become due), which was not reflected or reserved against in the balance sheets which are part of the Financial Statements, except for those incurred in the ordinary course of business and which are fully reflected on the books of account of the Borrower or its Subsidiaries, as applicable.

 

  37  

 

 

(b)          Except as set forth on Schedule 6.12 , all statements, reports, schedules, forms and other documents (the “ SEC Documents ”) required to have been filed or furnished by any Loan Party with or to the SEC from January 1, 2016 through the Closing Date have been so filed or furnished on a timely basis (other than any immaterial Form 3, 4, 5 or 8-K filings or any filings relating solely to benefit plans). No Subsidiary of any Loan Party is required to file or furnish any documents with or to the SEC. As of the time it was filed with or furnished to the SEC: (i) each of the SEC Documents complied as to form in all material respects with the applicable requirements of the Securities Act or the Exchange Act (as the case may be); and (ii) none of the SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, except to the extent corrected by the filing or furnishing of the applicable amending or superseding SEC Document. Each of the certifications and statements relating to SEC Documents required by: (1) Rule 13a-14 or 15d-14 under the Exchange Act; or (2) 18 U.S.C. §1350 (Section 906 of the Sarbanes-Oxley Act) (collectively, the “ Certifications ”) is accurate and complete, and complied as to form and content with all Applicable Laws in effect at the time such Certification was filed with or furnished to the SEC .

 

6.13         Absence of Certain Changes or Events . Since December 31, 2016, there has been no development, event, circumstance, or change which could be expected to have, either individually or in the aggregate, a Material Adverse Effect.

 

6.14         Environmental Matters .

 

(a)          The Borrower and its Subsidiaries are and have been in compliance in all material respects with all applicable Environmental Laws relating to their Property, assets and operations; to the Knowledge of the Borrower, there are no Hazardous Materials stored or otherwise located in, on or under any of the Property or assets of the Borrower or its Subsidiaries, including, without limitation, the groundwater, except in material compliance with applicable Environmental Laws; and, to the Knowledge of the Borrower, there have been no releases or, threatened releases of Hazardous Materials in, on or under any property adjoining any of the Property or assets of (or used by) the Borrower or its Subsidiaries which have not been remediated to the satisfaction of the appropriate Governmental Authorities and in material compliance with Environmental Laws.

 

(b)          To the Knowledge of the Borrower, none of the Property, assets or operations of (or used by) the Borrower and its Subsidiaries is the subject of any federal, state or local investigation evaluating whether (i) any remedial action is needed to respond to a release or threatened release of any Hazardous Materials into the environment or (ii) any release or threatened release of any Hazardous Materials into the environment is in contravention of any Environmental Law.

 

  38  

 

 

(c)          Neither the Borrower nor any Subsidiary has received any written notice or claim, nor, to the Knowledge of the Borrower, are there any pending, threatened, or anticipated lawsuits or proceedings against them, with respect to violations of an Environmental Law or in connection with the presence of or exposure to any Hazardous Materials in the environment or any release or threatened release of any Hazardous Materials into the environment, and, to the Knowledge of the Borrower, neither the Borrower nor any Subsidiary is or has been the owner or operator of any property which (i) pursuant to any Environmental Law has been placed on any list of Hazardous Materials disposal sites, including, without limitation, the “National Priorities List” or “CERCLIS List,” (ii) has, or had, any subsurface storage tanks located thereon, or (iii) has ever been used as or for a waste disposal facility, a mine, a gasoline service station or a petroleum products storage facility.

 

(d)          To the Knowledge of the Borrower, neither the Borrower nor any Subsidiary has present or contingent liability in connection with the presence either on or off the Property or assets of, or used by, the Borrower or any Subsidiary of any Hazardous Materials in the environment or any release or threatened release of any Hazardous Materials into the environment.

 

6.15         Investment Company/Government Regulations . Neither the Borrower nor any Subsidiary is an “investment company” within the meaning of the Investment Company Act of 1940, as amended. Neither the Borrower nor any Subsidiary is subject to regulation under the Public Utility Holding Company Act of 1935, as amended, the Federal Power Act, the Interstate Commerce Act, or any federal or state statute or regulation limiting its ability to incur Indebtedness.

 

6.16         Subsidiaries . Except as set forth in Schedule 6.16 , the Borrower does not (a) have any Subsidiaries or (b) own of record or beneficially, directly or indirectly, any (i) Capital Stock issued by any other Person or (ii) equity, voting or participating interest in any joint venture or other enterprise.

 

  39  

 

 

6.17         Capitalization . As of the Closing Date, after giving effect to the transactions contemplated hereby and in the other Note Documents, the capitalization of the Borrower and its Subsidiaries (including the maximum amount of diluted shares) is as set forth on Schedule 6.17 . All of the issued and outstanding Capital Stock of the Borrower has been, and Capital Stock of the Borrower issuable upon the exercise of outstanding securities when issued will be, duly authorized and validly issued and are fully paid and nonassessable. All outstanding Capital Stock of the Borrower’s Subsidiaries are 100% owned by the Borrower or one of its Subsidiaries free and clear of all Liens other than Permitted Liens. Except as set forth in the Charter Documents (as in effect on the Closing Date), the issuance of the foregoing Capital Stock is not and has not been subject to preemptive rights in favor of any Person other than such rights that have been waived and will not result in the issuance of any additional Capital Stock of the Borrower or the triggering of any anti-dilution or similar rights contained in any options warrants, debentures or other securities or agreements of the Borrower or any of its Subsidiaries. On the Closing Date, except as set forth on Schedule 6.17 , there are no outstanding securities convertible into or exchangeable for Capital Stock of the Borrower or any of its Subsidiaries or options, warrants or other rights to purchase or subscribe for Capital Stock of the Borrower or any of its Subsidiaries, or contracts, commitments, agreements, understandings or arrangements of any kind to which the Borrower or any of its Subsidiaries is a party relating to the issuance of any Capital Stock of the Borrower or any of its Subsidiaries, or any such convertible or exchangeable securities or any such options, warrants or rights. On the Closing Date, except as set forth on Schedule 6.17 , neither the Borrower nor any of its Subsidiaries has any obligation, whether mandatory or at the option of any other Person, at any time to redeem or repurchase any Capital Stock of the Borrower or any of its Subsidiaries, pursuant to the terms of their respective Charter Documents or otherwise. On the Closing Date, except as set forth on Schedule 6.20 and Schedule 6.21 , neither the Borrower nor any of its Subsidiaries maintains nor has any obligations under any stock option plan or other equity compensation related plans or agreements. No issued and outstanding shares of the Borrower’s Capital Stock are subject to a right of first refusal or condition of forfeiture in favor of the Borrower, and no shares of the Capital Stock of the Borrower are subject to vesting restrictions. Since January 1, 2017, the Borrower has not declared or paid, or become responsible to declare or pay, and the Borrower is not responsible for or have any obligation to declare or pay, a dividend or other distribution on its securities or otherwise combined, split, recapitalized or taken similar actions with respect to its outstanding Capital Stock. There are no voting trusts, proxies or other contracts or understandings to which the Borrower is a party or is bound with respect to the voting of any shares of the Borrower’s Capital Stock, the acquisition (including rights of co-sale, first refusal, antidilution or pre-emptive rights), disposition, registration of securities of the Borrower, or other rights of securityholders, or obligations of the Borrower, with respect to the securities of the Borrower, other than registration rights under warrants set forth on Schedule 6.17 . All securities of the Borrower and its Subsidiaries (including all shares of the Borrower’s common stock, securities, options and warrants to purchase shares of the Borrower’s common stock (both outstanding as well as those that are no longer outstanding)), have been and were issued and granted pursuant to an exception from the Securities Act and otherwise in compliance, in all material respects, with all securities and other Applicable Laws, in compliance with the fiduciary obligations of the board of directors of the Borrower, and in compliance with all requirements of applicable contracts affecting, applicable to or relating to, such issuances.

