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Finance
Contents
Executive
Summary
...............................................................................................................................
2
Introduction
...........................................................................................................................................
2
Pre-Negotiation
Expectations
................................................................................................................
2
Term
Sheet
.........................................................................................................................................
3
Board
of
directors
..........................................................................................................................
3
Share
Repurchase
..........................................................................................................................
3
Initial
Public
Offering
.....................................................................................................................
3
Terms
.....................................................................................................................................................
3
Terms
of
No
Flexibility
.......................................................................................................................
3
Terms
of
Negotiation
.........................................................................................................................
4
Process of Negotiation
....................................................................................................................
4
Post-Negotiation
Summary
....................................................................................................................
5
Bibliography
...........................................................................................................................................
7
Appendix
................................................................................................................................................
7
Appendix
A
.........................................................................................................................................
7
Appendix
B
.........................................................................................................................................
7
Appendix
C
.........................................................................................................................................
7
Appendix
D
.........................................................................................................................................
8
Appendix
E
.........................................................................................................................................
9
Appendix
F
.......................................................................................................................................
11
Executive
Summary
Grace
Bioremediation
Technologies
(GBT)
management
sought
US$4
million
in
financing
to
purchase
GBT
from
its
parent
company
W.R.
Grace
&
Company
(Grace).
Venture
Capitalist
firm
Covington
has
shown
interest
in
this
deal
and
negotiations
were
undertaken
to
seek
a
possible
agreement.
Agreement
was
made
on
Monday
12th
November
2012
between
GBT
management
and
Covington
as
to
the
details
of
the
financing.
Covington
would
provide
GBT
management
with
the
US$4
million
required
which
consisted
of
Covingtons
US$3M
Preferred
Participating
Shares
and
Skylons
US$1M
Ordinary
Shares.
This
resulted
in
an
ownership
of
GBT
Management
8.05%,
Covington
Capital
68.97%,
Skylon
17.24%
and
Options
for
GBT
management
5.75%.
Exit
Strategy
was
based
around
a
5
year
term
with
a
minimum
exit
value
of
$8.45
million
for
GBT
management
to
access
their
options.
Full
detail
of
the
term
sheet
signed
by
both
GBT
management
and
Covington
has
been
provided.
Introduction
It
is
April
2002
and
GBT
a
Canadian
based
company,
is
currently
a
subsidiary
of
the
NYSE-listed
organisation
Grace.
Grace
has
filed
for
bankruptcy
protection
and
is
currently
seeking
to
divest
non- core
assets,
one
of
which
being
GBT.
GBTs
management
are
looking
to
raise
US$4
million
in
financing,
along
with
their
own
contribution
of
US$350,000,
to
purchase
GBT
for
US$4.35
million.
GBT
has
entered
negotiations
with
a
venture
capital
(VC)
firm
Covington,
based
in
Toronto,
Ontario
to
raise
funds
for
the
US$4
million.
The
available
financing
instruments
for
Covington
are
straight
equity,
convertible
preferred
with
dividend
and
debt
accompanied
by
free
warrants.
GBT
has
projected
growth
expectations
for
their
two
products
(DARAMEND
&
AQUAMEND)
until
2006.
These
projections
are
based
on
only
10
per
cent
of
expected
sales
for
DARAMEND
and
fifty
per
cent
of
expected
sales
for
AQUAMEND.
These
projections
were
considered
reasonable
by
management
and
were
also
acceptable
to
Covington.
This
report
discusses
and
outlines
the
expectations
that
the
management
team
of
GBT
had
pre
and
post
negotiations.
It
also
describes
the
negotiation
process
with
Covington
and
what
terms
of
negotiation
were
deemed
to
be
acceptable
or
unacceptable
to
GBTs
management.
All
dollar
figures
from
this
point
forward
are
assumed
to
be
in
US
currency.
Pre-Negotiation
Expectations
An
important
issue
to
GBT
management
was
to
increase
the
voting
control
of
the
company.
Whilst
GBT
management
would
prefer
majority
of
voting
control,
based
on
the
modest
amount
of
capital
able
to
be
raised
by
GBT
management
it
would
be
highly
unlikely.
However,
there
were
other
options
available
GBT
management
to
increase
control.
