UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
xx ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
OR
o 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: 000-22563
SG BLOCKS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
3 Columbus Circle, 16th Floor, New York, NY
(Address of principal executive offices)
95-4463937
(I.R.S. Employer
Identification No.)
10019
(Zip Code)
(212) 520-6218
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes o No x
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 x No o
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 x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large accelerated filer o
Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
The aggregate market value of the common stock held by non-affiliates of SG Blocks, Inc. as of June 30, 2013 was approximately
$4,183,308.
As of April 8, 2014, the issuer had a total of 43,273,093 shares of common stock outstanding.
SG BLOCKS, INC.
FORM 10-K
TABLE OF CONTENTS
Business
Risk Factors.
Unresolved Staff Comments
Properties.
Legal Proceedings.
Mine Safety Disclosures.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of
Equity Securities
Selected Financial Data.
Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures (A) Disclosure Controls And Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and management and Related Stockholder
Matters
Certain Relationships and Related Transactions, and Director Independence.
Principal Accounting Fees and Services
Exhibits and Financial Statement Schedules
PART I
Item 1
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
SIGNATURES
Item 16.
Exhibits and Financial Statement Schedules
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ITEM 1 BUSINESS
PART I
FORWARD-LOOKING STATEMENTS
Certain statements made in this Annual Report on Form 10-K (the “Annual Report”) are “forward-looking statements”
regarding the plans and objectives of management for future operations. Such statements involve known and unknown risks, uncertainties
and other factors that may cause actual results, performance or achievements of ours to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking statements. The forward-looking statements included herein
are based on current expectations that involve numerous risks and uncertainties. Our plans and objectives are based, in part, on
assumptions involving judgments with respect to, among other things, future economic, competitive and market conditions and future
business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of us. Although
we believe that our assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate
and, therefore, there can be no assurance that the forward-looking statements included in this report will prove to be accurate. In light of
the significant uncertainties inherent in the forward-looking statements included herein, particularly in view of our limited operations, the
inclusion of such information should not be regarded as a representation by us or any other person that the objectives and plans of ours
will be achieved. Readers are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date
on which such statements are made. Factors that could cause actual results to differ materially from those expressed or implied by such
forward-looking statements include, but are not limited to, the factors set forth in this report under the headings “The Company”, “Risk
Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. We do not undertake to update
any forward-looking statement that may be made from time to time on our behalf.
THE COMPANY
DESCRIPTION OF BUSINESS
Background of SG Blocks, Inc.
SG Blocks, Inc. was previously known as CDSI Holdings, Inc. and PC411, Inc., and was incorporated in Delaware on
December 29, 1993. SG Blocks, Inc. (and together with its subsidiaries, as context requires) is referred to herein as "we," "our," "us" or the
"Company". On January 12, 1999, the Company’s stockholders voted to change the corporate name of the Company from PC411, Inc. to
CDSI Holdings Inc. Prior to May 1998, the Company’s principal business was an on-line electronic delivery information service that
transmitted name, address, telephone number and other related information digitally to users of personal computers. In May 1998, the
Company acquired Controlled Distribution Systems, Inc. (“CDS”), a company engaged in the marketing and leasing of an inventory control
system for tobacco products. In February 2000, the Company announced that CDS will no longer actively engage in the business of
marketing and leasing the inventory control system. In November 2003, the Company and CDS (a wholly-owned subsidiary) merged with
the Company as the surviving corporation. Immediately prior to the merger between the Company’s wholly-owned subsidiary, CDSI
Merger Sub, Inc. and SG Building (described below under the heading “SG Blocks Merger”) the Company was a shell company, as defined
in Rule 12b-2 of the Securities Exchange Act of 1934 (the “Exchange Act”), seeking acquisition and investment opportunities.
Background of SG Building Blocks, Inc.
On October 25, 2010, SG Blocks, LLC (“SG LLC”), a Missouri limited liability company, merged with and into SG Building
Blocks, Inc. (“SG Building”), which was formerly known as SG Blocks, Inc., then continued the business of SG LLC. SG LLC was formed
on January 23, 2007 and SG Building was formed in Delaware on August 16, 2010. SG Building was not engaged in any business prior to
the merger with SG LLC in 2010.
1
SG Blocks Merger
On July 27, 2011, the Company entered into a Merger Agreement and Plan of Reorganization (the “Merger Agreement”) by
and among the Company, CDSI Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of the Company (“Merger Sub”),
SG Building, and certain stockholders of SG Building. The merger contemplated by Merger Agreement was completed on November 4,
2011 (the “Merger”). Upon the consummation of the transactions contemplated by the Merger Agreement, Merger Sub was merged with
and into SG Building, with SG Building surviving the Merger and becoming a wholly-owned subsidiary, and only operating business of, the
Company. The Merger was a reverse merger that will be accounted for as a recapitalization of SG Building, and accordingly SG Building
is deemed to be the accounting acquirer.
Upon consummation of the Merger, the holders of common stock of SG Building received an aggregate of 36,050,764 shares
of common stock in the Company. Additionally, Ladenburg Thalman & Co. Inc. ("Ladenburg") received in the Merger 408,750 shares of
Company common stock pursuant to contractual obligations between SG Building and Ladenburg. Upon consummation of the Merger, all
outstanding SG Building warrants were cancelled and substituted with warrants of similar tenor to purchase an aggregate of 1,145,510
shares of Company common stock. Immediately following the Merger, warrants to purchase 100,926 shares of Company common stock
were forfeited by a warrant holder. As a result of the foregoing, the holders of Company common stock prior to the Merger owned an
aggregate of 8% of the Company common stock on a fully diluted basis immediately after the Merger, the stockholders and warrant holders
of SG Building before the Merger beneficially owned an aggregate of 91% of the Company common stock on a fully diluted basis
immediately after the Merger, and Ladenburg owned an aggregate of 1% of the Company common stock on a fully diluted basis
immediately after the Merger (not including warrants to purchase shares of Company common stock it received in the Merger as a result of
it holding warrants to purchase shares of SG Building common stock prior to the Merger).
Overview
The principal business of the Company, through SG Building, is to provide code engineered cargo shipping containers. SG
Building modifies and delivers containers to meet the growing demand for safe and green construction. Rather than consuming new steel
and lumber, SG Building capitalizes on the structural engineering and design parameters a shipping container must meet and repurposes
them for use in building. Offering a product that typically exceeds building code requirements, SG Building seeks to enable developers,
architects, builders and owners to achieve greener construction, faster execution and stronger buildings of higher value. Since its inception
in 2007, SG Building has developed and implemented the technology to break away from standardized container-construction while
maintaining reduced costs. Committed to providing a construction methodology that will lessen the global carbon footprint, SG Building
does not simply recycle (which requires additional energy consumption to break down material and then reform it for another purposes) —
it utilizes existing steel material and repurposes it into modules that can be put to a higher and better use with significantly less energy
input. In addition to providing code engineered cargo shipping containers for construction use, SG Building also continues to advance
a proprietary structural steel framing system and the use thereof.
During 2011, the Company formed SG Blocks Sistema De Constucao Brasileiro LTDA. (“SG Brazil”), a wholly owned
subsidiary of the Company. SG Brazil was formed in order to actively explore opportunities in Brazil. As of December 31, 2013, SG Brazil
is inactive.
SG Building’s products have been featured in reports by several leading media outlets including Fortune, NY Times, NY Post,
USA Today, CNN, Washington Post, ABC World News, NBC Nightly News and Bob Vila. In addition, Popular Mechanics selected one of
SG Building’s buildings as a “best green design” in its April 2009 edition.
Description of Business
SG Building first selects shipping containers appropriate for the project, often that have reached the end of their useful life,
which are then designed and proprietarily engineered. These durable steel containers are then modified or manufactured under contract
into a structure that is referred to in this “Description of Business” section as “SG Blocks™”. A combination of engineering and
architecture is used to make the containers adaptable for a wide variety of commercial and residential uses.
2
From a design perspective, SG Blocks™ can be used to build virtually any style of construction, from traditional to
modern. SG Blocks™ can be delivered with a highly durable surface finish or ready to be clad with any type of standard or green
technology friendly building skin.
SG Blocks™ have a particular application in meeting safe and sustainable housing needs in the United States and
globally. The building system is designed to meet the needs of builders, developers, government officials, urban planners, architects, and
engineers looking for fast and affordable alternatives that meet safe housing needs and standards, particularly in hurricane and earthquake
prone areas. Criteria and testing processes have been developed to evaluate each container. Conversion and assembly is subjected to
quality control, making the containers “code-ready.” Conformance with International Code Council requirements is an ongoing objective
as this standard is used by a vast majority of governmental jurisdictions in the United States.
Partners, affiliates and customers carry the responsibility for container storage, modification, transportation and welding,
leaving SG Building to manage the logistical task of coordinating the efforts of its strategic partners. These alliances help SG Building
maintain a steady supply of containers available around the world. SG Building has been asked to explore by clients, international
opportunities, including in Brazil where it has formed a subsidiary.
Green Building
There is a worldwide movement toward green and carbon neutrality. Sustainable or “green” building is the practice of
designing, constructing, operating, maintaining and removing buildings in ways that conserve natural resources and reduce their impact on
climate change. Builders are increasingly incorporating “green” components in all projects as they adopt the LEED system, a third-party
certification program and the nationally accepted benchmark for the design, construction and operation of high performance green
buildings. We believe SG Building’s structural system contributes significantly towards LEED certification, and help minimize the
wasteful practices of traditional construction methods.
Description of the Product
SG Building’s structural building system represents a change from the way buildings have typically been built in the past. It
also represents a contribution to the greening of the construction industry with the advancement of new technology. Of great importance to
the technology is the recycling of standard shipping containers. Intermodal containers generally come in either 40 foot or 20 foot long units
that are either 8’6” (standard cube) or 9’6” (high cube).
The payload rating in a shipping configuration for a 40 foot container is roughly 60,000 pounds. The payload rating normally
associated with residential or commercial structures is in most cases half of that amount. These units are designed for 9-high stacking
aboard ships. The structures in this condition need to be able to withstand 15 long tons of load transversely and 7.5 long tons longitudinally.
This far exceeds any gravity or lateral loads a normal residential or commercial building will ever experience.
This robust structure is the beginning of the SG Building building system. Various combinations as desired of siding, brick,
and stucco can be added and the interior finished as any conventional structure would be. Upon completion, structures look and feel as if
they were erected using traditional construction methods. However, the SG Building product is generally stronger, more durable,
environmentally sensitive, and erected in less time than traditional construction methods.
Also, SG Building builds off of an alternative steel framing system that provides different benefits to customers.
The Process of the SG Building Conversion
Containers are selected, starting with International Convention for Safe Containers (“CSC”) approved units, and evaluated
against SG Building’s engineering, environmental, and utilization criteria and standards. The used containers are then certified as SG
Blocks™, ready for the manufacturing and fabrication processes. SG Building then provides specific and detailed engineering and
fabrication details to qualified contractors and subcontractors who then modify the containers in various configurations, which often require
structural changes, wall reconfigurations, the creation of window and door openings, and ceiling alterations to allow sheetrock
hanging. The exterior walls and roof structure are then insulated with a high tech waterproof ceramic insulation. The SG Blocks™ are then
shipped directly to the building site or are run through a modular factory and then delivered to the site. The builder, generally under
contract with the Company, places the SG Blocks™ into position on their foundation and connects them together by welding. The builder
may then add roof trusses or other roof systems, quickly creating an insulated structure under roof. The potential for savings in building
time can be significant, particularly if interior pre-finish modularization is introduced at this step.
3
Historical Use of Shipping Containers in Construction
Although shipping containers have been reused as building structures since their introduction in the 1950s, such applications
have been limited. Typically, shipping containers have been re-used to provide temporary shelter or storage. However, the idea of
fabricating containers in large quantities for the building sector market is a relatively novel idea.
Several companies and individuals have been touting the use of shipping containers for construction purposes. Very few,
however, have actually designed and built structures to meet building code requirements. In contrast, SG Building has already completed
projects for the US Military, municipalities and Fortune 500 companies. As a result, we believe SG Building is positioned as the leader in
this new technology industry.
We believe SG Building has debunked the architectural notion that structures built with containers look as if they were built
with containers. Through concentrated education and promotion, we believe SG Building has already begun to position its concept into the
vocabulary of the architecture and building industries.
Competition
The construction industry is highly competitive. SG Building competes against numerous local, regional, national and
international builders and others in the real estate business around the world. Going forward, SG Building is committed to further
educating the building community on the benefits of its technology to illustrate SG Building is more of a complement to than competition
for builders. SG Building may compete for investment opportunities, financing, available land, raw materials and skilled labor with entities
that possess greater financial, marketing and other resources than it does. Competition may increase if there is future consolidation in the
land development and construction industry or from new building technologies that could arise. Additionally, many of those working with
containers focus on the architecture and design element. As the Company’s competitors are generally not involved with the entire building
process (from container selection to occupancy), SG Building has an advantage in being able to deliver a final product.
We believe SG Building can distinguish itself from its competitors on the basis of cost and construction time. SG Building’s
construction method is typically less expensive than traditional construction methods, particularly in urban locations and multi-story
projects. Construction time is typically reduced by using SG Building’s construction method, reducing construction and soft costs
substantially. The SG Blocks™ are designed to be hurricane, tornado and blast resistant, able to withstand harsh climate conditions and
their flexibility of construction allows architects, developers, and owners to design the product to meet their needs.
Having already worked with regulatory agencies and obtained jurisdictional approvals from building departments, SG
Building has gained practical experience needed to complement its engineering, architectural and technological knowledge. Standard
permit approvals at the municipal level is the principal compliance and approval requirement for SG Building.
Customers
SG Building counts among its customers such notable brands as Schneider Electric, Starbucks Coffee Company, Lacoste,
Equinox Fitness Clubs, Bareburger and Puma.
4
The SG Buildings Network
One of our stockholders, ConGlobal Industries, Inc. (“ConGlobal”), is also one of our important affiliates. ConGlobal is one
of the largest depot operators in the United States. ConGlobal operates container repair and storage depots throughout the United States, as
well as in Costa Rica and Mexico, catering to major shipping, leasing and freight movement companies around the world. With a national
capacity of over 600 acres, the ConGlobal network of maintenance depots currently handles over 6,500 containers per week and can
accommodate at least 170,000 TEU’s (twenty-foot equivalent unit). Through SG Building, we currently have an exclusive 10 year
Collaboration and Supply contract with ConGlobal (the “ConGlobal Agreement”), which is currently being renegotiated. Each ConGlobal
depot is equipped with the resources to modify used shipping containers into SG Building’s green building material.
The ConGlobal Agreement, in its current form, generally provides that during the term of the ConGlobal Agreement, we will
purchase our supply of SG Blocks™ for SG Building’s business exclusively from ConGlobal within the “Territory”, as defined in the
ConGlobal Agreement, and within the “Field of Use”, as defined in the ConGlobal Agreement. The ConGlobal Agreement defines
“Territory” as all locations within the continental United States within a five hundred (500) mile radius of an existing ConGlobal site. The
ConGlobal Agreement defines “Field of Use” as housing, office, and/or retail uses generally constructed as a permanent structures, but
excludes uses exclusively for storage, mobile storage, temporary storage and commercial applications that:
(1) are occupied by persons temporarily or infrequently (such as construction site temporary offices), or
(2) are not assembled into buildings consisting of greater than 6 containers in size and not intended for use as permanent
housing, office, and/or retail structures, or
(3) are buildings of such nature that: (A) (i) they do not require a building or other permit or process from local government
agencies, or (ii) are built from drawings, and/or specifications supplied to ConGlobal by the party buying the modified
container(s) and (B) are for purposes that are not primarily for permanent housing, office and/or retail structures.
In the event a proposed use of shipping containers by ConGlobal is not clearly within or outside of the Field of Use,
ConGlobal will notify us of such proposed use and we will collaborate to determine whether such use is within the Field of Use and if so,
whether (i) the proposed use by ConGlobal should be permitted; and (ii) if so, whether the proposed use should be performed on a shared or
joint venture basis.
The ConGlobal Agreement also provides that ConGlobal will not supply SG Blocks™ to any entity competing with SG
Building during the term of the ConGlobal Agreement unless SG Building fails to purchase at least sixty percent (60%) of its forecasted
purchases, as defined, for two (2) consecutive years.
We have seven employees, not including Brian Wasserman who is serving as our Chief Financial Officer pursuant to a
consulting agreement. We also hire independent contractors on an as-needed basis.
On November 15, 2011, we entered into a two-year consulting agreement with Admiral Edmund P. Giambastiani, Jr. U.S.
Navy (ret) (the “Giambastiani Agreement”). Pursuant to the Giambastiani Agreement, Mr. Giambastiani will serve as a consultant to the
Company on matters relating to business development and provide advice on products and operations. For each month during term of the
Giambastiani Agreement, Mr. Giambastiani was granted options to purchase 10,000 shares of Company common stock. Such grants were
made pursuant to our 2011 Incentive Stock Plan or pursuant to separate grant letters and priced at Fair Market Value on the date of grant.
As of December 31, 2013, the Giambastiani Agreement expired, but it is our intention to renew the agreement with Mr. Giambastiani.
On August 27, 2012, we entered into a two-year consulting agreement with Donald Trump, Jr. (the “Trump Agreement”).
Pursuant to the Trump Agreement, Mr. Trump Jr. will serve as a consultant to the Company on matters relating to business development
and provide advice on products and operations. Mr. Trump Jr. was granted options to purchase 1,000,000 shares of the Company common
stock. Such grant was made pursuant to a grant letter and priced at Fair Market Value on the date of grant.
In January 2014, we established a relationship with Monarch Capital Corporation ("Monarch") to provide a lease financing
alternative to qualified clients in order to facilitate the financing of our product offerings.
Recent Developments
On April 10, 2014, the Company entered into an Exchange Agreement (the “Exchange Agreement”) with certain of the
holders of its existing Senior Convertible Debentures (the "Existing Debentures"). Under the terms of the Exchange Agreement, Existing
Debentures with a stated maturity value of $1,680,000 have been surrendered in exchange for (a) new Senior Convertible Debentures with
a stated interest rate of eight percent (8%) per year, a stated maturity value of $1,915,200, a conversion price of $.25 per share, subject to
adjustment, with a final maturity date of April 1, 2016 (the “2014 Exchange Debentures”), and (b) five (5) year warrants to purchase up to
7,660,830 shares of the Company’s common stock at an exercise price of $.275 per share (110% of the conversion price), subject to
adjustment (the “2014 Exchange Warrants”). Existing Debentures with a maturity value of $392,000 will be paid in accordance with the
original terms.
On April 10, 2014, the Company entered into a Securities Purchase Agreement (the “2014 SPA”) pursuant to which it issued
and sold (a) $2,080,500 (maturity value) in Senior Convertible Debentures for a subscription amount of $1,825,000, which have the same
terms as the 2014 Exchange Debentures, including a stated interest rate of eight percent (8%) per year and a conversion price of $.25 per
share, subject to adjustment, with a final maturity date of April 1, 2016 (the “2014 New Debentures” together with the 2014 Exchange
Debentures, the “2014 Debentures”)and (b) five (5) year warrants to purchase up to 8,322,000 shares of the Company’s common stock at
an exercise price of $.275 per share (110% of the conversion price), subject to adjustment (the “2014 New Warrants” together with the
2014 Exchange Warrants, the “2014 Warrants”). Holders of the 2014 Debentures are referred to in this Annual Report on Form 10-K as
the “2014 Holders”.
5
ITEM 1A. RISK FACTORS.
Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties
described below before making an investment decision. If any of the following risks or uncertainties occur, our business, prospects,
financial condition or operating results could be materially adversely affected, the trading price of our common stock could decline, and
you may lose all or part of your investment. In assessing the risks described below, you should also refer to the other information
contained in this Annual Report, including our consolidated financial statements and the related notes and schedules, before deciding to
purchase any shares of our common stock.
Risks Relating to the Company
If we are not successful in our efforts to increase sales or raise capital, we will experience a shortfall in cash over the next twelve
months and our ability to raise capital may be limited.
As of December 31, 2013 and 2012, SG Building, our wholly-owned subsidiary, had cash and cash equivalents of
$594,248 and $868,067, respectively. However, during the fiscal years ended December 31, 2013 and 2012, we had a net loss of
$2,163,302 and $1,766,025, respectively. We incurred additional losses during the quarter ended March 31, 2014. If we are not
successful with our marketing efforts to increase sales, we will experience a shortfall in cash over the next twelve months. If necessary,
we will implement a plan to fund such a deficit which could include, among other things, reducing operating expenses in an amount
sufficient to operate the business for a reasonable period of time. During the year ended December 31, 2012, we received net proceeds
of $642,183 from a private placement, and also received $74,250 for common stock. In addition, in December 2012 and during 2013 we
received an aggregate of $1,850,000 from the issuance of convertible debentures (the “Existing Debentures”). We also received
$1,825,000 (before transaction fees and expenses) in April 2014 from the issuance of convertible debentures. We may also seek to
obtain debt or additional equity financing to address any shortfalls in our cash. The type, timing and terms of the financing we may
select will depend on, among other things, our cash needs, the availability of other financing sources and prevailing conditions in the
financial markets. However, there can be no assurance that we would be able to secure additional funds if needed and that if such funds
are available, whether the terms or conditions would be acceptable to us. In such case, the further reduction in operating expenses
might need to be substantial in order for us to ensure enough liquidity to sustain our operations. It will also be difficult for us to make
any acquisitions unless we can raise additional capital. Any financing would be dilutive to our stockholders.
The Company has identified cost reduction measures which when implemented would result in a reduction in employee
headcount, reduction in base salaries to senior executives and employees, and other cost savings measures. These actions have been
implemented and have begun to result in annual cost savings.
We have incurred net losses in certain prior periods and there can be no assurance that we will generate income in the future.
Our ability to achieve profitability will depend upon our ability to generate and sustain substantially increased revenues. We
may incur operating losses in the future as we execute our growth strategy. We intend to make significant expenditures related to
marketing, expansion of our website, hiring of additional personnel, and development of our technology and infrastructure. Although SG
Building generated revenue from operations during the fiscal years ended December 31, 2013 and 2012, it has incurred net losses of
$2,163,302 and $1,766,025, respectively, during such periods. The likelihood that we will generate net income in the future must be
considered in light of the difficulties facing the construction and construction management industries as a whole, economic conditions, the
competitive environment in which we operate and the other risks and uncertainties discussed in this Annual Report. Our operating results
for future periods are subject to numerous uncertainties, and it may not achieve sufficient revenues to sustain or increase profitability on a
quarterly or annual basis.
The Company’s ability to continue as a going concern is contingent upon securing additional capital.
The Company expects that through the next 10 to 16 months, the capital requirements to fund the Company’s growth and to
cover the operating costs of a public company will consume substantially all of the cash flows that it expects to generate from its
operations, as well as from the proceeds of intended issuances of debt and equity securities. The Company further believes that during this
period, while the Company is focusing on the growth and expansion of its business, the gross profit that it expects to generate from
operations will not generate sufficient funds to cover these anticipated operating costs. Accordingly, the Company requires external
funding to sustain operations and to follow through on the execution of its business plan. However, there can be no assurance that the
Company’s plans will materialize and/or that the Company will be successful in funding estimated cash shortfalls through additional debt
or equity capital and through the cash generated by the Company’s operations. Given these conditions, the Company’s ability to continue as
a going concern is contingent upon it being able to secure an adequate amount of debt or equity capital to enable it to meet its cash
requirements. In addition, the Company’s ability to continue as a going concern must be considered in light of the problems, expenses and
complications frequently encountered by entrants into established markets, the competitive environment in which the Company operates
and the current capital raising environment.
The exercise of outstanding warrants and options will dilute the percentage ownership of then-existing stockholders.
As of April 10, 2014, there are outstanding Warrants to purchase 25,686,059 shares of common stock and options to purchase
10,320,001 shares of common stock. Options to purchase 7,996,072 shares were granted under our 2011 Incentive Stock Plan. We also
have outstanding convertible debt which is initially convertible into approximately 16,096,800 shares of the Company’s common stock.
However, the terms of the convertible debentures provide that under certain circumstances the number of shares issuable upon the
conversion of the debentures can be increased based on the market price of the Company’s common stock at the time of conversion.
Accordingly, if the price of the common stock is significantly below $0.25 per share the number of shares the convertible debt is
convertible into could be significantly higher than 16,096,800 shares. The exercise of such outstanding warrants and options or the
conversion into common stock of our convertible debt would dilute the then-existing stockholders' percentage ownership of the Company's
stock, and any sales in the public market of common stock underlying such securities could adversely affect prevailing market prices for the
common stock. Moreover, the terms upon which the Company would be able to obtain additional equity capital could be adversely
affected since the holders of such securities can be expected to exercise or convert them at a time when the Company would, in all
likelihood, be able to obtain any needed capital on terms more favorable to the Company than those provided by such securities. See
sections entitled “Executive Compensation - Stock Options".
We have a history of losses.
We have reported an operating loss in each of our fiscal quarters since inception. There is a risk that we will continue to
incur operating losses.
6
We are dependent on the services of key personnel, and the unexpected loss of their services may adversely affect its operations.
Our success depends highly upon the personal efforts and abilities of our senior management team, specifically the efforts of
Paul Galvin, the Company’s Chief Executive Officer and Director, Stevan Armstrong, the Company’s President and Chief Operating
Officer and Director, Brian Wasserman, the Company’s Chief Financial Officer and Director, David Cross, the Company’s Vice
President of Business Development, and Jennifer Strumingher, the Company’s Chief Administrative Officer. The employment
agreements with Messrs. Galvin, Armstrong and Ms. Strumingher have expired and the Company is currently negotiating new
agreements with Mr. Galvin and Ms. Strumingher. Although there is a general agreement on the terms of new agreements, there can be no
assurance that the Company will be able to enter into new agreements with these officers on favorable terms. The loss of the services of
one or more of these individuals could have a material adverse effect on our business. Our ability to achieve profitability and generate
increased revenue will depend upon our ability to retain, and attract if necessary, experienced management personnel.
An investor in our common stock must consider the uncertainties facing early stage companies in highly regulated industries.
An investor in our common stock must consider the uncertainties facing early stage companies in highly regulated
industries. These uncertainties include:
● an evolving business model that makes future success uncertain and an investment in our common stock highly speculative;
● the lack of a well-developed brand that may limit our ability to attract customers;
● the potential development of a comparable product and lack of barriers to entry by better funded competitors; and
● our new corporate organization, regulatory requirements and its anticipated growth could lead to management distractions
and higher than expected operating expenses.
Our business is susceptible to adverse weather conditions and natural disasters.
Our construction projects are susceptible to, and are significantly affected by, adverse weather conditions and natural disasters
such as hurricanes, tornadoes, earthquakes, droughts, floods and fires. These adverse weather conditions and natural disasters can cause
delays and increased costs in the construction of new buildings. If insurance is unavailable to us or is unavailable on acceptable terms, or if
our insurance is not adequate to cover business interruption or losses resulting from adverse weather or natural disasters, our business and
results of operations will be adversely affected. In addition, damage to new buildings caused by adverse weather or a natural disaster can
cause our insurance costs to increase.
Our failure to successfully complete the integration of SG Building or any other businesses acquired in the future could have a material
adverse effect on our business, financial condition and operating results.
Any financing required for acquisitions could dilute the interests of our existing holders of our common stock, result in an
increase in our indebtedness or both. Acquisitions may entail numerous risks, including:
● difficulties in assimilating acquired operations or products, including the loss of key employees from acquired businesses;
● diversion of management’s attention from our core business;
7
● adverse effects on existing business relationships with supplies and customers; and
● risks of entering markets in which we have limited or no prior experience.
Our failure to successfully complete the integration of SG Building or any other acquired business could have a material
adverse effect on our business, financial condition and operating results. In addition, there can be no assurance that we will be able to
identify suitable acquisition candidates or consummate acquisitions on favorable terms.
We rely on ConGlobal Industries, Inc. to supply us with containers used in our business and the unexpected termination of our
exclusive 10 year Collaboration and Supply contract with ConGlobal to provide these containers would have a negative impact on our
business.
We rely on ConGlobal to supply us with containers and other resources used in our business and if this relationship were to
unexpectedly end, or if the ConGlobal Agreement were to be unexpectedly terminated, such event could have a negative impact on our
business while our alternate sources of supply are being implemented.
We rely on certain vendors to supply us with materials and products that if we were unable to obtain could adversely affect our business.
We have relationships with key materials vendors, and we rely on suppliers for our purchases of products from them. Any
inability to obtain materials or services in the volumes required and at competitive prices from our major trading partners, the loss of any
major trading partner, or the discontinuation of vendor financing (if any) may seriously harm our business because we may not be able to
meet the demands of our customers on a timely basis in sufficient quantities or at all. Other factors, including reduced access to credit by
our vendors resulting from economic conditions, may impair our vendors’ ability to provide products in a timely manner or at competitive
prices. We also rely on other vendors for critical services such as transportation, supply chain and professional services. Any negative
impacts to our business or liquidity could adversely impact our ability to establish or maintain these relationships.
Risks Relating to our Business
We depend on the availability and skill of subcontractors, their willingness to work with us, and their selection of suitable and quality
building materials.
We rely on subcontractors to perform the actual construction of our building projects, and in many cases, to select and obtain
raw materials. Despite our detailed specifications and quality control procedures, in some cases, improper construction processes or
defective materials may be used to finish construction of our building projects. We may need to spend money to remediate such problems
when they are discovered. Defective products widely used by the construction industry can result in the need to perform extensive repairs
to large numbers of buildings. Though subcontracts are written to protect us from substandard performance or materials, pervasive
problems could adversely affect our business. The cost to us in complying with its warranty obligations in these cases may be significant if
it is unable to recover the cost of repair from subcontractors, materials suppliers and insurers. Further, the timing and quality of our
construction depends on the availability and skill of subcontractors. Although we believe that our relationships with our suppliers and
subcontractors are good, there can be no assurance that skilled subcontractors will continue to be available at reasonable rates and in the
areas in which we conducts our operations. The inability to contract with skilled subcontractors or general contractors at reasonable costs
on a timely basis could limit our ability to build and deliver buildings and could erode our profit margins and adversely affect our results of
operations and cash flows.
8
We may have difficulty protecting our proprietary technology.
Intellectual property and proprietary technology are important to the success of our business. We rely primarily on trade
secrets to protect our intellectual property and proprietary technology. While we intend to make the appropriate filings and protect our
intellectual property and proprietary technology, there can be no assurance that we will be able to so. In addition, it is difficult to protect
against or monitor all possible misappropriations and unauthorized access to our intellectual property and technology. To date, we have
ordered prior art on five potential intellectual property claims. Significant challenges in protecting our intellectual property and technology
are posed by (a) funding limitations and (b) our rapidly evolving adaptation to new product/market/technology challenges. Dissemination
or dilution of the aforementioned intellectual property and technology could have an adverse effect on our business, financial condition,
results of operations and liquidity.
Growth of operations may strain resources and if we fail to manage growth successfully, our business could be adversely affected.
Increased orders for our product have placed, and may continue to place, a strain on our operational, financial and managerial
resources and personnel. Any failure to manage growth effectively could have a material adverse effect on our business, operating results,
financial condition and liquidity.
Our exposure to foreign currency rate risks and inflation could materially and adversely affect our business, financial condition and
results of operations.
We may be exposed to foreign currency exchange rate risks and inflation with respect to our sales, profits, and assets and
liabilities denominated in currencies other than the U.S. dollar as a result of possible international operations. As a result, we may suffer
losses as a result of foreign currency rate fluctuations.
Our revenue growth rate depends on our ability to execute our business plan.
We may not be able to identify and maintain the necessary relationships within the industries in which we participate. Our
ability to execute our business plan also depends on other factors, including the ability to:
● negotiate and maintain contracts and agreements with acceptable terms;
● implement terms of contracts and agreements according to original specifications;
● hire and train qualified personnel and retain key employees;
● maintain an affordable labor force;
● maintain marketing and development costs at affordable rates;
● ensure the availability of project financing; and
● effectively compete within domestic and international markets.
Failure to properly perform any of the foregoing may have a material adverse effect on our business, operating results,
financial condition and liquidity.
We face continuous pricing pressure from our customers and our competitors. This will affect our margins and therefore our
profitability and cash flow unless we can efficiently manage our manufacturing costs and market our products based on superior
quality.
Our customers often make purchase decisions based on product pricing. Many of our competitors have significantly greater
financial resources than we have, and as a result may be able to withstand the adverse effect of discounted pricing and reduced margins in
order to build market share. While one of our strategies is to offer competitive pricing in order to retain and increase market share, and to
seek to manage its manufacturing efficiently to sustain acceptable margins, we may not be able to maintain appropriate prices or to manage
product manufacturing costs sufficiently to sustain acceptable margins. Similarly, we also seek to compete based on product quality rather
than just price, but we may not be successful in these efforts. This could adversely affect our profitability, liquidity and market share.
9
The sale and export of products to a foreign country involves inherent operational risks that may not be adequately covered by
insurance.
We can give no assurance that we will be adequately insured against all risks or that our insurers will pay a particular
claim. The cost of insurance on foreign business may be substantial and could decrease profitability. Furthermore, we may not be able to
obtain adequate insurance coverage at reasonable rates in the future. We may also be subject to claims by our customers involving disputes
or situations that are beyond its control. There is also a possibility of fraudulent claims or other illicit activities involving our
transactions. Any of these potentialities may give rise to a loss for which we are not insured, or adequately insured.
Our liability for estimated warranties may be inadequate, which could materially and adversely affect our business, financial condition
and results of operations.
As a construction manager, we are subject to construction defect and warranty claims arising in the ordinary course of its
business. These claims are common in the construction management industry and can be costly. At this time, the third party providers
offer guarantees and warranties in accordance with industry standards that flow through to our clients. Although we maintain reserves for
such claims, which to date have been adequate, there can be no assurance that warranty expense levels will remain at current levels or that
such reserves will continue to be adequate. A large number of warranty claims exceeding our current warranty expense levels could have a
material adverse effect on our results of operations.
We can be adversely affected by failures of persons who act on our behalf to comply with applicable regulations and guidelines.
Although we expect all of our associates (i.e., employees), officers and directors to comply at all times with all applicable
laws, rules and regulations, there are instances in which subcontractors or others through whom we do business may engage in practices
that do not comply with applicable regulations or guidelines. It is possible that our associates may become aware of these practices but do
not take steps to prevent them. If we learn of practices relating to buildings it constructs that do not comply with applicable regulations or
guidelines, we will move actively to stop the non-complying practices as soon as possible and we will take disciplinary action with regard
to our associates who were aware of the practices, including in some instances terminating their employment. However, regardless of the
steps we take, we may be subject to fines or other governmental penalties, and our reputation may be injured.
The cyclical and seasonal nature of the construction and construction management industries causes our revenues and operating
results to fluctuate, and we expect this cyclicality and seasonality to continue in the future.
The construction and construction management industries are highly cyclical and seasonal and is influenced by many
international, national and regional economic factors including the availability of consumer and wholesale financing, seasonality of
demand, consumer confidence, interest rates, income levels and general economic conditions, including inflation and recessions. As a
result of the foregoing factors, our revenues and operating results fluctuate, and we currently expect them to continue to fluctuate in the
future. Moreover, we have and may continue to experience operating losses during cyclical downturns in the construction and construction
management market.
We may not be paid all amounts owed to us by our customers.
If the financial condition of our customers were to deteriorate, resulting in their inability or unwillingness to pay amounts
owed to us, or if our customers are otherwise unable or unwilling to pay us, or if bankruptcy courts require us to refund amounts paid to us,
our earnings and financial position could be negatively impacted.
10
Risks Relating to the Construction and Construction Management Industries
The construction management industry suffers from a lack of third-party financing, and our financial condition and results of
operations could be negatively affected if additional third-party financing for the purchases of our buildings does not become available.
Our business and earnings depend substantially on our client’s ability to obtain financing for the development of their
construction projects. The availability and cost of such financing is further dependent on the number of financial institutions participating
in the industry, the departure of financial institutions from the industry, the financial institutions’ lending practices, the strength of the
domestic and international credit markets generally, governmental policies and other conditions, all of which are beyond our control. In
light of the current economic climate, some of our projects may not be successful in obtaining additional funds in a timely manner, on
favorable terms or at all. The availability of borrowed funds, especially for construction financing, has been greatly reduced, and lenders
may require project developers to invest increased amounts of equity in a project in connection with both new loans and the extension of
existing loans. Unfavorable changes in the availability and terms of financing in the industry will have a material adverse effect on certain
privately financed projects.
Our results of operations also depend on the ability of our potential privately financed customers to obtain loans for the
purchase of new buildings. Over the past few years, lenders have tightened the credit underwriting standards which have reduced lending
volumes. If this trend continues, it would negatively impact our sales. Our sales depend in large part on the availability and cost of
financing. In addition, where our potential customers must sell their existing buildings or real estate in order to develop the new buildings,
increases in mortgage costs and/or lack of availability of mortgages could prevent buyers of potential customers’ existing buildings from
obtaining the mortgages they need to complete their purchases, which would result in our potential customers’ inability to make purchases
from us. If our potential buyers cannot obtain suitable financing, our sales and results of operations would be adversely affected.
The construction and construction management industries are highly competitive, and competition may increase the adverse effects of
industry conditions.
We operate in a very competitive environment, which is characterized by competition from numerous local, regional and
national builders and others in the real estate development business around the world. We may compete for financing, raw materials and
skilled management and labor resources. We also compete with the rental market, as well as with the resale, or “previously owned,”
building market, which has increased significantly due to the large number of foreclosures due to the current economic downturn. An
oversupply of buildings available for sale and the heavy discounting of building prices by some of our competitors could adversely affect
demand for our buildings and our results of operations. Increased competition could require us to further increase our selling incentives
and/or reduce our prices which could negatively affect our profits.
Government regulations and legal challenges may delay the start or completion of our projects, increase our expenses or limit our
building activities, which could have a negative impact on our operations.
Various domestic and international rules and regulations concerning building, zoning, sales and similar matters apply to and/or
affect the construction and construction management industries. Governmental regulation affects construction activities as well as sales
activities, mortgage lending activities and other dealings with consumers. These industries also have experienced an increase in domestic
state and local legislation and regulations that limit the availability or use of land. Municipalities may also restrict or place moratoriums on
the availability of utilities, such as water and sewer taps. In some areas, municipalities may enact growth control initiatives, which will
restrict the number of building permits available in a given year. In addition, we may be required to apply for additional approvals or
modify our existing approvals because of changes in local circumstances or applicable law. If governments in locations in which we
operate take actions like these, it could have an adverse effect on our business by causing delays, increasing our costs or limiting our ability
to operate in those areas. Further, we may experience delays and increased expenses as a result of legal challenges to our proposed projects,
whether brought by governmental authorities or private parties. Failure to comply with laws or regulations applicable to or affecting us, or
the passage in the future of new and more stringent laws affecting us, may adversely affect our financial condition or results of operations.
11
Supply risks and shortages relating to labor and materials can harm our business by delaying construction and increasing costs.
Though the availability of talented consultants and subcontractors is high in the current economic environment, the
construction and construction management industries from time to time have experienced significant difficulties with respect to:
● shortages of materials;
● volatile or sustained increases in the cost of raw materials, including containers, traditional finish materials which are
significant components of its construction costs;
● shortages of qualified trades people and other labor;
● changes in laws relating to union organizing activity;
● inadequately capitalized or uninsured local subcontractors;
● lack of availability of adequate utility infrastructure and services; and
● transportation cost increases.
These difficulties can, and often do, cause unexpected short-term increases in construction costs and cause construction
delays. In addition, to the extent our subcontractors incur increased costs associated with higher insurance premiums and compliance with
regulations, these costs may be passed on to us. We are generally unable to pass on any unexpected increases in construction costs to those
customers who have already entered into sales contracts, as those contracts generally fix the price of the building at the time the contract is
signed. Pricing competition, oversupply of new and existing buildings and tightening mortgage qualifications, among other factors may
restrict our ability to pass on any additional costs, and may negatively impact its profit margins.
We have not experienced any work stoppages due to strikes by unionized workers, but there is no assurance that there will not
be any work stoppages due to strikes or other job actions in the future.
Risks Relating to the Merger
As a result of the merger between a wholly-owned subsidiary of the Company and SG Building in November 2011, we have become
subject to more reporting requirements of federal securities laws, which can be expensive.
As a result of the merger between a wholly-owned subsidiary of the Company and SG Building in November 2011, we have
become an operating company. See the section entitled “Description of Business - SG Blocks Merger” in Part I, Item 1 of this Annual
Report for a description of the Merger. Accordingly, we are subject to more information and reporting requirements of the Securities
Exchange Act of 1934 and other Federal securities laws, including compliance with the Sarbanes-Oxley Act. The costs of preparing and
filing annual and quarterly reports, proxy statements and other information with the Securities and Exchange Commission (including
reporting of the Merger) and furnishing audited reports to stockholders have increased and caused our expenses to be higher.
In addition, it may be time consuming, difficult and costly for us to develop and implement the internal controls and reporting
procedures required by the Sarbanes-Oxley Act. We may need to hire additional financial reporting, internal controls and other finance
personnel in order to develop and implement appropriate internal controls and reporting procedures. If we are unable to comply with the
internal controls requirements of the Sarbanes-Oxley Act, we may not be able to obtain the independent registered public accountant
certifications required by the Sarbanes-Oxley Act.
12
Because we were previously a shell company and acquired an operating entity by means of a reverse merger with one of our
subsidiaries, we may not be able to attract the attention of major brokerage firms.
There may be risks associated with us formerly being a shell company and acquiring an operating entity through a “reverse
merger”. Securities analysts of major brokerage firms may not provide coverage of us since there is no incentive to brokerage firms to
recommend the purchase of our common stock. No assurance can be given that brokerage firms will, in the future, want to conduct any
secondary offerings on our behalf. In addition, the ability of stockholders to sell their shares under Rule 144 can be prohibited if the
Company is not current in their SEC filings.
Risks Relating to our common stock
Our stock price may be volatile.
The market price of our common stock is likely to be highly volatile and could fluctuate widely in price in response to various
factors, many of which are beyond our control, including the following:
● technological innovations or new products by us or our competitors;
● intellectual property disputes;
● additions or departures of key personnel;
● sales of our common stock;
● our ability to execute our business plan;
● operating results that fall below expectations;
● loss of any strategic relationship;
● industry developments;
● economic and other external factors; and
● period-to-period fluctuations in our financial results.
In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are
unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the
market price of our common stock.
Our limited operating history makes evaluating our common stock more difficult, and therefore, investors have limited information
upon which to rely.
We have limited historical data upon which to forecast operating expenses or future needs and operating results. Our limited
operating history will make it difficult for investors to evaluate our business and prospects. Investors must consider our prospects in light
of the risks, expenses and difficulties we face as an early stage company with a limited operating history, new organizational structure and
operating in a highly regulated and competitive industry.
13
Our directors, executive officers and affiliated persons beneficially own a substantial number of shares of our common stock, which
gives them significant control over certain major decisions upon which its stockholders may vote and may discourage an acquisition of
the Company.
Our executive officers, directors and affiliated persons (including investors holding convertible debentures and warrants
described herein) beneficially own a substantial number of shares of our common stock. The interests of our officers, directors and
affiliated persons (as stockholders) may differ from the interests of other stockholders. As a result, these officers, directors and affiliated
persons will have significant influence over all corporate actions requiring stockholder approval, irrespective of how other stockholders
may vote, including the following actions:
● elect or defeat the election of the our directors;
● amend or prevent amendment the our Amended and Restated Certificate of Incorporation or By-Laws;
● effect or prevent a merger, sale of assets or other corporate transaction; and
● control the outcome of any other matter submitted to the stockholders for vote.
Management’s ownership of a substantial number of shares of our common stock may discourage a potential acquirer from
making a tender offer or otherwise attempting to obtain control of the Company, which in turn could reduce its stock price or prevent our
stockholders from realizing a premium over its stock price.
Trading of our common stock may be restricted by Blue Sky eligibility and our common stock may be deemed a “penny stock”, which
would make it more difficult for the Company’s investors to sell their shares.
We currently are not Blue Sky eligible in certain states so trading of the Company’s stock in such states may be restricted. In
addition, our common stock is subject to the “penny stock” rules adopted under section 15(g) of the Securities Exchange Act. The penny
stock rules apply to non-Nasdaq companies whose common stock trades at less than $5.00 per share or that have tangible net worth of less
than $5,000,000 ($2,000,000 if the company has been operating for three or more years). These rules require, among other things, that
brokers who trade penny stock to persons other than “established customers” complete certain documentation, make suitability inquiries of
investors and provide investors with certain information concerning trading in the security, including a risk disclosure document and quote
information under certain circumstances. Many brokers have decided not to trade penny stocks because of the requirements of the penny
stock rules and, as a result, the number of broker-dealers willing to act as market makers in such securities is limited. If we remain subject
to the penny stock rules for any significant period, that could have an adverse effect on the market, if any, for our securities. If our
securities are subject to the penny stock rules, investors will find it more difficult to dispose of the common stock. In addition, the Blue
Sky eligibility rules may discourage investor interest in and limit the marketability of, the common stock.
Furthermore, for companies whose securities are quoted on the OTC Bulletin Board of the National Association of Security
Dealers, Inc., it is more difficult (1) to obtain accurate quotations, (2) to obtain coverage for significant news events because major wire
services generally do not publish press releases about such companies, and (3) to obtain needed capital.
Sale of a substantial number of shares of the common stock may cause the price of our common stock to decline.
If our stockholders sell substantial amounts of the common stock in the public market, the market price of our common stock
could fall. These sales also may make it more difficult for us to sell equity or equity-related securities in the future at a time and price that
it deems reasonable or appropriate.
14
The issuance of additional securities by the Board will dilute the ownership interests of our current stockholders and could discourage
the acquisition of the Company.
Our Board, without any action by our stockholders, is authorized to designate and issue additional classes or series of capital
stock (including classes or series of preferred stock) as it deems appropriate and to establish the rights, preferences and privileges of such
classes or series. The issuance of any new class or series of capital stock would not only dilute the ownership interest of our current
stockholders but may also adversely affect the voting power and other rights of holders of common stock. The rights of holders of
preferred stock and other classes of common stock that may be issued may be superior to the rights of the holders of the existing class of
common stock in terms of the payment of ordinary and liquidating dividends and voting rights.
In addition, the ability of the Board to designate and issue such undesignated shares could impede or deter an unsolicited
tender offer or takeover proposal regarding the Company and the issuance of additional shares having preferential rights could adversely
affect the voting power and other rights of holders of common stock and render more difficult the removal of current management, even if
such removal may be in the stockholders’ best interests.
Additional equity offerings may dilute current stockholders.
We completed a capital raise on April 10, 2014 which results in significant dilution. As a result of acquisitions or additional
capital raisings, we may issue additional securities or instruments that may be convertible into or exercisable or exchangeable for, or
otherwise entitle the holder thereof to receive common stock. The issuance of such additional securities will dilute the ownership of our
then current stockholders.
If we do not implement necessary internal control over financial reporting in an efficient and timely manner, or if we discover
deficiencies and weaknesses in existing systems and controls, we could be subject to regulatory enforcement and investors may lose
confidence in our ability to operate in compliance with existing internal control rules and regulations, either of which could result in a
decline in our stock price.
It may be difficult to design and implement effective internal control over financial reporting for combined operations as the
Company integrates the business of SG Building it acquired as a result of the Merger, and perhaps other acquired businesses in the
future. In addition, differences in existing controls of acquired businesses may result in weaknesses that require remediation when internal
controls over financial reporting are combined.
If we fail to maintain an effective system of internal control, we may be unable to produce reliable financial reports or prevent
fraud. If we are unable to assert that its internal control over financial reporting is effective at any time in the future, or if our independent
registered public accounting firm is unable to attest to the effectiveness of internal controls, is unable to deliver a report at all or can deliver
only a qualified report, we could be subject to regulatory enforcement and investors may lose confidence in our ability to operate in
compliance with existing internal control rules and regulations, either of which could result in a decline in the our stock price.
We do not expect to pay dividends in the future. Any return on investment may be limited to the value of our common stock.
We have never paid nor do we expect in the foreseeable future to pay any dividends.
There is a limited trading market for our common stock.
Our common stock has been quoted on the OTC Bulletin Board since 1999 and is currently quoted under the symbol
“SGBX”. Prior to November 9, 2011, our common stock was quoted under the symbol “CDSI.” There is a limited trading market in our
shares and a stockholder could likely find it difficult to sell or to obtain quotations as to prices of our common stock. Since the
consummation of the Merger on November 4, 2011 there has been limited trading volume of our common stock, and on many days there
has been no trading activity in our common stock.
No assurances can be given that our common stock will continue to be quoted on the OTC Bulletin Board or that an orderly
trading market will be maintained for our common stock.
15
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES.
We lease office space in New York City for use as our headquarters. We have three individual offices, with shared use of
conference rooms, kitchen and other amenities. The lease expires December 31, 2014. We also have use of storage and processing space
at certain ConGlobal facilities pursuant to the ConGlobal Agreement. We believe that our current facilities are adequate for the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS.
We are not a party to any legal proceedings.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
16
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASE OF EQUITY SECURITIES
The Company’s common stock is currently quoted on the OTC Bulletin Board (“ OTCBB ”) under the symbol “SGBX”. The
following table sets forth for the periods indicated, the reported high and low closing bid quotations per share for our common stock. The sale
prices set forth below reflect inter-dealer quotations, do not include retail mark-ups, markdowns or commissions and do not necessarily
represent actual transactions.
Year Ended December 31, 2013
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Year Ended December 31, 2012
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Stockholders
$
$
High
Low
$
$
0.33
0.36
0.35
0.39
0.45
0.51
0.60
0.70
0.13
0.14
0.13
0.15
0.25
0.12
0.25
0.26
Low
High
As of April 8, 2014, there were 43,273,093 shares of common stock outstanding, held by 106 holders of record.
Dividend Policy
We have never declared or paid dividends on our common stock and do not expect to pay any dividends in the foreseeable
future.
Recent Sales of Unregistered Securities
On October 1, 2013, the Company entered into a one year consulting agreement pursuant to which, in exchange for certain
services, the consultant will receive up to 1,000,000 shares of the Company’s common stock in addition to cash payments (the “2013
Consulting Issuance”). On October 1, 2013, the Company issued 1,000,000 shares of the Company’s common stock at a fair value of $0.23
per share to the consultant in exchange for services provided. 500,000 shares were issued at $0.23 and the fair value of the 500,000 unvested
shares is not fixed until the shares fully vest. In November 2013, the Company’s board of directors approved the issuance of 1,000,000
shares of the Company’s common stock to the consultant, of which 500,000 shares are being held in escrow. If neither party has terminated
the consulting agreement during the first six month period after the execution of the agreement, the escrowed shares will be released to the
consultant. The issuance of these shares was exempt from the registration requirements under the Securities Act, pursuant to Section 4(a)(2)
thereof, because the transaction did not involve a public offering.
On November 8, 2013, the Company issued 25,000 shares of the Company’s common stock at a fair value of $0.23 per share to a
consultant in exchange for serviced provided. The issuance of these shares was exempt from the registration requirements under the Securities
Act, pursuant to Section 4(2) thereof, because the transaction did not involve a public offering.
Effective January 20, 2014, Mr. Lampen resigned as a member of the Board of Directors of the Company. Following his
resignation, Mr. Lampen exercised options to purchase 50,000 shares of our common stock at $0.20 per share.
On April 10, 2014, the Company entered into an Exchange Agreement (the “Exchange Agreement”) with certain of the holders
of its existing Senior Convertible Debentures (the "Existing Debentures"). Under the terms of the Exchange Agreement, Existing
Debentures with a stated maturity value of $1,680,000 have been surrendered in exchange for (a) new Senior Convertible Debentures with a
stated interest rate of eight percent (8%) per year, a stated maturity value of $1,915,200, a conversion price of $.25 per share, subject to
adjustment, with a final maturity date of April 1, 2016 (the “2014 Exchange Debentures”), and (b) five (5) year warrants to purchase up to
7,660,830 shares of the Company’s common stock at an exercise price of $.275 per share (110% of the conversion price), subject to
adjustment (the “2014 Exchange Warrants”). Existing Debentures with a maturity value of $392,000 will be paid in accordance with the
original terms.
On April 10, 2014, the Company entered into a Securities Purchase Agreement (the “2014 SPA”) pursuant to which it issued
and sold (a) $2,080,500 (maturity value) in Senior Convertible Debentures for a subscription amount of $1,825,000, which have the same
terms as the 2014 Exchange Debentures, including a stated interest rate of eight percent (8%) per year and a conversion price of $.25 per
share, subject to adjustment, with a final maturity date of April 1, 2016 (the “2014 New Debentures” together with the 2014 Exchange
Debentures, the “2014 Debentures”) and (b) five (5) year warrants to purchase up to 8,322,000 shares of the Company’s common stock at an
exercise price of $.275 per share (110% of the conversion price), subject to adjustment (the “2014 New Warrants” together with the 2014
Exchange Warrants, the “2014 Warrants”). Holders of the 2014 Debentures are referred to in this Annual Report on Form 10-K as the “2014
Holders”.
The issuance of the 2014 Warrants and the 2014 Debentures was exempt from the registration requirements under the
Securities Act, pursuant to Section 4(a)(2) thereof, because the transaction did not involve a public offering.
17
During the three months ended December 31, 2013, the Company issued the following options to purchase the Company’s
common stock to consultants, directors, officers and employees of the Company:
Recipient
Edmund P. Giambastiani, Jr. - Consultant
Jennie Enterprise – Consultant
Jim Williams – Consultant
TOTAL
Date
10/31/2013 $
11/8/2013 $
11/8/2013 $
Exercise
Price
Amount
0.20
0.43
0.43
10,000
200,000
200,000
410,000
The options awarded to Edmund P. Giambastiani were awarded by approval of the Company’s board of directors. The options
awarded to Jennie Enterprise and Jim Williams were awarded by approval of the Company’s board of directors, and under the 2013 Stock
Plan. One third of the options vest upon grant, the second third vests on the first anniversary of the grant date, and the remaining third vests
on the second anniversary of the grant date. These options generally have the same terms and conditions as provided under the 2011
Incentive Stock Plan (See Note 16), but the 2013 Stock Plan was not approved by the Company’s shareholders. The aggregate number of such
options granted to consultants is 410,000 options. The issuance of such options was exempt from the registration requirements under the
Securities Act, pursuant to Section 4(a)(2) thereof, because the transaction did not involve a public offering.
Issuer Purchases of Equity Securities
No securities of ours were repurchased by us during 2013.
ITEM 6. SELECTED FINANCIAL DATA.
Not applicable.
ITEM 7.
OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
Introduction and Certain Cautionary Statements
The following discussion and analysis of the financial condition and results of our operations should be read in conjunction with
our consolidated financial statements and related notes and schedules included elsewhere in this Annual Report. This discussion contains
forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed
below. Factors that could cause or contribute to such differences include, but are not limited to, intensified competition and/or operating
problems in its operating business projects and their impact on revenues and profit margins or additional factors, and those discussed in the
section entitled “Risk Factors” in Part I, Item 1A of this Annual Report. In addition, certain information presented below is based on
unaudited financial information. There can be no assurance that there will not be changes to this information once audited financial
information is available.
18
General
SG Building, our wholly-owned subsidiary, offers the construction industry a safer, greener, faster, longer lasting and more
economical alternative to conventional construction methods. SG Building redesigns, repurposes, and converts heavy-gauge steel cargo
shipping containers into safe green building blocks for commercial, industrial, and residential building construction.
SG Building is a provider of code engineered cargo shipping containers that it modifies and delivers to meet the growing demand
for safe and green construction. Rather than consuming new steel and lumber, SG Building capitalizes on the structural engineering and design
parameters a shipping container must meet and repurposes them for use in building.
During 2011, the Company formed SG Blocks Sistema De Constucao Brasileiro LTDA. (“SG Brazil”), a wholly owned
subsidiary of the Company. SG Brazil was formed in order to actively explore opportunities in Brazil. As of December 31, 2013, SG Brazil is
inactive.
Results of Operations
Years Ended December 31, 2013 and 2012:
Loss from operations
Other income (expenses):
Net Loss
Year Ended December 31
2013
(1,858,775)
(304,527)
(2,163,302)
2012
(1,940,424)
174,399
(1,766,025)
Year Ended December 31, 2013 Compared to the Year Ended December 31, 2012:
Revenue
Revenue for the year ended December 31, 2013 was $5,732,776 compared to $2,450,665 for the year ended December 31,
2012. This increase of $3,282,111 resulted mainly from an increase of revenue from block “green steel” jobs and project management jobs as
well as a decrease in revenue from engineering jobs. Revenue recognized from block “green steel” jobs and project management jobs
increased by $1,667,606 and $2,102,032, respectively, and revenue recognized from engineering jobs decreased by $487,527 for the year
ended December 31, 2013 compared to the year ended December 31, 2012. Revenue from block “green steel” jobs increased primarily due to
two jobs in the amount of $1,356,996 being recognized during the year ended December 31, 2013. Revenue from project management jobs
increased primarily due to $1,499,972 being recognized during the year ended December 31, 2013 from one customer. Revenue from
engineering jobs decreased primarily due to one job in the amount of $468,895 being recognized during the year ended December 31, 2012.
During the year ended December 31, 2013 the Company recognized revenue from 4 engineering jobs compared to 10 engineering jobs for
the year ended December 31, 2012.
19
Cost of Revenue and Gross Profit
Cost of revenue increase by $3,151,481 to $5,149,219 for the year ended December 31, 2013 from $1,997,738 for the year
ended December 31, 2012. The increase in cost of revenue resulted primarily from an increase of costs from block “green steel” costs and
project management jobs, a decrease in costs from engineering jobs and loss accruals of approximately $9,900. Costs recognized from
block “green steel” jobs and project management jobs increased $1,396,825 and $2,226,888, respectively, and costs recognized from
engineering jobs decreased $472,232 for the year ended December 31, 2013 compared to the year ended December 31, 2012. Gross profit
increased by $130,630 to $583,557 for the year ended December 31, 2013 compared to $452,927 for the year ended December 31, 2012.
Gross profit percentage decreased to 10% for the year ended December 31, 2013 compared to 19% for the year ended December 31, 2012.
This decrease results primarily from losses on five jobs from one customer in the amount of $197,240 being recognized during the year
ended December 31, 2013.
Payroll and Related Expense
Payroll and related expense for the year ended December 31, 2013 was $1,350,953 compared to $1,357,717 for the year
ended December 31, 2012. Stock compensation decreased by $86,960 to $421,305 for the year ended December 31, 2013 compared to
$508,265 for the year ended December 31, 2012. This decrease was offset by an increase of $62,419 in payroll expense for the year ended
December 31, 2013 compared to the year ended December 31, 2012.
Other Operating Expenses
Other operating expense for the year ended December 31, 2013 was $1,091,379 compared to $1,035,634 for the year ended
December 31, 2012. The change results primarily from an increase of $105,589 and a decrease of $61,384, in professional fees and rent
expense respectively, for the year ended December 31, 2013 compared to the year ended December 31, 2012.
Interest Expense
Interest expense for the year ended December 31, 2013 was $689,156 compared to $8,220 for the year ended December 31,
2012. This increase of $680,936 results from accrued interest and interest paid, amortization of debt discount on the Company’s convertible
debentures and amortization of debt issuance costs.
Other Income (Expense)
During the year ended December 31, 2013 and 2012, there was other income recognized from cancellation of trade liabilities
and accrued interest of $25,530 and $102,128, respectively. Additionally in 2013 there was other income of $358,973 recognized due to a
change in fair value of financial instruments, compared to $80,352 in 2012.
Income Tax Provision
A 100% valuation allowance was provided against the deferred tax asset consisting of available net operating loss carry
forwards and accordingly no income tax benefit was provided.
Impact of Inflation
The impact of inflation upon the Company’s revenue and income/(loss) from continuing operations during each of the past two
fiscal years has not been material to its financial position or results of operations for those years because the Company does not maintain any
inventories whose costs are affected by inflation.
20
Liquidity and Capital Resources
Since SG Building’s inception in 2008, SG Building has generated losses from operations and the Company anticipates that it
will continue to generate losses from operations for the foreseeable future. As of December 31, 2013 and 2012, the Company’s stockholders’
deficiency was approximately $2,089,000 and $516,000, respectively. The Company’s net loss from operations for the years ended December
31, 2013 and 2012 was $2,163,302 and $1,766,025, respectively. Net cash used in operating activities was $1,075,604 and $1,268,539 for the
years ended December 31, 2013 and 2012, respectively.
Through December 31, 2013, the Company has incurred an accumulated deficiency since inception of $9,200,078.
At December 31, 2013, the Company had a cash balance of $594,248.
Since the Company’s inception, it has generated revenues from SG Block sales, engineering services, and project management.
The Company expects that through the next 10 to 16 months, the capital requirements to fund the Company’s growth will
consume all of the cash flows that it expects to generate from its operations, as well as from the proceeds of the issuances of senior convertible
debt securities. The Company further believes that during this period, while the Company is focusing on the growth and expansion of its
business, the gross profit that it expects to generate from operations will not generate sufficient funds to cover expected operating costs.
Accordingly, the Company requires further external funding to sustain operations and to follow through on the execution of its business plan.
However, there can be no assurance that the Company’s plans will materialize and/or that the Company will be successful in funding
estimated cash shortfalls through additional debt or equity capital and through the cash generated by the Company’s operations. Given these
conditions, the Company’s ability to continue as a going concern is contingent upon it being able to secure an adequate amount of debt or
equity capital to enable it to meet its cash requirements. In addition, the Company’s ability to continue as a going concern must be considered
in light of the problems, expenses and complications frequently encountered by entrants into established markets, the competitive environment
in which the Company operates and the current capital raising environment.
Since inception, the Company’s operations have primarily been funded through proceeds from equity and debt financings and
sales activity. Although management believes that the Company has access to capital resources, there are currently no commitments in place
for new financing at this time, and there is no assurance that the Company will be able to obtain funds on commercially acceptable terms, if at
all.
During the year ended December 31, 2013, the Company raised $850,000 in net new funds through the issuance of convertible
debentures.
On April 10, 2014, the Company entered into an Exchange Agreement (the “Exchange Agreement”) with certain of the holders
of its existing Senior Convertible Debentures (the "Existing Debentures"). Under the terms of the Exchange Agreement, Existing
Debentures with a stated maturity value of $1,680,000 have been surrendered in exchange for (a) new Senior Convertible Debentures with a
stated interest rate of eight percent (8%) per year, a stated maturity value of $1,915,200, a conversion price of $.25 per share, subject to
adjustment, with a final maturity date of April 1, 2016 (the “2014 Exchange Debentures”), and (b) five (5) year warrants to purchase up to
7,660,830 shares of the Company’s common stock at an exercise price of $.275 per share (110% of the conversion price), subject to
adjustment (the “2014 Exchange Warrants”). Existing Debentures with a maturity value of $392,000 will be paid in accordance with the
original terms.
On April 10, 2014, the Company entered into a Securities Purchase Agreement (the “2014 SPA”) pursuant to which it issued
and sold (a) $2,080,500 (maturity value) in Senior Convertible Debentures for a subscription amount of $1,825,000, which have the same
terms as the 2014 Exchange Debentures, including a stated interest rate of eight percent (8%) per year and a conversion price of $.25 per
share, subject to adjustment, with a final maturity date of April 1, 2016 (the “2014 New Debentures” together with the 2014 Exchange
Debentures, the “2014 Debentures”) and (b) five (5) year warrants to purchase up to 8,322,000 shares of the Company’s common stock at an
exercise price of $.275 per share (110% of the conversion price), subject to adjustment (the “2014 New Warrants” together with the 2014
Exchange Warrants, the “2014 Warrants”). Holders of the 2014 Debentures are referred to in this Annual Report on Form 10-K as the “2014
Holders”.
The Exchange Agreement and the 2014 SPA trigger anti-dilution adjustments to the warrants issued on the Existing Debentures
based on a $.25 per share conversion price (adjusted from the original stated conversion price of $.43 per share), which reduces the exercise
price to $.25 per share and increases the number of shares issuable upon the exercise of these warrants to 8,288,000 shares.
At any time after April 10, 2014, (the “Original Issue Date”) until the 2014 Debentures are no longer outstanding, the 2014
Debentures shall be convertible, in whole or in part, into shares of Common Stock at the option of the 2014 Holders, subject to certain
conversion limitations set forth in the 2014 Debentures. The initial conversion price for the 2014 Debentures is $.25 per share, subject to
adjustments upon certain events, as set forth in the 2014 Debentures. The Company shall pay interest on the aggregate unconverted and then
outstanding principal amount of the 2014 Debentures at the rate of 8% per annum, payable quarterly on January 1, April 1, July 1 and
October 1, beginning on October 1, 2014. Interest is payable in cash or at the Company’s option in shares of Common Stock, provided
certain terms and conditions are met as more fully described in the 2014 Debentures. On each of October 1, 2015 and January 1, 2016, the
Company is obligated to redeem an amount equal to $ 998,925 and on April 1, 2016, an amount equal to $1,997,850, plus accrued but unpaid
interest, liquidated damages and any other amounts then owing in respect of the 2014 Debentures (as to each of the forgoing periodic
redemptions, each a “Periodic Redemption Amount”). In lieu of a cash redemption and subject to the Company meeting certain equity
conditions described in the 2014 Debentures, the Company may elect to pay the Periodic Redemption Amount in shares on the terms set
forth in the 2014 Debentures.
21
Upon any Event of Default (as defined in the Debenture), the outstanding principal amount of the Debenture, plus liquidated
damages, interest, a premium of 30% and other amounts owing in respect thereof through the date of acceleration, shall become, at the 2014
Holders’ election, immediately due and payable in cash. Commencing five days after the occurrence of any Event of Default, the interest
rate on the Debenture shall accrue at an interest rate equal to the lesser of 18% per annum or the maximum rate permitted under applicable
law. The 20014 Debentures contain anti-dilution protective provisions as described therein. The Company is subject to compliance with
certain covenants under the 2014 Debentures as set forth therein.
The 2014 Warrants may be exercised at any time on or after April 10, 2014 and on or prior to the close of business on April 10,
2019, at an exercise price of $.275 per share, subject to adjustment upon certain events. The 2014 Warrants contain anti-dilution protective
provisions and limitations on exercise as described therein.
To secure the Company’s obligations under the 2014 Debentures, the Company’s wholly-owned subsidiary, SG Building
Blocks, Inc. (“SG Building”), entered into a Subsidiary Guarantee, dated as of April 10, 2014 (the “Guarantee”), pursuant to which it
unconditionally and irrevocably guaranteed the prompt and complete payment and performance when due of the obligations arising from the
2014 Debentures. The Company and SG Building have each granted the 2014 Holders a security interest in their assets to secure the
payment, performance and discharge in full of all of the Company’s obligations under the 2014 Debentures and the guarantor’s obligations
under the Guarantee, in accordance with that certain Security Agreement, dated as of April 10, 2014.
With respect to the Existing Debenture, sold in 2012 and 2013, at any time after such issuance until the debentures are no
longer outstanding, the debentures are convertible, in whole or in part, into shares of Common Stock of the Company at the option of the
holder, subject to certain conversion limitations set forth in the Existing Debenture. The initial conversion price for the Existing Debenture
was $0.43 per share, subject to adjustments upon certain events, as set forth in the Existing Debenture. The Company shall pay interest on
the outstanding principal amount of the Debenture that has not been converted, at the rate of 8% per annum, payable quarterly on July 1,
October 1, January 1 and April 1, beginning on July 1, 2013. Interest is payable in cash or at the Company’s option in shares of Common
Stock, provided certain conditions are met, as described in the debenture. On each of April 1, 2014 and July 1, 2014, the Company is
obligated to redeem $196,000 and $196,000 respectively, (plus accrued but unpaid interest, liquidated damages and any other amounts then
owing in respect of the Debenture) (the “2012 Periodic Redemption Amount”). In lieu of a cash redemption and subject to the Company
meeting certain equity conditions described in the Debenture, the Company may elect to pay the 2012 Periodic Redemption Amount in
Common Stock on the terms set forth in the Existing Debentures. Upon any Event of Default (as defined in the Debenture), the outstanding
principal amount of the Debenture, plus liquidated damages, interest, a premium of 30% and other amounts owing in respect thereof, shall
become, at the holder’s election, immediately due and payable in cash. Commencing five days after the occurrence of any Event of Default,
the interest rate on the Debenture shall accrue at an interest rate equal to the lesser of 18% per annum or the maximum rate permitted under
applicable law. The Existing Debentures were extended in 2014 as described above.
The Company intends to raise additional funds in the future through a private placement of its senior convertible debentures.
The additional capital would be used to fund the Company’s operations, including the costs that it expects to incur as a public company. The
current level of cash and operating margins is not enough to cover the existing fixed and variable obligations of the Company, so increased
revenue performance and the addition of capital through issuances of securities are critical to the Company’s success. Assuming that the
Company is successful in its growth plans and development efforts, the Company believes that it will be able to raise additional funds
through sales of its stock. There is no guarantee that the Company will be able to raise such additional funds on acceptable terms, if at all.
These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern.
The Company’s financial statements do not include any adjustments relating to the recoverability and classification of recorded
asset amounts or the amounts and classification of liabilities that might be necessary should it be unable to continue as a going concern.
22
Off –Balance Sheet Arrangements
As of December, 2013 and 2012, the Company had no material off-balance sheet arrangements other than operating leases to
which SG Building is a party.
In the ordinary course of business, SG Building enters into agreements with third parties that include indemnification
provisions which, in its judgment, are normal and customary for companies in its industry sector. These agreements are typically with
consultants and certain vendors. Pursuant to these agreements, SG Building generally agrees to indemnify, hold harmless, and reimburse
indemnified parties for losses suffered or incurred by the indemnified parties with respect to actions taken or omitted by SG Building. The
maximum potential amount of future payments SG Building could be required to make under these indemnification provisions is unlimited.
SG Building has not incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. As a result, the
estimated fair value of liabilities relating to these provisions is minimal. Accordingly, SG Building has no liabilities recorded for these
provisions as of December 31, 2013.
Critical Accounting Policies and New Accounting Pronouncements
Critical Accounting Policies
Accounting Estimates. The preparation of consolidated financial statements in accordance with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect reported amounts and related disclosures in
the financial statements. Management considers an accounting estimate to be critical if it requires assumptions to be made that were
uncertain at the time the estimate was made, and changes in the estimate or different estimates that could have been selected could have a
material impact on our consolidated results of operations or financial condition. Significant areas which require the Company to make
estimates include revenue recognition, stock-based compensation and allowance for doubtful accounts.
Share-Based Payments. The Company measures the cost of services received in exchange for an award of equity instruments
based on the fair value of the award. For employees and directors, the fair value of the award is measured on the grant date and for non-
employees, the fair value of the award is generally re-measured on interim financial reporting dates and vesting dates until the service period
is complete. The fair value amount is then recognized over the period services are required to be provided in exchange for the award, usually
the vesting period. The Company recognizes stock-based compensation expense on a graded-vesting basis over the requisite service period
for each separately vesting tranche of each award. Stock-based compensation expense is reported within operating expenses in the
consolidated statements of operations.
Common stock purchase warrants and other derivative financial instruments. The Company classifies as equity any contracts
that (i) require physical settlement or net-share settlement or (ii) provides a choice of net-cash settlement or settlement in the Company’s own
shares (physical settlement or net-share settlement) providing that such contracts are indexed to the Company’s own stock. The Company
classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract if any
event occurs and if that event is outside the Company’s control) or (ii) gives the counterparty a choice of net-cash settlement of settlement
shares (physical settlement or net-cash settlement). The Company assesses classification of common stock purchase warrants and other free
standing derivatives at each reporting date to determine whether a change in classification between assets and liabilities or equity is required.
The Company’s free standing derivatives consist of warrants to purchase common stock that were issued to a placement agent
involved with the private offering memorandum as well as issuances of convertible debentures . The Company evaluated the common stock
purchase warrants to assess their proper classification in the consolidated balance sheet and determined that the common stock purchase
warrants feature a characteristic permitting cash settlement at the option of the holder. Accordingly, these instruments have been classified as
warrant liabilities.
Convertible instruments – The Company bifurcates conversion options from their host instruments and account for them as free
standing derivative financial instruments according to certain criteria. The criteria includes circumstances in which (a) the economic
characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of
the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at
fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur
and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.
The Company has determined that the embedded conversion options should be bifurcated from their host and a portion of the
proceeds received upon the issuance of the hybrid contract have been allocated to the fair value of the derivative. The derivative is
subsequently marked to market at each reporting date based on current fair value, with the changes in fair value reporting in results of
operations.
Revenue Recognition. The Company (through SG Building) accounts for its long-term contracts associated with the design,
engineering, manufacture and project management of building projects and related services, using the percentage-of-completion accounting
method. Under this method, revenue is recognized based on the extent of progress towards completion of the long-term contract.
Contract costs include all direct material and labor costs and those indirect costs related to contract performance. General and
administrative costs, marketing and business development expenses and pre-project expenses are charged to expense as incurred. Provisions
for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job
conditions and estimated profitability, including those arising from contract penalty provisions, and final contract settlements may result in
revisions to costs and income and are recognized in the period in which the revisions are determined. An amount equal to contract costs
attributable to claims is included in revenue when realization is probable and the amount can be reliably estimated.
23
The asset, “Costs and estimated earnings in excess of billing on uncompleted contracts,” represents revenue recognized in excess
of amounts billed. The liability, “Billings in excess of costs and estimated earnings on uncompleted contracts,” represents billing in excess of
revenue recognized.
SG Building offers a one-year warranty on completed contracts. SG Building has not incurred any losses to date and nor does it
anticipate incurring any losses for warranties that are currently outstanding. Accordingly no warranty reserve is considered necessary for any
of the periods presented.
SG Building also supplies repurposed containers to its customers. In these cases, SG Building serves as a supplier to its customers
for standard and made to order products that it sells at fixed prices. Revenue from these contracts is generally recognized when the products
have been delivered to the customer, accepted by the customer and collection is reasonably assured. Revenue is recognized upon completion
of the following: an order for product is received from a customer; written approval for the payment schedule is received from the customer
and the corresponding required deposit or payments are received; a common carrier signs documentation accepting responsibility for the unit
as agent for the customer; and the unit is delivered to the customer’s shipping point.
Amounts billed to customers in a sales transaction for shipping and handling are classified as revenue. Products sold are
generally paid for based on schedules provided for in each individual customer contract including upfront deposits and progress payments as
products are being manufactured.
Funds received in advance of meeting the criteria for revenue recognition are deferred and are recorded as revenue when they are
earned.
Related Party Transactions
ConGlobal Industries, Inc. is a minority stockholder of the Company and provides containers and labor on domestic projects.
The Company recognized Cost of Goods Sold of $1,595,468 and $1,044,354, for services ConGlobal Industries, Inc. rendered during the years
ended December, 31, 2013 and 2012, respectively. As of December 31, 2013 and 2012, $176,929 and $62,844, respectively, of such expenses
are included in related party accounts payable and accrued expenses in the accompanying consolidated balance sheets.
The Lawrence Group is a minority stockholder of the Company and is a building design, development and project delivery firm.
The Company recognized Cost of Goods Sold of $52,966 and $62,276 for services The Lawrence Group rendered during the year ended
December 31, 2013 and 2012, respectively. For the years ended December 31, 2013 and 2012, $27,629 and $37,233, respectively, of pre-
project expenses were included in related party accounts payable and accrued expenses in the accompanying consolidated balance sheet.
An affiliated accounting firm of the Company’s Chief Financial Officer provides accounting and consulting services to the
Company. The Company recognized General and Administrative expenses in the amount of $80,050 and $80,000 for the years ended
December 31, 2013 and 2012, respectively. As of December 31, 2013, $36,050 of such expenses are included in related party accounts payable
and accrued expenses on the accompanying consolidated balance sheet.
The Company has accrued certain reimbursable expenses of owners of the Company. Such expenses amounted to $2,779 for the
year ended December 31, 2012, and are included in related party accounts payable and accrued expenses in the accompanying consolidated
balance sheets.
Transactions with Vector
On March 26, 2009, the Company entered into a $50,000 revolving credit promissory note (the “Revolver”) with Vector Group
Ltd. (“Vector”), a principal stockholder of the Company. On January 26, 2011, the Company and Vector entered into an amendment to the
Revolver increasing the amount that the Company may borrow from $50,000 to $100,000. The loan bears interest at 11% per annum and
was due on December 31, 2013. During January 2014, the Revolver was extended from December 31, 2013 to June 30, 2015. As of
December 31, 2013 and 2012, the balance due to Vector amounted to $73,500. As of December 31, 2013 and 2012, accrued interest related to
the Revolver amounted to $28,636 and $20,439, respectively.
During November 2012, the Company received $10,000 from J. Bryant Kirland III for 28,572 shares of the Company’s
common stock.
Transactions with Ladenburg
During the first quarter of 2012, the Company engaged Ladenburg as its placement agent to conduct a best efforts private
placement of the Company’s common stock at a valuation of $0.35 per share (the 2012 Private Placement). In connection with the 2012
Private Placement, Ladenburg has and will receive compensation based on the following components: (a) a cash commission equal to 6% of
the aggregate purchase price of the shares sold to all investors at each closing (or a lesser percentage with respect to certain investors, as
agreed upon between the Ladenburg and the Company) and will be issued a five-year warrant to purchase shares of Common Stock of the
Company equal to nine percent (9%) of the total number of shares sold to all investors at such closing (or a lesser percentage in the event
certain investors invest, as agreed upon between Ladenburg and the Company), (b) the shares of Common Stock underlying the warrants
issued to the Ladenburg will have the same registration rights as the investors with respect to their shares and (c) at the initial closing, the
Company reimbursed Ladenburg for its reasonable expenses incurred in connection with the offering.
During November 2012, the Company received $10,500 from Richard J. Lampen for 30,000 shares of the Company’s common
stock. At that time, Mr. Lampen was a director of the Company, as well as President and Chief Executive Officer of Ladenburg.
On March 28, 2012, we received net proceeds of $433,608 from the 2012 Private Placement. On May 23, 2012, we received
additional proceeds of $208,575 from the 2012 Private Placement.
Mr. Lampen, who was a member of the Company’s Board of Directors until January 30, 2014, is the president and chief
executive officer of Landenburg’s parent company. Additionally, Vector beneficially owns approximately 8% of the Ladenburg Thalmann
Financial Services, Inc., the parent company and sole owner of Ladenburg.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our financial statements and the notes thereto, together with the report thereon of Marcum LLP dated April 15, 2014, appear
beginning on page F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
24
ITEM 9A. CONTROLS AND PROCEDURES (A) DISCLOSURE CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures.
