Download KRONOS ADVANCED TECHNOLOGIES INC (Form

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 13D
Under the Securities Exchange Act of 1934
Kronos Advanced Technologies, Inc.
(Name of Issuer)
Common Stock, $0.001 Par Value Per Share
(Title of Class of Securities)
50105X106
(CUSIP Number)
Reinaldo Pascual
Paul, Hastings, Janofsky & Walker LLP
600 Peachtree Street
Suite 2400
Atlanta, GA 30308
(404) 815-2400
(Name, Address and Telephone Number of Person Authorized
to Receive Notices and Communications)
June 19, 2007
(Date of Event which Requires Filing of this Statement)
If the filing person has previously filed a statement on Schedule 13G to report the acquisition that is the subject of this
Schedule 13D, and is filing this schedule because of Rule 13d-1(e), 13d-1(f) or 13d-1(g), check the following box . 
The information required on the remainder of this cover page shall not be deemed to be “filed” for the purpose of
Section 18 of the Securities Exchange Act of 1934 (“Act”) or otherwise subject to the liabilities of that section of the
Act but shall be subject to all other provisions of the Act (however, see the Notes).
CUSIP No. 50105X106
SCHEDULE 13D
1
NAME OF REPORTING PERSON
I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
AIRWORKS FUNDING LLLP
2
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP
3
SEC USE ONLY
4
SOURCE OF FUNDS
(a) 
(b) 
OO
5
CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO
ITEMS 2(d) or 2(e)
6
CITIZENSHIP OR PLACE OF ORGANIZATION

STATE OF GEORGIA
NUMBER OF
SHARES
BENEFICIALLY
OWNED BY
EACH
REPORTING
PERSON
WITH
7
SOLE VOTING POWER
885,714,285
8
SHARED VOTING POWER
9
SOLE DISPOSITIVE POWER
885,714,285
10
11
(1)
(1)
SHARED DISPOSITIVE POWER
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
885,714,285
(1)
CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES

12
13
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
79%
14
TYPE OF REPORTING PERSON
PN
CUSIP No. 50105X106
1
NAME OF REPORTING PERSON
I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
COMPASS PARTNERS, LLC
2
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP
3
SEC USE ONLY
4
SOURCE OF FUNDS
(a) 
(b) 
OO
5
CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO
ITEMS 2(d) or 2(e)
6
CITIZENSHIP OR PLACE OF ORGANIZATION

STATE OF NEW YORK
NUMBER OF
SHARES
BENEFICIALLY
OWNED BY
EACH
REPORTING
PERSON
WITH
7
SOLE VOTING POWER
885,714,285
8
SHARED VOTING POWER
9
SOLE DISPOSITIVE POWER
885,714,285
10
11
(1)
SHARED DISPOSITIVE POWER
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
885,714,285
12
(1)
(1)
CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES

13
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
79%
14
TYPE OF REPORTING PERSON
OO
CUSIP No. 50105X106
1
NAME OF REPORTING PERSON
I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
RICHARD PERLMAN
(a) 
(b) 
2
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP
3
SEC USE ONLY
4
SOURCE OF FUNDS
5
CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO
ITEMS 2(d) or 2(e)
6
CITIZENSHIP OR PLACE OF ORGANIZATION

UNITED STATES
NUMBER OF
SHARES
BENEFICIALLY
OWNED BY
EACH
REPORTING
PERSON
WITH
7
SOLE VOTING POWER
885,714,285
8
SHARED VOTING POWER
25,341,343
9
(2)
SOLE DISPOSITIVE POWER
885,714,285
10
11
(1)
(1)
SHARED DISPOSITIVE POWER
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
911,055,628
(1) (2)
CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES

12
13
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
79%
14
TYPE OF REPORTING PERSON
IN
CUSIP No. 50105X106
____ ___________________
(1)
Includes 885,714,285 shares of Common Stock issuable upon conversion of the $2,480,000 current principal
balance of the $10,820,000 Secured Convertible Promissory Note due June 19, 2010 which was issued to AirWorks
Funding LLLP on June 19, 2007, but excludes up to 2,978,571,428 shares of Common Stock which may become
issuable if such convertible note is funded in full.