Initial
discussions
between
GBT
management
revolved
around
the
cost
of
debt
versus
the
cost
of
equity.
Debt
was
the
obvious
cheaper
option,
with
the
current
prime
rate
being
six
per
cent.
Equity
however
would
be
much
more
expensive
with
the
twenty
to
thirty
per
cent
expected
return
on
equity sought by Covington. A straight debt forecast was derived to see how liquid GBT would become satisfying a $4 million debt. Appendix A depicts a forecast of straight debt issue; GBT management saw this as an unacceptable solution due to the lack of liquidity in the company. Appendix B depicts a forecast for a blend of $2 million in debt and $2 million in equity; GBT management saw this second option as a much more preferable solution due to the increase in liquidity and also the future potential to repurchase the equity with cash or a second round of debt. The second option also increases GBT managements control of the company, with their $350,000 contribution, bringing them closer to obtaining voting control. Covington would be expected to buy in at $1.40 per share, giving them 33% control over GBT for their $2 million equity injection. Two exit strategies were envisioned by GBT management, one being the repurchase of Covingtons equity using cash on hand in 2009 (depicted in Appendix C), or perhaps earlier if funds allowed, or to raise an Initial Public Offering (IPO) for a predicted $19 million, at which point Covington would obtain an estimated $6.27 million or a 20 per cent return on equity.
Term
Sheet
Appendix
D
is
a
table
containing
the
initial
expectations
of
GBT
management
in
the
form
of
contract
terms.
Some
important
points
for
discussion
were:
Board
of
directors
The
board
of
directors
will
contain
three
directors
with
equal
voting
rights
given
to
GBT
and
Covington.
A
third
independent
director
will
be
brought
in
to
make
the
deciding
vote,
should
GBT
and
Covington
disagree.
This
will
ensure
that
both
companies
have
an
equal
say
regarding
issues
they
feel
that
are
important.
Share
Repurchase
In
2008,
GBTs
cash
flows
are
predicted
to
be
able
to,
or
close
to,
repurchasing
Covingtons
equity
portion.
In
the
event
that
cash
on
hand
alone
cannot
complete
the
repurchase,
a
new
round
of
debt
financing
should
be
investigated
to
complete
the
transaction,
if
cash
flow
and
liquidity
expectations
allow
it.
Covington
should
not
have
the
right
to
force
this
transaction
if
GBT
cannot
cope
with
the
new
round
of
debt.
Initial
Public
Offering
In
the
event
that
the
share
purchase
is
unachievable,
an
IPO
is
envisioned
to
give
Covington
their
exit
strategy.
An
IPO
of
$19
million
is
predicted
in
order
to
give
Covington
their
expected
returns.
After
2008
it
will
be
Covingtons
decision
to
raise,
or
refuse,
an
IPO
for
anything
less
that
$19
million.
Terms
Terms
of
No
Flexibility
GBT
management
identified
certain
key
terms
that
were
considered
to
be
non-negotiable
with
Covington.
The
following
section
describes
these
terms
in
detail.
GBT valuation: The asking price of $4.35million by Grace was considered non-negotiable by GBT management; furthermore as management could only provide $350,000, the $4million of extra funding was necessary to fulfil the asking price by Grace. Board control: In order to steer the company in the best direction possible, using their extensive knowledge and experience, GBT management saw control over the company as a major issue driving forward. A seat on the board for GBT was considered essential, along with a board seating that did not favour Covington to make an independent decision without the agreement of a third party board member.
Terms
of
Negotiation
GBT
management
identified
certain
key
terms
that
were
considered
to
be
negotiable
with
Covington.
The
following
section
describes
these
terms
in
detail.
Capital
structure:
GBT
management
saw
high
liquidity
within
the
company,
forecast
to
be
able
to
satisfy
a
$2million
debt.
This,
in
turn,
increased
ownership
and
control
for
the
GBT
management
with
their
contribution.
This
debt/equity
structure
was
considered
negotiable
with
Covington
in
order
to
provide
them
with
satisfactory
risk
mitigation
and
return.
Required
rate
of
return/risk:
GBT
management
were
aware
that
Covingtons
required
rate
of
return
was
between
20
and
30
per
cent;
however
due
to
the
already
established
size
of
the
company,
operating
cash
flows
and
knowledgeable
management,
GBT
management
saw
GBT
to
be
a
low
risk
investment.