Management, with the participation of our Principal Executive Officer and Principal Financial Officer, carried out an evaluation of the
effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934, as amended (the “Exchange
Act”)) Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Annual Report on Form 10-K (the “Evaluation Date”).
Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that, as of the Evaluation Date, our
disclosure controls and procedures are not effective to ensure that information required to be disclosed by us in the reports that we file or
submit under the Exchange Act (i) is recorded, processed, summarized and reported, within the time periods specified in the SEC rules and
forms and (ii) is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial
Officer, as appropriate to allow timely decisions regarding required disclosure.
Notwithstanding the conclusion that our disclosure controls and procedures were not effective as of the end of the period covered by this
Annual Report, the Principal Executive Officer and the Principal Financial Officer believe that the consolidated financial statements and other
information contained in this Annual Report present fairly, in all material respects, our business, financial condition and results of operations.
(b) Management’s Annual Report on Internal Control over Financial Reporting
Our management is also responsible for establishing and maintaining adequate internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). The Company’s internal control over financial reporting is designed to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles.
As of December 31, 2013, we carried out an assessment of the effectiveness of our internal control over financial reporting based on the
framework in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission
in 1992. Based on our evaluation, our management concluded that our internal control over financial reporting was not effective as of
December 31, 2013.
As of December 31, 2013, we had identified certain matters that constituted material weaknesses in our internal controls over financial
reporting, specific material weaknesses include the fact that we (i) have experienced difficulty in generating data in a form and format that
facilitates the timely analysis of information needed to produce accurate financial reports, (ii) have experienced difficulty in applying
complex accounting and financial reporting and disclosure rules required under GAAP and the SEC reporting regulations, and (iii) have
limited segregation of duties. We have taken certain steps in an effort to correct these material weaknesses, including hiring of a Chief
Financial Officer in 2011 who has significant experience with publicly held companies. Although this was an important step towards
improving the application of complex accounting principles, the preparation of financial reports and the segregation of duties, we still
believe we have not remediated our deficiencies. Because these remediation steps have not yet been completed, we have performed
additional analyses and other procedures to ensure that our consolidated financial statements contained in this Annual Report were prepared
in accordance with GAAP and applicable SEC regulations.
We believe that our weaknesses in internal control over financial reporting and our disclosure controls relate in part to the fact that SG
Building is a relatively small company with few employees. Our internal controls are still in a state of transition as we work diligently to
integrate and assimilate all of our operations and work to remedy the significant deficiencies that together constitute a material weakness in
our internal control over financial reporting.
This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to the exemption
provided to issuers that are neither “large accelerated filers” nor “accelerated filers” under the Dodd-Frank Wall Street Reform and Consumer
Protection Act.
(c) Changes in Internal Control over Financial Reporting
Notwithstanding our remedial actions and integration of our financial reporting systems, there was no change in our internal control over
financial reporting that occurred during the fourth quarter of 2013 that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
On April 10, 2014, the Company entered into an Exchange Agreement (the “Exchange Agreement”) with certain of the holders
of its existing Senior Convertible Debentures (the "Existing Debentures"). Under the terms of the Exchange Agreement, Existing Debentures
with a stated maturity value of $1,680,000 have been surrendered in exchange for (a) new Senior Convertible Debentures with a stated interest
rate of eight percent (8%) per year, a stated maturity value of $1,915,200, a conversion price of $.25 per share, subject to adjustment, with a
final maturity date of April 1, 2016 (the “2014 Exchange Debentures”), and (b) five (5) year warrants to purchase up to 7,660,830 shares of
the Company’s common stock at an exercise price of $.275 per share (110% of the conversion price), subject to adjustment (the “2014
Exchange Warrants”). Existing Debentures with a maturity value of $392,000 will be paid in accordance with the original terms.
On April 10, 2014, the Company entered into a Securities Purchase Agreement (the “2014 SPA”) pursuant to which it issued
and sold (a) $2,080,500 (maturity value) in Senior Convertible Debentures for a subscription amount of $1,825,000, which have the same
terms as the 2014 Exchange Debentures, including a stated interest rate of eight percent (8%) per year and a conversion price of $.25 per
share, subject to adjustment, with a final maturity date of April 1, 2016 (the “2014 New Debentures” together with the 2014 Exchange
Debentures, the “2014 Debentures”)and (b) five (5) year warrants to purchase up to 8,322,000 shares of the Company’s common stock at an
exercise price of $.275 per share (110% of the conversion price), subject to adjustment (the “2014 New Warrants” together with the 2014
Exchange Warrants, the “2014 Warrants”). Holders of the 2014 Debentures are referred to in this Annual Report on Form 10-K as the “2014
Holders”.
For additional information related to 2014 SPA and the transactions thereunder, see Note 20 in the Notes to Consolidated
Financial Statements included in Part IV of this Annual Report on Form 10-K.
25
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
The following table sets forth information regarding the members of the Board of Directors and the executive officers of SG
Blocks. Our directors are elected to serve until the next annual meeting of stockholders and serve until their respective successors have been
duly elected and qualified. Our executive officers are appointed by the Board of Directors and serve until their successors have been duly
appointed and qualified. Additional information regarding our directors and executive officers, including their business experience for the
past five years (and in some instances for prior years) and the key attributes, experience and skills that led the board of directors to conclude
that each person should serve as a director is set forth below.
Current Directors and Executive Officers
Name
Age
Year First Elected
Director
Position
Paul Galvin
Stevan Armstrong
J. Bryant Kirkland III
Joseph Tacopina
J. Scott Magrane
Christopher Melton
Brian Wasserman
Marc Bell
Frank Casano
Jennifer Strumingher
51
65
48
47
66
42
48
53
58
38
2011
2011
1998
2011
2011
2011
2012
2014
2014
—
Chief Executive Officer and Director
President, Chief Operating Officer and Director
Director
Director
Director
Director
Chief Financial Officer and Director
Director
Director
Chief Administrative Officer
J. Bryant Kirkland III has served as a director of the Company since November 1998 and served as the Company’s Vice
President, Chief Financial Officer, Secretary and Treasurer of the Company from January 1998 until his resignation from those positions
upon consummation of the Merger on November 4, 2011. Mr. Kirkland has served as a Vice President of Vector (NYSE: VGR) since 2001
and became Vice President, Treasurer and Chief Financial Officer of Vector on April 1, 2006. From November 1994 to December 2005,
Mr. Kirkland served in various financial capacities with New Valley Corporation. Mr. Kirkland served as Vice President, Treasurer and
Chief Financial Officer from January 1998 to December 2005. Mr. Kirkland also served as Chief Financial Officer of Ladenburg Thalmann
Financial Services Inc. (NYSE MKT: LTS) from June 2001 to October 2002. Mr. Kirkland received a Bachelor of Science in Business
Administration from the University of North Carolina in 1987 and a Masters of Business Administration from Barry University in December
2006. Mr. Kirkland is also a Certified Public Accountant licensed in the states of Florida, New York and North Carolina. Mr. Kirkland’s
pertinent experience, qualifications, attributes and skills include financial literacy and expertise.
26
Paul M. Galvin was appointed as a director and the Company’s Chief Executive Officer upon consummation of the Merger on
November 4, 2011. Mr. Galvin has served as the Chief Executive Officer of SG Building and its predecessor entity, SG LLC, since April
2009; and as a director of SG Building and its predecessor entity since January 2007. Mr. Galvin is a founder of SG LLC. Mr. Galvin has been
a managing member of TAG, an investment partnership formed for the purpose of investing in SG Building, since October 2007. Mr. Galvin
brings to SG Building over 20 years of experience developing and managing real estate including residential condominiums, luxury sales,
market rate and affordable rental projects. Prior to his involvement in real estate, he founded a non-profit organization that focused on public
health, housing and child survival, and where he served for over a decade in a leadership position. During that period Mr. Galvin designed,
developed, and managed emergency food and shelter programs through New York City’s Human Resources Administration and other Federal
and State entities. From November 2005 to June 2007, Mr. Galvin was Chief Operating Officer of Yucaipa Investments where he worked with
religious institutions that needed to monetize underperforming assets. There he designed and managed systems that produced highest and best
use analysis for hundreds of religious assets and used them to acquire and re-develop properties across the United States. Mr. Galvin holds a
B.S. in Accounting from LeMoyne College and a Master’s Degree in Social Policy from Fordham University. He was formerly an adjunct
professor at Fordham University’s Graduate School of Welfare. Mr. Galvin previously served for ten years on the Sisters of Charity
Healthcare System Advisory Board and six years on the Board of SentiCare, Inc. In 2011, the Council of Churches of New York recognized
Mr. Galvin with an Outstanding Business Leadership Award. Mr. Galvin’s pertinent experience, qualifications, attributes and skills include
managerial experience and the knowledge and experience he has attained in real estate industry.
Stevan Armstrong was appointed as a director and as the Company’s President and Chief Operating Officer upon consummation
of the Merger on November 4, 2011. Mr. Armstrong served as the President and Chief Operating Officer of SG Building since April 2009
and as a director of SG Building and its predecessor entity since January 2007. Mr. Armstrong is a founder of SG LLC. Prior to joining SG
Building, he was a minority partner (owner) and Chief Construction Officer for Stratford Companies, a large Senior Housing development
group, from 2003 until fully phasing out in March 2010, where he had complete responsibility for all engineering, design construction and
commissioning of over $250,000,000 of facilities over a three year period. Prior to that, he was Executive Vice President for Operations of
Hospital Affiliates Development Corp., a proprietary health care company specializing in the development of healthcare and senior care
projects both domestically and internationally. Mr. Armstrong managed the design and construction of healthcare and elderly care housing
projects in 40 states and 16 foreign countries with overall responsibility for operations. His background includes structural design engineering
for large-scale healthcare projects, project scheduling and management of developmental of construction budgets. He spent much of his early
career working on site as a field engineer and construction specialist. Mr. Armstrong served 30 years on active and reserve duty as a Civil
Engineering Corps Officer for the United States Navy, retiring as Assistant Chief of Staff for Operations for the Atlantic Seabees (Navy
Construction Battalions) both Active and Reserve based out of Norfolk Virginia with 8000 engineering and construction troops reporting to
headquarters. Mr. Armstrong was responsible for their operations both in the United States and worldwide. Mr. Armstrong holds a Bachelor of
Architectural Engineering from Penn State University and an M.S. in Engineering from George Washington University. Mr. Armstrong brings
extensive design, construction experience and engineering expertise to SG Building and his pertinent experience, qualifications, attributes and
skills include real estate and development expertise.
Joseph Tacopina was appointed as a director of the Company’s upon consummation of the Merger on November 4,
2011. Mr. Tacopina served as a director of SG Building and its predecessor entity from January 2008 until November 4, 2011. Mr. Tacopina
has been a managing member of TAG since October 2007. Mr. Tacopina founded the Law Offices of Joseph Tacopina, P.C. in 1994 and
continues to practice law at his firm. Since September 2009, he has also led the Talent Representation practice at Madison Avenue Sports and
Entertainment, a talent representation, marketing and advising firm. Mr. Tacopina is a member of the Federal Bar Council, the New York
Counsel of Defense Lawyers, and the Judicial Committee for the Association of the Bar of the City of New York. He also serves on the
Legislative Committee for the National Association of Criminal Defense Lawyers. Additionally, Mr. Tacopina volunteers his time as an
adjunct professor at Fordham Law School and lectures nationwide on a variety of legal issues. Mr. Tacopina is a graduate of Skidmore
College and the University of Bridgeport Law School. Mr. Tacopina’s pertinent experience, qualifications, attributes and skills include legal
and securities compliance.
27
J. Scott Magrane was appointed as a director of the Company’s upon consummation of the Merger on November 4,
2011. Mr. Magrane is a Managing Director at Coady Diemar Partners, an investment banking firm he co-founded in 2004. Prior to co-
founding Coady Diemar Partners, Mr. Magrane spent 15 years with Goldman Sachs & Co. where his responsibilities encompassed all manner
of corporate finance and strategic advisory activities. While at Goldman, he started the firm’s Energy Technology effort. Mr. Magrane began
his career and spent 10 years with Blyth Eastman Dillon & Co. and Paine Webber where he specialized in energy and power project finance.
Mr. Magrane holds a BA from the College of Wooster and an MBA from Wharton. Mr. Magrane has spent over 26 years advising power
related enterprises including energy technology companies, utilities, independent power companies, rural electric cooperatives and
governments. Mr. Magrane’s pertinent experience, qualifications, attributes and skills include corporate finance and strategic advisory
expertise.
Christopher Melton was appointed as a director of the Company’s upon consummation of the Merger on November 4,
2011. Mr. Melton has served on the board of directors of World Education and Development Fund, a non-profit organization that focuses on
education for underprivileged children in Latin America, since 2008 and as a director of Bestival Ltd, a music festival on the Isle of Wight UK,
since 2004. From 2000 to 2008, Mr. Melton was a Portfolio Manager for Kingdon Capital Management (“ Kingdon ”) in New York City
where he ran an $800 million book in media, telecom and Japanese investment. Mr. Melton opened Kingdon’s office in Japan where he set up
a Japanese research company. From 1997 to 2000, Mr. Melton served as a Vice President at JP Morgan Investment Management as an equity
research analyst, where he helped manage $500 million in REIT funds under management. Mr. Melton was a Senior Real Estate Equity
Analyst at RREEF Funds (“ RREEF ”) in Chicago from 1995 to 1997. RREEF is the real estate investment management business of
Deutsche Bank’s Asset Management division. Mr. Melton earned a BA in Political Economy of Industrial Societies from UC Berkeley in
1995. Mr. Melton’s pertinent experience, qualifications, attributes and skills include financial literacy and expertise, managerial experience
and the knowledge and experience he has attained through his services as a director of various companies and through his personal real estate
investment and development activities.
Brian Wasserman, CPA, has served as the Chief Financial Officer of the Company since consummation of the Merger on
November 4, 2011, pursuant to a consulting agreement, dated November 7, 2011 between the Company, BAW Holdings Corp. (“ BAW ”)
and Mr. Wasserman (the “ Wasserman Agreement ”). Mr. Wasserman was appointed as a director of the Company on May 23, 2012.
Although Mr. Wasserman will not devote all his professional time to serving as the Chief Financial Officer of the Company, he will devote as
much time as is necessary to fully and professionally perform his duties as the Company’s Chief Financial Officer. Mr. Wasserman served as
the Chief Financial Officer of SG Building pursuant to the Wasserman Agreement since June 2011. Mr. Wasserman served as Chief
Executive Officer of ContinuityX Solutions, Inc. from August 16, 2012 to February 7, 2013. Mr. Wasserman has been a Partner and a Director
of Forensic Services at Janover, LLC, a public accounting firm since January 2010 and the Chief Executive Officer of BAW, a financial
consulting business, since September 2005. Mr. Wasserman was a founder, the Chief Financial Officer and Treasurer of Newtek Business
Services, Inc. (“ Newtek ” — NASDAQ Symbol “NEWT”) from September 1997 through July 2005. Newtek is a direct distributor of a wide
range of business services and financial products to the small- and medium-sized business market under the Newtek brand. Newtek serves as a
“one-stop-shop” provider of business services to the small- and medium-sized business market. From 1992 thru 1997, Mr. Wasserman was
the Chief Financial Officer for a Wall Street investment banking firm, the General Partner of various investment limited partnerships and the
Treasurer of Engex, Inc., a publicly traded closed end mutual fund. Mr. Wasserman is a licensed New York State Certified Public Accountant
and holds a BS in Accounting from Lehigh University. From 1987 thru 1992, Mr. Wasserman worked for Coopers & Lybrand (now
PricewatershouseCoopers) and earned the title of Manager. Mr. Wasserman’s pertinent experience, qualifications, attributes and skills include
financial literacy expertise, managerial experience, as well as corporate finance and accounting expertise.
Marc Bell was appointed as a director of the Company on January 30, 2014. Mr. Bell has been the General Counsel and
Secretary of Vector since 1994, the Vice President of Vector since January 1998 and the Senior Vice President and General Counsel of Vector
Tobacco since April 2002. Since 1998, Mr. Bell has served as Vice President of New Valley Corporation, and its successor New Valley LLC.
Vector is a publicly traded holding company listed on NYSE that is primarily engaged in: (a) the manufacture and sale of cigarettes in the
United States through its Liggett Group LLC and Vector Tobacco Inc. subsidiaries, and (b) the real estate business through its New Valley
LLC subsidiary, which is seeking to acquire additional operating companies and real estate properties. New Valley LLC owns 70.59% of
Douglas Elliman Realty, LLC, which operates the largest residential brokerage company in the New York metropolitan area. Mr. Bell’s
pertinent experience, qualifications, attributes and skills include legal expertise and managerial experience and the knowledge gained through
his services as an officer and director or manager of various companies.
Frank Casano was appointed as a director of the Company on January 30, 2014. Mr. Casano has been the Principal and
Executive Vice President of Air City International Forwarding Group, a cargo transportation entity, for the past 30 years. Mr. Casano’s
pertinent experience, qualifications, attributes and skills include managerial experience and the knowledge gained through his service as an
executive of Air City International Forwarding Group.
Jennifer Strumingher was appointed as the Company’s Chief Administrative Officer upon consummation of the Merger on
November 4, 2011. Ms. Strumingher held various positions with SG Building and its predecessor entity since February 2008, and has served
as the Chief Administrative Officer of SG Building since March 2010 and as a director since April 2009. From May 2007 to February 2008,
Ms. Strumingher was involved in private real estate renovations. From November 2005 to May 2007, Ms. Strumingher worked for a boutique
contemporary knitwear company in brand positioning, sales and product marketing. Prior to that Ms. Strumingher was an Equity Sales
Manager for PaineWebber, Inc. from July 1996 to December 2000 where she communicated and marketed PaineWebber’s equity research to a
select group of Private Wealth Advisors. Additionally, Ms. Strumingher led conference calls, branch seminars and public speaking
engagement to create equity positions recommended by the firm. Ms. Strumingher holds a B.S. in Management and Marketing from
Binghamton University’s (State University of New York) School of Management.
28
Family Relationships
There are no family relationships among the Company’s existing or incoming directors or officers.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our officers and directors, and persons who own more than ten
percent of a registered class of our equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange
Commission (the "SEC"). Based solely on review of the copies of such forms furnished to us, or written representations that no Forms 5 were
required, we believe that, during and with respect to the fiscal year ended December 31, 2013, all officers and directors complied with
applicable Section 16(a) filing requirements.
Code of Ethics
We have adopted a Code of Ethics that applies to our two employees, our President and Chief Executive Officer and our Vice
President and Chief Financial Officer. We will provide, without charge, a copy of the Code of Ethics on the written request of any person
addressed to our Chief Financial Officer at SG Blocks, Inc., 3 Columbus Circle, 16th Floor, New York NY 10019.
Audit Committee
We currently have an audit committee consisting of J. Bryant Kirkland III, J. Scott Magrane and Christopher Melton each of
whom is an independent director. Mr. Kirkland is an “audit committee financial expert.” As we are not a “listed company” under the rules of
the SEC, we are not required to comply with the director independence requirements of any securities exchange, and we therefore utilize the
definition of “independent” set forth in Rule 10A-3 of the Exchange Act.
Nominating Committee and Stockholder-Director Communications
We do not have a nominating committee because our Board does not believe that a defined policy with regard to the
consideration of candidates recommended by stockholders is necessary at this time. Given the scope of the Company’s operations, our Board
believes a specific nominating policy would be premature and of little assistance until the Company’s business operations are at a more
advanced level.
Currently, the entire Board decides on nominees, on the recommendation of any member of the Board, followed by the Board’s
review of the candidates’ resumes and interviews of candidates. There has not been any defined policy or procedural requirements for
stockholders to submit recommendations or nomination for directors. However, the Board will consider suggestions from individual
stockholders, subject to evaluation of the person’s merits. Stockholders should communicate nominee suggestions directly to any of the Board
members, accompanied by biographical details and a statement of support for the nominees. The suggested nominee must also provide a
statement of consent to being considered for nomination. Although there are no formal criteria for nominees, the Board believes that persons
should be actively engaged in business endeavors, have a financial background, be familiar with acquisition strategies and money management
and be able to promote a diversity of views based on the person’s education, experience and professional employment. Based on the
information gathered, the Board then makes a decision on whether to recommend the candidates as nominees for director. The Company does
not pay any fee to any third party or parties to identify or evaluate or assist in identifying or evaluating potential nominees.
29
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth all compensation awarded to, paid to or earned by the following executive officers, for each of the
Company and SG Building, for the fiscal year ended December 31, 2013 and 2012: (i) individuals who served as, or acted in the capacity of,
the principal executive officers of the Company and SG Building for the fiscal year ended December 31, 2013; (ii) the two most highly
compensated executive officers of the Company and SG Building, other than the principal executive officer, who were serving as executive
officers at the end of the fiscal year ended December 31, 2013. No disclosure is made for any executive officer, other than the Principal
Executive Officer, whose total compensation did not exceed $100,000.
Name and Principal Position
Year
Salary
($)
Bonus
($)
Option
Awards
($)
All Other
Compensation
($)
Total
($)
SG Blocks, Inc.
Paul M. Galvin
current Chief Executive Officer (1)
Stevan Armstrong
current President and Chief Operating
Officer(2)
Brian Wasserman
current Chief Financial Officer
2013
2012
2013
2012
2013
2012
212,333
225,000
—
—
3,770(1(a))
206,000(1(b))
129,250
—
3,770(2(a))
140,100
—
2,796(2(b))
—
—
—
—
216,103
431,000
133,020
142,896
—
—
—
—
3,770
2,266
167,000(3(a))
155,000(3(b))
170,770
157,266
(1)
(2)
(3)
(a) On March 14, 2013, an option to purchase 50,000 shares of the Company’s common stock were granted to Mr. Galvin as
part of compensation for serving on the Board of the Company. The amounts shown represent the aggregate grant date fair
value of stock options granted to Mr. Galvin during 2013, as determined in accordance with ASC Topic 718.
(b) On January 2, 2012, an option to purchase 2,000,000 shares of the Company’s common stock were granted to Mr. Galvin as
part of direct compensation. Mr. Galvin was not granted any options in connection with this service on the Board. The amounts
shown represent the aggregate grant date fair value of stock options granted to Mr. Galvin during 2012, as determined in
accordance with ASC Topic 718.
(a) On March 14, 2013, an option to purchase 50,000 shares of the Company’s common stock were granted to Mr. Armstrong as
part of compensation for serving on the Board of the Company. The amounts shown represent the aggregate grant date fair value
of stock options granted to Mr. Galvin during 2013, as determined in accordance with ASC Topic 718.
(b) On March 21, 2012 and August 7, 2012, options to purchase an aggregate of 34,286 shares of the Company’s common stock
were granted to Mr. Armstrong a as compensation for serving on the Board of the Company. The number of options granted in
connection with service on the Board was determined by dividing $10,000 by the Fair Market Value (as defined in the 2011 Plan)
on the grant date ($0.50 and $0.35). Notwithstanding the calculation, the amounts shown represent the aggregate grant date fair
value of stock options granted to Mr. Armstrong during 2012, as determined in accordance with ASC Topic 718. See discussion
of the 2011 Director Options under the section titled “Compensation of Directors”.
(a) Amount reflects payments of $92,000 to BAW pursuant to the Wasserman Agreement (Mr. Wasserman is the Chief Executive
Officer of BAW, a financial consulting business), and payments of $75,000 to Janover, LLC, a public accounting firm that
provides various services to the Company. Mr. Wasserman is a Partner and a Director of Forensic Services at Janover, LLC.
(b) Amount reflects payments of $106,000 to BAW pursuant to the Wasserman Agreement (Mr. Wasserman is the Chief
Executive Officer of BAW, a financial consulting business), and payments of $49,000 to Janover, LLC, a public accounting firm
that provides various services to the Company. Mr. Wasserman is a Partner and a Director of Forensic Services at Janover, LLC.
30
Employment Contracts and Termination of Employment and Change-in-Control Arrangements
Prior to their expiration in October 2013, we were, through our principal operating subsidiary, SG Building, party to employment
agreements with Paul Galvin, our Chief Executive Officer, Stevan Armstrong, our President and Chief Operating Officer and Jennifer
Strumingher, our Chief Administrative Officer, each dated October 26, 2010 (the “SGB Employment Agreements”). Mr. Galvin’s agreement
is for a term of three (3) years with a base salary of $240,000 per year. As of June 1, 2012 Mr. Galvin’s base salary was decreased to $214,000
per year. Mr. Armstrong’s agreement is for a term of three (3) years with a base salary of $150,000 per year. As of June 1, 2012, Mr.
Armstrong’s base salary was decreased to $ 133,000 per year. Ms. Strumingher’s agreement is for a term of three (3) years with a base salary
of $100,000 per year. As of June 1, 2012, Ms. Strumingher’s base salary was decreased to $88,000 per year. Subsequently, in March 2013,
Ms. Strumingher’s base salary went back to $100,000 per year. In addition, each of the officers may be entitled to receive a discretionary
bonus as determined by our Board of Directors. All of the SGB Employment Agreements expired in accordance with their terms and the
Company is in the process of negotiating new agreements with Mr. Galvin and Ms. Strumingher.
It is anticipated that under the new employment arrangements, the cash compensation for: Mr Galvin will be $275,000 for the
first year and $300,000 for the second year; and for Ms. Strumingher will be $138,000 for the first year and $150,000 for the second year.
Wasserman Consulting Agreement
On November 7, 2011, we entered into the Wasserman Agreement with Mr. Wasserman and BAW, which provides for certain
consulting services to be provided by BAW and for Mr. Wasserman to serve as our Chief Financial Officer from November 7, 2011 until
November 7, 2014, unless the Agreement is terminated for “Cause” (as defined in the Wasserman Agreement). The Wasserman Agreement
provides that BAW will be paid $10,000 per month and for Mr. Wasserman will receive options to purchase 1,000,000 shares of Company
common stock at fair market value on the grant date ($0.20); one-third of which vest on the grant date, one-third vesting on November 7,
2012, and the remaining one-third vesting on November 7, 2013. As of June 1, 2012, BAW’s fee was reduced to $8,000 per month and as of
November 1, 2013, BAW’s fee was reduced to $6,000 per month. The Company is in the process of negotiating a new agreement with Mr.
Wasserman which will provide for cash compensation of $10,000 per month for the first year and $12,000 per month for the second year.
Stock Options
On July 27, 2011, in connection with the Merger, the Company obtained the written consent of holders of a majority of its
outstanding common stock approving the 2011 Incentive Stock Plan. The 2011 Plan covers up to 8,000,000 shares of common stock, and is
designed to enable us to offer our employees, officers, directors, consultants and advisors whose services are considered valuable an
opportunity to acquire an interest in the Company, to encourage a sense of proprietorship in the Company and to stimulate the active interest of
such persons in the development and financial success of the Company and its subsidiaries. The various types of incentive awards that may be
provided under the 2011 Plan (including options, restricted stock, and stock appreciation rights) are intended to enable us to respond to
changes in compensation practices, tax laws, accounting regulations and the size and diversity of its business. All of our officers, directors,
employees, consultants and advisors, as well as those of its subsidiaries, are eligible to be granted awards under the 2011 Plan. An incentive
stock option may be granted under the 2011 Plan only to a person who, at the time of the grant, is an employee of the Company or its
subsidiaries. The 2011 Plan expires on July 26, 2021 and is administered by the Company’s Board.
During the year ended December 31, 2012, the Company’s board of directors approved the issuance of up to an additional
2,000,000 shares of the Company’s Common Stock in the form of restricted stock or options. These options generally have the same terms
and conditions as those provided under the 2011 Plan, however, the authorization of these options is not subject to shareholder approval. The
issuance of these options will be approved by the Company’s board of directors on a case-by-case basis.
During November 2013, the Company’s board of directors approved the 2013 Stock Plan. The 2013 Stock Plan has not been
approved by the Company’s stockholders. The 2013 Stock Plan covers up to 2,000,000 shares of common stock, and all officers, directors,
employees, consultants and advisors are eligible to be granted awards under the 2013 Stock Plan. The 2013 Stock Plan is administered by the
Company’s board of directors.
2013 Option Grants
On March 14, 2013, the Company granted 487,500 options to purchase common stock to executives and directors of the
Company. (the “March Options”) One third of the March Options vest upon grant, the second third vests on the first anniversary of the grant
date, and the remaining third vests on the second anniversary of the grant date. 150,000 of the August Options were granted under the 2011
Plan at fair market value. The remaining 337,500 of the March Options were approved by the Company’s board.
31
Outstanding Equity Awards at Fiscal Year End
Name
Paul M. Galvin
Current Chief Executive Officer
Stevan Armstrong
Current President and Chief Operating Officer
Brian Wasserman
Current Chief Financial Officer
Number of
securities
underlying
unexercised
options (#)
unexercisable
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
Option
Vest
Date(1)
Option
Exercise
Price
($)
Option
Expiration
Date
666,666
666,666
666,667
666,667
16,667
666,667
116,666
6,666
4,762
116,667
16,667
6,667
4,762
116,667
333,334
4,762
333,333
16,667
4,762
333,333
11/7/2011
1/2/2012
11/7/2012
1/2/2013
3/14/2013
11/7/2013
3/14/2014
1/2/2014
3/14/2015
11/7/2011
3/20/2012
8/7/2012
11/7/2012
3/14/2013
3/20/2013
8/7/2013
11/7/2013
3/14/2014
3/20/2014
8/7/2014
3/14/2015
11/7/2011
8/7/2012
11/7/2012
3/14/2013
8/7/2013
11/7/2013
3/14/2014
8/7/2014
3/14/2015
32
16,667
666,667
16,666
16,667
6,667
4,762
16,666
16,667
4,762
16,666
0.2 11/6/2021
0.75 1/1/2022
0.2 11/6/2021
0.75 1/1/2022
0.43 3/13/2022
0.2 11/6/2021
0.43 3/13/2022
0.75 1/1/2022
0.43 3/13/2022
0.2 11/6/2021
0.5 3/19/2022
0.35 8/6/2022
0.2 11/6/2021
0.43 3/13/2022
0.5 3/19/2022
0.35 8/6/2022
0.2 11/6/2021
0.43 3/13/2022
0.5 3/19/2022
0.35 8/6/2022
0.43 3/13/2022
0.2 11/6/2021
0.35 8/6/2022
0.2 11/6/2021
0.43 3/13/2022
0.35 8/6/2022
0.2 11/6/2021
0.43 3/13/2022
0.35 8/6/2022
0.43 3/13/2022
Compensation of Directors
Director Compensation Table
The table below summarizes the compensation paid by us to directors for the fiscal year ended December 31, 2013.
Name
Richard J. Lampen*
J. Bryant Kirkland III
Magrane
Melton
Tacopina
Galvin
Armstrong
Wasserman
Option
Awards $ (1)
Fees Earned
or
Paid in
Cash ($)
Total ($)
3,770(2)
4,713(2)
4,713(2)
4,713(2)
3,770(2)
—
—
—
—
—
3,770
4,713
4,713
4,713
3,770
(3)
(3)
(3)
* Mr. Lampen resigned from our Board of Directors effective 2014.
(1)
(2)
The amounts shown represent the aggregate grant date fair value of stock options granted during 2013, as determined in
accordance with ASC Topic 718.
Following the effective date of the Merger, each director who was appointed to the Board, or continued to serve on the Board,
received options in lieu of an annual retainer. On March 14, 2013, the Company’s Compensation/Stock Option Committee
granted options to purchase 50,000 shares of Company common stock to Armstrong, Tacopina and Lampen, in connection with
their service on the Board of Directors; and granted options to purchase 62,500 shares of Company common stock to Kirkland,
Magrane and Melton, in connection with their service on the Board of Directors. The March 14, 2013 option grants to Armstrong
were made pursuant to the 2011 Plan. The March 14, 2013 option grants to Lampen, Kirkland, Magrane and Tacopina were made
pursuant to board approval.
(3)
The compensation arrangements for Galvin, Armstrong and Wasserman are disclosed in the Summary Compensation Table.
We also reimburse the directors for reasonable travel expenses incurred in connection with their activities on the Company’s behalf.
33
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The following table sets forth the number of shares of common stock beneficially owned as of March 25, 2014 by (i) those
persons or groups known to beneficially own more than 5% of Company common stock, (ii) each current director and executive officer of the
Company and (iii) all executive officers and directors as a group. The information is determined in accordance with Rule 13d-3 promulgated
under the Exchange Act. Except as indicated below, the stockholders listed possess sole voting and investment power with respect to their
shares. Except as otherwise indicated in the table below, the business address of each individual or entity is 3 Columbus Circle, 16 th Floor,
New York NY 10019.
Name of Beneficial Owner
5% or Greater Stockholders
Vector Group Ltd.(8)
Tag Partners, LLC (4)
SMA Development Group, LLC (5)
Directors and Named Executive Officers
Paul Galvin(3)(4)(11)
Joseph Tacopina(3)(4)(12)
Stevan Armstrong(3)(5)(13)
J. Scott Magrane(3)(6)(14)
Christopher Melton(3)(7)(15)
J. Bryant Kirkland III (8)(9)(16)
Brian Wasserman(3)(17)
Marc Bell (8)
Frank Casano (10)
Jennifer Strumingher (3)(18)
All executive officers and directors as a group (10 persons)
*
Less than 1%.
34
Number of
Shares(1)
Percent of
Class(2)
3,508,519
2,658,127
3,327,266
6,691,459
2,770,985
3,740,124
550,777
495,978
189,522
1,257,144
8.1%
6.1%
7.7%
15.5%
6.4%
8.7%
1.3%
1.1%
*
2.9%
0
*
1,041,861
362,858
15,031,270
2.4%
*
34.8%
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Unless otherwise indicated, includes shares owned by a spouse, minor children and relatives sharing the same home, as well as
entities owned or controlled by the named person. Also includes options and warrants to purchase shares of common stock
exercisable within sixty (60) days. Unless otherwise noted, shares are owned of record and beneficially by the named person.
Based on 43,273,093 shares of common stock outstanding on March 25, 2014.
Paul Galvin, Joseph Tacopina, Stevan Armstrong, J. Scott Magrane and Christopher Melton were appointed as directors upon
consummation of the Merger on November 4, 2011. Additionally, Mr. Galvin was appointed as Chief Executive Officer,
Mr. Armstrong was appointed as President and Chief Operating Officer, Brian Wasserman was appointed as Chief Financial
Officer and Ms. Strumingher was appointed as Chief Administrative Officer, all upon consummation of the Merger on November
4, 2011.
Includes 2,658,127 shares held by Tag Partners, LLC (“TAG”), an investment partnership formed for the purpose of investing in
SG Building (other partners include employees of SG Building). Paul Galvin and Joseph Tacopina are managing members of, and
have a controlling interest in, TAG. Each of Messrs. Galvin and Tacopina may be deemed to beneficially own the shares of
common stock owned by TAG. Each of Messrs. Galvin and Tacopina specifically disclaims beneficial ownership of the shares of
common stock held by TAG, except to the extent of each of their pecuniary interest therein, and this shall not be deemed to be an
admission that Messrs. Galvin and Tacopina are the beneficial owner of such shares of common stock.
Includes 3,327,266 shares held by SMA Development Group, LLC, an entity controlled by Mr. Armstrong. Mr. Armstrong
specifically disclaims beneficial ownership of the shares of common stock held by SMA Development Group, LLC, except to the
extent of his pecuniary interest therein, and this shall not be deemed to be an admission that Mr. Armstrong is the beneficial
owner of such shares of common stock. The business address for SMA Development Group, LLC is 912 Bluff Road -
Brentwood, TN 37027.
Includes 409,708 shares held by Two Lake, LLC, an entity controlled by Mr. Magrane. Mr. Magrane specifically disclaims
beneficial ownership of the shares held by Two Lake, LLC except to the extent of his pecuniary interest therein, and this shall not
be deemed an admission that Mr. Magrane is the beneficial owner of such shares of stock.
Includes 194,909 shares held by Mr. Melton. Does not include shares held by TAG. Mr. Melton and Ms. Strumingher each has a
membership interest in TAG. Mr. Melton and Ms. Strumingher each specifically disclaims beneficial ownership of the shares of
common stock held by TAG, except to the extent of their pecuniary interest therein, and this shall not be deemed to be an
admission that either Mr. Melton or Ms. Strumingher is a beneficial owner of such shares of common stock.
J. Bryant Kirkland III, a director of the Company, serves as Vice President, Treasurer and Chief Financial Officer of
Vector. Marc Bell has been the General Counsel and Secretary of Vector since 1994 and the Vice President of Vector since
January 1998. Neither Mr. Kirkland nor Mr. Bell has investment authority or voting control over the 3,508,519 shares of
Common Stock owned by Vector. The business address for Vector is 4400 Biscayne Boulevard, 10 th Floor, Miami, Florida
33137. Based upon a Schedule 13D filed on December 1, 2011 with the SEC by Vector, the other executive officers and
directors of Vector are:
Howard M. Lorber
Marc N. Bell
Ronald J. Bernstein
Stanley S. Arkin
Henry C. Beinstein
Bennett S. LeBow
Jeffrey S. Podell
Jean E. Sharpe
Director; President and Chief Executive Officer
Vice President, Secretary and General Counsel
Director
Director
Director
Director, Chairman of the Board
Director
Director
35
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
Does not include shares of common stock held by Vector, as Mr. Kirkland nor Mr. Bell has no investment authority or voting
control over the securities owned by Vector.
On April 24, 2013, the Company issued and sold to Mr. Casano: (a) $448,000 in 8% Original Issue Discount Senior Secured
Convertible Debentures due July 1, 2014, for a subscription amount of $400,000 (the “Casano Debenture”), and (b) a common
stock purchase warrant (the “Casano Warrant”) to purchase up to 1,041,861 shares of Common Stock for $0.4488 per share,
subject to adjustments upon certain events. The initial conversion price for the Casano Debenture is $0.43 per share, subject to
adjustments upon certain events, as set forth in the Debenture. If the Casano Debenture is converted and the Casano Warrant is
exercised, Mr. Casano would hold 1,041,861 shares.
Includes 3,350,000 shares that Mr. Galvin has the right to acquire at within 60 days upon exercise of stock options.
Includes 89,524 shares that Mr. Tacopina has the right to acquire at within 60 days upon exercise of stock options.
Includes 389,524 shares that Mr. Armstrong has the right to acquire at within 60 days upon exercise of stock options.
Includes 111,904 shares that Mr. Magrane has the right to acquire at within 60 days upon exercise of stock options.
Includes 111,904 shares that Mr. Melton has the right to acquire at within 60 days upon exercise of stock options.
Includes 111,904 shares that Mr. Kirkland has the right to acquire at within 60 days upon exercise of stock options.
Includes 1,016,190 shares that Mr. Wasserman has the right to acquire at within 60 days upon exercise of stock options.
Includes 339,524 shares that Ms. Strumingher has the right to acquire at within 60 days upon exercise of stock options.
Equity Compensation Plan Information
On July 27, 2011, in connection with the Merger, we obtained the written consent of holders of a majority of our outstanding
common stock approving the 2011 Incentive Stock Plan. The 2011 Plan covers up to 8,000,000 shares of common stock, and is designed to
enable us to offer our employees, officers, directors, consultants and advisors whose services are considered valuable an opportunity to acquire
an interest in the Company, to encourage a sense of proprietorship in the Company and to stimulate the active interest of such persons in the
development and financial success of the Company and its subsidiaries. Also, during the year ended December 31, 2012, the Company’s
board of directors approved the issuance of up to an additional 2,000,000 shares of the Company’s common stock in the form of restricted
stock or options. These options generally have the same terms and conditions as those provided under the 2011 Plan, however, the
authorization of these options is not subject to shareholder approval. The issuance of these options will be approved by the Company’s board
of directors on a case-by-case basis. During November 2013, the Company’s board of directors also approved the 2013 Stock Plan. The 2013
Stock Plan covers up to 2,000,000 shares of the Company’s common stock. The 2013 Stock an is administered by the Company’s board of
directors. In addition to the options granted to our Directors and Executive Officers, described in the section entitled “Executive Compensation
- 2013 Option Grants”, the Company has also granted 525,000 options to employees and consultants during the period covered by this Annual
Report on Form 10-K. The aggregate number of options granted during the period covered by this Annual Report on Form 10-K is 1,012,500.
36
As of December 31, 2013, there were 3,928 shares of common stock remaining available for future issuance under the 2011 Plan,
1,600,000 shares of common stock available for future issuance under the 2013 Stock Plan and 66,071 available for future issuances under the
board’s additional approval.
Securities Authorized for Issuance Under Equity Compensation Plans.
Number of
securities
remaining
available for
future
issuance
under equity
compensation
plans
(excluding
securities
reflected in
column (a))
(c)
Number of
securities to
be issued
upon
exercise of
outstanding
options,
warrants
and rights
(a)
Weighted-
average
exercise price
of
outstanding
options,
warrants and
rights
(b)
7,996,072 $
2,333,929 $
10,330,001
0.36
0.34
3,928
1,666,071
1,669,999
Plan category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Transactions with Related Persons
Transactions with Vector
On March 26, 2009, the Company entered into a $50,000 revolving credit promissory note (the “Revolver”) with Vector Group
Ltd. (“Vector”), a principal stockholder of the Company. On January 26, 2011, the Company and Vector entered into an amendment to the
Revolver increasing the amount that the Company may borrow from $50,000 to $100,000. The loan bears interest at 11% per annum and
was due on December 31, 2013. During January 2014, the Revolver was extended from December 31, 2013 to June 30, 2015. As of
December 31, 2013 and 2012, the balance due to Vector amounted to $73,500. As of December 31, 2013 and 2012, accrued interest related to
the Revolver amounted to $28,636 and $20,439, respectively.
Transactions with Ladenburg
During the first quarter of 2012, the Company engaged Ladenburg as its placement agent to conduct a best efforts private
placement of the Company’s common stock at a valuation of $0.35 per share (the 2012 Private Placement). In connection with the 2012
Private Placement, Ladenburg received compensation based on the following components: (a) a cash commission equal to 6% of the aggregate
purchase price of the shares sold to all investors at each closing (or a lesser percentage with respect to certain investors, as agreed upon
between the Ladenburg and the Company) and was issued a five-year warrant to purchase shares of Common Stock of the Company equal to
nine percent (9%) of the total number of shares sold to all investors at such closing (or a lesser percentage in the event certain investors invest,
as agreed upon between Ladenburg and the Company), (b) the shares of Common Stock underlying the warrants issued to the Ladenburg will
have the same registration rights as the investors with respect to their shares and (c) at the initial closing, the Company reimbursed Ladenburg
for its reasonable expenses incurred in connection with the offering.
On March 28, 2012, we received net proceeds of $433,608 from the 2012 Private Placement. On May 23, 2012, we received
additional proceeds of $208,575 from the 2012 Private Placement.
Additionally, Vector beneficially owns approximately 8% of the Ladenburg Thalmann Financial Services, Inc., the parent
company and sole owner of Ladenburg.
37
Director Independence and Board Committees
As we are not a “listed company” under SEC rules, we are not required to comply with the director independence requirements of
any securities exchange, we currently utilize the definition of “independent” set forth in Rule 10A-3 of the Exchange Act. We believe that
Kirkland, Tacopina, Magrane and Melton are independent under Rule 10A-3 of the Exchange Act.
We currently have an audit committee consisting of J. Bryant Kirkland III, J. Scott Magrane and Christopher Melton each of
whom is an independent director. Mr. Kirkland is an “audit committee financial expert.”
As the Company is not a “listed company” under the rules of the SEC, we are not required to have a compensation
committee. Furthermore, we do not believe it is necessary for the Board of Directors to have a separately designated lead director, because the
volume of matters that came before the Board of Directors for consideration permits all directors to give sufficient time and attention to such
matters to be involved in all decision making. Notwithstanding the foregoing, we have established a Compensation/Stock Option Committee
consisting of Kirkland, Magrane and Melton, which is responsible for reviewing and approving all stock option grants.
The Board of Directors does not have a nominating committee because the Board of Directors does not believe that a defined
policy with regard to the consideration of candidates recommended by stockholders is necessary at this time. Given the scope of our
operations, the Board of Directors believes a specific nominating policy would be premature and of little assistance until our business
operations are at a more advanced level. Currently, the entire Board of Directors decides on nominees, on the recommendation of any
member of the Board of Directors, followed by a review by the Board of Directors of the candidates’ resumes and interviews of candidates.
The Board of Directors is responsible for overseeing risk management, and receives reports from management periodically.
38
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The Audit Committee reviews and approves audit and permissible non-audit services performed by the Company’s independent
registered public accounting firm, as well as the fees charged for such services. Marcum LLP has served as the Company’s independent
registered public accounting firm since November 8, 2011 and has been selected as the Company’s independent registered public accounting
firm for the year ending December 31, 2014. The appointment of Marcum LLP as our independent registered public accounting firm was
approved by the Audit Committee. In our review of non-audit service fees and our appointment of Marcum LLP as our independent
accountants, the Audit Committee considered whether the provision of such services is compatible with maintaining Marcum LLP
independence. All of the services provided and fees charged by Marcum LLP were pre-approved by the Audit Committee.
Audit Fees. The aggregate fees billed by Marcum LLP for professional services rendered were $115,500 and $103,500 for the
audits of the Company’s annual financial statements for the fiscal years ended December 31, 2013 and 2012, respectively, which services
included the cost of the reviews of the consolidated financial statements for the fiscal years ended December 31, 2013 and 2012, and other
periodic reports for each respective year.
Audit-Related Fees. The aggregate fees billed by Marcum LLP for professional services categorized as Audit-Related Fees
rendered was $0 and $7,500 for the years ended December 31, 2013 and 2012, respectively.
Tax Fees. There were no fees billed by Marcum LLP during the last two fiscal years for professional services rendered for tax
compliance, tax advice and tax planning.
All Other Fees. Other than the services described above, the aggregate fees billed for services rendered by Marcum LLP were
$0, for each of the fiscal years ended December 31, 2013 and 2012.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) INDEX TO 2013 CONSOLIDATED FINANCIAL STATEMENTS:
Our financial statements and the notes thereto, together with the report thereon of Marcum LLP dated April 15, 2014, appear
beginning on page F-1 of this Annual Report. See Index at page F-1 to Consolidated Financial Statements included in Part IV of this Annual
Report.
(a)(3) EXHIBITS
The information required by this Item is listed in the Exhibit Index of this Annual Report on Form 10-K.
39
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
SG BLOCKS, INC.
(Company)
By: /s/ Paul M. Galvin
Paul M. Galvin
Date: April 15, 2014
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below does hereby constitute and
appoint jointly and severally, Paul Galvin and Brian Wasserman, or either of them, with full power of substitution and full power to act
without the other, his or her true and lawful attorney-in-fact and agent to act for him or her in his or her name, place and stead, in any and all
capacities, to sign any or all amendments to this report, and to file each of the same, with all exhibits thereto, and other documents in
connection therewith or herewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises in
order to effectuate the same as fully, to all intents and purposes, as they, he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the Company and in the capacities and on the date indicated.
Signature
Title
Date
/s/ Paul M. Galvin
Paul M. Galvin
Chief Executive Officer and Chairman of the
April 15, 2014
Board
(Principal Executive Officer)
/s/ Brian Wasserman
Chief Financial Officer (Principal Financial
April 15, 2014
Brian Wasserman
/s/ Stevan Armstrong
Stevan Armstrong
/s/ J. Bryant Kirkland III
J. Bryant Kirkland III
/s/ Joseph Tacopina
Joseph Tacopina
/s/ J. Scott Magrane
J. Scott Magrane
/s/ Christopher Melton
Christopher Melton
/s/ Marc Bell
Marc Bell
/s/ Frank Casano
Frank Casano
Officer and
Principal Accounting Officer) and Director
President, Chief Operating Officer and Director
April 15, 2014
Director
Director
Director
Director
Director
Director
40
April 15, 2014
April 15, 2014
April 15, 2014
April 15, 2014
April 15, 2014
April 15, 2014
INDEX TO EXHIBITS
The exhibit number, description and sequential page number in the original copy of this document where exhibits can be found as
follows:
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibit
Number Description of Exhibits
2.1
Merger Agreement and Plan of Reorganization, dated July 27, 2011, by and among CDSI Holdings Inc., CDSI Merger Sub, Inc.,
SG Blocks, Inc. and Certain Stockholders of SG Blocks, Inc. Incorporated herein by reference to Exhibit 2.01 to the Current
Report on Form 8-K as filed by SG Blocks, Inc. (fka CDSI Holdings Inc.) with the Securities and Exchange Commission on
August 2, 2011.
Amended and Restated Certificate of Incorporation of SG Blocks, Inc. (fka CDSI Holdings Inc.). Incorporated herein by
reference to Exhibit 3.01 to the Current Report on Form 8-K as filed by SG Blocks, Inc. (fka CDSI Holdings Inc.) on November
10, 2011.
Amended and Restated Bylaws of SG Blocks, Inc. (fka CDSI Holdings Inc.). Incorporated herein by reference to Exhibit 3.2 to
the Company’s Registration Statement on Form SB-2A filed on May 05, 2009.
Revolving Credit Promissory Note, dated as of March 26, 2009, by and between Vector Group Ltd., Lender, and CDSI Holdings
Inc., as borrower. Incorporated herein by reference to Exhibit 4.1 to the Annual Report on Form 10-K for the year ended
December 31, 2008.
Amendment, dated as of January 26, 2011, to the Revolving Credit Promissory Note between Vector Group Ltd., Lender, and
CDSI Holdings Inc., as borrower. (4) Incorporated herein by reference to Exhibit 4.1 to the Current Report on Form 8-K as filed
by SG Blocks, Inc. (fka CDSI Holdings Inc.) on January 27, 2011.
Warrant issued by SG Blocks, Inc. to Ladenburg Thalmann & Co. Inc. on November 4, 2011. Incorporated herein by reference to
Exhibit 4.3 to the Company’s Annual Report on Form 10-k for the fiscal year ended December 31, 2011.
Warrant issued by SG Blocks, Inc. to Ladenburg Thalmann & Co. Inc. on March 28, 2012. Incorporated herein by reference to
Exhibit 4.3 to the Company’s Annual Report on Form 10-k for the fiscal year ended December 31, 2011.
8% Original Issue Discount Secured Convertible Debentures issued to Hillair Capital Investments, L.P. Incorporated herin by
reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed January 3, 2013.
Common Stock Purchase Warrant, dated December 27, 2012, granted to Hillair Capital Investments, L.P. Incorporated herin by
reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K, filed January 3, 2013.
Form of Original Issue Discount Secured Convertible Debentures issued to additional investors. Incorporated herein by reference
to Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed January 14, 2013.
Form of Common Stock Purchase Warrants issued to additional investors. Incorporated herein by reference to Exhibit 4.8 to the
Company’s Current Report on Form 8-K, filed January 14, 2013.
Form of Original Issue Discount Secured Convertible Debentures issued to additional investors. Incorporated herein by reference
to Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed April 30, 2013.
Form of Common Stock Purchase Warrants issued to additional investors. Incorporated herein by reference to Exhibit 4.2 to the
Company’s Current Report on Form 8-K, filed April 30, 2013.
Form of Original Issue Discount Senior Secured Convertible Debentures Due April 1, 2016, issued to investors pursuant to the
Exchange Agreement, dated April 10, 2014, between the Company and such investors.
Form of Common Stock Purchase Warrants issued to investors pursuant to the Exchange Agreement, dated April 10, 2014,
between the Company and such investors.
Form of Original Issue Discount Senior Secured Convertible Debentures issued to investors pursuant to the Securities Purchase
Agreement, dated April 10, 2014, between the Company and such investors.
Form of Common Stock Purchase Warrants issued to investors pursuant to the Securities Purchase Agreement, dated April 10,
2014, between the Company and such investors.
2011 Incentive Stock Plan, incorporated herein by reference to Exhibit 4.1 to the Current Report on Form 8-K as filed by SG
Blocks, Inc. (fka CDSI Holdings Inc.) with the Securities and Exchange Commission on August 2, 2011.
Form of Company Indemnification Agreement dated, November 7, 2011, between SG Blocks, Inc. and each of Paul Galvin,
Joseph Tacopina, Stevan Armstrong, J. Scott Magrane, Christopher Melton, J. Bryant Kirkland III, Richard J. Lampen, Jennifer
Strumingher, and Brian Wasserman. Incorporated herein by reference to Exhibit 10.02 to the Current Report on Form 8-K as
filed by SG Blocks, Inc. (fka CDSI Holdings Inc.) on November 10, 2011.
Employment Agreement, dated October 26, 2010, between Paul Galvin and SG Building Blocks, Inc. (fka SG Blocks,
Inc.). Incorporated herein by reference to Exhibit 10.03 to the Current Report on Form 8-K as filed by SG Blocks, Inc. (fka CDSI
Holdings Inc.) on November 10, 2011.
Employment Agreement, dated October 26, 2010, between Stevan Armstrong and SG Building Blocks, Inc. (fka SG Blocks,
Inc.). Incorporated herein by reference to Exhibit 10.04 to the Current Report on Form 8-K as filed by SG Blocks, Inc. (fka CDSI
Holdings Inc.) on November 10, 2011.
Employment Agreement, dated October 26, 2010, between Jennifer Strumingher and SG Building Blocks, Inc. (fka SG Blocks,
Inc.). Incorporated herein by reference to Exhibit 10.05 to the Current Report on Form 8-K as filed by SG Blocks, Inc. (fka CDSI
Holdings Inc.) on November 10, 2011.
Consulting Agreement, dated November 7, 2011 between SG Blocks, Inc., BAW Holdings Corp. and Brian
Wasserman. Incorporated herein by reference to Exhibit 10.06 to the Current Report on Form 8-K/A as filed by SG Blocks, Inc.
(fka CDSI Holdings Inc.) on December 20, 2011.
Form Option Grant Letter for Employees, entered into between SG Blocks, Inc. and each of Paul Galvin, Stevan Armstrong and
Jennifer Strumingher.
Form Option Grant Letter for Non-Employee Directors and Consultants, entered into between SG Blocks, Inc. and each of Joseph
Tacopina, J. Scott Magrane, Christopher Melton, J. Bryant Kirkland III, Richard J. Lampen, and Brian Wasserman.
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11+
4.12+
4.13+
4.14+
10.1*
10.2
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
41
Exhibit
Number
10.9**
10.10
10.10
10.11
10.12
10.13
10.14
10.15
10.16+
10.17+
10.18+
Description of Exhibits
Collaboration and Supply Agreement, dated July 23, 2007, between SGBlocks, LLC (now known as SG Building, Inc.) and
ConGlobal Industries, Inc. Incorporated herein by reference to Exhibit 10.7 to the Current Report on Form 8-K/A as filed by
SG Blocks, Inc. (fka CDSI Holdings Inc.) on January 13, 2012.
Form of Subscription/Registration Rights Agreement between the Company and each of J. Bryant Kirkland III, effective as of
May 24, 2012; and Christopher Melton and Brian A. Wasserman, effective as of March 27, 2012. Incorporated herein by
reference to Exhibit 10.7 to the Current Report on Form 8-K/A as filed by SG Blocks, Inc. (fka CDSI Holdings Inc.) on May
31, 2012.
Form Subsidiary Guarantee, dated December 27, 2012. Incorporated herein by reference to Exhibit 10.4 to the Company’s
Current Report on Form 8-K, filed January 3, 2013.
Form Security Agreement, dated December 27, 2012. Incorporated herein by reference to Exhibit 10.5 to the Company’s
Current Report on Form 8-K, filed January 3, 2013.
Form Securities Purchase Agreement, dated December 27, 2012 between the Company and Hillair Investments, L.P.
Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed January 3, 2013.
Form of Addendum to Securities Purchase Agreement issued to additional investors. Incorporated herein by reference to Exhibit
10.1 to the Company’s Current Report on Form 8-K, filed April 30, 2013.
Form of Addendum to Security Agreement issued to additional investors. Incorporated herein by reference to Exhibit 10.2 to the
Company’s Current Report on Form 8-K, filed April 30, 2013.
Form Securities Purchase Agreement, dated December 27, 2012 between the Company and Hillair Investments, L.P.
Incorporated (as amended) herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q, filed
November 14, 2013.
Form of Exchange Agreement, dated April 10, 2014, between the Company and investors party thereto.
Form of Securities Purchase Agreement, dated April 10, 2014, between the Company and investors party thereto.
Form of Subsidiary Guarantee, dated April 10, 2014, by SG Building Blocks, Inc. in favor of investors party to the Securities
Purchase Agreement, dated April 10, 2014.
Form of Security Agreement, dated April 10, 2014, between the Company and investors party thereto.
10.19+
10.20*+ 2013 Stock Plan.
21.1+
31.1+
31.2+
32+
List of Subsidiaries.
Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification by Chief Executive Officer and Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of
2002.
101.INS+ XBRL Instance Document.
101.SCH+ XBRL Taxonomy Extension Schema Document.
101.CAL+ XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF+ XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB+ XBRL Taxonomy Extension Label Linkbase Document.
101.PRE+ XBRL Taxonomy Extension Presentation Linkbase Document.
*
**
Includes compensatory plan or arrangement.
Filed with confidential portions omitted pursuant to request for confidential treatment. The omitted portions have been separately filed
with the SEC.
+
Transmitted herewith.
42
SG BLOCKS, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 2013 and 2012
SG BLOCKS, INC. AND SUBSIDIARIES
Table of Contents
Consolidated Financial Statements
Page
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Loss
Consolidated Statement of Changes in Stockholders’ Deficiency
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
F-2
F-3
F-4
F-5
F-6 to F-
30
Report of Independent Registered Public Accounting Firm
To the Stockholders of
SG Blocks, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of SG Blocks, Inc. and Subsidiaries (the “Company”) as of December 31,
2013 and 2012, and the related consolidated statements of operations and comprehensive loss, changes in stockholders’deficiency and cash
flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SG
Blocks, Inc. and Subsidiaries, as of December 31, 2013 and 2012, and the results of its consolidated operations and its cash flows for the
years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As
discussed in Note 2 to the consolidated financial statements, the Company’s significant operating losses raises substantial doubt about its
ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Marcum LLP
Marcum LLP
New York, New York
April 15, 2014
F-1
SG BLOCKS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
Assets
Current assets:
Cash and cash equivalents
Short-term investment
Accounts receivable, net
Costs and estimated earnings in excess of billings on uncompleted contracts
Inventory
Prepaid expenses and other current assets
Total current assets
Equipment, net
Security deposit
Debt issuance costs, net
Totals
Liabilities and Stockholders' Deficiency
Current liabilities:
Accounts payable and accrued expenses
Accrued interest, related party
Accrued interest
Related party accounts payable and accrued expenses
Related party notes payable
Convertible debentures, net of discounts of $434,308
Billings in excess of costs and estimated earnings on uncompleted contracts
Deferred revenue
Conversion option liabilities
Warrant liabilities
Total current liabilities
Convertible debentures, net of discounts of $269,387
Total liabilities
Commitments
Stockholders' deficiency:
Preferred stock, $0.01 par value, 5,000,000 shares authorized; 0 issued and outstanding at December 31,
2013 and 2012
Common stock, $0.01 par value, 100,000,000 shares authorized; 43,223,093 issued and outstanding at
December 31, 2013, 42,198,093 issued and outstanding at December 31, 2012
Additional paid-in capital
Accumulated deficiency
Accumulated other comprehensive loss
Total stockholders' deficiency
Totals
2013
2012
$
$
594,248
39,375
246,519
-
34,052
15,493
929,687
868,067
39,249
284,395
36,476
48,011
1,405
1,277,603
11,867
12,000
44,830
6,064
0
103,632
$
998,384
$
1,387,299
$
$
306,144
28,636
9,458
244,858
73,500
1,802,612
24,349
379,765
2,873
214,738
3,086,933
-
3,086,933
343,080
20,439
102,856
73,500
-
69,789
201,117
69,502
337,055
1,217,338
685,692
1,903,030
-
-
432,231
6,679,298
(9,200,078)
-
(2,088,549)
421,981
6,099,635
(7,036,776)
(571)
(515,731)
$
998,384
$
1,387,299
The accompanying notes are an integral part of these consolidated financial statements.
F-2
SG BLOCKS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Loss
For the Years Ended December 31,
Revenue:
SG Block sales
Engineering services
Project management
Cost of revenue:
SG Block sales
Engineering services
Project management
Gross profit
Operating expenses:
Payroll and related expenses
General and administrative expenses
Marketing and business development expense
Pre-project expenses
Total
Operating loss
Other income (expense):
Interest expense
Interest income
Change in fair value of financial instruments
Cancellation of trade liabilities and unpaid interest
Total
Net loss
Comprehensive loss
Foreign currency translation adjustment
Total comprehensive loss
Net loss per share - basic and diluted:
Basic and diluted
Weighted average shares outstanding:
Basic and diluted
2013
2012
$
$
3,195,764
109,138
2,427,874
5,732,776
1,528,158
596,665
325,842
2,450,665
2,550,275
27,667
2,571,277
5,149,219
1,153,450
499,899
344,389
1,997,738
583,557
452,927
1,350,953
932,862
124,496
34,021
2,442,332
1,357,717
880,774
85,428
69,432
2,393,351
(1,858,775)
(1,940,424)
(689,156)
126
358,973
25,530
(304,527)
(8,220)
139
80,352
102,128
174,399
$ (2,163,302) $ (1,766,025)
571
(571)
$ (2,162,731) $ (1,766,596)
$
(0.05) $
(0.04)
42,327,819
41,378,216
The accompanying notes are an integral part of these consolidated financial statements.
F-3
SG BLOCKS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Deficiency
For the Years Ended December 31, 2013 and 2012
Additional
Accumulated
Other
$0.01 Par Value Common
Stock
Shares
Amount
Paid-in
Capital
Accumulated Comprehensive
Deficiency
Loss
Total
Balance - December 31, 2011
39,779,506
$
397,795
$
4,688,417
$ (5,270,751) $
-
$
(184,539)
Stock issued in private offering, net of
warrant liabilities in the amount of
$19,130 and closing costs in the
amount of $36,072
2,166,444
21,665
681,388
Stock-based compensation
-
-
508,265
Issuance of common stock issued for
settlement of related party accounts
payable
Forgiveness of related party accrued
compensation costs
40,000
400
67,382
-
-
73,888
Issuance of common stock
212,143
2,121
72,129
-
-
-
-
-
-
-
-
-
-
703,053
508,265
67,782
73,888
74,250
Fair value of warrants issued
-
-
8,166
-
-
8,166
Foreign currency translation
adjustment
Net loss
-
-
-
-
-
-
-
(571)
(571)
(1,766,025)
-
(1,766,025)
Balance - December 31, 2012
42,198,093
421,981
6,099,635
(7,036,776)
(571)
(515,731)
Stock-based compensation
-
-
421,305
Issuance of common stock for services
525,000
5,250
115,500
Issuance of common stock for services
(unvested shares)
500,000
5,000
(5,000)
Vesting of consultant stock
-
-
45,000
-
-
-
-
2,858
-
-
-
-
421,305
120,750
-
45,000
2,858
Fair value of warrants issued
Foreign currency translation
adjustment
Net loss
-
-
-
-
-
-
-
571
571
(2,163,302)
-
(2,163,302 )
Balance - December 31, 2013
43,223,093
$
432,231
$
6,679,298
$ (9,200,078) $
-
$ (2,088,549)
The accompanying notes are an integral part of these consolidated financial statements.
F-4
SG BLOCKS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31,
Cash flows from operating expenses:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation expense
Amortization of debt issuance costs
Accretion of discount on convertible debentures
Interest income on short-term investment
Change in fair value of financial instruments
Stock-based compensation
Issuance of common stock for services
Bad debts expense
Cancellation of trade liabilities and unpaid interest
Changes in operating assets and liabilities:
Accounts receivable
Costs and estimated earnings in excess of billings on uncompleted contracts
Inventory
Prepaid expenses and other current assets
Accounts payable and accrued expenses
Accrued interest, related party
Accrued interest
Related party accounts payable and accrued expenses
Billings in excess of costs and estimated earnings on uncompleted contracts
Deferred revenue
Net cash used in operating activities
Cash flows used in investing activities
Security deposit
Purchase of equipment
Net cash used in investing activities
Cash flows from financing activities:
Expenditures on debt issuance costs
Proceeds from issuances of common stock
Proceeds from issuance of common stock and warrants in private offering
Proceeds from issuance of convertible debentures
Net cash provided by financing activities
Effect of exchange rate changes in cash
Net increase (decrease) in cash
Cash and cash equivalents - beginning of year
2013
2012
$ (2,163,302 ) $ (1,766,025)
2,982
89,660
436,947
(126)
(358,973)
421,305
165,750
70,960
(25,530)
2,543
-
-
(139)
(80,352)
508,265
-
124,415
(102,128)
(33,084)
36,476
13,959
(14,088)
(11,405)
8,197
9,458
142,002
(45,440)
178,648
(1,075,604)
(265,490)
29,978
(48,011)
(1,405)
(33,069)
8,220
-
83,753
69,789
201,117
(1,268,539)
(12,000)
(8,786)
(20,786)
-
(549)
(549)
(28,000)
-
-
850,000
822,000
(140,466)
74,250
642,183
1,000,000
1,575,967
571
(571)
(273,819)
306,308
868,067
561,759
Cash and cash equivalents - end of year
$
594,248
$
868,067
Supplemental disclosure of cash flow information:
Cash paid during the year/period for:
Interest
$
144,893
$
-
Supplemental disclosure of non-cash financing activities:
In connection with the private offering, $80,000 was paid for a prior liability which was included
in accounts payable and accrued expenses.
Issuance of common stock for settlement of debt
Forgiveness of related party accrued compensation
$
$
-
$
67,782
-
$
73,888
The accompanying notes are an integral part of these consolidated financial statements.
F-5
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
1. Description of Business
SG Blocks, Inc. (the “Company”) was previously known as CDSI Holdings, Inc. (a Delaware corporation incorporated on December
29, 1993). On November 4, 2011, the Company’s wholly-owned subsidiary was merged with and into SG Building Blocks, Inc. (“SG
Building”, formerly SG Blocks Inc.) (the “Merger”), with SG Building surviving the Merger and becoming a wholly-owned subsidiary
of the Company. The Merger was a reverse merger that was accounted for as a recapitalization of SG Building as SG Building was the
accounting acquirer. Accordingly, the historical financial statements presented are the financial statements of SG Building.
During 2011, the Company formed SG Blocks Sistema De Constucao Brasileiro LTDA. (“SG Brazil”), a wholly owned subsidiary of
the Company. The Company formed SG Brazil in order to actively explore opportunities in Brazil. As of December 31, 2013, SG Brazil
is inactive.
The Company is a provider of code engineered cargo shipping containers modified for use in “green” construction. The Company also
provides engineering and project management services related to the use of modified containers in construction.
2. Liquidity and Financial Condition
Through December 31, 2013, the Company has incurred an accumulated deficiency since inception of $9,200,078. At December 31,
2013, the Company had a cash balance of $594,248. At April 14, 2014, the Company had a cash balance of approximately
$1,516,000.
Since the Company’s inception, it has generated revenues from SG Block sales, engineering services, and project management.
The Company expects that through the next 10 to 16 months, the capital requirements to fund the Company’s growth will consume all
of the cash flows that it expects to generate from its operations, as well as from the proceeds of the issuances of senior convertible debt
securities. The Company further believes that during this period, while the Company is focusing on the growth and expansion of its
business, the gross profit that it expects to generate from operations will not generate sufficient funds to cover expected operating costs.
Accordingly, the Company requires further external funding to sustain operations and to follow through on the execution of its business
plan. There is no assurance that the Company’s plans will materialize and/or that the Company will be successful in funding estimated
cash shortfalls through additional debt or equity capital and through the cash generated by the Company’s operations. Given these
conditions, the Company’s ability to continue as a going concern is contingent upon it being able to secure an adequate amount of debt
or equity capital to enable it to meet its cash requirements. In addition, the Company’s ability to continue as a going concern must be
considered in light of the problems, expenses and complications frequently encountered by entrants into established markets, the
competitive environment in which the Company operates and the current capital raising environment.
Since inception, the Company’s operations have primarily been funded through proceeds from equity and debt financings and sales
activity. Although management believes that the Company has access to capital resources, there are currently no commitments in place
for new financing at this time, and there is no assurance that the Company will be able to obtain funds on commercially acceptable
terms, if at all.
During the year ended December 31, 2013, the Company raised $850,000 in new net funds through the issuance of convertible
debentures (See Note 10). In April 2014, the Company raised $1,850,000 in net funds through the issuance of convertible debentures.
The proceeds from these issuances were used to fund the Company’s operations and working capital needs.
The Company has raised additional funds during 2014 through a private placement of its convertible debentures. The additional capital
would be used to fund the Company’s operations, including the costs that it expects to incur as a public company. The current level of
cash and operating margins is not enough to cover the existing fixed and variable obligations of the Company, so increased revenue
performance and the addition of capital through issuances of securities are critical to the Company’s success. Assuming that the
Company is successful in its growth plans and development efforts, the Company believes that it will be able to raise additional funds
through sales of its stock. There is no guarantee that the Company will be able to raise such additional funds on acceptable terms, if at
all.
These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern.
The Company’s financial statements do not include any adjustments relating to the recoverability and classification of recorded asset
amounts or the amounts and classification of liabilities that might be necessary should it be unable to continue as a going concern.
F-6
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
3. Summary of Significant Accounting Policies
Reclassification – Certain prior year amounts have been reclassified to conform to the current year presentation.
Basis of consolidation – The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries,
SG Building and SG Brazil. All intercompany balances and transactions have been eliminated.
Accounting estimates – The preparation of consolidated financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the
reporting period. Significant areas which require the Company to make estimates include revenue recognition, stock-based
compensation, warrant liabilities and allowance for doubtful accounts. Actual results could differ from those estimates.
Operating cycle – The length of the Company’s contracts varies, but is typically between six to twelve months. Assets and liabilities
relating to long-term contracts are included in current assets and current liabilities in the accompanying balance sheets as they will be
liquidated in the normal course of contract completion, which at times could exceed one year.
Revenue recognition – The Company accounts for its long-term contracts associated with the design, engineering, manufacture and
project management of building projects and related services, using the percentage-of-completion accounting method. Under this
method, revenue is recognized based on the extent of progress towards completion of the long-term contract. The Company uses the cost
to cost basis because management considers it to be the best available measure of progress on these contracts.
F-7
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
3. Summary of Significant Accounting Policies (continued)
Contract costs include all direct material and labor costs and those indirect costs related to contract performance. General and
administrative costs, marketing and business development expenses and pre-project expenses are charged to expense as incurred.
Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job
performance, job conditions and estimated profitability, including those arising from contract penalty provisions, and final contract
settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined. An
amount equal to contract costs attributable to claims is included in revenue when realization is probable and the amount can be reliably
estimated.
The asset, “Costs and estimated earnings in excess of billing on uncompleted contracts,” represents revenue recognized in excess of
amounts billed. The liability, “Billings in excess of costs and estimated earnings on uncompleted contracts,” represents billing in excess
of revenue recognized.
The Company offers a one-year warranty on completed contracts. The Company has not incurred any claim obligations to date and does
not anticipate that any claims are likely to occur for warranties that are currently outstanding. Accordingly no warranty reserve is
considered necessary for any of the periods presented.
The Company also supplies repurposed containers to its customers. In these cases, the Company serves as a supplier to its customers for
standard and made to order products that it sells at fixed prices. Revenue from these contracts is generally recognized when the products
have been delivered to the customer, accepted by the customer and collection is reasonably assured. Revenue is recognized upon
completion of the following: an order for product is received from a customer; written approval for the payment schedule is received
from the customer and the corresponding required deposit or payments are received; a common carrier signs documentation accepting
responsibility for the unit as agent for the customer; and the unit is delivered to the customer’s shipping point. The title and risk of loss
passes to the customer at the customer’s receiving point.
Amounts billed to customers in a sales transaction for shipping and handling are classified as revenue. Products sold are generally paid
for based on schedules provided for in each individual customer contract including upfront deposits and progress payments as products
are being manufactured.
Funds received in advance of meeting the criteria for revenue recognition are deferred and are recorded as revenue when they are earned.
F-8
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
3. Summary of Significant Accounting Policies (continued)
Cash and cash equivalents – The Company considers cash and cash equivalents to include all short-term, highly liquid investments that
are readily convertible to known amounts of cash and have original maturities of three months or less upon acquisition.
Short-term investment – The Company classifies its investment consisting of a certificate of deposit with a maturity greater than three
months but less than one year as short-term investment.
Accounts receivable – Accounts receivable are receivables generated from sales to customers and progress billings on performance type
contracts. Amounts included in accounts receivable are deemed to be collectible within the Company’s operating cycle. Management
provides an allowance for doubtful accounts based on the Company’s historical losses, specific customer circumstances, and general
economic conditions. Periodically, management reviews accounts receivable and adjusts the allowance based on current circumstances
and charges off uncollectible receivables when all attempts to collect have been exhausted and the prospects for recovery are remote.
The Company has a factoring agreement which provides for the Company to receive an advance of 75% of any accounts receivable that it
factors. On August 13, 2012, the factoring agreement was increased for up to $1,000,000 for credit worthy retail clients. The factoring
agreement also provides for discount fees ranging from 2.5% to 7.5% of the face value of any accounts receivable factored. The factoring
agreement is with recourse except in an instance which the customer is insolvent. The agreement originally expired January 2013 and
was automatically extended for a one year period. The agreement will continue to automatically extend for successive periods of one year
unless either party formally cancels. For the years ended December 31, 2013 and 2012 there has been no activity with regard to this
agreement. Under the convertible debentures agreement as described in Note 10, the Company is precluded from any borrowing under
this factoring agreement.
Inventory – Raw construction materials (primarily shipping containers) are valued at the lower of costs (first-in, first-out method) or
market. Finished goods and work-in-process inventories are valued at the lower of costs or market, using the specific identification
method. As of December 31, 2013 and 2012, work-in-process inventory amounted to $34,052 and $48,011, respectively.
Equipment – Equipment is stated at cost. Depreciation is computed using the straight-line method over the estimated lives of each asset.
Estimated useful lives for significant classes of assets are as follows: computer and software 3 to 5 years and equipment 5 years. Repairs
and maintenance are charged to expense when incurred.
Debt issuance costs – All debt issuances are stated at cost, net of amortization. Amortization is computed over the estimated useful life
of the related assets on a straight-line method. As of December 31, 2013, all debt issuance costs are amortized over 18 months.
F-9
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
3. Summary of Significant Accounting Policies (continued)
Convertible instruments – The Company bifurcates conversion options from their host instruments and accounts for them as free
standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic
characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and
risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not
re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in
earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a
derivative instrument.
The Company has determined that the embedded conversion options should be bifurcated from their host instruments and a portion of the
proceeds received upon the issuance of the hybrid contract have been allocated to the fair value of the derivative. The derivative is
subsequently marked to market at each reporting date based on current fair value, with the changes in fair value reported in results of
operations.
F-10
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
3. Summary of Significant Accounting Policies (continued)
Common stock purchase warrants and other derivative financial instruments – The Company classifies as equity any contracts that (i)
require physical settlement or net-share settlement or (ii) provides a choice of net-cash settlement or settlement in the Company’s own
shares (physical settlement or net-share settlement) providing that such contracts are indexed to the Company’s own stock. The Company
classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract if
any event occurs and if that event is outside the Company’s control) or (ii) gives the counterparty a choice of net-cash settlement of
settlement shares (physical settlement or net-cash settlement). The Company assesses classification of common stock purchase warrants
and other free standing derivatives at each reporting date to determine whether a change in classification between assets and liabilities or
equity is required.
The Company’s free standing derivatives consist of warrants to purchase common stock that were issued to a placement agent involved
with the private offering memorandum as well as issuances of convertible debentures as described in Note 10 and 15 . The Company
evaluated the common stock purchase warrants to assess their proper classification in the consolidated balance sheet and determined that
the common stock purchase warrants feature a characteristic permitting cash settlement at the option of the holder. Accordingly, these
instruments have been classified as warrant liabilities in the accompanying consolidated balance sheets as of December 31, 2013 and
2012.
Fair value measurements – Financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and
accrued liabilities are carried at cost, which the Company believes approximates fair value due to the short-term nature of these
instruments.
The Company measures the fair value of financial assets and liabilities based on the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. The Company maximized the use of observable inputs and minimizes the use of
unobservable inputs when measuring fair value.
F-11
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
3. Summary of Significant Accounting Policies (continued)
The Company uses three levels of inputs that may be used to measure fair value:
Level 1
Level 2
Level 3
Quoted prices in active markets for identical assets or liabilities
Quoted prices for similar assets and liabilities in active markets or inputs that are observable.
Inputs that are unobservable (for example, cash flow modeling inputs based on assumptions).
Financial liabilities measured at fair value on a recurring basis are summarized below:
Warrant Liabilities
Conversion Option Liabilities
Warrant Liabilities
Conversion Option Liabilities
Quoted prices
in active
market for
identical
assets
(Level l)
Quoted prices
in active
market for
identical
assets
(Level l)
Significant
other
observable
inputs
(Level 2)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
-
$
- $
214,738
2,873
Significant
unobservable
inputs (Level
3)
337,055
69,502
-
$
- $
- $
- $
- $
- $
December
31,
2013
214,738 $
2,873 $
$
$
December
31,
2012
337,055 $
69,502 $
$
$
Warrant and conversion option liabilities are measured at fair value the lattice pricing model and are classified within Level 3 of the
valuation hierarchy. For fair value measurements categorized within Level 3 of the fair value hierarchy, the Company’s Chief Financial
Officer, who reports to the Chief Executive Officer, determines its valuation policies and procedures. The development and
determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the
Company’s Chief Financial Officer and are approved by the Chief Executive Officer.
The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial liabilities that are measured
at fair value on a recurring basis:
Beginning balance
Aggregate fair value of conversion option liabilities and warrants issued
Change in fair value of conversion option liabilities and warrants
Ending balance
F-12
For the
year ended
December
31,
2013
406,557
$
170,027
(358,973)
$
217,611
For the
year ended
December
31,
2012
198,471
288,438
(80,352)
406,557
$
$
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
3. Summary of Significant Accounting Policies (continued)
The significant assumptions and valuation methods that the Company used to determine fair value and the change in fair value of the
Company’s derivative financial instruments are discussed in Note 10 and 15.