This Schedule 13D has been prepared taking into account that, as described in Items 3, 4 and 5 below, pursuant to the
Lender Voting Agreement (as defined below) and the Letter Agreement (as defined below), AirWorks Funding LLLP
and RS Properties (as defined below) have agreed to convert a sufficient principal amount of their respective Notes (as
defined below) to secure voting control of the Issuer and will subsequently vote to approve an amendment to the
Issuer’s articles of incorporation to increase the authorized share capital of the Issuer to allow the Lenders (as defined
below) to convert the entire principal amounts advanced under the Notes into shares of Common Stock of the Issuer.
As described in Items 3, 4 and 5 below, AirWorks Funding LLLP may be deemed to be part of a group with RS
Properties and the Critical Capital Entities (as defined below) pursuant to the terms of the Lender Voting Agreement
and the L etter Agreement described below. The Reporting Persons expressly disclaim beneficial ownership of shares
of Common Stock issuable to RS Properties and the Critical Capital Entities upon conversion of the Notes (as defined
below). Such shares of Common Stock are not included in the amounts specified by the Reporting Persons above.
(2)
Includes (a) the right to vote, for limited purposes in accordance with those certain voting and support
agreements dated June 19, 2007, an aggregate of 8,590,696 shares of Common Stock owned by Messrs. Dwight,
McDermott, Tusing, Krichtafovitch, Sun and Gumbinner pursuant to a proxy granted to Mr. Perlman as of June 19,
2007 and (c) the right to vote, for limited purposes in accordance with those certain voting and support agreements
dated June 19, 2007, an aggregate of 16,750,647 shares of Common Stock issuable upon exercise of stock options
owned by Messrs. Dwight, McDermott, Segal, Tusing and Krichtafovitch. The Reporting Persons expressly disclaim
beneficial ownership of shares of Common Stock owned by or issuable to Messrs. Dwight, McDermott, Segal, Tusing,
Krichtafovitch, Sun and Gumbinner.
CUSIP No. 50105X106
Item 1. Security and Issuer.
The title of the class of equity securities to which this statement relates is Common Stock, par value $0.001 each
(“Common Stock”) of Kronos Advanced Technologies, Inc., a Nevada corporation (the “Issuer”). The principal
executive office of the Issuer is located at 494 Common Street, Suite 301, Belmont, MA 02478.
Item 2. Identity and Background.
(a)-(c) and (f) This Statement is being filed jointly by the following (the “Reporting Persons”)
AirWorks Funding LLLP, a Georgia limited liability limited partnership (“AirWorks”)
655 Madison Avenue
23rd Floor
New York, New York 10021
AirWorks is a newly-formed limited liability limited partnership whose sole business purpose is to invest in the
secured convertible promissory note issued by the Issuer and to acquire, own, hold, maintain and otherwise deal
with the shares of the Issuer.
Compass Partners, L.L.C. (“Compass”)
655 Madison Avenue
23rd Floor
New York, New York 10021
Compass is a limited liability company whose business purpose is to act as the General Partner of AirWorks.
Compass controls AirWorks through its role as General Partner of AirWorks.
Richard Perlman, an individual citizen of the United States
c/o AirWorks Funding LLP
655 Madison Avenue
23rd Floor
New York, New York 10021
Mr. Perlman’s present principal occupation is Chairman of the Board of TurboChef Technologies, Inc. Mr. Perlman
also is the President and controlling member of Compass.
(d) and (e) None of the Reporting Persons has, during the last five years, been (a) convicted in a criminal proceeding
(excluding traffic violations or similar misdemeanors), or (b) a party to a civil proceeding of a judicial or administrative
body of competent jurisdiction as a result of which he or it is or was subject to a judgment, decree or final order
enjoining future violations of, or prohibiting or mandating activities subject to, federal or state securities laws or
finding any violation with respect to such laws.
CUSIP No. 50105X106
Item 3. Source and Amount of Funds or Other Consideration.