Ownership/control:
GBT
management
were
aware
that
their
contribution
of
$350,000
would
likely
result
in
the
minority
control
of
GBT;
however
GBT
management
were
aiming
to
increase
their
ownership
by
increasing
debt
and
decreasing
the
shares
outstanding.
Share
price:
Analysis
lead
to
an
initial
asking
price
of
$1.40
per
share;
however
GBT
management
saw
this
to
be
directly
correlated
to
the
business
evaluation
which
would
also
be
negotiated
with
Covington
in
the
near
future.
Process of Negotiation
Covington
Capital
and
GBT
team
approached
the
case
using
the
eight-stage
negotiation
process.
1. Preparation
Both
teams
studied
the
GBT
Financial
Case
independently.
GBT
management
focused
on
the
value
of
GBT
based
on
the
projected
cash
flow
operations.
It
had
considered
the
existing
business
model
of
GBT
and
how
it
would
change
if
Covington
Capital
would
acquire
the
company.
The
GBT
management
discussed
different
financing
options
such
as
debt
capital
raising
and
ordinary
shares
capital
injection.
GBT
management
considered
preferred
shares
however
it
was
disregarded
as
it
was
not
a
favourable
outcome
for
the
management
team.
GBT
management
firmly
believed
that
there
should
be
at
least
one
board
seat
allocated
to
GBT
management
in
order
to
maintain
some
level
of
control.
2. Open GBT management made a presentation and disclosed its positions to Covington Capital about the value of the company, sources of funding, terms of payment and structure ownership. 3. Covington Rebuttal During the meeting between GBT management and Covington Capital team, there were significant and conflicting positions that were discussed. This has been summarised in Appendix E. Refer to Points Discussed. 4. Explore Both teams had an open mind-set to explore and resolve any conflicting perspectives. 5. Signal Both teams offered alternative suggestions to conflicting disputes for resolution. 6. Package - Both teams were willing to compromise in order to find possible solutions to proceed the deal. 7. Close Covington Capital team and GBT both agreed on the revised term sheet. Refer to result/Agreement column in Appendix E. 8. Sustain Covington Capital team updated the Term Sheet and a revised Term Sheet was sent through via email, ready for signature by both parties.
Post-Negotiation
Summary
The
end
result
of
lengthy
discussions
between
GBT
management
and
Covington
Capital
was
an
agreement
between
the
two
parties
on
the
various
terms
of
the
financing.
A
full
term
sheet
has
been
provided
in
the
Appendix
along
with
signed
agreement
between
GBT
management
and
Covington
Capital
team.
As
discussed
above
GBT
management
had
a
certain
number
of
Non-Negotiable
terms
of
which
the
following
were
agreed
to
by
Covington
Capital:
Final
valuation
of
GBT
will
be
US$4.35M
and
$4M
in
funding
would
be
required
GBT
must
have
board
representation
and
there
must
be
an
independent
on
the
board
Similarly Covington Capital had Non-Negotiable terms that were agreed to by GBT management: Required Rate of Return = 24.35% US$3M Preferred Participating Shares and US$1M Ordinary Shares (Skylon) Preferred shares have conversion ratio of 1:1 to ordinary shares Ownership o GBT Management 8.05% o Covington Capital 68.97% o Skylon 17.24% o Options 5.75%
The following negotiable terms were negotiated and agreed to by both GBT management and Covington Capital: Funding was to be provided through capital only (US$3M Preferred Participating Shares and US$1M Ordinary Shares) rather than US$2M Ordinary Shares and US$2M Debt. Covington drove straight equity financing in an attempt to lower the risk of increased debt and to increase their control and total returns that was only obtainable with equity.