The Company presented warrant and conversion option liabilities at fair value on its consolidated balance sheets, with the corresponding
changes in fair value recorded in the Company’s consolidated statements of operations for the applicable reporting periods. As disclosed
in Note 10 and 15, the Company computed the fair value of the warrant and conversion option liabilities at the dates of issuance and the
reporting dates of December 31, 2013 and 2012 using the lattice pricing method.
The calculation of the lattice pricing model involves the use of the fair value of the Company’s common stock, estimated term, volatility,
risk-free interest rates, the size of the time step and dividend yield (if applicable). The Company developed the assumptions that were
used as follows: The fair value of the Company’s common stock was obtained from publicly quoted prices as well as valuation models
developed by the Company. The results of the valuation were assessed for reasonableness by comparing such amount to sales of other
equity and equity linked securities to unrelated parties for cash and intervening events affected in the price of the Company’s stock. The
term represents the remaining contractual term of the derivative; the volatility rate was developed based on analysis of the Company’s
historical stock price volatility and the historical volatility rates of several other similarly situated companies (using a number of
observations that was at least equal to or exceeded the number of observations in the life of the derivative financial instrument at issue);
the risk free interest rates were obtained from publicly available US Treasury yield curve rates; the dividend yield is zero because the
Company has not paid dividends and does not expect to pay dividends in the foreseeable future. The size of the time step is used to
determine the up ratio and down ratio probabilities applied in the lattice model and are proportional to the remaining term of the
derivative instrument.
Share-based payments – The Company measures the cost of services received in exchange for an award of equity instruments based on
the fair value of the award. For employees and directors, the fair value of the award is measured on the grant date and for non-
employees, the fair value of the award is generally re-measured on interim financial reporting dates and vesting dates until the service
period is complete. The fair value amount is then recognized over the period services are required to be provided in exchange for the
award, usually the vesting period. The Company recognizes stock-based compensation expense on a graded-vesting basis over the
requisite service period for each separately vesting tranche of each award. Stock-based compensation expense is reported within
operating expenses in the consolidated statements of operations.
Foreign currency translation – The Company’s international subsidiary consider their local currency to be their functional currency.
Assets and liabilities of the Company’s subsidiary operating in a foreign country are translated into U.S. dollars using both the exchange
rate in effect at the balance sheet date or historical date, as applicable. Results of operations are translated using the average exchange
rates prevailing throughout the period. The effects of exchange rate fluctuations on translating foreign currency assets and liabilities into
U.S. dollars are included in stockholders’ equity (deficiency) as a component of accumulated other comprehensive loss, while gains and
losses resulting from foreign currency translations are included in operations.
Income taxes – The Company accounts for income taxes utilizing the asset and liability approach. Under this approach, deferred taxes
represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The
provision for income taxes generally represents income taxes paid or payable for the current year plus the change in deferred taxes
during the year. Deferred taxes result from the differences between the financial and tax bases of the Company’s assets and liabilities
and are adjusted for changes in tax rates and tax laws when changes are enacted.
F-13
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
3. Summary of Significant Accounting Policies (continued)
The calculation of tax liabilities involves dealing with uncertainties in the application of complex tax regulations. The Company
recognizes liabilities for anticipated tax audit issues based on the Company’s estimate of whether, and the extent to which, additional
taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax
benefits being recognized in the period when the liabilities are no longer determined to be necessary. If the estimate of tax liabilities
proves to be less than the ultimate assessment, a further charge to expense would result.
The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in
the consolidated financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between
the financial statement basis and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences
are expected to reverse. The Company estimates the degree to which tax assets and credit carryforwards will result in a benefit based on
expected profitability by tax jurisdiction. A valuation allowance for such tax assets and loss carryforwards is provided when it is
determined to be more likely than not that the benefit of such deferred tax asset will not be realized in future periods. If it becomes more
likely than not that a tax asset will be used, the related valuation allowance on such assets would be reduced.
Concentrations of credit risk – Financial instruments, which potentially subject the Company to concentration of credit risk, consist
principally of cash and cash equivalents. The Company places its cash with high credit quality institutions. At times, such amounts may
be in excess of the FDIC insurance limits. The Company has not experienced any losses in such account and believes that it is not
exposed to any significant credit risk on the account.
F-14
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
3. Summary of Significant Accounting Policies (continued)
With respect to receivables, concentrations of credit risk are limited to a few customers in the construction industry. The Company
performs ongoing credit evaluations of its customers’ financial condition and, generally, requires no collateral from its customers other
than normal lien rights. At December 31, 2013 and 2012, 87% and 59%, respectively, of the Company’s accounts receivable were due
from two and three customers, respectively.
Revenue relating to two customers, respectively, represented approximately 57% and 74% of the Company’s total revenue for the years
ended December 31, 2013 and 2012, respectively. During the year ended December 31, 2012, 19% of the Company’s total revenue was
recognized by SG Brazil.
Costs of revenue relating to one vendor, who is a related party and disclosed in Note 18, represented approximately 31% and 52% of the
Company’s total cost of revenue for the years ended December 31, 2013 and 2012, respectively. Cost of revenue relating to one unrelated
vendor represented approximately 27% of the Company’s total cost of revenue for the year ended December 31, 2013. The Company
believes it has access to alternative suppliers, with limited disruption to the business, should circumstances change with its existing
suppliers.
F-15
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
4. Accounts Receivable
At December 31, 2013 and 2012, the Company’s accounts receivable consisted of the following:
Billed:
SG block sales
Engineering services
Project management
Total gross receivables
Less: allowance for doubtful accounts
Total net receivables
F-16
2013
2012
$
$
$
258,287
12,344
71,594
342,225
(95,706)
$
246,519
207,390
216,535
34,900
458,825
(174,430)
284,395
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
5. Costs and Estimated Earnings on Uncompleted Contracts
Costs and estimated earnings on uncompleted contracts consist of the following at December 31, 2013 and 2012:
Costs incurred on uncompleted contracts
Provision for loss on uncompleted contracts
Estimated earnings (losses)
Less: billings to date
$
2013
228,643
9,896
(47,932)
190,607
(214,956)
(24,349) $
2012
177,529
6,680
6,156
190,365
(223,678)
(33,313)
$
$
The above amounts are included in the accompanying balance sheets under the following captions at December 31, 2013 and 2012.
Costs and estimated earnings in excess of billings on uncompleted contracts
Billings in excess of cost and estimated earnings on uncompleted contracts
2013
2012
$
$
-
$
(24,349)
(24,349) $
36,476
(69,789)
(33,313)
Although management believes it has established adequate procedures for estimating costs to complete on open contracts, it is at least
reasonably possible that additional costs in excess of current estimates could be incurred on contracts prior to completion. The
Company periodically evaluates and revises its estimates and makes adjustments when they are considered necessary.
As of December 31, 2013 and 2012, the Company has accrued anticipated losses on uncompleted contracts in the amount of $9,896 and
$6,860, respectively. This amount is included in cost of revenue on the accompanying consolidated statements of operations and
comprehensive loss and is included in accounts payable and accrued expenses on the accompanying consolidated balance sheets.
6. Inventory
At December 31, 2013 and 2012, the Company’s inventory consisted of the following:
Contract building
2013
2012
$
$
34,052 $
34,052 $
48,011
48,011
F-17
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
7. Equipment
At December 31, 2013 and 2012, the Company’s equipment consisted of the following:
Computer equipment and software
Furniture and other equipment
Less: accumulated depreciation
2013
2012
$
$
$
20,324
2,391
22,715
(10,848)
$
11,867
11,774
2,155
13,929
(7,865)
6,064
Depreciation expense for the years ended December 31, 2013 and 2012 amounted to $2,982, and $2,543, respectively.
8. Debt Issuance Costs
Debt issuance costs consisted of the following at December 31, 2013 and 2012:
Financial advisor fee
Legal fees
Fair value of warrants issued (as disclosed in Note 15 )
Less: accumulated amortization
2013
108,000 $
15,466
11,024
134,490
(89,660)
44,830 $
2012
80,000
15,466
8,166
103,632
-
103,632
$
$
Amortization expense of debt issuance costs for the year ended December 31, 2013 amounted to $89,660, and is included in interest
expense on the accompanying consolidated statements of operations. There was no amortization expense of debt issuance costs as of
December 31, 2012, as the transaction was completed on December 27, 2012. Future estimated amortization expense of deferred loan
costs as of December 31, 2013 is as follows:
2014
Total
9. Related Party Notes Payable
For the
year
ending
December
31,
$
$
44,830
44,830
On March 26, 2009, the Company entered into a $50,000 revolving credit promissory note (the “Revolver”) with Vector Group Ltd.
(“Vector”), a principal stockholder of the Company. On January 26, 2011, the Company and Vector entered into an amendment to the
Revolver increasing the amount that the Company may borrow from $50,000 to $100,000. The loan bears interest at 11% per annum and
was due on December 31, 2013. During January 2014, the Revolver was extended from December 31, 2013 to June 30, 2015. As of
December 31, 2013 and 2012, the balance due to Vector amounted to $73,500. As of December 31, 2013 and 2012, accrued interest
related to the Revolver amounted to $28,636 and $20,439, respectively, and is included in accrued interest, related party on the
accompanying consolidated balance sheets.
Interest expense for other related party notes payable amounted to $8,197 and $8,220 for the years ended December 31, 2013 and 2012,
respectively.
F-18
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
10. Convertible Debentures
On December 27, 2012, the Company entered a Securities Purchase Agreement (“Securities Purchase Agreement”) with Hillair
Capital Investments L.P. (“Hillair), whereby the Company issued and sold to Hillair: (i) $1,120,000 in 8% Original Discount Senior
Secured Convertible Debentures due July 1, 2014, for $1,000,000 (“Debenture”), and (ii) a Common Stock purchase warrant to
purchase up to 2,604,651 shares of the Company’s Common Stock with a fair value of $199,806 at issuance, which has been recorded
as a discount to the debenture. (As disclosed in Note 15) The Company recorded a discount of $120,000, which is being amortized
over the term of the debenture, using the effective interest method. At the date of issuance the fair value of the conversion option
liability was determined to be $69,502, which has been recorded as a discount to the debenture. At any time after December 28, 2012,
until the Debenture is no longer outstanding, the Debenture shall be convertible, in whole or in part, into shares of Common Stock at
the option of Hillair, subject to certain conversion limitations set forth in the Debenture. The initial conversion price for the Debenture
is $0.43 per share, subject to adjustments upon certain events, as set forth in the Debenture. The Company shall pay interest on the
aggregate unconverted and then outstanding principal amount of the Debenture at 8% per annum, payable quarterly on January 1,
April 1, July 1 and October 1, beginning on July 1, 2013. Interest is payable in cash or at the Company’s option in shares of Common
Stock, provided certain conditions are met, based on a share value equal to the lesser of (a) $0.43 per share, subject to adjustments
upon certain events, and (b) 90% of the average of the volume weighted average price for 20 consecutive trading days prior to the
applicable interest payment date, provided that the price shall be equal to at least a $0.01 discount to the volume weighted average
price for the trading day that is immediately prior to the applicable interest payment date. Merriman Capital, Inc. (“Merriman”) acted
as financial advisor to the Company in connection with the transaction and received a fee consisting of $80,000 and warrants to
purchase up to 104,186 shares of the Company’s Common Stock. (As disclosed in Note 15) In connection with the issuance of the
Debenture, the Company also paid Hillair $45,000 for due diligence which has been recorded as a discount to the debenture, and will
be amortized over the term of the debenture, using the effective interest method. In addition, the Company incurred $15,466 in legal
fees which are included in debt issuance costs in the accompanying consolidated balance sheet at December 31, 2012. As of
December 31, 2013 and 2012, the discount related to the Debenture amounted to $144,769 and $434,308, respectively.
On January 8, 2013 and January 9, 2013, the Company issued and sold to Next View Capital LP (“Next View”) and another investor
(“Another Investor”) an aggregate of (i) $392,000 in 8% Original Discount Senior Secured Convertible Debentures due July 1, 2014,
for $350,000 (“January 2013 Debentures”), and (ii) Common Stock purchase warrants to purchase up to 911,628 shares of the
Company’s Common Stock with a fair value of $69,933 at issuance, which has been recorded as a discount to the January 2013
Debentures. (As disclosed in Note 15). The Company recorded a discount of $42,000, which will be amortized over the term of the
debenture, using the effective interest method. At the date of issuance the fair value of the conversion option liability was determined
to be $24,322, which has been recorded as a discount to the debenture. Except for the date of issuance, these debentures and warrants
have the same terms and conditions as the debenture and warrant issued to Hillair as described above. Also, the conversion price for
the January 2013 Debentures was adjusted to $0.23 per share. Merriman acted as financial advisor to the Company in connection with
this transaction and received a fee consisting of $28,000 and warrants to purchase up to 36,466 shares of the Company’s Common
Stock. (As disclosed in Note 15) As of December 31, 2013, the discount related to the January 2013 Debentures amounted to
$145,418.
On each of April 1, 2014 and July 1, 2014, the Company is obligated to redeem a total amount equal to $756,000 in connection with the
Hillair, Next View and Another Investor debentures. In lieu of a cash redemption and subject to the Company meeting certain equity
conditions described in the Debenture, the Company may elect to pay the Periodic Redemption Amount in shares based on a conversion
price equal to the lesser of (a) $0.43 per share, subject to adjustments upon certain events, and (b) 90% of the average of the volume
weighted average price for the 20 consecutive trading days prior to the applicable redemption date, provided that the conversion price
shall be equal to at least a $0.01 discount to the volume weighted average price for the 20 consecutive days that is immediately prior to
the applicable redemption date.
In April 2013, the Company issued and sold to Frank Casano (“Casano”) and Scott Masterson (“Masterson”) an aggregate of (i)
$560,000 in 8% Original Discount Senior Secured Convertible Debentures due October 15, 2014, for $500,000 (“April 2013
Debentures”), and (ii) Common Stock purchase warrants to purchase up to 1,302,326 shares of the Company’s Common Stock with a
fair value of $60,801 at issuance, which has been recorded as a discount to the April 2013 Debentures. (As disclosed in Note 15). The
Company recorded a discount of $60,000, which will be amortized over the term of the debenture, using the effective interest method.
At the date of issuance the fair value of the conversion option liability was determined to be $14,971, which has been recorded as a
discount to the debenture. Except for the date of issuance, these debentures and warrants have the same terms and conditions as the
debenture and warrant issued to Hillair as described above. As of December 31, 2013, the discount related to the April 2013 Debentures
amounted to $79,200.
On each of July 15, 2014 and October 15, 2014, the Company is obligated to redeem a total amount equal to $280,000 in connection with
the Casano and Masterson debentures. In lieu of a cash redemption and subject to the Company meeting certain equity conditions
described in the Debenture, the Company may elect to pay the Periodic Redemption Amount in shares based on a conversion price equal
to the lesser of (a) $0.43 per share, subject to adjustments upon certain events, and (b) 90% of the average of the volume weighted
average price for the 20 consecutive trading days prior to the applicable redemption date, provided that the conversion price shall be
equal to at least a $0.01 discount to the volume weighted average price for the 20 consecutive days that is immediately prior to the
applicable redemption date.
F-19
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
10. Convertible Debentures (continued)
A summary of the Company’s convertible debentures as of December 31, 2013 is as follows:
Hillair Debentures, net of $144,769 discount
January 2013 Debentures, net of $45,418 discount
April 2013 Debentures, net of $79,200 discount
Total current portion of debt
$
975,231
346,581
480,800
1,802,612
For the years ended December 31, 2013, interest expense on the convertible debentures amounted to $154,351 and is included on the
accompanying consolidated statements of operations. For year ended December 31, 2013 total amortization relating to the discount
amounted to $436,947, and is included in interest expense on the accompanying consolidated statements of operations. There was no
amortization expense of convertible debentures as of December 31, 2012, as the transaction was completed on December 27, 2012.
The Company bifurcated the conversion option from its debt host. The fair value of the conversion option liabilities were determined to
be $108,795 at the date of issuance, utilizing the lattice method. Consequently, the Company recorded a discount of $108,795 on the
debentures, which will be amortized over the term of the debenture, using the effective interest method. The fair value of the
conversion option liabilities as of December 31, 2013 was $2,873. The significant assumptions which the Company used to measure
the fair value at the date of issuance and December 31, 2013 of the conversion option liability are as follows:
Stock price
Term
Volatility
Risk-free interest rate
Exercise price
Delta
Up Ratio
Down Ratio
Up transition probability
Date of
Issuance
December 31,
2013
$
$
0.24-0.30
1.25 to 1.5
years
$
50%
0.14-0.21%
0.43
$
0.02-0.03
1.072-1.079
0.921-0.928
0.500
0.21
0.25 to 0.79
years
50%
0.10%
0.43
0.00-0.01
1.032-1.057
0.865-0.968
0.500
In connection with the Securities Purchase Agreement, the Company is required to maintain compliance with a variety of contractual
provisions which include certain affirmative and negative covenants. The requirements principally consist of a requirement to maintain
timely filings with the SEC, reserve sufficient authorized shares to issue upon the exercise of the underlying conversion option, and
permit the note holders to participate in future financing transactions. The Company is also restricted, among other things, from incurring
new indebtedness, permitting additional liens, making material changes to its charter documents, repay or repurchase more than a de
minims number of shares of its common stock or common stock equivalents, repay or repurchase any indebtedness, pay cash dividends,
enter into transactions with affiliates or use the proceeds of the convertible notes to provide funding to its Brazilian subsidiary. The
underlying securities purchase and debenture agreements also provide for the Company to pay liquidated damages in the event of its
failure to (i) deliver shares upon the conversion of the notes, in which case the liquidated damages would amount to a cash payment of
$10 per trading day (increasing to $15 per trading day on the fifth trading day) for each $1,000 of principal amount being converted until
such certificates are delivered (ii) maintain timely required filings with the SEC, in which case the liquidated damages would amount to
a cash payment of two percent (2.0%) of the aggregate subscription amount of such purchasers securities on the day of the failure to
maintain timely filings with the SEC and on every thirtieth (30th) day thereafter until the required documents are filed with the SEC or is
no longer required for the purchaser to transfer the underlying shares pursuant to Rule 144 and (iii) to compensate the Holder for a Buy-
in of securities previously sold by the Holder, as defined in the agreements, on a failure to timely deliver certificates upon conversion by
the Holder. If the holder is subject to a Buy-in, then Company shall (A) pay in cash to the Holder (in addition to any other remedies
available to or elected by the Holder) the amount, if any, by which (x) the Holder’s total purchase price (including any brokerage
commissions) for the Common Stock so purchased exceeds (y) the product of (1) the aggregate number of shares of Common Stock that
the Holder was entitled to receive from the conversion at issue multiplied by (2) the actual sale price at which the sell order giving rise to
such purchase obligation was executed (including any brokerage commissions) and (B) at the option of the Holder, either reissue (if
surrendered) this Debenture in a principal amount equal to the principal amount of the attempted conversion (in which case such
conversion shall be deemed rescinded) or deliver to the Holder the number of shares of Common Stock that would have been issued if
the Company had timely complied with its delivery requirements.
F-20
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
11. Income Taxes
The Company’s benefit for income taxes consists of the following for the year ended December 31, 2013 and 2012:
Deferred:
Federal
State and local
Total deferred
Total benefit for income taxes
Less: valuation reserve
Income Tax provision
2013
2012
$
(692,787) $
(389,582)
(1,082,369)
(535,089)
(406,952)
(942,041)
(1,082,369)
1,082,369
$
- $
(942,041)
942,041
-
A reconciliation of the federal statutory rate of 0% for the year ended December 31, 2013 and 2012 to the effective rate for income from
operations before income taxes is as follows:
Benefit for income taxes at federal statutory rate
State and local income taxes, net of federal benefit
Differences attributable to change in state business apportionment
Change in fair value of derivative liabilities
Other
Less valuation allowance
Effective income tax rate
2013
2012
34.0%
9.6
(1.9)
7.3
1.3
(50.3)
0.0%
34.0%
10.6
7.0
2.0
(0.3)
(53.3)
0.0%
During 2013, the Company adjusted its estimate of business apportionment, thus decreasing its effective state and local tax rate from
10.6% to 9.6%. The decrease is primarily due to allocation of business receipts from New York State and New York City.
F-21
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
11. Income Taxes (continued)
The tax effects of these temporary differences along with the net operating losses, net of an allowance for credits, have been recognized
as deferred tax assets at December 31, 2013 and 2012 as follows:
Net operating loss carryforward
Bad debt reserve
Employee stock compensation
Accrued losses on uncompleted jobs
Depreciation
Related party expenses
Total deferred tax asset
Less valuation allowance
Net deferred tax asset
2013
$ 2,294,888
121,792
510,816
$
4,318
419
2,618
2,934,851
(2,934,851)
2012
1,443,296
75,163
334,393
-
(370)
-
1,852,482
(1,852,482)
$
-
$
-
The Company establishes a valuation allowance, if based on the weight of available evidence, it is more likely than not that some
portion or all of the deferred assets will not be realized. The valuation allowance increased $1,082,369 and $942,041 during 2013 and
2012, respectively, offsetting the increase in the deferred tax asset attributable to the net operating loss and reserves.
As of December 31, 2013, the Company has a net operating loss carry forward of approximately $5,260,000 for Federal tax
purposes. The net operating loss expires through 2032.
The Company recognizes interest and penalties related to uncertain tax positions in general and administrative expenses. As of December
31, 2013, the Company has no unrecognized tax positions, including interest and penalties. The tax years 2010-2012 are still open to
examination by the major tax jurisdictions in which the Company operates. The Company files returns in the United States Federal tax
jurisdiction and various other state jurisdictions.
F-22
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
12. Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of
common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) for the
period by the weighted average number of common and potentially dilutive common shares outstanding during the period. Potentially
dilutive common shares consist of the common shares issuable upon the exercise of stock options and warrants. Potentially dilutive
common shares are excluded from the calculation if their effect is antidilutive. At December 31, 2013 basic and diluted common shares
outstanding exclude 500,000 common shares that are held in escrow and subject to forfeiture. At December 31, 2013, there were options
and warrants to purchase 10,330,001 and 6,119,864 shares of common stock, respectively, outstanding which could potentially dilute
future net income (loss) per share. At December 31, 2013 the Company also has outstanding convertible debt which is initially
convertible into 4,818,605 shares of common stock, which could potentially dilute future net income (loss) per share. The number of
shares the convertible debt could be converted into could potentially increase under certain circumstances related to the market price of
the Company’s common stock at the time of conversion. At December 31, 2012, there were options and warrants to purchase 9,317,501
and 3,869,444 shares of common stock, respectively, outstanding which could potentially dilute future net income (loss) per share. At
December 31, 2012 the Company also had outstanding convertible debt which was initially convertible into 4,320,000 shares of common
stock, which could potentially dilute future net income (loss) per share.
Basic and diluted net loss per share was calculated for the years ending December 31, 2013 and 2012 as follows:
Net loss
Weighted average shares outstanding - basic
Dilutive effect of stock options and warrants
Weighted average shares outstanding - diluted
Net loss per share - basic and diluted
13. Construction Backlog
2013
2012
$ (2,163,302 ) $ (1,766,025)
42,327,819
-
42,327,819
41,378,216
-
41,378,216
$
(0.05) $
(0.04)
The following represents the backlog of signed engineering and project management contracts in existence at December 31, 2013 and
2012:
Balance - January 1
New contracts and change orders during the period
Less: contract revenue earned during the period
Contracts signed but not started
Balance - December 31
F-23
2012
2013
$ 1,405,803
1,180,802
2,586,605
(2,537,012)
49,593
-
49,593
$
$
18,419
2,309,891
2,328,310
(922,507)
1,405,803
-
$ 1,405,803
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
14. Stockholders’ Equity
Private Placements – In March 2012, the Company issued 1,463,572 shares of its Common Stock at $0.35 per share through a private
placement (the “March Private Placement”). The Company incurred $28,642 in closing costs from the March Private Placement, and also
issued warrants valued at $14,675 to Ladenburg Thalmann & Co. Inc. (“Ladenburg”), the placement agent for the March Private
Placement (see Note 15).
As part of the March Private Placement, in May 2012, the Company issued an additional 702,872 shares of its Common Stock at $0.35.
The Company incurred $7,430 in closing costs from this issuance, and also issued warrants valued at $4,455 to Ladenburg (see Note 15).
During 2012, as part of the March Private Placement, the Company received proceeds of $74,250 for 212,143 shares of Common Stock.
The maximum amount that could be raised through the March Private Placement is $1,000,000. As of December 31, 2012, the Company
raised $832,505 through the March Private Placement.
Forgiveness of debt – In April 2012, two stockholders of the Company forgave $73,888 of accrued compensation costs to the Company.
The substance of the forgiveness was to provide the Company with additional capital. Accordingly, forgiveness of the accrued
compensation costs is reported as a $73,888 increase in paid-in capital.
Settlement of related party accounts payable – In April 2012, the Company issued 40,000 shares of Common Stock for settlement of a
related party accounts payable, as described in Note 18.
Issuance of common stock for services – On October 1, 2013, the Company issued 1,000,000 shares of Common Stock for services
provided by a consultant. These shares were deemed to have a fair market value of $220,000. 500,000 of the shares vested immediately
and 500,000 shares vest on May 1, 2014. As of December 31, 2013, the Company recognized professional fees in the amount of
$160,000 related to the shares issued to the consultant. On November 8, 2013, the Company issued 25,000 shares of Common Stock for
services provided by a consultant. These shares were deemed to have a fair market value of $5,750.
F-24
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
15. Warrants
In conjunction with a private placement in October 2010 (the “2010 Private Placement”), the Company issued warrants to Ladenburg,
the placement agent for the 2010 Private Placement. The warrants entitle Ladenburg to purchase up to a total of 1,044,584 shares of
Common Stock for $0.25 per share. The warrants expire October 28, 2015. The warrants are exercisable, at the option of the holder, at
any time prior to their expiration. The fair value of warrants issued to placement agents was calculated utilizing the lattice method. The
warrants issued to Ladenburg contain provisions that make them redeemable for cash by the holder of the warrant under certain
circumstances that are not within the control of the Company. Accordingly, the fair market value of the warrants as of the date of
issuance has been classified as liabilities. The fair value of the 2010 Private Placement warrants as of December 31, 2013 and 2012 was
$41,078 and $125,350, respectively.
In conjunction with a private placement in 2012 (the “2012 Private Placement”), the Company issued warrants to Ladenburg in March
2012. The warrants entitle Ladenburg to purchase up to a total of 86,323 shares of common stock for $0.35 per share and expire March
27, 2017. The Company also issued warrants to Ladenburg in May 2012 in connection with the additional 702,872 shares of common
stock issued in the 2012 Private Placement. These warrants entitle Ladenburg to purchase 29,700 shares of common stock at $0.35 per
share and expire May 22, 2017. These warrants are exercisable, at the option of the holder, at any time prior to their expiration. The fair
value of warrants issued to placement agents were calculated utilizing the lattice method. The warrants issued to Ladenburg contain
provisions that make them redeemable for cash by the holder of the warrant under certain circumstances that are not within the control
of the Company. Accordingly, the fair market value of the warrants as of the date of issuance has been classified as liabilities. The fair
value of the 2012 Private Placements warrants as of December 31, 2013 and 2012 was $4,050 and $11,899, respectively.
As part of the issuance of convertible debentures to Hillair as disclosed in Note 10, the Company issued warrants to Hillair. The
warrants entitle Hillair to purchase up to 2,604,651 shares of Common Stock for $0.4488, subject to adjustments upon certain events.
The warrants may be exercised at any time on or after June 27, 2013 and expire on June 27, 2018. The fair value of warrants issued to
Hillair was calculated utilizing the lattice method. The warrants issued to Hillair contain provisions that make them redeemable for cash
by the holder of the warrant under certain circumstances that are not within the control of the Company. Accordingly, the fair market
value of the warrants as of the date of issuance has been classified as liabilities and has been included as a debt discount of the
convertible debentures described in Note 10. The fair value of the Hillair warrants as of December 31, 2013 and 2012 was $89,940 and
$199,806, respectively.
In connection, with the issuance of convertible debentures to Hillair, the Company issued warrants to Merriman. The warrants entitle
Merriman to purchase up to 52,093 shares of Common Stock for $0.4488 and 52,093 shares of Common Stock at $0.43 per share. The
fair market value of the warrants as of the date of issuance has been classified as equity and is recorded in deferred loan costs on the
accompanying consolidated balance sheets. The fair value of the Merriman warrants as of the date of issuance was $8,166.
As part of the issuance of convertible debentures to Next View and Another Investor as disclosed in Note 10, the Company issued
warrants to Next View and Another Investor. The warrants entitle Next View and Another Investor to purchase up to 651,163 and
260,465, respectively, shares of Common Stock for $0.4488 per share, subject to adjustments upon certain events. As of December 31,
2013, the exercise price of these warrants was adjusted to $0.23. The warrants issued to Next View and Another Investor contain
substantially all of the same terms as the warrants issued to Hillair. The fair market value of the warrants as of the date of issuance has
been classified as liabilities and has been included as a debt discount of the convertible debentures described in Note 10. The fair value
of the Next View and Another Investor warrants as of December 31, 2013 was $31,479.
In connection, with the issuance of convertible debentures to Next View and Another Investor, the Company issued warrants to
Merriman. The warrants entitle Merriman to purchase up to 18,233 shares of Common Stock for $0.4488 per share and 18,233 shares of
Common Stock at $0.43 per share. The fair market value of the warrants as of the date of issuance has been classified as equity and is
recorded in deferred loan costs on the accompanying consolidated balance sheets. The fair value of the Merriman warrants as of the
date of issuance was $2,858.
As part of the issuance of convertible debentures to Casano and Masterson as disclosed in Note 10, the Company issued warrants to
Casano and Masteson. The warrants entitle Casano and Masterson to purchase up to 1,041,861 and 260,465, respectively, shares of
Common Stock for $0.4488 per share, subject to adjustments upon certain events. The warrants issued to Casano and Masterson contain
substantially all of the same terms as the warrants issued to Hillair. The fair market value of the warrants as of the date of issuance has
been classified as liabilities and has been included as a debt discount of the convertible debentures described in Note 10. The fair value
of the Next View and Another Investor warrants as of December 31, 2013 was $48,191.
The change in fair value of the warrants of $253,051 and $80,352 is included in the accompanying consolidated statement of operations
for the years ended December 31, 2013 and 2012, respectively.
The significant assumptions which the Company used to measure the fair value of warrants at December 31, 2013 and 2012 is as
follows:
2013
2012
Stock price
Term
Volatility
Risk-free interest rate
Exercise prices
Dividend yield
Delta
Up ratio
Down ratio
Up transition probability
$
$
0.21
1.83-4.79
Years
$
0.30
2.84-5 Years
50%
0.38-1.75%
0.25-
0.4488
50%
0.36-0.72%
$0.25-0.4488
0.00%
0.03-0.08
1.087-
1.137
0.861-
0.913
0.500
0.00%
0.08
1.144
0.857
0.500
F-25
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
16. Stock Options and Grants
2011 Plan – On July 27, 2011, in connection with the Merger, the Company obtained the written consent of holders of a majority of its
outstanding common stock approving the 2011 Incentive Stock Plan (the “2011 Plan”). The 2011 Plan covers up to 8,000,000 shares of
common stock, and all officers, directors, employees, consultants and advisors are eligible to be granted awards under the 2011 Plan. An
incentive stock option may be granted under the 2011 Plan only to a person who, at the time of the grant, is an employee of the Company
or its subsidiaries. The 2011 Plan expires on July 26, 2021, and is administered by the Company’s Board. As of December 31, 2013,
there were 3,928 shares of common stock available for issuance under the 2011 Plan.
During the year ended December 31, 2012, the Company’s board of directors approved the issuance of up to an additional 2,000,000
shares of the Company’s Common Stock in the form of restricted stock or options. These options generally have the same terms and
conditions as those provided under the 2011 Plan, however, the authorization of these options is not subject to shareholder approval. The
issuance of these options will be approved by the Company’s board of directors on a case-by-case basis. As of December 31, 2013, there
were 66,071 shares of common stock available for issuance under this approval.
During November 2013, the Company’s board of directors approved the issuance of up to 2,000,000 shares of the Company’s Common
Stock in the form of restricted stock of options (“2013 Stock Plan”). The options granted under the 2013 Stock Plan have generally the
same terms and conditions as those provided under the 2011 Plan. The Stock Plan is administered by the Company’s board of directors.
As of December 31, 2013, there were 1,600,000 shares of common stock available for issuance under the 2013 Stock Plan.
A summary of stock option activity and changes during the years ended December 31, 2013 and 2012 are presented below:
Outstanding – January 1, 2012
Granted
Exercised
Cancelled
Outstanding – December 31, 2012
Granted
Exercised
Cancelled
Outstanding – December 31, 2013
Exercisable – December 31, 2012
Exercisable – December 31, 2013
Weighted
Average
Fair Value
Per Share
0.09
0.14
$
$
Shares
5,407,500
3,910,001
-
-
$
9,317,501
1,012,500
-
-
$
$
$
10,330,001
4,973,333
8,416,668
-
-
$
0.11
0.09
-
-
$
$
$
0.10
0.11
0.10
Weighted
Average
Exercise
Price Per
Share
Weighted
Average
Remaining
Terms
(in years)
Aggregate
Intrinsic
Value
0.20
0.57
-
-
0.36
0.41
-
-
0.36
0.30
0.32
9.86
966,250
9.03
$
539,650
8.16
8.97
8.05
$
$
$
109,050
39,600
107,517
For the year ended December 31, 2013 and 2012, the Company recognized stock-based compensation expense of $421,305 and
$508,265, respectively, which is included in payroll and related expenses in the accompanying consolidated statements of operations.
As of December 31 2013, there was $100,569 of total unrecognized compensation costs related to non-vested stock options, which will
be expensed over a weighted average period of 0.65 years. The intrinsic value is calculated as the difference between the fair value of the
stock price at year end and the exercise price of each of the outstanding stock options. The fair value of the stock price at December 31,
2013 and December 31, 2012 was $0.21 per share and $0.30 per share, respectively, as determined by using a weighted value between the
income approach method and the weighted average bulletin board price.
F-26
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
16. Stock Options and Grants (continued)
During 2011, the Company executed a two year consulting agreement with a consultant, to act as a Senior Advisor of the Company. In
consideration for the services to be performed under the agreement, the Company shall on the last business day of each month during the
term, grant the consultant an option to purchase 10,000 shares of the Company’s common stock with an exercise price equal to fair
market value. One-third of the options vest upon the grant date, the second third vests on the first anniversary date of the grant date, and
the remaining third vests on the second anniversary of the grant date. During the year ended December 31, 2013, the consultant was
granted options to purchase 100,000 shares of the Company’s common stock with exercise prices ranging from $0.16 to $0.32 per share.
These options were not granted under the 2011 Plan or the 2013 Stock Plan. The fair value of these options upon issuance amounted to
$15,083.
On January 2, 2012, the Chief Executive Officer of the Company was granted an option to purchase 2,000,000 shares of the Company’s
Common Stock with an exercise price of $0.75. One-third of the options vest upon the grant date, the second third vests on the first
anniversary date of the grant date, and the remaining third vests on the second anniversary of the grant date. The fair value of these
options upon issuance amounted to $206,500.
On March 20, 2012, three employees of the Company were granted options to purchase a total of 215,000 shares of the Company’s
Common Stock with an exercise price of $0.50. One-third of the options vest upon the grant date, the second third vests on the first
anniversary date of the grant date, and the remaining third vests on the second anniversary of the grant date. The fair value of these
options upon issuance amounted to $30,143.
On March 21, 2012, seven employees and directors of the Company were granted options to purchase 155,000 shares of the Company’s
Common Stock with an exercise price of $0.50. One-third of the options vest upon the grant date, the second third vests on the first
anniversary date of the grant date, and the remaining third vests on the second anniversary of the grant date. The fair value of these
options upon issuance amounted to $21,669.
On June 20, 2012, four consultants of the Company were granted options to purchase 195,000 shares of the Company’s Common Stock
with an exercise price of $0.28. These options were granted separate and apart from the 2011 Plan and were not granted from the shares
available under the Company’s 2011 Plan. One-third of the options vest upon the grant date, the second third vests on December 20,
2012 and the remaining third vests on June 20, 2013. The fair value of these options upon issuance amounted to $34,632.
On August 7, 2012, eight executives and directors of the Company were granted options to purchase 125,001 shares of the Company’s
Common Stock with an exercise price of $0.35. One-third of the options vest upon the grant date, the second third vests on the first
anniversary date of the grant date, and the remaining third vests on the second anniversary of the grant date. The fair value of these
options upon issuance amounted to $17,559.
On August 10, 2012, two consultants of the Company were granted options to purchase 1,100,000 shares of the Company’s Common
Stock with an exercise price of $0.35. One-third of the options vest upon the grant date, the second third vests on the first anniversary
date of the grant date, and the remaining third vests on the second anniversary of the grant date. The fair value of these options upon
issuance amounted to $225,610.
On March 14, 2013, under the 2011 Plan, three employees and directors of the Company were granted options to purchase 150,000
shares of the Company’s Common Stock with an exercise price of $0.43 per share. One-third of the options vest upon the grant date, the
second third vests on the first anniversary date of the grant date, and the remaining third vests on the second anniversary of the grant
date. The fair value of these options upon issuance amounted to $11,310.
On March 14, 2013, seven employees and directors of the Company were granted options to purchase 362,500 shares of the Company’s
Common Stock with an exercise price of $0.43 per share. These options were granted separate and apart from the 2011 Plan and were not
granted from the shares available under the Company’s 2011 Plan. One-third of the options vest upon the grant date, the second third
vests on the first anniversary date of the grant date, and the remaining third vests on the second anniversary of the grant date. The fair
value of these options upon issuance amounted to $27,333.
On November 8, 2013, two consultants of the Company were granted options to purchase 400,000 shares of the Company’s Common
Stock with an exercise price of $0.43 per share. These shares were granted under the 2013 Stock Plan. One-third of the options vest upon
the grant date, the second third vests on the first anniversary date of the grant date, and the remaining third vests on the second
anniversary of the grant date. The fair value of these options upon issuance amounted to $37,600.
F-27
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
16. Stock Options and Grants (continued)
The fair value of the stock-based option awards granted during the years ended December 31, 2013 and 2012 were estimated at the date
of grant using the Black-Scholes option valuation model with the following assumptions:
Expected dividend yield
Expected stock volatility
Risk-free interest rate
Expected life
2013
2012
0.00%
50%
0.88 – 3.04% 0.59 – 1.22%
0.00%
50%
5.25-10
years
5.25-10
years
Because the Company does not have significant historical data on employee exercise behavior, the Company uses the “Simplified
Method” to calculate the expected life of the stock-based option awards granted to employees. The simplified method is calculated by
averaging the vesting period and contractual term of the options.
F-28
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
17. Commitments
Operating lease – The Company leases office space in New York City to conduct its business. The Company’s previous lease began in
October 2011 and was terminated as of September 30, 2013. As of December 31, 2013, the Company owes $25,000 to the former
lessor which will be settled with the issuance of 83,334 shares of the company’s common stock. Non-contingent rent increases were
being amortized over the life of the lease on a straight line basis. As of the date of termination, the reversal of the accrued rent increases
resulted in a decrease of rent expense. The Company’s current lease began on October 1, 2013 and expires December 31, 2014. The
rental expense charged to operations for the year ended December 31, 2013 and 2012 amounted to $51,483 (net of approximately
$43,000 in reversal of accrued rent upon termination of lease) and $112,867, respectively. Future minimum rental payments on this
lease are as follows for the years ending December 31,:
2014
18. Related Party Transactions
$
$
72,000
72,000
ConGlobal Industries, Inc. is a minority stockholder of the Company and provides containers and labor on domestic projects. The
Company recognized Cost of Goods Sold of $1,595,468 and $1,044,354, for services ConGlobal Industries, Inc. rendered during the
years ended December, 31, 2013 and 2012, respectively. As of December 31, 2013 and 2012, $176,929 and $62,844, respectively, of
such expenses are included in related party accounts payable and accrued expenses in the accompanying consolidated balance sheets.
The Lawrence Group is a minority stockholder of the Company and is a building design, development and project delivery firm. The
Company recognized Cost of Goods Sold of $52,966 and $62,276, for services The Lawrence Group rendered during the years ended
December 31, 2013 and 2012. For the years ended December 31, 2013 and 2012, $27,629 and $37,233, respectively, of pre-project
expenses were included in related party accounts payable and accrued expenses in the accompanying consolidated balance sheet.
An affiliated accounting firm of the Company’s Chief Financial Officer provides accounting and consulting services to the Company.
The Company recognized General and Administrative expenses in the amount of $80,050 and $80,000 for the years ended December
31, 2013 and 2012, respectively. As of December 31, 2013, $36,050 of such expenses are included in related party accounts payable
and accrued expenses on the accompanying consolidated balance sheet.
The Company has accrued certain reimbursable expenses of owners of the Company. Such expenses amounted to $2,779 for the years
ended December 31, 2012, and are included in related party accounts payable and accrued expenses in the accompanying consolidated
balance sheets.
F-29
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
19. Cancellation of Trade Liabilities and Unpaid Interest
For the years ended December 31, 2012, the Company recognized debt forgiveness income of $102,128, as shown on the accompanying
statements of operations, which represents forgiveness of trade accounts payable resulting from settlement agreements with vendors.
20. Subsequent Events
Management has evaluated events and transactions occurring after the date of the balance sheet and through the date of the report of
independent registered public accounting firm to determine whether any of these events or transactions were required to be recognized or
disclosed in the consolidated financial statements. The date of the report of independent registered public accounting firm is the date
that the consolidated financial statements were available to be issued.
In February 2014 a former director of the Company exercised options to purchase 50,000 shares of the Company’s Common Stock at
$0.20 per share.
On April 10, 2014, the Company entered into an Exchange Agreement (the “Exchange Agreement”) with certain of the holders of
its existing Senior Convertible Debentures (the "Existing Debentures"). In this exchange transaction, Existing Debentures with a
stated maturity value of $1,680,000 have been surrendered in exchange for (i) new Senior Convertible Debentures with a stated
interest rate of eight percent (8%) per year, a stated maturity value of $1,915,200, a conversion price of $.25 per share, subject to
adjustment, with a final maturity date of April 1, 2016 (the “2014 Exchange Debentures”), and (ii) a five (5) year Common Stock
purchase warrant to purchase up to 7,660,830 shares of the Company’s common stock at an exercise price of $0.275 (110% of the
conversion price), subject to adjustment. Existing Debentures with a maturity value of $392,000 will be paid in accordance with the
original terms.
On April 10, 2014, the Company entered into a Securities Purchase Agreement (the “2014 SPA”) pursuant to which it issued and sold
(i) $2,080,500 in 8% Original Discount Senior Secured Convertible Debentures, for $1,825,000 (“April Debenture”), with a
conversion price of $0.25, subject to adjustment, with a final maturity date of April 1, 2016 (the “2014 New Debentures” together with
the 2014 Exchange Debentures, the “2014 Debentures”), and (ii) a five (5) year Common Stock purchase warrant to purchase up to
8,322,000 shares of the Company’s common stock at an exercise price of $0.275 (110% of the conversion Price), subject to
adjustment. The initial conversion price for the April Debenture is $0.25 per share, subject to adjustments upon certain events, as set
forth in the April Debenture.
The Exchange Agreement and the 2014 SPA trigger anti-dilution adjustments to the warrants issued on the Existing Debentures based
on a $.25 per share conversion price (adjusted from the original stated conversion price of $.43 per share), which reduces the exercise
price to $.25 per share and increases the number of shares issuable upon the exercise of these warrants from 4,818,605 to 8,288,000
shares.
At any time after April 10, 2014, (the “Original Issue Date”) until the 2014 Debentures are no longer outstanding, the 2014
Debentures shall be convertible, in whole or in part, into shares of Common Stock at the option of the holders of the 2014
Debentures, subject to certain conversion limitations set forth in the 2014 Debentures. The initial conversion price for the 2014
Debentures is $.25 per share, subject to adjustments upon certain events, as set forth in the 2014 Debentures. The Company shall
pay interest on the aggregate unconverted and then outstanding principal amount of the 2014 Debentures at the rate of 8% per
annum, payable quarterly on January 1, April 1, July 1 and October 1, beginning on October 1, 2014. Interest is payable in cash or
at the Company’s option in shares of Common Stock, provided certain terms and conditions are met as more fully described in the
2014 Debentures. On each of October 1, 2015 and January 1, 2016, the Company is obligated to redeem an amount equal to
$998,925 and on April 1, 2016, an amount equal to $1,997,850, plus accrued but unpaid interest, liquidated damages and any other
amounts then owing in respect of the 2014 Debentures (as to each of the forgoing periodic redemptions, each a “Periodic
Redemption Amount”). In lieu of a cash redemption and subject to the Company meeting certain equity conditions described in the
2014 Debentures, the Company may elect to pay the Periodic Redemption Amount in shares on the terms set forth in the 2014
Debentures.
Upon any Event of Default (as defined in the Debenture), the outstanding principal amount of the Debenture, plus liquidated damages,
interest, a premium of 30% and other amounts owing in respect thereof through the date of acceleration, shall become, at the 2014
Holders’ election, immediately due and payable in cash. Commencing five days after the occurrence of any Event of Default, the
interest rate on the Debenture shall accrue at an interest rate equal to the lesser of 18% per annum or the maximum rate permitted
under applicable law. The 20014 Debentures contain anti-dilution protective provisions as described therein. The Company is subject
to compliance with certain covenants under the 2014 Debentures as set forth therein.
The 2014 Warrants may be exercised at any time on or after April 10, 2014 and on or prior to the close of business on April 10, 2019,
at an exercise price of $.275 per share, subject to adjustment upon certain events. The 2014 Warrants contain anti-dilution protective
provisions and limitations on exercise as described therein.
To secure the Company’s obligations under the 2014 Debentures, SG Building entered into a Subsidiary Guarantee, dated as of April
10, 2014 (the “Guarantee”), pursuant to which it unconditionally and irrevocably guaranteed the prompt and complete payment and
performance when due of the obligations arising from the 2014 Debentures. The Company and SG Building have each granted the
2014 Holders a security interest in their assets to secure the payment, performance and discharge in full of all of the Company’s
obligations under the 2014 Debentures and the guarantor’s obligations under the Guarantee, in accordance with that certain Security
Agreement, dated as of April 10, 2014.
F-30
NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE HAVE BEEN REGISTERED
WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE
UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES
ACT”) AND APPLICABLE STATE SECURITIES LAWS, AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL
OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY
ACCEPTABLE TO THE COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS
SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY
SUCH SECURITIES.
Exhibit 4.11
Original Issue Date: April 10, 2014
Original Conversion Price (subject to adjustment herein): $0.25
$________
8% ORIGINAL ISSUE DISCOUNT
SENIOR SECURED CONVERTIBLE DEBENTURE
DUE APRIL 1, 2016
THIS 8% ORIGINAL ISSUE DISCOUNT SENIOR SECURED CONVERTIBLE DEBENTURE is one of a series of duly authorized and
validly issued 8% Original Issue Discount Senior Secured Convertible Debentures of SG Blocks, Inc., a Delaware corporation, (the
“Company”), having its principal place of business at 3 Columbus Circle 16th Floor New York, NY 10019, designated as its 8% Original
Issue Discount Senior Secured Convertible Debenture due April 1, 2016 (this debenture, the “Debenture” and, collectively with the other
debentures of such series, the “Debentures”). This Debenture is being issued in substitution for and not in satisfaction of that certain 8%
Original Issue Discount Convertible Debenture issued to the Holder on December 28, 2012. Pursuant to Rule 144, the holding period of this
Debenture, the Conversion Shares issuable upon conversion and redemption hereof shall tack back to December 28, 2012. This Debenture
shall not constitute a novation or satisfaction and accord of such 8% Original Issue Discount Convertible Debenture.
FOR VALUE RECEIVED, the Company promises to pay to _____________ or its registered assigns (the “Holder”), or shall have
paid pursuant to the terms hereunder, the principal sum of $________ on April 1, 2016 (the “Maturity Date”) or such earlier date as this
Debenture is required or permitted to be repaid as provided hereunder, and to pay interest to the Holder on the aggregate unconverted and
then outstanding principal amount of this Debenture in accordance with the provisions hereof. This Debenture is subject to the following
additional provisions:
Section 1.
Definitions. For the purposes hereof, in addition to the terms defined elsewhere in this Debenture, (a) capitalized terms not
otherwise defined herein shall have the meanings set forth in the Exchange Agreement and (b) the following terms shall have the following
meanings:
“Alternate Consideration” shall have the meaning set forth in Section 5(e).
“Bankruptcy Event” means any of the following events: (a) the Company or any Significant Subsidiary (as such term is
defined in Rule 1-02(w) of Regulation S-X) thereof commences a case or other proceeding under any bankruptcy, reorganization,
arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction relating to
the Company or any Significant Subsidiary thereof, (b) there is commenced against the Company or any Significant Subsidiary thereof
any such case or proceeding that is not dismissed within 60 days after commencement, (c) the Company or any Significant Subsidiary
thereof is adjudicated insolvent or bankrupt or any order of relief or other order approving any such case or proceeding is entered, (d)
the Company or any Significant Subsidiary thereof suffers any appointment of any custodian or the like for it or any substantial part of
its property that is not discharged or stayed within 60 calendar days after such appointment, (e) the Company or any Significant
Subsidiary thereof makes a general assignment for the benefit of creditors, (f) the Company or any Significant Subsidiary thereof calls
a meeting of its creditors with a view to arranging a composition, adjustment or restructuring of its debts or (g) the Company or any
Significant Subsidiary thereof, by any act or failure to act, expressly indicates its consent to, approval of or acquiescence in any of the
foregoing or takes any corporate or other action for the purpose of effecting any of the foregoing.
“Base Conversion Price” shall have the meaning set forth in Section 5(b).
“Beneficial Ownership Limitation” shall have the meaning set forth in Section 4(d).
“Business Day” means any day except any Saturday, any Sunday, any day which is a federal legal holiday in the United States
or any day on which banking institutions in the State of New York are authorized or required by law or other governmental action to
close.
“Buy-In” shall have the meaning set forth in Section 4(c)(v).
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“Change of Control Transaction ” means the occurrence after the date hereof of any of (a) an acquisition after the date hereof
by an individual or legal entity or “group” (as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of effective control
(whether through legal or beneficial ownership of capital stock of the Company, by contract or otherwise) of in excess of 33% of the
voting securities of the Company (other than by means of conversion or exercise of the Debentures and the Securities issued together
with the Debentures), (b) the Company merges into or consolidates with any other Person, or any Person merges into or consolidates
with the Company and, after giving effect to such transaction, the stockholders of the Company immediately prior to such transaction
own less than 66% of the aggregate voting power of the Company or the successor entity of such transaction, (c) the Company sells or
transfers all or substantially all of its assets to another Person and the stockholders of the Company immediately prior to such
transaction own less than 66% of the aggregate voting power of the acquiring entity immediately after the transaction, (d) a
replacement at one time or within a three year period of more than one-half of the members of the Board of Directors which is not
approved by a majority of those individuals who are members of the Board of Directors on the Original Issue Date (or by those
individuals who are serving as members of the Board of Directors on any date whose nomination to the Board of Directors was
approved by a majority of the members of the Board of Directors who are members on the date hereof), or (e) the execution by the
Company of an agreement to which the Company is a party or by which it is bound, providing for any of the events set forth in clauses
(a) through (d) above.
“Conversion” shall have the meaning ascribed to such term in Section 4.
“Conversion Date” shall have the meaning set forth in Section 4(a).
“Conversion Price” shall have the meaning set forth in Section 4(b).
“Conversion Schedule” means the Conversion Schedule in the form of Schedule 1 attached hereto.
“Conversion Shares” means, collectively, the shares of Common Stock issuable upon conversion of this Debenture in
accordance with the terms hereof.
“Debenture Register” shall have the meaning set forth in Section 2(c).
“Dilutive Issuance” shall have the meaning set forth in Section 5(b).
“Dilutive Issuance Notice” shall have the meaning set forth in Section 5(b).
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“Equity Conditions” means, during the period in question, (a) the Company shall have duly honored all conversions and
redemptions scheduled to occur or occurring by virtue of one or more Notices of Conversion of the Holder, if any, (b) the Company
shall have paid all liquidated damages and other amounts owing to the Holder in respect of this Debenture, (c)(i) there is an effective
Registration Statement pursuant to which the Holder is permitted to utilize the prospectus thereunder to resell all of the shares of
Common Stock issuable pursuant to the Transaction Documents (and the Company believes, in good faith, that such effectiveness will
continue uninterrupted for the foreseeable future) or (ii) all of the Conversion Shares issuable pursuant to the Transaction Documents
(and shares issuable in lieu of cash payments of interest) may be resold pursuant to Rule 144 or Section 4(1) of the Securities Act
without volume or manner-of-sale restrictions or current public information requirements as determined by the counsel to the
Company as set forth in a written opinion letter to such effect, addressed and acceptable to the Transfer Agent and the Holder, (d) the
Common Stock is trading or quoted on a Trading Market and all of the shares issuable pursuant to the Transaction Documents are
listed or quoted for trading on such Trading Market (and the Company believes, in good faith, that trading or quotation of the Common
Stock on a Trading Market will continue uninterrupted for the foreseeable future), (e) there is a sufficient number of authorized but
unissued and otherwise unreserved shares of Common Stock for the issuance of all of the shares then issuable pursuant to the
Transaction Documents, (f) there is no existing Event of Default and no existing event which, with the passage of time or the giving of
notice, would reasonably constitute an Event of Default, (g) the issuance of the shares in question (or, in the case of an Optional
Redemption or Periodic Redemption, the shares issuable upon conversion in full of the Optional Redemption Amount or Periodic
Redemption Amount) to the Holder would not violate the limitations set forth in Section 4(d) herein, (h) there has been no public
announcement of a pending or proposed Fundamental Transaction or Change of Control Transaction that has not been consummated,
(i) the applicable Holder is not in possession of any information provided by the Company that constitutes, or may constitute, material
non-public information, and (j) with respect to Sections 2 and 6(b), the number of shares of Common Stock proposed to be issued in
respect of such payments at issue, in each case as attributable to all holders of Debentures, is less than 10% of the aggregate number of
shares of Common Stock traded on the principal Trading Market during the 20 Trading Days immediately prior to such payment date.
“Event of Default” shall have the meaning set forth in Section 8(a).
“Exchange Agreement” means the Exchange Agreement, dated as of April 10, 2014 among the Company and the original
Holders, as amended, modified or supplemented from time to time in accordance with its terms.
“Fundamental Transaction” shall have the meaning set forth in Section 5(e).
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“Interest Conversion Rate” means the lesser of (a) the Conversion Price or (b) 90% of the lesser of (i) the average of the
VWAPs for the 20 consecutive Trading Days ending on the Trading Day that is immediately prior to the applicable Interest Payment
Date or (ii) the average of the VWAPs for the 20 consecutive Trading Days ending on the Trading Day that is immediately prior to the
date the applicable Interest Conversion Shares are issued and delivered if such delivery is after the Interest Payment Date (provided,
however, in the case of clause (b) the Interest Conversion Rate shall be at least a $.01 discount to the VWAP on the Trading Day
immediately preceding such payment date).
“Interest Conversion Shares” shall have the meaning set forth in Section 2(a).
“Interest Notice Period” shall have the meaning set forth in Section 2(a).
“Interest Payment Date” shall have the meaning set forth in Section 2(a).
“Interest Share Amount” shall have the meaning set forth in Section 2(a).
“Late Fees” shall have the meaning set forth in Section 2(d).
“Mandatory Default Amount” means the sum of (a) the greater of (i) the outstanding principal amount of this Debenture, plus
all accrued and unpaid interest hereon, divided by the Conversion Price on the date the Mandatory Default Amount is either (A)
demanded (if demand or notice is required to create an Event of Default) or otherwise due or (B) paid in full, whichever has a lower
Conversion Price, multiplied by the VWAP on the date the Mandatory Default Amount is either (x) demanded or otherwise due or (y)
paid in full, whichever has a higher VWAP, or (ii) 130% of the outstanding principal amount of this Debenture, plus 100% of accrued
and unpaid interest hereon, and (b) all other amounts, costs, expenses and liquidated damages due in respect of this Debenture.
“New York Courts” shall have the meaning set forth in Section 9(d).
“Notice of Conversion” shall have the meaning set forth in Section 4(a).
“Optional Redemption” shall have the meaning set forth in Section 6(a).
“Optional Redemption Amount” means the sum of (a) 120% of the then outstanding principal amount of the Debenture, (b)
accrued but unpaid interest and (c) all liquidated damages and other amounts due in respect of the Debenture.
“Optional Redemption Date” shall have the meaning set forth in Section 6(a).
“Optional Redemption Notice” shall have the meaning set forth in Section 6(a).
“Optional Redemption Notice Date” shall have the meaning set forth in Section 6(a).
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“Optional Redemption Period” shall have the meaning set forth in Section 6(a).
“Original Issue Date” means the date of the first issuance of the Debentures, regardless of any transfers of any Debenture and
regardless of the number of instruments which may be issued to evidence such Debentures.
“Periodic Conversion Period” shall have the meaning set forth in Section 6(b) hereof.
“Periodic Conversion Price” shall have the meaning set forth in Section 6(b) hereof.
“Periodic Redemption” means the redemption of this Debenture pursuant to Section 6(b) hereof.
“Periodic Redemption Amount” means, as to a Periodic Redemption, $_______ each as to the October 1, 2015 and January 1,
2016 Periodic Redemption Dates and $_______ as to the April 1, 2016 Periodic Redemption Date, in each case plus accrued but
unpaid interest, liquidated damages and any other amounts then owing to the Holder in respect of this Debenture.
“Periodic Redemption Date” means each of October 1, 2015, January 1, 2016 and April 1, 2016.
“Periodic Redemption Notice” shall have the meaning set forth in Section 6(b) hereof.
“Permitted Indebtedness” means (a) the indebtedness evidenced by the Debentures, and (b) lease obligations, purchase money
indebtedness incurred in connection with the acquisition of capital assets and lease obligations with respect to newly acquired or leased
assets, and the indebtedness existing on the Closing Date and set forth on Schedule 3.1(aa) to the April 2014 Purchase Agreement, of
up to $300,000, in the aggregate.
“Permitted Lien” means the individual and collective reference to the following: (a) Liens for taxes, assessments and other
governmental charges or levies not yet due or Liens for taxes, assessments and other governmental charges or levies being contested in
good faith and by appropriate proceedings for which adequate reserves (in the good faith judgment of the management of the
Company) have been established in accordance with GAAP, (b) Liens imposed by law which were incurred in the ordinary course of
the Company’s business, such as carriers’, warehousemen’s and mechanics’ Liens, statutory landlords’ Liens, and other similar Liens
arising in the ordinary course of the Company’s business, and which (x) do not individually or in the aggregate materially detract from
the value of such property or assets or materially impair the use thereof in the operation of the business of the Company and its
consolidated Subsidiaries or (y) are being contested in good faith by appropriate proceedings, which proceedings have the effect of
preventing for the foreseeable future the forfeiture or sale of the property or asset subject to such Lien, (c) Liens incurred in connection
with Permitted Indebtedness under clause (a) and (d) Liens incurred in connection with Permitted Indebtedness under clause (b)
thereunder, provided that such Liens are not secured by assets of the Company or its Subsidiaries other than the assets so acquired or
leased, or, in the case of the Prestige Capital Corporation factoring agreement, all assets of the Company.
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“Pre-Redemption Conversion Shares” shall have the meaning set forth in Section 6(b) hereof.
“Registration Statement” means a registration statement covering the resale of the Underlying Shares by the Holder.
“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
“Share Delivery Date” shall have the meaning set forth in Section 4(c)(ii).
“Successor Entity” shall have the meaning set forth in Section 5(e).
“Trading Day” means a day on which the principal Trading Market is open for trading.
“Trading Market” means any of the following markets or exchanges on which the Common Stock is listed or quoted for
trading on the date in question: the NYSE MKT, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select
Market, the New York Stock Exchange, OTC Markets Inc. or the OTC Bulletin Board (or any successors to any of the foregoing).
“VWAP” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock
is then listed or quoted on a Trading Market, the daily volume weighted average price of the Common Stock for such date (or the
nearest preceding date on which the Common Stock actually traded) on the Trading Market on which the Common Stock is then listed
or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City
time)), (b) if the OTC Bulletin Board is not a Trading Market, the volume weighted average price of the Common Stock for such date
(or the nearest preceding date) on the OTC Bulletin Board, (c) if the Common Stock is not then listed or quoted for trading on the OTC
Bulletin Board and if prices for the Common Stock are then reported in the “Pink Sheets” published by Pink OTC Markets, Inc. (or a
similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common
Stock so reported, or (d) in all other cases, the fair market value of a share of Common Stock as determined by an independent
appraiser selected in good faith by the Holders of a majority in interest of the Securities then outstanding and reasonably acceptable to
the Company, the fees and expenses of which shall be paid by the Company.
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Section 2.
Interest.
a) Payment of Interest in Cash or Kind. At the Closing, the Company acknowledges and agrees that this Debenture was
issued at an original issue discount. The Company shall pay interest to the Holder on the aggregate unconverted and then outstanding
principal amount of this Debenture at the rate of 8% per annum, payable quarterly on January 1, April 1, July 1 and October 1,
beginning on October 1, 2014, on each Periodic Redemption Date (as to that principal amount then being redeemed), on each
Conversion Date (as to that principal amount then being converted), on each Optional Redemption Date (as to that principal amount
then being redeemed) and on the Maturity Date (each such date, an “Interest Payment Date”) (if any Interest Payment Date is not a
Business Day, then the applicable payment shall be due on the next succeeding Business Day), in cash or, at the Company’s option, in
duly authorized, validly issued, fully paid and non-assessable shares of Common Stock at the Interest Conversion Rate (the dollar
amount to be paid in shares, the “Interest Share Amount”) or a combination thereof; provided, however, that payment in shares of
Common Stock may only occur if (i) all of the Equity Conditions have been met (unless waived by the Holder in writing) during the
20 Trading Days immediately prior to the applicable Interest Payment Date (the “Interest Notice Period”) and through and including
the date such shares of Common Stock are actually issued to the Holder, (ii) the Company shall have given the Holder notice in
accordance with the notice requirements set forth below and (iii) as to such Interest Payment Date, prior to such Interest Notice Period
(but not more than five (5) Trading Days prior to the commencement of such Interest Notice Period), the Company shall have
delivered to the Holder’s account with The Depository Trust Company a number of shares of Common Stock to be applied against
such Interest Share Amount equal to the quotient of (x) the applicable Interest Share Amount divided by (y) the lesser of the (i) then
Conversion Price and (ii) the Interest Conversion Rate assuming for such purposes that the Interest Payment Date is the Trading Day
immediately prior to the commencement of the Interest Notice Period (the “Interest Conversion Shares”).
b
) Company’s Election to Pay Interest in Cash or Kind. Subject to the terms and conditions herein, the decision
whether to pay interest hereunder in cash, shares of Common Stock or a combination thereof shall be at the sole discretion of the
Company. Prior to the commencement of any Interest Notice Period, the Company shall deliver to the Holder a written notice of its
election to pay interest hereunder on the applicable Interest Payment Date either in cash, shares of Common Stock or a combination
thereof and the Interest Share Amount as to the applicable Interest Payment Date, provided that the Company may indicate in such
notice that the election contained in such notice shall apply to future Interest Payment Dates until revised by a subsequent
notice. During any Interest Notice Period, the Company’s election (whether specific to an Interest Payment Date or continuous) shall
be irrevocable as to such Interest Payment Date. Subject to the aforementioned conditions, failure to timely deliver such written notice
to the Holder shall be deemed an election by the Company to pay the interest on such Interest Payment Date in cash. At any time the
Company delivers a notice to the Holder of its election to pay the interest in shares of Common Stock, if a Registration Statement
covering such shares is then effective, the Company shall timely file a prospectus supplement pursuant to Rule 424 disclosing such
election. The aggregate number of shares of Common Stock otherwise issuable to the Holder on an Interest Payment Date shall be
reduced by the number of Interest Conversion Shares previously issued to the Holder in connection with such Interest Payment Date.
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c) Interest Calculations. Interest shall be calculated on the basis of a 360-day year, consisting of twelve 30 calendar day
periods, and shall accrue daily commencing on the Original Issue Date until payment in full of the outstanding principal, together with
all accrued and unpaid interest, liquidated damages and other amounts which may become due hereunder, has been made. Payment of
interest in shares of Common Stock (other than the Interest Conversion Shares issued prior to an Interest Notice Period) shall otherwise
occur pursuant to Section 4(c)(ii) herein and, solely for purposes of the payment of interest in shares, the Interest Payment Date shall
be deemed the Conversion Date. Interest shall cease to accrue with respect to any principal amount converted, provided that, the
Company actually delivers the Conversion Shares within the time period required by Section 4(c)(ii) herein. Interest hereunder will be
paid to the Person in whose name this Debenture is registered on the records of the Company regarding registration and transfers of
this Debenture (the “Debenture Register”). Except as otherwise provided herein, if at any time the Company pays interest partially in
cash and partially in shares of Common Stock to the holders of the Debentures, then such payment of cash shall be distributed ratably
among the holders of the then-outstanding Debentures based on their (or their predecessor’s) Exchange Amount (as defined in the
Exchange Agreement) pursuant to the Exchange Agreement.
d ) Late Fee. All overdue accrued and unpaid interest to be paid hereunder shall entail a late fee at an interest rate equal
to the lesser of 18% per annum or the maximum rate permitted by applicable law (the “Late Fees”) which shall accrue daily from the
date such interest is due hereunder through and including the date of actual payment in full. Notwithstanding anything to the contrary
contained herein, if, on any Interest Payment Date the Company has elected to pay accrued interest in the form of Common Stock but
the Company is not permitted to pay accrued interest in Common Stock because it fails to satisfy the conditions for payment in
Common Stock set forth in Section 2(a) herein, then, at the option of the Holder, the Company, in lieu of delivering either shares of
Common Stock pursuant to this Section 2 or paying the regularly scheduled interest payment in cash, shall deliver, within three (3)
Trading Days of each applicable Interest Payment Date, an amount in cash equal to the product of (x) the number of shares of
Common Stock otherwise deliverable to the Holder in connection with the payment of interest due on such Interest Payment Date
multiplied by (y) the highest VWAP during the period commencing on the Interest Payment Date and ending on the Trading Day prior
to the date such payment is actually made. If any Interest Conversion Shares are issued to the Holder in connection with an Interest
Payment Date and are not applied against an Interest Share Amount, then the Holder shall promptly return such excess shares to the
Company.
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e
) Prepayment. Except as otherwise set forth in this Debenture, the Company may not prepay any portion of the
principal amount of this Debenture without the prior written consent of the Holder.
Section 3.
Registration of Transfers and Exchanges.
a ) Different Denominations. This Debenture is exchangeable for an equal aggregate principal amount of Debentures of
different authorized denominations, as requested by the Holder surrendering the same. No service charge will be payable for such
registration of transfer or exchange.
b
) Investment Representations. This Debenture has been issued subject to certain investment representations of the
original Holder set forth in the Exchange Agreement and may be transferred or exchanged only in compliance with the Exchange
Agreement and applicable federal and state securities laws and regulations.
c
) Reliance on Debenture Register. Prior to due presentment for transfer to the Company of this Debenture, the
Company and any agent of the Company may treat the Person in whose name this Debenture is duly registered on the Debenture
Register as the owner hereof for the purpose of receiving payment as herein provided and for all other purposes, whether or not this
Debenture is overdue, and neither the Company nor any such agent shall be affected by notice to the contrary.
Section 4.
Conversion.
a ) Voluntary Conversion. At any time after the Original Issue Date until this Debenture is no longer outstanding, this
Debenture shall be convertible, in whole or in part, into shares of Common Stock at the option of the Holder, at any time and from time
to time (subject to the conversion limitations set forth in Section 4(d) hereof). The Holder shall effect conversions by delivering to the
Company a Notice of Conversion, the form of which is attached hereto as Annex A (each, a “Notice of Conversion”), specifying
therein the principal amount of this Debenture to be converted and the date on which such conversion shall be effected (such date, the
“Conversion Date”). If no Conversion Date is specified in a Notice of Conversion, the Conversion Date shall be the date that such
Notice of Conversion is deemed delivered hereunder. To effect conversions hereunder, the Holder shall not be required to physically
surrender this Debenture to the Company unless the entire principal amount of this Debenture, plus all accrued and unpaid interest
thereon, has been so converted. Conversions hereunder shall have the effect of lowering the outstanding principal amount of this
Debenture in an amount equal to the applicable conversion. The Holder and the Company shall maintain records showing the principal
amount(s) converted and the date of such conversion(s). The Company may deliver an objection to any Notice of Conversion within
two (2) Business Days of delivery of such Notice of Conversion. In the event of any dispute or discrepancy, the records of the Holder
shall be controlling and determinative in the absence of manifest error. The Holder, and any assignee by acceptance of this
Debenture, acknowledge and agree that, by reason of the provisions of this paragraph, following conversion of a portion of this
Debenture, the unpaid and unconverted principal amount of this Debenture may be less than the amount stated on the face
hereof.
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b
) Conversion Price. The conversion price in effect on any Conversion Date shall be equal to $0.25, subject to
adjustment herein (the “Conversion Price”).
c)
Mechanics of Conversion.
i
. Conversion Shares Issuable Upon Conversion of Principal Amount. The number of Conversion Shares
issuable upon a conversion hereunder shall be determined by the quotient obtained by dividing (x) the outstanding principal
amount of this Debenture to be converted by (y) the Conversion Price.
ii. Delivery of Certificate Upon Conversion. Not later than three (3) Trading Days after each Conversion Date
(the “Share Delivery Date”), the Company shall deliver, or cause to be delivered, to the Holder (A) a certificate or certificates
representing the Conversion Shares which shall be free of restrictive legends and trading restrictions (other than those which
may then be required by the Exchange Agreement) representing the number of Conversion Shares being acquired upon the
conversion of this Debenture (including, if the Company has given continuous notice pursuant to Section 2(b) for payment of
interest in shares of Common Stock at least 20 Trading Days prior to the date on which the Notice of Conversion is delivered
to the Company, shares of Common Stock representing the payment of accrued interest otherwise determined pursuant to
Section 2(a) but assuming that the Interest Notice Period is the 20 Trading Days period immediately prior to the date on which
the Notice of Conversion is delivered to the Company and excluding for such issuance the condition that the Company deliver
Interest Conversion Shares as to such interest payment prior to the commencement of the Interest Notice Period) and (B) a
bank check in the amount of accrued and unpaid interest (if the Company has elected or is required to pay accrued interest in
cash). The Company shall use its commercially reasonable efforts to deliver any certificate or certificates required to be
delivered by the Company under this Section 4(c) electronically through the Depository Trust Company or another established
clearing corporation performing similar functions.
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i i i . Failure to Deliver Certificates. If, in the case of any Notice of Conversion, such certificate or certificates
are not delivered to or as directed by the applicable Holder by the Share Delivery Date, the Holder shall be entitled to elect by
written notice to the Company at any time on or before its receipt of such certificate or certificates, to rescind such
Conversion, in which event the Company shall promptly return to the Holder any original Debenture delivered to the
Company and the Holder shall promptly return to the Company the Common Stock certificates issued to such Holder
pursuant to the rescinded Conversion Notice.
i v . Obligation Absolute; Partial Liquidated Damages . The Company’s obligations to issue and deliver the
Conversion Shares upon conversion of this Debenture in accordance with the terms hereof are absolute and unconditional,
irrespective of any action or inaction by the Holder to enforce the same, any waiver or consent with respect to any provision
hereof, the recovery of any judgment against any Person or any action to enforce the same, or any setoff, counterclaim,
recoupment, limitation or termination, or any breach or alleged breach by the Holder or any other Person of any obligation to
the Company or any violation or alleged violation of law by the Holder or any other Person, and irrespective of any other
circumstance which might otherwise limit such obligation of the Company to the Holder in connection with the issuance of
such Conversion Shares; provided, however, that such delivery shall not operate as a waiver by the Company of any such
action the Company may have against the Holder. In the event the Holder of this Debenture shall elect to convert any or all
of the outstanding principal amount hereof, the Company may not refuse conversion based on any claim that the Holder or
anyone associated or affiliated with the Holder has been engaged in any violation of law, agreement or for any other reason,
unless an injunction from a court, on notice to Holder, restraining and or enjoining conversion of all or part of this Debenture
shall have been sought and obtained, and the Company posts a surety bond for the benefit of the Holder in the amount of
150% of the outstanding principal amount of this Debenture, which is subject to the injunction, which bond shall remain in
effect until the completion of arbitration/litigation of the underlying dispute and the proceeds of which shall be payable to the
Holder to the extent it obtains judgment. In the absence of such injunction, the Company shall issue Conversion Shares or, if
applicable, cash, upon a properly noticed conversion. If the Company fails for any reason to deliver to the Holder such
certificate or certificates pursuant to Section 4(c)(ii) by the Share Delivery Date, the Company shall pay to the Holder, in
cash, as liquidated damages and not as a penalty, for each $1,000 of principal amount being converted, $10 per Trading Day
(increasing to $15 per Trading Day on the fifth (5th) Trading Day after such liquidated damages begin to accrue) for each
Trading Day after such Share Delivery Date until such certificates are delivered or Holder rescinds such conversion. Nothing
herein shall limit a Holder’s right to pursue actual damages or declare an Event of Default pursuant to Section 8 hereof for the
Company’s failure to deliver Conversion Shares within the period specified herein and the Holder shall have the right to
pursue all remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific
performance and/or injunctive relief. The exercise of any such rights shall not prohibit the Holder from seeking to enforce
damages pursuant to any other Section hereof or under applicable law.
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v . Compensation for Buy-In on Failure to Timely Deliver Certificates Upon Conversion. In addition to any
other rights available to the Holder, if the Company fails for any reason to deliver to the Holder such certificate or certificates
by the Share Delivery Date pursuant to Section 4(c)(ii), and if after such Share Delivery Date the Holder is required by its
brokerage firm to purchase (in an open market transaction or otherwise), or the Holder’s brokerage firm otherwise purchases,
shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Conversion Shares which the Holder was
entitled to receive upon the conversion relating to such Share Delivery Date (a “Buy-In”), then the Company shall (A) pay in
cash to the Holder (in addition to any other remedies available to or elected by the Holder) the amount, if any, by which (x) the
Holder’s total purchase price (including any brokerage commissions) for the Common Stock so purchased exceeds (y) the
product of (1) the aggregate number of shares of Common Stock that the Holder was entitled to receive from the conversion
at issue multiplied by (2) the actual sale price at which the sell order giving rise to such purchase obligation was executed
(including any brokerage commissions) and (B) at the option of the Holder, either reissue (if surrendered) this Debenture in a
principal amount equal to the principal amount of the attempted conversion (in which case such conversion shall be deemed
rescinded) or deliver to the Holder the number of shares of Common Stock that would have been issued if the Company had
timely complied with its delivery requirements under Section 4(c)(ii). For example, if the Holder purchases Common Stock
having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted conversion of this Debenture with
respect to which the actual sale price of the Conversion Shares (including any brokerage commissions) giving rise to such
purchase obligation was a total of $10,000 under clause (A) of the immediately preceding sentence, the Company shall be
required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to
the Holder in respect of the Buy-In and, upon request of the Company, evidence of the amount of such loss. Nothing herein
shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without
limitation, a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely deliver
certificates representing shares of Common Stock upon conversion of this Debenture as required pursuant to the terms hereof.
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v i . Reservation of Shares Issuable Upon Conversion. The Company covenants that it will at all times reserve
and keep available out of its authorized and unissued shares of Common Stock for the sole purpose of issuance upon
conversion of this Debenture and payment of interest on this Debenture, each as herein provided, free from preemptive rights
or any other actual contingent purchase rights of Persons other than the Holder (and the other holders of the Debentures), not
less than such aggregate number of shares of the Common Stock as shall (subject to the terms and conditions set forth in the
Exchange Agreement) be issuable (taking into account the adjustments and restrictions of Section 5) upon the conversion of
the then outstanding principal amount of this Debenture and payment of interest hereunder. The Company covenants that all
shares of Common Stock that shall be so issuable shall, upon issue, be duly authorized, validly issued, fully paid and
nonassessable and, if the Registration Statement is then effective under the Securities Act, shall be registered for public resale
in accordance with such Registration Statement.
v i i . Fractional Shares. No fractional shares or scrip representing fractional shares shall be issued upon the
conversion of this Debenture. As to any fraction of a share which the Holder would otherwise be entitled to purchase upon
such conversion, the Company shall at its election, either pay a cash adjustment in respect of such final fraction in an amount
equal to such fraction multiplied by the Conversion Price or round up to the next whole share.
viii. Transfer Taxes and Expenses. The issuance of certificates for shares of the Common Stock on conversion
of this Debenture shall be made without charge to the Holder hereof for any documentary stamp or similar taxes that may be
payable in respect of the issue or delivery of such certificates, provided that, the Company shall not be required to pay any tax
that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in
a name other than that of the Holder of this Debenture so converted and the Company shall not be required to issue or deliver
such certificates unless or until the Person or Persons requesting the issuance thereof shall have paid to the Company the
amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. The Company
shall pay all Transfer Agent fees required for same-day processing of any Notice of Conversion.
14
d ) Holder’s Conversion Limitations. The Company shall not effect any conversion of this Debenture, and a Holder
shall not have the right to convert any portion of this Debenture, to the extent that after giving effect to the conversion set forth on the
applicable Notice of Conversion, the Holder (together with the Holder’s Affiliates, and any Persons acting as a group together with the
Holder or any of the Holder’s Affiliates) would beneficially own in excess of the Beneficial Ownership Limitation (as defined below).