 

6.18         Private Offering . No form of general solicitation or general advertising was used by the Borrower or its Subsidiaries or their respective representatives in connection with the offer or sale of the Notes to the Purchasers pursuant to this Agreement.

 

6.19         Broker’s, Finder’s or Similar Fees . Except as set forth on Schedule 6.19 , there are no brokerage commissions, finder’s fees or similar fees or commissions payable by the Borrower or its Subsidiaries in connection with the Transactions based on any agreement, arrangement or understanding with the Borrower or its Subsidiaries or any action taken by the Borrower or its Subsidiaries.

 

6.20         Labor Relations . Neither the Borrower nor any Subsidiary has committed or is engaged in any unfair labor practice (as defined in the National Labor Relations Act of 1947 and the regulations thereunder, in each case, as amended). There is (a) no unfair labor practice complaint pending or, to the Knowledge of the Borrower, threatened against the Borrower or any of its Subsidiaries before the National Labor Relations Board and no grievance or arbitration proceeding arising out of or under collective bargaining agreements is so pending or, to the Knowledge of the Borrower, threatened, (b) no strike, labor dispute, slowdown or stoppage pending or, to the Knowledge of the Borrower, threatened against the Borrower or any Subsidiary, (c) no union representation question existing with respect to the employees of the Borrower or any Subsidiary, and to the Knowledge of the Borrower, no union organizing activities are taking place, and (d) as of the Closing Date, no employment contract with any employee of the Borrower or any of its Subsidiaries except as set forth on Schedule 6.20 and the employment of all employees of the Borrower and its Subsidiaries are terminable at will without penalty or severance of any kind, except as set forth on Schedule 6.20 . Except as set forth on Schedule 6.20 , the Borrower and each Subsidiary is in compliance in all material respects with all federal, state or other Applicable Laws respecting employment and employment practices, terms and conditions of employment and wages and hours. Neither the Borrower nor any Subsidiary is a party to any collective bargaining agreement.

 

  40  

 

 

6.21         Employee Benefit Plans .

 

(a)           Employee Benefit Plans and Liabilities . Within the six-consecutive-year period immediately preceding the first day of the year in which the Closing Date occurs neither the Borrower nor any ERISA Affiliate thereof has contributed to, or has any actual or contingent, direct or indirect, liability in respect of, any employee benefit plan (as defined in Section 3(3) of ERISA) or other employee benefit arrangement (collectively, the “ Plans ”), other than liabilities with respect to such Plans specifically listed on Schedule 6.21 . Schedule 6.21 sets forth all Plans. The Borrower has delivered to the Purchasers materially accurate and complete copies of all of such Plans in effect as of the date hereof. At no time during such six year period has the Borrower or any ERISA Affiliate thereof participated in or contributed to any Multiemployer Plan, nor during such period has the Borrower or any ERISA Affiliate thereof had an obligation to participate in or contribute to any such Multiemployer Plan. No agreement subject to Section 4204 of ERISA has been entered into in connection with Transactions. There are no outstanding liabilities of the Borrower or any ERISA Affiliate thereof to any employee benefit plans previously maintained by the Borrower or any ERISA Affiliate thereof, and, the Borrower has no Knowledge of any potential liabilities in connection therewith. There are no actions, suits or claims, other than for benefits in the ordinary course, pending or, to the Knowledge of the Borrower, threatened against the Borrower, any ERISA Affiliate thereof or the Plans which might subject the Borrower or any ERISA Affiliate thereof to any material liability.

 

(b)           Plan Compliance . The Borrower and its Subsidiaries, individually and collectively, are in compliance in all material respects with all reporting, disclosure and registration requirements applicable to it under the Code, ERISA and all federal and state securities laws, and Department of Labor, IRS and SEC rules and regulations promulgated thereunder, with respect to all of the Plans, and are not subject to any material liability, whether asserted or not, for any penalties to any Governmental Authority for late filing of any return, report or other governmental filing. No civil or criminal action brought pursuant to the provisions of Title I, Subtitle B, Part 5 of ERISA or any other federal or state law is pending or, to the Knowledge of the Borrower, threatened against any fiduciary of the Plans with respect to the Plans. Except as set forth on Schedule 6.7 , no Plan, or, to the Knowledge of the Borrower, any fiduciary thereof, has been, or is currently, the direct or indirect subject of an audit, investigation, or examination by any Governmental Authority with respect to the Plans. All of the Plans comply currently, and have complied at all times (and all former Plans have complied at all times in the past), both as to form and operation, in all material respects, with its terms and with all Requirements of Law applicable thereto. Each of the Plans maintained by the Borrower or any ERISA Affiliate thereof that is an “employee benefit pension plan” (within the meaning of Section 3(2)(a) of ERISA) (each a “ Pension Plan ”) either (i) has obtained a favorable determination (covering all changes or amendments applicable under Requirements of Law) from the IRS as to its qualification under Sections 401(a) and 501(a) of the Code or, if the Pension Plan is maintained pursuant to a prototype or standardized plan, is entitled to rely on an opinion letter from the IRS, or (ii) is within the remedial amendment period (as provided in Section 401(b) of the Code) for making any required changes or amendments, and nothing has occurred before or after the date of each such determination letter as would reasonably be expected to adversely affect such qualification. All amounts that are currently owing to Plan participants (including, without limitation, former Plan participants), or contributions required to be made to the Plans have been timely paid in all material respects, contributed or accrued in accordance with past historical practices with respect to all periods prior to the Closing Date.