On July 19, 2007, pursuant to a Funding Agreement (the “Funding Agreement”), among the Issuer, AirWorks, Sands
Brothers Venture Capital, LLC (“SBVC I”), Sands Brothers Venture Capital II LLC (“SBVC II”), Sands Brothers
Venture Capital III LLC (“SBVC III”), Sands Brothers Venture Capital IV LLC (“SBVC IV”), Critical Capital Growth
Fund, L.P. (“Critical Capital” and together with SBVC I, SBVC II, SBVC III and SBVC IV, the “Critical Capital
Entities”) and RS Properties I LLC (“RS Properties”, and collectively with AirWorks and the Critical Capital Entities,
the “Lenders”), the Issuer issued a $10,820,000 Secured Convertible Promissory Note due June 19, 2010 (the
“AirWorks Note”) to AirWorks, the outstanding principal amount of which is convertible into an aggregate of up to
3,864,285,714 shares of the Issuer’s Common Stock at the initial conversion price of $.0028 per share. On July 19,
2007, AirWorks made its first advance under the Funding Agreement and the AirWorks Note in the amount of
$2,480,000, which is convertible into 885,714,285 shares of Common Stock. Since the Issuer currently is only
authorized to issue 500 million shares of Common Stock and as of May 18, 2007, 242,342,803 shares of Common
Stock were issued and outstanding (according to filings made by the Issuer with the Securities and Exchange
Commission), AirWorks will not be able to convert the entire current outstanding principal amount of the AirWorks
Note until such time as the Issuer increases its authorized share capital to authorize additional shares of Common
Stock. As described in Item 4, pursuant to the Lender Voting Agreement and the Letter Agreement, AirWorks and RS
Properties have agreed to convert a sufficient principal amount of their respective Notes to secure voting control of the
Issuer and will subsequently vote to approve an amendment to the Issuer’s articles of incorporation to increase the
authorized share capital of the Issuer to allow the Lenders to convert the entire principal amounts advanced under the
Notes into shares of Common Stock of the Issuer. Assuming that AirWorks funds the full principal amount of the
AirWorks Note and converts such full principal amount, the AirWorks Note will be convertible into 3,864,285,714
shares of Common Stock. The source of funds used for the AirWorks Note was capital contributions from the funds of
the General Partner and limited partners of AirWorks. None of the funds used in connection with the issuance of the
AirWorks Note were borrowed by AirWorks.
Additionally, on June 19, 2007, the Issuer entered into Voting and Support Agreements (the “Securityholder Voting
Agreements”) with Messrs. Dwight, McDermott, Segal, Tusing, Krichtafovitch, Poster, Sun and Gumbinner
(collectively, the “Securityholders”) pursuant to which the Securityholders agreed to vote the Issuer’s securities owned
by them on certain specified matters in accordance with the Securityholder Voting Agreement. In addition, on June 19,
2007, each of the Securityholders granted Mr. Perlman a proxy to vote the Issuer’s securities owned by each of them in
accordance with the Securityholder Voting Agreements.
See Item 4 below for more information.
Item 4. Purpose of Transaction.
Funding Agreement and Secured Convertible Promissory Notes
Pursuant to the Funding Agreement, the Lenders agreed to loan the Issuer up to an aggregate of $18,159,000 (the
“Loan”), evidenced by the AirWorks Note, a $859,000 Secured Convertible Promissory Note due December 31, 2007
to the Critical Capital Entities (the “Critical Capital Note”) and a $6,480,000 Secured Convertible Promissory Note due
June 19, 2010 to RS Properties (the “RS Note” and together with the AirWorks Note and the Critical Capital Note, the
“Notes”). The first installment of the Loan, totaling $4,259,000, was advanced to the Issuer in the following amounts:
AirWorks advanced $2,480,000, the Critical Capital Entities advanced $859,000 and RS Properties advanced $920,000.
Pursuant to the Funding Agreement, AirWorks may advance up to an additional $8,340,000 under the AirWorks Note
and RS Properties may advance up to an additional $5,560,000 under the RS Note, at any time, and from time to time,
prior to the maturity date of such notes, in the sole discretion of AirWorks and RS Properties, respectively.
CUSIP No. 50105X106
Pursuant to the terms of the Notes, based on the amounts advanced in the first installment of the Loan, (1) the
AirWorks Note is convertible into 885,714,285 shares of Common Stock, (2) the Critical Capital Note is convertible
into 306,785,714 shares of Common Stock upon the occurrence of certain events described below and (3) the RS Note
is convertible into 328,571,428 shares of Common Stock, in each case, based on the initial conversion price of the
Notes (which is subject to adjustment under certain specified circumstances). Assuming the full amount of the Notes
are funded and the entire aggregate principal amount of the Notes is converted, (1) the AirWorks Note will be
convertible into up to 3,864,285,714 shares of Common Stock, (2) the Critical Capital Note will be convertible into up
to 306,785,714 shares of Common Stock and (3) the RS Note will be convertible into up to 2,314,285,714 shares of
Common Stock, in each case, based on the initial conversion price of the Notes (which is subject to adjustment under
certain specified circumstances). The AirWorks Note and the RS Note are convertible at any time, in whole or in part,
and the Critical Capital Note is only convertible in the event that all principal and accrued interest is not paid in full to
the Critical Capital Entities on or prior to the maturity date of the Critical Capital Note. Each of the Notes bear interest,
in arrears, at a rate of 12% per annum, payable in cash with respect to the AirWorks and RS Note commencing on
January 1, 2008 and payable in cash with respect to the Critical Capital Note commencing on July 1, 2007. All
outstanding principal and accrued interest under the Critical Capital Note is due and payable on December 31, 2007.