An options pool was negotiated for GBT management to increase their ownership on a performance and successful exit basis. This helped to offset the lack of ownership previously lost with the negotiated 100% equity financing. Life Insurance for Key Officers was reduced to US$6M from $US10M. This was negotiated down by GMT management to discourage using loss of management as a successful exit strategy. Successful exit strategy evaluation was set at an achievable target value ($8.45M) rather than 200% of Covington Capitals preferred shares plus its accrued dividend. This helped to set a realistic goal of the future and helped GBT management to meet their performance targets. Minimum IPO value was reduced to US$15M from US$20M. This was driven by GBT management to provide a more realistic exit strategy that still returned Covington their required returns. It also helped to show lower risk in the organisation. Preference Dividend was agreed to 11%. This was negotiated down by GBT management in order to increase liquidity and ownership of the organisation. In the case of liquidation, a Series A investor would receive pro rata of share liquidation not the greater of 150% purchase price or pro rata. This was negotiated by GBT management to decrease their liability should the company enter liquidation, only company assets would be available to Covington during liquidation.
GBT management were reasonably pleased with the outcome as their primary objective, which was to receive immediate funding for the entire US$4M, was met. Furthermore, they ensured that they still had an input into the direction/operations of the company through a vital board seat and the appointment of an independent worked to GBT managements favour. Due to their expertise in bioremediation the return on equity required was lower than Covington Capitals high risk investment of 30% and 24.35% was seen as a fair risk level for the investors. GBT management would have preferred greater control in the firm through a mix of capital and debt investment, however in order to gain the necessary funding US$3M Preferred Participating Shares and US$1M Ordinary Shares had to be agreed to resulting in lower ownership by GBT management of 8.05%. The exit strategy with an achievable target of US$8.45M including the vesting of options as this level was seen as a fair target and given GBT managements expertise in bioremediation and the superior products the target value should be achieved.
Bibliography
Grace
Bioremediation
Technologies,
Richard
Ivey
School
of
Business,
2004
Appendix
Appendix
A
Appendix
A
shows
a
forecast
of
the
available
cash
within
GBT
to
satisfy
a
debt
of
US$4
million
within
a
five
year
period.
It
can
be
noticed
the
lack
of
liquidity
within
GBT
which
may
be
considered
highly
risky.
4500
4000
3500
3000
2500
2000
1500
1000
500
0
2001
2002
2003
2004
2005
2006
Appendix
B
Appendix
B
shows
a
forecast
of
the
available
case
within
GBT
to
satisfy
a
debt
of
US$2
million
and
equity
injection
of
US$2million.
It
can
be
noticed
that
GBT
would
be
much
more
liquid
to
operate
than
that
of
a
straight
debt
injection.
2500
2000
1500
1000
500
0
2001
2002
2003
2004
2005
2006
Debt
Equity
Debt
Payment
Cash
Appendix
C
Appendix
C
shows
a
forecast
into
year
2009,
and
the
ability
for
GBT
to
repurchase
Covingtons
portion
of
equity
using
cash.
This
forecast
assumes
a
6%
rate
of
debt
and
20%
rate
of
equity.
It
can
be
noticed
that
around
the
first
quarter
of
2009,
GBT
is
forecast
to
be
able
to
repurchase
Covingtons
equity,
giving
them
an
exit
strategy.
6000 5000 4000 3000 2000 1000 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 Debt Equity Return Debt Payment Cash
Appendix
D
Appendix
D
is
a
table
representing
the
initial
deal
structure
expected
by
GBT
management.
Term
Condition
Amount
of
financing
Graces
$3.5
million
in
goodwill
is
non-negotiable
$4.35
million
total
investment
required,
$4
million
required
by
Covington
Preferred
Covington
$2
million
debt
financing
$2
million
equity
Use
of
funds
GBT
will
use
the
funds
to
divest
ownership
from
W.R.
Grace
&
Co.
Subscription
price
$1.40
per
share
Closing
Date
30th
June
2012
Costs
&
Expenses
GBT
will
pay
legal
all
legal
fees
surrounding
the
investment
deal
Due-Diligence
Covington
will
incur
their
own
due
diligence
expenses
Expenses:
Exclusivity
period
30
days
from
the
signing
of
the
term
sheet
Break
fee
Incurred
by
the
party
that
break
contract
after
signing,
total
costs
incurred
include
legal
&
due
diligence
expenses.
Board
of
directors
The
board
of
directors
will
consist
of
three
directors
and
two
observers.
1
seat
to
GBT
management
1
seat
to
Covington
investors
1
third
part
seat
1
observer
to
GBT
management
1
observer
to
Covington
Further
financing
There
is
no
foreseen
need
for
further
financing,
should
the
need
arise
for
overseas
expansion,
further
financing
will
not
proceed
without
the
approval
of
Covington.