 

  41  

 

 

(c)           Prohibited Transactions . No Plan, nor any related trust, nor the Borrower or Subsidiary, nor any trustee, administrator or other “party in interest” or “disqualified person” (within the meaning of Section 3(14) of ERISA or Section 4975(e)(2) of the Code, respectively) with respect to the Plans, has engaged in any nonexempt “prohibited transaction” (within the meaning of Section 406 of ERISA or Section 4975(c) of the Code, respectively) with respect to the participation of the Borrower or any Subsidiary therein, which could subject any of the Plans or related trusts, or any trustee, administrator or other fiduciary of any such Plan, or the Borrower or Subsidiary or any Purchaser, or any other party dealing with the Plans, to the penalties or excise tax imposed on prohibited transactions by Section 502 of ERISA or Section 4975 of the Code.

 

(d)           Miscellaneous . Neither the Borrower nor any Subsidiary nor any Plan provides for or promises retiree, medical, disability, or life insurance benefits to any current or former employee, officer, or director of the Borrower or any Subsidiary other than continuation coverage required by Section 4980B of the Code. Neither the Borrower nor any Subsidiary is a party to, or obligated, under any agreement, plan, contract or other arrangements that will result, separately or in the aggregate, in the payment of any “excess parachute payment” within the meaning of Section 280G of the Code as a result of the consummation of the Transactions.

 

6.22         Patents, Trademarks, Etc .

 

(a)          The Borrower and each Subsidiary owns and/or has the right to use all Intellectual Property material to the conduct of its business (collectively, “ IP Rights ”) without any conflict with or infringement of the IP Rights of others. Schedule 6.22 sets forth a complete list of Licenses or other Contractual Obligations relating to the Borrower’s and its Subsidiaries’ IP Rights (other than off the shelf computer software and programs and Licenses and Contractual Obligations entered in the ordinary course of business) and of registrations of patents, trademarks, service marks and copyrights including any applications therefor constituting such IP Rights as of the Closing Date. Neither the Borrower nor any Subsidiary has any obligation to pay any royalty with respect to the IP Rights.

 

(b)          Except as set forth in Schedule 6.22 , as of the Closing Date no claims have been asserted by any Person with respect to the use by the Borrower or any Subsidiary of any such IP Rights or challenging or questioning the validity or effectiveness of any License or agreement held by the Borrower or its Subsidiaries or to which it is a party relating to any such IP Rights which claims could reasonably be expected to have a Material Adverse Effect. To the Knowledge of the Borrower, the conduct of the business of the Borrower and its Subsidiaries as conducted and as proposed to be conducted does not and will not, in any material respect, conflict with or infringe upon the IP Rights of others, and neither the Borrower nor any Subsidiary has received any communication alleging any such violation. To the Knowledge of the Borrower, no third party is infringing or violating any of the IP Rights of the Borrower or its Subsidiaries. To the Knowledge of the Borrower, no person employed by or affiliated with the Borrower or its Subsidiaries has violated any confidential relationship that such person may have had with any third party, in connection with the development or sale of any product or service or proposed product or service of the Borrower or its Subsidiaries.

 

  42  

 

 

6.23         Potential Conflicts of Interest . Except as set forth on Schedule 6.23 , no executive officer, director or manager (or equivalent Person) or member of the Borrower or any Subsidiary: (a) is an officer, director, manager, employee or consultant of, any Person that is, or is engaged in business as, a competitor, lessor, lessee, supplier, distributor, sales agent or customer of, or lender to or borrower from, the Borrower or its Subsidiaries; (b) has been a party to any material transaction with the Borrower or any Subsidiary; (c) owns, directly or indirectly, in whole or in part, any material tangible or intangible property that the Borrower or its Subsidiaries use or contemplate using in the conduct of business; or (d) has any material cause of action or other material claim whatsoever against, or owes or has advanced any amount to the Borrower or any Subsidiary, except for advances in the ordinary course of business such as for accrued vacation pay, accrued benefits under employee benefit plans, customary expense reimbursements existing on the date hereof, and similar matters and agreements.

 

6.24         Trade Relations . To the Knowledge of the Borrower, there exists no present condition or state of facts or circumstances that could reasonably be expected to have a Material Adverse Effect or prevent the Borrower or any of its Subsidiaries from conducting its business after the consummation of the Transactions, in substantially the same manner in which such business has heretofore been conducted.

 

6.25         Indebtedness . Schedule 6.25 lists (a) the amount of all Indebtedness of the Borrower and its Subsidiaries (other than Indebtedness under this Agreement) that will remain outstanding after the Closing Date, (b) the Liens that relate to such Indebtedness and that encumber the assets of the Borrower and its Subsidiaries, (c) the name of each lender thereof, and (d) the amount of any unfunded commitments, if any, available to the Borrower and its Subsidiaries in connection with any such Indebtedness facilities.

 

6.26         Material Contracts . Schedule 6.26 lists all Material Contracts as of the Closing Date. Each of the Material Contracts is in full force and effect. The Borrower and its Subsidiaries has satisfied in full or provided for all of its liabilities and obligations under each Material Contract requiring performance prior to the date hereof in all material respects, and is not in default under any of such Material Contracts, nor does, to the Knowledge of the Borrower, any condition exist that with notice or lapse of time or both would constitute such a default. To the Knowledge of the Borrower, no other party to any Material Contract is in default thereunder, nor, to the Knowledge of the Borrower, does any condition exist that with notice or lapse of time or both would constitute such a default. No approval or consent of any Person is needed for the Material Contracts to continue to be in full force and effect after giving effect to the Transactions.

 

  43  

 

 

6.27         Insurance . Schedule 6.27 accurately summarizes all of the insurance policies or programs of the Borrower and its Subsidiaries as of the date hereof. All such policies are in full force and effect, are underwritten by reputable insurers, are sufficient for all applicable Requirements of Law and otherwise are in compliance with the criteria set forth in Section 8.6 hereof. All such policies will remain in full force and effect and will not terminate or lapse by reason of any of the Transactions.

 

6.28         Solvency . Borrower and its Subsidiaries, on a consolidated basis, are Solvent, both before and after taking into account the Transactions.

 

6.29         Licenses and Approvals . The Borrower and each of its Subsidiaries holds all material Licenses that are required by any Governmental Authority to permit it to conduct and operate the Borrower’s or its Subsidiaries’ business as now conducted, and all such Licenses are valid and in full force and effect and will remain in full force and effect upon consummation of the transactions contemplated by this Agreement and the other Note Documents. The Borrower and its Subsidiaries are in compliance in all material respects with all Licenses. Neither the Borrower nor any Subsidiary is a party to and, to the Knowledge of the Borrower, there is not, any investigation, notice of apparent liability, violation, forfeiture or other order or complaint issued by or before any Governmental Authority or any other proceedings which could in any manner threaten or adversely affect the validity or continued effectiveness of such material Licenses of the Borrower or its Subsidiaries, or give rise to any order of forfeiture. There is no pending threat of cancellation, loss, termination, modification, or nonrenewal of any such Licenses of the Borrower or its Subsidiaries, nor any basis for such cancellation, loss, termination, modification, or nonrenewal. The Borrower has no reason to believe that such Licenses will not be renewed in the ordinary course. The Borrower and its Subsidiaries have filed in a timely manner all material reports, applications, documents, instruments, and information required to be filed pursuant to applicable rules and regulations or requests of every regulatory body having jurisdiction over any of its Licenses.