All outstanding principal and accrued interest on the AirWorks Note and the RS Note is due and payable on June 19,
2010. In addition, pursuant to the Notes, the Lenders have been granted certain preemptive rights in the event the Issuer
proposes to issue or sell any shares of Common Stock or any rights or options to purchase shares of Common Stock.
Each of the Notes contains additional terms and conditions, including events of default, that are generally consistent
with securities of this kind.
Pursuant to the Funding Agreement, the Issuer has agreed to take all actions necessary to ensure that AirWorks and RS
Properties have the right to designate a majority of the members of the board of directors of the Issuer, including
increasing the number of members of the issuer’s board of directors.
The Issuer’s obligations under the Notes are secured by substantially all of the assets of the Issuer and its subsidiary
Kronos Air Technologies, Inc., pursuant to a Security Agreement dated June 19, 2007.
In connection with the Funding Agreement, the Lenders entered into an Intercreditor Agreement with certain existing
creditors of the Issuer (the “Existing Creditors”) whereby the Existing Creditors agreed to subordinate their security
interest to that of the Lenders. In addition, the Lenders also entered into an Intercreditor Agreement whereby AirWorks
and RS Properties agreed to subordinate their security interest to that of the Critical Capital Entities.
CUSIP No. 50105X106
Voting and Support Agreements
On June 19, 2007, the Issuer, AirWorks, the Critical Capital Entities and RS Properties entered into a Voting and
Support Agreement (the “Lender Voting Agreement”) pursuant to which the Lenders agreed to vote the shares of
Common Stock entitled to vote on the following matters in the following manner: (1) in favor of a slate of directors to
serve on the Company’s board of directors as proposed by AirWorks and RS Properties, (2) in favor or adjusting the
size of the Issuer’s board of directors such that upon the election of the slate of directors proposed by AirWorks and RS
Properties, such directors hold a majority of the seats on the Issuer’s board of directors, (3) in favor of approving an
amendment to the Issuer’s articles of incorporation to increase the Issuer’s authorized common stock to a number of
shares necessary to allow the Lenders to convert the entire principal amount of the Notes into share of common stock of
the Company, (4) in favor of approving the reincorporation of the Company in Delaware, (5) in favor of a reverse stock
split proposed by AirWorks or the Issuer’s board of directors and (6) against any action or transaction that may
reasonably be expected to impede, interfere with, delay, postpone or attempt to discourage the consummation of any of
the foregoing. The expiration of the Lender Voting Agreement is the earlier of (a) the date on which the matters set
forth in (1)-(5) above have been approved by the stockholders of the Issuer and (b) August 1, 2008.
As described in Item 3 above, on June 19, 2007, the Issuer entered into the Securityholder Voting Agreements with the
Securityholders. The terms and expiration date of the Securityholder Voting Agreements are substantially similar to
those of the Lender Voting Agreement. In addition, on June 19, 2007, the Securityholders granted Mr. Perlman a proxy
(the “Proxy”) to vote the Issuer’s securities owned by each of them in accordance with the Securityholder Voting
Agreements.
Letter Agreement
On June 19, 2007, AirWorks and RS Properties entered into a letter agreement (the “Letter Agreement”) pursuant to
which the parties agreed (1) that any advances made to the Issuer pursuant to the Funding Agreement and the AirWorks
Note and RS Note, respectively, at a subsequent closing, will be made 60% by AirWorks and 40% by RS Properties,
(2) that following the closing of the Funding Agreement, AirWorks and RS Properties will secure more than 50% of the
voting control of the Issuer with AirWorks converting such portion of the AirWorks Note as is necessary to represent
60% of such controlling position and RS Properties converting such portion of the RS Note as is necessary to represent
40% of such controlling position, (3) to enter into the Lender Voting Agreement and (4) to make certain adjustments to
the percentage of additional advances required to be made by AirWorks and RS Note if certain specified events
occurred. This Schedule 13D has been prepared taking into account that, pursuant to the terms of the Letter Agreement,
AirWorks and RS Properties, will have voting control of the Issuer once the above actions have been taken and will
vote their respective shares of Common Stock in accordance with the terms of the Lender Voting Agreement.