In
the
event
of
further
financing,
Covington
will
have
the
right
to
first
financing.
Spending
GBT
management
will
not
spend
greater
than
10%
of
retained
earnings
without
board
approval.
Share
Vesting
GBT
managers
will
not
be
able
to
divest
their
shares
within
the
first
5
years
without
board
approval.
Preference
Shares
Covington
will
have
to
right
to
convert
all
preference
shares,
to
common
stock,
at
a
conversion
rate
of
1:1.
Debt
repayments
Any
debt
portion
borrowed
by
GBT,
from
Covington,
in
2002
will
be
repaid
in
entirety
by
EOFY
2007.
Share
repurchase
Covington
shares
to
be
repurchased
by
GBT
in
2008
if
assets
and
cash
flow
allow
it.
Covington
will
have
to
right
to
refuse
the
repurchase
and
stay
IPO
invested. Covington will not have to right to force GBT to repurchase the equity if cash flows cannot cover any additional debt required for the repurchase. In the event that GBT cannot repurchase Covingtons equity, an IPO can be raised for no less than $19 million. This will ensure that Covington get the minimum of $6.27 million or 20% return on equity. Covington will have to right to force the raise of an IPO after 2008 for less than $19m if desired.
Appendix
E
Covington
Capital
and
GBT
Management
have
discussed
key
elements
of
the
term
sheet
that
are
vital
in
closing
the
deal.
Below
is
the
list
of
key
items:
Points
Discussed
GBT
Valuation
Source
of
Funding
Covington
Capital
(CC)
Position
CC
was
willing
to
pay
the
company
worth
$4.
million
CC
offered
$3M
worth
of
12%
Preferred
Participating,
and
$1M
worth
of
ordinary
shares
GBT
Management
Team
Position
Result/Agreement
GBT was asking for $4 to $4 Million was agreed. pursue the deal GBT offered $4M debt financing with 20% interest. Payment is fully paid after 6 years. No initial position on this matter GBT believed that it would fair that CC would give its 1 board seat to an independent director. GBT requested that it should be reduced to $5M. GBT agreed with the term. GBT gave up its positions and accepted CC $3M Preferred Participating and $1M of ordinary shares. GBT agreed to 1:1 Conversion CC agreed with GBT request. GBT and CC compromised to $6M. Agreed CC revised its term and set a minimum exit value of $8.45M, in the event of IPO, merger or sale. GBT agreed the revised term. Agreed
Conversion Rights Preferred shares have conversion ratio of 1:1 to ordinary shares CC would like to have 3 seats Board in the board, 1 seat for Representation Skylon and 1 seat for GBT Team CC informed that GBT key Life insurance officers would be insured by at least $10M, individually In case any party would not Break Fees continue the venture, the party that caused the breach would pay $100K break fees Exit Strategy CC will exit after 5 years and the GBT Management team needs to pay 200% of its preferred shares plus its accrued dividend
Fees
The Company will pay all the expenses incidental to this transaction
GBT pointed out to CC that based on the projected cash flow, there is no way that the company could pay CC based on that term. GBT suggested that CC should revise its position. GBT agreed that all fees related to this should be shouldered by the Company
Qualified IPO
CC defined initial public offering to be at least US$20M and Gross Proceeds to be in excess of US$12M
Liquidation Preference
CC required the Series A investor to receive the greater of 150% of Purchase Price or pro rata of share liquidation CC Preferred Participating share would receive 12% Dividend
Preference Dividend
GBT believed US$20M is too optimistic a figure to be the minimum and initial IPO should be for US$10M and Gross Proceeds to be US$5M GBT requested to remove the greater of 150% of Purchase Price and that Series A investors would only receive pro rata share of liquidation GBT offered a share dividend of 10%
CC and GBT compromised and agreed to a minimum IPO of US$15M and Gross Proceeds to be in excess of US$6.5M CC agreed and 150% was removed
CC and GBT agreed the final Preferred Participating Share Dividend would be 11%
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Appendix
F
TERM SHEET FOR PRIVATE CONVERTIBLE PREFERENCE TECHNOLOGIES. 14 th November 2012 PLACEMENT SHARES OF BY SERIES "A" PARTICIPATING GRACE BIOREMEDIATION
The following is a summary of the principal terms with respect to the proposed Series "A" Participating Convertible Preference Share issue by Grace Bioremediation Technologies (the Company). Except for the section entitled Binding Terms, this summary of terms does not constitute a legally binding obligation on the parties. Any other legally binding obligation will only be made pursuant to definitive agreements to be negotiated and executed by the parties. Offering Terms Securities to Issue: 3,000,000 Series A Participating Convertible Preference Shares (Series A Preferred Shares), convertible into an equal number of Ordinary Shares. A preferred dividend of 11% per annum on the Series A Preferred Shares will be payable quarterly from available cash flow, as determined by the Board. To the extent the dividend is not paid, it will accrue, but not compound. No dividends may be paid on the Ordinary Shares or any series of preferred stock, except for dividends on the Series A Preferred Shares as described herein. Aggregate Price: Investors: Key Executive Shareholders: Issue US$3,000,000 in aggregate.