 

6.30         Change of Control and Similar Payments . Neither the execution, delivery and performance by the Borrower and the Guarantors of this Agreement, nor the execution, delivery and performance by the Borrower and the Guarantors of any of the other Note Documents, nor the consummation of the transactions contemplated hereby shall require any payment by the Borrower or any Subsidiary, in cash or kind, under any other agreement, plan, policy, commitment or other arrangement, other than pursuant to the terms of the Indebtedness that is being repaid on the Closing Date in accordance with Section 8.2(a) . There are no agreements, plans, policies, commitments or other arrangements with respect to any compensation, benefits or consideration which will be materially increased, or the vesting of benefits of which will be materially accelerated, as a result of this Agreement or the other Note Documents or the occurrence of any of the transactions contemplated hereby or thereby. There are no payments or other benefits payable by the Borrower or its Subsidiaries, the value of which will be calculated on the basis of any of the transactions contemplated by this Agreement or the other Note Documents.

 

  44  

 

 

6.31         OFAC; Anti-Terrorism; Patriot Act .

 

(a)          Neither the Borrower nor any Subsidiary nor, to the knowledge of the Borrower, any Affiliate of the foregoing: (a) is a Sanctioned Person, (b) has any assets in Sanctioned Entities, or (c) derives any operating income from Investments in, or transactions with Sanctioned Persons or Sanctioned Entities. The proceeds of the Notes will not be used and have not been used to fund any operations in, finance any Investments or activities in, or make any payments to, a Sanctioned Person or a Sanctioned Entity.

 

(b)          The Borrower and its Subsidiaries are in compliance, in all material respects, with any United States Requirements of Law relating to terrorism, sanctions or money laundering (the “ Anti-Terrorism Laws ”), including the United States Executive Order No. 13224 on Terrorist Financing (the “ Anti-Terrorism Order ”) and the Patriot Act. No part of the proceeds of any Note will be used, directly or indirectly, for any payments to any governmental official or employee, political party, official of a political party, candidate for political office, or anyone else acting in an official capacity, in order to obtain, retain or direct business or obtain any improper advantage, in violation of the United States Foreign Corrupt Practices Act of 1977, as amended, or any other Anti-Terrorism Law.

 

(c)          No Loan Party and no Subsidiary of any Loan Party (and, to the knowledge of each Loan Party, no joint venture or Affiliate thereof) (i) is listed in the annex to, or is otherwise subject to the provisions of, the Anti-Terrorism Order, (ii) is owned or controlled by, or acting for or on behalf of, any person listed in the annex to, or is otherwise subject to the provisions of, the Anti-Terrorism Order or (iii) commits, threatens or conspires to commit or supports “terrorism” as defined in the Anti-Terrorism Order.

 

6.32         Disclosure .

 

(a)           Agreement and Other Documents . This Agreement, together with all exhibits and schedules hereto, the Note Documents, and the agreements, certificates and other documents furnished to the Purchasers by the Borrower at the Closing, do not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained herein or therein, in the light of the circumstances under which they were made, not misleading provided that to the extent any such exhibit, schedule, agreement, certificate or other document was based solely upon or constitutes a forecast or projection, the Borrower represents only that it acted in good faith and utilized reasonable assumptions in the preparation of such exhibit, schedule, agreement, certificate or other document, it being understood that actual results may vary from such forecasts and that such variations may be material.

 

(b)           Material Adverse Effect . To the Knowledge of the Borrower, there is no fact which the Borrower has not disclosed to the Purchasers in writing which could reasonably be expected to have a Material Adverse Effect.

 

6.33         Customers and Suppliers . Schedule 6.33 sets forth a complete and accurate list of (a) the 10 largest customers of the Loan Parties (measured by aggregate billing) during (i) the Fiscal Year ended December 31, 2016 and (ii) the Fiscal Quarter ended March 31, 2017, noting the relevant Loan Party, and (b) the 10 largest suppliers of materials, products or services to the Loan Parties (measured by the aggregate amount purchased by the Loan Parties during (i) the Fiscal Year ended December 31, 2016 and (ii) the Fiscal Quarter ended March 31, 2017, noting the relevant Loan Party.

 

  45  

 

 

6.34         Passive Foreign Investment Company . To the Knowledge of the Borrower or any Loan Party (but without consultation with any of the Borrower’s independent accountants), no Loan Party is, or has been, a “passive foreign investment company,” as defined in Section 1297 of the Code, during any tax year beginning after May 31, 2012.

 

6.35         Absence of Certain Practices . Except as set forth on Schedule 6.35 , no Loan Party or any of its Subsidiaries, or, to the Knowledge of the Borrower or any Loan Party, any director, officer, agent, employee or other Person acting on their behalf, has given or agreed to give any gift or similar benefit of more than nominal value to any customer, supplier, governmental employee or official or any other Person who is or may be in a position to help or hinder any Loan Party or its Subsidiaries or assist any Loan Party or its Subsidiaries in connection with any proposed transaction involving such Loan Party or its Subsidiaries, which gift or similar benefit, induced any party to do business with such Loan Party. No Loan Party or any of its Subsidiaries, or, to the Knowledge of the Borrower or any Loan Party, any director, officer, agent, employee or other Person acting on their behalf has (i) used any corporate or other funds for unlawful contributions, payments, gifts, or entertainment, or made any unlawful expenditures relating to political activity to, or on behalf of, government officials or others; or (ii) accepted or received any unlawful contributions, payments, gifts or expenditures.

 

6.36         Internal Controls . Each Loan Party and its Subsidiaries maintain a system of internal control over financial reporting. Such internal controls over financial reporting (a) provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and (b) as to Borrower are designed to ensure that all material information concerning Borrower and its Subsidiaries required to be disclosed by Borrower in the reports that it is required to file, submit or furnish under the Exchange Act is recorded, processed, summarized and reported on a timely basis to the individuals responsible for the preparation of such reports. There are no significant deficiencies or material weaknesses in the design or operation of any Loan Party’s or its Subsidiaries’ ability to record, process, summarize and report financial data other than set forth on Schedule 6.36 . There is and has been no fraud, whether or not material, that involves management or other employees who have a significant role in any Loan Party’s and/or its Subsidiaries’ internal controls.