CUSIP No. 50105X106
Registration Rights Agreement
In connection with the Funding Agreement, the Issuer and the Lenders entered into a Registration Rights Agreement
dated June 19, 2007. Pursuant to the Registration Rights Agreement, the Issuer agreed to file a registration statement
registering the Common Stock owned by the Lenders, the Common Stock underlying the Notes and any other securities
issued or issuable with respect to such securities upon any classification, share combination, share division, share
dividend, merger consolidation or similar event (the “Registrable Securities”), upon demand of the holders of at least
20% of the Registrable Securities. The Issuer is required to file such registration statement within 45 days (or 90 days if
the registration statement is on a form other than Form S-3) after notice is give and to use its reasonable best efforts to
cause the registration statement to become effective as promptly as practicable. The Issuer is required to keep such
registration statement effective until the earlier of (1) the date all Registrable Securities covered by such registration
statement have been sold or (2) the date on which all of the Registrable Securities may be sold without restriction
pursuant to subsection (k) of Rule 144 of the Securities Act of 1933, as amended. The Registration Rights Agreement
also provides the Lenders with piggy back registration rights with respect to certain offerings of the Issuer’s securities.
The foregoing summaries of the Funding Agreement, the Notes, the Security Agreement, the Intercreditor Agreements,
the Lender Voting Agreement, the Securityholder Voting Agreements, the Proxy, the Letter Agreement and the
Registration Rights Agreement are qualified in their entirety by reference to the copies of such agreements which are
attached hereto as Exhibits 2 through 14, respectively, and which are hereby incorporated by this reference.
Except as set forth herein, none of the Reporting Persons have a present plan or proposal that relates to or would result
in any other action specified in clauses (a) through (j) of Item 4 of Schedule 13D.
Item 5. Interest in Securities of the Issuer.
(a) and (b) See Items 7 through 11 and 13 of the cover sheet for each Reporting Person.
Each of AirWorks and Compass may be deemed to beneficially own 885,714,285 shares of Common Stock,
representing 79% of the outstanding shares of Common Stock (based upon 242,342,803 shares of Common Stock as of
May 18, 2007, as reported in the Issuer’s quarterly report on Form 10-QSB for the quarter ended March 31, 2007). Mr.
Perlman may be deemed to beneficially own 911,055,628 shares of Common Stock, representing 79% of the
outstanding shares of Common Stock (based upon 242,342,803 shares of Common Stock as of May 18, 2007, as
reported in the Issuer’s quarterly report on Form 10-QSB for the quarter ended March 31, 2007). Such shares of
Common Stock beneficially owned by the Reporting Persons include (a) 885,714,285 shares of Common Stock
issuable upon conversion of $2,480,000 principal amount of the AirWorks Note, but excludes up to 2,978,571,428
additional shares of Common Stock which may become issuable if the AirWorks Note is funded in full, (b) in respect
of Mr. Perlman, the right to vote, for limited purposes in accordance with the Securityholder Voting Agreements, an
aggregate of 8,590,696 shares of Common Stock owned by Messrs. Dwight, McDermott, Tusing, Krichtafovitch,
Poster, Sun and Gumbinner pursuant to a proxy granted to Mr. Perlman as of June 19, 2007 and (c) in respect of Mr.
Perlman, the right to vote, for limited purposes in accordance with the Securityholder Voting Agreements, an aggregate
of 16,750,647 shares of Common Stock issuable upon exercise of stock options owned by Messrs. Dwight, McDermott,
Segal, Tusing, Krichtafovitch and Poster.