Covington Capital (the Investors). Key Executive Shareholders (the Key Executive Shareholders), include Alan Seech, Kerry Bolanos-Shaw, David Raymond and Theresa Phillips. The Key Executive Shareholders Shares vest twenty percent on closing with the remainder vesting linearly over a forty-eight month period. $1 (the Original Issue Price), based on a pre-money valuation of $4,350,000, and as outlined in the table below. Investor Key Executive Shareholders Covington Capital Skylon Advisors Inc Options Totals Instrument Common Shares Participating Convertible Preference Shares Common Shares Options $4,350,000 Investment $350,000 No. Shares 350,000 [1] Ownership 8.05%
$3,000,000
3,000,000
68.97%
$1,000,000
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Minimum Value:
Exit
As an incentive to the Key Executive Shareholders, a minimum exit value (the Minimum Exit Value) will be set at US$8.45m. In the event that a sale or IPO of the Company results in a valuation that is less than the Minimum Exit Value, the Key Executive Shareholders will transfer 250,000 of their Ordinary Shares to the Investors. The Company will use the proceeds from the Series A Preferred Shares to purchase all the assets of Grace Bioremediation Technologies (the Company) from W.R. Grace & Company (Grace). i. Minimum committed financing of US$4.35 million from a syndicate comprised of the Company management team and Investors acceptable to each other and o the Company. Completion of satisfactory due diligence, included audited historical financial statements. Creation of the Company as a separate legal entity. All intellectual property including trademarks, patents, and copyright belonging to Grace or the Management team are to be registered or transferred into the Companys name. Investor to appoint key executive staff including Chief Financial Officer, Vice President of Sales and Vice President of Marketing. Approval process of the Investors
Use of Funds:
Conditions Precedent:
The Company will pay its own legal fees and the legal fees and expenses of the Investors. The Company will pay third party due diligence expenses and out-of-pocket expenses incurred by Investors. Expenses to be paid from the proceeds of investment at closing. In the event that the Company declines the investment, then the Company will pay the Investors the greater of US$100,000 or third party expenses. Similarly, in the event that the Investors decline the investment, then the Investors will pay the Company the greater of US$100,000 or third party expenses. The Companys Constitution would provide for a Board of five Directors, including, two seats for the Investors, one seat for the Company, one seat for Skylon Advisors Inc and one independent Director, who shall be elected by the Series A and Ordinary Shares voting together as a single class on an asif-converted basis.
Board of Directors:
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Information Rights:
So long as any Series A Preferred Shares were outstanding, the Company would deliver to the Investor (i) audited annual financial statements within [90] days after the end of each fiscal year; (ii) unaudited quarterly financial statements, including forecasts for the next [6] months within [45] days of the end of each fiscal quarter; (iii) unaudited monthly financial statements, including forecasts for the next [3] months within [30] days of the end of each month; (iv) monthly business unit performance reports within [30] days of the end of each month and (v) an annual budget within 60 days prior to the end of each fiscal year. For so long as any Series A Preferred Shares were outstanding, the Investor would have standard inspection rights. Each holder of Series A Preferred Shares has the same right to attend and speak at any general meeting of the Company and to vote on a show of hands as any Ordinary Shareholder and to vote on a poll casting the same number of votes per Series A Preferred Share as is cast per Ordinary Share. Business Plan: The Company will prepare an annual business plan, with financial projections, for Board Approval, no later than thirty [30] days prior to the beginning of each fiscal year. Key Man Insurance: The Company will have obtained Key Man Life Insurance on the lives of Alan Seech, Kerry Bolanos-Shaw, David Raymond and Theresa Phillips in an amount of not less than US$6,000,000 each with the Company as the beneficiary. Financial Audits: So long as any Series A Preferred Shares were outstanding, the Investor may appoint an independent auditor to audit any annual, quarterly or monthly financial statements provided to the Investor by the Company. The cost of such appointment will be borne by the Company. IP Protection: The Company will maintain appropriate protection, including the payment of annual maintenance fees, for all existing intellectual property, including trademarks, patents, and copyright. All new intellectual property will be appropriately protected at the time of creation or acquisition.