 

6.37         Accounts and Notes Receivable; Accounts and Notes Payable .

 

(a)          All the accounts receivable and notes receivable owing to any Loan Party or any of its Subsidiaries as of the date hereof constitute valid and enforceable (except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors’ rights and by general principles of equity) claims (without any previously exercised rights of set off or compromise) arising from bona fide transactions in the ordinary course of business, consistent with past practice, and, to the Knowledge of the Borrower or any Loan Party, there are no known or, to the Knowledge of the Borrower or any Loan Party, asserted claims, refusals to pay or other rights of set-off against any thereof. Except as provided on Schedule 6.37(a) , (i) as of April 30, 2017, no account debtor or note debtor is delinquent by more than thirty (30) days in any payment due that exceeds $5,000; (ii) as of the Closing Date, no account debtor or note debtor has refused (or, to the Knowledge of the Borrower or any Loan Party, threatened to refuse) to pay its obligations for any reasons; (iii) to the Knowledge of the Borrower or any Loan Party, as of the Closing Date no account debtor or note debtor is insolvent or bankrupt and (iv) no account receivable or note receivable is hypothecated or pledged to any person (except in connection with the Notes) by any Loan Party or any of its Subsidiaries.

 

  46  

 

 

(b)          All accounts payable and notes payable by any Loan Party or any of its Subsidiaries to third parties as of the date hereof arise from bona fide transactions in the ordinary course of business, consistent with past practice and, except as set forth on Schedule 6.37(b) , as of April 30, 2017, there is no such account payable or note payable more than thirty (30) days delinquent in its payment, except those contested in good faith.

 

Article 7

REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS

 

Each Purchaser hereby severally and not jointly represents and warrants as follows:

 

7.1           Authorization; No Contravention . The execution, delivery and performance by such Purchaser of this Agreement: (a) is within its power and authority and has been duly authorized by all necessary action; (b) does not contravene the terms of its Charter Documents or any amendment thereof, and (c) will not, in any material respect, violate, conflict with or result in any breach or contravention of any of its Contractual Obligations, or any order or decree directly relating to it.

 

7.2           Binding Effect . This Agreement has been duly executed and delivered by such Purchaser and this Agreement constitutes its legal, valid and binding obligation, enforceable against it in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, or similar laws affecting the enforcement of creditors’ rights generally or by equitable principles relating to enforceability.

 

7.3           No Legal Bar . The execution, delivery, and performance of this Agreement by such Purchaser will not violate in any material respect any Requirement of Law applicable to it, assuming the accuracy and correctness of the representations and warranties made by the Borrower to the Purchasers in the Note Documents.

 

7.4           Securities Laws .

 

(a)          The Notes are being or will be acquired by such Purchaser hereunder for its own account, not as a nominee or agent, and not with the view to, or for resale in connection with, any distribution thereof in any transaction which would be in violation of state or federal securities laws.

 

(b)          Such Purchaser is a sophisticated purchaser with respect to the purchase of the Notes and is an “accredited investor” as defined in Rule 501(a) of Regulation D promulgated under the Securities Act.

 

  47  

 

 

(c)          Such Purchaser understands that (i) the Notes constitute “restricted securities” under the Securities Act, (ii) the offer and sale of the Notes hereunder is not registered under the Securities Act or under any “blue sky” laws in reliance upon certain exemptions from such registration and that the Borrower is relying on the representations made herein by such Purchaser in its determination of whether such specific exemptions are available, and (iii) the Notes may not be transferred except pursuant to an effective registration statement under the Securities Act, or under an exemption from such registration available under the Securities Act and under applicable “blue sky” laws or in a transaction exempt from such registration. Such Purchaser acknowledges that: (1) it has no right to require registration thereof under the Securities Act or any “blue sky” laws, and (2) there is not now and is not contemplated to be any public market therefor. As a result, such Purchaser is prepared and is able to bear the economic risk of an investment in the Notes for an indefinite period of time. Such Purchaser understands that any certificate representing the Notes that are issued to the Purchaser may bear, in the Borrower’s discretion, the following restrictive legend and will be restricted from transfer in accordance with such legend:

 

“This Note has not been and will not be registered under the United States Securities Act 1933 (the “Securities Act”) or with any securities regulatory authority of any state or other jurisdiction of the United States. The holder hereof, by purchasing or otherwise acquiring this security, acknowledges that this security has not been registered under the Securities Act. The holder agrees that this security may be offered, resold, pledged or otherwise transferred only in compliance with the Securities Act and any applicable state securities laws and only (1) pursuant to Rule 144 under the Securities Act or (2) pursuant to an exemption from registration under the Securities Act, and in each case in accordance with any applicable securities laws of the states of the United States and other jurisdictions. The holder acknowledges that the purpose of the foregoing limitation is, in part, to ensure that Company is not required to register under the Securities Act.”

 

(d)          Such Purchaser (i) has been furnished with or has had access to all material books and records of the Borrower and each Subsidiary and all of their respective material contracts, agreements and documents and (ii) has had an opportunity to ask questions of, and receive answers from, management and representatives of the Borrower and its Subsidiaries and which representatives have made available to them such information regarding the Borrower and its Subsidiaries and their current respective businesses, operations, assets, finances, financial results, financial condition and prospects in order to make a fully informed decision to purchase and acquire the Notes. Such Purchaser has generally such knowledge and experience in business and financial matters, and with respect to investments in securities of privately held companies, as to enable it to understand and evaluate the risks of an investment in the Notes and form an investment decision with respect thereto. Such Purchaser acknowledges that none of the Borrower or its Subsidiaries has given such Purchaser any investment advice, credit information or opinion as to whether the purchase of the Notes is prudent.

 

(e)          The foregoing, however, does not limit or modify the representations and warranties set forth in Article 6 of this Agreement or in any other Note Document or the right of such Purchaser to rely thereon.

 

  48  

 

 

7.5           Governmental Authorization; Third Party Consent . No approval, consent, compliance, exemption or authorization of any Governmental Authority or any other Person in respect of any Requirement of Law, and no lapse of a waiting period under a Requirement of Law, is necessary or required in connection with the execution, delivery or performance by it or enforcement against such Purchaser of this Agreement or the transactions contemplated hereby.

 

7.6           Broker’s, Finder’s or Similar Fees . There are no brokerage commissions, finder’s fees or similar fees or commissions payable in connection with the transactions contemplated by the Note Documents based on any agreement, arrangement or understanding with such Purchaser or any action taken by it.

 

Article 8

AFFIRMATIVE COVENANTS

 

Until the indefeasible payment in full in cash of all Obligations under the Notes (other than contingent indemnification or expense reimbursement obligations for which no claim has been made) or such later date as set forth below, the Borrower hereby covenants and agrees with the Purchasers as follows:

 

8.1           Delivery of Financial and Other Information . The Borrower will, and will cause each other Loan Party to, maintain a system of accounting established and administered in accordance with GAAP (including reflecting in its financial statements adequate accruals and appropriations to reserves). In addition, the Borrower shall deliver or cause to be delivered to the Purchasers the following:

 

(a)          Within ninety (90) days after the close of each Fiscal Year, an unqualified audit report certified by BDO USA, LLP or such other independent certified public accountants selected by the Borrower and reasonably acceptable to Collateral Agent, prepared in accordance with GAAP, including consolidated balance sheets of the Borrower and its Subsidiaries as of the end of such Fiscal Year and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for such Fiscal Year, all such financial statements to be prepared in accordance with GAAP and accompanied by (i) any management letter prepared by said accountants and (ii) a management summary, discussion, and analysis prepared by an authorized officer of the Borrower setting forth in narrative form all significant operational and financial events and activities affecting the Borrower and its Subsidiaries during such Fiscal Year.