For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates
shall include the number of shares of Common Stock issuable upon conversion of this Debenture with respect to which such
determination is being made, but shall exclude the number of shares of Common Stock which are issuable upon (i) conversion of the
remaining, unconverted principal amount of this Debenture beneficially owned by the Holder or any of its Affiliates and (ii) exercise or
conversion of the unexercised or unconverted portion of any other securities of the Company subject to a limitation on conversion or
exercise analogous to the limitation contained herein (including, without limitation, any other Debentures or the Warrants) beneficially
owned by the Holder or any of its Affiliates. Except as set forth in the preceding sentence, for purposes of this Section 4(d), beneficial
ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated
thereunder. To the extent that the limitation contained in this Section 4(d) applies, the determination of whether this Debenture is
convertible (in relation to other securities owned by the Holder together with any Affiliates) and of which principal amount of this
Debenture is convertible shall be in the sole discretion of the Holder, and the submission of a Notice of Conversion shall be deemed to
be the Holder’s determination of whether this Debenture may be converted (in relation to other securities owned by the Holder together
with any Affiliates) and which principal amount of this Debenture is convertible, in each case subject to the Beneficial Ownership
Limitation. To ensure compliance with this restriction, the Holder will be deemed to represent to the Company each time it delivers a
Notice of Conversion that such Notice of Conversion has not violated the restrictions set forth in this paragraph and the Company shall
have no obligation to verify or confirm the accuracy of such determination. In addition, a determination as to any group status as
contemplated above shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations
promulgated thereunder. For purposes of this Section 4(d), in determining the number of outstanding shares of Common Stock, the
Holder may rely on the number of outstanding shares of Common Stock as stated in the most recent of the following: (i) the
Company’s most recent periodic or annual report filed with the Commission, as the case may be, (ii) a more recent public
announcement by the Company, or (iii) a more recent written notice by the Company or the Company’s transfer agent setting forth the
number of shares of Common Stock outstanding. Upon the written or oral request of a Holder, the Company shall within two Trading
Days confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of
outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the
Company, including this Debenture, by the Holder or its Affiliates since the date as of which such number of outstanding shares of
Common Stock was reported. The “Beneficial Ownership Limitation” shall be 4.99% of the number of shares of the Common Stock
outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon conversion of this Debenture
held by the Holder. The Holder, upon not less than 61 days’ prior notice to the Company, may increase or decrease the Beneficial
Ownership Limitation provisions of this Section 4(d), provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of
the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock
upon conversion of this Debenture held by the Holder and the Beneficial Ownership Limitation provisions of this Section 4(d) shall
continue to apply. Any such increase or decrease will not be effective until the 61 st day after such notice is delivered to the Company.
The Beneficial Ownership Limitation provisions of this paragraph shall be construed and implemented in a manner otherwise than in
strict conformity with the terms of this Section 4(d) to correct this paragraph (or any portion hereof) which may be defective or
inconsistent with the intended Beneficial Ownership Limitation contained herein or to make changes or supplements necessary or
desirable to properly give effect to such limitation. The limitations contained in this paragraph shall apply to a successor holder of this
Debenture.
15
Section 5. Certain Adjustments.
a ) Stock Dividends and Stock Splits. If the Company, at any time while this Debenture is outstanding: (i) pays a stock
dividend or otherwise makes a distribution or distributions payable in shares of Common Stock on shares of Common Stock or any
Common Stock Equivalents (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company
upon conversion of, or payment of interest on, the Debentures or in connection with an Exempt Issuance), (ii) subdivides outstanding
shares of Common Stock into a larger number of shares, (iii) combines (including by way of a reverse stock split) outstanding shares
of Common Stock into a smaller number of shares or (iv) issues, in the event of a reclassification of shares of the Common Stock, any
shares of capital stock of the Company, then the Conversion Price shall be multiplied by a fraction of which the numerator shall be the
number of shares of Common Stock (excluding any treasury shares of the Company) outstanding immediately before such event, and
of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event. Any adjustment
made pursuant to this Section shall become effective immediately after the record date for the determination of stockholders entitled to
receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision,
combination or re-classification.
16
b ) Subsequent Equity Sales. If, at any time while this Debenture is outstanding, the Company or any Subsidiary, as
applicable, sells or grants any option to purchase or sells or grants any right to reprice, or otherwise disposes of or issues (or announces
any sale, grant or any option to purchase or other disposition), any Common Stock or Common Stock Equivalents entitling any Person
to acquire shares of Common Stock at an effective price per share that is lower than the then Conversion Price (such lower price, the
“Base Conversion Price” and such issuances, collectively, a “Dilutive Issuance”) (if the holder of the Common Stock or Common
Stock Equivalents so issued shall at any time, whether by operation of purchase price adjustments, reset provisions, floating
conversion, exercise or exchange prices or otherwise, or due to warrants, options or rights per share which are issued in connection
with such issuance, be entitled to receive shares of Common Stock at an effective price per share that is lower than the Conversion
Price, such issuance shall be deemed to have occurred for less than the Conversion Price on such date of the Dilutive Issuance), then
the Conversion Price shall be reduced to equal the Base Conversion Price. Such adjustment shall be made whenever such Common
Stock or Common Stock Equivalents are issued. Notwithstanding the foregoing, no adjustment will be made under this Section 5(b) in
respect of an Exempt Issuance. If the Company enters into a Variable Rate Transaction, despite the prohibition set forth in the
Exchange Agreement, the Company shall be deemed to have issued Common Stock or Common Stock Equivalents at the lowest
possible conversion price at which such securities may be converted or exercised. The Company shall notify the Holder in writing, no
later than the Trading Day following the issuance of any Common Stock or Common Stock Equivalents subject to this Section 5(b),
indicating therein the applicable issuance price, or applicable reset price, exchange price, conversion price and other pricing terms
(such notice, the “Dilutive Issuance Notice”). For purposes of clarification, whether or not the Company provides a Dilutive Issuance
Notice pursuant to this Section 5(b), upon the occurrence of any Dilutive Issuance, the Holder is entitled to receive a number of
Conversion Shares based upon the Base Conversion Price on or after the date of such Dilutive Issuance, regardless of whether the
Holder accurately refers to the Base Conversion Price in the Notice of Conversion.
c ) Subsequent Rights Offerings. In addition to any adjustments pursuant to the other subsections of this Section 5, if at
any time the Company grants, issues or sells any Common Stock Equivalents or rights to purchase stock, warrants, securities or other
property pro rata to the record holders of any class of shares of Common Stock (the “Purchase Rights”), then the Holder will be
entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have
acquired if the Holder had held the number of shares of Common Stock acquirable upon complete conversion of this Debenture
(without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately
before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the
date as of which the record holders of shares of Common Stock are to be determined for the grant, issue or sale of such Purchase
Rights (provided, however, to the extent that the Holder’s right to participate in any such Purchase Right would result in the Holder
exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Purchase Right to such
extent (or beneficial ownership of such shares of Common Stock as a result of such Purchase Right to such extent) and such Purchase
Right to such extent shall be held in abeyance for the Holder until such time, if ever, as its right thereto would not result in the Holder
exceeding the Beneficial Ownership Limitation).
17
d) Pro Rata Distributions. During such time as this Debenture is outstanding, if the Company shall declare or make any
dividend or other distribution of its assets (or rights to acquire its assets) to holders of shares of Common Stock, by way of return of
capital or otherwise (including, without limitation, any distribution of cash, stock or other securities, property or options by way of a
dividend, spin off, reclassification, corporate rearrangement, scheme of arrangement or other similar transaction) (a “Distribution”), at
any time after the issuance of this Debenture, then, in each such case, the Holder shall be entitled to participate in such Distribution to
the same extent that the Holder would have participated therein if the Holder had held the number of shares of Common Stock
acquirable upon complete exercise of this Debenture (without regard to any limitations on exercise hereof, including without
limitation, the Beneficial Ownership Limitation) immediately before the date of which a record is taken for such Distribution, or, if no
such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the participation in
such Distribution (provided, however, to the extent that the Holder's right to participate in any such Distribution would result in the
Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Distribution to such
extent (or in the beneficial ownership of any shares of Common Stock as a result of such Distribution to such extent) and the portion of
such Distribution shall be held in abeyance for the benefit of the Holder until such time, if ever, as its right thereto would not result in
the Holder exceeding the Beneficial Ownership Limitation).
18
e) Fundamental Transaction. If, at any time while this Debenture is outstanding, (i) the Company, directly or indirectly,
in one or more related transactions effects any merger or consolidation of the Company with or into another Person, (ii) the Company,
directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of
its assets in one or a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by
the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to sell, tender or exchange
their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common
Stock, (iv) the Company, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or
recapitalization of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively
converted into or exchanged for other securities, cash or property, (v) the Company, directly or indirectly, in one or more related
transactions consummates a stock or share purchase agreement or other business combination (including, without limitation, a
reorganization, recapitalization, spin-off or scheme of arrangement) with another Person whereby such other Person acquires more
than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the other Person or other
Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock or share purchase
agreement or other business combination) (each a “Fundamental Transaction”), then, upon any subsequent conversion of this
Debenture, the Holder shall have the right to receive, for each Conversion Share that would have been issuable upon such conversion
immediately prior to the occurrence of such Fundamental Transaction (without regard to any limitation in Section 4(d) on the
conversion of this Debenture), the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if
it is the surviving corporation, and any additional consideration (the “Alternate Consideration”) receivable as a result of such
Fundamental Transaction by a holder of the number of shares of Common Stock for which this Debenture is convertible immediately
prior to such Fundamental Transaction (without regard to any limitation in Section 4(d) on the conversion of this Debenture). For
purposes of any such conversion, the determination of the Conversion Price shall be appropriately adjusted to apply to such Alternate
Consideration based on the amount of Alternate Consideration issuable in respect of one (1) share of Common Stock in such
Fundamental Transaction, and the Company shall apportion the Conversion Price among the Alternate Consideration in a reasonable
manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are
given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the
same choice as to the Alternate Consideration it receives upon any conversion of this Debenture following such Fundamental
Transaction. The Company shall cause any successor entity in a Fundamental Transaction in which the Company is not the survivor
(the “Successor Entity”) to assume in writing all of the obligations of the Company under this Debenture and the other Transaction
Documents (as defined in the Exchange Agreement) in accordance with the provisions of this Section 5(e) pursuant to written
agreements in form and substance reasonably satisfactory to the Holder and approved by the Holder (without unreasonable delay) prior
to such Fundamental Transaction and shall, at the option of the holder of this Debenture, deliver to the Holder in exchange for this
Debenture a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to this
Debenture which is convertible for a corresponding number of shares of capital stock of such Successor Entity (or its parent entity)
equivalent to the shares of Common Stock acquirable and receivable upon conversion of this Debenture (without regard to any
limitations on the conversion of this Debenture) prior to such Fundamental Transaction, and with a conversion price which applies the
conversion price hereunder to such shares of capital stock (but taking into account the relative value of the shares of Common Stock
pursuant to such Fundamental Transaction and the value of such shares of capital stock, such number of shares of capital stock and
such conversion price being for the purpose of protecting the economic value of this Debenture immediately prior to the
consummation of such Fundamental Transaction), and which is reasonably satisfactory in form and substance to the Holder. Upon the
occurrence of any such Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after
the date of such Fundamental Transaction, the provisions of this Debenture and the other Transaction Documents referring to the
“Company” shall refer instead to the Successor Entity), and may exercise every right and power of the Company and shall assume all
of the obligations of the Company under this Debenture and the other Transaction Documents with the same effect as if such
Successor Entity had been named as the Company herein.
19
f) Calculations. All calculations under this Section 5 shall be made to the nearest cent or the nearest 1/100th of a share,
as the case may be. For purposes of this Section 5, the number of shares of Common Stock deemed to be issued and outstanding as of
a given date shall be the sum of the number of shares of Common Stock (excluding any treasury shares of the Company) issued and
outstanding.
g) Notice to the Holder.
i
. Adjustment to Conversion Price. Whenever the Conversion Price is adjusted pursuant to any provision of
this Section 5, the Company shall promptly deliver to each Holder a notice setting forth the Conversion Price after such
adjustment and setting forth a brief statement of the facts requiring such adjustment.
i
i
. Notice to Allow Conversion by Holder. If (A) the Company shall declare a dividend (or any other
distribution in whatever form) on the Common Stock, (B) the Company shall declare a special nonrecurring cash dividend on
or a redemption of the Common Stock, (C) the Company shall authorize the granting to all holders of the Common Stock of
rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (D) the approval of any
stockholders of the Company shall be required in connection with any reclassification of the Common Stock, any
consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the
Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property
or (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the
Company, then, in each case, the Company shall cause to be filed at each office or agency maintained for the purpose of
conversion of this Debenture, and shall cause to be delivered to the Holder at its last address as it shall appear upon the
Debenture Register, at least twenty (20) calendar days prior to the applicable record or effective date hereinafter specified, a
notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or
warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to
such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification,
consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is
expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for
securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share
exchange, provided that the failure to deliver such notice or any defect therein or in the delivery thereof shall not affect the
validity of the corporate action required to be specified in such notice. To the extent that any notice provided hereunder
constitutes, or contains, material, non-public information regarding the Company or any of the Subsidiaries, the Company
shall simultaneously file such notice with the Commission pursuant to a Current Report on Form 8-K. The Holder shall
remain entitled to convert this Debenture during the 20-day period commencing on the date of such notice through the
effective date of the event triggering such notice except as may otherwise be expressly set forth herein.
20
Section 6. Redemption.
a ) Optional Redemption at Election of Company . Subject to the provisions of this Section 6(a), at any time after the 6-
month anniversary of the Closing Date, the Company may deliver a notice to the Holder (an “Optional Redemption Notice” and the
date such notice is deemed delivered hereunder, the “Optional Redemption Notice Date”) of its irrevocable election to redeem some or
all of the then outstanding principal amount of this Debenture for cash in an amount equal to the Optional Redemption Amount on the
10th Trading Day following the Optional Redemption Notice Date (such date, the “ Optional Redemption Date”, such 10 Trading Day
period, the “Optional Redemption Period” and such redemption, the “Optional Redemption”). The Optional Redemption Amount is
payable in full on the Optional Redemption Date. The Company may only effect an Optional Redemption if each of the Equity
Conditions shall have been met (unless waived in writing by the Holder) on each Trading Day during the period commencing on the
Optional Redemption Notice Date through to the Optional Redemption Date and through and including the date payment of the
Optional Redemption Amount is actually made in full. If any of the Equity Conditions shall cease to be satisfied at any time during the
Optional Redemption Period, then the Holder may elect to nullify the Optional Redemption Notice by notice to the Company within 3
Trading Days after the first day on which any such Equity Condition has not been met (provided that if, by a provision of the
Transaction Documents, the Company is obligated to notify the Holder of the non-existence of an Equity Condition, such notice
period shall be extended to the third Trading Day after proper notice from the Company) in which case the Optional Redemption
Notice shall be null and void, ab initio. The Company covenants and agrees that it will honor all Notices of Conversion tendered from
the time of delivery of the Optional Redemption Notice through the date all amounts owing thereon are due and paid in full. The
Company’s determination to pay an Optional Redemption in cash shall be applied ratably to all of the holders of the then outstanding
Debentures based on their (or their predecessor’s) Exchange Amount pursuant to the Exchange Agreement.
21
b ) Periodic Redemption. On each Periodic Redemption Date, the Company shall redeem the Periodic Redemption
Amount (the “Periodic Redemption”). The Periodic Redemption Amount payable on each Periodic Redemption Date shall be paid in
cash; provided, however, as to any Periodic Redemption and upon 20 Trading Days’ prior written irrevocable notice (the “Periodic
Redemption Notice”), in lieu of a cash redemption payment the Company may elect to pay all or part of a Periodic Redemption
Amount in Conversion Shares based on a conversion price equal to the lesser of (i) the then Conversion Price and (ii) 90% of the
average of the VWAPs for the 20 consecutive Trading Days ending on the Trading Day that is immediately prior to the applicable
Periodic Redemption Date (subject to adjustment for any stock dividend, stock split, stock combination or other similar event affecting
the Common Stock during such 20 Trading Day period), provided, however, in the case of this clause (ii) the conversion price shall be
equal to at least a $.01 discount the VWAP on the Trading Day immediately prior to the applicable Periodic Redemption Date (the
price calculated during the 20 Trading Day period immediately prior to the Periodic Redemption Date, the “Periodic Conversion
Price” and such 20 Trading Day period, the “Periodic Conversion Period”); provided, further, that the Company may not pay the
Periodic Redemption Amount in Conversion Shares unless (y) from the date the Holder receives the duly delivered Periodic
Redemption Notice through and until the date such Periodic Redemption is paid in full, the Equity Conditions have been satisfied,
unless waived in writing by the Holder, and (z) as to such Periodic Redemption, prior to such Periodic Conversion Period (but not more
than 5 Trading Days prior to the commencement of the Periodic Conversion Period), the Company shall have delivered to the Holder’s
account with The Depository Trust Company a number of shares of Common Stock to be applied against such Periodic Redemption
Amount equal to the quotient of (x) the applicable Periodic Redemption Amount divided by (y) the lesser of (A) the Conversion Price
and (B) 90% of the average of the 20 VWAPs during the period ending on the 3 rd Trading Day immediately prior to the date of the
Periodic Redemption Notice (the “Pre-Redemption Conversion Shares”). The Holder may convert, pursuant to Section 4(a), any
principal amount of this Debenture subject to a Periodic Redemption at any time prior to the date that the Periodic Redemption
Amount, plus accrued but unpaid interest, liquidated damages and any other amounts then owing to the Holder are due and paid in
full. Unless otherwise indicated by the Holder in the applicable Notice of Conversion, any principal amount of this Debenture
converted during the applicable Periodic Conversion Period until the date the Periodic Redemption Amount is paid in full shall be first
applied to the principal amount subject to the Periodic Redemption Amount payable in cash and then to the Periodic Redemption
Amount payable in Conversion Shares. Any principal amount of this Debenture converted during the applicable Periodic Conversion
Period in excess of the Periodic Redemption Amount shall be applied against the last principal amount of this Debenture scheduled to
be redeemed hereunder, in reverse time order from the Maturity Date; provided, however, if any such conversion is applied against
such Periodic Redemption Amount, the Pre-Redemption Conversion Shares, if any were issued in connection with such Periodic
Redemption or were not already applied to such conversions, shall be first applied against such conversion. The Company covenants
and agrees that it will honor all Notices of Conversion tendered up until such amounts are paid in full. The Company’s determination
to pay a Periodic Redemption in cash, shares of Common Stock or a combination thereof shall be applied ratably to all of the holders of
the then outstanding Debentures based on their (or their predecessor’s) Exchange Amount pursuant to the Exchange Agreement. At
any time the Company delivers a notice to the Holder of its election to pay the Periodic Redemption Amount in shares of Common
Stock, if a Registration Statement is then effective, the Company shall file a prospectus supplement pursuant to Rule 424 disclosing
such election.
22
c ) Redemption Procedure. The payment of cash or issuance of Common Stock, as applicable, pursuant to an Optional
Redemption or a Periodic Redemption shall be payable on the Optional Redemption Date or Periodic Redemption Date, as
applicable. If any portion of the payment pursuant to an Optional Redemption or Periodic Redemption shall not be paid by the
Company by the applicable due date, interest shall accrue thereon at an interest rate equal to the lesser of 18% per annum or the
maximum rate permitted by applicable law until such amount is paid in full. Notwithstanding anything herein contained to the
contrary, if any portion of the Optional Redemption Amount or Periodic Redemption Amount remains unpaid after such date, the
Holder may elect, by written notice to the Company given at any time thereafter, to invalidate such Optional Redemption or Periodic
Redemption, ab initio, and, with respect to the Company’s failure to honor the Optional Redemption, the Company shall have no
further right to exercise such Optional Redemption. Notwithstanding anything to the contrary in this Section 6, the Company’s
determination to redeem in cash or its elections under Section 6(b) shall be applied ratably among the Holders of Debentures. The
Holder may elect to convert the outstanding principal amount of the Debenture pursuant to Section 4 prior to actual payment in cash
for any redemption under this Section 6 by the delivery of a Notice of Conversion to the Company.
Section 7. Negative Covenants. As long as any portion of this Debenture remains outstanding, unless the holders of at least
50.1% in principal amount of the then outstanding Debentures shall have otherwise given prior written consent, the Company shall not, and
shall not permit any of the Subsidiaries to, directly or indirectly:
a ) other than Permitted Indebtedness, enter into, create, incur, assume, guarantee or suffer to exist any indebtedness for
borrowed money of any kind, including, but not limited to, a guarantee, on or with respect to any of its property or assets now owned or
hereafter acquired or any interest therein or any income or profits therefrom;
b
) other than Permitted Liens, enter into, create, incur, assume or suffer to exist any Liens of any kind, on or with
respect to any of its property or assets now owned or hereafter acquired or any interest therein or any income or profits therefrom;
c) amend its charter documents, including, without limitation, its certificate of incorporation and bylaws, in any manner
that materially and adversely affects any rights of the Holder (for avoidance of doubt, amendments of the Company’s charter
documents in accordance with Section 4.11 of the Purchase Agreement shall be permitted and shall not require consent);
23
d) repay, repurchase or offer to repay, repurchase or otherwise acquire more than a de minimis number of shares of its
Common Stock or Common Stock Equivalents other than as to (i) the Conversion Shares or Warrant Shares as permitted or required
under the Transaction Documents and (ii) repurchases of Common Stock or Common Stock Equivalents of departing officers and
directors of the Company, provided that such repurchases shall not exceed an aggregate of $150,000 for all officers and directors
during the term of this Debenture;
e ) repay, repurchase or offer to repay, repurchase or otherwise acquire any Indebtedness, other than (i) the Debentures
if on a pro-rata basis, (ii) the 2012 Debentures in accordance with the terms and conditions of the 2012 Debentures as of the Original
Issue Date or (iii) the 2012 Debentures set forth on Schedule 4.9 to the April, 2014 Purchase Agreement;
f) pay cash dividends or distributions on any equity securities of the Company;
g) enter into any transaction with any Affiliate of the Company which would be required to be disclosed in any public
filing with the Commission, unless such transaction is made on an arm’s-length basis and expressly approved by a majority of the
disinterested directors of the Company (even if less than a quorum otherwise required for board approval); or
h) enter into any agreement with respect to any of the foregoing.
Section 8. Events of Default.
a) “Event of Default” means, wherever used herein, any of the following events (whatever the reason for such event
and whether such event shall be voluntary or involuntary or effected by operation of law or pursuant to any judgment, decree or order
of any court, or any order, rule or regulation of any administrative or governmental body):
i . any default in the payment of (A) the principal amount of any Debenture or (B) interest, liquidated damages
and other amounts owing to a Holder on any Debenture, as and when the same shall become due and payable (whether on a
Conversion Date or the Maturity Date or by acceleration or otherwise) which default, solely in the case of an interest payment
or other default under clause (B) above, is not cured within 3 Trading Days;
ii. the Company shall fail to observe or perform any other covenant or agreement contained in the Debentures
(other than a breach by the Company of its obligations to deliver shares of Common Stock to the Holder upon conversion,
which breach is addressed in clause (x) below) which failure is not cured, if possible to cure, within the earlier to occur of (A)
5 Trading Days after notice of such failure sent by the Holder or by any other Holder to the Company and (B) 20 Trading
Days after the Company has become or should have become aware of such failure;
24
iii. a default or event of default (subject to any grace or cure period provided in the applicable agreement,
document or instrument) shall occur under (A) any of the Transaction Documents or (B) any other material agreement, lease,
document or instrument to which the Company or any Subsidiary is obligated (and not covered by clause (vi) below);
i v . any representation or warranty made in this Debenture, any other Transaction Documents, any written
statement pursuant hereto or thereto or any other report, financial statement or certificate made or delivered to the Holder or
any other Holder shall be untrue or incorrect in any material respect as of the date when made or deemed made;
v. the Company or any Significant Subsidiary (as such term is defined in Rule 1-02(w) of Regulation S-
X) shall be subject to a Bankruptcy Event;
vi. the Company or any Subsidiary shall default on any of its obligations under any mortgage, credit agreement
or other facility, indenture agreement, factoring agreement or other instrument under which there may be issued, or by which
there may be secured or evidenced, any indebtedness for borrowed money or money due under any long term leasing or
factoring arrangement that (a) involves an obligation greater than $500,000, whether such indebtedness now exists or shall
hereafter be created, and (b) results in such indebtedness becoming or being declared due and payable prior to the date on
which it would otherwise become due and payable;
vii. the Common Stock shall not be eligible for listing or quotation for trading on a Trading Market and shall not
be eligible to resume listing or quotation for trading thereon within five Trading Days;
viii. the Company shall be a party to any Change of Control Transaction or Fundamental Transaction or shall
agree to sell or dispose of all or in excess of 33% of its assets in one transaction or a series of related transactions (whether or
not such sale would constitute a Change of Control Transaction);
i x . the Company does not meet the current public information requirements under Rule 144 in respect of the
Underlying Shares;
25
x. the Company shall fail for any reason to deliver certificates to a Holder prior to the fifth Trading Day after a
Conversion Date pursuant to Section 4(c) or the Company shall provide at any time notice to the Holder, including by way of
public announcement, of the Company’s intention to not honor requests for conversions of any Debentures in accordance with
the terms hereof; or
xi. any monetary judgment, writ or similar final process shall be entered or filed against the Company, any
subsidiary or any of their respective property or other assets for more than $300,000, and such judgment, writ or similar final
process shall remain unvacated, unbonded or unstayed for a period of 45 calendar days.
b
) Remedies Upon Event of Default. If any Event of Default occurs, the outstanding principal amount of this
Debenture, plus accrued but unpaid interest, liquidated damages and other amounts owing in respect thereof through the date of
acceleration, shall become, at the Holder’s election, immediately due and payable in cash at the Mandatory Default
Amount. Commencing 5 days after the occurrence of any Event of Default that results in the eventual acceleration of this Debenture,
the interest rate on this Debenture shall accrue at an interest rate equal to the lesser of 18% per annum or the maximum rate permitted
under applicable law. Upon the payment in full of the Mandatory Default Amount, the Holder shall promptly surrender this Debenture
to or as directed by the Company. In connection with such acceleration described herein, the Holder need not provide, and the
Company hereby waives, any presentment, demand, protest or other notice of any kind, and the Holder may immediately and without
expiration of any grace period enforce any and all of its rights and remedies hereunder and all other remedies available to it under
applicable law. Such acceleration may be rescinded and annulled by Holder at any time prior to payment hereunder and the Holder
shall have all rights as a holder of the Debenture until such time, if any, as the Holder receives full payment pursuant to this Section
8(b). No such rescission or annulment shall affect any subsequent Event of Default or impair any right consequent thereon.
Section 9. Miscellaneous.
a
) Notices. Any and all notices or other communications or deliveries to be provided by the Holder hereunder,
including, without limitation, any Notice of Conversion, shall be in writing and delivered personally, by facsimile, or sent by a
nationally recognized overnight courier service, addressed to the Company, at the address set forth above, or such other facsimile
number or address as the Company may specify for such purposes by notice to the Holder delivered in accordance with this Section
9(a). Any and all notices or other communications or deliveries to be provided by the Company hereunder shall be in writing and
delivered personally, by facsimile, or sent by a nationally recognized overnight courier service addressed to each Holder at the
facsimile number or address of the Holder appearing on the books of the Company, or if no such facsimile number or address appears
on the books of the Company, at the principal place of business of such Holder, as set forth in the Exchange Agreement. Any notice or
other communication or deliveries hereunder 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 set forth on the signature pages attached hereto prior to
5:30 p.m. (New York City time) on any date, (ii) the next Trading Day after the date of transmission, if such notice or communication
is delivered via facsimile at the facsimile number set forth on the signature pages attached hereto on a day that is not a Trading Day or
later than 5:30 p.m. (New York City time) on any Trading Day, (iii) the second Trading Day following the date of mailing, if sent by
U.S. nationally recognized overnight courier service or (iv) upon actual receipt by the party to whom such notice is required to be
given.
26
b ) Absolute Obligation. Except as expressly provided herein, no provision of this Debenture shall alter or impair the
obligation of the Company, which is absolute and unconditional, to pay the principal of, liquidated damages and accrued interest, as
applicable, on this Debenture at the time, place, and rate, and in the coin or currency, herein prescribed. This Debenture is a direct debt
obligation of the Company. This Debenture ranks pari passu with all other Debentures now or hereafter issued under the terms set
forth herein.
c
) Lost or Mutilated Debenture. If this Debenture shall be mutilated, lost, stolen or destroyed, the Company shall
execute and deliver, in exchange and substitution for and upon cancellation of a mutilated Debenture, or in lieu of or in substitution for
a lost, stolen or destroyed Debenture, a new Debenture for the principal amount of this Debenture so mutilated, lost, stolen or
destroyed, but only upon receipt of evidence of such loss, theft or destruction of such Debenture, and of the ownership hereof,
reasonably satisfactory to the Company.
d
) Governing Law. All questions concerning the construction, validity, enforcement and interpretation of this
Debenture shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without
regard to the principles of conflict of laws thereof. Each party agrees that all legal proceedings concerning the interpretation,
enforcement and defense of the transactions contemplated by any of the Transaction Documents (whether brought against a party
hereto or its respective Affiliates, directors, officers, shareholders, employees or agents) shall be commenced in the state and federal
courts sitting in the City of New York, Borough of Manhattan (the “New York Courts ”). Each party hereto hereby irrevocably
submits to the exclusive jurisdiction of the New York Courts for the adjudication of any dispute hereunder or in connection herewith
or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of any of the Transaction
Documents), and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not
personally subject to the jurisdiction of such New York Courts, or such New York Courts are improper or inconvenient venue for such
proceeding. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit,
action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such
party at the address in effect for notices to it under this Debenture and agrees that such service shall constitute good and sufficient
service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any
other manner permitted by applicable law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable
law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Debenture or the transactions contemplated
hereby. If any party shall commence an action or proceeding to enforce any provisions of this Debenture, then the prevailing party in
such action or proceeding shall be reimbursed by the other party for its attorneys fees and other costs and expenses incurred in the
investigation, preparation and prosecution of such action or proceeding.
27
e ) Waiver. Any waiver by the Company or the Holder of a breach of any provision of this Debenture shall not operate
as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Debenture. The
failure of the Company or the Holder to insist upon strict adherence to any term of this Debenture on one or more occasions shall not
be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this
Debenture on any other occasion. Any waiver by the Company or the Holder must be in writing.
f
) Severability. If any provision of this Debenture is invalid, illegal or unenforceable, the balance of this Debenture
shall remain in effect, and if any provision is inapplicable to any Person or circumstance, it shall nevertheless remain applicable to all
other Persons and circumstances. If it shall be found that any interest or other amount deemed interest due hereunder violates the
applicable law governing usury, the applicable rate of interest due hereunder shall automatically be lowered to equal the maximum rate
of interest permitted under applicable law. The Company covenants (to the extent that it may lawfully do so) that it shall not at any
time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law or
other law which would prohibit or forgive the Company from paying all or any portion of the principal of or interest on this Debenture
as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance
of this Debenture, and the Company (to the extent it may lawfully do so) hereby expressly waives all benefits or advantage of any such
law, and covenants that it will not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the
Holder, but will suffer and permit the execution of every such as though no such law has been enacted.
g
) Next Business Day. Whenever any payment or other obligation hereunder shall be due on a day other than a
Business Day, such payment shall be made on the next succeeding Business Day.
28
h ) Headings. The headings contained herein are for convenience only, do not constitute a part of this Debenture and
shall not be deemed to limit or affect any of the provisions hereof.
i ) Secured Obligation. The obligations of the Company under this Debenture are secured by all assets of the Company
and each Subsidiary pursuant to the Security Agreement, dated as of April 10, 2014 between the Company, the Subsidiaries of the
Company and the Secured Parties (as defined therein).
*********************
(Signature Pages Follow)
29
IN WITNESS WHEREOF, the Company has caused this Debenture to be duly executed by a duly authorized officer as of the date
first above indicated.
SG BLOCKS, INC.
By:
Name: Paul M. Galvin
Title: Chief Executive Officer
Facsimile No. for delivery of Notices: 646.747.2438
30
ANNEX A
NOTICE OF CONVERSION
The undersigned hereby elects to convert principal under the 8% Original Issue Discount Senior Secured Convertible Debenture due April 1,
2016 of SG Blocks, Inc., a Delaware corporation (the “Company”), into shares of common stock (the “Common Stock”), of the Company
according to the conditions hereof, as of the date written below. If shares of Common Stock are to be issued in the name of a person other
than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates and
opinions as reasonably requested by the Company in accordance therewith. No fee will be charged to the holder for any conversion, except
for such transfer taxes, if any.
By the delivery of this Notice of Conversion the undersigned represents and warrants to the Company that its ownership of the Common Stock
does not exceed the amounts specified under Section 4 of this Debenture, as determined in accordance with Section 13(d) of the Exchange Act.
The undersigned agrees to comply with the prospectus delivery requirements under the applicable securities laws in connection with any
transfer of the aforesaid shares of Common Stock.
Conversion calculations:
Date to Effect Conversion:
Principal Amount of Debenture to be Converted:
Payment of Interest in Common Stock __ yes __ no
If yes, $_____ of Interest Accrued on Account of Conversion
at Issue.
Number of shares of Common Stock to be issued:
Signature:
Name:
Address for Delivery of Common Stock Certificates:
Or
DWAC Instructions:
Broker No:_____________________
Account No:___________________
31
Schedule 1
CONVERSION SCHEDULE
This 8% Original Issue Discount Senior Secured Convertible Debentures due on April 1, 2016 in the original principal amount of $________
is issued by SG Blocks, Inc., a Delaware corporation. This Conversion Schedule reflects conversions made under Section 4 of the above
referenced Debenture.
Dated:
Date of Conversion
(or for first entry, Original Issue
Date)
Amount of
Conversion
Aggregate Principal
Amount Remaining
Subsequent to Conversion
(or original Principal Amount)
Company Attest
32
NEITHER THIS SECURITY NOR THE SECURITIES FOR WHICH THIS SECURITY 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 APPLICABLE STATE SECURITIES LAWS, AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL
OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY
ACCEPTABLE TO THE COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS SECURITY
MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH
SECURITIES.
Exhibit 4.12
COMMON STOCK PURCHASE WARRANT
SG BLOCKS, INC.
Warrant Shares: ________
Initial Exercise Date: April 10, 2014
THIS COMMON STOCK PURCHASE WARRANT (the “ Warrant”) certifies that, for value received, _____________ or
its assigns (the “Holder”) is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any
time on or after April 10, 2014 (the “Initial Exercise Date”) and on or prior to the close of business on the five year anniversary of the Initial
Exercise Date (the “Termination Date”) but not thereafter, to subscribe for and purchase from SG Blocks, Inc., a Delaware corporation (the
“Company”), up to ________ shares (as subject to adjustment hereunder, the “Warrant Shares”) of Common Stock. The purchase price of one
share of Common Stock under this Warrant shall be equal to the Exercise Price, as defined in Section 2(b). This Warrant is being issued in
exchange for that certain 8% Original Issue Discount Convertible Debenture issued to the Holder on December 28, 2012. Pursuant to Rule
144, the holding period of this Warrant and the Warrant Shares (in the event of a cashless exercise) shall tack back to December 28, 2012.
Section 1. Definitions. Capitalized terms used and not otherwise defined herein shall have the meanings set forth in that
certain Exchange Agreement (the “Exchange Agreement”), dated April 10, 2014, among the Company and the purchasers signatory thereto.
Section 2. Exercise.
a) Exercise of Warrant. Exercise of the purchase rights represented by this Warrant may be made, in whole or in part, at
any time or times on or after the Initial Exercise Date and on or before the Termination Date by delivery to the Company (or such
other office or agency of the Company as it may designate by notice in writing to the registered Holder at the address of the Holder
appearing on the books of the Company) of a duly executed facsimile copy of the Notice of Exercise form annexed hereto and within
three (3) Trading Days of the date said Notice of Exercise is delivered to the Company, the Company shall have received payment of
the aggregate Exercise Price of the shares thereby purchased by wire transfer or cashier’s check drawn on a United States bank or, if
available, pursuant to the cashless exercise procedure specified in Section 2(c) below. Notwithstanding anything herein to the contrary,
the Holder shall not be required to physically surrender this Warrant to the Company until the Holder has purchased all of the Warrant
Shares available hereunder and the Warrant has been exercised in full, in which case, the Holder shall surrender this Warrant to the
Company for cancellation within three (3) Trading Days of the date the final Notice of Exercise is delivered to the Company. Partial
exercises of this Warrant resulting in purchases of a portion of the total number of Warrant Shares available hereunder shall have the
effect of lowering the outstanding number of Warrant Shares purchasable hereunder in an amount equal to the applicable number of
Warrant Shares purchased. The Holder and the Company shall maintain records showing the number of Warrant Shares purchased and
the date of such purchases. The Company shall deliver any objection to any Notice of Exercise Form within two (2) Business Days of
receipt of such notice. The Holder and any assignee, by acceptance of this Warrant, acknowledge and agree that, by reason of
the provisions of this paragraph, following the purchase of a portion of the Warrant Shares hereunder, the number of
Warrant Shares available for purchase hereunder at any given time may be less than the amount stated on the face hereof.
b ) Exercise Price. The exercise price per share of the Common Stock under this Warrant shall be $0.275, subject to
adjustment hereunder (the “Exercise Price”).
c ) Cashless Exercise. If at any time after Initial Exercise Date there is no effective Registration Statement registering,
or no current prospectus available for, the resale of the Warrant Shares by the Holder, then this Warrant may only also be exercised, in
whole or in part, at such time by means of a “cashless exercise” in which the Holder shall be entitled to receive a number of Warrant
Shares equal to the quotient obtained by dividing [(A-B) (X)] by (A), where:
(A)
=
the VWAP on the Trading Day immediately preceding the date on which Holder elects to exercise this Warrant by means of
a “cashless exercise,” as set forth in the applicable Notice of Exercise;
the Exercise Price of this Warrant, as adjusted hereunder; and
(B)
=
(X)
=
the number of Warrant Shares that would be issuable upon exercise of this Warrant in accordance with the terms of this
Warrant if such exercise were by means of a cash exercise rather than a cashless exercise.
2
Notwithstanding anything herein to the contrary, on the Termination Date, this Warrant shall be automatically exercised via
cashless exercise pursuant to this Section 2(c).
d) Mechanics of Exercise.
i.
Delivery of Warrant Shares Upon Exercise. Warrant Shares purchased hereunder shall be
transmitted by the Transfer Agent to the Holder by crediting the account of the Holder’s prime broker with The
Depository Trust Company through its Deposit or Withdrawal at Custodian system (“DWAC”) if the Company is
then a participant in such system and either (A) there is an effective registration statement permitting the issuance of
the Warrant Shares to or resale of the Warrant Shares by the Holder or (B) the shares are eligible for resale by the
Holder without volume or manner-of-sale limitations pursuant to Rule 144, and otherwise by physical delivery to the
address specified by the Holder in the Notice of Exercise by the date that is three (3) Trading Days after the latest of
(A) the delivery to the Company of the Notice of Exercise, (B) surrender of this Warrant (if required), and (C)
payment of the aggregate Exercise Price as set forth above (including by cashless exercise, if permitted) (such date,
the “Warrant Share Delivery Date”). The Warrant Shares shall be deemed to have been issued, and Holder or any
other person so designated to be named therein shall be deemed to have become a holder of record of such shares for
all purposes, as of the date the Warrant has been exercised, with payment to the Company of the Exercise Price (or
by cashless exercise, if permitted) and all taxes required to be paid by the Holder, if any, pursuant to Section 2(d)(vi)
prior to the issuance of such shares, having been paid. If the Company fails for any reason to deliver to the Holder
the Warrant Shares subject to a Notice of Exercise by the Warrant Share Delivery Date, the Company shall pay to the
Holder, in cash, as liquidated damages and not as a penalty, for each $1,000 of Warrant Shares subject to such
exercise (based on the VWAP of the Common Stock on the date of the applicable Notice of Exercise), $10 per
Trading Day (increasing to $15 per Trading Day on the fifth Trading Day after such liquidated damages begin to
accrue) for each Trading Day after such Warrant Share Delivery Date until such Warrant Shares are delivered or
Holder rescinds such exercise.
ii.
Delivery of New Warrants Upon Exercise . If this Warrant shall have been exercised in part, the
Company shall, at the request of a Holder and upon surrender of this Warrant certificate, at the time of delivery of
the Warrant Shares, deliver to the Holder a new Warrant evidencing the rights of the Holder to purchase the
unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical
with this Warrant.
3
i i i . Rescission Rights. If the Company fails to cause the Transfer Agent to transmit to the Holder the
Warrant Shares pursuant to Section 2(d)(i) by the Warrant Share Delivery Date, then the Holder will have the right to
rescind such exercise.
iv. Compensation for Buy-In on Failure to Timely Deliver Warrant Shares Upon Exercise. In addition
to any other rights available to the Holder, if the Company fails to cause the Transfer Agent to transmit to the Holder
the Warrant Shares pursuant to an exercise on or before the Warrant Share Delivery Date, and if after such date the
Holder is required by its broker to purchase (in an open market transaction or otherwise) or the Holder’s brokerage
firm otherwise purchases, shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant
Shares which the Holder anticipated receiving upon such exercise (a “Buy-In”), then the Company shall (A) pay in
cash to the Holder the amount, if any, by which (x) the Holder’s total purchase price (including brokerage
commissions, if any) for the shares of Common Stock so purchased exceeds (y) the amount obtained by multiplying
(1) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the
exercise at issue times (2) the price at which the sell order giving rise to such purchase obligation was executed, and
(B) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares
for which such exercise was not honored (in which case such exercise shall be deemed rescinded) or deliver to the
Holder the number of shares of Common Stock that would have been issued had the Company timely complied with
its exercise and delivery obligations hereunder subject to payment of the Exercise Price therefor. For example, if the
Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an
attempted exercise of shares of Common Stock with an aggregate sale price giving rise to such purchase obligation
of $10,000, under clause (A) of the immediately preceding sentence the Company shall be required to pay the Holder
$1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in
respect of the Buy-In and, upon request of the Company, evidence of the amount of such loss. Nothing herein shall
limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without
limitation, a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely
deliver shares of Common Stock upon exercise of the Warrant as required pursuant to the terms hereof.
v. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be
issued upon the exercise of this Warrant. As to any fraction of a share which the Holder would otherwise be entitled
to purchase upon such exercise, the Company shall, at its election, either pay a cash adjustment in respect of such
final fraction in an amount equal to such fraction multiplied by the Exercise Price or round up to the next whole
share.
4
v i . Charges, Taxes and Expenses. Issuance of Warrant Shares shall be made without charge to the
Holder for any issue or transfer tax or other incidental expense in respect of the issuance of Warrant Shares, all of
which transfer taxes and expenses shall be paid by the Company, and such Warrant Shares shall be issued in the
name of the Holder or in such name or names as may be directed by the Holder; provided, however, that in the event
that Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for
exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder and the
Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax
incidental thereto. The Company shall pay all Transfer Agent fees required for same-day processing of any Notice of
Exercise.
v i i . Closing of Books. The Company will not close its stockholder books or records in any manner
which prevents the timely exercise of this Warrant, pursuant to the terms hereof.
5
e ) Holder’s Exercise Limitations. The Company shall not effect any exercise of this Warrant, and a Holder
shall not have the right to exercise any portion of this Warrant, pursuant to Section 2 or otherwise, to the extent that after
giving effect to such issuance after exercise as set forth on the applicable Notice of Exercise, the Holder (together with the
Holder’s Affiliates, and any other Persons acting as a group together with the Holder or any of the Holder’s Affiliates), would
beneficially own in excess of the Beneficial Ownership Limitation (as defined below). For purposes of the foregoing
sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates shall include the number
of shares of Common Stock issuable upon exercise of this Warrant with respect to which such determination is being made,
but shall exclude the number of shares of Common Stock which would be issuable upon (i) exercise of the remaining,
nonexercised portion of this Warrant beneficially owned by the Holder or any of its Affiliates and (ii) exercise or conversion
of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any
other Common Stock Equivalents) subject to a limitation on conversion or exercise analogous to the limitation contained
herein beneficially owned by the Holder or any of its Affiliates. Except as set forth in the preceding sentence, for purposes of
this Section 2(e), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules
and regulations promulgated thereunder, it being acknowledged by the Holder that the Company is not representing to the
Holder that such calculation is in compliance with Section 13(d) of the Exchange Act and the Holder is solely responsible for
any schedules required to be filed in accordance therewith. To the extent that the limitation contained in this Section 2(e)
applies, the determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together
with any Affiliates) and of which portion of this Warrant is exercisable shall be in the sole discretion of the Holder, and the
submission of a Notice of Exercise shall be deemed to be the Holder’s determination of whether this Warrant is exercisable (in
relation to other securities owned by the Holder together with any Affiliates) and of which portion of this Warrant is
exercisable, in each case subject to the Beneficial Ownership Limitation, and the Company shall have no obligation to verify
or confirm the accuracy of such determination. In addition, a determination as to any group status as contemplated above
shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated
thereunder. For purposes of this Section 2(e), in determining the number of outstanding shares of Common Stock, a Holder
may rely on the number of outstanding shares of Common Stock as reflected in (A) the Company’s most recent periodic or
annual report filed with the Commission, as the case may be, (B) a more recent public announcement by the Company or (C)
a more recent written notice by the Company or the Transfer Agent setting forth the number of shares of Common Stock
outstanding. Upon the written or oral request of a Holder, the Company shall within two Trading Days confirm orally and in
writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding
shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company,
including this Warrant, by the Holder or its Affiliates since the date as of which such number of outstanding shares of
Common Stock was reported. The “Beneficial Ownership Limitation” shall be 4.99% of the number of shares of the
Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon
exercise of this Warrant. The Holder, upon not less than 61 days’ prior notice to the Company, may increase or decrease the
Beneficial Ownership Limitation provisions of this Section 2(e), provided that the Beneficial Ownership Limitation in no
event exceeds 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the
issuance of shares of Common Stock upon exercise of this Warrant held by the Holder and the provisions of this Section 2(e)
shall continue to apply. Any such increase or decrease will not be effective until the 61 st day after such notice is delivered to
the Company. The provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict
conformity with the terms of this Section 2(e) to correct this paragraph (or any portion hereof) which may be defective or
inconsistent with the intended Beneficial Ownership Limitation herein contained or to make changes or supplements
necessary or desirable to properly give effect to such limitation. The limitations contained in this paragraph shall apply to a
successor holder of this Warrant.
6
Section 3. Certain Adjustments.
a ) Stock Dividends and Splits. If the Company, at any time while this Warrant is outstanding: (i) pays a stock dividend
or otherwise makes a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities
payable in shares of Common Stock (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the
Company upon exercise of this Warrant or in connection with an Exempt Issuance), (ii) subdivides outstanding shares of Common
Stock into a larger number of shares, (iii) combines (including by way of reverse stock split) outstanding shares of Common Stock into
a smaller number of shares or (iv) issues by reclassification of shares of the Common Stock any shares of capital stock of the
Company, then in each case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares
of Common Stock (excluding treasury shares, if any) outstanding immediately before such event and of which the denominator shall
be the number of shares of Common Stock outstanding immediately after such event, and the number of shares issuable upon exercise
of this Warrant shall be proportionately adjusted such that the aggregate Exercise Price of this Warrant shall remain unchanged. Any
adjustment made pursuant to this Section 3(a) shall become effective immediately after the record date for the determination of
stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case
of a subdivision, combination or re-classification.
b ) Subsequent Equity Sales. If the Company or any Subsidiary thereof, as applicable, at any time while this Warrant is
outstanding, shall sell or grant any option to purchase, or sell or grant any right to reprice, or otherwise dispose of or issue (or
announce any offer, sale, grant or any option to purchase or other disposition) any Common Stock or Common Stock Equivalents, at
an effective price per share less than the Exercise Price then in effect (such lower price, the “Base Share Price” and such issuances
collectively, a “ Dilutive Issuance”) (it being understood and agreed that if the holder of the Common Stock or Common Stock
Equivalents so issued shall at any time, whether by operation of purchase price adjustments, reset provisions, floating conversion,
exercise or exchange prices or otherwise, or due to warrants, options or rights per share which are issued in connection with such
issuance, be entitled to receive shares of Common Stock at an effective price per share that is less than the Exercise Price, such
issuance shall be deemed to have occurred for less than the Exercise Price on such date of the Dilutive Issuance at such effective
price), then simultaneously with the consummation of each Dilutive Issuance the Exercise Price shall be reduced and only reduced to
equal the Base Share Price and the number of Warrant Shares issuable hereunder shall be increased such that the aggregate Exercise
Price payable hereunder, after taking into account the decrease in the Exercise Price, shall be equal to the aggregate Exercise Price
prior to such adjustment. Such adjustment shall be made whenever such Common Stock or Common Stock Equivalents are
issued. Notwithstanding the foregoing, no adjustments shall be made, paid or issued under this Section 3(b) in respect of an Exempt
Issuance. The Company shall notify the Holder, in writing, no later than the Trading Day following the issuance or deemed issuance
of any Common Stock or Common Stock Equivalents subject to this Section 3(b), indicating therein the applicable issuance price, or
applicable reset price, exchange price, conversion price and other pricing terms (such notice, the “Dilutive Issuance Notice”). For
purposes of clarification, whether or not the Company provides a Dilutive Issuance Notice pursuant to this Section 3(b), upon the
occurrence of any Dilutive Issuance, the Holder is entitled to receive a number of Warrant Shares based upon the Base Share Price
regardless of whether the Holder accurately refers to the Base Share Price in the Notice of Exercise. If the Company enters into a
Variable Rate Transaction, despite the prohibition thereon in the Exchange Agreement, the Company shall be deemed to have issued
Common Stock or Common Stock Equivalents at the lowest possible conversion or exercise price at which such securities may be
converted or exercised
7
c
) Subsequent Rights Offerings. In addition to any adjustments pursuant to Section 3(a) above, if at any time the
Company grants, issues or sells any Common Stock Equivalents or rights to purchase stock, warrants, securities or other property pro
rata to the record holders of any class of shares of Common Stock (the “Purchase Rights”), then the Holder will be entitled to acquire,
upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder
had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant (without regard to any limitations
on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date on which a record
is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of
shares of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights (provided, however, to the extent
that the Holder’s right to participate in any such Purchase Right would result in the Holder exceeding the Beneficial Ownership
Limitation, then the Holder shall not be entitled to participate in such Purchase Right to such extent (or beneficial ownership of such
shares of Common Stock as a result of such Purchase Right to such extent) and such Purchase Right to such extent shall be held in
abeyance for the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership
Limitation).
d ) Pro Rata Distributions. During such time as this Warrant is outstanding, if the Company shall declare or make any
dividend or other distribution of its assets (or rights to acquire its assets) to holders of shares of Common Stock, by way of return of
capital or otherwise (including, without limitation, any distribution of cash, stock or other securities, property or options by way of a
dividend, spin off, reclassification, corporate rearrangement, scheme of arrangement or other similar transaction) (a "Distribution"), at
any time after the issuance of this Warrant, then, in each such case, the Holder shall be entitled to participate in such Distribution to the
same extent that the Holder would have participated therein if the Holder had held the number of shares of Common Stock acquirable
upon complete exercise of this Warrant (without regard to any limitations on exercise hereof, including without limitation, the
Beneficial Ownership Limitation) immediately before the date of which a record is taken for such Distribution, or, if no such record is
taken, the date as of which the record holders of shares of Common Stock are to be determined for the participation in such
Distribution (provided, however, to the extent that the Holder's right to participate in any such Distribution would result in the Holder
exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Distribution to such extent
(or in the beneficial ownership of any shares of Common Stock as a result of such Distribution to such extent) and the portion of such
Distribution shall be held in abeyance for the benefit of the Holder until such time, if ever, as its right thereto would not result in the
Holder exceeding the Beneficial Ownership Limitation).
8
a) Fundamental Transaction. If, at any time while this Warrant is outstanding, (i) the Company, directly or indirectly, in
one or more related transactions effects any merger or consolidation of the Company with or into another Person, (ii) the Company,
directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of
its assets in one or a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by
the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to sell, tender or exchange
their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common
Stock, (iv) the Company, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or
recapitalization of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively
converted into or exchanged for other securities, cash or property, or (v) the Company, directly or indirectly, in one or more related
transactions consummates a stock or share purchase agreement or other business combination (including, without limitation, a
reorganization, recapitalization, spin-off or scheme of arrangement) with another Person or group of Persons whereby such other
Person or group acquires more than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held
by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such
stock or share purchase agreement or other business combination) (each a “Fundamental Transaction”), then, upon any subsequent
exercise of this Warrant, the Holder shall have the right to receive, for each Warrant Share that would have been issuable upon such
exercise immediately prior to the occurrence of such Fundamental Transaction, at the option of the Holder (without regard to any
limitation in Section 2(e) on the exercise of this Warrant), the number of shares of Common Stock of the successor or acquiring
corporation or of the Company, if it is the surviving corporation, and any additional consideration (the “ Alternate Consideration”)
receivable as a result of such Fundamental Transaction by a holder of the number of shares of Common Stock for which this Warrant
is exercisable immediately prior to such Fundamental Transaction (without regard to any limitation in Section 2(e) on the exercise of
this Warrant). For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to
such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in
such Fundamental Transaction, and the Company shall apportion the Exercise Price among the Alternate Consideration in a reasonable
manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are
given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the
same choice as to the Alternate Consideration it receives upon any exercise of this Warrant following such Fundamental
Transaction. Notwithstanding anything to the contrary, in the event of a Fundamental Transaction that is (1) an all cash transaction, (2)
a “Rule 13e-3 transaction” as defined in Rule 13e-3 under the Exchange Act, or (3) a Fundamental Transaction involving a person or
entity not traded on a national securities exchange, the Company or any Successor Entity (as defined below) shall, at the Holder’s
option, exercisable at any time concurrently with, or within 30 days after, the consummation of the Fundamental Transaction,
purchase this Warrant from the Holder by paying to the Holder an amount of cash equal to the Black Scholes Value of the remaining
unexercised portion of this Warrant on the date of the consummation of such Fundamental Transaction. “ Black Scholes Value” means
the value of this Warrant based on the Black and Scholes Option Pricing Model obtained from the “OV” function on Bloomberg, L.P.
(“Bloomberg”) determined as of the day of consummation of the applicable Fundamental Transaction for pricing purposes and
reflecting (A) a risk-free interest rate corresponding to the U.S. Treasury rate for a period equal to the time between the date of the
public announcement of the applicable Fundamental Transaction and the Termination Date, (B) an expected volatility equal to the
greater of 100% and the 100 day volatility obtained from the HVT function on Bloomberg as of the Trading Day immediately
following the public announcement of the applicable Fundamental Transaction, (C) the underlying price per share used in such
calculation shall be the sum of the price per share being offered in cash, if any, plus the value of any non-cash consideration, if any,
being offered in such Fundamental Transaction and (D) a remaining option time equal to the time between the date of the public
announcement of the applicable Fundamental Transaction and the Termination Date. The Company shall cause any successor entity in
a Fundamental Transaction in which the Company is not the survivor (the “Successor Entity”) to assume in writing all of the
obligations of the Company under this Warrant and the other Transaction Documents in accordance with the provisions of this Section
3(e) pursuant to written agreements in form and substance reasonably satisfactory to the Holder and approved by the Holder (without
unreasonable delay) prior to such Fundamental Transaction and shall, at the option of the Holder, deliver to the Holder in exchange for
this Warrant a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to this
Warrant which is exercisable for a corresponding number of shares of capital stock of such Successor Entity (or its parent entity)
equivalent to the shares of Common Stock acquirable and receivable upon exercise of this Warrant (without regard to any limitations
on the exercise of this Warrant) prior to such Fundamental Transaction, and with an exercise price which applies the exercise price
hereunder to such shares of capital stock (but taking into account the relative value of the shares of Common Stock pursuant to such
Fundamental Transaction and the value of such shares of capital stock, such number of shares of capital stock and such exercise price
being for the purpose of protecting the economic value of this Warrant immediately prior to the consummation of such Fundamental
Transaction), and which is reasonably satisfactory in form and substance to the Holder. Upon the occurrence of any such Fundamental
Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental
Transaction, the provisions of this Warrant and the other Transaction Documents referring to the “Company” shall refer instead to the
Successor Entity), and may exercise every right and power of the Company and shall assume all of the obligations of the Company
under this Warrant and the other Transaction Documents with the same effect as if such Successor Entity had been named as the
Company herein.
9
f ) Calculations. All calculations under this Section 3 shall be made to the nearest cent or the nearest 1/100th of a share,
as the case may be. For purposes of this Section 3, the number of shares of Common Stock deemed to be issued and outstanding as of a
given date shall be the sum of the number of shares of Common Stock (excluding treasury shares, if any) issued and outstanding.
g) Notice to Holder.
i . Adjustment to Exercise Price. Whenever the Exercise Price is adjusted pursuant to any provision of
this Section 3, the Company shall promptly mail to the Holder a notice setting forth the Exercise Price after such
adjustment and any resulting adjustment to the number of Warrant Shares and setting forth a brief statement of the
facts requiring such adjustment..
i i . Notice to Allow Exercise by Holder. If (A) the Company shall declare a dividend (or any other
distribution in whatever form) on the Common Stock, (B) the Company shall declare a special nonrecurring cash
dividend on or a redemption of the Common Stock, (C) the Company shall authorize the granting to all holders of
the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any
rights, (D) the approval of any stockholders of the Company shall be required in connection with any reclassification
of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or
substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is
converted into other securities, cash or property, or (E) the Company shall authorize the voluntary or involuntary
dissolution, liquidation or winding up of the affairs of the Company, then, in each case, the Company shall cause to
be mailed to the Holder at its last address as it shall appear upon the Warrant Register of the Company, at least 20
calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on
which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a
record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such
dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such
reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and
the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their
shares of the Common Stock for securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer or share exchange; provided that the failure to mail such notice or any defect
therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such
notice. To the extent that any notice provided hereunder constitutes, or contains, material, non-public information
regarding the Company or any of the Subsidiaries, the Company shall simultaneously file such notice with the
Commission pursuant to a Current Report on Form 8-K. The Holder shall remain entitled to exercise this Warrant
during the period commencing on the date of such notice to the effective date of the event triggering such
notice except as may otherwise be expressly set forth herein.
10
Section 4. Transfer of Warrant.
a) Transferability. Subject to compliance with any applicable securities laws and the conditions set forth in Section 4(d)
hereof and to the provisions of Section 6 of the Exchange Agreement, this Warrant and all rights hereunder (including, without
limitation, any registration rights) are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the
Company or its designated agent, together with a written assignment of this Warrant substantially in the form attached hereto duly
executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer,
but only after such transferee agrees to be bound by the provisions of this Agreement. Upon such surrender and, if required, such
payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees, as applicable,
and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant
evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. The Warrant, if properly
assigned in accordance herewith, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant
issued.
b
) New Warrants . This Warrant may be divided or combined with other Warrants upon presentation hereof at the
aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to
be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 4(a), as to any transfer which may be
involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the
Warrant or Warrants to be divided or combined in accordance with such notice. All Warrants issued on transfers or exchanges shall be
dated the original Issue Date and shall be identical with this Warrant except as to the number of Warrant Shares issuable pursuant
thereto.
c ) Warrant Register. The Company shall register this Warrant, upon records to be maintained by the Company for that
purpose (the “Warrant Register”), in the name of the record Holder hereof from time to time. The Company may deem and treat the
registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder,
and for all other purposes, absent actual notice to the contrary.
d ) Transfer Restrictions. If, at the time of the surrender of this Warrant in connection with any transfer of this Warrant,
the transfer of this Warrant shall not be either (i) registered pursuant to an effective registration statement under the Securities Act and
under applicable state securities or blue sky laws or (ii) eligible for resale without volume or manner-of-sale restrictions or current
public information requirements pursuant to Rule 144, the Company may require, as a condition of allowing such transfer, that the
Holder or transferee of this Warrant, as the case may be, comply with the provisions of Section 9(d) of the Exchange Agreement.
11
e ) Representation by the Holder. The Holder, by the acceptance hereof, represents and warrants that it is acquiring this
Warrant and, upon any exercise hereof, will acquire the Warrant Shares issuable upon such exercise, for its own account and not with a
view to or for distributing or reselling such Warrant Shares or any part thereof in violation of the Securities Act or any applicable state
securities law, except pursuant to sales registered or exempted under the Securities Act.
Section 5. Miscellaneous.
a) No Rights as Stockholder Until Exercise. This Warrant does not entitle the Holder to any voting rights, dividends or
other rights as a stockholder of the Company prior to the exercise hereof as set forth in Section 2(d)(i), except as expressly set forth in
Section 3.
b ) Loss, Theft, Destruction or Mutilation of Warrant . The Company covenants that upon receipt by the Company of
evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the
Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the
Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if
mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu
of such Warrant or stock certificate.
c ) Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any
right required or granted herein shall not be a Business Day, then, such action may be taken or such right may be exercised on the next
succeeding Business Day.
d) Authorized Shares.
The Company covenants that, during the period the Warrant is outstanding, it will reserve from its
authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon
the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall
constitute full authority to its officers who are charged with the duty of issuing the necessary Warrant Shares upon the
exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to
assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of
any requirements of the Trading Market upon which the Common Stock may be listed. The Company covenants that all
Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise
of the purchase rights represented by this Warrant and payment for such Warrant Shares in accordance herewith, be duly
authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges created by the Company in
respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue).
12
Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including,
without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms
and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this
Warrant against impairment. Without limiting the generality of the foregoing, the Company will (i) not increase the par value
of any Warrant Shares above the amount payable therefor upon such exercise immediately prior to such increase in par value,
(ii) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid
and nonassessable Warrant Shares upon the exercise of this Warrant and (iii) use commercially reasonable efforts to obtain all
such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof, as may be, necessary
to enable the Company to perform its obligations under this Warrant.
Before taking any action which would result in an adjustment in the number of Warrant Shares for which this
Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or
consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof.
e ) Jurisdiction. All questions concerning the construction, validity, enforcement and interpretation of this Warrant shall
be determined in accordance with the provisions of the Exchange Agreement.
f ) Restrictions. The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not
registered and the Holder does not utilize cashless exercise, will have restrictions upon resale imposed by state and federal securities
laws.
g ) Nonwaiver and Expenses. No course of dealing or any delay or failure to exercise any right hereunder on the part of
Holder shall operate as a waiver of such right or otherwise prejudice the Holder’s rights, powers or remedies, notwithstanding the fact
that all rights hereunder terminate on the Termination Date. If either party willfully and knowingly fails to comply with any provision
of this Warrant, which results in any material damages to the other, the first party shall pay to the other party such amounts as shall be
sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys’ fees, including those of appellate
proceedings, incurred by the affected party in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights,
powers or remedies hereunder.
13
h ) Notices. Any notice, request or other document required or permitted to be given or delivered to the Holder by the
Company shall be delivered in accordance with the notice provisions of the Exchange Agreement.
i ) Limitation of Liability. No provision hereof, in the absence of any affirmative action by the Holder to exercise this
Warrant to purchase Warrant Shares, and no enumeration herein of the rights or privileges of the Holder, shall give rise to any liability
of the Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by
the Company or by creditors of the Company.
j
) Remedies. The Holder, in addition to being entitled to exercise all rights granted by law, including recovery of
damages, will be entitled to specific performance of its rights under this Warrant. The Company agrees that monetary damages would
not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to
waive and not to assert the defense in any action for specific performance that a remedy at law would be adequate.
k ) Successors and Assigns. Subject to applicable securities laws, this Warrant and the rights and obligations evidenced
hereby shall inure to the benefit of and be binding upon the successors and permitted assigns of the Company and the successors and
permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of any Holder from time to time of this
Warrant and shall be enforceable by the Holder or holder of Warrant Shares.
l) Amendment. This Warrant may be modified or amended or the provisions hereof waived with the written consent of
the Company and the Holder.
m) Severability. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective
and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such
provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or
the remaining provisions of this Warrant.
n
) Headings. The headings used in this Warrant are for the convenience of reference only and shall not, for any
purpose, be deemed a part of this Warrant.
********************
(Signature Page Follows)
14
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized as of the
date first above indicated.
SG Blocks, Inc.
By:
Name: Paul M. Galvin
Title: Chief Executive Officer
15
TO: SG BLOCKS, INC.
NOTICE OF EXERCISE
( 1 ) The undersigned hereby elects to purchase ________ Warrant Shares of the Company pursuant to the terms of the
attached Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer
taxes, if any.
(2) Payment shall take the form of (check applicable box):
o in lawful money of the United States; or
o [if permitted the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula
set forth in subsection 2(c), to exercise this Warrant with respect to the maximum number of Warrant Shares
purchasable pursuant to the cashless exercise procedure set forth in subsection 2(c).
_______________________________
(3) Please issue said Warrant Shares in the name of the undersigned or in such other name as is specified below:
The Warrant Shares shall be delivered to the following DWAC Account Number or by physical delivery of a certificate to:
DTC Participant: _______________________________
_______________________________
_______________________________
( 4 ) Accredited Investor. The undersigned is an “accredited investor” as defined in Regulation D promulgated under the Securities Act of
1933, as amended, and that the aforesaid Shares are being acquired for the account of the undersigned for investment and not with a view to,
or for resale, in connection with the distribution thereof, and that the undersigned has no present intention of distributing or reselling such
shares.
[SIGNATURE OF HOLDER]
Name of Investing Entity: ________________________________________________________________________
Signature of Authorized Signatory of Investing Entity: __________________________________________________
Name of Authorized Signatory: ____________________________________________________________________
Title of Authorized Signatory: _____________________________________________________________________
Date: ________________________________________________________________________________________
1
ASSIGNMENT FORM
(To assign the foregoing warrant, execute
this form and supply required information.
Do not use this form to exercise the warrant.)
hereby
is_______________________________________________________________.
assigned
FOR VALUE RECEIVED, ____ all of or _______ shares of the foregoing Warrant and all rights evidenced thereby are
address
to_______________________________________________
whose
_______________________________________________________________
Holder’s Signature: _____________________________
Holder’s Address: _____________________________
Signature Guaranteed: ___________________________________________
_____________________________
Dated: ______________, _______
NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or
enlargement or any change whatsoever, and must be guaranteed by a bank or trust company. Officers of corporations and those acting in a
fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.
NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE HAVE BEEN REGISTERED
WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE
UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES
ACT”) AND APPLICABLE STATE SECURITIES LAWS, AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL
OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY
ACCEPTABLE TO THE COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS
SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY
SUCH SECURITIES.
Exhibit 4.13
Original Issue Date: April 10, 2014
Original Conversion Price (subject to adjustment herein): $0.25
$________
8% ORIGINAL ISSUE DISCOUNT
SENIOR SECURED CONVERTIBLE DEBENTURE
DUE APRIL 1, 2016
THIS 8% ORIGINAL ISSUE DISCOUNT SENIOR SECURED CONVERTIBLE DEBENTURE is one of a series of duly
authorized and validly issued 8% Original Issue Discount Senior Secured Convertible Debentures of SG Blocks, Inc., a Delaware corporation,
(the “Company”), having its principal place of business at 3 Columbus Circle, 16th Floor, New York, NY 10019, designated as its 8%
Original Issue Discount Senior Secured Convertible Debenture due April 1, 2016 (this debenture, the “Debenture” and, collectively with the
other debentures of such series, the “Debentures”).
FOR VALUE RECEIVED, the Company promises to pay to _____________ or its registered assigns (the “Holder”), or shall have
paid pursuant to the terms hereunder, the principal sum of $________ on April 1, 2016 (the “Maturity Date”) or such earlier date as this
Debenture is required or permitted to be repaid as provided hereunder, and to pay interest to the Holder on the aggregate unconverted and
then outstanding principal amount of this Debenture in accordance with the provisions hereof. This Debenture is subject to the following
additional provisions:
Section 1.
Definitions. For the purposes hereof, in addition to the terms defined elsewhere in this Debenture, (a) capitalized terms not
otherwise defined herein shall have the meanings set forth in the Purchase Agreement and (b) the following terms shall have the following
meanings:
“Alternate Consideration” shall have the meaning set forth in Section 5(e).
“Bankruptcy Event” means any of the following events: (a) the Company or any Significant Subsidiary (as such term is
defined in Rule 1-02(w) of Regulation S-X) thereof commences a case or other proceeding under any bankruptcy, reorganization,
arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction relating to
the Company or any Significant Subsidiary thereof, (b) there is commenced against the Company or any Significant Subsidiary thereof
any such case or proceeding that is not dismissed within 60 days after commencement, (c) the Company or any Significant Subsidiary
thereof is adjudicated insolvent or bankrupt or any order of relief or other order approving any such case or proceeding is entered, (d)
the Company or any Significant Subsidiary thereof suffers any appointment of any custodian or the like for it or any substantial part of
its property that is not discharged or stayed within 60 calendar days after such appointment, (e) the Company or any Significant
Subsidiary thereof makes a general assignment for the benefit of creditors, (f) the Company or any Significant Subsidiary thereof calls
a meeting of its creditors with a view to arranging a composition, adjustment or restructuring of its debts or (g) the Company or any
Significant Subsidiary thereof, by any act or failure to act, expressly indicates its consent to, approval of or acquiescence in any of the
foregoing or takes any corporate or other action for the purpose of effecting any of the foregoing.
“Base Conversion Price” shall have the meaning set forth in Section 5(b).
“Beneficial Ownership Limitation” shall have the meaning set forth in Section 4(d).
“Business Day” means any day except any Saturday, any Sunday, any day which is a federal legal holiday in the United States
or any day on which banking institutions in the State of New York are authorized or required by law or other governmental action to
close.
“Buy-In” shall have the meaning set forth in Section 4(c)(v).
2
“Change of Control Transaction ” means the occurrence after the date hereof of any of (a) an acquisition after the date hereof
by an individual or legal entity or “group” (as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of effective control
(whether through legal or beneficial ownership of capital stock of the Company, by contract or otherwise) of in excess of 33% of the
voting securities of the Company (other than by means of conversion or exercise of the Debentures and the Securities issued together
with the Debentures), (b) the Company merges into or consolidates with any other Person, or any Person merges into or consolidates
with the Company and, after giving effect to such transaction, the stockholders of the Company immediately prior to such transaction
own less than 66% of the aggregate voting power of the Company or the successor entity of such transaction, (c) the Company sells or
transfers all or substantially all of its assets to another Person and the stockholders of the Company immediately prior to such
transaction own less than 66% of the aggregate voting power of the acquiring entity immediately after the transaction, (d) a
replacement at one time or within a three year period of more than one-half of the members of the Board of Directors which is not
approved by a majority of those individuals who are members of the Board of Directors on the Original Issue Date (or by those
individuals who are serving as members of the Board of Directors on any date whose nomination to the Board of Directors was
approved by a majority of the members of the Board of Directors who are members on the date hereof), or (e) the execution by the
Company of an agreement to which the Company is a party or by which it is bound, providing for any of the events set forth in clauses
(a) through (d) above.
“Conversion” shall have the meaning ascribed to such term in Section 4.
“Conversion Date” shall have the meaning set forth in Section 4(a).
“Conversion Price” shall have the meaning set forth in Section 4(b).
“Conversion Schedule” means the Conversion Schedule in the form of Schedule 1 attached hereto.
“Conversion Shares” means, collectively, the shares of Common Stock issuable upon conversion of this Debenture in
accordance with the terms hereof.
“Debenture Register” shall have the meaning set forth in Section 2(c).
“Dilutive Issuance” shall have the meaning set forth in Section 5(b).
“Dilutive Issuance Notice” shall have the meaning set forth in Section 5(b).
3
“Equity Conditions” means, during the period in question, (a) the Company shall have duly honored all conversions and
redemptions scheduled to occur or occurring by virtue of one or more Notices of Conversion of the Holder, if any, (b) the Company
shall have paid all liquidated damages and other amounts owing to the Holder in respect of this Debenture, (c)(i) there is an effective
Registration Statement pursuant to which the Holder is permitted to utilize the prospectus thereunder to resell all of the shares of
Common Stock issuable pursuant to the Transaction Documents (and the Company believes, in good faith, that such effectiveness will
continue uninterrupted for the foreseeable future) or (ii) all of the Conversion Shares issuable pursuant to the Transaction Documents
(and shares issuable in lieu of cash payments of interest) may be resold pursuant to Rule 144 or Section 4(1) of the Securities Act
without volume or manner-of-sale restrictions or current public information requirements as determined by the counsel to the
Company as set forth in a written opinion letter to such effect, addressed and acceptable to the Transfer Agent and the Holder, (d) the
Common Stock is trading or quoted on a Trading Market and all of the shares issuable pursuant to the Transaction Documents are
listed or quoted for trading on such Trading Market (and the Company believes, in good faith, that trading or quotation of the Common
Stock on a Trading Market will continue uninterrupted for the foreseeable future), (e) there is a sufficient number of authorized but
unissued and otherwise unreserved shares of Common Stock for the issuance of all of the shares then issuable pursuant to the
Transaction Documents, (f) there is no existing Event of Default and no existing event which, with the passage of time or the giving of
notice, would reasonably constitute an Event of Default, (g) the issuance of the shares in question (or, in the case of an Optional
Redemption or Periodic Redemption, the shares issuable upon conversion in full of the Optional Redemption Amount or Periodic
Redemption Amount) to the Holder would not violate the limitations set forth in Section 4(d) herein, (h) there has been no public
announcement of a pending or proposed Fundamental Transaction or Change of Control Transaction that has not been consummated,
(i) the applicable Holder is not in possession of any information provided by the Company that constitutes, or may constitute, material
non-public information, and (j) with respect to Sections 2 and 6(b), the number of shares of Common Stock proposed to be issued in
respect of such payments at issue, in each case as attributable to all holders of Debentures, is less than 10% of the aggregate number of
shares of Common Stock traded on the principal Trading Market during the 20 Trading Days immediately prior to such payment date.
“Event of Default” shall have the meaning set forth in Section 8(a).
“Fundamental Transaction” shall have the meaning set forth in Section 5(e).
“Interest Conversion Rate” means the lesser of (a) the Conversion Price or (b) 90% of the lesser of (i) the average of the
VWAPs for the 20 consecutive Trading Days ending on the Trading Day that is immediately prior to the applicable Interest Payment
Date or (ii) the average of the VWAPs for the 20 consecutive Trading Days ending on the Trading Day that is immediately prior to the
date the applicable Interest Conversion Shares are issued and delivered if such delivery is after the Interest Payment Date (provided,
however, in the case of clause (b) the Interest Conversion Rate shall be at least a $.01 discount to the VWAP on the Trading Day
immediately preceding such payment date).
“Interest Conversion Shares” shall have the meaning set forth in Section 2(a).
“Interest Notice Period” shall have the meaning set forth in Section 2(a).
“Interest Payment Date” shall have the meaning set forth in Section 2(a).
“Interest Share Amount” shall have the meaning set forth in Section 2(a).
4
“Late Fees” shall have the meaning set forth in Section 2(d).
“Mandatory Default Amount” means the sum of (a) the greater of (i) the outstanding principal amount of this Debenture, plus
all accrued and unpaid interest hereon, divided by the Conversion Price on the date the Mandatory Default Amount is either (A)
demanded (if demand or notice is required to create an Event of Default) or otherwise due or (B) paid in full, whichever has a lower
Conversion Price, multiplied by the VWAP on the date the Mandatory Default Amount is either (x) demanded or otherwise due or (y)
paid in full, whichever has a higher VWAP, or (ii) 130% of the outstanding principal amount of this Debenture, plus 100% of accrued
and unpaid interest hereon, and (b) all other amounts, costs, expenses and liquidated damages due in respect of this Debenture.
“New York Courts” shall have the meaning set forth in Section 9(d).
“Notice of Conversion” shall have the meaning set forth in Section 4(a).
“Optional Redemption” shall have the meaning set forth in Section 6(a).
“Optional Redemption Amount” means the sum of (a) 120% of the then outstanding principal amount of the Debenture, (b)
accrued but unpaid interest and (c) all liquidated damages and other amounts due in respect of the Debenture.
“Optional Redemption Date” shall have the meaning set forth in Section 6(a).
“Optional Redemption Notice” shall have the meaning set forth in Section 6(a).
“Optional Redemption Notice Date” shall have the meaning set forth in Section 6(a).
“Optional Redemption Period” shall have the meaning set forth in Section 6(a).
“Original Issue Date” means the date of the first issuance of the Debentures, regardless of any transfers of any Debenture and
regardless of the number of instruments which may be issued to evidence such Debentures.
“Periodic Conversion Period” shall have the meaning set forth in Section 6(b) hereof.
“Periodic Conversion Price” shall have the meaning set forth in Section 6(b) hereof.
“Periodic Redemption” means the redemption of this Debenture pursuant to Section 6(b) hereof.
5
“Periodic Redemption Amount” means, as to a Periodic Redemption, $_______ each as to the October 1, 2015 and January 1,
2016 Periodic Redemption Dates and $_______as to the April 1, 2016 Periodic Redemption Date, in each case plus accrued but unpaid
interest, liquidated damages and any other amounts then owing to the Holder in respect of this Debenture.
“Periodic Redemption Date” means each of October 1, 2015, January 1, 2016 and April 1, 2016.
“Periodic Redemption Notice” shall have the meaning set forth in Section 6(b) hereof.
“Permitted Indebtedness” means (a) the indebtedness evidenced by the Debentures, and (b) lease obligations, purchase money
indebtedness incurred in connection with the acquisition of capital assets and lease obligations with respect to newly acquired or leased
assets, and the indebtedness existing on the Closing Date and set forth on Schedule 3.1(aa) to the Purchase Agreement, of up to
$300,000, in the aggregate.
“Permitted Lien” means the individual and collective reference to the following: (a) Liens for taxes, assessments and other
governmental charges or levies not yet due or Liens for taxes, assessments and other governmental charges or levies being contested in
good faith and by appropriate proceedings for which adequate reserves (in the good faith judgment of the management of the
Company) have been established in accordance with GAAP, (b) Liens imposed by law which were incurred in the ordinary course of
the Company’s business, such as carriers’, warehousemen’s and mechanics’ Liens, statutory landlords’ Liens, and other similar Liens
arising in the ordinary course of the Company’s business, and which (x) do not individually or in the aggregate materially detract from
the value of such property or assets or materially impair the use thereof in the operation of the business of the Company and its
consolidated Subsidiaries or (y) are being contested in good faith by appropriate proceedings, which proceedings have the effect of
preventing for the foreseeable future the forfeiture or sale of the property or asset subject to such Lien, (c) Liens incurred in connection
with Permitted Indebtedness under clause (a) and (d) Liens incurred in connection with Permitted Indebtedness under clause (b)
thereunder, provided that such Liens are not secured by assets of the Company or its Subsidiaries other than the assets so acquired or
leased, or, in the case of the Prestige Capital Corporation factoring agreement, all assets of the Company.
“Pre-Redemption Conversion Shares” shall have the meaning set forth in Section 6(b) hereof.