Voting Rights:
Covenants:
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Protective Provisions:
Consent of the holders of at least 50% of the outstanding Series A Preferred Shares, voting as a single class, would be required for: (i) any amendment or change of the rights, preferences, privileges or powers of, or the restrictions provided for the benefit of, the Series A Preferred Shares; (ii) any action that authorized, created or issued shares of any class of shares having preferences superior to or on a parity with the Series A Preferred Shares; (iii) any action that reclassified any outstanding shares into shares having preferences or priority as to dividends or assets senior to or on a parity with the preference of the Series A Preferred Shares; (iv) any amendment of the Company's Constitution that adversely affected the rights of the Series A Preferred Shares; (v) any merger or consolidation of the Company with one or more other corporations in which the shareholders of the Company immediately after such merger or consolidation held stock representing less than a majority of the voting power of the outstanding stock of the surviving corporation; (vi) a Change in Control of the Company; (vii) the sale of all or substantially all the Company's assets; (viii) the liquidation or dissolution of the Company; (ix) the declaration or payment of a dividend on the Ordinary Shares; (x) borrowings or financial accommodation (in whatever form) of an amount in excess of US$100,000 by or to the Company; (xi) material changes in the Company's business plan; (xii) any expenditure by the Company or agreement by the Company to expend amounts or agreement by the Company to incur any liability, contingent or otherwise, including (without limitation) capital expenditure on any one item or series of related or interconnected or operationally interdependent items in aggregate greater than US$100,000, or under any comfort letter aggregating in excess of US$100,000 in any one financial year and not provided for in the Business Plan for that year; (xiii) appointment or removal of any Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Vice President of Sales or Vice President of Marketing; or (xiv) the resignation or removal of any Key Executive Shareholders.
Non-compete Agreement:
In the event of the resignation or removal of any Company executives, or Key Executive Shareholders, such persons shall be restricted from working for any other company that competes directly or indirectly with the Company for a period of no less than three years. The Company and the Key Executive Shareholders will provide normal commercial representations and warranties with agreed caps and time limits acceptable to the Investor relating to the disclosure of all relevant information regarding the business. In the event of a material breach of warranties, nondefaulting shareholders reserve the right to purchase the vested and unvested shares or options of the defaulting shareholder at a valuation established by an independent auditor, conducted at the expense of the defaulting shareholder.
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Conversion Rights:
The Investors would have the right to convert the Series A Preferred Shares into Ordinary Shares at any time. The conversion rate for the Preferred Shares would be 1-for-1. The Preferred Shares would automatically be converted into Ordinary Shares, at the then applicable conversion rate, upon the closing of an underwritten public offering of Ordinary Shares of the Company (a "Qualified IPO"). In case of subsequent equity financings the Investor and other ordinary or common share holders, but not option holders, shall be entitled to purchase such portion of that financing to maintain the percentage of the outstanding stock held by that shareholder calculated on an as-converted, as exercised basis other than: i. ii. shares issued in a Qualifying IPO; or ordinary shares in the Company pursuant to strategic or one-off alliances.
Right of Financing:
First
Options:
The company will establish an Employee Share Option Plan (the ESOP) as an incentive for Key Executive Shareholders. The number of options issued under this plan will be 250,000 (the Exit Bonus Pool). Options in the Exit Bonus Pool will vest under the following conditions: i. ii. After the fifth year; and On the sale or IPO of the Company that meets or exceeds the Minimum Exit Value.