 

(b)          Within forty-five (45) days after the close of each Fiscal Quarter beginning with June 30, 2017, an unaudited consolidated balance sheet of the Borrower and its Subsidiaries and as of the end of such Fiscal Quarter and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for such Fiscal Quarter and for the portion of the Fiscal Year ended at the end of such Fiscal Quarter, prepared in accordance with GAAP and setting forth in each case in comparative form, the figures for (i) the corresponding Fiscal Quarter and the corresponding portion of the previous Fiscal Year (as applicable), (ii) the immediately preceding Fiscal Quarter and (iii) the annual budget described in Section 8.1(g) for the corresponding Fiscal Quarter and the corresponding portion of the previous Fiscal Year, all of which shall be prepared in an actual-to-budget comparative format in relation to the applicable annual budget described in Section 8.1(g) hereof and shall be certified by an authorized officer of the Borrower as fairly presenting, in all material respects, the financial position of the Borrower and its Subsidiaries, as of the respective dates thereof, and the results of operations and cash flows thereof, as of the respective dates or for the respective periods set forth therein and accompanied by a management summary, discussion, and analysis prepared by an authorized officer of the Borrower setting forth in narrative form all significant operational and financial events and activities affecting the Borrower and its Subsidiaries during such Fiscal Quarter.

 

  49  

 

 

(c)          Within thirty (30) days after the close of each calendar month beginning with June 30, 2017, (i) an unaudited consolidated balance sheet of the Borrower and its Subsidiaries and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for such month and for the portion of the Fiscal Year ended at the end of such month, prepared in accordance with GAAP and setting forth in each case in comparative form, the figures for (A) the corresponding month and the corresponding portion of the previous Fiscal Year (as applicable) (B) the immediately preceding month, and (C) the annual budget described in Section 8.1(g) for the corresponding month and the corresponding portion of the previous fiscal year, all of which shall be prepared in an actual-to-budget comparative format in relation to the applicable annual budget described in Section 8.1(g) hereof and shall be certified by an authorized officer of the Borrower as fairly presenting, in all material respects, the financial position of the Borrower and its Subsidiaries, as of the respective dates thereof, and the results of operations and cash flows thereof, as of the respective dates or for the respective periods set forth therein, (ii) an accounts payable aging report and an accounts receivable aging report, each in form and substance reasonably satisfactory to the Required Purchasers, (iii) a revenue report in form and substance reasonably satisfactory to the Required Purchasers and with no less detail than such report contained in the Borrower’s financial model delivered to the Purchasers prior to the Closing Date, which report shall include by business segment: (s) revenue, (t) number of subscribers, (u) number of new subscribers added, (v) number of subscribers dropped, (w) churn (net and gross), (x) number of new customers, (y) number of customers dropped and (z) the average selling price of hardware and software, and (iv) a product line profit and loss report.

 

(d)          Together with the financial statements required under Sections 8.1(a), Section 8.1(b) , and Section 8.1(c) , a Compliance Certificate signed by an authorized officer of the Borrower (i) evidencing the Loan Parties’ compliance with the financial covenants contained in Section 9.20 hereof and (ii) stating whether there exists on the date of such certificate any Default or Event of Default and, if any Default or Event of Default then exists, setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto.

 

(e)          Promptly upon receipt thereof, any reports (including, without limitation, any management letters and/or reports) submitted to the Borrower or any Subsidiary (other than reports previously delivered pursuant to Sections 8.1(a) , 8.1(b) and 8.1(c) above) by independent accountants in connection with any annual, interim or special audit made by them of the books of the Borrower or any Subsidiary.

 

(f)          Promptly upon receipt or transmission thereof, and in any event no later than two (2) Business Days after the date of such receipt or transmission, provided that the delivery thereof is not prohibited by any Requirement of Law, copies of all communications to and from Governmental Authorities regarding notice of material enforcement proceedings, complaints, inspections, and related matters addressed to the Borrower or any Subsidiary.

 

  50  

 

 

(g)          As soon as available, but in any event no later than thirty (30) days after the end of the Fiscal Year, consolidated capital and operating expense budgets, projections of sources and applications of funds, balance sheets and profit and loss projections, all for each month of the applicable Fiscal Year, all itemized in detail (including itemization of provisions for officers’ compensation), together with any material revisions thereto.

 

(h)          Upon the request of any Purchaser, copies of the annual federal and state income Tax Returns of the Borrower and each Subsidiary for the immediately preceding year, any filings with the SEC and, if requested by any Purchaser, copies of all reports filed with any federal, state or local Governmental Authority.

 

(i)          Promptly upon receipt by the Borrower or any Subsidiary, written notice of any material default which has not been waived or cured, given to any such Loan Party by the holder of the Subordinated Note or any other creditor or lessor to whom the Borrower or any Subsidiary has material debt or other obligations.

 

(j)          Promptly upon obtaining knowledge thereof, written notice of any litigation claiming in excess of $200,000 from the Borrower or any Subsidiary, or which could be expected to otherwise have a Material Adverse Effect and copies of any pleadings associated therewith.

 

(k)          As soon as available, copies of all statements, reports, press releases, and other documents relating to the financial condition of the Borrower, each Subsidiary and their respective business operations as required to be furnished to any lender of the Borrower or any Subsidiary.

 

(l)          Promptly, and in any event within five (5) Business Days after receipt thereof by the Borrower or any Subsidiary, provided that the delivery thereof is not prohibited by any Requirement of Law, copies of each notice or other correspondence received from the SEC (or comparable agency in any applicable non-U.S. jurisdiction) concerning any investigation or possible investigation or other inquiry by such agency regarding financial or other operational results of the Borrower or any Subsidiary.

 

(m)          Together with the financial statements required under Section 8.1(c) , copies of any (i) board materials provided to the Board of the Borrower or any Subsidiary and (ii) a copy of the internal management FP&A package; provided that the Purchasers may be denied access to any such materials, if and to the extent the Borrower reasonably and in good faith determines (x) such denial is reasonably necessary based on the reasonable advice of counsel to preserve attorney-client privilege, (y) there exists an actual or potential conflict of interest between the Purchasers, and the Borrower or its Subsidiaries, as applicable, or (z) based on the reasonable advice of counsel, such denial is required by Applicable Laws;

 

  51  

 

 

(n)          Promptly upon the filing or sending thereof, and in any event within three (3) Business Days after filing thereof, copies of all regular, periodic or special reports of any Loan Party filed with the SEC; copies of all registration statements of any Loan Party filed with the SEC (other than on Form S-8); and copies of all proxy statements or other communications made to security holders generally; provided that filing or furnishing of such report, registration statement, proxy statement or other communication with the SEC via the EDGAR system shall be deemed to be furnishing of the same to Purchasers; or

 

(o)          Such other information (including non-financial information) as any Purchaser may from time to time reasonably request.