“Purchase Agreement” means the Securities Purchase Agreement, dated as of April 10, 2014 among the Company and the
original Holders, as amended, modified or supplemented from time to time in accordance with its terms.
6
“Registration Statement” means a registration statement covering the resale of the Underlying Shares by the Holder.
“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
“Share Delivery Date” shall have the meaning set forth in Section 4(c)(ii).
“Successor Entity” shall have the meaning set forth in Section 5(e).
“Trading Day” means a day on which the principal Trading Market is open for trading.
“Trading Market” means any of the following markets or exchanges on which the Common Stock is listed or quoted for
trading on the date in question: the NYSE MKT, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select
Market, the New York Stock Exchange, OTC Markets Inc. or the OTC Bulletin Board (or any successors to any of the foregoing).
“VWAP” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock
is then listed or quoted on a Trading Market, the daily volume weighted average price of the Common Stock for such date (or the
nearest preceding date on which the Common Stock actually traded) on the Trading Market on which the Common Stock is then listed
or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City
time)), (b) if the OTC Bulletin Board is not a Trading Market, the volume weighted average price of the Common Stock for such date
(or the nearest preceding date) on the OTC Bulletin Board, (c) if the Common Stock is not then listed or quoted for trading on the OTC
Bulletin Board and if prices for the Common Stock are then reported in the “Pink Sheets” published by Pink OTC Markets, Inc. (or a
similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common
Stock so reported, or (d) in all other cases, the fair market value of a share of Common Stock as determined by an independent
appraiser selected in good faith by the Holders of a majority in interest of the Securities then outstanding and reasonably acceptable to
the Company, the fees and expenses of which shall be paid by the Company.
7
Section 2. Interest.
a) Payment of Interest in Cash or Kind. At the Closing, the Company acknowledges and agrees that this Debenture was
issued at an original issue discount. The Company shall pay interest to the Holder on the aggregate unconverted and then outstanding
principal amount of this Debenture at the rate of 8% per annum, payable quarterly on January 1, April 1, July 1 and October 1,
beginning on October 1, 2014, on each Periodic Redemption Date (as to that principal amount then being redeemed), on each
Conversion Date (as to that principal amount then being converted), on each Optional Redemption Date (as to that principal amount
then being redeemed) and on the Maturity Date (each such date, an “Interest Payment Date”) (if any Interest Payment Date is not a
Business Day, then the applicable payment shall be due on the next succeeding Business Day), in cash or, at the Company’s option, in
duly authorized, validly issued, fully paid and non-assessable shares of Common Stock at the Interest Conversion Rate (the dollar
amount to be paid in shares, the “Interest Share Amount”) or a combination thereof; provided, however, that payment in shares of
Common Stock may only occur if (i) all of the Equity Conditions have been met (unless waived by the Holder in writing) during the
20 Trading Days immediately prior to the applicable Interest Payment Date (the “Interest Notice Period”) and through and including
the date such shares of Common Stock are actually issued to the Holder, (ii) the Company shall have given the Holder notice in
accordance with the notice requirements set forth below and (iii) as to such Interest Payment Date, prior to such Interest Notice Period
(but not more than five (5) Trading Days prior to the commencement of such Interest Notice Period), the Company shall have
delivered to the Holder’s account with The Depository Trust Company a number of shares of Common Stock to be applied against
such Interest Share Amount equal to the quotient of (x) the applicable Interest Share Amount divided by (y) the lesser of the (i) then
Conversion Price and (ii) the Interest Conversion Rate assuming for such purposes that the Interest Payment Date is the Trading Day
immediately prior to the commencement of the Interest Notice Period (the “Interest Conversion Shares”).
b
) Company’s Election to Pay Interest in Cash or Kind. Subject to the terms and conditions herein, the decision
whether to pay interest hereunder in cash, shares of Common Stock or a combination thereof shall be at the sole discretion of the
Company. Prior to the commencement of any Interest Notice Period, the Company shall deliver to the Holder a written notice of its
election to pay interest hereunder on the applicable Interest Payment Date either in cash, shares of Common Stock or a combination
thereof and the Interest Share Amount as to the applicable Interest Payment Date, provided that the Company may indicate in such
notice that the election contained in such notice shall apply to future Interest Payment Dates until revised by a subsequent
notice. During any Interest Notice Period, the Company’s election (whether specific to an Interest Payment Date or continuous) shall
be irrevocable as to such Interest Payment Date. Subject to the aforementioned conditions, failure to timely deliver such written notice
to the Holder shall be deemed an election by the Company to pay the interest on such Interest Payment Date in cash. At any time the
Company delivers a notice to the Holder of its election to pay the interest in shares of Common Stock, if a Registration Statement
covering such shares is then effective, the Company shall timely file a prospectus supplement pursuant to Rule 424 disclosing such
election. The aggregate number of shares of Common Stock otherwise issuable to the Holder on an Interest Payment Date shall be
reduced by the number of Interest Conversion Shares previously issued to the Holder in connection with such Interest Payment Date.
8
c) Interest Calculations. Interest shall be calculated on the basis of a 360-day year, consisting of twelve 30 calendar day
periods, and shall accrue daily commencing on the Original Issue Date until payment in full of the outstanding principal, together with
all accrued and unpaid interest, liquidated damages and other amounts which may become due hereunder, has been made. Payment of
interest in shares of Common Stock (other than the Interest Conversion Shares issued prior to an Interest Notice Period) shall otherwise
occur pursuant to Section 4(c)(ii) herein and, solely for purposes of the payment of interest in shares, the Interest Payment Date shall
be deemed the Conversion Date. Interest shall cease to accrue with respect to any principal amount converted, provided that, the
Company actually delivers the Conversion Shares within the time period required by Section 4(c)(ii) herein. Interest hereunder will be
paid to the Person in whose name this Debenture is registered on the records of the Company regarding registration and transfers of
this Debenture (the “Debenture Register”). Except as otherwise provided herein, if at any time the Company pays interest partially in
cash and partially in shares of Common Stock to the holders of the Debentures, then such payment of cash shall be distributed ratably
among the holders of the then-outstanding Debentures based on their (or their predecessor’s) initial purchases of Debentures pursuant
to the Purchase Agreement.
d ) Late Fee. All overdue accrued and unpaid interest to be paid hereunder shall entail a late fee at an interest rate equal
to the lesser of 18% per annum or the maximum rate permitted by applicable law (the “Late Fees”) which shall accrue daily from the
date such interest is due hereunder through and including the date of actual payment in full. Notwithstanding anything to the contrary
contained herein, if, on any Interest Payment Date the Company has elected to pay accrued interest in the form of Common Stock but
the Company is not permitted to pay accrued interest in Common Stock because it fails to satisfy the conditions for payment in
Common Stock set forth in Section 2(a) herein, then, at the option of the Holder, the Company, in lieu of delivering either shares of
Common Stock pursuant to this Section 2 or paying the regularly scheduled interest payment in cash, shall deliver, within three (3)
Trading Days of each applicable Interest Payment Date, an amount in cash equal to the product of (x) the number of shares of
Common Stock otherwise deliverable to the Holder in connection with the payment of interest due on such Interest Payment Date
multiplied by (y) the highest VWAP during the period commencing on the Interest Payment Date and ending on the Trading Day prior
to the date such payment is actually made. If any Interest Conversion Shares are issued to the Holder in connection with an Interest
Payment Date and are not applied against an Interest Share Amount, then the Holder shall promptly return such excess shares to the
Company.
e
) Prepayment. Except as otherwise set forth in this Debenture, the Company may not prepay any portion of the
principal amount of this Debenture without the prior written consent of the Holder.
9
Section 3. Registration of Transfers and Exchanges.
a ) Different Denominations. This Debenture is exchangeable for an equal aggregate principal amount of Debentures of
different authorized denominations, as requested by the Holder surrendering the same. No service charge will be payable for such
registration of transfer or exchange.
b
) Investment Representations. This Debenture has been issued subject to certain investment representations of the
original Holder set forth in the Purchase Agreement and may be transferred or exchanged only in compliance with the Purchase
Agreement and applicable federal and state securities laws and regulations.
c
) Reliance on Debenture Register. Prior to due presentment for transfer to the Company of this Debenture, the
Company and any agent of the Company may treat the Person in whose name this Debenture is duly registered on the Debenture
Register as the owner hereof for the purpose of receiving payment as herein provided and for all other purposes, whether or not this
Debenture is overdue, and neither the Company nor any such agent shall be affected by notice to the contrary.
Section 4. Conversion.
a ) Voluntary Conversion. At any time after the Original Issue Date until this Debenture is no longer outstanding, this
Debenture shall be convertible, in whole or in part, into shares of Common Stock at the option of the Holder, at any time and from time
to time (subject to the conversion limitations set forth in Section 4(d) hereof). The Holder shall effect conversions by delivering to the
Company a Notice of Conversion, the form of which is attached hereto as Annex A (each, a “Notice of Conversion”), specifying
therein the principal amount of this Debenture to be converted and the date on which such conversion shall be effected (such date, the
“Conversion Date”). If no Conversion Date is specified in a Notice of Conversion, the Conversion Date shall be the date that such
Notice of Conversion is deemed delivered hereunder. To effect conversions hereunder, the Holder shall not be required to physically
surrender this Debenture to the Company unless the entire principal amount of this Debenture, plus all accrued and unpaid interest
thereon, has been so converted. Conversions hereunder shall have the effect of lowering the outstanding principal amount of this
Debenture in an amount equal to the applicable conversion. The Holder and the Company shall maintain records showing the principal
amount(s) converted and the date of such conversion(s). The Company may deliver an objection to any Notice of Conversion within
two (2) Business Days of delivery of such Notice of Conversion. In the event of any dispute or discrepancy, the records of the Holder
shall be controlling and determinative in the absence of manifest error. The Holder, and any assignee by acceptance of this
Debenture, acknowledge and agree that, by reason of the provisions of this paragraph, following conversion of a portion of this
Debenture, the unpaid and unconverted principal amount of this Debenture may be less than the amount stated on the face
hereof.
10
b
) Conversion Price. The conversion price in effect on any Conversion Date shall be equal to $0.25, subject to
adjustment herein (the “Conversion Price”).
c) Mechanics of Conversion.
i
. Conversion Shares Issuable Upon Conversion of Principal Amount. The number of Conversion Shares
issuable upon a conversion hereunder shall be determined by the quotient obtained by dividing (x) the outstanding principal
amount of this Debenture to be converted by (y) the Conversion Price.
i i . Delivery of Certificate Upon Conversion. Not later than three (3) Trading Days after each Conversion
Date (the “Share Delivery Date”), the Company shall deliver, or cause to be delivered, to the Holder (A) a certificate or
certificates representing the Conversion Shares which, on or after the earlier of (i) the six month anniversary of the Original
Issue Date or (ii) the Effective Date, shall be free of restrictive legends and trading restrictions (other than those which may
then be required by the Purchase Agreement) representing the number of Conversion Shares being acquired upon the
conversion of this Debenture (including, if the Company has given continuous notice pursuant to Section 2(b) for payment of
interest in shares of Common Stock at least 20 Trading Days prior to the date on which the Notice of Conversion is delivered
to the Company, shares of Common Stock representing the payment of accrued interest otherwise determined pursuant to
Section 2(a) but assuming that the Interest Notice Period is the 20 Trading Days period immediately prior to the date on which
the Notice of Conversion is delivered to the Company and excluding for such issuance the condition that the Company deliver
Interest Conversion Shares as to such interest payment prior to the commencement of the Interest Notice Period) and (B) a
bank check in the amount of accrued and unpaid interest (if the Company has elected or is required to pay accrued interest in
cash). On or after the earlier of (i) the six month anniversary of the Original Issue Date or (ii) the Effective Date, the
Company shall use its commercially reasonable efforts to deliver any certificate or certificates required to be delivered by the
Company under this Section 4(c) electronically through the Depository Trust Company or another established clearing
corporation performing similar functions.
i i i . Failure to Deliver Certificates. If, in the case of any Notice of Conversion, such certificate or certificates
are not delivered to or as directed by the applicable Holder by the Share Delivery Date, the Holder shall be entitled to elect by
written notice to the Company at any time on or before its receipt of such certificate or certificates, to rescind such
Conversion, in which event the Company shall promptly return to the Holder any original Debenture delivered to the
Company and the Holder shall promptly return to the Company the Common Stock certificates issued to such Holder
pursuant to the rescinded Conversion Notice.
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i v . Obligation Absolute; Partial Liquidated Damages . The Company’s obligations to issue and deliver the
Conversion Shares upon conversion of this Debenture in accordance with the terms hereof are absolute and unconditional,
irrespective of any action or inaction by the Holder to enforce the same, any waiver or consent with respect to any provision
hereof, the recovery of any judgment against any Person or any action to enforce the same, or any setoff, counterclaim,
recoupment, limitation or termination, or any breach or alleged breach by the Holder or any other Person of any obligation to
the Company or any violation or alleged violation of law by the Holder or any other Person, and irrespective of any other
circumstance which might otherwise limit such obligation of the Company to the Holder in connection with the issuance of
such Conversion Shares; provided, however, that such delivery shall not operate as a waiver by the Company of any such
action the Company may have against the Holder. In the event the Holder of this Debenture shall elect to convert any or all
of the outstanding principal amount hereof, the Company may not refuse conversion based on any claim that the Holder or
anyone associated or affiliated with the Holder has been engaged in any violation of law, agreement or for any other reason,
unless an injunction from a court, on notice to Holder, restraining and or enjoining conversion of all or part of this Debenture
shall have been sought and obtained, and the Company posts a surety bond for the benefit of the Holder in the amount of
150% of the outstanding principal amount of this Debenture, which is subject to the injunction, which bond shall remain in
effect until the completion of arbitration/litigation of the underlying dispute and the proceeds of which shall be payable to the
Holder to the extent it obtains judgment. In the absence of such injunction, the Company shall issue Conversion Shares or, if
applicable, cash, upon a properly noticed conversion. If the Company fails for any reason to deliver to the Holder such
certificate or certificates pursuant to Section 4(c)(ii) by the Share Delivery Date, the Company shall pay to the Holder, in
cash, as liquidated damages and not as a penalty, for each $1,000 of principal amount being converted, $10 per Trading Day
(increasing to $15 per Trading Day on the fifth (5th) Trading Day after such liquidated damages begin to accrue) for each
Trading Day after such Share Delivery Date until such certificates are delivered or Holder rescinds such conversion. Nothing
herein shall limit a Holder’s right to pursue actual damages or declare an Event of Default pursuant to Section 8 hereof for the
Company’s failure to deliver Conversion Shares within the period specified herein and the Holder shall have the right to
pursue all remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific
performance and/or injunctive relief. The exercise of any such rights shall not prohibit the Holder from seeking to enforce
damages pursuant to any other Section hereof or under applicable law.
12
v . Compensation for Buy-In on Failure to Timely Deliver Certificates Upon Conversion. In addition to any
other rights available to the Holder, if the Company fails for any reason to deliver to the Holder such certificate or certificates
by the Share Delivery Date pursuant to Section 4(c)(ii), and if after such Share Delivery Date the Holder is required by its
brokerage firm to purchase (in an open market transaction or otherwise), or the Holder’s brokerage firm otherwise purchases,
shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Conversion Shares which the Holder was
entitled to receive upon the conversion relating to such Share Delivery Date (a “Buy-In”), then the Company shall (A) pay in
cash to the Holder (in addition to any other remedies available to or elected by the Holder) the amount, if any, by which (x) the
Holder’s total purchase price (including any brokerage commissions) for the Common Stock so purchased exceeds (y) the
product of (1) the aggregate number of shares of Common Stock that the Holder was entitled to receive from the conversion
at issue multiplied by (2) the actual sale price at which the sell order giving rise to such purchase obligation was executed
(including any brokerage commissions) and (B) at the option of the Holder, either reissue (if surrendered) this Debenture in a
principal amount equal to the principal amount of the attempted conversion (in which case such conversion shall be deemed
rescinded) or deliver to the Holder the number of shares of Common Stock that would have been issued if the Company had
timely complied with its delivery requirements under Section 4(c)(ii). For example, if the Holder purchases Common Stock
having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted conversion of this Debenture with
respect to which the actual sale price of the Conversion Shares (including any brokerage commissions) giving rise to such
purchase obligation was a total of $10,000 under clause (A) of the immediately preceding sentence, the Company shall be
required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to
the Holder in respect of the Buy-In and, upon request of the Company, evidence of the amount of such loss. Nothing herein
shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without
limitation, a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely deliver
certificates representing shares of Common Stock upon conversion of this Debenture as required pursuant to the terms hereof.
v i . Reservation of Shares Issuable Upon Conversion. The Company covenants that it will at all times reserve
and keep available out of its authorized and unissued shares of Common Stock for the sole purpose of issuance upon
conversion of this Debenture and payment of interest on this Debenture, each as herein provided, free from preemptive rights
or any other actual contingent purchase rights of Persons other than the Holder (and the other holders of the Debentures), not
less than such aggregate number of shares of the Common Stock as shall (subject to the terms and conditions set forth in the
Purchase Agreement) be issuable (taking into account the adjustments and restrictions of Section 5) upon the conversion of
the then outstanding principal amount of this Debenture and payment of interest hereunder. The Company covenants that all
shares of Common Stock that shall be so issuable shall, upon issue, be duly authorized, validly issued, fully paid and
nonassessable and, if the Registration Statement is then effective under the Securities Act, shall be registered for public resale
in accordance with such Registration Statement.
13
v i i . Fractional Shares. No fractional shares or scrip representing fractional shares shall be issued upon the
conversion of this Debenture. As to any fraction of a share which the Holder would otherwise be entitled to purchase upon
such conversion, the Company shall at its election, either pay a cash adjustment in respect of such final fraction in an amount
equal to such fraction multiplied by the Conversion Price or round up to the next whole share.
viii. Transfer Taxes and Expenses. The issuance of certificates for shares of the Common Stock on conversion
of this Debenture shall be made without charge to the Holder hereof for any documentary stamp or similar taxes that may be
payable in respect of the issue or delivery of such certificates, provided that, the Company shall not be required to pay any tax
that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in
a name other than that of the Holder of this Debenture so converted and the Company shall not be required to issue or deliver
such certificates unless or until the Person or Persons requesting the issuance thereof shall have paid to the Company the
amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. The Company
shall pay all Transfer Agent fees required for same-day processing of any Notice of Conversion.
14
d ) Holder’s Conversion Limitations. The Company shall not effect any conversion of this Debenture, and a Holder
shall not have the right to convert any portion of this Debenture, to the extent that after giving effect to the conversion set forth on the
applicable Notice of Conversion, the Holder (together with the Holder’s Affiliates, and any Persons acting as a group together with the
Holder or any of the Holder’s Affiliates) would beneficially own in excess of the Beneficial Ownership Limitation (as defined below).
For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates
shall include the number of shares of Common Stock issuable upon conversion of this Debenture with respect to which such
determination is being made, but shall exclude the number of shares of Common Stock which are issuable upon (i) conversion of the
remaining, unconverted principal amount of this Debenture beneficially owned by the Holder or any of its Affiliates and (ii) exercise or
conversion of the unexercised or unconverted portion of any other securities of the Company subject to a limitation on conversion or
exercise analogous to the limitation contained herein (including, without limitation, any other Debentures or the Warrants) beneficially
owned by the Holder or any of its Affiliates. Except as set forth in the preceding sentence, for purposes of this Section 4(d), beneficial
ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated
thereunder. To the extent that the limitation contained in this Section 4(d) applies, the determination of whether this Debenture is
convertible (in relation to other securities owned by the Holder together with any Affiliates) and of which principal amount of this
Debenture is convertible shall be in the sole discretion of the Holder, and the submission of a Notice of Conversion shall be deemed to
be the Holder’s determination of whether this Debenture may be converted (in relation to other securities owned by the Holder together
with any Affiliates) and which principal amount of this Debenture is convertible, in each case subject to the Beneficial Ownership
Limitation. To ensure compliance with this restriction, the Holder will be deemed to represent to the Company each time it delivers a
Notice of Conversion that such Notice of Conversion has not violated the restrictions set forth in this paragraph and the Company shall
have no obligation to verify or confirm the accuracy of such determination. In addition, a determination as to any group status as
contemplated above shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations
promulgated thereunder. For purposes of this Section 4(d), in determining the number of outstanding shares of Common Stock, the
Holder may rely on the number of outstanding shares of Common Stock as stated in the most recent of the following: (i) the
Company’s most recent periodic or annual report filed with the Commission, as the case may be, (ii) a more recent public
announcement by the Company, or (iii) a more recent written notice by the Company or the Company’s transfer agent setting forth the
number of shares of Common Stock outstanding. Upon the written or oral request of a Holder, the Company shall within two Trading
Days confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of
outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the
Company, including this Debenture, by the Holder or its Affiliates since the date as of which such number of outstanding shares of
Common Stock was reported. The “Beneficial Ownership Limitation” shall be 4.99% of the number of shares of the Common Stock
outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon conversion of this Debenture
held by the Holder. The Holder, upon not less than 61 days’ prior notice to the Company, may increase or decrease the Beneficial
Ownership Limitation provisions of this Section 4(d), provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of
the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock
upon conversion of this Debenture held by the Holder and the Beneficial Ownership Limitation provisions of this Section 4(d) shall
continue to apply. Any such increase or decrease will not be effective until the 61 st day after such notice is delivered to the Company.
The Beneficial Ownership Limitation provisions of this paragraph shall be construed and implemented in a manner otherwise than in
strict conformity with the terms of this Section 4(d) to correct this paragraph (or any portion hereof) which may be defective or
inconsistent with the intended Beneficial Ownership Limitation contained herein or to make changes or supplements necessary or
desirable to properly give effect to such limitation. The limitations contained in this paragraph shall apply to a successor holder of this
Debenture.
15
Section 5. Certain Adjustments.
a ) Stock Dividends and Stock Splits. If the Company, at any time while this Debenture is outstanding: (i) pays a stock
dividend or otherwise makes a distribution or distributions payable in shares of Common Stock on shares of Common Stock or any
Common Stock Equivalents (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company
upon conversion of, or payment of interest on, the Debentures or in connection with an Exempt Issuance), (ii) subdivides outstanding
shares of Common Stock into a larger number of shares, (iii) combines (including by way of a reverse stock split) outstanding shares
of Common Stock into a smaller number of shares or (iv) issues, in the event of a reclassification of shares of the Common Stock, any
shares of capital stock of the Company, then the Conversion Price shall be multiplied by a fraction of which the numerator shall be the
number of shares of Common Stock (excluding any treasury shares of the Company) outstanding immediately before such event, and
of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event. Any adjustment
made pursuant to this Section shall become effective immediately after the record date for the determination of stockholders entitled to
receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision,
combination or re-classification.
b ) Subsequent Equity Sales. If, at any time while this Debenture is outstanding, the Company or any Subsidiary, as
applicable, sells or grants any option to purchase or sells or grants any right to reprice, or otherwise disposes of or issues (or announces
any sale, grant or any option to purchase or other disposition), any Common Stock or Common Stock Equivalents entitling any Person
to acquire shares of Common Stock at an effective price per share that is lower than the then Conversion Price (such lower price, the
“Base Conversion Price” and such issuances, collectively, a “Dilutive Issuance”) (if the holder of the Common Stock or Common
Stock Equivalents so issued shall at any time, whether by operation of purchase price adjustments, reset provisions, floating
conversion, exercise or exchange prices or otherwise, or due to warrants, options or rights per share which are issued in connection
with such issuance, be entitled to receive shares of Common Stock at an effective price per share that is lower than the Conversion
Price, such issuance shall be deemed to have occurred for less than the Conversion Price on such date of the Dilutive Issuance), then
the Conversion Price shall be reduced to equal the Base Conversion Price. Such adjustment shall be made whenever such Common
Stock or Common Stock Equivalents are issued. Notwithstanding the foregoing, no adjustment will be made under this Section 5(b) in
respect of an Exempt Issuance. If the Company enters into a Variable Rate Transaction, despite the prohibition set forth in the
Purchase Agreement, the Company shall be deemed to have issued Common Stock or Common Stock Equivalents at the lowest
possible conversion price at which such securities may be converted or exercised. The Company shall notify the Holder in writing, no
later than the Trading Day following the issuance of any Common Stock or Common Stock Equivalents subject to this Section 5(b),
indicating therein the applicable issuance price, or applicable reset price, exchange price, conversion price and other pricing terms
(such notice, the “Dilutive Issuance Notice”). For purposes of clarification, whether or not the Company provides a Dilutive Issuance
Notice pursuant to this Section 5(b), upon the occurrence of any Dilutive Issuance, the Holder is entitled to receive a number of
Conversion Shares based upon the Base Conversion Price on or after the date of such Dilutive Issuance, regardless of whether the
Holder accurately refers to the Base Conversion Price in the Notice of Conversion.
16
c ) Subsequent Rights Offerings. In addition to any adjustments pursuant to the other subsections of this Section 5, if at
any time the Company grants, issues or sells any Common Stock Equivalents or rights to purchase stock, warrants, securities or other
property pro rata to the record holders of any class of shares of Common Stock (the “Purchase Rights”), then the Holder will be
entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have
acquired if the Holder had held the number of shares of Common Stock acquirable upon complete conversion of this Debenture
(without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately
before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the
date as of which the record holders of shares of Common Stock are to be determined for the grant, issue or sale of such Purchase
Rights (provided, however, to the extent that the Holder’s right to participate in any such Purchase Right would result in the Holder
exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Purchase Right to such
extent (or beneficial ownership of such shares of Common Stock as a result of such Purchase Right to such extent) and such Purchase
Right to such extent shall be held in abeyance for the Holder until such time, if ever, as its right thereto would not result in the Holder
exceeding the Beneficial Ownership Limitation).
d) Pro Rata Distributions. During such time as this Debenture is outstanding, if the Company shall declare or make any
dividend or other distribution of its assets (or rights to acquire its assets) to holders of shares of Common Stock, by way of return of
capital or otherwise (including, without limitation, any distribution of cash, stock or other securities, property or options by way of a
dividend, spin off, reclassification, corporate rearrangement, scheme of arrangement or other similar transaction) (a “Distribution”), at
any time after the issuance of this Debenture, then, in each such case, the Holder shall be entitled to participate in such Distribution to
the same extent that the Holder would have participated therein if the Holder had held the number of shares of Common Stock
acquirable upon complete exercise of this Debenture (without regard to any limitations on exercise hereof, including without
limitation, the Beneficial Ownership Limitation) immediately before the date of which a record is taken for such Distribution, or, if no
such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the participation in
such Distribution (provided, however, to the extent that the Holder's right to participate in any such Distribution would result in the
Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Distribution to such
extent (or in the beneficial ownership of any shares of Common Stock as a result of such Distribution to such extent) and the portion of
such Distribution shall be held in abeyance for the benefit of the Holder until such time, if ever, as its right thereto would not result in
the Holder exceeding the Beneficial Ownership Limitation).
17
e) Fundamental Transaction. If, at any time while this Debenture is outstanding, (i) the Company, directly or indirectly,
in one or more related transactions effects any merger or consolidation of the Company with or into another Person, (ii) the Company,
directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of
its assets in one or a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by
the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to sell, tender or exchange
their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common
Stock, (iv) the Company, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or
recapitalization of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively
converted into or exchanged for other securities, cash or property, (v) the Company, directly or indirectly, in one or more related
transactions consummates a stock or share purchase agreement or other business combination (including, without limitation, a
reorganization, recapitalization, spin-off or scheme of arrangement) with another Person whereby such other Person acquires more
than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the other Person or other
Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock or share purchase
agreement or other business combination) (each a “Fundamental Transaction”), then, upon any subsequent conversion of this
Debenture, the Holder shall have the right to receive, for each Conversion Share that would have been issuable upon such conversion
immediately prior to the occurrence of such Fundamental Transaction (without regard to any limitation in Section 4(d) on the
conversion of this Debenture), the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if
it is the surviving corporation, and any additional consideration (the “Alternate Consideration”) receivable as a result of such
Fundamental Transaction by a holder of the number of shares of Common Stock for which this Debenture is convertible immediately
prior to such Fundamental Transaction (without regard to any limitation in Section 4(d) on the conversion of this Debenture). For
purposes of any such conversion, the determination of the Conversion Price shall be appropriately adjusted to apply to such Alternate
Consideration based on the amount of Alternate Consideration issuable in respect of one (1) share of Common Stock in such
Fundamental Transaction, and the Company shall apportion the Conversion Price among the Alternate Consideration in a reasonable
manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are
given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the
same choice as to the Alternate Consideration it receives upon any conversion of this Debenture following such Fundamental
Transaction. The Company shall cause any successor entity in a Fundamental Transaction in which the Company is not the survivor
(the “Successor Entity”) to assume in writing all of the obligations of the Company under this Debenture and the other Transaction
Documents (as defined in the Purchase Agreement) in accordance with the provisions of this Section 5(e) pursuant to written
agreements in form and substance reasonably satisfactory to the Holder and approved by the Holder (without unreasonable delay) prior
to such Fundamental Transaction and shall, at the option of the holder of this Debenture, deliver to the Holder in exchange for this
Debenture a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to this
Debenture which is convertible for a corresponding number of shares of capital stock of such Successor Entity (or its parent entity)
equivalent to the shares of Common Stock acquirable and receivable upon conversion of this Debenture (without regard to any
limitations on the conversion of this Debenture) prior to such Fundamental Transaction, and with a conversion price which applies the
conversion price hereunder to such shares of capital stock (but taking into account the relative value of the shares of Common Stock
pursuant to such Fundamental Transaction and the value of such shares of capital stock, such number of shares of capital stock and
such conversion price being for the purpose of protecting the economic value of this Debenture immediately prior to the
consummation of such Fundamental Transaction), and which is reasonably satisfactory in form and substance to the Holder. Upon the
occurrence of any such Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after
the date of such Fundamental Transaction, the provisions of this Debenture and the other Transaction Documents referring to the
“Company” shall refer instead to the Successor Entity), and may exercise every right and power of the Company and shall assume all
of the obligations of the Company under this Debenture and the other Transaction Documents with the same effect as if such
Successor Entity had been named as the Company herein.
18
f) Calculations. All calculations under this Section 5 shall be made to the nearest cent or the nearest 1/100th of a share,
as the case may be. For purposes of this Section 5, the number of shares of Common Stock deemed to be issued and outstanding as of
a given date shall be the sum of the number of shares of Common Stock (excluding any treasury shares of the Company) issued and
outstanding.
g) Notice to the Holder.
i
. Adjustment to Conversion Price. Whenever the Conversion Price is adjusted pursuant to any provision of
this Section 5, the Company shall promptly deliver to each Holder a notice setting forth the Conversion Price after such
adjustment and setting forth a brief statement of the facts requiring such adjustment.
i
i
. Notice to Allow Conversion by Holder. If (A) the Company shall declare a dividend (or any other
distribution in whatever form) on the Common Stock, (B) the Company shall declare a special nonrecurring cash dividend on
or a redemption of the Common Stock, (C) the Company shall authorize the granting to all holders of the Common Stock of
rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (D) the approval of any
stockholders of the Company shall be required in connection with any reclassification of the Common Stock, any
consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the
Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property
or (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the
Company, then, in each case, the Company shall cause to be filed at each office or agency maintained for the purpose of
conversion of this Debenture, and shall cause to be delivered to the Holder at its last address as it shall appear upon the
Debenture Register, at least twenty (20) calendar days prior to the applicable record or effective date hereinafter specified, a
notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or
warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to
such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification,
consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is
expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for
securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share
exchange, provided that the failure to deliver such notice or any defect therein or in the delivery thereof shall not affect the
validity of the corporate action required to be specified in such notice. To the extent that any notice provided hereunder
constitutes, or contains, material, non-public information regarding the Company or any of the Subsidiaries, the Company
shall simultaneously file such notice with the Commission pursuant to a Current Report on Form 8-K. The Holder shall
remain entitled to convert this Debenture during the 20-day period commencing on the date of such notice through the
effective date of the event triggering such notice except as may otherwise be expressly set forth herein.
19
Section 6. Redemption.
a ) Optional Redemption at Election of Company . Subject to the provisions of this Section 6(a), at any time after the 6-
month anniversary of the Closing Date, the Company may deliver a notice to the Holder (an “Optional Redemption Notice” and the
date such notice is deemed delivered hereunder, the “Optional Redemption Notice Date”) of its irrevocable election to redeem some or
all of the then outstanding principal amount of this Debenture for cash in an amount equal to the Optional Redemption Amount on the
10th Trading Day following the Optional Redemption Notice Date (such date, the “ Optional Redemption Date”, such 10 Trading Day
period, the “Optional Redemption Period” and such redemption, the “Optional Redemption”). The Optional Redemption Amount is
payable in full on the Optional Redemption Date. The Company may only effect an Optional Redemption if each of the Equity
Conditions shall have been met (unless waived in writing by the Holder) on each Trading Day during the period commencing on the
Optional Redemption Notice Date through to the Optional Redemption Date and through and including the date payment of the
Optional Redemption Amount is actually made in full. If any of the Equity Conditions shall cease to be satisfied at any time during the
Optional Redemption Period, then the Holder may elect to nullify the Optional Redemption Notice by notice to the Company within 3
Trading Days after the first day on which any such Equity Condition has not been met (provided that if, by a provision of the
Transaction Documents, the Company is obligated to notify the Holder of the non-existence of an Equity Condition, such notice
period shall be extended to the third Trading Day after proper notice from the Company) in which case the Optional Redemption
Notice shall be null and void, ab initio. The Company covenants and agrees that it will honor all Notices of Conversion tendered from
the time of delivery of the Optional Redemption Notice through the date all amounts owing thereon are due and paid in full. The
Company’s determination to pay an Optional Redemption in cash shall be applied ratably to all of the holders of the then outstanding
Debentures based on their (or their predecessor’s) initial purchases of Debentures pursuant to the Purchase Agreement.
20
b ) Periodic Redemption. On each Periodic Redemption Date, the Company shall redeem the Periodic Redemption
Amount (the “Periodic Redemption”). The Periodic Redemption Amount payable on each Periodic Redemption Date shall be paid in
cash; provided, however, as to any Periodic Redemption and upon 20 Trading Days’ prior written irrevocable notice (the “Periodic
Redemption Notice”), in lieu of a cash redemption payment the Company may elect to pay all or part of a Periodic Redemption
Amount in Conversion Shares based on a conversion price equal to the lesser of (i) the then Conversion Price and (ii) 90% of the
average of the VWAPs for the 20 consecutive Trading Days ending on the Trading Day that is immediately prior to the applicable
Periodic Redemption Date (subject to adjustment for any stock dividend, stock split, stock combination or other similar event affecting
the Common Stock during such 20 Trading Day period), provided, however, in the case of this clause (ii) the conversion price shall be
equal to at least a $.01 discount the VWAP on the Trading Day immediately prior to the applicable Periodic Redemption Date (the
price calculated during the 20 Trading Day period immediately prior to the Periodic Redemption Date, the “Periodic Conversion
Price” and such 20 Trading Day period, the “Periodic Conversion Period”); provided, further, that the Company may not pay the
Periodic Redemption Amount in Conversion Shares unless (y) from the date the Holder receives the duly delivered Periodic
Redemption Notice through and until the date such Periodic Redemption is paid in full, the Equity Conditions have been satisfied,
unless waived in writing by the Holder, and (z) as to such Periodic Redemption, prior to such Periodic Conversion Period (but not more
than 5 Trading Days prior to the commencement of the Periodic Conversion Period), the Company shall have delivered to the Holder’s
account with The Depository Trust Company a number of shares of Common Stock to be applied against such Periodic Redemption
Amount equal to the quotient of (x) the applicable Periodic Redemption Amount divided by (y) the lesser of (A) the Conversion Price
and (B) 90% of the average of the 20 VWAPs during the period ending on the 3 rd Trading Day immediately prior to the date of the
Periodic Redemption Notice (the “Pre-Redemption Conversion Shares”). The Holder may convert, pursuant to Section 4(a), any
principal amount of this Debenture subject to a Periodic Redemption at any time prior to the date that the Periodic Redemption
Amount, plus accrued but unpaid interest, liquidated damages and any other amounts then owing to the Holder are due and paid in
full. Unless otherwise indicated by the Holder in the applicable Notice of Conversion, any principal amount of this Debenture
converted during the applicable Periodic Conversion Period until the date the Periodic Redemption Amount is paid in full shall be first
applied to the principal amount subject to the Periodic Redemption Amount payable in cash and then to the Periodic Redemption
Amount payable in Conversion Shares. Any principal amount of this Debenture converted during the applicable Periodic Conversion
Period in excess of the Periodic Redemption Amount shall be applied against the last principal amount of this Debenture scheduled to
be redeemed hereunder, in reverse time order from the Maturity Date; provided, however, if any such conversion is applied against
such Periodic Redemption Amount, the Pre-Redemption Conversion Shares, if any were issued in connection with such Periodic
Redemption or were not already applied to such conversions, shall be first applied against such conversion. The Company covenants
and agrees that it will honor all Notices of Conversion tendered up until such amounts are paid in full. The Company’s determination
to pay a Periodic Redemption in cash, shares of Common Stock or a combination thereof shall be applied ratably to all of the holders of
the then outstanding Debentures based on their (or their predecessor’s) initial purchases of Debentures pursuant to the Purchase
Agreement. At any time the Company delivers a notice to the Holder of its election to pay the Periodic Redemption Amount in shares
of Common Stock, if a Registration Statement is then effective, the Company shall file a prospectus supplement pursuant to Rule 424
disclosing such election.
21
c ) Redemption Procedure. The payment of cash or issuance of Common Stock, as applicable, pursuant to an Optional
Redemption or a Periodic Redemption shall be payable on the Optional Redemption Date or Periodic Redemption Date, as
applicable. If any portion of the payment pursuant to an Optional Redemption or Periodic Redemption shall not be paid by the
Company by the applicable due date, interest shall accrue thereon at an interest rate equal to the lesser of 18% per annum or the
maximum rate permitted by applicable law until such amount is paid in full. Notwithstanding anything herein contained to the
contrary, if any portion of the Optional Redemption Amount or Periodic Redemption Amount remains unpaid after such date, the
Holder may elect, by written notice to the Company given at any time thereafter, to invalidate such Optional Redemption or Periodic
Redemption, ab initio, and, with respect to the Company’s failure to honor the Optional Redemption, the Company shall have no
further right to exercise such Optional Redemption. Notwithstanding anything to the contrary in this Section 6, the Company’s
determination to redeem in cash or its elections under Section 6(b) shall be applied ratably among the Holders of Debentures. The
Holder may elect to convert the outstanding principal amount of the Debenture pursuant to Section 4 prior to actual payment in cash
for any redemption under this Section 6 by the delivery of a Notice of Conversion to the Company.
22
Section 7. Negative Covenants. As long as any portion of this Debenture remains outstanding, unless the holders of at least
50.1% in principal amount of the then outstanding Debentures shall have otherwise given prior written consent, the Company shall not, and
shall not permit any of the Subsidiaries to, directly or indirectly:
a ) other than Permitted Indebtedness, enter into, create, incur, assume, guarantee or suffer to exist any indebtedness for
borrowed money of any kind, including, but not limited to, a guarantee, on or with respect to any of its property or assets now owned or
hereafter acquired or any interest therein or any income or profits therefrom;
b
) other than Permitted Liens, enter into, create, incur, assume or suffer to exist any Liens of any kind, on or with
respect to any of its property or assets now owned or hereafter acquired or any interest therein or any income or profits therefrom;
c) amend its charter documents, including, without limitation, its certificate of incorporation and bylaws, in any manner
that materially and adversely affects any rights of the Holder (for avoidance of doubt, amendments of the Company’s charter
documents in accordance with Section 4.11 of the Purchase Agreement shall be permitted and shall not require consent);
d) repay, repurchase or offer to repay, repurchase or otherwise acquire more than a de minimis number of shares of its
Common Stock or Common Stock Equivalents other than as to (i) the Conversion Shares or Warrant Shares as permitted or required
under the Transaction Documents and (ii) repurchases of Common Stock or Common Stock Equivalents of departing officers and
directors of the Company, provided that such repurchases shall not exceed an aggregate of $150,000 for all officers and directors
during the term of this Debenture;
e ) repay, repurchase or offer to repay, repurchase or otherwise acquire any Indebtedness, other than (i) the Debentures
if on a pro-rata basis, (ii) the December 2012 Debentures in accordance with the terms and conditions of the December 2012
Debentures as of the Original Issue Date or (iii) the December 2012 Debentures set forth on Schedule 4.9 of the Purchase Agreement;
or
f) pay cash dividends or distributions on any equity securities of the Company;
g) enter into any transaction with any Affiliate of the Company which would be required to be disclosed in any public
filing with the Commission, unless such transaction is made on an arm’s-length basis and expressly approved by a majority of the
disinterested directors of the Company (even if less than a quorum otherwise required for board approval); or
h) enter into any agreement with respect to any of the foregoing.
23
Section 8. Events of Default.
a) “Event of Default” means, wherever used herein, any of the following events (whatever the reason for such event
and whether such event shall be voluntary or involuntary or effected by operation of law or pursuant to any judgment, decree or order
of any court, or any order, rule or regulation of any administrative or governmental body):
i. any default in the payment of (A) the principal amount of any Debenture or (B) interest, liquidated damages
and other amounts owing to a Holder on any Debenture, as and when the same shall become due and payable (whether on a
Conversion Date or the Maturity Date or by acceleration or otherwise) which default, solely in the case of an interest payment
or other default under clause (B) above, is not cured within 3 Trading Days;
ii. the Company shall fail to observe or perform any other covenant or agreement contained in the Debentures
(other than a breach by the Company of its obligations to deliver shares of Common Stock to the Holder upon conversion,
which breach is addressed in clause (x) below) which failure is not cured, if possible to cure, within the earlier to occur of (A)
5 Trading Days after notice of such failure sent by the Holder or by any other Holder to the Company and (B) 20 Trading
Days after the Company has become or should have become aware of such failure;
iii. a default or event of default (subject to any grace or cure period provided in the applicable agreement,
document or instrument) shall occur under (A) any of the Transaction Documents or (B) any other material agreement, lease,
document or instrument to which the Company or any Subsidiary is obligated (and not covered by clause (vi) below);
i v . any representation or warranty made in this Debenture, any other Transaction Documents, any written
statement pursuant hereto or thereto or any other report, financial statement or certificate made or delivered to the Holder or
any other Holder shall be untrue or incorrect in any material respect as of the date when made or deemed made;
v. the Company or any Significant Subsidiary (as such term is defined in Rule 1-02(w) of Regulation S-
X) shall be subject to a Bankruptcy Event;
vi. the Company or any Subsidiary shall default on any of its obligations under any mortgage, credit agreement
or other facility, indenture agreement, factoring agreement or other instrument under which there may be issued, or by which
there may be secured or evidenced, any indebtedness for borrowed money or money due under any long term leasing or
factoring arrangement that (a) involves an obligation greater than $500,000, whether such indebtedness now exists or shall
hereafter be created, and (b) results in such indebtedness becoming or being declared due and payable prior to the date on
which it would otherwise become due and payable;
24
vii. the Common Stock shall not be eligible for listing or quotation for trading on a Trading Market and shall not
be eligible to resume listing or quotation for trading thereon within five Trading Days;
viii. the Company shall be a party to any Change of Control Transaction or Fundamental Transaction or shall
agree to sell or dispose of all or in excess of 33% of its assets in one transaction or a series of related transactions (whether or
not such sale would constitute a Change of Control Transaction);
i x . the Company does not meet the current public information requirements under Rule 144 in respect of the
Underlying Shares;
x. the Company shall fail for any reason to deliver certificates to a Holder prior to the fifth Trading Day after a
Conversion Date pursuant to Section 4(c) or the Company shall provide at any time notice to the Holder, including by way of
public announcement, of the Company’s intention to not honor requests for conversions of any Debentures in accordance with
the terms hereof; or
xi. any monetary judgment, writ or similar final process shall be entered or filed against the Company, any
subsidiary or any of their respective property or other assets for more than $300,000, and such judgment, writ or similar final
process shall remain unvacated, unbonded or unstayed for a period of 45 calendar days.
b
) Remedies Upon Event of Default. If any Event of Default occurs, the outstanding principal amount of this
Debenture, plus accrued but unpaid interest, liquidated damages and other amounts owing in respect thereof through the date of
acceleration, shall become, at the Holder’s election, immediately due and payable in cash at the Mandatory Default
Amount. Commencing 5 days after the occurrence of any Event of Default that results in the eventual acceleration of this Debenture,
the interest rate on this Debenture shall accrue at an interest rate equal to the lesser of 18% per annum or the maximum rate permitted
under applicable law. Upon the payment in full of the Mandatory Default Amount, the Holder shall promptly surrender this Debenture
to or as directed by the Company. In connection with such acceleration described herein, the Holder need not provide, and the
Company hereby waives, any presentment, demand, protest or other notice of any kind, and the Holder may immediately and without
expiration of any grace period enforce any and all of its rights and remedies hereunder and all other remedies available to it under
applicable law. Such acceleration may be rescinded and annulled by Holder at any time prior to payment hereunder and the Holder
shall have all rights as a holder of the Debenture until such time, if any, as the Holder receives full payment pursuant to this Section
8(b). No such rescission or annulment shall affect any subsequent Event of Default or impair any right consequent thereon.
25
Section 9. Miscellaneous.
a
) Notices. Any and all notices or other communications or deliveries to be provided by the Holder hereunder,
including, without limitation, any Notice of Conversion, shall be in writing and delivered personally, by facsimile, or sent by a
nationally recognized overnight courier service, addressed to the Company, at the address set forth above, or such other facsimile
number or address as the Company may specify for such purposes by notice to the Holder delivered in accordance with this Section
9(a). Any and all notices or other communications or deliveries to be provided by the Company hereunder shall be in writing and
delivered personally, by facsimile, or sent by a nationally recognized overnight courier service addressed to each Holder at the
facsimile number or address of the Holder appearing on the books of the Company, or if no such facsimile number or address appears
on the books of the Company, at the principal place of business of such Holder, as set forth in the Purchase Agreement. Any notice or
other communication or deliveries hereunder 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 set forth on the signature pages attached hereto prior to
5:30 p.m. (New York City time) on any date, (ii) the next Trading Day after the date of transmission, if such notice or communication
is delivered via facsimile at the facsimile number set forth on the signature pages attached hereto on a day that is not a Trading Day or
later than 5:30 p.m. (New York City time) on any Trading Day, (iii) the second Trading Day following the date of mailing, if sent by
U.S. nationally recognized overnight courier service or (iv) upon actual receipt by the party to whom such notice is required to be
given.
b ) Absolute Obligation. Except as expressly provided herein, no provision of this Debenture shall alter or impair the
obligation of the Company, which is absolute and unconditional, to pay the principal of, liquidated damages and accrued interest, as
applicable, on this Debenture at the time, place, and rate, and in the coin or currency, herein prescribed. This Debenture is a direct debt
obligation of the Company. This Debenture ranks pari passu with all other Debentures now or hereafter issued under the terms set
forth herein.
c
) Lost or Mutilated Debenture. If this Debenture shall be mutilated, lost, stolen or destroyed, the Company shall
execute and deliver, in exchange and substitution for and upon cancellation of a mutilated Debenture, or in lieu of or in substitution for
a lost, stolen or destroyed Debenture, a new Debenture for the principal amount of this Debenture so mutilated, lost, stolen or
destroyed, but only upon receipt of evidence of such loss, theft or destruction of such Debenture, and of the ownership hereof,
reasonably satisfactory to the Company.
26
d
) Governing Law. All questions concerning the construction, validity, enforcement and interpretation of this
Debenture shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without
regard to the principles of conflict of laws thereof. Each party agrees that all legal proceedings concerning the interpretation,
enforcement and defense of the transactions contemplated by any of the Transaction Documents (whether brought against a party
hereto or its respective Affiliates, directors, officers, shareholders, employees or agents) shall be commenced in the state and federal
courts sitting in the City of New York, Borough of Manhattan (the “New York Courts ”). Each party hereto hereby irrevocably
submits to the exclusive jurisdiction of the New York Courts for the adjudication of any dispute hereunder or in connection herewith
or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of any of the Transaction
Documents), and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not
personally subject to the jurisdiction of such New York Courts, or such New York Courts are improper or inconvenient venue for such
proceeding. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit,
action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such
party at the address in effect for notices to it under this Debenture and agrees that such service shall constitute good and sufficient
service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any
other manner permitted by applicable law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable
law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Debenture or the transactions contemplated
hereby. If any party shall commence an action or proceeding to enforce any provisions of this Debenture, then the prevailing party in
such action or proceeding shall be reimbursed by the other party for its attorneys fees and other costs and expenses incurred in the
investigation, preparation and prosecution of such action or proceeding.
e ) Waiver. Any waiver by the Company or the Holder of a breach of any provision of this Debenture shall not operate
as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Debenture. The
failure of the Company or the Holder to insist upon strict adherence to any term of this Debenture on one or more occasions shall not
be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this
Debenture on any other occasion. Any waiver by the Company or the Holder must be in writing.
f
) Severability. If any provision of this Debenture is invalid, illegal or unenforceable, the balance of this Debenture
shall remain in effect, and if any provision is inapplicable to any Person or circumstance, it shall nevertheless remain applicable to all
other Persons and circumstances. If it shall be found that any interest or other amount deemed interest due hereunder violates the
applicable law governing usury, the applicable rate of interest due hereunder shall automatically be lowered to equal the maximum rate
of interest permitted under applicable law. The Company covenants (to the extent that it may lawfully do so) that it shall not at any
time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law or
other law which would prohibit or forgive the Company from paying all or any portion of the principal of or interest on this Debenture
as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance
of this Debenture, and the Company (to the extent it may lawfully do so) hereby expressly waives all benefits or advantage of any such
law, and covenants that it will not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the
Holder, but will suffer and permit the execution of every such as though no such law has been enacted.
27
g
) Next Business Day. Whenever any payment or other obligation hereunder shall be due on a day other than a
Business Day, such payment shall be made on the next succeeding Business Day.
h ) Headings. The headings contained herein are for convenience only, do not constitute a part of this Debenture and
shall not be deemed to limit or affect any of the provisions hereof.
i ) Secured Obligation. The obligations of the Company under this Debenture are secured by all assets of the Company
and each Subsidiary pursuant to the Security Agreement, dated as of April 10, 2014 between the Company, the Subsidiaries of the
Company and the Secured Parties (as defined therein).
*********************
(Signature Pages Follow)
28
IN WITNESS WHEREOF, the Company has caused this Debenture to be duly executed by a duly authorized officer as of the date
first above indicated.
SG BLOCKS, INC.
By:
Name: Paul M. Galvin
Title: Chief Executive Officer
Facsimile No. for delivery of Notices:
646.747.2438
29
ANNEX A
NOTICE OF CONVERSION
The undersigned hereby elects to convert principal under the 8% Original Issue Discount Senior Secured Convertible Debenture due April 1,
2016 of SG Blocks, Inc., a Delaware corporation (the “Company”), into shares of common stock (the “Common Stock”), of the Company
according to the conditions hereof, as of the date written below. If shares of Common Stock are to be issued in the name of a person other
than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates and
opinions as reasonably requested by the Company in accordance therewith. No fee will be charged to the holder for any conversion, except
for such transfer taxes, if any.
By the delivery of this Notice of Conversion the undersigned represents and warrants to the Company that its ownership of the Common Stock
does not exceed the amounts specified under Section 4 of this Debenture, as determined in accordance with Section 13(d) of the Exchange Act.
The undersigned agrees to comply with the prospectus delivery requirements under the applicable securities laws in connection with any
transfer of the aforesaid shares of Common Stock.
Conversion calculations:
Date to Effect Conversion:
Principal Amount of Debenture to be Converted:
Payment of Interest in Common Stock __ yes __ no
If yes, $_____ of Interest Accrued on Account of Conversion at
Issue.
Number of shares of Common Stock to be issued:
Signature:
Name:
Address for Delivery of Common Stock Certificates:
Or
DWAC Instructions:
Broker No:______________________
Account No:_____________________
30
Schedule 1
CONVERSION SCHEDULE
This 8% Original Issue Discount Senior Secured Convertible Debentures due on April 1, 2016 in the original principal amount of $________
is issued by SG Blocks, Inc., a Delaware corporation. This Conversion Schedule reflects conversions made under Section 4 of the above
referenced Debenture.
Date of Conversion
(or for first entry, Original Issue
Date)
Amount of Conversion
Aggregate Principal
Amount Remaining
Subsequent to Conversion
(or original Principal Amount)
Company Attest
Dated:
31
NEITHER THIS SECURITY NOR THE SECURITIES FOR WHICH THIS SECURITY 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 APPLICABLE STATE SECURITIES LAWS, AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL
OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY
ACCEPTABLE TO THE COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS SECURITY
MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH
SECURITIES.
Exhibit 4.14
COMMON STOCK PURCHASE WARRANT
SG BLOCKS, INC.
Warrant Shares: ________
Initial Exercise Date: April 10, 2014
THIS COMMON STOCK PURCHASE WARRANT (the “ Warrant”) certifies that, for value received, _____________or
its assigns (the “Holder”) is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any
time on or after April 10, 2014 (the “Initial Exercise Date”) and on or prior to the close of business on the five year anniversary of the Initial
Exercise Date (the “Termination Date”) but not thereafter, to subscribe for and purchase from SG Blocks, Inc., a Delaware corporation (the
“Company”), up to _____________ shares (as subject to adjustment hereunder, the “Warrant Shares”) of Common Stock. The purchase
price of one share of Common Stock under this Warrant shall be equal to the Exercise Price, as defined in Section 2(b).
Section 1. Definitions. Capitalized terms used and not otherwise defined herein shall have the meanings set forth in that
certain Securities Purchase Agreement (the “Purchase Agreement”), dated April 10, 2014, among the Company and the purchasers signatory
thereto.
Section 2. Exercise.
a) Exercise of Warrant. Exercise of the purchase rights represented by this Warrant may be made, in whole or in part, at
any time or times on or after the Initial Exercise Date and on or before the Termination Date by delivery to the Company (or such
other office or agency of the Company as it may designate by notice in writing to the registered Holder at the address of the Holder
appearing on the books of the Company) of a duly executed facsimile copy of the Notice of Exercise form annexed hereto and within
three (3) Trading Days of the date said Notice of Exercise is delivered to the Company, the Company shall have received payment of
the aggregate Exercise Price of the shares thereby purchased by wire transfer or cashier’s check drawn on a United States bank or, if
available, pursuant to the cashless exercise procedure specified in Section 2(c) below. Notwithstanding anything herein to the contrary,
the Holder shall not be required to physically surrender this Warrant to the Company until the Holder has purchased all of the Warrant
Shares available hereunder and the Warrant has been exercised in full, in which case, the Holder shall surrender this Warrant to the
Company for cancellation within three (3) Trading Days of the date the final Notice of Exercise is delivered to the Company. Partial
exercises of this Warrant resulting in purchases of a portion of the total number of Warrant Shares available hereunder shall have the
effect of lowering the outstanding number of Warrant Shares purchasable hereunder in an amount equal to the applicable number of
Warrant Shares purchased. The Holder and the Company shall maintain records showing the number of Warrant Shares purchased and
the date of such purchases. The Company shall deliver any objection to any Notice of Exercise Form within two (2) Business Days of
receipt of such notice. The Holder and any assignee, by acceptance of this Warrant, acknowledge and agree that, by reason of
the provisions of this paragraph, following the purchase of a portion of the Warrant Shares hereunder, the number of
Warrant Shares available for purchase hereunder at any given time may be less than the amount stated on the face hereof.
b ) Exercise Price. The exercise price per share of the Common Stock under this Warrant shall be $0.275, subject to
adjustment hereunder (the “Exercise Price”).
c ) Cashless Exercise. If at any time after the six month anniversary of the date of the Purchase Agreement there is no
effective Registration Statement registering, or no current prospectus available for, the resale of the Warrant Shares by the Holder, then
this Warrant may only also be exercised, in whole or in part, at such time by means of a “cashless exercise” in which the Holder shall
be entitled to receive a number of Warrant Shares equal to the quotient obtained by dividing [(A-B) (X)] by (A), where:
(A) =
the VWAP on the Trading Day immediately preceding the date on which Holder elects to exercise this Warrant
by means of a “cashless exercise,” as set forth in the applicable Notice of Exercise;
(B) =
the Exercise Price of this Warrant, as adjusted hereunder; and
(X) =
the number of Warrant Shares that would be issuable upon exercise of this Warrant in accordance with the
terms of this Warrant if such exercise were by means of a cash exercise rather than a cashless exercise.
Notwithstanding anything herein to the contrary, on the Termination Date, this Warrant shall be automatically exercised via
cashless exercise pursuant to this Section 2(c).
2
d) Mechanics of Exercise.
i.
Delivery of Warrant Shares Upon Exercise. Warrant Shares purchased hereunder shall be
transmitted by the Transfer Agent to the Holder by crediting the account of the Holder’s prime broker with The
Depository Trust Company through its Deposit or Withdrawal at Custodian system (“DWAC”) if the Company is
then a participant in such system and either (A) there is an effective registration statement permitting the issuance of
the Warrant Shares to or resale of the Warrant Shares by the Holder or (B) the shares are eligible for resale by the
Holder without volume or manner-of-sale limitations pursuant to Rule 144, and otherwise by physical delivery to the
address specified by the Holder in the Notice of Exercise by the date that is three (3) Trading Days after the latest of
(A) the delivery to the Company of the Notice of Exercise, (B) surrender of this Warrant (if required), and (C)
payment of the aggregate Exercise Price as set forth above (including by cashless exercise, if permitted) (such date,
the “Warrant Share Delivery Date”). The Warrant Shares shall be deemed to have been issued, and Holder or any
other person so designated to be named therein shall be deemed to have become a holder of record of such shares for
all purposes, as of the date the Warrant has been exercised, with payment to the Company of the Exercise Price (or
by cashless exercise, if permitted) and all taxes required to be paid by the Holder, if any, pursuant to Section 2(d)(vi)
prior to the issuance of such shares, having been paid. If the Company fails for any reason to deliver to the Holder
the Warrant Shares subject to a Notice of Exercise by the Warrant Share Delivery Date, the Company shall pay to the
Holder, in cash, as liquidated damages and not as a penalty, for each $1,000 of Warrant Shares subject to such
exercise (based on the VWAP of the Common Stock on the date of the applicable Notice of Exercise), $10 per
Trading Day (increasing to $15 per Trading Day on the fifth Trading Day after such liquidated damages begin to
accrue) for each Trading Day after such Warrant Share Delivery Date until such Warrant Shares are delivered or
Holder rescinds such exercise.
ii.
Delivery of New Warrants Upon Exercise . If this Warrant shall have been exercised in part, the
Company shall, at the request of a Holder and upon surrender of this Warrant certificate, at the time of delivery of
the Warrant Shares, deliver to the Holder a new Warrant evidencing the rights of the Holder to purchase the
unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical
with this Warrant.
3
i i i . Rescission Rights. If the Company fails to cause the Transfer Agent to transmit to the Holder the
Warrant Shares pursuant to Section 2(d)(i) by the Warrant Share Delivery Date, then the Holder will have the right to
rescind such exercise.
iv. Compensation for Buy-In on Failure to Timely Deliver Warrant Shares Upon Exercise. In addition
to any other rights available to the Holder, if the Company fails to cause the Transfer Agent to transmit to the Holder
the Warrant Shares pursuant to an exercise on or before the Warrant Share Delivery Date, and if after such date the
Holder is required by its broker to purchase (in an open market transaction or otherwise) or the Holder’s brokerage
firm otherwise purchases, shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant
Shares which the Holder anticipated receiving upon such exercise (a “Buy-In”), then the Company shall (A) pay in
cash to the Holder the amount, if any, by which (x) the Holder’s total purchase price (including brokerage
commissions, if any) for the shares of Common Stock so purchased exceeds (y) the amount obtained by multiplying
(1) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the
exercise at issue times (2) the price at which the sell order giving rise to such purchase obligation was executed, and
(B) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares
for which such exercise was not honored (in which case such exercise shall be deemed rescinded) or deliver to the
Holder the number of shares of Common Stock that would have been issued had the Company timely complied with
its exercise and delivery obligations hereunder subject to payment of the Exercise Price therefor. For example, if the
Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an
attempted exercise of shares of Common Stock with an aggregate sale price giving rise to such purchase obligation
of $10,000, under clause (A) of the immediately preceding sentence the Company shall be required to pay the Holder
$1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in
respect of the Buy-In and, upon request of the Company, evidence of the amount of such loss. Nothing herein shall
limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without
limitation, a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely
deliver shares of Common Stock upon exercise of the Warrant as required pursuant to the terms hereof.
v. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be
issued upon the exercise of this Warrant. As to any fraction of a share which the Holder would otherwise be entitled
to purchase upon such exercise, the Company shall, at its election, either pay a cash adjustment in respect of such
final fraction in an amount equal to such fraction multiplied by the Exercise Price or round up to the next whole
share.
4
v i . Charges, Taxes and Expenses. Issuance of Warrant Shares shall be made without charge to the
Holder for any issue or transfer tax or other incidental expense in respect of the issuance of Warrant Shares, all of
which transfer taxes and expenses shall be paid by the Company, and such Warrant Shares shall be issued in the
name of the Holder or in such name or names as may be directed by the Holder; provided, however, that in the event
that Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for
exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder and the
Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax
incidental thereto. The Company shall pay all Transfer Agent fees required for same-day processing of any Notice of
Exercise.
v i i . Closing of Books. The Company will not close its stockholder books or records in any manner
which prevents the timely exercise of this Warrant, pursuant to the terms hereof.
5
e ) Holder’s Exercise Limitations. The Company shall not effect any exercise of this Warrant, and a Holder
shall not have the right to exercise any portion of this Warrant, pursuant to Section 2 or otherwise, to the extent that after
giving effect to such issuance after exercise as set forth on the applicable Notice of Exercise, the Holder (together with the
Holder’s Affiliates, and any other Persons acting as a group together with the Holder or any of the Holder’s Affiliates), would
beneficially own in excess of the Beneficial Ownership Limitation (as defined below). For purposes of the foregoing
sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates shall include the number
of shares of Common Stock issuable upon exercise of this Warrant with respect to which such determination is being made,
but shall exclude the number of shares of Common Stock which would be issuable upon (i) exercise of the remaining,
nonexercised portion of this Warrant beneficially owned by the Holder or any of its Affiliates and (ii) exercise or conversion
of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any
other Common Stock Equivalents) subject to a limitation on conversion or exercise analogous to the limitation contained
herein beneficially owned by the Holder or any of its Affiliates. Except as set forth in the preceding sentence, for purposes of
this Section 2(e), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules
and regulations promulgated thereunder, it being acknowledged by the Holder that the Company is not representing to the
Holder that such calculation is in compliance with Section 13(d) of the Exchange Act and the Holder is solely responsible for
any schedules required to be filed in accordance therewith. To the extent that the limitation contained in this Section 2(e)
applies, the determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together
with any Affiliates) and of which portion of this Warrant is exercisable shall be in the sole discretion of the Holder, and the
submission of a Notice of Exercise shall be deemed to be the Holder’s determination of whether this Warrant is exercisable (in
relation to other securities owned by the Holder together with any Affiliates) and of which portion of this Warrant is
exercisable, in each case subject to the Beneficial Ownership Limitation, and the Company shall have no obligation to verify
or confirm the accuracy of such determination. In addition, a determination as to any group status as contemplated above
shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated
thereunder. For purposes of this Section 2(e), in determining the number of outstanding shares of Common Stock, a Holder
may rely on the number of outstanding shares of Common Stock as reflected in (A) the Company’s most recent periodic or
annual report filed with the Commission, as the case may be, (B) a more recent public announcement by the Company or (C)
a more recent written notice by the Company or the Transfer Agent setting forth the number of shares of Common Stock
outstanding. Upon the written or oral request of a Holder, the Company shall within two Trading Days confirm orally and in
writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding
shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company,
including this Warrant, by the Holder or its Affiliates since the date as of which such number of outstanding shares of
Common Stock was reported. The “Beneficial Ownership Limitation” shall be 4.99% of the number of shares of the
Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon
exercise of this Warrant. The Holder, upon not less than 61 days’ prior notice to the Company, may increase or decrease the
Beneficial Ownership Limitation provisions of this Section 2(e), provided that the Beneficial Ownership Limitation in no
event exceeds 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the
issuance of shares of Common Stock upon exercise of this Warrant held by the Holder and the provisions of this Section 2(e)
shall continue to apply. Any such increase or decrease will not be effective until the 61 st day after such notice is delivered to
the Company. The provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict
conformity with the terms of this Section 2(e) to correct this paragraph (or any portion hereof) which may be defective or
inconsistent with the intended Beneficial Ownership Limitation herein contained or to make changes or supplements
necessary or desirable to properly give effect to such limitation. The limitations contained in this paragraph shall apply to a
successor holder of this Warrant.
6
Section 3. Certain Adjustments.
a ) Stock Dividends and Splits. If the Company, at any time while this Warrant is outstanding: (i) pays a stock dividend
or otherwise makes a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities
payable in shares of Common Stock (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the
Company upon exercise of this Warrant or in connection with an Exempt Issuance), (ii) subdivides outstanding shares of Common
Stock into a larger number of shares, (iii) combines (including by way of reverse stock split) outstanding shares of Common Stock into
a smaller number of shares or (iv) issues by reclassification of shares of the Common Stock any shares of capital stock of the
Company, then in each case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares
of Common Stock (excluding treasury shares, if any) outstanding immediately before such event and of which the denominator shall
be the number of shares of Common Stock outstanding immediately after such event, and the number of shares issuable upon exercise
of this Warrant shall be proportionately adjusted such that the aggregate Exercise Price of this Warrant shall remain unchanged. Any
adjustment made pursuant to this Section 3(a) shall become effective immediately after the record date for the determination of
stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case
of a subdivision, combination or re-classification.
b ) Subsequent Equity Sales. If the Company or any Subsidiary thereof, as applicable, at any time while this Warrant is
outstanding, shall sell or grant any option to purchase, or sell or grant any right to reprice, or otherwise dispose of or issue (or
announce any offer, sale, grant or any option to purchase or other disposition) any Common Stock or Common Stock Equivalents, at
an effective price per share less than the Exercise Price then in effect (such lower price, the “Base Share Price” and such issuances
collectively, a “ Dilutive Issuance”) (it being understood and agreed that if the holder of the Common Stock or Common Stock
Equivalents so issued shall at any time, whether by operation of purchase price adjustments, reset provisions, floating conversion,
exercise or exchange prices or otherwise, or due to warrants, options or rights per share which are issued in connection with such
issuance, be entitled to receive shares of Common Stock at an effective price per share that is less than the Exercise Price, such
issuance shall be deemed to have occurred for less than the Exercise Price on such date of the Dilutive Issuance at such effective
price), then simultaneously with the consummation of each Dilutive Issuance the Exercise Price shall be reduced and only reduced to
equal the Base Share Price and the number of Warrant Shares issuable hereunder shall be increased such that the aggregate Exercise
Price payable hereunder, after taking into account the decrease in the Exercise Price, shall be equal to the aggregate Exercise Price
prior to such adjustment. Such adjustment shall be made whenever such Common Stock or Common Stock Equivalents are
issued. Notwithstanding the foregoing, no adjustments shall be made, paid or issued under this Section 3(b) in respect of an Exempt
Issuance. The Company shall notify the Holder, in writing, no later than the Trading Day following the issuance or deemed issuance
of any Common Stock or Common Stock Equivalents subject to this Section 3(b), indicating therein the applicable issuance price, or
applicable reset price, exchange price, conversion price and other pricing terms (such notice, the “Dilutive Issuance Notice”). For
purposes of clarification, whether or not the Company provides a Dilutive Issuance Notice pursuant to this Section 3(b), upon the
occurrence of any Dilutive Issuance, the Holder is entitled to receive a number of Warrant Shares based upon the Base Share Price
regardless of whether the Holder accurately refers to the Base Share Price in the Notice of Exercise. If the Company enters into a
Variable Rate Transaction, despite the prohibition thereon in the Purchase Agreement, the Company shall be deemed to have issued
Common Stock or Common Stock Equivalents at the lowest possible conversion or exercise price at which such securities may be
converted or exercised
7
c
) Subsequent Rights Offerings. In addition to any adjustments pursuant to Section 3(a) above, if at any time the
Company grants, issues or sells any Common Stock Equivalents or rights to purchase stock, warrants, securities or other property pro
rata to the record holders of any class of shares of Common Stock (the “Purchase Rights”), then the Holder will be entitled to acquire,
upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder
had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant (without regard to any limitations
on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date on which a record
is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of
shares of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights (provided, however, to the extent
that the Holder’s right to participate in any such Purchase Right would result in the Holder exceeding the Beneficial Ownership
Limitation, then the Holder shall not be entitled to participate in such Purchase Right to such extent (or beneficial ownership of such
shares of Common Stock as a result of such Purchase Right to such extent) and such Purchase Right to such extent shall be held in
abeyance for the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership
Limitation).
d ) Pro Rata Distributions. During such time as this Warrant is outstanding, if the Company shall declare or make any
dividend or other distribution of its assets (or rights to acquire its assets) to holders of shares of Common Stock, by way of return of
capital or otherwise (including, without limitation, any distribution of cash, stock or other securities, property or options by way of a
dividend, spin off, reclassification, corporate rearrangement, scheme of arrangement or other similar transaction) (a "Distribution"), at
any time after the issuance of this Warrant, then, in each such case, the Holder shall be entitled to participate in such Distribution to the
same extent that the Holder would have participated therein if the Holder had held the number of shares of Common Stock acquirable
upon complete exercise of this Warrant (without regard to any limitations on exercise hereof, including without limitation, the
Beneficial Ownership Limitation) immediately before the date of which a record is taken for such Distribution, or, if no such record is
taken, the date as of which the record holders of shares of Common Stock are to be determined for the participation in such
Distribution (provided, however, to the extent that the Holder's right to participate in any such Distribution would result in the Holder
exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Distribution to such extent
(or in the beneficial ownership of any shares of Common Stock as a result of such Distribution to such extent) and the portion of such
Distribution shall be held in abeyance for the benefit of the Holder until such time, if ever, as its right thereto would not result in the
Holder exceeding the Beneficial Ownership Limitation).
8
a) Fundamental Transaction. If, at any time while this Warrant is outstanding, (i) the Company, directly or indirectly, in
one or more related transactions effects any merger or consolidation of the Company with or into another Person, (ii) the Company,
directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of
its assets in one or a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by
the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to sell, tender or exchange
their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common
Stock, (iv) the Company, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or
recapitalization of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively
converted into or exchanged for other securities, cash or property, or (v) the Company, directly or indirectly, in one or more related
transactions consummates a stock or share purchase agreement or other business combination (including, without limitation, a
reorganization, recapitalization, spin-off or scheme of arrangement) with another Person or group of Persons whereby such other
Person or group acquires more than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held
by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such
stock or share purchase agreement or other business combination) (each a “Fundamental Transaction”), then, upon any subsequent
exercise of this Warrant, the Holder shall have the right to receive, for each Warrant Share that would have been issuable upon such
exercise immediately prior to the occurrence of such Fundamental Transaction, at the option of the Holder (without regard to any
limitation in Section 2(e) on the exercise of this Warrant), the number of shares of Common Stock of the successor or acquiring
corporation or of the Company, if it is the surviving corporation, and any additional consideration (the “ Alternate Consideration”)
receivable as a result of such Fundamental Transaction by a holder of the number of shares of Common Stock for which this Warrant
is exercisable immediately prior to such Fundamental Transaction (without regard to any limitation in Section 2(e) on the exercise of
this Warrant). For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to
such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in
such Fundamental Transaction, and the Company shall apportion the Exercise Price among the Alternate Consideration in a reasonable
manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are
given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the
same choice as to the Alternate Consideration it receives upon any exercise of this Warrant following such Fundamental
Transaction. Notwithstanding anything to the contrary, in the event of a Fundamental Transaction that is (1) an all cash transaction, (2)
a “Rule 13e-3 transaction” as defined in Rule 13e-3 under the Exchange Act, or (3) a Fundamental Transaction involving a person or
entity not traded on a national securities exchange, the Company or any Successor Entity (as defined below) shall, at the Holder’s
option, exercisable at any time concurrently with, or within 30 days after, the consummation of the Fundamental Transaction,
purchase this Warrant from the Holder by paying to the Holder an amount of cash equal to the Black Scholes Value of the remaining
unexercised portion of this Warrant on the date of the consummation of such Fundamental Transaction. “ Black Scholes Value” means
the value of this Warrant based on the Black and Scholes Option Pricing Model obtained from the “OV” function on Bloomberg, L.P.
(“Bloomberg”) determined as of the day of consummation of the applicable Fundamental Transaction for pricing purposes and
reflecting (A) a risk-free interest rate corresponding to the U.S. Treasury rate for a period equal to the time between the date of the
public announcement of the applicable Fundamental Transaction and the Termination Date, (B) an expected volatility equal to the
greater of 100% and the 100 day volatility obtained from the HVT function on Bloomberg as of the Trading Day immediately
following the public announcement of the applicable Fundamental Transaction, (C) the underlying price per share used in such
calculation shall be the sum of the price per share being offered in cash, if any, plus the value of any non-cash consideration, if any,
being offered in such Fundamental Transaction and (D) a remaining option time equal to the time between the date of the public
announcement of the applicable Fundamental Transaction and the Termination Date. The Company shall cause any successor entity in
a Fundamental Transaction in which the Company is not the survivor (the “Successor Entity”) to assume in writing all of the
obligations of the Company under this Warrant and the other Transaction Documents in accordance with the provisions of this Section
3(e) pursuant to written agreements in form and substance reasonably satisfactory to the Holder and approved by the Holder (without
unreasonable delay) prior to such Fundamental Transaction and shall, at the option of the Holder, deliver to the Holder in exchange for
this Warrant a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to this
Warrant which is exercisable for a corresponding number of shares of capital stock of such Successor Entity (or its parent entity)
equivalent to the shares of Common Stock acquirable and receivable upon exercise of this Warrant (without regard to any limitations
on the exercise of this Warrant) prior to such Fundamental Transaction, and with an exercise price which applies the exercise price
hereunder to such shares of capital stock (but taking into account the relative value of the shares of Common Stock pursuant to such
Fundamental Transaction and the value of such shares of capital stock, such number of shares of capital stock and such exercise price
being for the purpose of protecting the economic value of this Warrant immediately prior to the consummation of such Fundamental
Transaction), and which is reasonably satisfactory in form and substance to the Holder. Upon the occurrence of any such Fundamental
Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental
Transaction, the provisions of this Warrant and the other Transaction Documents referring to the “Company” shall refer instead to the
Successor Entity), and may exercise every right and power of the Company and shall assume all of the obligations of the Company
under this Warrant and the other Transaction Documents with the same effect as if such Successor Entity had been named as the
Company herein.
9
f ) Calculations. All calculations under this Section 3 shall be made to the nearest cent or the nearest 1/100th of a share,
as the case may be. For purposes of this Section 3, the number of shares of Common Stock deemed to be issued and outstanding as of a
given date shall be the sum of the number of shares of Common Stock (excluding treasury shares, if any) issued and outstanding.
g) Notice to Holder.
i . Adjustment to Exercise Price. Whenever the Exercise Price is adjusted pursuant to any provision of
this Section 3, the Company shall promptly mail to the Holder a notice setting forth the Exercise Price after such
adjustment and any resulting adjustment to the number of Warrant Shares and setting forth a brief statement of the
facts requiring such adjustment..
i i . Notice to Allow Exercise by Holder. If (A) the Company shall declare a dividend (or any other
distribution in whatever form) on the Common Stock, (B) the Company shall declare a special nonrecurring cash
dividend on or a redemption of the Common Stock, (C) the Company shall authorize the granting to all holders of
the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any
rights, (D) the approval of any stockholders of the Company shall be required in connection with any reclassification
of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or
substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is
converted into other securities, cash or property, or (E) the Company shall authorize the voluntary or involuntary
dissolution, liquidation or winding up of the affairs of the Company, then, in each case, the Company shall cause to
be mailed to the Holder at its last address as it shall appear upon the Warrant Register of the Company, at least 20
calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on
which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a
record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such
dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such
reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and
the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their
shares of the Common Stock for securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer or share exchange; provided that the failure to mail such notice or any defect
therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such
notice. To the extent that any notice provided hereunder constitutes, or contains, material, non-public information
regarding the Company or any of the Subsidiaries, the Company shall simultaneously file such notice with the
Commission pursuant to a Current Report on Form 8-K. The Holder shall remain entitled to exercise this Warrant
during the period commencing on the date of such notice to the effective date of the event triggering such
notice except as may otherwise be expressly set forth herein.
10
Section 4. Transfer of Warrant.
a) Transferability. Subject to compliance with any applicable securities laws and the conditions set forth in Section 4(d)
hereof and to the provisions of Section 4.1 of the Purchase Agreement, this Warrant and all rights hereunder (including, without
limitation, any registration rights) are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the
Company or its designated agent, together with a written assignment of this Warrant substantially in the form attached hereto duly
executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer,
but only after such transferee agrees to be bound by the provisions of this Agreement. Upon such surrender and, if required, such
payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees, as applicable,
and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant
evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. The Warrant, if properly
assigned in accordance herewith, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant
issued.
b
) New Warrants . This Warrant may be divided or combined with other Warrants upon presentation hereof at the
aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to
be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 4(a), as to any transfer which may be
involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the
Warrant or Warrants to be divided or combined in accordance with such notice. All Warrants issued on transfers or exchanges shall be
dated the original Issue Date and shall be identical with this Warrant except as to the number of Warrant Shares issuable pursuant
thereto.
c ) Warrant Register. The Company shall register this Warrant, upon records to be maintained by the Company for that
purpose (the “Warrant Register”), in the name of the record Holder hereof from time to time. The Company may deem and treat the
registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder,
and for all other purposes, absent actual notice to the contrary.
d ) Transfer Restrictions. If, at the time of the surrender of this Warrant in connection with any transfer of this Warrant,
the transfer of this Warrant shall not be either (i) registered pursuant to an effective registration statement under the Securities Act and
under applicable state securities or blue sky laws or (ii) eligible for resale without volume or manner-of-sale restrictions or current
public information requirements pursuant to Rule 144, the Company may require, as a condition of allowing such transfer, that the
Holder or transferee of this Warrant, as the case may be, comply with the provisions of Section 5.7 of the Purchase Agreement.