Options will vest in the following proportions: Exit Value Range < US $8.45m US $8.45m - $11.9m US $12m - $14.9m US $15m - $17.9m > US$18m Proportion: 0% 40% 60% 80% 100% Number of Shares 0 100,000 150,000 200,000 250,000
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Anti Dilution:
The conversion price of the Series A Preferred will be subject to a full ratchet adjustment to reduce dilution in the event that the Company issues additional equity securities (other than shares (i) reserved as employee shares described under the Companys option pool; (ii) shares issued for consideration other than cash pursuant to a merger, consolidation, acquisition, or similar business combination approved by the Board; (iii) shares issued pursuant to any equipment loan or leasing arrangement, real property leasing arrangement or debt financing from a bank or similar financial institution approved by the Board; and (iv) shares with respect to which the holders of a majority of the outstanding Series A Preferred waive their anti-dilution rights) at a purchase price less than the applicable conversion price. In the event of an issuance of stock involving tranches or other multiple closings, the anti dilution adjustment shall be calculated as if all stock was issued at the first closing. The conversion price will also be subject to proportional adjustment for stock splits, stock dividends, combinations, recapitalizations and the like. The Company will give each holder of the Series A Preferred Shares the right of first refusal with respect to any future equity offerings. Furthermore, each holder of the Series A Preferred will have pre-emptive rights on all offerings of equity securities or securities convertible or exchangeable into equity securities in order to maintain its original fully-diluted, post investment equity ownership position. A Series A Preferred holder will have 30 days in which to exercise these pre-emptive rights. Notwithstanding the provisions set forth above, no pre-emptive rights will apply to (i) equity compensation grants to employees, consultants or directors pursuant to plans or other arrangements approved by the Board of Directors or (ii) the issuance of securities in connection with a bona fide business acquisition of or by the Company, whether by merger, consolidation, sale of assets, sale or exchange of stock or otherwise. These rights will terminate at the Company's Official Public Offering. If any shareholder with 10% or more of the Company sells any proportion of its shares in the Company (other than to another existing shareholder), the Series A Investor shall have the right to a sale of that same proportion of the Series A Investors Preference Shares and/or ordinary shares in the Company. If the holders of 75% of the Series A Preferred Shares and Ordinary Shares, (calculated on an as-if-converted basis) execute a final, binding, definitive agreement with a prospective purchaser to sell all of their respective shares to such purchaser for consideration consisting entirely of cash or publicly traded securities, then the remaining shareholders shall be entitled and obliged to sell their shares to the same purchaser upon the same terms.
Pre-Emptive Rights:
Tag-along Agreement:
Drag-along Agreement:
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Liquidation Preference:
In the event of any insolvent liquidation, dissolution or winding up of the Company, following distributions to other legally senior parties and subject to the legal availability thereafter of distributable assets, the Series A Investor would be entitled to receive, prior to any distribution to the holders of the Ordinary Shares or any other class of preferred shares, pro rata share of such liquidation. If, at the end of four years from the Closing Date, more than 50% of all the shares of Series A Preferred, or Common Stock issued upon conversion of the Series A Preferred, voting as a single class may force the Company to register their shares for an IPO, or appoint an investment banker to place their shares or sell the Company. A "Qualified IPO" is defined as an initial public offering at an implied valuation of at least US$15,000,000 million and gross proceeds to the Company in excess of US$6.5 million. If, by five years from the closing date the Company has not listed or merged for liquid securities, or the Series A Investor has not otherwise sold its holding in the Company, then the Company, if requested by a simple majority of Series A Preference Shareholders will enter into a share Buy-back Scheme (the Buy-back Scheme) that allows the Company to purchase the Series A shares, as converted to Ordinary Shares. The Buy-back Scheme will take into account the need of the Investors to sell their shares by the end of seven years from the closing date with the available cash flows and borrowing capacity of the Company and will require approval by the Board of Directors. For a period of ninety days, the Company agrees not to solicit offers from other parties for any financing. Without the consent of Investors, the Company will not disclose these terms to anyone other than officers, directors, key service providers, and other potential Investors in this financing.
Registration Rights:
Qualified IPO:
Redemption Rights:
Binding Terms:
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INVESTORS
DATE:
DATE:
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