 

Documents required to be delivered pursuant to Section 8.1(a),(b) or (g) (to the extent any such documents are included in materials otherwise filed with the SEC) may be delivered electronically and if so delivered, shall be deemed to have been delivered on the date (i) on which the Borrower posts such documents, or provides a link thereto on the Borrower’s website on the Internet at the website address; or (ii) on which such documents are posted on the Borrower’s behalf on an Internet or intranet website, if any, to which each Purchaser has access; provided that : (i) the Borrower shall deliver paper copies of such documents to any Purchaser upon its request to the Borrower to deliver such paper copies until a written request to cease delivering paper copies is given by such Purchaser and (ii) the Borrower shall notify each Purchaser (by telecopier or electronic mail) of the posting of any such documents and provide electronic mail electronic versions ( i.e. , soft copies) of such documents.

 

The Borrower hereby acknowledges that certain of the Purchasers (each, a “ Public Purchaser ”) may have personnel who do not wish to receive material non-public information with respect to the Borrower or its Affiliates, or the respective securities of any of the foregoing, and who may be engaged in investment and other market-related activities with respect to such Persons’ securities. The Borrower hereby agrees that so long as the Borrower is the issuer of any outstanding debt or equity securities that are registered or issued pursuant to a private offering or is actively contemplating issuing any such securities it will use commercially reasonable efforts to identify that portion of the materials and/or information provided by or on behalf of the Borrower hereunder (collectively, “ Borrower Materials ”) that may be distributed to the Public Purchasers and that (w) all such Borrower Materials shall be clearly and conspicuously marked “PUBLIC” which, at a minimum, shall mean that the word “PUBLIC” shall appear prominently on the first page thereof; by marking Borrower Materials “PUBLIC,” the Borrower shall be deemed to have authorized the Purchasers to treat such Borrower Materials as not containing any material non-public information (although it may be sensitive and proprietary) with respect to the Borrower or its securities for purposes of United States federal and state securities laws.

 

8.2           Use of Proceeds .

 

(a)          The Borrower shall use the proceeds of the sale of the Notes hereunder only as follows: (i) to repay that certain Term Loan Agreement, dated as of March 9, 2016, between the Numerex Corp., as lead borrower, the other borrowers party thereto from time to time, Crystal Financial LLC, as term agent, and the term lenders party thereto from time to time, (ii) for general corporate purposes and working capital requirements of the Borrower and its Subsidiaries, and (iii) to pay the closing fee and all other fees and expenses in connection with this Agreement.

 

  52  

 

 

(b)          The Borrower shall not use any proceeds of the sale of the Notes hereunder to, directly or indirectly, purchase or carry any “margin stock” (as defined in Regulation U) or to extend credit to others for the purpose of purchasing or carrying any “margin stock” in violation of the provisions of Regulation T, U or X of the Board of Governors of the Federal Reserve System.

 

8.3           Notice of Default or Material Adverse Effect . The Borrower will give prompt notice in writing to the Purchasers upon becoming aware of the following: (a) the occurrence of any Default or Event of Default under this Agreement (such notice to specify the nature and period of existence thereof and what action the Borrower is taking (and proposes to take) with respect thereto), (b) the occurrence of any event which constitutes or which with the passage of time or giving of notice or both would constitute an event of default under any Material Contract, (c) the occurrence of any event which constitutes or which with the passage of time or giving of notice or both would constitute a default under any other Contractual Obligation which could reasonably be expected to have a Material Adverse Effect and (d) any development or other information outside the ordinary course of business of the Borrower or any Subsidiary which could reasonably be expected to have a Material Adverse Effect.

 

8.4           Conduct of Business . The Borrower will, and will cause each other Loan Party to, carry on and conduct its business in substantially the same manner and in substantially the same fields of enterprise as it is presently conducted or those reasonably related or ancillary thereto and do all things necessary to remain duly incorporated or organized, validly existing and in good standing as a domestic corporation or limited liability company in its jurisdiction of incorporation or organization, as the case may be, and maintain all requisite authority to conduct its business in each jurisdiction in which its business is conducted except to the extent the failure to be so qualified could not reasonably be expected to have a Material Adverse Effect.

 

8.5           Taxes and Claims . The Borrower will, and will cause each of its Subsidiaries to:

 

(a)          Timely file complete and correct United States federal and material state income and applicable foreign and material state and local Tax Returns required by law, in each case with due regard for any extension of time within which to file such Tax Return, and pay when due all material Taxes, except those which are being contested in good faith by appropriate proceedings and with respect to which adequate reserves have been set aside in accordance with GAAP, which deferment of payment is permissible so long as no Lien, other than a Permitted Lien has been entered and the Borrower’s and its Subsidiaries’ title to, and its/their right to use, its/their Properties are not materially adversely affected thereby; and

 

(b)          Pay and perform (i) all Obligations under this Agreement and the other Note Documents and (ii) except where failure to do so could not reasonably be expected to have a Material Adverse Effect, all other Indebtedness, obligations and liabilities in accordance with customary trade practices; provided that the Borrower or such Subsidiary may contest any item described in clause (ii) above in good faith so long as adequate reserves are maintained with respect thereto in accordance with GAAP.

 

  53  

 

 

8.6           Insurance .

 

(a)          The Borrower will, and will cause each of its Subsidiaries to, maintain with reputable insurance companies insurance in such amounts and covering such risks as set forth on Schedule 8.6 and is otherwise consistent with sound business practice, including, without limitation, property and casualty insurance on all of its Property, general liability insurance, workers compensation insurance, business interruption insurance, and directors and officers liability insurance and maintain such insurance as is required by the terms of any Collateral Document. All such insurance policies shall contain the provision that the Purchasers be given 30 days written notice of intent to terminate by either the Borrower or any of its Subsidiaries or insuring company, and shall name Collateral Agent as lenders loss payee or additional insured, as applicable, thereunder. The Borrower will, and will cause each of its Subsidiaries to, furnish to the Purchasers upon request full information as to the insurance carried by it.

 

(b)          The Borrower will, and will cause each of its Subsidiaries to, at all times keep its Property which is subject to the Lien of any Collateral Document insured in favor of the Purchasers, and all policies or certificates (or certified copies thereof) with respect to such insurance. At or prior to the Closing Date, the Borrower shall furnish certificates of insurance issued on applicable ACORD Forms with respect to property and liability insurance for the Borrower. The Borrower will, and will cause each of its Subsidiaries to, notify the Purchasers, promptly, upon receipt of a notice of termination, cancellation, or non-renewal from its insurance company of any such policy.