11
e ) Representation by the Holder. The Holder, by the acceptance hereof, represents and warrants that it is acquiring this
Warrant and, upon any exercise hereof, will acquire the Warrant Shares issuable upon such exercise, for its own account and not with a
view to or for distributing or reselling such Warrant Shares or any part thereof in violation of the Securities Act or any applicable state
securities law, except pursuant to sales registered or exempted under the Securities Act.
Section 5. Miscellaneous.
a) No Rights as Stockholder Until Exercise. This Warrant does not entitle the Holder to any voting rights, dividends or
other rights as a stockholder of the Company prior to the exercise hereof as set forth in Section 2(d)(i), except as expressly set forth in
Section 3.
b ) Loss, Theft, Destruction or Mutilation of Warrant . The Company covenants that upon receipt by the Company of
evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the
Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the
Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if
mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu
of such Warrant or stock certificate.
c ) Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any
right required or granted herein shall not be a Business Day, then, such action may be taken or such right may be exercised on the next
succeeding Business Day.
d) Authorized Shares.
The Company covenants that, during the period the Warrant is outstanding, it will reserve from its
authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon
the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall
constitute full authority to its officers who are charged with the duty of issuing the necessary Warrant Shares upon the
exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to
assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of
any requirements of the Trading Market upon which the Common Stock may be listed. The Company covenants that all
Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise
of the purchase rights represented by this Warrant and payment for such Warrant Shares in accordance herewith, be duly
authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges created by the Company in
respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue).
12
Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including,
without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms
and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this
Warrant against impairment. Without limiting the generality of the foregoing, the Company will (i) not increase the par value
of any Warrant Shares above the amount payable therefor upon such exercise immediately prior to such increase in par value,
(ii) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid
and nonassessable Warrant Shares upon the exercise of this Warrant and (iii) use commercially reasonable efforts to obtain all
such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof, as may be, necessary
to enable the Company to perform its obligations under this Warrant.
Before taking any action which would result in an adjustment in the number of Warrant Shares for which this
Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or
consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof.
e ) Jurisdiction. All questions concerning the construction, validity, enforcement and interpretation of this Warrant shall
be determined in accordance with the provisions of the Purchase Agreement.
f ) Restrictions. The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not
registered and the Holder does not utilize cashless exercise, will have restrictions upon resale imposed by state and federal securities
laws.
g ) Nonwaiver and Expenses. No course of dealing or any delay or failure to exercise any right hereunder on the part of
Holder shall operate as a waiver of such right or otherwise prejudice the Holder’s rights, powers or remedies, notwithstanding the fact
that all rights hereunder terminate on the Termination Date. If either party willfully and knowingly fails to comply with any provision
of this Warrant, which results in any material damages to the other, the first party shall pay to the other party such amounts as shall be
sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys’ fees, including those of appellate
proceedings, incurred by the affected party in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights,
powers or remedies hereunder.
h ) Notices. Any notice, request or other document required or permitted to be given or delivered to the Holder by the
Company shall be delivered in accordance with the notice provisions of the Purchase Agreement.
13
i ) Limitation of Liability. No provision hereof, in the absence of any affirmative action by the Holder to exercise this
Warrant to purchase Warrant Shares, and no enumeration herein of the rights or privileges of the Holder, shall give rise to any liability
of the Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by
the Company or by creditors of the Company.
j
) Remedies. The Holder, in addition to being entitled to exercise all rights granted by law, including recovery of
damages, will be entitled to specific performance of its rights under this Warrant. The Company agrees that monetary damages would
not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to
waive and not to assert the defense in any action for specific performance that a remedy at law would be adequate.
k ) Successors and Assigns. Subject to applicable securities laws, this Warrant and the rights and obligations evidenced
hereby shall inure to the benefit of and be binding upon the successors and permitted assigns of the Company and the successors and
permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of any Holder from time to time of this
Warrant and shall be enforceable by the Holder or holder of Warrant Shares.
l) Amendment. This Warrant may be modified or amended or the provisions hereof waived with the written consent of
the Company and the Holder.
m) Severability. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective
and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such
provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or
the remaining provisions of this Warrant.
n
) Headings. The headings used in this Warrant are for the convenience of reference only and shall not, for any
purpose, be deemed a part of this Warrant.
********************
(Signature Page Follows)
14
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized as of the
date first above indicated.
SG Blocks, Inc.
By:
Name: Paul M. Galvin
Title: Chief Executive Officer
15
TO: SG BLOCKS, INC.
NOTICE OF EXERCISE
( 1 ) The undersigned hereby elects to purchase ________ Warrant Shares of the Company pursuant to the terms of the
attached Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer
taxes, if any.
(2) Payment shall take the form of (check applicable box):
o in lawful money of the United States; or
o [if permitted the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula
set forth in subsection 2(c), to exercise this Warrant with respect to the maximum number of Warrant Shares
purchasable pursuant to the cashless exercise procedure set forth in subsection 2(c).
_______________________________
(3) Please issue said Warrant Shares in the name of the undersigned or in such other name as is specified below:
The Warrant Shares shall be delivered to the following DWAC Account Number or by physical delivery of a certificate to:
DTC Participant: _______________________________
_______________________________
_______________________________
( 4 ) Accredited Investor. The undersigned is an “accredited investor” as defined in Regulation D promulgated under the Securities Act of
1933, as amended, and that the aforesaid Shares are being acquired for the account of the undersigned for investment and not with a view to,
or for resale, in connection with the distribution thereof, and that the undersigned has no present intention of distributing or reselling such
shares.
[SIGNATURE OF HOLDER]
Name of Investing Entity: ________________________________________________________________________
Signature of Authorized Signatory of Investing Entity: __________________________________________________
Name of Authorized Signatory: ____________________________________________________________________
Title of Authorized Signatory: _____________________________________________________________________
Date: ________________________________________________________________________________________
16
ASSIGNMENT FORM
(To assign the foregoing warrant, execute
this form and supply required information.
Do not use this form to exercise the warrant.)
hereby
is_______________________________________________________________.
assigned
FOR VALUE RECEIVED, ____ all of or _______ shares of the foregoing Warrant and all rights evidenced thereby are
address
to_______________________________________________
whose
_______________________________________________________________
Holder’s Signature: _____________________________
Holder’s Address: _____________________________
Signature Guaranteed: ___________________________________________
_____________________________
Dated: ______________, _______
NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or
enlargement or any change whatsoever, and must be guaranteed by a bank or trust company. Officers of corporations and those acting in a
fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.
SECURITIES EXCHANGE AGREEMENT
Exhibit 10.16
THIS SECURITIES EXCHANGE AGREEMENT (the “ Agreement”), dated as of April 10, 2014, is entered into by and among SG
Blocks, Inc., a Delaware corporation (the “Company”), and the persons identified as “Holders” on the signature pages hereto (the “Holders”).
WHEREAS, pursuant to a Securities Purchase Agreement dated December 27, 2012, among the Company and the Holders (the
“Purchase Agreement”), the Company issued to the Holders 8% Original Issue Discount Secured Convertible Debentures due July 1, 2014
(the “2012 Debentures”) in the aggregate principal amount of $1,915,200 and Warrants to purchase common stock, par value $0.01 per share,
of the Company (the “Common Stock”) to purchase up to 4,453,954 shares of Common Stock (the “2012 Warrants”); and
WHEREAS, the Company and the Holders have agreed to exchange the 2012 Debentures for new debentures and new warrants as
described herein.
NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, each Holder
hereby agrees as follows:
1 . Definitions. Terms used as defined terms herein and not otherwise defined shall have the meanings provided therefore in
the Purchase Agreement and the New Debentures (as defined below).
“Affiliate” means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is
under common control with a Person, as such terms are used in and construed under Rule 405 under the Securities Act.
“April 2014 Purchase Agreement” shall mean the purchase agreement, dated on or about the date hereof, between the
Company and the signatories thereto.
“Closing” means the closing of the purchase and sale of the Securities pursuant to Section 3.
“Closing Date” means the Trading Day when this Agreement, the New Debentures and New Warrants have been executed
and delivered by the applicable parties thereto.
“Common Stock Equivalents” means any securities of the Company or the Subsidiaries which would entitle the holder
thereof to acquire at any time Common Stock, including, without limitation, any debt, preferred stock, rights, options, warrants or other
instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive,
Common Stock.
“Company Counsel” means Olshan Frome Wolosky LLP, with offices located at Park Avenue Tower, 65 East 55 th Street,
New York, NY 10022.
“Conversion Price” shall have the meaning ascribed to such term in the New Debentures.
“Conversion Shares” shall have the meaning ascribed to such term in the New Debentures.
“Disclosure Schedules” means the Disclosure Schedules to this Agreement which are delivered concurrently herewith.
“EGS” means Ellenoff Grossman & Schole LLP, with offices located at 1345 Ave. of the Americas, New York, New York
10105.
“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated
thereunder.
“Exempt Issuance” means the issuance of (a) shares of Common Stock or options to employees, officers or directors of the
Company pursuant to any stock or option plan duly adopted for such purpose, by a majority of the non-employee members of the
Board of Directors or a majority of the members of a committee of non-employee directors established for such purpose, plus up to
150,000 options (subject to adjustment for forward and reverse stock splits and the like that occur after the date hereof) to consultants
and up to 150,000 shares of Common Stock (subject to adjustment for forward and reverse stock splits and the like that occur after the
date hereof) to service providers in connection with Company projects, (b) securities upon the exercise or exchange of or conversion of
any Securities issued hereunder and/or other securities exercisable or exchangeable for or convertible into shares of Common Stock
issued and outstanding on the date of this Agreement, provided that such securities have not been amended since the date of this
Agreement to increase the number of such securities or to decrease the exercise price, exchange price or conversion price of such
securities, (c) securities issued pursuant to acquisitions or strategic transactions approved by a majority of the disinterested directors of
the Company, provided that any such issuance shall only be to a Person (or to the equityholders of a Person) which is, itself or through
its subsidiaries, an operating company or an owner of an asset in a business synergistic with the business of the Company and shall
provide to the Company additional benefits in addition to the investment of funds, but shall not include a transaction in which the
Company is issuing securities primarily for the purpose of raising capital or to an entity whose primary business is investing in
securities and (d) securities issued pursuant to the April 2014 Agreement (including securities issuable on conversion or exercise of the
securities issued thereunder).
“Liens” means a lien, charge, security interest, encumbrance, right of first refusal, preemptive right or other restriction.
“Material Adverse Effect” shall have the meaning assigned to such term in Section 4(b).
2
“New Underlying Shares” means the shares of Common Stock issued and issuable upon conversion or redemption of the
New Debentures and upon exercise of the New Warrants and issued and issuable in lieu of the cash payment of interest on the New
Debentures in accordance with the terms of the New Debentures.
“New Warrants ” means, collectively, the Common Stock purchase warrants delivered to the Holders at the Closing in
accordance with Section 3(a) hereof, which New Warrants shall be exercisable on or after the Closing Date and have a term of exercise
equal to five years from the Initial Exercise Date (as defined in the New Warrants), in the form of Exhibit C attached hereto.
“New Warrant Shares” means the shares of Common Stock issuable upon exercise of the New Warrants.
“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.
“Principal Amount” means, as to each Holder, the amounts set forth below such Holder’s signature block on the signature
pages hereto next to the heading “Principal Amount,” in United States Dollars, which shall equal such Holder’s principal amount of its
2012 Debenture (the “Exchange Amount”) multiplied by 1.14
“Required Minimum” means, as of any date, the maximum aggregate number of shares of Common Stock then issued or
potentially issuable in the future pursuant to the Transaction Documents, including any New Underlying Shares issuable upon exercise
in full of all New Warrants or conversion or redemption in full of all outstanding New Debentures (including Underlying Shares
issuable as payment of interest on the Debenture), ignoring any conversion or exercise limits set forth therein, and assuming that the
Conversion Price is at all times on and after the date of determination 75% of the then Conversion Price on the Trading Day
immediately prior to the date of determination.
“Rule 144” means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended
from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such
Rule.
“SEC Reports” shall have the meaning set forth in Section 4(j).
“Securities” means the New Debentures, the New Warrants and the New Underlying Shares.
“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
“Security Documents” shall mean the Security Agreement, the Subsidiary Guarantees and any other documents and filing
required thereunder in order to grant the Holders a first priority security interest in the assets of the Company and the Subsidiaries as
provided in the Security Agreement, including all UCC-1 filing receipts.
3
“Subsidiary” means any subsidiary of the Company, as set forth on Schedule 4(a) and shall, where applicable, also include any
direct or indirect subsidiary of the Company formed or acquired after the date hereof.
“Subsidiary Guarantee” means the Subsidiary Guarantee, dated the date hereof, by each Subsidiary in favor of the Holders, in
the form of Exhibit E attached hereto.
“Trading Day” means a day on which any Trading Market is open for trading.
“Trading Market” means any of the following markets or exchanges on which the Common Stock is listed or quoted for
trading on the date in question: the NYSE MKT (formerly NYSE AMEX), the Nasdaq Capital Market, the Nasdaq Global Market, the
Nasdaq Global Select Market, the New York Stock Exchange, the OTC Bulletin Board or the OTC Markets Inc. (or any successors to
any of the foregoing).
“Transaction Documents” means this Agreement, the New Debentures, the New Warrants, the Security Agreement, the
Subsidiary Guarantee, all “Transaction Documents” as defined in the Purchase Agreement, all schedules and exhibits thereto and
hereto and any other documents or agreements executed in connection with the transactions contemplated hereunder.
2. Agreements and Acknowledgements. The Company and the Holders signatory hereto agree as follows:
( a ) Exchange of Debentures. The Company hereby agrees to issue to each Holder an 8% Original Issue Discount
Senior Secured Convertible Debenture due April 1, 2016, in the form attached hereto as Exhibit A (the “New Debentures”) in the
aggregate Principal Amount as set forth on such Holder’s signature page hereto and New Warrants as calculated under Section 3(a) in
exchange for such Holder’s 2012 Debenture. Each Holder acknowledges and agrees that, upon the issuance and delivery of the New
Debentures, the 2012 Debentures will be deemed cancelled. Each Holder shall use reasonable best efforts to deliver, or cause to be
delivered, within 10 calendar days from the Closing Date its original 2012 Debenture to the Company for cancellation.
(b) Definitions in the Purchase Agreement.
(i) The Company and Holders hereby agree that, in the Purchase Agreement, (i) the term “Debentures” shall
include the New Debentures, (ii) the term “Warrants” shall include the New Warrants, (iii) the term “Warrant Shares” shall
include the Warrants, (iv) the term “Underlying Shares shall include the New Underlying Shares and (v) the term “Securities”
shall include the New Debentures, New Warrants and Underlying Shares.
4
( i i ) Exempt Issuance. The definition of “Exempt Issuance” in the Purchase Agreement shall be amended to
include the issuance of the securities pursuant to the April 2014 Purchase Agreement. As such, clause (d) shall be added to
the definition of Exempt Issuance as follows:
“(d) securities issued pursuant to the April 2014 Purchase Agreement”
( c ) Security Interest. The obligations of the Company under the New Debentures shall be secured by all assets of the
Company and each Subsidiary pursuant to the Security Agreement, dated as of April 10, 2014, between the Company, the Subsidiaries
and the Security Parties (as defined therein), in the form attached hereto as Exhibit B (the “Security Agreement”).
(d) Issuances Pursuant to the 2012 Debentures and the 2012 Warrants . From the date hereof until the New Debentures
and New Warrants are no longer outstanding, the Company shall not issue any shares of Common Stock pursuant to the 2012
Debentures or the 2012 Warrants at an effective per share price less than the then effective Conversion Price
3 . Closing. On the Closing Date, upon the terms and subject to the conditions set forth herein, substantially concurrent with
the execution and delivery of this Agreement by the parties hereto, the Company and the Holders, severally and not jointly, agree to exchange
such Holders’ 2012 Debentures for the New Debentures. The Company shall deliver to each Holder its respective New Debenture and a New
Warrant, as determined pursuant to Section 3(a), and the Company and each Holder shall deliver the other items set forth in Section 3
deliverable at the Closing. Upon satisfaction or waiver of the covenants and conditions set forth in Sections 3(a), (b), (c) and (d), the Closing
shall occur at the offices of EGS or such other location as the parties shall mutually agree.
(a) Company Deliveries. On or prior to the Closing Date, the Company shall deliver or cause to be delivered to each Holder the
following:
(i) this Agreement duly executed by the Company;
( i i ) a legal opinion of Company Counsel, substantially in the form of Exhibit C attached hereto, which such
opinion shall include an opinion as to the immediate availability of Rule 144 for the resale of the
Conversion
Shares;
( i i i ) a New Debenture with a principal amount equal to such Holder’s Principal Amount, registered in the
name of such
Holder;
(iv) a New Warrant registered in the name of such Holder to purchase up to a number of shares of Common
Stock equal to 100% of the Principal Amount of such Holder’s New Debenture divided by $0.25, with an
exercise price equal to $0.275, subject to adjustment therein (such New Warrant certificate may be
delivered within three Trading Days of the Closing Date); and
( v ) the Security Agreement, duly executed by the Company and each Subsidiary, along with all of the
Security Documents, including the Subsidiary Guarantee.
5
( b ) Holder Deliveries. On or prior to the Closing Date, each Holder shall deliver or cause to be delivered to the Company, the
following:
(i) this Agreement, duly executed by such Holder; and
(ii) the Security Agreement duly executed by such Holder.
( c ) Company Closing Conditions. The obligations of the Company hereunder in connection with the Closing are subject to the
following conditions being met:
(i) the accuracy in all material respects on the Closing Date of the representations and warranties of the
Holders contained herein (unless as of a specific date therein in which case they shall be accurate as of such date);
(ii) all obligations, covenants and agreements of each Holder required to be performed at or prior to the
Closing Date shall have been performed; and
(iii) the delivery by each Holder of the items set forth in Section 3(b) of this Agreement.
( d ) Holder Closing Conditions. The obligations of the Holders hereunder in connection with the Closing are subject to the
following conditions being met:
(i) the accuracy in all material respects when made and on the Closing Date of the representations and warranties of
the Company contained herein (unless as of a specific date therein in which case they shall be accurate as of such date);
(ii) all obligations, covenants and agreements of the Company required to be performed at or prior to the
Closing Date shall have been performed;
(iii) the delivery by the Company of the items set forth in Section 3(a) of this Agreement;
(iv) there shall have been no Material Adverse Effect with respect to the Company since the date hereof; and
(v) from the date hereof to the Closing Date, trading in the Common Stock shall not have been suspended by
the Commission or the Company’s principal Trading Market and, at any time prior to the Closing Date, trading in securities
generally as reported by Bloomberg L.P. shall not have been suspended or limited, or minimum prices shall not have been
established on securities whose trades are reported by such service, or on any Trading Market, nor shall a banking
moratorium have been declared either by the United States or New York State authorities nor shall there have occurred any
material outbreak or escalation of hostilities or other national or international calamity of such magnitude in its effect on, or
any material adverse change in, any financial market which, in each case, in the reasonable judgment of such Holder, makes it
impracticable or inadvisable to purchase the Securities at the Closing.
6
4
. Representations and Warranties . Except as set forth in the corresponding section of the disclosure schedules attached
hereto, the Company hereby makes to the Holders the following representations and warranties:
(a) Subsidiaries. All of the direct and indirect subsidiaries of the Company are set forth on Schedule 4(a). The Company owns,
directly or indirectly, all of the capital stock or other equity interests of each Subsidiary free and clear of any Liens, and all of the
issued and outstanding shares of capital stock of each Subsidiary are validly issued and are fully paid, non-assessable and free of
preemptive and similar rights to subscribe for or purchase securities. If the Company has no subsidiaries, all other references to the
Subsidiaries or any of them in the Transaction Documents shall be disregarded.
( b ) Organization and Qualification. The Company and each of the Subsidiaries is an entity duly incorporated or
otherwise organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization, with
the requisite power and authority to own and use its properties and assets and to carry on its business as currently conducted. Neither
the Company nor any Subsidiary is in violation nor default of any of the provisions of its respective certificate or articles of
incorporation, bylaws or other organizational or charter documents. Each of the Company and the Subsidiaries is duly qualified to
conduct business and is in good standing as a foreign corporation or other entity in each jurisdiction in which the nature of the business
conducted or property owned by it makes such qualification necessary, except where the failure to be so qualified or in good standing,
as the case may be, could not have or reasonably be expected to result in: (i) a material adverse effect on the legality, validity or
enforceability of any Transaction Document, (ii) a material adverse effect on the results of operations, assets, business, prospects or
condition (financial or otherwise) of the Company and the Subsidiaries, taken as a whole, or (iii) a material adverse effect on the
Company’s ability to perform in any material respect on a timely basis its obligations under any Transaction Document (any of (i), (ii)
or (iii), a “Material Adverse Effect ”; and provided, that changes in the trading price of the Common Stock shall not, in and of itself,
constitute a Material Adverse Effect) and no Proceeding has been instituted in any such jurisdiction revoking, limiting or curtailing or
seeking to revoke, limit or curtail such power and authority or qualification.
7
( c ) Authorization; Enforcement. The Company has the requisite corporate power and authority to enter into and to
consummate the transactions contemplated by this Agreement and otherwise to carry out its obligations hereunder and thereunder. The
execution and delivery of this Agreement by the Company and the consummation by it of the transactions contemplated hereby have
been duly authorized by all necessary action on the part of the Company and no further action is required by the Company, the Board
of Directors or the Company’s stockholders in connection therewith. This Agreement has been duly executed by the Company and,
when delivered in accordance with the terms hereof will constitute the valid and binding obligation of the Company enforceable
against the Company in accordance with its terms except (i) as limited by general equitable principles and applicable bankruptcy,
insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally, (ii)
as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies and (iii) insofar as
indemnification and contribution provisions may be limited by applicable law.
( d ) No Conflicts. Except as provided in Schedule 4(d), the execution, delivery and performance by the Company of this
Agreement and the consummation by the it of the transactions contemplated hereby do not and will not: (i) conflict with or violate any
provision of the Company’s or any Subsidiary’s certificate or articles of incorporation, bylaws or other organizational or charter
documents, or (ii) conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default)
under, result in the creation of any Lien upon any of the properties or assets of the Company or any Subsidiary, or give to others any
rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any material
agreement, credit facility, debt or other material instrument (evidencing a Company or Subsidiary debt or otherwise) or other material
understanding to which the Company or any Subsidiary is a party or by which any property or asset of the Company or any Subsidiary
is bound or affected, or (iii) conflict with or result in a violation of any law, rule, regulation, order, judgment, injunction, decree or
other restriction of any court or governmental authority to which the Company or a Subsidiary is subject (including federal and state
securities laws and regulations), or by which any property or asset of the Company or a Subsidiary is bound or affected; except in the
case of each of clauses (ii) and (iii), such as could not have or reasonably be expected to result in a Material Adverse Effect.
( e ) Equal Consideration. The Company has complied with Section 4.14 of the Purchase Agreement and has provided each
holder of the 2012 Debentures only with the consideration set forth in this Agreement.
f
(
) Issuance of the Securities. The Securities are duly authorized and, when issued and paid for in accordance with the
applicable Transaction Documents, will be duly and validly issued, fully paid and nonassessable, free and clear of all Liens imposed by
the Company other than restrictions on transfer provided for in the Transaction Documents. The New Underlying Shares, when issued
in accordance with the terms of the Transaction Documents, will be validly issued, fully paid and nonassessable, free and clear of all
Liens imposed by the Company other than restrictions on transfer provided for in the Transaction Documents. The Company has
reserved from its duly authorized capital stock a number of shares of Common Stock for issuance of the New Underlying Shares at
least equal to the Required Minimum on the date hereof.
8
( g ) Capitalization. Except as provided in Schedule 4(g), the capitalization of the Company is as described in the SEC
Reports. Schedule 4(g) also includes the number of shares of Common Stock owned beneficially, and of record, by Affiliates of the
Company as of the date hereof. Except as provided in Schedule 4(g), the Company has not issued any capital stock since its most
recently filed periodic report under the Exchange Act, other than pursuant to the exercise of employee stock options under the
Company’s stock option plans, the issuance of shares of Common Stock to employees pursuant to the Company’s employee stock
purchase plans and pursuant to the conversion and/or exercise of Common Stock Equivalents outstanding as of the date of the most
recently filed periodic report under the Exchange Act. Except as provided in Schedule 4(g), no Person has any right of first refusal,
preemptive right, right of participation, or any similar right to participate in the transactions contemplated by the Transaction
Documents. Except as provided in Schedule 4(g) or as a result of the issuance of the Securities, there are no outstanding options,
warrants, scrip rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities, rights or obligations
convertible into or exercisable or exchangeable for, or giving any Person any right to subscribe for or acquire any shares of Common
Stock, or contracts, commitments, understandings or arrangements by which the Company or any Subsidiary is or may become bound
to issue additional shares of Common Stock or Common Stock Equivalents. Except as set forth in Schedule 4(g), the issuance and sale
of the Securities will not obligate the Company to issue shares of Common Stock or other securities to any Person (other than the
Holders) and will not result in a right of any holder of Company securities to adjust the exercise, conversion, exchange or reset price
under any of such securities. All of the outstanding shares of capital stock of the Company are duly authorized, validly issued, fully
paid and nonassessable, have been issued in compliance with all federal and state securities laws, and none of such outstanding shares
was issued in violation of any preemptive rights or similar rights to subscribe for or purchase securities. No further approval or
authorization of any stockholder, the Board of Directors or others is required for the issuance and sale of the Securities. There are no
stockholders agreements, voting agreements or other similar agreements with respect to the Company’s capital stock to which the
Company is a party or, to the knowledge of the Company, between or among any of the Company’s stockholders.
(h) Bring Down. The Company expressly reaffirms that each of the representations and warranties set forth in the Purchase
Agreement (as supplemented or qualified by the disclosures in any disclosure schedule to Purchase Agreement), continues to be true,
accurate and complete in all material respects as of the date hereof, and the Company hereby remakes and incorporates herein by
reference each such representation and warranty as though made on the date of this Agreement and as of the Closing Date (unless as of
a specific date therein), except as set forth in the Disclosure Schedules.
(i) Tacking of Securities. The Company represents that the holding period of the Securities tack to the holding period
of the 2012 Debentures for Rule 144 purposes. The Company agrees not to take a position contrary to this paragraph. The Company
agrees to take all actions, including, without limitation, causing the issuance by its legal counsel of any necessary legal opinions,
necessary to issue to the Securities.
9
(j) SEC Reports; Financial Statements . The Company has filed all reports, schedules, forms, statements and other
documents required to be filed by the Company under the Securities Act and the Exchange Act, including pursuant to Section 13(a) or
15(d) thereof, for the two years preceding the date hereof (or such shorter period as the Company was required by law or regulation to
file such material) (the foregoing materials, including the exhibits thereto and documents incorporated by reference therein, being
collectively referred to herein as the “SEC Reports”). Except as described on Schedule 4(j), such SEC Reports were filed on a timely
basis or the Company received a valid extension of such time of filing and has filed any such SEC Reports prior to the expiration of
any such extension. As of their respective dates, the SEC Reports complied in all material respects with the requirements of the
Securities Act and the Exchange Act, as applicable, and none of the SEC Reports, when filed, contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the SEC
Reports comply in all material respects with applicable accounting requirements and the rules and regulations of the Commission with
respect thereto as in effect at the time of filing. Such financial statements have been prepared in accordance with United States
generally accepted accounting principles applied on a consistent basis during the periods involved (“GAAP”), except as may be
otherwise specified in such financial statements or the notes thereto and except that unaudited financial statements may not contain all
footnotes required by GAAP, and fairly present in all material respects the financial position of the Company and its consolidated
Subsidiaries as of and for the dates thereof and the results of operations and cash flows for the periods then ended, subject, in the case
of unaudited statements, to normal, immaterial, year-end audit adjustments.
(l) No Integrated Offering. Assuming the accuracy of the Holders’ representations and warranties set forth in Section
5, neither the Company, nor any of its Affiliates, nor any Person acting on its or their behalf has, directly or indirectly, made any offers
or sales of any security or solicited any offers to buy any security, under circumstances that would cause this offering of the Securities
to be integrated with prior offerings by the Company for purposes of (i) the Securities Act which would require the registration of any
such securities under the Securities Act, or (ii) any applicable shareholder approval provisions of any Trading Market on which any of
the securities of the Company are listed or designated.
(m)
No Novation. The New Debentures are being issued in substitution for and not in satisfaction of the 2012
Debentures. The New Debentures shall not constitute a novation or satisfaction and accord of any of the 2012 Debentures. The
Company hereby acknowledges and agrees that the New Debentures shall amend, restate, modify, extend, renew and continue the
terms and provisions contained in the 2012 Debentures and shall not extinguish or release the Company or any of its Subsidiaries
under any Transaction Document otherwise constitute a novation of its obligations thereunder.
(n) No Event of Default. The Company represents and warrants to each Holder that after giving effect to the terms of
the waivers contemplated in this Agreement, no Event of Default (as defined in the 2012 Debentures) shall have occurred and be
continuing as of the date hereof.
10
5 . Representations and Warranties of the Holders . Each Holder, for itself and for no other Holder, hereby represents and
warrants as of the date hereof and as of the Closing Date to the Company as follows (unless as of a specific date therein):
( a ) Organization; Authority . Such Holder is either an individual or an entity duly incorporated or formed, validly
existing and in good standing under the laws of the jurisdiction of its incorporated or formed with full right, corporate, partnership,
limited liability company or similar power and authority to enter into and to consummate the transactions contemplated by the
Transaction Documents and otherwise to carry out its obligations hereunder and thereunder. The execution and delivery of the
Transaction Documents and performance by such Holder of the transactions contemplated by the Transaction Documents have been
duly authorized by all necessary corporate, partnership, limited liability company or similar action, as applicable, on the part of such
Holder. Each Transaction Document to which it is a party has been duly executed by such Holder, and when delivered by such Holder
in accordance with the terms hereof, will constitute the valid and legally binding obligation of such Holder, enforceable against it in
accordance with its terms, except: (i) as limited by general equitable principles and applicable bankruptcy, insolvency, reorganization,
moratorium and other laws of general application affecting enforcement of creditors’ rights generally, (ii) as limited by laws relating to
the availability of specific performance, injunctive relief or other equitable remedies and (iii) insofar as indemnification and
contribution provisions may be limited by applicable law.
( b ) Own Account. Such Holder understands that the Securities are “restricted securities” and have not been registered
under the Securities Act or any applicable state securities law and is acquiring the Securities as principal for its own account and not
with a view to or for distributing or reselling such Securities or any part thereof in violation of the Securities Act or any applicable state
securities law, has no present intention of distributing any of such Securities in violation of the Securities Act or any applicable state
securities law and has no direct or indirect arrangement or understandings with any other persons to distribute or regarding the
distribution of such Securities in violation of the Securities Act or any applicable state securities law (this representation and warranty
not limiting such Holder’s right to sell the Securities in compliance with applicable federal and state securities laws). Such Holder is
acquiring the Securities hereunder in the ordinary course of its business.
(c) Holder Status. At the time such Holder was offered the Securities, it was, and as of the date hereof it is, and on each
date on which it exercises any Warrants or converts any Debentures it will be an “accredited investor” as defined in Rule 501(a)(1), (a)
(2), (a)(3), (a)(7) or (a)(8) under the Securities Act.
The Company acknowledges and agrees that the representations contained in Section 5 shall not modify, amend or affect such Holder’s right
to rely on the Company’s representations and warranties contained in this Agreement or any express representations and warranties contained
in any other Transaction Document or any other document or instrument executed and/or delivered in connection with this Agreement or the
consummation of the transaction contemplated hereby.
11
6. Transfer Restrictions.
(a) The Securities may only be disposed of in compliance with state and federal securities laws. In connection with any
transfer of Securities other than pursuant to an effective registration statement or Rule 144, to the Company or to an Affiliate of a
Holder or in connection with a pledge as contemplated in Section 6(b), the Company may require the transferor thereof to provide to
the Company an opinion of counsel selected by the transferor and reasonably acceptable to the Company, the form and substance of
which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does not require registration of such
transferred Securities under the Securities Act. As a condition of transfer, any such transferee shall agree in writing to be bound by the
terms of this Agreement, and then shall have the rights and obligations of a Holder under this Agreement.
(b) The Holders agree to the imprinting, so long as is required by this Section 6, of a legend on any of the Securities in
the following form:
[NOR THE SECURITIES
INTO WHICH THIS SECURITY
[NEITHER] THIS SECURITY
[EXERCISABLE]
[CONVERTIBLE]] HAS [NOT] BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR
SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR
PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS
EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF
WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THIS SECURITY [AND THE SECURITIES
ISSUABLE UPON [EXERCISE] [CONVERSION] OF THIS SECURITY] MAY BE PLEDGED IN CONNECTION WITH A BONA
FIDE MARGIN ACCOUNT WITH A REGISTERED BROKER-DEALER OR OTHER LOAN WITH A FINANCIAL
INSTITUTION THAT IS AN “ACCREDITED INVESTOR” AS DEFINED IN RULE 501(a) UNDER THE SECURITIES ACT OR
OTHER LOAN SECURED BY SUCH SECURITIES.
IS
12
The Company acknowledges and agrees that a Holder may from time to time pledge pursuant to a bona fide margin agreement with a
registered broker-dealer or grant a security interest in some or all of the Securities to a financial institution that is an “accredited
investor” as defined in Rule 501(a) under the Securities Act and who agrees to be bound by the provisions of this Agreement and, if
required under the terms of such arrangement, such Holder may transfer pledged or secured Securities to the pledgees or secured
parties. Such a pledge or transfer would not be subject to approval of the Company and no legal opinion of legal counsel of the
pledgee, secured party or pledgor shall be required in connection therewith. Further, no notice shall be required of such pledge. At the
appropriate Holder’s expense, the Company will execute and deliver such reasonable documentation as a pledgee or secured party of
Securities may reasonably request in connection with a pledge or transfer of the Securities.
(c) Certificates evidencing the New Underlying Shares shall not contain any legend (including the legend set forth in
Section 6(b) hereof): (i) while a registration statement covering the resale of such security is effective under the Securities Act, (ii)
following any sale of such New Underlying Shares pursuant to Rule 144, (iii) if such New Underlying Shares are eligible for sale
under Rule 144, without the requirement for the Company to be in compliance with the current public information required under Rule
144 as to such New Underlying Shares and without volume or manner-of-sale restrictions or (iv) if such legend is not required under
applicable requirements of the Securities Act (including judicial interpretations and pronouncements issued by the staff of the
Commission). The Company shall cause its counsel to issue a legal opinion to the Transfer Agent promptly after the effective date of a
registration statement covering the resale of the New Underlying Shares if required by the Transfer Agent to effect the removal of the
legend hereunder. If all or any portion of a New Debenture is converted or a New Warrants is exercised at a time when there is an
effective registration statement to cover the resale of the New Underlying Shares, or if such New Underlying Shares may be sold
under Rule 144 without the requirement for the Company to be in compliance with the current public information required under Rule
144 as to such New Underlying Shares and without volume or manner-of-sale restrictions or if such legend is not otherwise required
under applicable requirements of the Securities Act (including judicial interpretations and pronouncements issued by the staff of the
Commission), then such New Underlying Shares shall be issued free of all legends. The Company agrees that following the Effective
Date or at such time as such legend is no longer required under this Section 6(c), it will, no later than three Trading Days following the
delivery by a Holder to the Company or the Transfer Agent of a certificate representing New Underlying Shares, as applicable, issued
with a restrictive legend (such third Trading Day, the “Legend Removal Date”), deliver or cause to be delivered to such Holder a
certificate representing such shares that is free from all restrictive and other legends. The Company may not make any notation on its
records or give instructions to the Transfer Agent that enlarge the restrictions on transfer set forth in this Section 5. Certificates for
New Underlying Shares subject to legend removal hereunder shall be transmitted by the Transfer Agent to the Holder by crediting the
account of the Holder’s prime broker with the Depository Trust Company System as directed by such Holder.
13
(d) In addition to such Holder’s other available remedies, the Company shall pay to a Holder, in cash, as partial
liquidated damages and not as a penalty, for each $1,000 of New Underlying Shares (based on the VWAP of the Common Stock on the
date such Securities are submitted to the Transfer Agent) delivered on or after the earlier of (i) the date the Company files its annual
report on form 10-K for the year ended December 31, 2013 or (ii) April 15, 2014 for removal of the restrictive legend and subject to
Section 6(c), $10 per Trading Day (increasing to $15 per Trading Day five (5) Trading Days after such damages have begun to accrue)
for each Trading Day after the Legend Removal Date until such certificate is delivered without a legend; provided, however, the
parties acknowledge and agree that, so long as the Company is then in compliance with the current public information requirement
under Rule 144(c), the Underlying Shares may be issued free of all legends as of the date hereof. Nothing herein shall limit such
Holder’s right to pursue actual damages for the Company’s failure to deliver certificates representing any Securities as required by the
Transaction Documents, and such Holder shall have the right to pursue all remedies available to it at law or in equity including,
without limitation, a decree of specific performance and/or injunctive relief.
(e) Each Holder, severally and not jointly with the other Holders, agrees with the Company that such Holder will sell
any Securities pursuant to either the registration requirements of the Securities Act, including any applicable prospectus delivery
requirements, or an exemption therefrom, and that if Securities are sold pursuant to a registration statement, they will be sold in
compliance with the plan of distribution set forth therein, and acknowledges that the removal of the restrictive legend from certificates
representing Securities as set forth in this Section 6 is predicated upon the Company’s reliance upon this understanding.
7. Greenshoe.
(a) From the date hereof until the twelve month anniversary of the Closing Date, each Holder may, in its sole
determination, elect to purchase, severally and not jointly with the other Holders and, subject to the proviso below, in one or more
purchases, additional debentures and warrants in accordance with the calculations in Section 3 having an aggregate cash subscription
amount for each Holder equal to 50% of such Holder’s Exchange Amount (such securities, the “Greenshoe Securities” and such right to
receive the Greenshoe Securities pursuant to this Section 7, the “Greenshoe Rights”). The Greenshoe Securities shall, except as set
forth in this Section 7, be identical to the Securities. The debenture included in the Greenshoe Securities shall have an initial
conversion price equal to the lesser of (i) $0.35 (subject to adjustment for forward and reverse stock splits and the like that occur after
the date hereof) or (ii) the then effective Conversion Price of the New Debentures issued hereunder multiplied by 1.4. The warrants
included in the Greenshoe Securities shall have an initial exercise price equal to the lesser of (i) $.040 (subject to adjustment for
forward and reverse stock splits and the like that occur after the date hereof) or (ii) the then effective exercise price of the New
Warrants issued hereunder multiplied by 1.45.
(b) Any Greenshoe Right exercised by a Holder shall close within 5 Trading Days of a duly delivered exercise notice by
the exercising party. Any additional investment in the Greenshoe Securities shall be on terms identical to those set forth in the
Transaction Documents, mutatis mutandis. In order to effectuate a purchase and sale of the Greenshoe Securities, the Company and
the Holders shall enter into a securities purchase agreement otherwise identical to the April 2014 Purchase Agreement, mutatis
mutandis and shall include updated disclosure schedules.
14
8. Variable Rate Transactions. From the date hereof until such time as no Holder holds any of the New Warrants, the Company
shall be prohibited from effecting or entering into an agreement to effect any issuance by the Company or any of its Subsidiaries of
Common Stock or Common Stock Equivalents (or a combination of units thereof) involving a Variable Rate Transaction. “Variable
Rate Transaction” means a transaction in which the Company (i) issues or sells any debt or equity securities that are convertible into,
exchangeable or exercisable for, or include the right to receive, additional shares of Common Stock either (A) at a conversion price,
exercise price or exchange rate or other price that is based upon, and/or varies with, the trading prices of or quotations for the shares of
Common Stock at any time after the initial issuance of such debt or equity securities or (B) with a conversion, exercise or exchange
price that is subject to being reset at some future date after the initial issuance of such debt or equity security or upon the occurrence of
specified or contingent events directly or indirectly related to the business of the Company or the market for the Common Stock or (ii)
enters into any agreement, including, but not limited to, an equity line of credit, whereby the Company may issue securities at a future
determined price. Any Holder shall be entitled to obtain injunctive relief against the Company to preclude any such issuance, which
remedy shall be in addition to any right to collect damages
9. Miscellaneous.
(a) The respective obligations and agreements of the Holders hereunder are subject to the following conditions being
met: (a) the accuracy in all material respects of the representations and warranties of the Company contained herein (except for those
representations and warranties that are qualified by materiality or Material Adverse Effect, which shall be true and correct in all
respects) and (b) the performance by the Company of all if its obligations, covenants and agreements required to be performed
hereunder. Except as expressly set forth above, all of the terms and conditions of the Transaction Documents shall continue in full
force and effect after the execution of this Agreement and shall not be in any way changed, modified or superseded by the terms set
forth herein. The Company shall, within 4 Trading Days of the date hereof, issue a Current Report on Form 8-K with the Commission
disclosing the material terms of the transactions contemplated hereby, and shall attach this Agreement and the form of New Debenture
as exhibits thereto (the “8-K Filing”). From and after the 8-K Filing, the Holder shall not be in possession of any material, nonpublic
information received from the Company, any of its Subsidiaries or any of their respective officers, directors, employees or agents, that
is not disclosed in the 8-K Filing. The Company will provide all documentation reasonably requested by the Holders for purposes of
qualifying the New Underlying Shares in compliance with Rule 144 to be issued without restriction and not containing any restrictive
legend. The Company shall consult with the Holders in issuing any other press releases with respect to the transactions contemplated
hereby.
15
(b) This Agreement may be executed in two or more counterparts and by facsimile signature or otherwise, and each of
such counterparts shall be deemed an original and all of such counterparts together shall constitute one and the same agreement. Each
party shall pay the fees and expenses of its advisers, counsel, accountants and other experts, if any, and all other expenses incurred by
such party incident to the negotiation, preparation, execution, delivery and performance of this Agreement.
(c) The Company has elected to provide all Holders with the same terms and form of agreement for the convenience of
the Company and not because it was required or requested to do so by the Holders. The obligations of each Holder under this
Agreement, and any Transaction Document are several and not joint with the obligations of any other Holder, and no Holder shall be
responsible in any way for the performance or non-performance of the obligations of any other Holder under this Agreement or any
Transaction Document. Nothing contained herein or in any Transaction Document, and no action taken by any Holder pursuant
thereto, shall be deemed to constitute the Holders as a partnership, an association, a joint venture or any other kind of entity, or create a
presumption that the Holders are in any way acting in concert or as a group with respect to such obligations or the transactions
contemplated by this Agreement or the Transaction Documents. Each Holder shall be entitled to independently protect and enforce its
rights, including without limitation, the rights arising out of this Agreement or out of the other Transaction Documents, and it shall not
be necessary for any other Holder to be joined as an additional party in any proceeding for such purpose. Each Holder has been
represented by its own separate legal counsel in their review and negotiation of this Agreement and the Transaction Documents.
(d) This Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted
assigns. The Company may not assign this Agreement or any rights or obligations hereunder without the prior written consent of each
Holder (other than by merger). Any Holder may assign any or all of its rights under this Agreement to any Person to whom such
Holder assigns or transfers any Securities, provided that such transferee agrees in writing to be bound, with respect to the transferred
Securities, by the provisions of the Transaction Documents that apply to the “Holders.”
(e) If any provision of this Agreement is prohibited by law or otherwise determined to be invalid or unenforceable by a
court of competent jurisdiction, the provision that would otherwise be prohibited, invalid or unenforceable shall be deemed amended to
apply to the broadest extent that it would be valid and enforceable, and the invalidity or unenforceability of such provision shall not
affect the validity of the remaining provisions of this Agreement so long as this Agreement as so modified continues to express,
without material change, the original intentions of the parties as to the subject matter hereof and the prohibited nature, invalidity or
unenforceability of the provision(s) in question does not substantially impair the respective expectations or reciprocal obligations of
the parties or the practical realization of the benefits that would otherwise be conferred upon the parties. The parties will endeavor in
good faith negotiations to replace the prohibited, invalid or unenforceable provision(s) with a valid provision(s), the effect of which
comes as close as possible to that of the prohibited, invalid or unenforceable provision(s).
16
(f) Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in
writing and shall be deemed given and effective on the earliest of: (a) the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile number set forth on the signature pages attached hereto at or prior to 5:30 p.m. (New York City
time) on a Trading Day, (b) the next Trading Day after the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile number set forth on the signature pages attached hereto on a day that is not a Trading Day or later than 5:30
p.m. (New York City time) on any Trading Day, (c) the second (2 nd) Trading Day following the date of mailing, if sent by U.S.
nationally recognized overnight courier service or (d) upon actual receipt by the party to whom such notice is required to be
given. The address for such notices and communications shall be as set forth on the signature pages attached hereto
(g) This Agreement shall be governed by and interpreted in accordance with laws of the State of New York, excluding
its choice of law rules. The parties hereto hereby waive the right to a jury trial in any litigation resulting from or related to this
Agreement. The parties hereto consent to exclusive jurisdiction and venue in the federal courts sitting in the southern district of New
York, unless no federal subject matter jurisdiction exists, in which case the parties hereto consent to exclusive jurisdiction and venue in
the New York state courts in the borough of Manhattan, New York. Each party waives all defenses of lack of personal jurisdiction and
forum non conveniens. Process may be served on any party hereto in the manner authorized by applicable law or court rule.
***********************
17
IN WITNESS WHEREOF, this Agreement is executed as of the date first set forth above.
SG BLOCKS, INC.
By:
Name :
Title :
Address for notice:
[signature pages of Holders to follow]
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SIGNATURE PAGE OF HOLDER TO
SECURITIES EXCHANGE AGREEMENT
AMONG SG BLOCKS, INC. AND
THE HOLDERS THEREUNDER
Name of Holder:
By:
Name:
Title:
Principal Amount of 2012 Debentures: $
Principal Amount
(Principal Amount of 2012 Debentures x 1.14) $
Warrant Shares:
Address for notice:
SECURITIES PURCHASE AGREEMENT
Exhibit 10.17
This Securities Purchase Agreement (this “Agreement”) is dated as of April 10, 2014, between SG Blocks, Inc., a Delaware
corporation (the “Company”), and each purchaser identified on the signature pages hereto (each, including its successors and assigns, a
“Purchaser” and collectively, the “Purchasers”).
WHEREAS, subject to the terms and conditions set forth in this Agreement and pursuant to Section 4(a)(2) of the Securities Act of
1933, as amended (the “Securities Act”), and Rule 506 promulgated thereunder, the Company desires to issue and sell to each Purchaser, and
each Purchaser, severally and not jointly, desires to purchase from the Company, securities of the Company as more fully described in this
Agreement.
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this Agreement, and for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the Company and each Purchaser agree as follows:
ARTICLE I.
DEFINITIONS
1.1 Definitions. In addition to the terms defined elsewhere in this Agreement: (a) capitalized terms that are not otherwise
defined herein have the meanings given to such terms in the Debentures (as defined herein), and (b) the following terms have the meanings
set forth in this Section 1.1:
“Acquiring Person” shall have the meaning ascribed to such term in Section 4.7.
“Action” shall have the meaning ascribed to such term in Section 3.1(j).
“Affiliate” means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is
under common control with a Person, as such terms are used in and construed under Rule 405 under the Securities Act.
“Board of Directors” means the board of directors of the Company.
“Business Day” means any day except any Saturday, any Sunday, any day which is a federal legal holiday in the United States
or any day on which banking institutions in the State of New York are authorized or required by law or other governmental action to
close.
“Closing” means the closing of the purchase and sale of the Securities pursuant to Section 2.1.
“Closing Date” means the Trading Day on which all of the Transaction Documents have been executed and delivered by the
applicable parties thereto, and all conditions precedent to (i) the Purchasers’ obligations to pay the Subscription Amount and (ii) the
Company’s obligations to deliver the Securities, in each case, have been satisfied or waived, but in no event later than the third Trading
Day following the date hereof.
“Commission” means the United States Securities and Exchange Commission.
“Common Stock” means the common stock of the Company, par value $0.01 per share, and any other class of securities into
which such securities may hereafter be reclassified or changed.
“Common Stock Equivalents” means any securities of the Company or the Subsidiaries which would entitle the holder
thereof to acquire at any time Common Stock, including, without limitation, any debt, preferred stock, right, option, warrant or other
instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive,
Common Stock.
“Company Counsel” means Olshan Frome Wolosky LLP, with offices located at Park Avenue Tower, 65 East 55th Street,
New York, NY 10022.
“Conversion Price” shall have the meaning ascribed to such term in the Debentures.
“Conversion Shares” shall have the meaning ascribed to such term in the Debentures.
“Debentures” means the 8% Original Issue Discount Senior Secured Convertible Debentures due April 1, 2016, subject to the
terms therein, issued by the Company to the Purchasers hereunder, in the form of Exhibit A attached hereto.
“December 2012 Debentures” means the 8% Original Issue Discount Secured Convertible Debentures issued pursuant to the
December 2012 Purchase Agreement.
“December 2012 Purchase Agreement” means that certain Securities Purchase Agreement dated December 27, 2012 among
the Company and signatories thereto.
“December 2012 Warrants” means the Common Stock purchase warrants issued pursuant to the December 2012 Purchase
Agreement.
“Disclosure Schedules” shall have the meaning ascribed to such term in Section 3.1.
“EGS” means Ellenoff Grossman & Schole LLP, with offices located at 1345 Ave. of the Americas, New York, New York
10105.
“Effective Date” means the earliest of the date that (a) all of the Underlying Shares have been sold pursuant to Rule 144 or
may be sold pursuant to Rule 144 without the requirement for the Company to be in compliance with the current public information
required under Rule 144 and without volume or manner-of-sale restrictions or (b) following the one year anniversary of the Closing
Date provided that a holder of Underlying Shares is not an Affiliate of the Company, all of the Underlying Shares may be sold
pursuant to an exemption from registration under Section 4(1) of the Securities Act without volume or manner-of-sale restrictions and
Company counsel has delivered to such holders a standing written unqualified opinion that resales may then be made by such holders
of Underlying Shares pursuant to such exemption which opinion shall be in form and substance reasonably acceptable to such holders.
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“Evaluation Date” shall have the meaning ascribed to such term in Section 3.1(r).
“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated
thereunder.
“Exchange Agreement” means the exchange agreement, dated on or about the date hereof, between the Company and the
signatories thereto.
“Exempt Issuance” means the issuance of (a) shares of Common Stock or options to employees, officers or directors of the
Company pursuant to any stock or option plan duly adopted for such purpose, by a majority of the non-employee members of the
Board of Directors or a majority of the members of a committee of non-employee directors established for such purpose, plus up to
150,000 options (subject to adjustment for forward and reverse stock splits and the like that occur after the date hereof) to
consultants and up to 150,000 shares of Common Stock (subject to adjustment for forward and reverse stock splits and the like that
occur after the date hereof) to service providers in connection with Company projects, (b) securities upon the exercise or exchange of
or conversion of any Securities issued hereunder and/or other securities exercisable or exchangeable for or convertible into shares of
Common Stock issued and outstanding on the date of this Agreement, provided that such securities have not been amended since the
date of this Agreement to increase the number of such securities or to decrease the exercise price, exchange price or conversion price of
such securities, (c) securities issued pursuant to acquisitions or strategic transactions approved by a majority of the disinterested
directors of the Company, provided that any such issuance shall only be to a Person (or to the equityholders of a Person) which is,
itself or through its subsidiaries, an operating company or an owner of an asset in a business synergistic with the business of the
Company and shall provide to the Company additional benefits in addition to the investment of funds, but shall not include a
transaction in which the Company is issuing securities primarily for the purpose of raising capital or to an entity whose primary
business is investing in securities and (d) securities issued pursuant to the Exchange Agreement (including securities issuable on
conversion or exercise of the securities issued thereunder).
“FCPA” means the Foreign Corrupt Practices Act of 1977, as amended.
“GAAP” shall have the meaning ascribed to such term in Section 3.1(h).
“Indebtedness” shall have the meaning ascribed to such term in Section 3.1(aa).
“Intellectual Property Rights” shall have the meaning ascribed to such term in Section 3.1(o).
3
“Legend Removal Date” shall have the meaning ascribed to such term in Section 4.1(c).
“Liens” means a lien, charge, pledge, security interest, encumbrance, right of first refusal, preemptive right or other
restriction.
“Material Adverse Effect” shall have the meaning assigned to such term in Section 3.1(b).
“Material Permits” shall have the meaning ascribed to such term in Section 3.1(m).
“Maximum Rate” shall have the meaning ascribed to such term in Section 5.17.
“Participation Maximum” shall have the meaning ascribed to such term in Section 4.12(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.
“Pre-Notice” shall have the meaning ascribed to such term in Section 4.12(b).
“Principal Amount” means, as to each Purchaser, the amounts set forth below such Purchaser’s signature block on the
signature pages hereto next to the heading “Principal Amount,” in United States Dollars, which shall equal such Purchaser’s
Subscription Amount multiplied by 1.14.
“Pro Rata Portion” shall have the meaning ascribed to such term in Section 4.12(e).
“Proceeding” means an action, claim, suit, investigation or proceeding (including, without limitation, an informal
investigation or partial proceeding, such as a deposition), whether commenced or threatened.
“Public Information Failure” shall have the meaning ascribed to such term in Section 4.3(b).
“Public Information Failure Payments” shall have the meaning ascribed to such term in Section 4.3(b).
“Purchaser Party” shall have the meaning ascribed to such term in Section 4.10.
“Required Approvals” shall have the meaning ascribed to such term in Section 3.1(e).
4
“Required Minimum” means, as of any date, the maximum aggregate number of shares of Common Stock then issued or
potentially issuable in the future pursuant to the Transaction Documents, including any Underlying Shares issuable upon exercise in
full of all Warrants or conversion in full of all outstanding Debentures (including Underlying Shares issuable as payment of interest on
the Debentures), ignoring any conversion or exercise limits set forth therein, and assuming that the Conversion Price is at all times on
and after the date of determination 75% of the then Conversion Price on the Trading Day immediately prior to the date of
determination.
“Rule 144” means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended
from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such
Rule.
“Rule 424” means Rule 424 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended or
interpreted from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same
purpose and effect as such Rule.
“SEC Reports” shall have the meaning ascribed to such term in Section 3.1(h).
“Securities” means the Debentures, the Warrants, the Warrant Shares and the Underlying Shares.
“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
“Security Agreement” means the Security Agreement, dated the date hereof, among the Company and the Purchasers, in the
form of Exhibit D attached hereto.
“Security Documents” shall mean the Security Agreement, the Subsidiary Guarantees and any other documents and filing
required thereunder in order to grant the Purchasers a first priority security interest in the assets of the Company and the Subsidiaries as
provided in the Security Agreement, including all UCC-1 filing receipts.
“Short Sales” means all “short sales” as defined in Rule 200 of Regulation SHO under the Exchange Act (but shall not be
deemed to include the location and/or reservation of borrowable shares of Common Stock).
“Subscription Amount” means, as to each Purchaser, the aggregate amount to be paid for Debentures and Warrants purchased
hereunder as specified below such Purchaser’s name on the signature page of this Agreement and next to the heading “Subscription
Amount,” in United States dollars and in immediately available funds.
“Subsequent Financing” shall have the meaning ascribed to such term in Section 4.12(a).
“Subsequent Financing Notice” shall have the meaning ascribed to such term in Section 4.12(b).
5
“Subsidiary” means any subsidiary of the Company as set forth on Schedule 3.1(a) and shall, where applicable, also include
any direct or indirect subsidiary of the Company formed or acquired after the date hereof.
“Subsidiary Guarantee” means the Subsidiary Guarantee, dated the date hereof, by each Subsidiary in favor of the Purchasers,
in the form of Exhibit E attached hereto.
“Trading Day” means a day on which the principal Trading Market is open for trading.
“Trading Market” means any of the following markets or exchanges on which the Common Stock is listed or quoted for
trading on the date in question: the NYSE MKT, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select
Market, the New York Stock Exchange, OTC Markets Inc., or the OTC Bulletin Board (or any successors to any of the foregoing).
“Transaction Documents” means this Agreement, the Debentures, the Warrants, the Security Agreement, the Subsidiary
Guarantee, all exhibits and schedules thereto and hereto and any other documents or agreements executed in connection with the
transactions contemplated hereunder.
“Transfer Agent” means American Stock Transfer & Trust Company LLC, the current transfer agent of the Company, with a
mailing address of: Operations Center, 6201 15th Avenue, Brooklyn, NY 11219 and any successor transfer agent of the Company.
“Underlying Shares” means the shares of Common Stock issued and issuable upon conversion or redemption of the
Debentures and upon exercise of the Warrants and issued and issuable in lieu of the cash payment of interest on the Debentures in
accordance with the terms of the Debentures.
“Variable Rate Transaction” shall have the meaning ascribed to such term in Section 4.13(b).
“VWAP” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock
is then listed or quoted on a Trading Market, the daily volume weighted average price of the Common Stock for such date (or the
nearest preceding date on which the Common Stock actually trades) on the Trading Market on which the Common Stock is then listed
or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City
time)), (b) if the OTC Bulletin Board is not a Trading Market, the volume weighted average price of the Common Stock for such date
(or the nearest preceding date) on the OTC Bulletin Board, (c) if the Common Stock is not then listed or quoted for trading on the OTC
Bulletin Board and if prices for the Common Stock are then reported in the “Pink Sheets” published by Pink OTC Markets, Inc. (or a
similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common
Stock so reported, or (d) in all other cases, the fair market value of a share of Common Stock as determined by an independent
appraiser selected in good faith by the Purchasers of a majority in interest of the Securities then outstanding and reasonably acceptable
to the Company, the fees and expenses of which shall be paid by the Company.
6
“Warrants” means, collectively, the Common Stock purchase warrants delivered to the Purchasers at the Closing in
accordance with Section 2.2(a) hereof, which Warrants shall be exercisable on or after the Closing Date and have a term of exercise
equal to five years from the Initial Exercise Date, in the form of Exhibit C attached hereto.
“Warrant Shares” means the shares of Common Stock issuable upon exercise of the Warrants.
ARTICLE II.
PURCHASE AND SALE
2.1 Closing. On the Closing Date, upon the terms and subject to the conditions set forth herein, substantially concurrent with
the execution and delivery of this Agreement by the parties hereto, the Company agrees to sell, and the Purchasers, severally and not jointly,
agree to purchase, up to an aggregate of $2,080,500 in principal amount of the Debentures (corresponding to an aggregate Subscription
Amount of up to $1,825,000). Each Purchaser shall deliver to the Company, via wire transfer or a certified check, immediately available
funds equal to such Purchaser’s Subscription Amount as set forth on the signature page hereto executed by such Purchaser, and the Company
shall deliver to each Purchaser its respective Debenture and a Warrant, as determined pursuant to Section 2.2(a), and the Company and each
Purchaser shall deliver the other items set forth in Section 2.2 deliverable at the Closing. Upon satisfaction or waiver of the covenants and
conditions set forth in Sections 2.2 and 2.3, the Closing shall occur at the offices of EGS or such other location as the parties shall mutually
agree.
2.2 Deliveries.
(a) On or prior to the Closing Date, the Company shall deliver or cause to be delivered to each Purchaser the following:
(i)
this Agreement duly executed by the Company;
(ii) a legal opinion of Company Counsel, substantially in the form of Exhibit B attached hereto;
(iii) a Debenture with a principal amount equal to such Purchaser’s Principal Amount, registered in the name of
such Purchaser;
(iv) a Warrant registered in the name of such Purchaser to purchase up to a number of shares of Common Stock
equal to 100% of the Principal Amount of such Purchaser’s Debenture divided by $0.25, with an exercise price equal to
$0.275, subject to adjustment therein (such Warrant certificate may be delivered within three Trading Days of the Closing
Date);
7
(v) waivers of dilution and/or reset rights contractually granted to purchasers of the Company’s common Stock
in private placements completed in 2012, and adoption of a resolution of the Board of Directors revoking any purported
extension of such dilution and/or reset rights to other purchasers of the Common Stock during 2012 of such shares; and
(vi) the Security Agreement, duly executed by the Company and each Subsidiary, along with all of the Security
Documents, including the Subsidiary Guarantee.
(b) On or prior to the Closing Date, each Purchaser shall deliver or cause to be delivered to the Company, the following:
(i)
this Agreement duly executed by such Purchaser;
(ii) such Purchaser’s Subscription Amount by wire transfer to the account specified in writing by the
Company; and
(iii) the Security Agreement duly executed by such Purchaser.
2.3 Closing Conditions.
(a) The obligations of the Company hereunder in connection with the Closing are subject to the following conditions
being met:
(i) the accuracy in all material respects on the Closing Date of the representations and warranties of the
Purchasers contained herein (unless as of a specific date therein in which case they shall be accurate as of such date);
(ii) all obligations, covenants and agreements of each Purchaser required to be performed at or prior to the
Closing Date shall have been performed; and
(iii) the delivery by each Purchaser of the items set forth in Section 2.2(b) of this Agreement.
(b) The respective obligations of the Purchasers hereunder in connection with the Closing are subject to the following
conditions being met:
(i) the accuracy in all material respects when made and on the Closing Date of the representations and
warranties of the Company contained herein (unless as of a specific date therein in which case they shall be accurate as of
such date);
(ii) all obligations, covenants and agreements of the Company required to be performed at or prior to the
Closing Date shall have been performed;
8
(iii) the delivery by the Company of the items set forth in Section 2.2(a) of this Agreement;
(iv) there shall have been no Material Adverse Effect with respect to the Company since the date hereof; and
(v) from the date hereof to the Closing Date, trading in the Common Stock shall not have been suspended by
the Commission or the Company’s principal Trading Market and, at any time prior to the Closing Date, trading in securities
generally as reported by Bloomberg L.P. shall not have been suspended or limited, or minimum prices shall not have been
established on securities whose trades are reported by such service, or on any Trading Market, nor shall a banking
moratorium have been declared either by the United States or New York State authorities nor shall there have occurred any
material outbreak or escalation of hostilities or other national or international calamity of such magnitude in its effect on, or
any material adverse change in, any financial market which, in each case, in the reasonable judgment of such Purchaser,
makes it impracticable or inadvisable to purchase the Securities at the Closing.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of the Company . Except as set forth in the Disclosure Schedules, which Disclosure
Schedules shall be deemed a part hereof and shall qualify any representation or otherwise made herein to the extent of the disclosure
contained in the corresponding section of the Disclosure Schedules, the Company hereby makes the following representations and warranties
to each Purchaser:
( a ) Subsidiaries. All of the direct and indirect subsidiaries of the Company are set forth on Schedule 3.1(a). The
Company owns, directly or indirectly, all of the capital stock or other equity interests of each Subsidiary free and clear of any Liens,
and all of the issued and outstanding shares of capital stock of each Subsidiary are validly issued and are fully paid, non-assessable and
free of preemptive and similar rights to subscribe for or purchase securities. If the Company has no subsidiaries, all other references to
the Subsidiaries or any of them in the Transaction Documents shall be disregarded.
( b ) Organization and Qualification. The Company and each of the Subsidiaries is an entity duly incorporated or
otherwise organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization, with
the requisite power and authority to own and use its properties and assets and to carry on its business as currently conducted. Neither
the Company nor any Subsidiary is in violation nor default of any of the provisions of its respective certificate or articles of
incorporation, bylaws or other organizational or charter documents. Each of the Company and the Subsidiaries is duly qualified to
conduct business and is in good standing as a foreign corporation or other entity in each jurisdiction in which the nature of the business
conducted or property owned by it makes such qualification necessary, except where the failure to be so qualified or in good standing,
as the case may be, could not have or reasonably be expected to result in: (i) a material adverse effect on the legality, validity or
enforceability of any Transaction Document, (ii) a material adverse effect on the results of operations, assets, business, prospects or
condition (financial or otherwise) of the Company and the Subsidiaries, taken as a whole, or (iii) a material adverse effect on the
Company’s ability to perform in any material respect on a timely basis its obligations under any Transaction Document (any of (i), (ii)
or (iii), a “Material Adverse Effect ”; and provided, that changes in the trading price of the Common Stock shall not, in and of itself,
constitute a Material Adverse Effect) and no Proceeding has been instituted in any such jurisdiction revoking, limiting or curtailing or
seeking to revoke, limit or curtail such power and authority or qualification.
9
( c ) Authorization; Enforcement. The Company has the requisite corporate power and authority to enter into and to
consummate the transactions contemplated by this Agreement and each of the other Transaction Documents and otherwise to carry out
its obligations hereunder and thereunder. The execution and delivery of this Agreement and each of the other Transaction Documents
by the Company and the consummation by it of the transactions contemplated hereby and thereby have been duly authorized by all
necessary action on the part of the Company and no further action is required by the Company, the Board of Directors or the
Company’s stockholders in connection herewith or therewith other than in connection with the Required Approvals. This Agreement
and each other Transaction Document to which it is a party has been (or upon delivery will have been) duly executed by the Company
and, when delivered in accordance with the terms hereof and thereof, will constitute the valid and binding obligation of the Company
enforceable against the Company in accordance with its terms, except: (i) as limited by general equitable principles and applicable
bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights
generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies and
(iii) insofar as indemnification and contribution provisions may be limited by applicable law.
( d ) No Conflicts. Except as provided in Schedule 3.1(d), the execution, delivery and performance by the Company of
this Agreement and the other Transaction Documents to which it is a party, the issuance and sale of the Securities and the
consummation by it of the transactions contemplated hereby and thereby do not and will not: (i) conflict with or violate any provision
of the Company’s or any Subsidiary’s certificate or articles of incorporation, bylaws or other organizational or charter documents, (ii)
conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, result in the
creation of any Lien upon any of the properties or assets of the Company or any Subsidiary, or give to others any rights of termination,
amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any material agreement, credit facility, debt
or other material instrument (evidencing a Company or Subsidiary debt or otherwise) or other material understanding to which the
Company or any Subsidiary is a party or by which any property or asset of the Company or any Subsidiary is bound or affected, or (iii)
subject to the Required Approvals, conflict with or result in a violation of any law, rule, regulation, order, judgment, injunction, decree
or other restriction of any court or governmental authority to which the Company or a Subsidiary is subject (including federal and state
securities laws and regulations), or by which any property or asset of the Company or a Subsidiary is bound or affected; except in the
case of each of clauses (ii) and (iii), such as could not have or reasonably be expected to result in a Material Adverse Effect.
10
(e) Filings, Consents and Approvals. The Company is not required to obtain any consent, waiver, authorization or order
of, give any notice to, or make any filing or registration with, any court or other federal, state, local or other governmental authority or
other Person in connection with the execution, delivery and performance by the Company of the Transaction Documents, other than:
(i) the filings required pursuant to Section 4.6 of this Agreement, (ii) the notice and/or application(s) to each applicable Trading Market
for the issuance and sale of the Securities and the listing of the Conversion Shares and Warrant Shares for trading thereon in the time
and manner required thereby, (iii) the filing of Form D with the Commission and such filings as are required to be made under
applicable state securities laws and (iv) as set forth on Schedule 3.1(e) (collectively, the “Required Approvals”).
( f ) Issuance of the Securities. The Securities are duly authorized and, when issued and paid for in accordance with the
applicable Transaction Documents, will be duly and validly issued, fully paid and nonassessable, free and clear of all Liens imposed by
the Company other than restrictions on transfer provided for in the Transaction Documents. The Underlying Shares, when issued in
accordance with the terms of the Transaction Documents, will be validly issued, fully paid and nonassessable, free and clear of all
Liens imposed by the Company other than restrictions on transfer provided for in the Transaction Documents. The Company has
reserved from its duly authorized capital stock a number of shares of Common Stock for issuance of the Underlying Shares at least
equal to the Required Minimum on the date hereof.
(g) Capitalization. Except as provided in Schedule 3.1(g), the capitalization of the Company is as described in the SEC
Reports. Schedule 3.1(g) also includes the number of shares of Common Stock owned beneficially, and of record, by Affiliates of the
Company as of the date hereof. Except as provided in Schedule 3.1(g), the Company has not issued any capital stock since its most
recently filed periodic report under the Exchange Act, other than pursuant to the exercise of employee stock options under the
Company’s stock option plans, the issuance of shares of Common Stock to employees pursuant to the Company’s employee stock
purchase plans and pursuant to the conversion and/or exercise of Common Stock Equivalents outstanding as of the date of the most
recently filed periodic report under the Exchange Act. Except as provided in Schedule 3.1(g), no Person has any right of first refusal,
preemptive right, right of participation, or any similar right to participate in the transactions contemplated by the Transaction
Documents. Except as provided in Schedule 3.1(g) or as a result of the purchase and sale of the Securities, there are no outstanding
options, warrants, scrip rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities, rights or
obligations convertible into or exercisable or exchangeable for, or giving any Person any right to subscribe for or acquire any shares of
Common Stock, or contracts, commitments, understandings or arrangements by which the Company or any Subsidiary is or may
become bound to issue additional shares of Common Stock or Common Stock Equivalents. Except as set forth in Schedule 3.1(g), the
issuance and sale of the Securities will not obligate the Company to issue shares of Common Stock or other securities to any Person
(other than the Purchasers) and will not result in a right of any holder of Company securities to adjust the exercise, conversion,
exchange or reset price under any of such securities. All of the outstanding shares of capital stock of the Company are duly authorized,
validly issued, fully paid and nonassessable, have been issued in compliance with all federal and state securities laws, and none of such
outstanding shares was issued in violation of any preemptive rights or similar rights to subscribe for or purchase securities. No further
approval or authorization of any stockholder, the Board of Directors or others is required for the issuance and sale of the
Securities. There are no stockholders agreements, voting agreements or other similar agreements with respect to the Company’s
capital stock to which the Company is a party or, to the knowledge of the Company, between or among any of the Company’s
stockholders.
11
( h ) SEC Reports; Financial Statements . The Company has filed all reports, schedules, forms, statements and other
documents required to be filed by the Company under the Securities Act and the Exchange Act, including pursuant to Section 13(a) or
15(d) thereof, for the two years preceding the date hereof (or such shorter period as the Company was required by law or regulation to
file such material) (the foregoing materials, including the exhibits thereto and documents incorporated by reference therein, being
collectively referred to herein as the “SEC Reports”). Except as described on Schedule 3.1(h), such SEC Reports were filed on a
timely basis or the Company received a valid extension of such time of filing and has filed any such SEC Reports prior to the
expiration of any such extension. As of their respective dates, the SEC Reports complied in all material respects with the requirements
of the Securities Act and the Exchange Act, as applicable, and none of the SEC Reports, when filed, contained any untrue statement of
a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the SEC
Reports comply in all material respects with applicable accounting requirements and the rules and regulations of the Commission with
respect thereto as in effect at the time of filing. Such financial statements have been prepared in accordance with United States
generally accepted accounting principles applied on a consistent basis during the periods involved (“GAAP”), except as may be
otherwise specified in such financial statements or the notes thereto and except that unaudited financial statements may not contain all
footnotes required by GAAP, and fairly present in all material respects the financial position of the Company and its consolidated
Subsidiaries as of and for the dates thereof and the results of operations and cash flows for the periods then ended, subject, in the case
of unaudited statements, to normal, immaterial, year-end audit adjustments.
12
(i) Material Changes; Undisclosed Events, Liabilities or Developments. Except as provided in Schedule 3.1(i) since the
date of the latest audited financial statements included within the SEC Reports, except as specifically disclosed in a subsequent SEC
Report filed prior to the date hereof: (i) there has been no event, occurrence or development that has had or that could reasonably be
expected to result in a Material Adverse Effect, (ii) the Company has not incurred any liabilities (contingent or otherwise) other than
(A) trade payables and accrued expenses incurred in the ordinary course of business consistent with past practice and (B) liabilities not
required to be reflected in the Company’s financial statements pursuant to GAAP or disclosed in filings made with the Commission,
(iii) the Company has not altered its method of accounting, (iv) the Company has not declared or made any dividend or distribution of
cash or other property to its stockholders or purchased, redeemed or made any agreements to purchase or redeem any shares of its
capital stock and (v) the Company has not issued any equity securities to any officer, director or Affiliate, except pursuant to existing
Company stock option plans. The Company does not have pending before the Commission any request for confidential treatment of
information. Except for the issuance of the Securities contemplated by this Agreement or as set forth on Schedule 3.1(i), no event,
liability, fact, circumstance, occurrence or development has occurred or exists or is reasonably expected to occur or exist with respect
to the Company or its Subsidiaries or their respective businesses, properties, operations, assets or financial condition, that would be
required to be disclosed by the Company under applicable securities laws at the time this representation is made or deemed made that
has not been publicly disclosed at least 1 Trading Day prior to the date that this representation is made.
( j ) Litigation. Except as provided in Schedule 3.1(j), there is no action, suit, inquiry, notice of violation, proceeding or
investigation pending or, to the knowledge of the Company, threatened against or affecting the Company, any Subsidiary or any of
their respective properties before or by any court, arbitrator, governmental or administrative agency or regulatory authority (federal,
state, county, local or foreign) (collectively, an “ Action”) which (i) adversely affects or challenges the legality, validity or
enforceability of any of the Transaction Documents or the Securities or (ii) could, if there were an unfavorable decision, have or
reasonably be expected to result in a Material Adverse Effect. Neither the Company nor any Subsidiary, nor any director or officer
thereof, is or has been the subject of any Action involving a claim of violation of or liability under federal or state securities laws or a
claim of breach of fiduciary duty. There has not been, and to the knowledge of the Company, there is not pending or contemplated,
any investigation by the Commission involving the Company or any current or former director or officer of the Company. The
Commission has not issued any stop order or other order suspending the effectiveness of any registration statement filed by the
Company or any Subsidiary under the Exchange Act or the Securities Act.
( k ) Labor Relations. No labor dispute exists or, to the knowledge of the Company, is imminent with respect to any of
the employees of the Company, which could reasonably be expected to result in a Material Adverse Effect. None of the Company’s or
its Subsidiaries’ employees is a member of a union that relates to such employee’s relationship with the Company or such Subsidiary,
and neither the Company nor any of its Subsidiaries is a party to a collective bargaining agreement, and the Company and its
Subsidiaries believe that their relationships with their employees are good. To the knowledge of the Company, no executive officer of
the Company or any Subsidiary, is, or is now expected to be, in violation of any material term of any employment contract,
confidentiality, disclosure or proprietary information agreement or non-competition agreement, or any other contract or agreement or
any restrictive covenant in favor of any third party, and the continued employment of each such executive officer does not subject the
Company or any of its Subsidiaries to any liability with respect to any of the foregoing matters. The Company and its Subsidiaries are
in compliance with all U.S. federal, state, local and foreign laws and regulations relating to employment and employment practices,
terms and conditions of employment and wages and hours, except where the failure to be in compliance could not, individually or in
the aggregate, reasonably be expected to have a Material Adverse Effect.
13
(l) Compliance. Except as set forth on Schedule 3.1(l), neither the Company nor any Subsidiary: (i) is in default under
or in violation of (and no event has occurred that has not been waived that, with notice or lapse of time or both, would result in a
default by the Company or any Subsidiary under), nor has the Company or any Subsidiary received notice of a claim that it is in default
under or that it is in violation of, any indenture, loan or credit agreement or any other agreement or instrument to which it is a party or
by which it or any of its properties is bound (whether or not such default or violation has been waived), (ii) is in violation of any
judgment, decree or order of any court, arbitrator or other governmental authority or (iii) is or has been in violation of any statute, rule,
ordinance or regulation of any governmental authority, including without limitation all foreign, federal, state and local laws relating to
taxes, environmental protection, occupational health and safety, product quality and safety and employment and labor matters, except
in each case as could not have or reasonably be expected to result in a Material Adverse Effect.
( m ) Regulatory Permits. The Company and the Subsidiaries possess all certificates, authorizations and permits issued
by the appropriate federal, state, local or foreign regulatory authorities necessary to conduct their respective businesses as described in
the SEC Reports, except where the failure to possess such permits could not reasonably be expected to result in a Material Adverse
Effect (“Material Permits”), and neither the Company nor any Subsidiary has received any notice of proceedings relating to the
revocation or modification of any Material Permit.
(n) Title to Assets. The Company and the Subsidiaries have good and marketable title in fee simple to all real property
owned by them and good and marketable title in all personal property owned by them that is material to the business of the Company
and the Subsidiaries, in each case free and clear of all Liens, except for (i) the Liens disclosed on Schedule 3.1(n), (ii) Liens as do not
materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such
property by the Company and the Subsidiaries and (iii) Liens for the payment of federal, state or other taxes, for which appropriate
reserves have been made therefor in accordance with GAAP and, the payment of which is neither delinquent nor subject to
penalties. Any real property and facilities held under lease by the Company and the Subsidiaries are held by them under valid,
subsisting and enforceable leases with which the Company and the Subsidiaries are in compliance.
14
(o) Intellectual Property. The Company and the Subsidiaries have, or have rights to use, all patents, patent applications,
trademarks, trademark applications, service marks, trade names, trade secrets, inventions, copyrights, licenses and other intellectual
property rights and similar rights as described in the SEC Reports as necessary or required for use in connection with their respective
businesses and which the failure to so have could have a Material Adverse Effect (collectively, the “ Intellectual Property
Rights”). None of, and neither the Company nor any Subsidiary has received a notice (written or otherwise) that any of, the
Intellectual Property Rights has expired, terminated or been abandoned, or is expected to expire or terminate or be abandoned, within
two (2) years from the date of this Agreement. Neither the Company nor any Subsidiary has received, since the date of the latest
audited financial statements included within the SEC Reports, a written notice of a claim or otherwise has any knowledge that the
Intellectual Property Rights violate or infringe upon the rights of any Person, except as could not have or reasonably be expected to not
have a Material Adverse Effect. To the knowledge of the Company, all such Intellectual Property Rights are enforceable and there is
no existing infringement by another Person of any of the Intellectual Property Rights. The Company and its Subsidiaries have taken
reasonable security measures to protect the secrecy, confidentiality and value of all of their intellectual properties, except where failure
to do so could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
(p) Insurance. The Company and the Subsidiaries are insured by insurers of recognized financial responsibility against
such losses and risks and in such amounts as are prudent and customary in the businesses in which the Company and the Subsidiaries
are engaged, including, but not limited to, directors and officers insurance coverage at least equal to the aggregate Subscription
Amount. Neither the Company nor any Subsidiary has any reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its
business without a significant increase in cost.