 

(c)          If the Borrower shall fail to maintain all insurance in accordance with this Section 8.6 or to timely pay or cause to be paid the premium(s) on any such insurance, or if the Borrower shall fail to deliver all certificates with respect thereto, the Purchasers shall have the right (but shall be under no obligation) to procure such insurance or pay such premiums, and the Borrower agrees to reimburse the Purchasers, on demand, for all costs and expenses relating thereto.

 

8.7           Compliance with Laws and Material Agreements .

 

(a)          The Borrower will, and will cause each of its Subsidiaries to, comply with any and all Requirements of Law to which it may be subject including, without limitation, all Environmental Laws, and obtain any and all Licenses necessary to the ownership of its Property or to the conduct of its businesses, except, in each case, where failure to do so could not reasonably be expected to have a Material Adverse Effect. The Borrower will, and will cause each of its Subsidiaries to, timely satisfy all material assessments, fines, costs and penalties imposed by any Governmental Authority against such Person or any Property of such Person except to the extent such assessments, fines, costs, or penalties are being contested in good faith by appropriate proceedings and for which the Borrower or such Subsidiary has set aside on its books adequate reserves in accordance with GAAP. The Borrower will, and will cause each of its Subsidiaries to, comply with any and all agreements or instruments evidencing Indebtedness and any other material agreement to which it is a party or by which it is bound, where such default would result in a Material Adverse Effect.

 

  54  

 

 

(b)          The Borrower will file or furnish, on a timely basis in accordance with the applicable requirements of the Securities Act or the Exchange Act (as the case may be) or in the timeframe set forth in any extension granted by the SEC, all statements, reports, schedules, forms and other documents (other than any immaterial Form 3, 4, 5 or 8-K filings or any filings relating solely to benefit plans), required to be filed or furnished with or to the SEC.

 

8.8           Maintenance of Properties . The Borrower will, and will cause each of its Subsidiaries to, do all things necessary to maintain, preserve, protect and keep its Property (other than Property that is obsolete, surplus, or no longer used or useful in the ordinary conduct of its business) in good repair, working order and condition (ordinary wear and tear and casualty and condemnation excepted), make all necessary and proper repairs, renewals and replacements such that its business can be carried on in connection therewith and be properly conducted at all times and pay and discharge when due the cost of repairs and maintenance to its Property, and pay all rentals when due for all real estate leased by such Person.

 

8.9           Audits and Inspection . The Borrower will, and will cause each of its Subsidiaries to, permit the Collateral Agent, and any of its representatives or designees, to visit and inspect any of its Property, books of account, records and reports to examine, audit and make copies thereof, and to discuss its affairs, finances and accounts with, and to be advised as to the same by, its officers, managers, employees and independent certified public accountants at such times and intervals as the Collateral Agent may designate upon advance notice to the Borrower (except following the occurrence and during the continuance of an Event of Default in which case no advance notice shall be required). The reasonable and documented out-of-pocket costs and expenses associated with such activities shall be paid by the Borrower.

 

8.10         Issue Taxes . The Borrower shall pay all Taxes, if any, in connection with the issuance of the Notes. The obligations of the Borrower hereunder shall survive the payment of the Obligations and the termination of the Note Documents.

 

8.11         Employee Benefit Plans . The Borrower will, and will cause each of its Subsidiaries to, (a) keep in full force and effect any and all Plans which are presently in existence or may, from time to time, come into existence under ERISA and not withdraw from any such Plans, unless such withdrawal can be effected or such Plans can be terminated without material liability to the Borrower or its Subsidiaries, (b) make contributions to all such Plans in a timely manner and in a sufficient amount to comply in all material respects with the standards of ERISA, including, without limitation, the minimum funding standards of ERISA, (c) comply in all material respects with all requirements of ERISA, (d) notify the Purchasers promptly upon receipt by the Borrower or any Subsidiary of any notice concerning the imposition of any withdrawal liability or of the institution of any proceeding or other action which may result in the termination of any such Plans by the PBGC or the appointment of a trustee to administer such Plans, (e) promptly advise the Purchasers of the occurrence of any Reportable Event or non-exempt prohibited transaction (as defined in ERISA) with respect to any such Plans of which Borrower becomes aware, and (f) amend any Plan that is intended to be qualified within the meaning of Section 401 of the Code to the extent necessary to keep the Plan qualified and to cause the Plan to be administered and operated in a manner that does not cause the Plan to lose its qualified status.

 

  55  

 

 

8.12         Environmental Covenants . The Borrower will, and will cause each of its Subsidiaries to:

 

(a)          use and operate all of its facilities and Properties in material compliance with all Environmental Laws, keep all necessary Licenses in effect and remain in material compliance therewith, and handle all Hazardous Materials in material compliance with all applicable Environmental Laws;

 

(b)          promptly notify the Purchasers and provide copies upon receipt of all written claims or complaints relating to compliance of the Properties with Environmental Laws, and shall promptly seek to cure and diligently pursue and have dismissed with prejudice any such actions and proceedings to the satisfaction of the Purchasers; and

 

(c)          provide such information and certifications which any Purchaser may reasonably request from time to time to ensure compliance with this Section 8.12 .

 

8.13         Website Links . The Borrower will, and will cause each of its Subsidiaries to, permit each Purchaser to place on its website a link to the Borrower’s and each of its Subsidiaries’ websites.

 

8.14         Further Assurances . The Borrower will, and will cause each of its Subsidiaries to, take any action reasonably requested by any Purchaser in order to effectuate the purposes and terms contained in this Agreement or any of the Note Documents.

 

8.15         Board Observation . For so long as the Obligations are outstanding, the Purchasers shall have the right to appoint Martin Hale Jr. (or another Hale Capital representative acceptable to the Purchasers), by written notice to the Borrower from time to time, as an observer (the “ Observer ”) to the board of directors or similar governing body of the Borrower and each of its Subsidiaries (the “ Board ”). The Observer shall have the right to attend (which attendance may occur telephonically at the election of the Observer) and participate in all meetings of the Board and any committees thereof. The Observer shall have no right to vote on any matter presented to the Board or any committee thereof. The Borrower shall give the Observer written notice of each meeting thereof at the same time and in the same manner as the other members of the Board or such committee receive notice of such meetings. The Borrower shall permit the Observer to attend and participate in all meetings thereof. The Observer shall be entitled to receive all written materials and other information given to other members of the Board and such committees in connection with such meeting or otherwise, at the same time such materials and information are given to the other members of the Board and such committees, and the Observer shall keep such materials and information confidential, and shall abide by the Borrower’s insider trading policy. If the Borrower or any Subsidiary proposes to take any action by written consent in lieu of a meeting of the Board, then the Borrower shall give written notice thereof to the Observer describing the nature and substance of such action and including the text of such written consents. The Borrower shall pay and reimburse the reasonable and documented out-of-pocket costs and expenses of the Observer incurred in connection with traveling to and attending such meetings of the Board