( q ) Transactions With Affiliates and Employees. Except as set forth in the SEC Reports, none of the officers or
directors of the Company or any Subsidiary and, to the knowledge of the Company, none of the employees of the Company or any
Subsidiary is presently a party to any transaction with the Company or any Subsidiary (other than for services as employees, officers
and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for
rental of real or personal property to or from providing for the borrowing of money from or lending of money to, or otherwise
requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any entity in which any
officer, director, or any such employee has a substantial interest or is an officer, director, trustee, stockholder, member or partner, in
each case in excess of $120,000 other than for: (i) payment of salary or consulting fees for services rendered, (ii) reimbursement for
expenses incurred on behalf of the Company and (iii) other employee benefits, including stock option agreements under any stock
option plan of the Company.
15
(r) Sarbanes-Oxley; Internal Accounting Controls. The Company and the Subsidiaries are in compliance with any and
all applicable requirements of the Sarbanes-Oxley Act of 2002 that are effective as of the date hereof, and any and all applicable rules
and regulations promulgated by the Commission thereunder that are effective as of the date hereof and as of the Closing Date. The
Company and the Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that: (i)
transactions are executed in accordance with management’s general or specific authorizations, (ii) transactions are recorded as
necessary to permit preparation of financial statements in conformity with GAAP and to maintain asset accountability, (iii) access to
assets is permitted only in accordance with management’s general or specific authorization, and (iv) the recorded accountability for
assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. The
Company and the Subsidiaries have established disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the Company and the Subsidiaries and designed such disclosure controls and procedures to ensure that information
required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized
and reported, within the time periods specified in the Commission’s rules and forms. The Company’s certifying officers have
evaluated the effectiveness of the disclosure controls and procedures of the Company and the Subsidiaries as of the end of the period
covered by the most recently filed periodic report under the Exchange Act (such date, the “ Evaluation Date”). The Company
presented in its most recently filed periodic report under the Exchange Act the conclusions of the certifying officers about the
effectiveness of the disclosure controls and procedures based on their evaluations as of the Evaluation Date. Since the Evaluation
Date, there have been no changes in the internal control over financial reporting (as such term is defined in the Exchange Act) that
have materially affected, or is reasonably likely to materially affect, the internal control over financial reporting of the Company and
its Subsidiaries.
( s ) Certain Fees. Except as provided in Schedule 3.1(s), no brokerage or finder’s fees or commissions are or will be
payable by the Company or any Subsidiaries to any broker, financial advisor or consultant, finder, placement agent, investment banker,
bank or other Person with respect to the transactions contemplated by the Transaction Documents. The Purchasers shall have no
obligation with respect to any fees or with respect to any claims made by or on behalf of other Persons for fees of a type contemplated
in this Section that may be due in connection with the transactions contemplated by the Transaction Documents.
( t ) Private Placement. Assuming the accuracy of the Purchasers’ representations and warranties set forth in Section
3.2, no registration under the Securities Act is required for the offer and sale of the Securities by the Company to the Purchasers as
contemplated hereby. The issuance and sale of the Securities hereunder does not contravene the rules and regulations of the Trading
Market.
( u ) Investment Company. The Company is not, and is not an Affiliate of, and immediately after receipt of payment for
the Securities, will not be or be an Affiliate of, an “investment company” within the meaning of the Investment Company Act of 1940,
as amended. The Company shall conduct its business in a manner so that it will not become an “investment company” subject to
registration under the Investment Company Act of 1940, as amended.
16
(v) Registration Rights. Except as set forth on Schedule 3.1(v), no Person has any right to cause the Company to effect
the registration under the Securities Act of any securities of the Company or any Subsidiaries.
( w ) Listing and Maintenance Requirements. The Common Stock is registered pursuant to Section 12(g) of the
Exchange Act, and the Company has taken no action designed to, or which to its knowledge is likely to have the effect of, terminating
the registration of the Common Stock under the Exchange Act nor has the Company received any notification that the Commission is
contemplating terminating such registration. The Company has not, in the 12 months preceding the date hereof, received notice from
any Trading Market on which the Common Stock is or has been listed or quoted to the effect that the Company is not in compliance
with the listing or maintenance requirements of such Trading Market. The Company is, and has no reason to believe that it will not in
the foreseeable future continue to be, in compliance with all such listing and maintenance requirements.
( x ) Application of Takeover Protections . The Company and the Board of Directors have taken all necessary action, if
any, in order to render inapplicable any control share acquisition, business combination, poison pill (including any distribution under a
rights agreement) or other similar anti-takeover provision under the Company’s certificate of incorporation (or similar charter
documents) or the laws of its state of incorporation that is or could become applicable to the Purchasers as a result of the Purchasers
and the Company fulfilling their obligations or exercising their rights under the Transaction Documents, including without limitation
as a result of the Company’s issuance of the Securities and the Purchasers’ ownership of the Securities.
( y ) Disclosure. Except with respect to the material terms and conditions of the transactions contemplated by the
Transaction Documents, the Company confirms that neither it nor any other Person acting on its behalf has provided any of the
Purchasers or their agents or counsel with any information that it believes constitutes or might reasonably constitute material, non-
public information. The Company understands and confirms that the Purchasers will rely on the foregoing representation in effecting
transactions in securities of the Company. All of the disclosure furnished by or on behalf of the Company to the Purchasers regarding
the Company and its Subsidiaries, their respective businesses and the transactions contemplated hereby, including the Disclosure
Schedules to this Agreement, is true and correct and does not contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not
misleading. The press releases disseminated by the Company during the twelve months preceding the date of this Agreement taken as
a whole do not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under which they were made and when made, not
misleading. The Company acknowledges and agrees that no Purchaser makes or has made any representations or warranties with
respect to the transactions contemplated hereby other than those specifically set forth in Section 3.2 hereof.
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( z ) No Integrated Offering. Assuming the accuracy of the Purchasers’ representations and warranties set forth in
Section 3.2, neither the Company, nor any of its Affiliates, nor any Person acting on its or their behalf has, directly or indirectly, made
any offers or sales of any security or solicited any offers to buy any security, under circumstances that would cause this offering of the
Securities to be integrated with prior offerings by the Company for purposes of (i) the Securities Act which would require the
registration of any such securities under the Securities Act, or (ii) any applicable shareholder approval provisions of any Trading
Market on which any of the securities of the Company are listed or designated.
(aa) Solvency. Based on the consolidated financial condition of the Company as of the Closing Date, after giving effect
to the receipt by the Company of the proceeds from the sale of the Securities hereunder: (i) the fair saleable value of the Company’s
assets exceeds the amount that will be required to be paid on or in respect of the Company’s existing debts and other liabilities
(including known contingent liabilities) as they mature, (ii) the Company’s assets do not constitute unreasonably small capital to carry
on its business as now conducted and as proposed to be conducted including its capital needs taking into account the particular capital
requirements of the business conducted by the Company, consolidated and projected capital requirements and capital availability
thereof, and (iii) the current cash flow of the Company, together with the proceeds the Company would receive, were it to liquidate all
of its assets, after taking into account all anticipated uses of the cash, would be sufficient to pay all amounts on or in respect of its
liabilities when such amounts are required to be paid. The Company does not intend to incur debts beyond its ability to pay such debts
as they mature (taking into account the timing and amounts of cash to be payable on or in respect of its debt). The Company has no
knowledge of any facts or circumstances which lead it to believe that it will file for reorganization or liquidation under the bankruptcy
or reorganization laws of any jurisdiction within one year from the Closing Date. Schedule 3.1(aa) sets forth as of the date hereof all
outstanding secured and unsecured Indebtedness of the Company or any Subsidiary, or for which the Company or any Subsidiary has
commitments. For the purposes of this Agreement, “Indebtedness” means (x) any liabilities for borrowed money or amounts owed in
excess of $50,000 (other than trade accounts payable incurred in the ordinary course of business), (y) all guaranties, endorsements and
other contingent obligations in respect of indebtedness of others, whether or not the same are or should be reflected in the Company’s
consolidated balance sheet (or the notes thereto), except guaranties by endorsement of negotiable instruments for deposit or collection
or similar transactions in the ordinary course of business; and (z) the present value of any lease payments in excess of $50,000 due
under leases required to be capitalized in accordance with GAAP. Neither the Company nor any Subsidiary is in default with respect to
any Indebtedness.
( b b ) Tax Status. Except for matters that would not, individually or in the aggregate, have or reasonably be expected to
result in a Material Adverse Effect, the Company and its Subsidiaries each (i) has made or filed all United States federal, state and
local income and all foreign income and franchise tax returns, reports and declarations required by any jurisdiction to which it is
subject, (ii) has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be
due on such returns, reports and declarations and (iii) has set aside on its books provision reasonably adequate for the payment of all
material taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in
any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company or of any Subsidiary
know of no basis for any such claim.
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(cc) No General Solicitation. Neither the Company nor any person acting on behalf of the Company has offered or sold
any of the Securities by any form of general solicitation or general advertising. The Company has offered the Securities for sale only
to the Purchasers and certain other “accredited investors” within the meaning of Rule 501 under the Securities Act.
(dd) Foreign Corrupt Practices. Neither the Company nor any Subsidiary, nor to the knowledge of the Company or any
Subsidiary, any agent or other person acting on behalf of the Company or any Subsidiary, has: (i) directly or indirectly, used any funds
for unlawful contributions, gifts, entertainment or other unlawful expenses related to foreign or domestic political activity, (ii) made
any unlawful payment to foreign or domestic government officials or employees or to any foreign or domestic political parties or
campaigns from corporate funds, (iii) failed to disclose fully any contribution made by the Company or any Subsidiary (or made by
any person acting on its behalf of which the Company is aware) which is in violation of law or (iv) violated in any material respect any
provision of FCPA.
(ee) Accountants. The Company’s accounting firm is set forth on Schedule 3.1(ee) of the Disclosure Schedules. To the
knowledge and belief of the Company, such accounting firm: (i) is a registered public accounting firm as required by the Exchange Act
and (ii) shall express its opinion with respect to the financial statements to be included in the Company’s Annual Report for the fiscal
year ended December 31, 2013.
(ff) Seniority. As of the Closing Date, no Indebtedness or other claim against the Company is senior to the Debentures
in right of payment, whether with respect to interest or upon liquidation or dissolution, or otherwise, other than indebtedness secured
by purchase money security interests (which is senior only as to underlying assets covered thereby) and capital lease obligations (which
is senior only as to the property covered thereby).
( g g ) No Disagreements with Accountants and Lawyers. There are no disagreements of any kind presently existing, or
reasonably anticipated by the Company to arise, between the Company and the accountants and lawyers formerly or presently
employed by the Company and the Company is current with respect to any fees owed to its accountants and lawyers which could affect
the Company’s ability to perform any of its obligations under any of the Transaction Documents.
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(hh) Acknowledgment Regarding Purchasers’ Purchase of Securities. The Company acknowledges and agrees that each
of the Purchasers is acting solely in the capacity of an arm’s length purchaser with respect to the Transaction Documents and the
transactions contemplated thereby. The Company further acknowledges that no Purchaser is acting as a financial advisor or fiduciary
of the Company (or in any similar capacity) with respect to the Transaction Documents and the transactions contemplated thereby and
any advice given by any Purchaser or any of their respective representatives or agents in connection with the Transaction Documents
and the transactions contemplated thereby is merely incidental to the Purchasers’ purchase of the Securities. The Company further
represents to each Purchaser that the Company’s decision to enter into this Agreement and the other Transaction Documents has been
based solely on the independent evaluation of the transactions contemplated hereby by the Company and its representatives.
(ii) Acknowledgment Regarding Purchaser’s Trading Activity . Anything in this Agreement or elsewhere herein to the
contrary notwithstanding (except for Sections 3.2(f) and 4.15 hereof), it is understood and acknowledged by the Company that: (i) none
of the Purchasers has been asked by the Company to agree, nor has any Purchaser agreed, to desist from purchasing or selling, long
and/or short, securities of the Company, or “derivative” securities based on securities issued by the Company or to hold the Securities
for any specified term, (ii) past or future open market or other transactions by any Purchaser, specifically including, without limitation,
Short Sales or “derivative” transactions, before or after the closing of this or future private placement transactions, may negatively
impact the market price of the Company’s publicly-traded securities, (iii) any Purchaser, and counter-parties in “derivative”
transactions to which any such Purchaser is a party, directly or indirectly, may presently have a “short” position in the Common Stock
and (iv) each Purchaser shall not be deemed to have any affiliation with or control over any arm’s length counter-party in any
“derivative” transaction; provided, that no Purchaser shall engage in a Net Short Sale (as defined in Section 4.15) until such Purchaser
no longer holds any Debentures or Warrants. The Company further understands and acknowledges that (y) one or more Purchasers
may engage in hedging activities at various times during the period that the Securities are outstanding, including, without limitation,
during the periods that the value of the Underlying Shares deliverable with respect to Securities are being determined, and (z) such
hedging activities (if any) could reduce the value of the existing stockholders' equity interests in the Company at and after the time that
the hedging activities are being conducted. The Company acknowledges that such aforementioned hedging activities do not constitute
a breach of any of the Transaction Documents.
(jj) Regulation M Compliance. The Company has not, and to its knowledge no one acting on its behalf has, (i) taken,
directly or indirectly, any action designed to cause or to result in the stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of any of the Securities, (ii) sold, bid for, purchased, or paid any compensation for soliciting
purchases of, any of the Securities, or (iii) paid or agreed to pay to any Person any compensation for soliciting another to purchase any
other securities of the Company, other than, in the case of clauses (ii) and (iii), compensation paid to the Company’s placement agent
in connection with the placement of the Securities.
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(kk) Stock Option Plans. Each stock option granted by the Company under the Company’s stock option plan was granted
(i) in accordance with the terms of the Company’s stock option plan or the terms of the stock option agreements between the Company
and the optionee and (ii) with an exercise price at least equal to the fair market value of the Common Stock on the date such stock
option would be considered granted under GAAP and applicable law. No stock option granted under the Company’s stock option plan
has been backdated. The Company has not knowingly granted, and there is no and has been no Company policy or practice to
knowingly grant, stock options prior to, or otherwise knowingly coordinate the grant of stock options with, the release or other public
announcement of material information regarding the Company or its Subsidiaries or their financial results or prospects.
(ll) Office of Foreign Assets Control. Neither the Company nor any Subsidiary nor, to the Company's knowledge, any
director, officer, agent, employee or affiliate of the Company or any Subsidiary is currently subject to any U.S. sanctions administered
by the Office of Foreign Assets Control of the U.S. Treasury Department (“OFAC”).
( m m ) U.S. Real Property Holding Corporation. The Company is not and has never been a U.S. real property holding
corporation within the meaning of Section 897 of the Internal Revenue Code of 1986, as amended, and the Company shall so certify
upon Purchaser’s request.
(nn) Money Laundering. The operations of the Company and its Subsidiaries are and have been conducted at all times in
compliance with applicable financial record-keeping and reporting requirements of the Currency and Foreign Transactions Reporting
Act of 1970, as amended, applicable money laundering statutes and applicable rules and regulations thereunder (collectively, the
“Money Laundering Laws”), and no action, suit or proceeding by or before any court or governmental agency, authority or body or any
arbitrator involving the Company or any Subsidiary with respect to the Money Laundering Laws is pending or, to the knowledge of the
Company or any Subsidiary, threatened.
(oo) No Disqualification Events. With respect to the Securities to be offered and sold hereunder in reliance on Rule 506
under the Securities Act, none of the Company, any of its predecessors, any affiliated issuer, any director, executive officer, other
officer of the Company participating in the offering hereunder, any beneficial owner of 20% or more of the Company’s outstanding
voting equity securities, calculated on the basis of voting power, nor any promoter (as that term is defined in Rule 405 under the
Securities Act) connected with the Company in any capacity at the time of sale (each, an "Issuer Covered Person" and, together, "Issuer
Covered Persons") is subject to any of the "Bad Actor" disqualifications described in Rule 506(d)(1)(i) to (viii) under the Securities Act
(a "Disqualification Event"), except for a Disqualification Event covered by Rule 506(d)(2) or (d)(3). The Company has exercised
reasonable care to determine whether any Issuer Covered Person is subject to a Disqualification Event. The Company has complied, to
the extent applicable, with its disclosure obligations under Rule 506(e), and has furnished to the Purchasers a copy of any disclosures
provided thereunder.
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( s s ) Other Covered Persons. The Company is not aware of any person (other than any Issuer Covered Person) that has
been or will be paid (directly or indirectly) remuneration for solicitation of purchasers in connection with the sale of any Regulation D
Securities.
(tt) Notice of Disqualification Events. The Company will notify the Purchasers in writing, prior to the Closing Date of
(i) any Disqualification Event relating to any Issuer Covered Person and (ii) any event that would, with the passage of time, become a
Disqualification Event relating to any Issuer Covered Person.
3.2
Representations and Warranties of the Purchasers . Each Purchaser, for itself and for no other Purchaser, hereby
represents and warrants as of the date hereof and as of the Closing Date to the Company as follows (unless as of a specific date therein):
( a ) Organization; Authority. Such Purchaser is either an individual or an entity duly incorporated or formed, validly
existing and in good standing under the laws of the jurisdiction of its incorporation or formation with full right, corporate, partnership,
limited liability company or similar power and authority to enter into and to consummate the transactions contemplated by the
Transaction Documents and otherwise to carry out its obligations hereunder and thereunder. The execution and delivery of the
Transaction Documents and performance by such Purchaser of the transactions contemplated by the Transaction Documents have
been duly authorized by all necessary corporate, partnership, limited liability company or similar action, as applicable, on the part of
such Purchaser. Each Transaction Document to which it is a party has been duly executed by such Purchaser, and when delivered by
such Purchaser in accordance with the terms hereof, will constitute the valid and legally binding obligation of such Purchaser,
enforceable against it in accordance with its terms, except: (i) as limited by general equitable principles and applicable bankruptcy,
insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally, (ii)
as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies and (iii) insofar as
indemnification and contribution provisions may be limited by applicable law.
( b ) Own Account. Such Purchaser understands that the Securities are “restricted securities” and have not been
registered under the Securities Act or any applicable state securities law and is acquiring the Securities as principal for its own account
and not with a view to or for distributing or reselling such Securities or any part thereof in violation of the Securities Act or any
applicable state securities law, has no present intention of distributing any of such Securities in violation of the Securities Act or any
applicable state securities law and has no direct or indirect arrangement or understandings with any other persons to distribute or
regarding the distribution of such Securities in violation of the Securities Act or any applicable state securities law (this representation
and warranty not limiting such Purchaser’s right to sell the Securities in compliance with applicable federal and state securities
laws). Such Purchaser is acquiring the Securities hereunder in the ordinary course of its business.
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( c ) Purchaser Status. At the time such Purchaser was offered the Securities, it was, and as of the date hereof it is, and
on each date on which it exercises any Warrants or converts any Debentures it will be an “accredited investor” as defined in Rule
501(a)(1), (a)(2), (a)(3), (a)(7) or (a)(8) under the Securities Act.
( d ) Experience of Such Purchaser. Such Purchaser, either alone or together with its representatives, has such
knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the
prospective investment in the Securities, and has so evaluated the merits and risks of such investment. Such Purchaser is able to bear
the economic risk of an investment in the Securities and, at the present time, is able to afford a complete loss of such investment.
(e) General Solicitation. Such Purchaser is not purchasing the Securities as a result of any advertisement, article, notice
or other communication regarding the Securities published in any newspaper, magazine or similar media or broadcast over television
or radio or presented at any seminar or any other general solicitation or general advertisement.
( f ) Certain Transactions and Confidentiality. Other than consummating the transactions contemplated hereunder, such
Purchaser has not directly or indirectly, nor has any Person acting on behalf of or pursuant to any understanding with such Purchaser,
executed any purchases or sales, including Short Sales, of the securities of the Company during the period commencing as of the time
that such Purchaser first received a term sheet (written or oral) from the Company or any other Person representing the Company
setting forth the material terms of the transactions contemplated hereunder and ending immediately prior to the execution
hereof. Notwithstanding the foregoing, in the case of a Purchaser that is a multi-managed investment vehicle whereby separate
portfolio managers manage separate portions of such Purchaser’s assets and the portfolio managers have no direct knowledge of the
investment decisions made by the portfolio managers managing other portions of such Purchaser’s assets, the representation set forth
above shall only apply with respect to the portion of assets managed by the portfolio manager that made the investment decision to
purchase the Securities covered by this Agreement. Other than to other Persons party to this Agreement, such Purchaser has
maintained the confidentiality of all disclosures made to it in connection with this transaction (including the existence and terms of this
transaction). Notwithstanding the foregoing, for avoidance of doubt, nothing contained herein shall constitute a representation or
warranty, or preclude any actions, with respect to the identification of the availability of, or securing of, available shares to borrow in
order to effect Short Sales or similar transactions in the future.
The Company acknowledges and agrees that the representations contained in Section 3.2 shall not modify, amend or affect such Purchaser’s
right to rely on the Company’s representations and warranties contained in this Agreement or any representations and warranties contained in
any other Transaction Document or any other document or instrument executed and/or delivered in connection with this Agreement or the
consummation of the transaction contemplated hereby.
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ARTICLE IV.
OTHER AGREEMENTS OF THE PARTIES
4.1 Transfer Restrictions.
(a) The Securities may only be disposed of in compliance with state and federal securities laws. In connection with any
transfer of Securities other than pursuant to an effective registration statement or Rule 144, to the Company or to an Affiliate of a
Purchaser or in connection with a pledge as contemplated in Section 4.1(b), the Company may require the transferor thereof to provide
to the Company an opinion of counsel selected by the transferor and reasonably acceptable to the Company, the form and substance of
which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does not require registration of such
transferred Securities under the Securities Act. As a condition of transfer, any such transferee shall agree in writing to be bound by the
terms of this Agreement and shall make the representations set forth in Section 3.2, and then shall have the rights and obligations of a
Purchaser under this Agreement.
(b) The Purchasers agree to the imprinting, so long as is required by this Section 4.1, of a legend on any of the
Securities in the following form:
[NOR THE SECURITIES
INTO WHICH THIS SECURITY
[EXERCISABLE]
[NEITHER] THIS SECURITY
[CONVERTIBLE]] HAS [NOT] BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR
SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR
PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS
EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF
WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THIS SECURITY [AND THE SECURITIES
ISSUABLE UPON [EXERCISE] [CONVERSION] OF THIS SECURITY] MAY BE PLEDGED IN CONNECTION WITH A BONA
FIDE MARGIN ACCOUNT WITH A REGISTERED BROKER-DEALER OR OTHER LOAN WITH A FINANCIAL
INSTITUTION THAT IS AN “ACCREDITED INVESTOR” AS DEFINED IN RULE 501(a) UNDER THE SECURITIES ACT OR
OTHER LOAN SECURED BY SUCH SECURITIES.
IS
The Company acknowledges and agrees that a Purchaser may from time to time pledge pursuant to a bona fide margin
agreement with a registered broker-dealer or grant a security interest in some or all of the Securities to a financial institution that is an
“accredited investor” as defined in Rule 501(a) under the Securities Act and who agrees to be bound by the provisions of this
Agreement and, if required under the terms of such arrangement, such Purchaser may transfer pledged or secured Securities to the
pledgees or secured parties. Such a pledge or transfer would not be subject to approval of the Company and no legal opinion of legal
counsel of the pledgee, secured party or pledgor shall be required in connection therewith. Further, no notice shall be required of such
pledge. At the appropriate Purchaser’s expense, the Company will execute and deliver such reasonable documentation as a pledgee or
secured party of Securities may reasonably request in connection with a pledge or transfer of the Securities.
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(c) Certificates evidencing the Underlying Shares shall not contain any legend (including the legend set forth in Section
4.1(b) hereof): (i) while a registration statement covering the resale of such security is effective under the Securities Act, (ii) following
any sale of such Underlying Shares pursuant to Rule 144, (iii) if such Underlying Shares are eligible for sale under Rule 144, without
the requirement for the Company to be in compliance with the current public information required under Rule 144 as to such
Underlying Shares and without volume or manner-of-sale restrictions or (iv) if such legend is not required under applicable
requirements of the Securities Act (including judicial interpretations and pronouncements issued by the staff of the Commission). The
Company shall cause its counsel to issue a legal opinion to the Transfer Agent promptly after the Effective Date if required by the
Transfer Agent to effect the removal of the legend hereunder. If all or any portion of a Debenture is converted or Warrant is exercised
at a time when there is an effective registration statement to cover the resale of the Underlying Shares, or if such Underlying Shares
may be sold under Rule 144 without the requirement for the Company to be in compliance with the current public information required
under Rule 144 as to such Underlying Shares and without volume or manner-of-sale restrictions or if such legend is not otherwise
required under applicable requirements of the Securities Act (including judicial interpretations and pronouncements issued by the staff
of the Commission) then such Underlying Shares shall be issued free of all legends. The Company agrees that following the Effective
Date or at such time as such legend is no longer required under this Section 4.1(c), it will, no later than three Trading Days following
the delivery by a Purchaser to the Company or the Transfer Agent of a certificate representing Underlying Shares, as applicable, issued
with a restrictive legend (such third Trading Day, the “Legend Removal Date”), deliver or cause to be delivered to such Purchaser a
certificate representing such shares that is free from all restrictive and other legends. The Company may not make any notation on its
records or give instructions to the Transfer Agent that enlarge the restrictions on transfer set forth in this Section 4. Certificates for
Underlying Shares subject to legend removal hereunder shall be transmitted by the Transfer Agent to the Purchaser by crediting the
account of the Purchaser’s prime broker with the Depository Trust Company System as directed by such Purchaser.
(d) In addition to such Purchaser’s other available remedies, the Company shall pay to a Purchaser, in cash, as partial
liquidated damages and not as a penalty, for each $1,000 of Underlying Shares (based on the VWAP of the Common Stock on the date
such Securities are submitted to the Transfer Agent) delivered for removal of the restrictive legend and subject to Section 4.1(c), $10
per Trading Day (increasing to $15 per Trading Day five (5) Trading Days after such damages have begun to accrue) for each Trading
Day after the Legend Removal Date until such certificate is delivered without a legend. Nothing herein shall limit such Purchaser’s
right to pursue actual damages for the Company’s failure to deliver certificates representing any Securities as required by the
Transaction Documents, and such Purchaser shall have the right to pursue all remedies available to it at law or in equity including,
without limitation, a decree of specific performance and/or injunctive relief.
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(e) Each Purchaser, severally and not jointly with the other Purchasers, agrees with the Company that such Purchaser
will sell any Securities pursuant to either the registration requirements of the Securities Act, including any applicable prospectus
delivery requirements, or an exemption therefrom, and that if Securities are sold pursuant to a registration statement, they will be sold
in compliance with the plan of distribution set forth therein, and acknowledges that the removal of the restrictive legend from
certificates representing Securities as set forth in this Section 4.1 is predicated upon the Company’s reliance upon this understanding.
4.2 Acknowledgment of Dilution. The Company acknowledges that the issuance of the Securities may result in dilution of the
outstanding shares of Common Stock, which dilution may be substantial under certain market conditions. The Company further
acknowledges that its obligations under the Transaction Documents, including, without limitation, its obligation to issue the Underlying
Shares pursuant to the Transaction Documents, are unconditional and absolute and not subject to any right of set off, counterclaim, delay or
reduction, regardless of the effect of any such dilution or any claim the Company may have against any Purchaser and regardless of the
dilutive effect that such issuance may have on the ownership of the other stockholders of the Company.
4.3 Furnishing of Information; Public Information.
(a) If the Common Stock is not registered under Section 12(b) or 12(g) of the Exchange Act on the date hereof, the
Company agrees to cause the Common Stock to be registered under Section 12(g) of the Exchange Act on or before the 60 th calendar
day following the date hereof. Until the earliest of the time that (i) no Purchaser owns Securities or (ii) the Warrants have expired, the
Company covenants to maintain the registration of the Common Stock under Section 12(b) or 12(g) of the Exchange Act and to timely
file (or obtain extensions in respect thereof and file within the applicable grace period) all reports required to be filed by the Company
after the date hereof pursuant to the Exchange Act even if the Company is not then subject to the reporting requirements of the
Exchange Act.
(b) At any time during the period commencing from the six (6) month anniversary of the date hereof and ending at such
time that all of the Securities may be sold without the requirement for the Company to be in compliance with Rule 144(c)(1) and
otherwise without restriction or limitation pursuant to Rule 144, if the Company shall fail for any reason to satisfy the current public
information requirement under Rule 144(c) (a “Public Information Failure”) then, in addition to such Purchaser’s other available
remedies, the Company shall pay to a Purchaser, in cash, as partial liquidated damages and not as a penalty, by reason of any such
delay in or reduction of its ability to sell the Securities, an amount in cash equal to two percent (2.0%) of the aggregate Subscription
Amount of such Purchaser’s Securities on the day of a Public Information Failure and on every thirtieth (30th) day (pro rated for
periods totaling less than thirty days) thereafter until the earlier of (a) the date such Public Information Failure is cured and (b) such
time that such public information is no longer required for the Purchasers to transfer the Underlying Shares pursuant to Rule 144. The
payments to which a Purchaser shall be entitled pursuant to this Section 4.3(b) are referred to herein as “Public Information Failure
Payments.” Public Information Failure Payments shall be paid on the earlier of (i) the last day of the calendar month during which
such Public Information Failure Payments are incurred and (ii) the third (3 rd) Business Day after the event or failure giving rise to the
Public Information Failure Payments is cured. In the event the Company fails to make Public Information Failure Payments in a
timely manner, such Public Information Failure Payments shall bear interest at the rate of 1.5% per month (prorated for partial
months) until paid in full. Nothing herein shall limit such Purchaser’s right to pursue actual damages for the Public Information
Failure, and such Purchaser shall have the right to pursue all remedies available to it at law or in equity including, without limitation, a
decree of specific performance and/or injunctive relief.
26
4.4
Integration. The Company shall not sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any
security (as defined in Section 2 of the Securities Act) that would be integrated with the offer or sale of the Securities in a manner that would
require the registration under the Securities Act of the sale of the Securities or that would be integrated with the offer or sale of the Securities
for purposes of the rules and regulations of any Trading Market such that it would require shareholder approval prior to the closing of such
other transaction unless shareholder approval is obtained before the closing of such subsequent transaction.
4.5 Conversion and Exercise Procedures. Each of the form of Notice of Exercise included in the Warrants and the form of
Notice of Conversion included in the Debentures set forth the totality of the procedures required of the Purchasers in order to exercise the
Warrants or convert the Debentures. No additional legal opinion, other information or instructions shall be required of the Purchasers to
exercise their Warrants or convert their Debentures. The Company shall honor exercises of the Warrants and conversions of the Debentures
and shall deliver Underlying Shares in accordance with the terms, conditions and time periods set forth in the Transaction Documents.
4.6 Securities Laws Disclosure; Publicity. The Company shall (a) by 9:30 a.m. (New York City time) on the fourth Trading
Day immediately following the date hereof, issue a press release disclosing the material terms of the transactions contemplated hereby, and
(b) file a Current Report on Form 8-K, including the Transaction Documents as exhibits thereto, with the Commission within the time
required by the Exchange Act. From and after the issuance of such press release, the Company represents to the Purchasers that it shall have
publicly disclosed all material, non-public information delivered to any of the Purchasers by the Company or any of its Subsidiaries, or any of
their respective officers, directors, employees or agents in connection with the transactions contemplated by the Transaction Documents. The
Company and each Purchaser shall consult with each other in issuing any other press releases with respect to the transactions contemplated
hereby, and neither the Company nor any Purchaser shall issue any such press release nor otherwise make any such public statement without
the prior consent of the Company, with respect to any press release of any Purchaser, or without the prior consent of each Purchaser, with
respect to any press release of the Company, which consent shall not unreasonably be withheld or delayed, except if such disclosure is
required by law, in which case the disclosing party shall promptly provide the other party with prior notice of such public statement or
communication. Notwithstanding the foregoing, the Company shall not publicly disclose the name of any Purchaser, or include the name of
any Purchaser in any filing with the Commission or any regulatory agency or Trading Market, without the prior written consent of such
Purchaser, except: (a) as required by federal securities law in connection with the filing of final Transaction Documents with the Commission,
(b) to the extent requested by the Commission and (c) to the extent such disclosure is required by law or Trading Market regulations, in which
case the Company shall provide the Purchasers with prior notice of such disclosure permitted under clauses (b) and (c).
27
4.7 Shareholder Rights Plan. No claim will be made or enforced by the Company or, with the consent of the Company, any
other Person, that any Purchaser is an “Acquiring Person” under any control share acquisition, business combination, poison pill (including
any distribution under a rights agreement) or similar anti-takeover plan or arrangement in effect or hereafter adopted by the Company, or that
any Purchaser could be deemed to trigger the provisions of any such plan or arrangement, by virtue of receiving Securities under the
Transaction Documents or under any other agreement between the Company and the Purchasers.
4.8 Non-Public Information. Except with respect to the material terms and conditions of the transactions contemplated by the
Transaction Documents, the Company covenants and agrees that neither it, nor any other Person acting on its behalf, will provide any
Purchaser or its agents or counsel with any information that the Company believes constitutes material non-public information, unless prior
thereto such Purchaser shall have entered into a written agreement with the Company regarding the confidentiality and use of such
information. The Company understands and confirms that each Purchaser shall be relying on the foregoing covenant in effecting transactions
in securities of the Company.
4.9 Use of Proceeds. Except as set forth on Schedule 4.9 attached hereto, the Company shall use the net proceeds from the sale
of the Securities hereunder for working capital purposes and shall not use such proceeds: (a) for the satisfaction of any portion of the
Company’s debt (other than payment of trade payables in the ordinary course of the Company’s business and prior practices or payments to
the December 2012 Debentures in accordance with the terms and conditions of the December 2012 Debentures as of the date hereof), (b) for
the redemption of any Common Stock or Common Stock Equivalents, (c) for the settlement of any outstanding litigation or (d) in violation of
FCPA or OFAC regulations.
28
4.10 Indemnification of Purchasers. Subject to the provisions of this Section 4.10, the Company will indemnify and hold each
Purchaser and its directors, officers, shareholders, members, partners, employees and agents (and any other Persons with a functionally
equivalent role of a Person holding such titles notwithstanding a lack of such title or any other title), each Person who controls such Purchaser
(within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the directors, officers, shareholders, agents,
members, partners or employees (and any other Persons with a functionally equivalent role of a Person holding such titles notwithstanding a
lack of such title or any other title) of such controlling persons (each, a “Purchaser Party”) harmless from any and all losses, liabilities,
obligations, claims, contingencies, damages, costs and expenses, including all judgments, amounts paid in settlements, court costs and
reasonable attorneys’ fees and costs of investigation that any such Purchaser Party may suffer or incur as a result of or relating to (a) any
breach of any of the representations, warranties, covenants or agreements made by the Company in this Agreement or in the other Transaction
Documents or (b) any action instituted against the Purchaser Parties in any capacity, or any of them or their respective Affiliates, by any
stockholder of the Company who is not an Affiliate of such Purchaser Party, with respect to any of the transactions contemplated by the
Transaction Documents (unless such action is based upon a breach of such Purchaser Party’s representations, warranties or covenants under
the Transaction Documents or any agreements or understandings such Purchaser Party may have with any such stockholder or any violations
by such Purchaser Party of state or federal securities laws or any conduct by such Purchaser Party which constitutes fraud, gross negligence,
willful misconduct or malfeasance). If any action shall be brought against any Purchaser Party in respect of which indemnity may be sought
pursuant to this Agreement, such Purchaser Party shall promptly notify the Company in writing, and the Company shall have the right to
assume the defense thereof with counsel of its own choosing reasonably acceptable to the Purchaser Party. Any Purchaser Party shall have the
right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at
the expense of such Purchaser Party except to the extent that (i) the employment thereof has been specifically authorized by the Company in
writing, (ii) the Company has failed after a reasonable period of time to assume such defense and to employ counsel or (iii) in such action
there is, in the reasonable opinion of counsel, a material conflict on any material issue between the position of the Company and the position
of such Purchaser Party, in which case the Company shall be responsible for the reasonable fees and expenses of no more than one such
separate counsel. The Company will not be liable to any Purchaser Party under this Agreement (y) for any settlement by a Purchaser Party
effected without the Company’s prior written consent, which shall not be unreasonably withheld or delayed; or (z) to the extent, but only to the
extent that a loss, claim, damage or liability is attributable to any Purchaser Party’s breach of any of the representations, warranties, covenants
or agreements made by such Purchaser Party in this Agreement or in the other Transaction Documents. The indemnification required by this
Section 4.10 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are
received or are incurred. The indemnity agreements contained herein shall be in addition to any cause of action or similar right of any
Purchaser Party against the Company or others and any liabilities the Company may be subject to pursuant to law.
4.11 Reservation and Listing of Securities.
(a) The Company shall maintain a reserve from its duly authorized shares of Common Stock for issuance pursuant to
the Transaction Documents in such amount as may then be required to fulfill its obligations in full under the Transaction Documents.
(b) If, on any date, the number of authorized but unissued (and otherwise unreserved) shares of Common Stock is less
than the Required Minimum on such date, then the Board of Directors shall use commercially reasonable efforts to amend the
Company’s certificate or articles of incorporation to increase the number of authorized but unissued shares of Common Stock to at
least the Required Minimum at such time, as soon as possible and in any event not later than the 120th day after such date.
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(c) The Company shall, if applicable: (i) in the time and manner required by the principal Trading Market, prepare and
file with such Trading Market an additional shares listing application covering a number of shares of Common Stock at least equal to
the Required Minimum on the date of such application, (ii) take all steps necessary to cause such shares of Common Stock to be
approved for listing or quotation on such Trading Market as soon as commercially reasonable thereafter, (iii) provide to the Purchasers
evidence of such listing or quotation and (iv) maintain the listing or quotation of such Common Stock on any date at least equal to the
Required Minimum on such date on such Trading Market or another Trading Market.
4.12 Participation in Future Financing.
(a) From the date hereof until the 18-month anniversary of the Closing Date, upon any issuance by the Company or any
of its Subsidiaries of Common Stock, Common Stock Equivalents for cash consideration, Indebtedness or a combination of units
hereof (a “Subsequent Financing”), each Purchaser shall have the right to participate in up to an amount of the Subsequent Financing
equal to 100% of such Subsequent Financing (the “Participation Maximum”) on the same terms, conditions and price provided for in
the Subsequent Financing.
(b) At least five (5) Trading Days prior to the closing of the Subsequent Financing, the Company shall deliver to each
Purchaser a written notice of its intention to effect a Subsequent Financing (“Pre-Notice”), which Pre-Notice shall ask such Purchaser if
it wants to review the details of such financing (such additional notice, a “Subsequent Financing Notice”). Upon the request of a
Purchaser, and only upon a request by such Purchaser, for a Subsequent Financing Notice, the Company shall promptly, but no later
than one (1) Trading Day after such request, deliver a Subsequent Financing Notice to such Purchaser. The Subsequent Financing
Notice shall describe in reasonable detail the proposed terms of such Subsequent Financing, the amount of proceeds intended to be
raised thereunder and the Person or Persons through or with whom such Subsequent Financing is proposed to be effected and shall
include a term sheet or similar document relating thereto as an attachment.
(c) Any Purchaser desiring to participate in such Subsequent Financing must provide written notice to the Company by
not later than 5:30 p.m. (New York City time) on the fifth (5th) Trading Day after all of the Purchasers have received the Pre-Notice
that such Purchaser is willing to participate in the Subsequent Financing, the amount of such Purchaser’s participation, and
representing and warranting that such Purchaser has such funds ready, willing, and available for investment on the terms set forth in
the Subsequent Financing Notice. If the Company receives no such notice from a Purchaser as of such fifth (5th) Trading Day, such
Purchaser shall be deemed to have notified the Company that it does not elect to participate.
(d) If by 5:30 p.m. (New York City time) on the fifth (5 th ) Trading Day after all of the Purchasers have received the
Pre-Notice, notifications by the Purchasers of their willingness to participate in the Subsequent Financing (or to cause their designees
to participate) is, in the aggregate, less than the total amount of the Subsequent Financing, then the Company may effect the remaining
portion of such Subsequent Financing on the terms and with the Persons set forth in the Subsequent Financing Notice.
30
(e) If by 5:30 p.m. (New York City time) on the fifth (5 th) Trading Day after all of the Purchasers have received the
Pre-Notice, the Company receives responses to a Subsequent Financing Notice from Purchasers seeking to purchase more than the
aggregate amount of the Participation Maximum, each such Purchaser shall have the right to purchase its Pro Rata Portion (as defined
below) of the Participation Maximum. “Pro Rata Portion” means the ratio of (x) the Subscription Amount of Securities purchased on
the Closing Date by a Purchaser participating under this Section 4.12 and (y) the sum of the aggregate Subscription Amounts of
Securities purchased on the Closing Date by all Purchasers participating under this Section 4.12.
(f) The Company must provide the Purchasers with a second Subsequent Financing Notice, and the Purchasers will
again have the right of participation set forth above in this Section 4.12, if the Subsequent Financing subject to the initial Subsequent
Financing Notice is not consummated for any reason on the terms set forth in such Subsequent Financing Notice within thirty (30)
Trading Days after the date of the initial Subsequent Financing Notice.
(g) The Company and each Purchaser agree that if any Purchaser elects to participate in the Subsequent Financing, the
transaction documents related to the Subsequent Financing shall not include any term or provision whereby such Purchaser shall be
required to agree to any restrictions on trading as to any of the Securities purchased hereunder or be required to consent to any
amendment to or termination of, or grant any waiver, release or the like under or in connection with, this Agreement, without the prior
written consent of such Purchaser.
(h) Notwithstanding anything to the contrary in this Section 4.12 and unless otherwise agreed to by such Purchaser, the
Company shall either confirm in writing to such Purchaser that the transaction with respect to the Subsequent Financing has been
abandoned or shall publicly disclose its intention to issue the securities in the Subsequent Financing, in either case in such a manner
such that such Purchaser will not be in possession of any material, non-public information, by the tenth (10th) Business Day following
delivery of the Subsequent Financing Notice. If by such tenth (10th) Business Day, no public disclosure regarding a transaction with
respect to the Subsequent Financing has been made, and no notice regarding the abandonment of such transaction has been received by
such Purchaser, such transaction shall be deemed to have been abandoned and such Purchaser shall not be deemed to be in possession
of any material, non-public information with respect to the Company or any of its Subsidiaries.
(i) Notwithstanding the foregoing, this Section 4.12 shall not apply in respect of (i) an Exempt Issuance, or (ii) an
underwritten public offering of Common Stock.
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4.13 Subsequent Equity Sales.
(a) From the date hereof until 180 days after the Closing Date, neither the Company nor any Subsidiary shall issue,
enter into any agreement to issue or announce the issuance or proposed issuance of any shares of Common Stock or Common Stock
Equivalents.
(b) From the date hereof until such time as no Purchaser holds any of the Warrants, the Company shall be prohibited
from effecting or entering into an agreement to effect any issuance by the Company or any of its Subsidiaries of Common Stock or
Common Stock Equivalents (or a combination of units thereof) involving a Variable Rate Transaction. “Variable Rate Transaction ”
means a transaction in which the Company (i) issues or sells any debt or equity securities that are convertible into, exchangeable or
exercisable for, or include the right to receive, additional shares of Common Stock either (A) at a conversion price, exercise price or
exchange rate or other price that is based upon, and/or varies with, the trading prices of or quotations for the shares of Common Stock
at any time after the initial issuance of such debt or equity securities or (B) with a conversion, exercise or exchange price that is subject
to being reset at some future date after the initial issuance of such debt or equity security or upon the occurrence of specified or
contingent events directly or indirectly related to the business of the Company or the market for the Common Stock or (ii) enters into
any agreement, including, but not limited to, an equity line of credit, whereby the Company may issue securities at a future determined
price. Any Purchaser shall be entitled to obtain injunctive relief against the Company to preclude any such issuance, which remedy
shall be in addition to any right to collect damages.
(c) Notwithstanding the foregoing, this Section 4.13 shall not apply in respect of an Exempt Issuance, except that no
Variable Rate Transaction shall be an Exempt Issuance.
4.14 Equal Treatment of Purchasers. No consideration (including any modification of any Transaction Document) shall be
offered or paid to any Person to amend or consent to a waiver or modification of any provision of this Agreement unless the same
consideration is also offered to all of the parties to this Agreement. Further, the Company shall not make any payment of principal or interest
on the Debentures in amounts which are disproportionate to the respective principal amounts outstanding on the Debentures at any applicable
time. The Company shall not amend, supplement or modify any Transaction Document to which any party to this Agreement is a party unless
either (x) such amendment, supplement or modification is offered to all Purchasers or (y) such amendment, supplement or modification could
not reasonably be expected to adversely affect the rights or interests of any such other parties. For clarification purposes, this provision
constitutes a separate right granted to each Purchaser by the Company and negotiated separately by each Purchaser, and is intended for the
Company to treat the Purchasers as a class and shall not in any way be construed as the Purchasers acting in concert or as a group with respect
to the purchase, disposition or voting of Securities or otherwise. Each Purchaser agrees that the provisions of this Section 4.14 shall not be
amended without the prior written consent of each Purchaser to this Agreement who is adversely affected thereby.
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4.15 Certain Transactions and Confidentiality. Each Purchaser, severally and not jointly with the other Purchasers, covenants
that neither it, nor any Affiliate acting on its behalf or pursuant to any understanding with it will execute any purchases or sales, including
Short Sales, of any of the Company’s securities during the period commencing with the execution of this Agreement and ending at such time
that the transactions contemplated by this Agreement are first publicly announced pursuant to the initial press release as described in Section
4.6. Each Purchaser, severally and not jointly with the other Purchasers, covenants that until such time as the transactions contemplated by
this Agreement are publicly disclosed by the Company pursuant to the initial press release as described in Section 4.6, such Purchaser will
maintain the confidentiality of the existence and terms of this transaction and the information included in the Transaction Documents and the
Disclosure Schedules. Notwithstanding the foregoing, no Purchaser makes any representation, warranty or covenant hereby that it will not
engage in Short Sales in the securities of the Company after the time that the transactions contemplated by this Agreement are first publicly
announced as described in Section 4.6; provided, however, each Purchaser agrees, severally and not jointly with any other Purchasers, that
such Purchaser will not enter into any Net Short Sales (as hereinafter defined) from the period commencing on the Closing Date and ending on
the date that such Purchaser no longer holds any Debentures or Warrants. For purposes of this Section 4.15, a “Net Short Sale” by any
Purchaser shall mean a sale of Common Stock by such Purchaser that is marked as a short sale and that is made at a time where there is no
equivalent offsetting long position in Common Stock held by such Purchaser. For purposes of determining whether there is an equivalent
offsetting long position in Common Stock held by the Purchaser, Underlying Shares that have not yet been converted pursuant to the
Debentures and Warrant Shares that have not yet been exercised pursuant to the Warrants shall be deemed to be held long by the Purchaser,
and the amount of shares of Common Stock held in a long position shall be all unconverted Underlying Shares and unexercised Warrant
Shares (ignoring any exercise limitations included therein) issuable to such Purchaser on such date, plus any shares of Common Stock or
Common Stock Equivalents otherwise then held by such Purchaser. Notwithstanding the foregoing, in the case of a Purchaser that is a multi-
managed investment vehicle whereby separate portfolio managers manage separate portions of such Purchaser’s assets and the portfolio
managers have no direct knowledge of the investment decisions made by the portfolio managers managing other portions of such Purchaser’s
assets, the covenant set forth above shall only apply with respect to the portion of assets managed by the portfolio manager that made the
investment decision to purchase the Securities covered by this Agreement.
4.16 Form D; Blue Sky Filings. The Company agrees to timely file a Form D with respect to the Securities as required under
Regulation D and to provide a copy thereof, promptly upon request of any Purchaser. The Company shall take such action as the Company
shall reasonably determine is necessary in order to obtain an exemption for, or to qualify the Securities for, sale to the Purchasers at the
Closing under applicable securities or “Blue Sky” laws of the states of the United States, and shall provide evidence of such actions promptly
upon request of any Purchaser.
4.17 Capital Changes. Until the one year anniversary of the Closing Date, the Company shall not undertake a reverse or
forward stock split or reclassification of the Common Stock without the prior written consent of the Purchasers holding a majority in principal
amount outstanding of the Debentures.
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4.18 Greenshoe.
(a) From the date hereof until the twelve month anniversary of the Closing Date, each Purchaser may, in its sole determination,
elect to purchase, severally and not jointly with the other Purchasers and, subject to the proviso below, in one or more purchases, additional
debentures and warrants in accordance with the calculations in Section 2.2 having an aggregate subscription amount for each Purchaser equal
to 50% of such Purchaser’s Subscription Amount hereunder (such securities, the “Greenshoe Securities” and such right to receive the
Greenshoe Securities pursuant to this Section 4.18, the “Greenshoe Rights”). The Greenshoe Securities shall, except as set forth in this Section
4.18, be identical to the Securities. The debenture included in the Greenshoe Securities shall have an initial conversion price equal to the
lesser of (i) $0.35 (subject to adjustment for forward and reverse stock splits and the like that occur after the date hereof) or (ii) the then
effective Conversion Price of the Debentures issued hereunder multiplied by 1.4. The warrants included in the Greenshoe Securities shall
have an initial exercise price equal to the lesser of (i) $.040 (subject to adjustment for forward and reverse stock splits and the like that occur
after the date hereof) or (ii) the then effective exercise price of the Warrants issued hereunder multiplied by 1.45.
(b) Any Greenshoe Right exercised by a Purchaser shall close within 5 Trading Days of a duly delivered exercise notice by the
exercising party. Any additional investment in the Greenshoe Securities shall be on terms identical to those set forth in the Transaction
Documents, mutatis mutandis. In order to effectuate a purchase and sale of the Greenshoe Securities, the Company and the Purchasers shall
enter into a Securities Purchase Agreement identical to this Agreement, mutatis mutandis and shall include updated disclosure schedules.
4 . 1 9 Issuances Pursuant to the December 2012 Debentures and December 2012 Warrants. From the date hereof until the
Debentures and Warrants are no longer outstanding, the Company shall not issue any shares of Common Stock pursuant to the December
2012 Debentures or the December 2012 Warrants at an effective per share price less than the then effective Conversion Price.
ARTICLE V.
MISCELLANEOUS
5.1 Termination. This Agreement may be terminated by any Purchaser, as to such Purchaser’s obligations hereunder only and
without any effect whatsoever on the obligations between the Company and the other Purchasers, by written notice to the other parties, if the
Closing has not been consummated on or before April 15, 2014 provided, however, that such termination will not affect the right of any party
to sue for any breach by any other party (or parties).
5.2 Fees and Expenses. At the Closing, the Company has agreed to reimburse Hillair Capital Management LLC (“ Hillair”) the
non-accountable sum of $30,000 for its due diligence expense, none of which has been paid prior to the Closing Date plus $30,000 for its legal
fees and expenses, $20,000 of which has been paid prior to the Closing. Accordingly, in lieu of the foregoing payments, the aggregate amount
that Hillair’s fund is to pay for the Securities at the Closing shall be reduced by $40,000 in lieu thereof. Except as expressly set forth in the
Transaction Documents to the contrary, each party shall pay the fees and expenses of its advisers, counsel, accountants and other
experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and
performance of this Agreement. The Company shall pay all Transfer Agent fees (including, without limitation, any fees required for same-
day processing of any instruction letter delivered by the Company and any conversion or exercise notice delivered by a Purchaser), stamp
taxes and other taxes and duties levied in connection with the delivery of any Securities to the Purchasers.
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5.3
Entire Agreement. The Transaction Documents, together with the exhibits and schedules thereto, contain the entire
understanding of the parties with respect to the subject matter hereof and thereof and supersede all prior agreements and understandings, oral
or written, with respect to such matters, which the parties acknowledge have been merged into such documents, exhibits and schedules.
5.4 Notices. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be
in writing and shall be deemed given and effective on the earliest of: (a) the date of transmission, if such notice or communication is delivered
via facsimile at the facsimile number set forth on the signature pages attached hereto at or prior to 5:30 p.m. (New York City time) on a
Trading Day, (b) the next Trading Day after the date of transmission, if such notice or communication is delivered via facsimile at the
facsimile number set forth on the signature pages attached hereto on a day that is not a Trading Day or later than 5:30 p.m. (New York City
time) on any Trading Day, (c) the second (2 nd) Trading Day following the date of mailing, if sent by U.S. nationally recognized overnight
courier service or (d) upon actual receipt by the party to whom such notice is required to be given. The address for such notices and
communications shall be as set forth on the signature pages attached hereto.
5.5 Amendments; Waivers. No provision of this Agreement may be waived, modified, supplemented or amended except in a
written instrument signed, in the case of an amendment, by the Company and the Purchasers holding at least 75% in interest of the Securities
then outstanding, which waiver, modification, supplement or amendment shall be binding on all holders of the Securities then
outstanding. No waiver of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a
continuing waiver in the future or a waiver of any subsequent default or a waiver of any other provision, condition or requirement hereof, nor
shall any delay or omission of any party to exercise any right hereunder in any manner impair the exercise of any such right.
5.6 Headings. The headings herein are for convenience only, do not constitute a part of this Agreement and shall not be
deemed to limit or affect any of the provisions hereof.
5.7 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their successors
and permitted assigns. The Company may not assign this Agreement or any rights or obligations hereunder without the prior written consent
of each Purchaser (other than by merger). Any Purchaser may assign any or all of its rights under this Agreement to any Person to whom such
Purchaser assigns or transfers any Securities, provided that such transferee agrees in writing to be bound, with respect to the transferred
Securities, by the provisions of the Transaction Documents that apply to the “Purchasers.”
35
5.8
No Third-Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective
successors and permitted assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other Person, except as
otherwise set forth in Section 4.10 and this Section 5.8.
5.9 Governing Law. All questions concerning the construction, validity, enforcement and interpretation of the Transaction
Documents shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to
the principles of conflicts of law thereof. Each party agrees that all legal proceedings concerning the interpretations, enforcement and defense
of the transactions contemplated by this Agreement and any other Transaction Documents (whether brought against a party hereto or its
respective affiliates, directors, officers, shareholders, partners, members, employees or agents) shall be commenced exclusively in the state
and federal courts sitting in the City of New York. 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 (including with respect to the enforcement of any of the Transaction Documents),
and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is improper or is an inconvenient venue for such proceeding. Each party
hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a
copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices
to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing
contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by law. If either party shall
commence an action, suit or proceeding to enforce any provisions of the Transaction Documents, then, in addition to the obligations of the
Company under Section 4.10, the prevailing party in such action, suit or proceeding shall be reimbursed by the other party for its reasonable
attorneys’ fees and other costs and expenses incurred with the investigation, preparation and prosecution of such action or proceeding.
5.10 Survival. The representations and warranties contained herein shall survive the Closing and the delivery of the Securities.
5.11 Execution. This Agreement may be executed in two or more counterparts, all of which when taken together shall be
considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to each
other party, it being understood that the parties need not sign the same counterpart. In the event that any signature is delivered by facsimile
transmission or by e-mail delivery of a “.pdf” format data file, such signature shall create a valid and binding obligation of the party executing
(or on whose behalf such signature is executed) with the same force and effect as if such facsimile or “.pdf” signature page were an original
thereof.
5.12 Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to
be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full
force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their commercially reasonable efforts
to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision,
covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining
terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or
unenforceable.
36
5.13 Rescission and Withdrawal Right. Notwithstanding anything to the contrary contained in (and without limiting any similar
provisions of) any of the other Transaction Documents, whenever any Purchaser exercises a right, election, demand or option under a
Transaction Document and the Company does not timely perform its related obligations within the periods therein provided, then such
Purchaser may rescind or withdraw, in its sole discretion from time to time upon written notice to the Company, any relevant notice, demand
or election in whole or in part without prejudice to its future actions and rights; provided, however, that in the case of a rescission of a
conversion of a Debenture or exercise of a Warrant, the applicable Purchaser shall be required to return any shares of Common Stock subject
to any such rescinded conversion or exercise notice concurrently with the return to such Purchaser of the aggregate exercise price paid to the
Company for such shares and the restoration of such Purchaser’s right to acquire such shares pursuant to such Purchaser’s Warrant (including,
issuance of a replacement warrant certificate evidencing such restored right).
5.14 Replacement of Securities. If any certificate or instrument evidencing any Securities is mutilated, lost, stolen or destroyed,
the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation thereof (in the case of mutilation), or in
lieu of and substitution therefor, a new certificate or instrument, but only upon receipt of evidence reasonably satisfactory to the Company of
such loss, theft or destruction. The applicant for a new certificate or instrument under such circumstances shall also pay any reasonable third-
party costs (including customary indemnity) associated with the issuance of such replacement Securities.
5.15 Remedies. In addition to being entitled to exercise all rights provided herein or granted by law, including recovery of
damages, each of the Purchasers and the Company will be entitled to specific performance under the Transaction Documents. The parties
agree that monetary damages may not be adequate compensation for any loss incurred by reason of any breach of obligations contained in the
Transaction Documents and hereby agree to waive and not to assert in any action for specific performance of any such obligation the defense
that a remedy at law would be adequate.
5.16 Payment Set Aside. To the extent that the Company makes a payment or payments to any Purchaser pursuant to any
Transaction Document or a Purchaser enforces or exercises its rights thereunder, and such payment or payments or the proceeds of such
enforcement or exercise or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside, recovered from,
disgorged by or are required to be refunded, repaid or otherwise restored to the Company, a trustee, receiver or any other Person under any
law (including, without limitation, any bankruptcy law, state or federal law, common law or equitable cause of action), then to the extent of
any such restoration the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if
such payment had not been made or such enforcement or setoff had not occurred.
37
5.17 Usury. To the extent it may lawfully do so, the Company hereby agrees not to insist upon or plead or in any manner
whatsoever claim, and will resist any and all efforts to be compelled to take the benefit or advantage of, usury laws wherever enacted, now or
at any time hereafter in force, in connection with any claim, action or proceeding that may be brought by any Purchaser in order to enforce any
right or remedy under any Transaction Document. Notwithstanding any provision to the contrary contained in any Transaction Document, it
is expressly agreed and provided that the total liability of the Company under the Transaction Documents for payments in the nature of
interest shall not exceed the maximum lawful rate authorized under applicable law (the “Maximum Rate”), and, without limiting the
foregoing, in no event shall any rate of interest or default interest, or both of them, when aggregated with any other sums in the nature of
interest that the Company may be obligated to pay under the Transaction Documents exceed such Maximum Rate. It is agreed that if the
maximum contract rate of interest allowed by law and applicable to the Transaction Documents is increased or decreased by statute or any
official governmental action subsequent to the date hereof, the new maximum contract rate of interest allowed by law will be the Maximum
Rate applicable to the Transaction Documents from the effective date thereof forward, unless such application is precluded by applicable
law. If under any circumstances whatsoever, interest in excess of the Maximum Rate is paid by the Company to any Purchaser with respect to
indebtedness evidenced by the Transaction Documents, such excess shall be applied by such Purchaser to the unpaid principal balance of any
such indebtedness or be refunded to the Company, the manner of handling such excess to be at such Purchaser’s election.
5.18
Independent Nature of Purchasers’ Obligations and Rights. The obligations of each Purchaser under any Transaction
Document are several and not joint with the obligations of any other Purchaser, and no Purchaser shall be responsible in any way for the
performance or non-performance of the obligations of any other Purchaser under any Transaction Document. Nothing contained herein or in
any other Transaction Document, and no action taken by any Purchaser pursuant hereto or thereto, shall be deemed to constitute the Purchasers
as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Purchasers are in any way acting in
concert or as a group with respect to such obligations or the transactions contemplated by the Transaction Documents. Each Purchaser shall
be entitled to independently protect and enforce its rights, including, without limitation, the rights arising out of this Agreement or out of the
other Transaction Documents, and it shall not be necessary for any other Purchaser to be joined as an additional party in any proceeding for
such purpose. Each Purchaser has been represented by its own separate legal counsel in its review and negotiation of the Transaction
Documents. For reasons of administrative convenience only, each Purchaser and its respective counsel have chosen to communicate with the
Company through EGS. EGS does not represent any of the Purchasers and only represents Hillair. The Company has elected to provide all
Purchasers with the same terms and Transaction Documents for the convenience of the Company and not because it was required or requested
to do so by any of the Purchasers.
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5.19 Liquidated Damages. The Company’s obligations to pay any partial liquidated damages or other amounts owing under the
Transaction Documents is a continuing obligation of the Company and shall not terminate until all unpaid partial liquidated damages and
other amounts have been paid notwithstanding the fact that the instrument or security pursuant to which such partial liquidated damages or
other amounts are due and payable shall have been canceled.
5.20 Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right
required or granted herein shall not be a Business Day, then such action may be taken or such right may be exercised on the next succeeding
Business Day.
5.21 Construction. The parties agree that each of them and/or their respective counsel have reviewed and had an opportunity to
revise the Transaction Documents and, therefore, the normal rule of construction to the effect that any ambiguities are to be resolved against
the drafting party shall not be employed in the interpretation of the Transaction Documents or any amendments thereto. In addition, each and
every reference to share prices and shares of Common Stock in any Transaction Document shall be subject to adjustment for reverse and
forward stock splits, stock dividends, stock combinations and other similar transactions of the Common Stock that occur after the date of this
Agreement.
5.22 WAIVER OF JURY TRIAL. IN ANY ACTION, SUIT, OR PROCEEDING IN ANY JURISDICTION BROUGHT
BY ANY PARTY AGAINST ANY OTHER PARTY, THE PARTIES EACH KNOWINGLY AND INTENTIONALLY, TO THE
GREATEST EXTENT PERMITTED BY APPLICABLE LAW, HEREBY ABSOLUTELY, UNCONDITIONALLY,
IRREVOCABLY AND EXPRESSLY WAIVES FOREVER TRIAL BY JURY.
(Signature Pages Follow)
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IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase Agreement to be duly executed by their respective
authorized signatories as of the date first indicated above.
SG BLOCKS, INC.
By: __________________________________________
Name:
Title:
With a copy to (which shall not constitute notice):
Address for Notice:
3 Columbus Circle, 16th Floor
New York, NY 10019
Fax:
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOR PURCHASER FOLLOWS]
40
[PURCHASER SIGNATURE PAGES TO SGBX SECURITIES PURCHASE AGREEMENT]
IN WITNESS WHEREOF, the undersigned have caused this Securities Purchase Agreement to be duly executed by their respective
authorized signatories as of the date first indicated above.
Name of Purchaser: ________________________________________________________
Signature of Authorized Signatory of Purchaser: __________________________________
Name of Authorized Signatory: ____________________________________________________
Title of Authorized Signatory: _____________________________________________________
Email Address of Authorized Signatory: _____________________________________________
Facsimile Number of Authorized Signatory: __________________________________________
Address for Notice to Purchaser:
Address for Delivery of Securities to Purchaser (if not same as address for notice):
Subscription Amount: _____________
Principal Amount (1.14 x Subscription Amount): _____________
Warrant Shares: _________________
EIN Number: _______________________
[SIGNATURE PAGES CONTINUE]
41
SUBSIDIARY GUARANTEE
Exhibit 10.18
SUBSIDIARY GUARANTEE, dated as of April 10, 2014 (this “Guarantee”), made by each of the signatories hereto (together with
any other entity that may become a party hereto as provided herein, the “Guarantors”), in favor of the purchasers signatory (together with their
permitted assigns, the “Purchasers”) to that certain Securities Purchase Agreement, dated as of the date hereof, between SG Blocks, Inc., a
Delaware corporation (the “Company”) and the Purchasers.
W I T N E S S E T H:
WHEREAS, pursuant to that certain Securities Purchase Agreement, dated as of the date hereof, by and between the Company and
the Purchasers (the “Purchase Agreement”), the Company has agreed to sell and issue to the Purchasers, and the Purchasers have agreed to
purchase from the Company the Debentures, subject to the terms and conditions set forth therein; and
WHEREAS, each Guarantor will directly benefit from the extension of credit to the Company represented by the issuance of the Debentures;
and
NOW, THEREFORE, in consideration of the premises and to induce the Purchasers to enter into the Purchase Agreement and to carry out the
transactions contemplated thereby, each Guarantor hereby agrees with the Purchasers as follows:
1
. Definitions. Unless otherwise defined herein, terms defined in the Purchase Agreement and used herein shall have the
meanings given to them in the Purchase Agreement. The words “hereof,” “herein,” “hereto” and “hereunder” and words of similar import
when used in this Guarantee shall refer to this Guarantee as a whole and not to any particular provision of this Guarantee, and Section and
Schedule references are to this Guarantee unless otherwise specified. The meanings given to terms defined herein shall be equally applicable
to both the singular and plural forms of such terms. The following terms shall have the following meanings:
“Guarantee” means this Subsidiary Guarantee, as the same may be amended, supplemented or otherwise modified from time
to time.
“Obligations” means, in addition to all other costs and expenses of collection incurred by Purchasers in enforcing any of such
Obligations and/or this Guarantee, all of the liabilities and obligations (primary, secondary, direct, contingent, sole, joint or several)
due or to become due, or that are now or may be hereafter contracted or acquired, or owing to, of the Company or any Guarantor to the
Purchasers, including, without limitation, all obligations under this Guarantee, the Debentures and any other instruments, agreements
or other documents executed and/or delivered in connection herewith or therewith, in each case, whether now or hereafter existing,
voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others,
and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such
obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from
any of the Purchasers as a preference, fraudulent transfer or otherwise as such obligations may be amended, supplemented, converted,
extended or modified from time to time. Without limiting the generality of the foregoing, the term “Obligations” shall include,
without limitation: (i) principal of, and interest on the Debentures and the loans extended pursuant thereto; (ii) any and all other fees,
indemnities, costs, obligations and liabilities of the Company or any Guarantor from time to time under or in connection with this
Guarantee, the Debentures and any other instruments, agreements or other documents executed and/or delivered in connection
herewith or therewith; and (iii) all amounts (including but not limited to post-petition interest) in respect of the foregoing that would be
payable but for the fact that the obligations to pay such amounts are unenforceable or not allowable due to the existence of a
bankruptcy, reorganization or similar proceeding involving the Company or any Guarantor.
2. Guarantee.
(a) Guarantee.
(i) The Guarantors hereby, jointly and severally, unconditionally and irrevocably, guarantee to the Purchasers
and their respective successors, indorsees, transferees and assigns, the prompt and complete payment and performance when
due (whether at the stated maturity, by acceleration or otherwise) of the Obligations.
(ii) Anything herein or in any other Transaction Document to the contrary notwithstanding, the maximum
liability of each Guarantor hereunder and under the other Transaction Documents shall in no event exceed the amount which
can be guaranteed by such Guarantor under applicable federal and state laws, including laws relating to the insolvency of
debtors, fraudulent conveyance or transfer or laws affecting the rights of creditors generally (after giving effect to the right of
contribution established in Section 2(b)).
(iii) Each Guarantor agrees that the Obligations may at any time and from time to time exceed the amount of
the liability of such Guarantor hereunder without impairing the guarantee contained in this Section 2 or affecting the rights
and remedies of the Purchasers hereunder.
(iv) The guarantee contained in this Section 2 shall remain in full force and effect until all the Obligations and
the obligations of each Guarantor under the guarantee contained in this Section 2 shall have been satisfied by indefeasible
payment in full.
2
(v) No payment made by the Company, any of the Guarantors, any other guarantor or any other Person or
received or collected by the Purchasers from the Company, any of the Guarantors, any other guarantor or any other Person
by virtue of any action or proceeding or any set-off or appropriation or application at any time or from time to time in
reduction of or in payment of the Obligations shall be deemed to modify, reduce, release or otherwise affect the liability of
any Guarantor hereunder which shall, notwithstanding any such payment (other than any payment made by such Guarantor
in respect of the Obligations or any payment received or collected from such Guarantor in respect of the Obligations),
remain liable for the Obligations up to the maximum liability of such Guarantor hereunder until the Obligations are
indefeasibly paid in full.
(vi) Notwithstanding anything to the contrary in this Guarantee, with respect to any defaulted non-monetary
Obligations the specific performance of which by the Guarantors is not reasonably possible (e.g. the issuance of the
Company's Common Stock), the Guarantors shall only be liable for making the Purchasers whole on a monetary basis for
the Company's failure to perform such Obligations in accordance with the Transaction Documents.
(b) Right of Contribution. Subject to Section 2(c), each Guarantor hereby agrees that to the extent that a Guarantor shall
have paid more than its proportionate share of any payment made hereunder, such Guarantor shall be entitled to seek and receive
contribution from and against any other Guarantor hereunder which has not paid its proportionate share of such payment. Each
Guarantor's right of contribution shall be subject to the terms and conditions of Section 2(c). The provisions of this Section 2(b) shall
in no respect limit the obligations and liabilities of any Guarantor to the Purchasers and each Guarantor shall remain liable to the
Purchasers for the full amount guaranteed by such Guarantor hereunder.
( c ) No Subrogation. Notwithstanding any payment made by any Guarantor hereunder or any set-off or application of
funds of any Guarantor by the Purchasers, no Guarantor shall be entitled to be subrogated to any of the rights of the Purchasers against
the Company or any other Guarantor or any collateral security or guarantee or right of offset held by the Purchasers for the payment of
the Obligations, nor shall any Guarantor seek or be entitled to seek any contribution or reimbursement from the Company or any other
Guarantor in respect of payments made by such Guarantor hereunder, until all amounts owing to the Purchasers by the Company on
account of the Obligations are indefeasibly paid in full. If any amount shall be paid to any Guarantor on account of such subrogation
rights at any time when all of the Obligations shall not have been paid in full, such amount shall be held by such Guarantor in trust for
the Purchasers, segregated from other funds of such Guarantor, and shall, forthwith upon receipt by such Guarantor, be turned over to
the Purchasers in the exact form received by such Guarantor (duly indorsed by such Guarantor to the Purchasers, if required), to be
applied against the Obligations, whether matured or unmatured, in such order as the Purchasers may determine.
3
(
d
) Amendments, Etc. With Respect to the Obligations. Each Guarantor shall remain obligated hereunder
notwithstanding that, without any reservation of rights against any Guarantor and without notice to or further assent by any Guarantor,
any demand for payment of any of the Obligations made by the Purchasers may be rescinded by the Purchasers and any of the
Obligations continued, and the Obligations, or the liability of any other Person upon or for any part thereof, or any collateral security
or guarantee therefor or right of offset with respect thereto, may, from time to time, in whole or in part, be renewed, extended,
amended, modified, accelerated, compromised, waived, surrendered or released by the Purchasers, and the Purchase Agreement and
the other Transaction Documents and any other documents executed and delivered in connection therewith may be amended, modified,
supplemented or terminated, in whole or in part, as the Purchasers may deem advisable from time to time, and any collateral security,
guarantee or right of offset at any time held by the Purchasers for the payment of the Obligations may be sold, exchanged, waived,
surrendered or released. The Purchasers shall have no obligation to protect, secure, perfect or insure any Lien at any time held by them
as security for the Obligations or for the guarantee contained in this Section 2 or any property subject thereto.
(e) Guarantee Absolute and Unconditional. Each Guarantor waives any and all notice of the creation, renewal, extension
or accrual of any of the Obligations and notice of or proof of reliance by the Purchasers upon the guarantee contained in this Section 2
or acceptance of the guarantee contained in this Section 2; the Obligations, and any of them, shall conclusively be deemed to have
been created, contracted or incurred, or renewed, extended, amended or waived, in reliance upon the guarantee contained in this
Section 2; and all dealings between the Company and any of the Guarantors, on the one hand, and the Purchasers, on the other hand,
likewise shall be conclusively presumed to have been had or consummated in reliance upon the guarantee contained in this Section 2.
Each Guarantor waives to the extent permitted by law diligence, presentment, protest, demand for payment and notice of default or
nonpayment to or upon the Company or any of the Guarantors with respect to the Obligations. Each Guarantor understands and agrees
that the guarantee contained in this Section 2 shall be construed as a continuing, absolute and unconditional guarantee of payment and
performance without regard to (a) the validity or enforceability of the Purchase Agreement or any other Transaction Document, any of
the Obligations or any other collateral security therefor or guarantee or right of offset with respect thereto at any time or from time to
time held by the Purchasers, (b) any defense, set-off or counterclaim (other than a defense of payment or performance or fraud by
Purchasers) which may at any time be available to or be asserted by the Company or any other Person against the Purchasers, or (c)
any other circumstance whatsoever (with or without notice to or knowledge of the Company or such Guarantor) which constitutes, or
might be construed to constitute, an equitable or legal discharge of the Company for the Obligations, or of such Guarantor under the
guarantee contained in this Section 2, in bankruptcy or in any other instance. When making any demand hereunder or otherwise
pursuing its rights and remedies hereunder against any Guarantor, the Purchasers may, but shall be under no obligation to, make a
similar demand on or otherwise pursue such rights and remedies as they may have against the Company, any other Guarantor or any
other Person or against any collateral security or guarantee for the Obligations or any right of offset with respect thereto, and any
failure by the Purchasers to make any such demand, to pursue such other rights or remedies or to collect any payments from the
Company, any other Guarantor or any other Person or to realize upon any such collateral security or guarantee or to exercise any such
right of offset, or any release of the Company, any other Guarantor or any other Person or any such collateral security, guarantee or
right of offset, shall not relieve any Guarantor of any obligation or liability hereunder, and shall not impair or affect the rights and
remedies, whether express, implied or available as a matter of law, of the Purchasers against any Guarantor. For the purposes hereof,
“demand” shall include the commencement and continuance of any legal proceedings.
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(f) Reinstatement. The guarantee contained in this Section 2 shall continue to be effective, or be reinstated, as the case
may be, if at any time payment, or any part thereof, of any of the Obligations is rescinded or must otherwise be restored or returned by
the Purchasers upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of the Company or any Guarantor, or upon
or as a result of the appointment of a receiver, intervenor or conservator of, or trustee or similar officer for, the Company or any
Guarantor or any substantial part of its property, or otherwise, all as though such payments had not been made.
(g) Payments. Each Guarantor hereby guarantees that payments hereunder will be paid to the Purchasers without set-off
or counterclaim in U.S. dollars at the address set forth or referred to in the Signature Pages to the Purchase Agreement.
3 . Representations and Warranties. Each Guarantor hereby makes the following representations and warranties to Purchasers
as of the date hereof:
( a ) Organization and Qualification. The Guarantor is a corporation, duly incorporated, validly existing and in good
standing under the laws of the applicable jurisdiction set forth on Schedule 1, with the requisite corporate power and authority to own
and use its properties and assets and to carry on its business as currently conducted. The Guarantor has no subsidiaries other than those
identified as such on the Disclosure Schedules to the Purchase Agreement. The Guarantor is duly qualified to do business and is in
good standing as a foreign corporation in each jurisdiction in which the nature of the business conducted or property owned by it
makes such qualification necessary, except where the failure to be so qualified or in good standing, as the case may be, could not,
individually or in the aggregate, (x) adversely affect the legality, validity or enforceability of any of this Guaranty in any material
respect, (y) have a material adverse effect on the results of operations, assets, prospects, or financial condition of the Guarantor or (z)
adversely impair in any material respect the Guarantor's ability to perform fully on a timely basis its obligations under this Guaranty (a
“Material Adverse Effect”).
5
( b ) Authorization; Enforcement. The Guarantor has the requisite corporate power and authority to enter into and to
consummate the transactions contemplated by this Guaranty, and otherwise to carry out its obligations hereunder. The execution and
delivery of this Guaranty by the Guarantor and the consummation by it of the transactions contemplated hereby have been duly
authorized by all requisite corporate action on the part of the Guarantor. This Guaranty has been duly executed and delivered by the
Guarantor and constitutes the valid and binding obligation of the Guarantor enforceable against the Guarantor in accordance with its
terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or
similar laws relating to, or affecting generally the enforcement of, creditors' rights and remedies or by other equitable principles of
general application.
(c) No Conflicts. The execution, delivery and performance of this Guaranty by the Guarantor and the consummation by
the Guarantor of the transactions contemplated thereby do not and will not (i) conflict with or violate any provision of its Certificate of
Incorporation or By-laws or (ii) conflict with, constitute a default (or an event which with notice or lapse of time or both would become
a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or
instrument to which the Guarantor is a party, or (iii) result in a violation of any law, rule, regulation, order, judgment, injunction,
decree or other restriction of any court or governmental authority to which the Guarantor is subject (including Federal and State
securities laws and regulations), or by which any material property or asset of the Guarantor is bound or affected, except in the case of
each of clauses (ii) and (iii), such conflicts, defaults, terminations, amendments, accelerations, cancellations and violations as could
not, individually or in the aggregate, have or result in a Material Adverse Effect. The business of the Guarantor is not being conducted
in violation of any law, ordinance or regulation of any governmental authority, except for violations which, individually or in the
aggregate, do not have a Material Adverse Effect.
6
( d ) Consents and Approvals. The Guarantor is not required to obtain any consent, waiver, authorization or order of, or
make any filing or registration with, any court or other federal, state, local, foreign or other governmental authority or other person in
connection with the execution, delivery and performance by the Guarantor of this Guaranty.
( e ) Purchase Agreement. The representations and warranties of the Company set forth in the Purchase Agreement as
they relate to such Guarantor, each of which is hereby incorporated herein by reference, are true and correct as of each time such
representations are deemed to be made pursuant to such Purchase Agreement, and the Purchasers shall be entitled to rely on each of
them as if they were fully set forth herein, provided that each reference in each such representation and warranty to the Company's
knowledge shall, for the purposes of this Section 3, be deemed to be a reference to such Guarantor's knowledge.
(f) Foreign Law. Each Guarantor has consulted with appropriate foreign legal counsel with respect to any of the above
representations for which non-U.S. law is applicable. Such foreign counsel have advised each applicable Guarantor that such counsel
knows of no reason why any of the above representations would not be true and accurate. Such foreign counsel were provided with
copies of this Subsidiary Guarantee and the Transaction Documents prior to rendering their advice.
4. Covenants.
(a) Each Guarantor covenants and agrees with the Purchasers that, from and after the date of this Guarantee until the
Obligations shall have been indefeasibly paid in full, such Guarantor shall take, and/or shall refrain from taking, as the case may be,
each commercially reasonable action that is necessary to be taken or not taken, as the case may be, so that no Event of Default (as
defined in the Debentures) is caused by the failure to take such action or to refrain from taking such action by such Guarantor.
(b) So long as any of the Obligations are outstanding, unless Purchasers holding at least 50.1% of the aggregate
principal amount of the then outstanding Debentures shall otherwise consent in writing, each Guarantor will not directly or indirectly
on or after the date of this Guarantee:
i. except for the Permitted Indebtedness (as defined in the Debenture) enter into, create, incur, assume or
suffer to exist any indebtedness for borrowed money of any kind, including but not limited to, a guarantee, on or with respect
to any of its property or assets now owned or hereafter acquired or any interest therein or any income or profits therefrom;
7
ii. except for the Permitted Liens (as defined in the Debenture) enter into, create, incur, assume or suffer to
exist any liens of any kind, on or with respect to any of its property or assets now owned or hereafter acquired or any interest
therein or any income or profits therefrom;
iii. amend its certificate of incorporation, bylaws or other charter documents so as to adversely affect any
rights of any Purchaser;
iv. repay, repurchase or offer to repay, repurchase or otherwise acquire more than a de minimis number of
shares of its securities or debt obligations;
v. pay cash dividends on any equity securities of the Company;
vi. enter into any transaction with any Affiliate of the Guarantor which would be required to be disclosed in
any public filing of the Company with the Commission, unless such transaction is made on an arm’s-length basis and
expressly approved by a majority of the disinterested directors of the Company (even if less than a quorum otherwise required
for board approval); or
vii. enter into any agreement with respect to any of the foregoing.
5. Miscellaneous.
(a) Amendments in Writing. None of the terms or provisions of this Guarantee may be waived, amended, supplemented
or otherwise modified except in writing by the Purchasers.
( b ) Notices. All notices, requests and demands to or upon the Purchasers or any Guarantor hereunder shall be effected
in the manner provided for in the Purchase Agreement, provided that any such notice, request or demand to or upon any Guarantor
shall be addressed to such Guarantor at its notice address set forth on Schedule 5(b).
( c ) No Waiver By Course Of Conduct; Cumulative Remedies . The Purchasers shall not by any act (except by a written
instrument pursuant to Section 5(a)), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy
hereunder or to have acquiesced in any default under the Transaction Documents or Event of Default. No failure to exercise, nor any
delay in exercising, on the part of the Purchasers, any right, power or privilege hereunder shall operate as a waiver thereof. No single
or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any
other right, power or privilege. A waiver by the Purchasers of any right or remedy hereunder on any one occasion shall not be
construed as a bar to any right or remedy which the Purchasers would otherwise have on any future occasion. The rights and remedies
herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any other rights or remedies provided
by law.
8
(d) Enforcement Expenses; Indemnification.
(i) Each Guarantor agrees to pay, or reimburse the Purchasers for, all its costs and expenses incurred in
collecting against such Guarantor under the guarantee contained in Section 2 or otherwise enforcing or preserving any rights
under this Guarantee and the other Transaction Documents to which such Guarantor is a party, including, without limitation,
the reasonable fees and disbursements of counsel to the Purchasers.
(ii) Each Guarantor agrees to pay, and to save the Purchasers harmless from, any and all liabilities with respect
to, or resulting from any delay in paying, any and all stamp, excise, sales or other taxes which may be payable or determined
to be payable in connection with any of the transactions contemplated by this Guarantee.
(iii) Each Guarantor agrees to pay, and to save the Purchasers harmless from, any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature
whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Guarantee to the
extent the Company would be required to do so pursuant to the Purchase Agreement.
(iv) The agreements in this Section shall survive repayment of the Obligations and all other amounts payable
under the Purchase Agreement and the other Transaction Documents.
(e) Successor and Assigns. This Guarantee shall be binding upon the successors and assigns of each Guarantor and shall
inure to the benefit of the Purchasers and their respective successors and assigns; provided that no Guarantor may assign, transfer or
delegate any of its rights or obligations under this Guarantee without the prior written consent of the Purchasers.
( f ) Set-Off. Each Guarantor hereby irrevocably authorizes the Purchasers at any time and from time to time while an
Event of Default under any of the Transaction Documents shall have occurred and be continuing, without notice to such Guarantor or
any other Guarantor, any such notice being expressly waived by each Guarantor, to set-off and appropriate and apply any and all
deposits, credits, indebtedness or claims, in any currency, in each case whether direct or indirect, absolute or contingent, matured or
unmatured, at any time held or owing by the Purchasers to or for the credit or the account of such Guarantor, or any part thereof in
such amounts as the Purchasers may elect, against and on account of the obligations and liabilities of such Guarantor to the Purchasers
hereunder and claims of every nature and description of the Purchasers against such Guarantor, in any currency, whether arising
hereunder, under the Purchase Agreement, any other Transaction Document or otherwise, as the Purchasers may elect, whether or not
the Purchasers have made any demand for payment and although such obligations, liabilities and claims may be contingent or
unmatured. The Purchasers shall notify such Guarantor promptly of any such set-off and the application made by the Purchasers of the
proceeds thereof, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of
the Purchasers under this Section are in addition to other rights and remedies (including, without limitation, other rights of set-off)
which the Purchasers may have.
9
( g ) Counterparts. This Guarantee may be executed by one or more of the parties to this Guarantee on any number of
separate counterparts (including by telecopy), and all of said counterparts taken together shall be deemed to constitute one and the same
instrument.
( h ) Severability. Any provision of this Guarantee which is prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions
hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in
any other jurisdiction.
(i) Section Headings. The Section headings used in this Guarantee are for convenience of reference only and are not to
affect the construction hereof or be taken into consideration in the interpretation hereof.
(j) Integration. This Guarantee and the other Transaction Documents represent the agreement of the Guarantors and the
Purchasers with respect to the subject matter hereof and thereof, and there are no promises, undertakings, representations or warranties
by the Purchasers relative to subject matter hereof and thereof not expressly set forth or referred to herein or in the other Transaction
Documents.
( k ) Governing Laws. All questions concerning the construction, validity, enforcement and interpretation of this
Guarantee shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without
regard to the principles of conflicts of law thereof. Each of the Company and the Guarantors agree that all proceedings concerning the
interpretations, enforcement and defense of the transactions contemplated by this Guarantee (whether brought against a party hereto or
its respective affiliates, directors, officers, shareholders, partners, members, employees or agents) shall be commenced exclusively in
the state and federal courts sitting in the City of New York, Borough of Manhattan. Each of the Company and the Guarantors 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 proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such proceeding is improper. Each party hereto hereby irrevocably waives personal service of
process and consents to process being served in any such proceeding by mailing a copy thereof via registered or certified mail or
overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Guarantee and agrees that
such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to
limit in any way any right to serve process in any manner permitted by law. Each party hereto hereby irrevocably waives, to the fullest
extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Guarantee
or the transactions contemplated hereby.
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(l) Acknowledgements. Each Guarantor hereby acknowledges that:
(i) it has been advised by counsel in the negotiation, execution and delivery of this Guarantee and the other
Transaction Documents to which it is a party;
(ii) the Purchasers have no fiduciary relationship with or duty to any Guarantor arising out of or in connection
with this Guarantee or any of the other Transaction Documents, and the relationship between the Guarantors, on the one hand,
and the Purchasers, on the other hand, in connection herewith or therewith is solely that of debtor and creditor; and
(iii) no joint venture is created hereby or by the other Transaction Documents or otherwise exists by virtue of
the transactions contemplated hereby among the Guarantors and the Purchasers.
( m ) Additional Guarantors. The Company shall cause each of its subsidiaries formed or acquired on or subsequent to
the date hereof that is organized under the laws of the United Sates or any state thereof to become a Guarantor for all purposes of this
Guarantee by executing and delivering an Assumption Agreement in the form of Annex 1 hereto.
(
n
) Release of Guarantors. Each Guarantor will be released from all liability hereunder concurrently with the
indefeasible repayment in full of all amounts owed under the Purchase Agreement, the Debentures and the other Transaction
Documents.
11
(o) Seniority. The Obligations of each of the Guarantors hereunder rank senior in priority to any other Indebtedness (as
defined in the Purchase Agreement) of such Guarantor.
(
p
) WAIVER OF JURY TRIAL . EACH GUARANTOR AND, BY ACCEPTANCE OF THE BENEFITS
HEREOF, THE PURCHASERS, HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN
ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS GUARANTEE AND FOR ANY COUNTERCLAIM
THEREIN.
*********************
(Signature Pages Follow)
12
IN WITNESS WHEREOF, each of the undersigned has caused this Guarantee to be duly executed and delivered as of the date first
above written.
SG Building Blocks, Inc.
By:
Name: Paul M. Galvin
Title: Chief Executive Officer
[ADD NEW SUBS, IF ANY]
13
The following are the names, notice addresses and jurisdiction of organization of each Guarantor.
SCHEDULE 1
GUARANTORS
SG Building Blocks, Inc.
14
JURISDICTION COMPANY
OWNED BY
INCORPORATION PERCENTAGE
OF
Delaware
100%
Annex 1 to
SUBSIDIARY GUARANTEE
ASSUMPTION AGREEMENT, dated as of ____ __, ______ made by ______________________________, a ______________ corporation
(the “Additional Guarantor”), in favor of the Purchasers pursuant to the Purchase Agreement referred to below. All capitalized terms not
defined herein shall have the meaning ascribed to them in such Purchase Agreement.
W I T N E S S E T H :
WHEREAS, SG Blocks, Inc., a Delaware corporation (the “Company”) and the Purchasers have entered into a Securities Purchase
Agreement, dated as of _______________, 2014 (as amended, supplemented or otherwise modified from time to time, the Purchase
Agreement”);
WHEREAS, in connection with the Purchase Agreement, the Subsidiaries of the Company (other than the Additional Guarantor) have
entered into the Subsidiary Guarantee, dated as of _____________, 2014 (as amended, supplemented or otherwise modified from time to time,
the “Guarantee”) in favor of the Purchasers;
WHEREAS, the Purchase Agreement requires the Additional Guarantor to become a party to the Guarantee; and
WHEREAS, the Additional Guarantor has agreed to execute and deliver this Assumption Agreement in order to become a party to the
Guarantee;
NOW, THEREFORE, IT IS AGREED:
1. Guarantee. By executing and delivering this Assumption Agreement, the Additional Guarantor, as provided in Section 5(m)
of the Guarantee, hereby becomes a party to the Guarantee as a Guarantor thereunder with the same force and effect as if originally named
therein as a Guarantor and, without limiting the generality of the foregoing, hereby expressly assumes all obligations and liabilities of a
Guarantor thereunder. The information set forth in Annex 1 hereto is hereby added to the information set forth in Schedule 1 to the Guarantee.
The Additional Guarantor hereby represents and warrants that each of the representations and warranties contained in Section 3 of the
Guarantee is true and correct on and as the date hereof as to such Additional Guarantor (after giving effect to this Assumption Agreement) as if
made on and as of such date.
2
. Governing Law. THIS ASSUMPTION AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
15
IN WITNESS WHEREOF, the undersigned has caused this Assumption Agreement to be duly executed and delivered as of the date
first above written.
[ADDITIONALGUARANTOR]
By:
Name:
Title:
16
SECURITY AGREEMENT
Exhibit 10.19
This SECURITY AGREEMENT, dated as of April 10, 2014 (this “ Agreement”), is among SG Blocks, Inc., a Delaware corporation
(the “Company”), all of the Subsidiaries of the Company (such subsidiaries, the “ Guarantors” and together with the Company, the “Debtors”)
and the holders of the Company’s 8% Senior Secured Original Issue Discount Convertible Debentures due April 1, 2016, in the original
aggregate principal amount of $3,995,700 issued pursuant to (i) that certain securities purchase agreement (the “Purchase Agreement”) dated
on or about the date hereof among the Company and certain Secured Parties and (ii) that certain exchange agreement (the “Exchange
Agreement”) dated on or about the date hereof among the Company and certain Secured Parties (collectively, the “ Debentures”) signatory
hereto, their endorsees, transferees and assigns (collectively, the “Secured Parties”).
W I T N E S S E T H:
WHEREAS, pursuant to the Purchase Agreement and Exchange Agreement, the Secured Parties have severally agreed to extend the
loans to the Company evidenced by the Debentures;
WHEREAS, pursuant to a certain Subsidiary Guarantee, dated as of the date hereof (the “Guarantee”), the Guarantors have jointly and
severally agreed to guarantee and act as surety for payment of such Debentures; and
WHEREAS, in order to induce the Secured Parties to extend the loans evidenced by the Debentures, each Debtor has agreed to execute
and deliver to the Secured Parties this Agreement and to grant the Secured Parties, pari passu with each other Secured Party and through the
Agent (as defined in Section 18 hereof), a security interest in certain property of such Debtor to secure the prompt payment, performance and
discharge in full of all of the Company’s obligations under the Debentures and the Guarantors’ obligations under the Guarantee.
NOW, THEREFORE, in consideration of the agreements herein contained and for other good and valuable consideration, the receipt
and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows:
1. Certain Definitions. As used in this Agreement, the following terms shall have the meanings set forth in this Section 1. Terms
used but not otherwise defined in this Agreement that are defined in Article 9 of the UCC (such as “account”, “chattel paper”, “commercial
tort claim”, “deposit account”, “document”, “equipment”, “fixtures”, “general intangibles”, “goods”, “instruments”, “inventory”, “investment
property”, “letter-of-credit rights”, “proceeds” and “supporting obligations”) shall have the respective meanings given such terms in Article 9
of the UCC.
(a) “Collateral” means the collateral in which the Secured Parties are granted a security interest by this Agreement and which
shall include the following personal property of the Debtors, whether presently owned or existing or hereafter acquired or coming into
existence, wherever situated, and all additions and accessions thereto and all substitutions and replacements thereof, and all proceeds,
products and accounts thereof, including, without limitation, all proceeds from the sale or transfer of the Collateral and of insurance
covering the same and of any tort claims in connection therewith, and all dividends, interest, cash, notes, securities, equity interest or
other property at any time and from time to time acquired, receivable or otherwise distributed in respect of, or in exchange for, any or all
of the Pledged Securities (as defined below):
(i) All goods, including, without limitation, (A) all machinery, equipment, computers, motor vehicles, trucks, tanks,
boats, ships, appliances, furniture, special and general tools, fixtures, test and quality control devices and other equipment of every
kind and nature and wherever situated, together with all documents of title and documents representing the same, all additions and
accessions thereto, replacements therefor, all parts therefor, and all substitutes for any of the foregoing and all other items used and
useful in connection with any Debtor’s businesses and all improvements thereto; and (B) all inventory;
(ii) All contract rights and other general intangibles, including, without limitation, all partnership interests,
membership interests, stock or other securities (other than any non-US organized subsidiaries), rights under any of the
Organizational Documents, agreements related to the Pledged Securities, licenses, distribution and other agreements, computer
software (whether “off-the-shelf”, licensed from any third party or developed by any Debtor), computer software development
rights, leases, franchises, customer lists, quality control procedures, grants and rights, goodwill, trademarks, service marks, trade
styles, trade names, patents, patent applications, copyrights, and income tax refunds;
(iii) All accounts, together with all instruments, all documents of title representing any of the foregoing, all rights in any
merchandising, goods, equipment, motor vehicles and trucks which any of the same may represent, and all right, title, security and
guaranties with respect to each account, including any right of stoppage in transit;
(iv) All documents, letter-of-credit rights, instruments and chattel paper;
(v) All commercial tort claims;
(vi) All deposit accounts and all cash (whether or not deposited in such deposit accounts);
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(vii) All investment property;
(viii) All supporting obligations; and
(ix) All files, records, books of account, business papers, and computer programs; and
(x) the products and proceeds of all of the foregoing Collateral set forth in clauses (i)-(ix) above.
Without limiting the generality of the foregoing, the “Collateral” shall include all investment property and general
intangibles respecting ownership and/or other equity interests in each Guarantor, including, without limitation, the shares of
capital stock and the other equity interests listed on Schedule H hereto (as the same may be modified from time to time pursuant to
the terms hereof), and any other shares of capital stock and/or other equity interests of any other direct or indirect subsidiary of
any Debtor obtained in the future, and, in each case, all certificates representing such shares and/or equity interests and, in each
case, all rights, options, warrants, stock, other securities and/or equity interests that may hereafter be received, receivable or
distributed in respect of, or exchanged for, any of the foregoing and all rights arising under or in connection with the Pledged
Securities, including, but not limited to, all dividends, interest and cash; provided, however, the “Collateral” shall not include the
Company’s ownership in any non-US organized subsidiary..
Notwithstanding the foregoing, nothing herein shall be deemed to constitute an assignment of any asset which, in the event
of an assignment, becomes void by operation of applicable law or the assignment of which is otherwise prohibited by applicable
law (in each case to the extent that such applicable law is not overridden by Sections 9-406, 9-407 and/or 9-408 of the UCC or
other similar applicable law); provided, however, that to the extent permitted by applicable law, this Agreement shall create a valid
security interest in such asset and, to the extent permitted by applicable law, this Agreement shall create a valid security interest in
the proceeds of such asset.
(b) “Intellectual Property” means the collective reference to all rights, priorities and privileges relating to intellectual property,
whether arising under United States, multinational or foreign laws or otherwise, including, without limitation, (i) all copyrights arising
under the laws of the United States, any other country or any political subdivision thereof, whether registered or unregistered and
whether published or unpublished, all registrations and recordings thereof, and all applications in connection therewith, including,
without limitation, all registrations, recordings and applications in the United States Copyright Office, (ii) all letters patent of the United
States, any other country or any political subdivision thereof, all reissues and extensions thereof, and all applications for letters patent of
the United States or any other country and all divisions, continuations and continuations-in-part thereof, (iii) all trademarks, trade names,
corporate names, company names, business names, fictitious business names, trade dress, service marks, logos, domain names and other
source or business identifiers, and all goodwill associated therewith, now existing or hereafter adopted or acquired, all registrations and
recordings thereof, and all applications in connection therewith, whether in the United States Patent and Trademark Office or in any
similar office or agency of the United States, any State thereof or any other country or any political subdivision thereof, or otherwise, and
all common law rights related thereto, (iv) all trade secrets arising under the laws of the United States, any other country or any political
subdivision thereof, (v) all rights to obtain any reissues, renewals or extensions of the foregoing, (vi) all licenses for any of the foregoing,
and (vii) all causes of action for infringement of the foregoing.
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(c) “Majority in Interest” means, at any time of determination, 50.1% in interest (based on then-outstanding principal amounts
of Debentures at the time of such determination) of the Secured Parties.
(d) “Necessary Endorsement” means undated stock powers endorsed in blank or other proper instruments of assignment duly
executed and such other instruments or documents as the Agent (as that term is defined below) may reasonably request.
(e) “Obligations” means all of the liabilities and obligations (primary, secondary, direct, contingent, sole, joint or several) due
or to become due, or that are now or may be hereafter contracted or acquired, or owing to, of any Debtor to the Secured Parties,
including, without limitation, all obligations under this Agreement, the Debentures, the Guarantee and any other instruments, agreements
or other documents executed and/or delivered in connection herewith or therewith, in each case, whether now or hereafter existing,
voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others,
and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such
obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from any
of the Secured Parties as a preference, fraudulent transfer or otherwise as such obligations may be amended, supplemented, converted,
extended or modified from time to time. Without limiting the generality of the foregoing, the term “Obligations” shall include, without
limitation: (i) principal of, and interest on the Debentures and the loans extended pursuant thereto; (ii) any and all other fees, indemnities,
costs, obligations and liabilities of the Debtors from time to time under or in connection with this Agreement, the Debentures, the
Guarantee and any other instruments, agreements or other documents executed and/or delivered in connection herewith or therewith; and
(iii) all amounts (including but not limited to post-petition interest) in respect of the foregoing that would be payable but for the fact that
the obligations to pay such amounts are unenforceable or not allowable due to the existence of a bankruptcy, reorganization or similar
proceeding involving any Debtor.
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(f) “Organizational Documents” means with respect to any Debtor, the documents by which such Debtor was organized (such
as a certificate of incorporation, certificate of limited partnership or articles of organization, and including, without limitation, any
certificates of designation for preferred stock or other forms of preferred equity) and which relate to the internal governance of such
Debtor (such as bylaws, a partnership agreement or an operating, limited liability or members agreement).
(g) “Pledged Interests” shall have the meaning ascribed to such term in Section 4(j).
(h) “Pledged Securities” shall have the meaning ascribed to such term in Section 4(i).
(i) “UCC” means the Uniform Commercial Code of the State of New York and or any other applicable law of any state or
states which has jurisdiction with respect to all, or any portion of, the Collateral or this Agreement, from time to time. It is the intent of
the parties that defined terms in the UCC should be construed in their broadest sense so that the term “Collateral” will be construed in its
broadest sense. Accordingly if there are, from time to time, changes to defined terms in the UCC that broaden the definitions, they are
incorporated herein and if existing definitions in the UCC are broader than the amended definitions, the existing ones shall be
controlling.
2 . Grant of Security Interest in Collateral. As an inducement for the Secured Parties to extend the loans as evidenced by the
Debentures and to secure the complete and timely payment, performance and discharge in full, as the case may be, of all of the Obligations,
each Debtor hereby unconditionally and irrevocably pledges, grants and hypothecates to the Secured Parties a security interest in and to, a lien
upon and a right of set-off against all of their respective right, title and interest of whatsoever kind and nature in and to, the Collateral (a
“Security Interest” and, collectively, the “Security Interests”).
3 . Delivery of Certain Collateral. Contemporaneously or prior to the execution of this Agreement, each Debtor shall deliver or
cause to be delivered to the Agent (a) any and all certificates and other instruments representing or evidencing the Pledged Securities, and (b)
any and all certificates and other instruments or documents representing any of the other Collateral, in each case, together with all Necessary
Endorsements. The Debtors are, contemporaneously with the execution hereof, delivering to Agent, or have previously delivered to Agent, a
true and correct copy of each Organizational Document governing any of the Pledged Securities.
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4
. Representations, Warranties, Covenants and Agreements of the Debtors . Except as set forth under the corresponding
section of the disclosure schedules delivered to the Secured Parties concurrently herewith (the “Disclosure Schedules”), which Disclosure
Schedules shall be deemed a part hereof, each Debtor represents and warrants to, and covenants and agrees with, the Secured Parties as
follows:
(a) Each Debtor has the requisite corporate, partnership, limited liability company or other power and authority to enter into this
Agreement and otherwise to carry out its obligations hereunder. The execution, delivery and performance by each Debtor of this
Agreement and the filings contemplated therein have been duly authorized by all necessary action on the part of such Debtor and no
further action is required by such Debtor. This Agreement has been duly executed by each Debtor. This Agreement constitutes the legal,
valid and binding obligation of each Debtor, enforceable against each Debtor in accordance with its terms except as such enforceability
may be limited by applicable bankruptcy, insolvency, reorganization and similar laws of general application relating to or affecting the
rights and remedies of creditors and by general principles of equity.
(b) The Debtors have no place of business or offices where their respective books of account and records are kept (other than
temporarily at the offices of its attorneys or accountants) or places where Collateral is stored or located, except as set forth on Schedule A
attached hereto. Except as specifically set forth on Schedule A , each Debtor is the record owner of the real property where such
Collateral is located, and there exist no mortgages or other liens on any such real property except for Permitted Liens (as defined in the
Debentures). Except as disclosed on Schedule A, none of such Collateral is in the possession of any consignee, bailee, warehouseman,
agent or processor.
(c) Except for Permitted Liens (as defined in the Debentures) and except as set forth on Schedule B attached hereto, the
Debtors are the sole owner of the Collateral (except for non-exclusive licenses granted by any Debtor in the ordinary course of business),
free and clear of any liens, security interests, encumbrances, rights or claims, and are fully authorized to grant the Security
Interests. Except as set forth on Schedule C attached hereto, there is not on file in any governmental or regulatory authority, agency or
recording office an effective financing statement, security agreement, license or transfer or any notice of any of the foregoing (other than
those that will be filed in favor of the Secured Parties pursuant to this Agreement) covering or affecting any of the Collateral. Except as
set forth on Schedule C attached hereto and except pursuant to this Agreement, as long as this Agreement shall be in effect, the Debtors
shall not execute and shall not knowingly permit to be on file in any such office or agency any other financing statement or other
document or instrument (except to the extent filed or recorded in favor of the Secured Parties pursuant to the terms of this Agreement).
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(d) No written claim has been received that any Collateral or any Debtor's use of any Collateral violates the rights of any third
party. There has been no adverse decision to any Debtor's claim of ownership rights in or exclusive rights to use the Collateral in any
jurisdiction or to any Debtor's right to keep and maintain such Collateral in full force and effect, and there is no proceeding involving said
rights pending or, to the best knowledge of any Debtor, threatened before any court, judicial body, administrative or regulatory agency,
arbitrator or other governmental authority.
(e) Each Debtor shall at all times maintain its books of account and records relating to the Collateral at its principal place of
business and its Collateral at the locations set forth on Schedule A attached hereto and may not relocate such books of account and
records or tangible Collateral unless it delivers to the Secured Parties at least 30 days prior to such relocation (i) written notice of such
relocation and the new location thereof (which must be within the United States) and (ii) evidence that appropriate financing statements
under the UCC and other necessary documents have been filed and recorded and other steps have been taken to perfect the Security
Interests to create in favor of the Secured Parties a valid, perfected and continuing perfected first priority lien in the Collateral.
(f) This Agreement creates in favor of the Secured Parties a valid security interest in the Collateral, subject only to Permitted
Liens (as defined in the Debentures) securing the payment and performance of the Obligations. Upon making the filings described in the
immediately following paragraph, all security interests created hereunder in any Collateral which may be perfected by filing Uniform
Commercial Code financing statements shall have been duly perfected. Except for the filing of the Uniform Commercial Code financing
statements referred to in the immediately following paragraph, the recordation of the Intellectual Property Security Agreement (as
defined in Section 4(p) hereof) with respect to copyrights and copyright applications in the United States Copyright Office referred to in
paragraph (m), the execution and delivery of deposit account control agreements satisfying the requirements of Section 9-104(a)(2) of
the UCC with respect to each deposit account of the Debtors, and the delivery of the certificates and other instruments provided in
Section 3, no action is necessary to create, perfect or protect the security interests created hereunder. Without limiting the generality of
the foregoing, except for the filing of said financing statements, the recordation of said Intellectual Property Security Agreement, and the
execution and delivery of said deposit account control agreements, no consent of any third parties and no authorization, approval or other
action by, and no notice to or filing with, any governmental authority or regulatory body is required for (i) the execution, delivery and
performance of this Agreement, (ii) the creation or perfection of the Security Interests created hereunder in the Collateral or (iii) the
enforcement of the rights of the Agent and the Secured Parties hereunder.
(g) Each Debtor hereby authorizes the Agent to file one or more financing statements under the UCC, with respect to the
Security Interests, with the proper filing and recording agencies in any jurisdiction deemed proper by it.
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(h) The execution, delivery and performance of this Agreement by the Debtors does not (i) violate any of the provisions of any
Organizational Documents of any Debtor or any judgment, decree, order or award of any court, governmental body or arbitrator or any
applicable law, rule or regulation applicable to any Debtor or (ii) conflict with, or constitute a default (or an event that with notice or
lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation
(with or without notice, lapse of time or both) of, any agreement, credit facility, debt or other instrument (evidencing any Debtor's debt or
otherwise) or other understanding to which any Debtor is a party or by which any property or asset of any Debtor is bound or affected. If
any, all required consents (including, without limitation, from stockholders or creditors of any Debtor) necessary for any Debtor to enter
into and perform its obligations hereunder have been obtained.
(i) The capital stock and other equity interests listed on Schedule H hereto (the “Pledged Securities”) represent all of the
capital stock and other equity interests of the Guarantors (other than of the Company’s non-United States subsidiaries, as to which no
pledge shall be required), and represent all capital stock and other equity interests owned, directly or indirectly, by the Company. All of
the Pledged Securities are validly issued, fully paid and nonassessable, and the Company is the legal and beneficial owner of the Pledged
Securities, free and clear of any lien, security interest or other encumbrance except for the security interests created by this Agreement
and other Permitted Liens (as defined in the Debentures).
(j) The ownership and other equity interests in partnerships and limited liability companies (if any) included in the Collateral
(the “Pledged Interests”) by their express terms do not provide that they are securities governed by Article 8 of the UCC and are not held
in a securities account or by any financial intermediary.
(k) Except for Permitted Liens (as defined in the Debentures), each Debtor shall at all times maintain the liens and Security
Interests provided for hereunder as valid and perfected first priority liens and security interests in the Collateral in favor of the Secured
Parties until this Agreement and the Security Interest hereunder shall be terminated pursuant to Section 14 hereof. Each Debtor hereby
agrees to defend the same against the claims of any and all persons and entities. Each Debtor shall safeguard and protect all Collateral for
the account of the Secured Parties. At the request of the Agent, each Debtor will sign and deliver to the Agent on behalf of the Secured
Parties at any time or from time to time one or more financing statements pursuant to the UCC in form reasonably satisfactory to the
Agent and will pay the cost of filing the same in all public offices wherever filing is, or is deemed by the Agent to be, necessary or
desirable to effect the rights and obligations provided for herein. Without limiting the generality of the foregoing, each Debtor shall pay
all fees, taxes and other amounts necessary to maintain the Collateral and the Security Interests hereunder, and each Debtor shall obtain
and furnish to the Agent from time to time, upon demand, such releases and/or subordinations of claims and liens which may be required
to maintain the priority of the Security Interests hereunder.
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(l) No Debtor will transfer, pledge, hypothecate, encumber, license, sell or otherwise dispose of any of the Collateral (except
for non-exclusive licenses granted by a Debtor in its ordinary course of business and sales of inventory by a Debtor in its ordinary course
of business) without the prior written consent of a Majority in Interest.
(m) Each Debtor shall keep and preserve its equipment, inventory and other tangible Collateral in good condition, repair and
order and shall not operate or locate any such Collateral (or cause to be operated or located) in any area excluded from insurance
coverage.
(n) Each Debtor shall maintain with financially sound and reputable insurers, insurance with respect to the Collateral, including
Collateral hereafter acquired, against loss or damage of the kinds and in the amounts customarily insured against by entities of
established reputation having similar properties similarly situated and in such amounts as are customarily carried under similar
circumstances by other such entities and otherwise as is prudent for entities engaged in similar businesses but in any event sufficient to
cover the full replacement cost thereof. Each Debtor shall cause each insurance policy issued in connection herewith to provide, and the
insurer issuing such policy to certify to the Agent, that (a) the Agent will be named as lender loss payee and additional insured under each
such insurance policy; (b) if such insurance be proposed to be cancelled or materially changed for any reason whatsoever, such insurer
will promptly notify the Agent and such cancellation or change shall not be effective as to the Agent for at least thirty (30) days after
receipt by the Agent of such notice, unless the effect of such change is to extend or increase coverage under the policy; and (c) the Agent
will have the right (but no obligation) at its election to remedy any default in the payment of premiums within thirty (30) days of notice
from the insurer of such default. If no Event of Default (as defined in the Debentures) exists and if the proceeds arising out of any claim
or series of related claims do not exceed $100,000, loss payments in each instance will be applied by the applicable Debtor to the repair
and/or replacement of property with respect to which the loss was incurred to the extent reasonably feasible, and any loss payments or
the balance thereof remaining, to the extent not so applied, shall be payable to the applicable Debtor; provided, however, that payments
received by any Debtor after an Event of Default occurs and is continuing or in excess of $100,000 for any occurrence or series of related
occurrences shall be paid to the Agent on behalf of the Secured Parties and, if received by such Debtor, shall be held in trust for the
Secured Parties and immediately paid over to the Agent unless otherwise directed in writing by the Agent. Copies of such policies or
the related certificates, in each case, naming the Agent as lender loss payee and additional insured shall be delivered to the Agent at least
annually and at the time any new policy of insurance is issued.
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(o) Each Debtor shall, within ten (10) Business Days of obtaining knowledge thereof, advise the Secured Parties promptly, in
sufficient detail, of any material adverse change in the Collateral, and of the occurrence of any event which would have a material
adverse effect on the value of the Collateral or on the Secured Parties’ security interest, through the Agent, therein.
(p) Each Debtor shall promptly execute and deliver to the Agent such further deeds, mortgages, assignments, security
agreements, financing statements or other instruments, documents, certificates and assurances and take such further action as the Agent
may from time to time request and may in its sole discretion deem necessary to perfect, protect or enforce the Secured Parties’ security
interest in the Collateral including, without limitation, if applicable, the execution and delivery of a separate security agreement with
respect to each Debtor’s Intellectual Property (“ Intellectual Property Security Agreement”) in which the Secured Parties have been
granted a security interest hereunder, substantially in a form reasonably acceptable to the Agent, which Intellectual Property Security
Agreement, other than as stated therein, shall be subject to all of the terms and conditions hereof.
(q) Each Debtor shall permit the Agent and its representatives and agents to inspect the Collateral during normal business hours
and upon reasonable prior notice, and to make copies of records pertaining to the Collateral as may be reasonably requested by the Agent
from time to time.
(r) Each Debtor shall take all steps reasonably necessary to diligently pursue and seek to preserve, enforce and collect any
rights, claims, causes of action and accounts receivable in respect of the Collateral.
(s) Each Debtor shall promptly notify the Secured Parties in sufficient detail upon becoming aware of any attachment,
garnishment, execution or other legal process levied against any material Collateral and of any other information received by such Debtor
that may materially affect the value of the Collateral, the Security Interest or the rights and remedies of the Secured Parties hereunder.
(t) All information heretofore, herein or hereafter supplied to the Secured Parties by or on behalf of any Debtor with respect to
the Collateral is accurate and complete in all material respects as of the date furnished.
(u) The Debtors shall at all times preserve and keep in full force and effect their respective valid existence and good standing
and any rights and franchises material to its business.
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(v) No Debtor will change its name, type of organization, jurisdiction of organization, organizational identification number (if
it has one), legal or corporate structure, or identity, or add any new fictitious name unless it provides at least 30 days prior written notice
to the Secured Parties of such change and, at the time of such written notification, such Debtor provides any financing statements or
fixture filings necessary to perfect and continue the perfection of the Security Interests granted and evidenced by this Agreement.
(w) Except in the ordinary course of business, no Debtor may consign any of its inventory or sell any of its inventory on bill
and hold, sale or return, sale on approval, or other conditional terms of sale without the consent of the Agent which shall not be
unreasonably withheld.
(x) No Debtor may relocate its chief executive office to a new location without providing 30 days prior written notification
thereof to the Secured Parties and so long as, at the time of such written notification, such Debtor provides any financing statements or
fixture filings necessary to perfect and continue the perfection of the Security Interests granted and evidenced by this Agreement.
(y) Each Debtor was organized and remains organized solely under the laws of the state set forth next to such Debtor’s name in
Schedule D attached hereto, which Schedule D sets forth each Debtor’s organizational identification number or, if any Debtor does not
have one, states that one does not exist.
(z) (i) The actual name of each Debtor is the name set forth in Schedule D attached hereto; (ii) no Debtor has any trade names
except as set forth on Schedule E attached hereto; (iii) no Debtor has used any name other than that stated in the preamble hereto or as set
forth on Schedule E for the preceding five years; and (iv) no entity has merged into any Debtor or been acquired by any Debtor within the
past five years except as set forth on Schedule E.
(aa) At any time and from time to time that any Collateral consists of instruments, certificated securities or other items that
require or permit possession by the secured party to perfect the security interest created hereby, the applicable Debtor shall deliver such
Collateral to the Agent.
(bb) Each Debtor, in its capacity as issuer, hereby agrees to comply with any and all orders and instructions of Agent regarding
the Pledged Interests consistent with the terms of this Agreement without the further consent of any Debtor as contemplated by Section
8-106 (or any successor section) of the UCC. Further, each Debtor agrees that it shall not enter into a similar agreement (or one that
would confer “control” within the meaning of Article 8 of the UCC) with any other person or entity.
(cc) Each Debtor shall cause all tangible chattel paper constituting Collateral to be delivered to the Agent, or, if such delivery is
not possible, then to cause such tangible chattel paper to contain a legend noting that it is subject to the security interest created by this
Agreement. To the extent that any Collateral consists of electronic chattel paper, the applicable Debtor shall cause the underlying chattel
paper to be “marked” within the meaning of Section 9-105 of the UCC (or successor section thereto).
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(dd) If there is any investment property or deposit account included as Collateral that can be perfected by “control” through an
account control agreement, the applicable Debtor shall cause such an account control agreement, in form and substance in each case
satisfactory to the Agent, to be entered into and delivered to the Agent for the benefit of the Secured Parties.
(ee) To the extent that any Collateral consists of letter-of-credit rights, the applicable Debtor shall cause the issuer of each
underlying letter of credit to consent to an assignment of the proceeds thereof to the Secured Parties.
(ff) To the extent that any Collateral is in the possession of any third party, the applicable Debtor shall join with the Agent in
notifying such third party of the Secured Parties’ security interest in such Collateral and shall use its reasonable best efforts to obtain an
acknowledgement and agreement from such third party with respect to the Collateral, in form and substance reasonably satisfactory to the
Agent.
(gg) If any Debtor shall at any time hold or acquire a commercial tort claim, such Debtor shall promptly notify the Secured
Parties in a writing signed by such Debtor of the particulars thereof and grant to the Secured Parties in such writing a security interest
therein and in the proceeds thereof, all upon the terms of this Agreement, with such writing to be in form and substance satisfactory to the
Agent.
(hh) Each Debtor shall immediately provide written notice to the Secured Parties of any and all accounts which arise out of
contracts with any governmental authority and, to the extent necessary to perfect or continue the perfected status of the Security Interests
in such accounts and proceeds thereof, shall execute and deliver to the Agent an assignment of claims for such accounts and cooperate
with the Agent in taking any other steps required, in its judgment, under the Federal Assignment of Claims Act or any similar federal,
state or local statute or rule to perfect or continue the perfected status of the Security Interests in such accounts and proceeds thereof.
(ii) Each Debtor shall cause each subsidiary of such Debtor, other than its non-US organized subsidiaries, to immediately
become a party hereto (an “Additional Debtor”), by executing and delivering an Additional Debtor Joinder in substantially the form of
Annex A attached hereto and comply with the provisions hereof applicable to the Debtors. Concurrent therewith, the Additional Debtor
shall deliver replacement schedules for, or supplements to all other Schedules to (or referred to in) this Agreement, as applicable, which
replacement schedules shall supersede, or supplements shall modify, the Schedules then in effect. The Additional Debtor shall also
deliver such opinions of counsel, authorizing resolutions, good standing certificates, incumbency certificates, organizational documents,
financing statements and other information and documentation as the Agent may reasonably request. Upon delivery of the foregoing to
the Agent, the Additional Debtor shall be and become a party to this Agreement with the same rights and obligations as the Debtors, for
all purposes hereof as fully and to the same extent as if it were an original signatory hereto and shall be deemed to have made the
representations, warranties and covenants set forth herein as of the date of execution and delivery of such Additional Debtor Joinder, and
all references herein to the “Debtors” shall be deemed to include each Additional Debtor.
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(jj) Each Debtor shall vote the Pledged Securities to comply with the covenants and agreements set forth herein and in the
Debentures.
(kk) Each Debtor shall register the pledge of the applicable Pledged Securities on the books of such Debtor. Each Debtor shall
notify each issuer of Pledged Securities to register the pledge of the applicable Pledged Securities in the name of the Secured Parties on
the books of such issuer. Further, except with respect to certificated securities delivered to the Agent, the applicable Debtor shall deliver
to Agent an acknowledgement of pledge (which, where appropriate, shall comply with the requirements of the relevant UCC with respect
to perfection by registration) signed by the issuer of the applicable Pledged Securities, which acknowledgement shall confirm that: (a) it
has registered the pledge on its books and records; and (b) at any time directed by Agent during the continuation of an Event of Default,
such issuer will transfer the record ownership of such Pledged Securities into the name of any designee of Agent, will take such steps as
may be necessary to effect the transfer, and will comply with all other instructions of Agent regarding such Pledged Securities without
the further consent of the applicable Debtor.
(ll) In the event that, upon an occurrence of an Event of Default, Agent shall sell all or any of the Pledged Securities to another
party or parties (herein called the “Transferee”) or shall purchase or retain all or any of the Pledged Securities, each Debtor shall, to the
extent applicable: (i) deliver to Agent or the Transferee, as the case may be, the articles of incorporation, bylaws, minute books, stock
certificate books, corporate seals, deeds, leases, indentures, agreements, evidences of indebtedness, books of account, financial records
and all other Organizational Documents and records of the Debtors and their direct and indirect subsidiaries; (ii) use its reasonable best
efforts to obtain resignations of the persons then serving as officers and directors of the Debtors and their direct and indirect subsidiaries,
if so requested; and (iii) use its reasonable best efforts to obtain any approvals that are required by any governmental or regulatory body
in order to permit the sale of the Pledged Securities to the Transferee or the purchase or retention of the Pledged Securities by Agent and
allow the Transferee or Agent to continue the business of the Debtors and their direct and indirect subsidiaries.
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(mm) Without limiting the generality of the other obligations of the Debtors hereunder, each Debtor shall promptly (i) cause to
be registered at the United States Copyright Office all of its material copyrights, (ii) cause the security interest contemplated hereby with
respect to all Intellectual Property registered at the United States Copyright Office or United States Patent and Trademark Office to be
duly recorded at the applicable office, and (iii) give the Agent notice whenever it acquires (whether absolutely or by license) or creates
any additional material Intellectual Property, subject to Agent’s agreement to confidentially treat such information if such information
has not been publicly disclosed.
(nn) Each Debtor will from time to time, at the joint and several expense of the Debtors, promptly execute and deliver all such
further instruments and documents, and take all such further action as may be necessary or desirable, or as the Agent may reasonably
request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable the Secured Parties to
exercise and enforce their rights and remedies hereunder and with respect to any Collateral or to otherwise carry out the purposes of this
Agreement.
( o o ) Schedule F attached hereto lists all of the patents, patent applications, trademarks, trademark applications, registered
copyrights, and domain names owned by any of the Debtors as of the date hereof. Schedule F lists all material licenses in favor of any
Debtor for the use of any patents, trademarks, copyrights and domain names as of the date hereof. All material patents and trademarks of
the Debtors have been duly recorded at the United States Patent and Trademark Office and all material copyrights of the Debtors have
been duly recorded at the United States Copyright Office.
(pp) Except as set forth on Schedule G attached hereto, none of the account debtors or other persons or entities obligated on any
of the Collateral is a governmental authority covered by the Federal Assignment of Claims Act or any similar federal, state or local statute
or rule in respect of such Collateral.
(qq) Until the Obligations shall have been paid and performed in full, the Company covenants that it shall promptly direct any
direct or indirect subsidiary of the Company formed or acquired after the date hereof to enter into a Subsidiary Guarantee in favor of the
Secured Party, in the form of Exhibit E to the Purchase Agreement.
5
. Effect of Pledge on Certain Rights. If any of the Collateral subject to this Agreement consists of nonvoting equity or
ownership interests (regardless of class, designation, preference or rights) that may be converted into voting equity or ownership interests
upon the occurrence of certain events (including, without limitation, upon the transfer of all or any of the other stock or assets of the issuer), it
is agreed that the pledge of such equity or ownership interests pursuant to this Agreement or the enforcement of any of Agent’s rights
hereunder shall not be deemed to be the type of event which would trigger such conversion rights notwithstanding any provisions in the
Organizational Documents or agreements to which any Debtor is subject or to which any Debtor is party.
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6. Defaults. The following events shall be “Events of Default”:
(a) The occurrence of an Event of Default (as defined in the Debentures) under the Debentures;
(b) Any representation or warranty of any Debtor in this Agreement of the Purchase Agreement or Exchange Agreement shall
prove to have been incorrect in any material respect when made;
(c) The failure by any Debtor to observe or perform in any material respects, any of its obligations hereunder for five (5)
Business Days after delivery to such Debtor of notice of such failure by or on behalf of a Secured Party unless such default is capable of
cure but cannot be cured within such time frame and such Debtor is using reasonable best efforts to cure same in a timely fashion; or
(d) If any provision of this Agreement shall at any time for any reason be declared to be null and void, or the validity or
enforceability thereof shall be contested by any Debtor, or a proceeding shall be commenced by any Debtor, or by any governmental
authority having jurisdiction over any Debtor, seeking to establish the invalidity or unenforceability thereof, or any Debtor shall deny that
any Debtor has any liability or obligation purported to be created under this Agreement.
7. Duty To Hold In Trust.
(a) Upon the occurrence of any Event of Default and at any time during the continuance of such Event of Default, each Debtor
shall, upon receipt of any revenue, income, dividend, interest or other sums subject to the Security Interests, whether payable pursuant to
the Debentures or otherwise, or of any check, draft, note, trade acceptance or other instrument evidencing an obligation to pay any such
sum, hold the same in trust for the Secured Parties and shall forthwith endorse and transfer any such sums or instruments, or both, to the
Secured Parties, pro-rata in proportion to their respective then-currently outstanding principal amount of Debentures for application to
the satisfaction of the Obligations (and if any Debenture is not outstanding, pro-rata in proportion to the initial purchases of the
remaining Debentures).
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(b) If any Debtor shall become entitled to receive or shall receive any securities or other property (including, without limitation,
shares of Pledged Securities or instruments representing Pledged Securities acquired after the date hereof, or any options, warrants, rights
or other similar property or certificates representing a dividend, or any distribution in connection with any recapitalization,
reclassification or increase or reduction of capital, or issued in connection with any reorganization of such Debtor or any of its direct or
indirect subsidiaries) in respect of the Pledged Securities (whether as an addition to, in substitution of, or in exchange for, such Pledged
Securities or otherwise), such Debtor agrees to (i) accept the same as the agent of the Secured Parties; (ii) hold the same in trust on
behalf of and for the benefit of the Secured Parties; and (iii) to deliver any and all certificates or instruments evidencing the same to
Agent on or before the close of business on the fifth business day following the receipt thereof by such Debtor, in the exact form
received together with the Necessary Endorsements, to be held by Agent subject to the terms of this Agreement as Collateral.
8. Rights and Remedies Upon Default.
(a) Upon the occurrence of any Event of Default and at any time during the continuance of such Event of Default, the Secured
Parties, acting through the Agent, shall have the right to exercise all of the remedies conferred hereunder and under the Debentures, and
the Secured Parties shall have all the rights and remedies of a secured party under the UCC. Without limitation, the Agent, for the
benefit of the Secured Parties, shall have the following rights and powers:
(i) The Agent shall have the right to take possession of the Collateral and, for that purpose, enter, with the aid and
assistance of any person, any premises where the Collateral, or any part thereof, is or may be placed and remove the same, and
each Debtor shall assemble the Collateral and make it available to the Agent at places which the Agent shall reasonably select,
whether at such Debtor's premises or elsewhere, and make available to the Agent, without rent, all of such Debtor’s respective
premises and facilities for the purpose of the Agent taking possession of, removing or putting the Collateral in saleable or
disposable form.
(ii) Upon notice to the Debtors by Agent, all rights of each Debtor to exercise the voting and other consensual rights
which it would otherwise be entitled to exercise and all rights of each Debtor to receive the dividends and interest which it would
otherwise be authorized to receive and retain, shall cease. Upon such notice, Agent shall have the right to receive, for the benefit
of the Secured Parties, any interest, cash dividends or other payments on the Collateral and, at the option of Agent, to exercise in
such Agent’s discretion all voting rights pertaining thereto. Without limiting the generality of the foregoing, Agent shall have the
right (but not the obligation) to exercise all rights with respect to the Collateral as it were the sole and absolute owner thereof,
including, without limitation, to vote and/or to exchange, at its sole discretion, any or all of the Collateral in connection with a
merger, reorganization, consolidation, recapitalization or other readjustment concerning or involving the Collateral or any Debtor
or any of its direct or indirect subsidiaries.
16
(iii) The Agent shall have the right to operate the business of each Debtor using the Collateral and shall have the right
to assign, sell, lease or otherwise dispose of and deliver all or any part of the Collateral, at public or private sale or otherwise,
either with or without special conditions or stipulations, for cash or on credit or for future delivery, in such parcel or parcels and at
such time or times and at such place or places, and upon such terms and conditions as the Agent may deem commercially
reasonable, all without (except as shall be required by applicable statute and cannot be waived) advertisement or demand upon or
notice to any Debtor or right of redemption of a Debtor, which are hereby expressly waived. Upon each such sale, lease,
assignment or other transfer of Collateral, the Agent, for the benefit of the Secured Parties, may, unless prohibited by applicable
law which cannot be waived, purchase all or any part of the Collateral being sold, free from and discharged of all trusts, claims,
right of redemption and equities of any Debtor, which are hereby waived and released.
(iv) The Agent shall have the right (but not the obligation) to notify any account debtors and any obligors under
instruments or accounts to make payments directly to the Agent, on behalf of the Secured Parties, and to enforce the Debtors’
rights against such account debtors and obligors.
(v) The Agent, for the benefit of the Secured Parties, may (but is not obligated to) direct any financial intermediary or
any other person or entity holding any investment property to transfer the same to the Agent, on behalf of the Secured Parties, or
its designee.
(vi) The Agent may (but is not obligated to) transfer any or all Intellectual Property registered in the name of any
Debtor at the United States Patent and Trademark Office and/or Copyright Office into the name of the Secured Parties or any
designee or any purchaser of any Collateral.
(b) The Agent shall comply with any applicable law in connection with a disposition of Collateral and such compliance will
not be considered adversely to affect the commercial reasonableness of any sale of the Collateral. The Agent may sell the Collateral
without giving any warranties and may specifically disclaim such warranties. If the Agent sells any of the Collateral on credit, the
Debtors will only be credited with payments actually made by the purchaser. In addition, each Debtor waives any and all rights that it
may have to a judicial hearing in advance of the enforcement of any of the Agent’s rights and remedies hereunder, including, without
limitation, its right following an Event of Default to take immediate possession of the Collateral and to exercise its rights and remedies
with respect thereto.
17
(c) For the purpose of enabling the Agent to further exercise rights and remedies under this Section 8 or elsewhere provided by
agreement or applicable law, each Debtor hereby grants to the Agent, for the benefit of the Agent and the Secured Parties, an irrevocable,
nonexclusive license (exercisable without payment of royalty or other compensation to such Debtor) to use, license or sublicense during
an Event of Default, any Intellectual Property now owned or hereafter acquired by such Debtor, and wherever the same may be located,
and including in such license access to all media in which any of the licensed items may be recorded or stored and to all computer
software and programs used for the compilation or printout thereof.
9. Applications of Proceeds. The proceeds of any such sale, lease or other disposition of the Collateral hereunder or from
payments made on account of any insurance policy insuring any portion of the Collateral shall be applied first, to the expenses of retaking,
holding, storing, processing and preparing for sale, selling, and the like (including, without limitation, any taxes, fees and other costs incurred
in connection therewith) of the Collateral, to the reasonable attorneys’ fees and expenses incurred by the Agent in enforcing the Secured
Parties’ rights hereunder and in connection with collecting, storing and disposing of the Collateral, and then to satisfaction of the Obligations
pro rata among the Secured Parties (based on then-outstanding principal amounts of Debentures at the time of any such determination), and to
the payment of any other amounts required by applicable law, after which the Secured Parties shall pay to the applicable Debtor any surplus
proceeds. If, upon the sale, license or other disposition of the Collateral, the proceeds thereof are insufficient to pay all amounts to which the
Secured Parties are legally entitled, the Debtors will be liable for the deficiency, together with interest thereon, at the rate of 18% per annum
or the lesser amount permitted by applicable law (the “Default Rate”), and the reasonable fees of any attorneys employed by the Secured
Parties to collect such deficiency. To the extent permitted by applicable law, each Debtor waives all claims, damages and demands against the
Secured Parties arising out of the repossession, removal, retention or sale of the Collateral, unless due solely to the gross negligence or willful
misconduct of the Secured Parties as determined by a final judgment (not subject to further appeal) of a court of competent jurisdiction.
10. Securities Law Provision. Each Debtor recognizes that Agent may be limited in its ability to effect a sale to the public of all or
part of the Pledged Securities by reason of certain prohibitions in the Securities Act of 1933, as amended, or other federal or state securities
laws (collectively, the “Securities Laws”), and may be compelled to resort to one or more sales to a restricted group of purchasers who may be
required to agree to acquire the Pledged Securities for their own account, for investment and not with a view to the distribution or resale
thereof. Each Debtor agrees that sales so made may be at prices and on terms less favorable than if the Pledged Securities were sold to the
public, and that Agent has no obligation to delay the sale of any Pledged Securities for the period of time necessary to register the Pledged
Securities for sale to the public under the Securities Laws. Each Debtor shall cooperate with Agent in its attempt to satisfy any requirements
under the Securities Laws (including, without limitation, registration thereunder if requested by Agent) applicable to the sale of the Pledged
Securities by Agent.
18
11. Costs and Expenses. Each Debtor agrees to pay all reasonable out-of-pocket fees, costs and expenses incurred in connection
with any filing required hereunder, including without limitation, any financing statements pursuant to the UCC, continuation statements,
partial releases and/or termination statements related thereto or any expenses of any searches reasonably required by the Agent. The Debtors
shall also pay all other claims and charges which in the reasonable opinion of the Agent is reasonably likely to prejudice, imperil or otherwise
affect the Collateral or the Security Interests therein. The Debtors will also, upon demand, pay to the Agent the amount of any and all
reasonable expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, which the Agent, for the benefit
of the Secured Parties, may incur in connection with the creation, perfection, protection, satisfaction, foreclosure, collection or enforcement of
the Security Interest and the preparation, administration, continuance, amendment or enforcement of this Agreement and pay to the Agent the
amount of any and all reasonable expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, which the
Agent, for the benefit of the Secured Parties, and the Secured Parties may incur in connection with (i) the enforcement of this Agreement, (ii)
the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Collateral, or (iii) the exercise or
enforcement of any of the rights of the Secured Parties under the Debentures. Until so paid, any fees payable hereunder shall be added to the
principal amount of the Debentures and shall bear interest at the Default Rate.
12. Responsibility for Collateral. The Debtors assume all liabilities and responsibility in connection with all Collateral, and the
Obligations shall in no way be affected or diminished by reason of the loss, destruction, damage or theft of any of the Collateral or its
unavailability for any reason. Without limiting the generality of the foregoing, (a) neither the Agent nor any Secured Party (i) has any duty
(either before or after an Event of Default) to collect any amounts in respect of the Collateral or to preserve any rights relating to the
Collateral, or (ii) has any obligation to clean-up or otherwise prepare the Collateral for sale, and (b) each Debtor shall remain obligated and
liable under each contract or agreement included in the Collateral to be observed or performed by such Debtor thereunder. Neither the Agent
nor any Secured Party shall have any obligation or liability under any such contract or agreement by reason of or arising out of this Agreement
or the receipt by the Agent or any Secured Party of any payment relating to any of the Collateral, nor shall the Agent or any Secured Party be
obligated in any manner to perform any of the obligations of any Debtor under or pursuant to any such contract or agreement, to make inquiry
as to the nature or sufficiency of any payment received by the Agent or any Secured Party in respect of the Collateral or as to the sufficiency of
any performance by any party under any such contract or agreement, to present or file any claim, to take any action to enforce any
performance or to collect the payment of any amounts which may have been assigned to the Agent or to which the Agent or any Secured Party
may be entitled at any time or times.
19
13. Security Interests Absolute . All rights of the Secured Parties and all obligations of the Debtors hereunder, shall be absolute
and unconditional, irrespective of: (a) any lack of validity or enforceability of this Agreement, the Debentures or any agreement entered into in
connection with the foregoing, or any portion hereof or thereof; (b) any change in the time, manner or place of payment or performance of, or
in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to any departure from the Debentures
or any other agreement entered into in connection with the foregoing; (c) any exchange, release or nonperfection of any of the Collateral, or
any release or amendment or waiver of or consent to departure from any other collateral for, or any guarantee, or any other security, for all or
any of the Obligations; (d) any action by the Secured Parties to obtain, adjust, settle and cancel in its sole discretion any insurance claims or
matters made or arising in connection with the Collateral; or (e) any other circumstance which might otherwise constitute any legal or
equitable defense available to a Debtor, or a discharge of all or any part of the Security Interests granted hereby. Until the Obligations shall
have been paid and performed in full, the rights of the Secured Parties shall continue even if the Obligations are barred for any reason,
including, without limitation, the running of the statute of limitations or bankruptcy. Each Debtor expressly waives presentment, protest,
notice of protest, demand, notice of nonpayment and demand for performance. In the event that at any time any transfer of any Collateral or
any payment received by the Secured Parties hereunder shall be deemed by final order of a court of competent jurisdiction to have been a
voidable preference or fraudulent conveyance under the bankruptcy or insolvency laws of the United States, or shall be deemed to be
otherwise due to any party other than the Secured Parties, then, in any such event, each Debtor’s obligations hereunder shall survive
cancellation of this Agreement, and shall not be discharged or satisfied by any prior payment thereof and/or cancellation of this Agreement, but
shall remain a valid and binding obligation enforceable in accordance with the terms and provisions hereof. Each Debtor waives all right to
require the Secured Parties to proceed against any other person or entity or to apply any Collateral which the Secured Parties may hold at any
time, or to marshal assets, or to pursue any other remedy. Each Debtor waives any defense arising by reason of the application of the statute of
limitations to any obligation secured hereby.
14. Term of Agreement . This Agreement and the Security Interests shall terminate on the date on which all payments under the
Debentures have been indefeasibly paid in full and all other Obligations have been paid or discharged; provided, however, that all indemnities
of the Debtors contained in this Agreement (including, without limitation, Annex B hereto) shall survive and remain operative and in full force
and effect regardless of the termination of this Agreement.
20
15. Power of Attorney; Further Assurances.
(a) Each Debtor authorizes the Agent, and does hereby make, constitute and appoint the Agent and its officers, agents,
successors or assigns with full power of substitution, as such Debtor’s true and lawful attorney-in-fact, with power, in the name of the
Agent or such Debtor, to, after the occurrence and during the continuance of an Event of Default, (i) endorse any note, checks, drafts,
money orders or other instruments of payment (including payments payable under or in respect of any policy of insurance) in respect of
the Collateral that may come into possession of the Agent; (ii) to sign and endorse any financing statement pursuant to the UCC or any
invoice, freight or express bill, bill of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications and notices
in connection with accounts, and other documents relating to the Collateral; (iii) to pay or discharge taxes, liens, security interests or
other encumbrances at any time levied or placed on or threatened against the Collateral; (iv) to demand, collect, receipt for, compromise,
settle and sue for monies due in respect of the Collateral; (v) to transfer any Intellectual Property or provide licenses respecting any
Intellectual Property; and (vi) generally, at the option of the Agent, and at the expense of the Debtors, at any time, or from time to time,
to execute and deliver any and all documents and instruments and to do all acts and things which the Agent deems necessary to protect,
preserve and realize upon the Collateral and the Security Interests granted therein in order to effect the intent of this Agreement and the
Debentures all as fully and effectually as the Debtors might or could do; and each Debtor hereby ratifies all that said attorney shall
lawfully do or cause to be done by virtue hereof. This power of attorney is coupled with an interest and shall be irrevocable for the term
of this Agreement and thereafter as long as any of the Obligations shall be outstanding. The designation set forth herein shall be deemed
to amend and supersede any inconsistent provision in the Organizational Documents or other documents or agreements to which any
Debtor is subject or to which any Debtor is a party. Without limiting the generality of the foregoing, after the occurrence and during the
continuance of an Event of Default, each Secured Party is specifically authorized to execute and file any applications for or instruments
of transfer and assignment of any patents, trademarks, copyrights or other Intellectual Property with the United States Patent and
Trademark Office and the United States Copyright Office.
(b) On a continuing basis, each Debtor will make, execute, acknowledge, deliver, file and record, as the case may be, with the
proper filing and recording agencies in any jurisdiction, including, without limitation, the jurisdictions indicated on Schedule C attached
hereto, all such instruments, and take all such action as may reasonably be deemed necessary or advisable, or as reasonably requested by
the Agent, to perfect the Security Interests granted hereunder and otherwise to carry out the intent and purposes of this Agreement, or for
assuring and confirming to the Agent the grant or perfection of a perfected security interest in all the Collateral under the UCC.
21
(c) Each Debtor hereby irrevocably appoints the Agent as such Debtor’s attorney-in-fact, with full authority in the place and
instead of such Debtor and in the name of such Debtor, from time to time in the Agent’s discretion, to take any action and to execute any
instrument which the Agent may deem necessary or advisable to accomplish the purposes of this Agreement, including the filing, in its
sole discretion, of one or more financing or continuation statements and amendments thereto, relative to any of the Collateral without the
signature of such Debtor where permitted by law, which financing statements may (but need not) describe the Collateral as “all assets” or
“all personal property” or words of like import, and ratifies all such actions taken by the Agent. This power of attorney is coupled with
an interest and shall be irrevocable for the term of this Agreement and thereafter as long as any of the Obligations shall be outstanding.
16. Notices. All notices, requests, demands and other communications hereunder shall be subject to the notice provision of the
Purchase Agreement or Exchange Agreement, as applicable.
17. Other Security. To the extent that the Obligations are now or hereafter secured by property other than the Collateral or by the
guarantee, endorsement or property of any other person, firm, corporation or other entity, then the Agent shall have the right, in its sole
discretion, to pursue, relinquish, subordinate, modify or take any other action with respect thereto, without in any way modifying or affecting
any of the Secured Parties’ rights and remedies hereunder.
18. Appointment of Agent. The Secured Parties hereby appoint Hillair Capital Management LLC to act as their agent (“ Hillair” or
“Agent”) for purposes of exercising any and all rights and remedies of the Secured Parties hereunder. Such appointment shall continue until
revoked in writing by a Majority in Interest, at which time a Majority in Interest shall appoint a new Agent, provided that Hillair may not be
removed as Agent unless funds managed by Hillair shall then hold less than $250,000 in principal amount of Debentures; provided, further,
that such removal may occur only if each of the other Secured Parties shall then hold not less than an aggregate of $250,000 in principal
amount of Debentures. The Agent shall have the rights, responsibilities and immunities set forth in Annex B hereto.
19. Miscellaneous.
(a) No course of dealing between the Debtors and the Secured Parties, nor any failure to exercise, nor any delay in exercising,
on the part of the Secured Parties, any right, power or privilege hereunder or under the Debentures shall operate as a waiver thereof; nor
shall any single or partial exercise of any right, power or privilege hereunder or thereunder preclude any other or further exercise thereof
or the exercise of any other right, power or privilege.
(b) All of the rights and remedies of the Secured Parties with respect to the Collateral, whether established hereby or by the
Debentures or by any other agreements, instruments or documents or by law shall be cumulative and may be exercised singly or
concurrently.
22
(c) This Agreement, together with the exhibits and schedules hereto, contain the entire understanding of the parties with respect
to the subject matter hereof and supersede all prior agreements and understandings, oral or written, with respect to such matters, which
the parties acknowledge have been merged into this Agreement and the exhibits and schedules hereto. No provision of this Agreement
may be waived, modified, supplemented or amended except in a written instrument signed, in the case of an amendment, by the Debtors
and the Secured Parties holding 50.1% or more of the principal amount of Debentures then outstanding, or, in the case of a waiver, by
the party against whom enforcement of any such waived provision is sought.
(d) If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid,
illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force
and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their commercially reasonable efforts
to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term,
provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the
remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void
or unenforceable.
(e) No waiver of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a
continuing waiver in the future or a waiver of any subsequent default or a waiver of any other provision, condition or requirement hereof,
nor shall any delay or omission of any party to exercise any right hereunder in any manner impair the exercise of any such right.
(f) This Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted
assigns. The Company and the Guarantors may not assign this Agreement or any rights or obligations hereunder without the prior written
consent of each Secured Party (other than by merger). Any Secured Party may assign any or all of its rights under this Agreement to any
Person (as defined in the Purchase Agreement) to whom such Secured Party assigns or transfers any Obligations, provided such
transferee agrees in writing to be bound, with respect to the transferred Obligations, by the provisions of this Agreement that apply to the
“Secured Parties.”
(g) Each party shall take such further action and execute and deliver such further documents as may be necessary or
appropriate in order to carry out the provisions and purposes of this Agreement.
23
(h) Except to the extent mandatorily governed by the jurisdiction or situs where the Collateral is located, all questions
concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by and construed and enforced
in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof. Except to the
extent mandatorily governed by the jurisdiction or situs where the Collateral is located, each Debtor agrees that all proceedings
concerning the interpretations, enforcement and defense of the transactions contemplated by this Agreement and the Debentures (whether
brought against a party hereto or its respective affiliates, directors, officers, shareholders, partners, members, employees or agents) shall
be commenced exclusively in the state and federal courts sitting in the City of New York, Borough of Manhattan. Except to the extent
mandatorily governed by the jurisdiction or situs where the Collateral is located, each Debtor 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 proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such
proceeding is improper. Each party hereto hereby irrevocably waives personal service of process and consents to process being served in
any such proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such
party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient
service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any
manner permitted by law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all
right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby.
(i) This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an
original and, all of which taken together shall constitute one and the same Agreement. In the event that any signature is delivered by
facsimile transmission, such signature shall create a valid binding obligation of the party executing (or on whose behalf such signature is
executed) the same with the same force and effect as if such facsimile signature were the original thereof.
(j) All Debtors shall jointly and severally be liable for the obligations of each Debtor to the Secured Parties hereunder.
24
(k) Each Debtor shall indemnify, reimburse and hold harmless the Agent and the Secured Parties and their respective partners,
members, shareholders, officers, directors, employees and agents (and any other persons with other titles that have similar functions)
(collectively, “Indemnitees”) from and against any and all losses, claims, liabilities, damages, penalties, suits, costs and expenses, of any
kind or nature, (including fees relating to the cost of investigating and defending any of the foregoing) imposed on, incurred by or
asserted against such Indemnitee in any way related to or arising from or alleged to arise from this Agreement or the Collateral, except
any such losses, claims, liabilities, damages, penalties, suits, costs and expenses which result from the gross negligence or willful
misconduct of the Indemnitee as determined by a final, nonappealable decision of a court of competent jurisdiction. This indemnification
provision is in addition to, and not in limitation of, any other indemnification provision in the Debentures, the Purchase Agreement, the
Exchange Agreement or any other agreement, instrument or other document executed or delivered in connection herewith or therewith.
(l) Nothing in this Agreement shall be construed to subject Agent or any Secured Party to liability as a partner in any Debtor or
any if its direct or indirect subsidiaries that is a partnership or as a member in any Debtor or any of its direct or indirect subsidiaries that is
a limited liability company, nor shall Agent or any Secured Party be deemed to have assumed any obligations under any partnership
agreement or limited liability company agreement, as applicable, of any such Debtor or any of its direct or indirect subsidiaries or
otherwise, unless and until any such Secured Party exercises its right to be substituted for such Debtor as a partner or member, as
applicable, pursuant hereto.
(m) To the extent that the grant of the security interest in the Collateral and the enforcement of the terms hereof require the
consent, approval or action of any partner or member, as applicable, of any Debtor or any direct or indirect subsidiary of any Debtor or
compliance with any provisions of any of the Organizational Documents, the Debtors hereby grant such consent and approval and waive
any such noncompliance with the terms of said documents.
[SIGNATURE PAGES FOLLOW]
25
IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement to be duly executed on the day and year first above
written.
SG Blocks, Inc.
By: __________________________________________
Name:
Title:
SG Building Blocks, Inc.
By: _________________________________
Name:
Title:
[ADD SIGNATURE BLOCKS FOR NEW SUBS, IF ANY]
[SIGNATURE PAGE OF HOLDERS FOLLOWS]
26
[SIGNATURE PAGE OF HOLDERS TO SGBX SA]
Name of Investing Entity: __________________________
Signature of Authorized Signatory of Investing entity: _________________________
Name of Authorized Signatory: _________________________
Title of Authorized Signatory: __________________________
[SIGNATURE PAGE OF HOLDERS FOLLOWS]
27
ANNEX A
to
SECURITY
AGREEMENT
FORM OF ADDITIONAL DEBTOR JOINDER
Security Agreement dated as of April 10, 2014 made by
SG Blocks, Inc.
and its subsidiaries party thereto from time to time, as Debtors
to and in favor of
the Secured Parties identified therein (the “Security Agreement”)
Reference is made to the Security Agreement as defined above; capitalized terms used herein and not otherwise defined herein shall
have the meanings given to such terms in, or by reference in, the Security Agreement.
The undersigned hereby agrees that upon delivery of this Additional Debtor Joinder to the Secured Parties referred to above, the
undersigned shall (a) be an Additional Debtor under the Security Agreement, (b) have all the rights and obligations of the Debtors under the
Security Agreement as fully and to the same extent as if the undersigned was an original signatory thereto and (c) be deemed to have made the
representations and warranties set forth therein as of the date of execution and delivery of this Additional Debtor Joinder. WITHOUT
LIMITING THE GENERALITY OF THE FOREGOING, THE UNDERSIGNED SPECIFICALLY GRANTS TO THE SECURED PARTIES
A SECURITY INTEREST IN THE COLLATERAL AS MORE FULLY SET FORTH IN THE SECURITY AGREEMENT AND
ACKNOWLEDGES AND AGREES TO THE WAIVER OF JURY TRIAL PROVISIONS SET FORTH THEREIN.
Attached hereto are supplemental and/or replacement Schedules to the Security Agreement, as applicable.
An executed copy of this Joinder shall be delivered to the Secured Parties, and the Secured Parties may rely on the matters set forth
herein on or after the date hereof. This Joinder shall not be modified, amended or terminated without the prior written consent of the Secured
Parties.
28
IN WITNESS WHEREOF, the undersigned has caused this Joinder to be executed in the name and on behalf of the undersigned.
[Name of Additional Debtor]
Dated:
By:
Name:
Title:
Address:
29
ANNEX B
to
SECURITY
AGREEMENT
THE AGENT
1 . Appointment. The Secured Parties (all capitalized terms used herein and not otherwise defined shall have the respective
meanings provided in the Security Agreement to which this Annex B is attached (the " Agreement")), by their acceptance of the benefits of the
Agreement, hereby designate Hillair Capital Management LLC (“Hillair” or “Agent”) as the Agent to act as specified herein and in the
Agreement. Each Secured Party shall be deemed irrevocably to authorize the Agent to take such action on its behalf under the provisions of
the Agreement and any other Transaction Document (as such term is defined in each of the Purchase Agreement and Exchange Agreement)
and to exercise such powers and to perform such duties hereunder and thereunder as are specifically delegated to or required of the Agent by
the terms hereof and thereof and such other powers as are reasonably incidental thereto. The Agent may perform any of its duties hereunder
by or through its agents or employees.
2
. Nature of Duties. The Agent shall have no duties or responsibilities except those expressly set forth in the
Agreement. Neither the Agent nor any of its partners, members, shareholders, officers, directors, employees or agents shall be liable for any
action taken or omitted by it as such under the Agreement or hereunder or in connection herewith or therewith, be responsible for the
consequence of any oversight or error of judgment or answerable for any loss, unless caused solely by its or their gross negligence or willful
misconduct as determined by a final judgment (not subject to further appeal) of a court of competent jurisdiction. The duties of the Agent
shall be mechanical and administrative in nature; the Agent shall not have by reason of the Agreement or any other Transaction Document a
fiduciary relationship in respect of any Debtor or any Secured Party; and nothing in the Agreement or any other Transaction Document,
expressed or implied, is intended to or shall be so construed as to impose upon the Agent any obligations in respect of the Agreement or any
other Transaction Document except as expressly set forth herein and therein.
3 . Lack of Reliance on the Agent . Independently and without reliance upon the Agent, each Secured Party, to the extent it
deems appropriate, has made and shall continue to make (i) its own independent investigation of the financial condition and affairs of the
Company and its subsidiaries in connection with such Secured Party’s investment in the Debtors, the creation and continuance of the
Obligations, the transactions contemplated by the Transaction Documents, and the taking or not taking of any action in connection therewith,
and (ii) its own appraisal of the creditworthiness of the Company and its subsidiaries, and of the value of the Collateral from time to time, and
the Agent shall have no duty or responsibility, either initially or on a continuing basis, to provide any Secured Party with any credit, market or
other information with respect thereto, whether coming into its possession before any Obligations are incurred or at any time or times
thereafter. The Agent shall not be responsible to the Debtors or any Secured Party for any recitals, statements, information, representations or
warranties herein or in any document, certificate or other writing delivered in connection herewith, or for the execution, effectiveness,
genuineness, validity, enforceability, perfection, collectibility, priority or sufficiency of the Agreement or any other Transaction Document, or
for the financial condition of the Debtors or the value of any of the Collateral, or be required to make any inquiry concerning either the
performance or observance of any of the terms, provisions or conditions of the Agreement or any other Transaction Document, or the
financial condition of the Debtors, or the value of any of the Collateral, or the existence or possible existence of any default or Event of
Default under the Agreement, the Debentures or any of the other Transaction Documents.
30
4. Certain Rights of the Agent. The Agent shall have the right to take any action with respect to the Collateral, on behalf of all
of the Secured Parties. To the extent practical, the Agent shall request instructions from the Secured Parties with respect to any material act or
action (including failure to act) in connection with the Agreement or any other Transaction Document, and shall be entitled to act or refrain
from acting in accordance with the instructions of a Majority in Interest; if such instructions are not provided despite the Agent’s request
therefor, the Agent shall be entitled to refrain from such act or taking such action, and if such action is taken, shall be entitled to appropriate
indemnification from the Secured Parties in respect of actions to be taken by the Agent; and the Agent shall not incur liability to any person or
entity by reason of so refraining. Without limiting the foregoing, (a) no Secured Party shall have any right of action whatsoever against the
Agent as a result of the Agent acting or refraining from acting hereunder in accordance with the terms of the Agreement or any other
Transaction Document, and the Debtors shall have no right to question or challenge the authority of, or the instructions given to, the Agent
pursuant to the foregoing and (b) the Agent shall not be required to take any action which the Agent believes (i) could reasonably be expected
to expose it to personal liability or (ii) is contrary to this Agreement, the Transaction Documents or applicable law.
5 . Reliance. The Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice,
statement, certificate, telex, teletype or telecopier message, cablegram, radiogram, order or other document or telephone message signed, sent
or made by the proper person or entity, and, with respect to all legal matters pertaining to the Agreement and the other Transaction Documents
and its duties thereunder, upon advice of counsel selected by it and upon all other matters pertaining to this Agreement and the other
Transaction Documents and its duties thereunder, upon advice of other experts selected by it. Anything to the contrary notwithstanding, the
Agent shall have no obligation whatsoever to any Secured Party to assure that the Collateral exists or is owned by the Debtors or is cared for,
protected or insured or that the liens granted pursuant to the Agreement have been properly or sufficiently or lawfully created, perfected, or
enforced or are entitled to any particular priority.
31
6 . Indemnification. To the extent that the Agent is not reimbursed and indemnified by the Debtors, the Secured Parties will
jointly and severally reimburse and indemnify the Agent, in proportion to their initially purchased respective principal amounts of Debentures,
from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of
any kind or nature whatsoever which may be imposed on, incurred by or asserted against the Agent in performing its duties hereunder or under
the Agreement or any other Transaction Document, or in any way relating to or arising out of the Agreement or any other Transaction
Document except for those determined by a final judgment (not subject to further appeal) of a court of competent jurisdiction to have resulted
solely from the Agent's own gross negligence or willful misconduct. Prior to taking any action hereunder as Agent, the Agent may require
each Secured Party to deposit with it sufficient sums as it determines in good faith is necessary to protect the Agent for costs and expenses
associated with taking such action.
7. Resignation by the Agent.
(a) The Agent may resign from the performance of all its functions and duties under the Agreement and the other Transaction
Documents at any time by giving 30 days' prior written notice (as provided in the Agreement) to the Debtors and the Secured Parties. Such
resignation shall take effect upon the appointment of a successor Agent pursuant to clauses (b) and (c) below.
(b) Upon any such notice of resignation, the Secured Parties, acting by a Majority in Interest, shall appoint a successor Agent
hereunder.
(c) If a successor Agent shall not have been so appointed within said 30-day period, the Agent shall then appoint a successor Agent
who shall serve as Agent until such time, if any, as the Secured Parties appoint a successor Agent as provided above. If a successor Agent
has not been appointed within such 30-day period, the Agent may petition any court of competent jurisdiction or may interplead the
Debtors and the Secured Parties in a proceeding for the appointment of a successor Agent, and all fees, including, but not limited to,
extraordinary fees associated with the filing of interpleader and expenses associated therewith, shall be payable by the Debtors on demand.
8. Rights with respect to Collateral. Each Secured Party agrees with all other Secured Parties and the Agent (i) that it shall not,
and shall not attempt to, exercise any rights with respect to its security interest in the Collateral, whether pursuant to any other agreement or
otherwise (other than pursuant to this Agreement), or take or institute any action against the Agent or any of the other Secured Parties in
respect of the Collateral or its rights hereunder (other than any such action arising from the breach of this Agreement) and (ii) that such
Secured Party has no other rights with respect to the Collateral other than as set forth in this Agreement and the other Transaction
Documents. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon
succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent and the retiring Agent shall be discharged
from its duties and obligations under the Agreement. After any retiring Agent’s resignation or removal hereunder as Agent, the provisions of
the Agreement including this Annex B shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent.
32
Subsidiaries of the Registrant
Subsidiary
Jurisdiction of Incorporation or Organization
SG Building Blocks, Inc.
Delaware
Exhibit 21.1
Exhibit 31.1
CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Paul M. Galvin, certify that:
1. I have reviewed this annual report on Form 10-K of SG Blocks, Inc. for the year ended December 31, 2013;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
(d)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
April 15, 2014
/s/ Paul M. Galvin
Name: Paul M. Galvin
Title: Chief Executive Officer
Exhibit 31.2
CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Brian Wasserman, certify that:
1. I have reviewed this annual report on Form 10-K of SG Blocks, Inc. for the year ended December 31, 2013;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
April 15, 2014
/s/ Brian Wasserman
Name: Brian Wasserman
Title: Chief Financial Officer
CERTIFICATION PURSUANT TO 18 U.S.C. §1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
Exhibit 32
In connection with the annual report on Form 10-K of SG Blocks, Inc., (the “Company”) for the year ended December 31, 2013
as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Paul M. Galvin, the Chief Executive Officer of the
Company, and I, Brian Wasserman, the Chief Financial Officer of the Company, do hereby certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief that:
1.
2.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
April 15, 2014
April 15, 2014
/s/ Paul M. Galvin
Name: Paul M. Galvin
Title: Chief Executive Officer
/s/ Brian Wasserman
Name: Brian Wasserman
Title: Chief Financial Officer
This certification accompanies each Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the
extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange
Act of 1934, as amended.
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and
will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.