CUSIP No. 50105X106
In addition, by virtue of any of the Lender Voting Agreement and the Letter Agreement, a “group,” within the meaning
of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or Rule 13d-5(b)(1)
thereunder, may have been formed that includes, AirWorks, RS Properties and the Critical Capital Entities. Such a
group including AirWorks, RS Properties and the Critical Capital Entities would be deemed to beneficially own, in the
aggregate, 1,214,285,713 shares of Common Stock, representing 83% of the Common Stock outstanding (based upon
242,342,803 shares of Common Stock outstanding as of May 18, 2007). Such shares of Common Stock which would
be deemed beneficially owned by such a group includes (1) 328,571,428 shares of Common Stock issuable upon
conversion of the funded portion of the RS Note and (2) 885,714,285 shares of Common Stock issuable upon
conversion of the funded portion of the AirWorks Note, but excludes (1) 1,985,714,285 shares of Common Stock
which may become issuable if the RS Note is funded in full, (2) 2,978,571,428 shares of Common Stock which may
become issuable if the AirWorks Note is funded in full and (3) 306,785,714 shares of Common Stock underlying the
Critical Capital Note which is not presently convertible. The Reporting Persons expressly disclaim beneficial
ownership of Common Stock beneficially owned by RS Properties and the Critical Capital Entities.
Since the Issuer currently is only authorized to issue 500 million shares of Common Stock and as of May 18, 2007,
242,342,803 shares of Common Stock were issued and outstanding (according to filings made by the Issuer with the
Securities and Exchange Commission), the Lenders will not be able to convert the entire current outstanding principal
amount of the Notes until such time as the Issuer increases its authorized share capital to authorize additional shares of
Common Stock. As described above, pursuant to the Lender Voting Agreement and the Letter Agreement, AirWorks
and RS Properties have agreed to convert a sufficient principal amount of the their respective Notes to secure voting
control of the Issuer and will subsequently vote to approve an amendment to the Issuer’s articles of incorporation to
increase the authorized share capital of the Issuer to allow the Lenders to convert the entire principal amounts advanced
under the Notes into shares of Common Stock of the Issuer.
Pursuant to, and to the extent set forth in, the Lender Voting Agreement, it could be alleged that AirWorks shares
voting power with respect to the shares of Common Stock beneficially owned by RS Properties or the Critical Capital
Entities. To the knowledge of AirWorks and based on documents publicly filed by RS Properties and the Critical
Capital Entities, Exhibit 15 sets forth certain information with respect to RS Properties and the Critical Capital Entities,
which is incorporated herein by reference. To the knowledge of AirWorks and based on documents publicly filed by
RS Properties and the Critical Capital Entities, during the last five years, neither RS Properties nor any of the Critical
Capital Entities has been: (i) convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors),
or (ii) a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such
proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or
mandating activities subject to Federal or State securities laws or finding any violation with respect to such laws.
CUSIP No. 50105X106
(c) Except as set forth in Items 3 and 4 above, no transactions in the Common Stock were effected by the Reporting
Persons in the last 60 days.
(d) and (e) Not applicable.
Item 6. Contracts, Arrangements, Understandings or Relationships With Respect to Securities of Issuer.
See Items 3, 4 and 5 above. Except as set forth in this Schedule 13D, to the best knowledge of the Reporting Persons,
no contracts, arrangements, understandings or relationships (legal or otherwise) exist among the Reporting Persons and
between the Reporting Persons and any other person with respect to the securities of the Issuer.
Item 7. Materials to be Filed as Exhibits.
Exhibit No.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
Description
Consent and Joint Filing Statement
Funding Agreement, dated June 19, 2007 between the Issuer, AirWorks, the Critical Capital
Entities and RS Properties
AirWorks Note, dated June 19, 2007
Critical Capital Note, dated June 19, 2007
RS Properties Note, dated June 19, 2007
Security Agreement, dated June 19, 2007 among the Issuer, AirWorks, the Critical Capital Entities
and RS Properties
Intercreditor Agreement, dated June 19, 2007 among AirWorks, the Critical Capital Entities, RS
Properties and certain existing creditors of the Issuer
Intercreditor Agreement, dated June 19, 2007 among AirWorks, the Critical Capital Entities and
RS Properties
Lender Voting Agreement, dated June 19, 2007 among the Issuer, AirWorks, the Critical Capital
Entities and RS Properties
Securityholder Voting Agreement, dated June 19, 2007 between the Issuer and the Securityholders
specified therein
Securityholder Voting Agreement, dated June 19, 2007 between the Issuer and the Securityholders
specified therein
Proxy granted in favor of Mr. Perlman dated June 19, 2007
Letter Agreement, dated June 19, 2007 between AirWorks and RS Properties
Registration Rights Agreement, dated June 19, 2007 among the Issuer, AirWorks, the Critical
Capital Entities and RS Properties
Information regarding RS Properties and the Critical Capital Entities
SIGNATURE
After reasonable inquiry and to the best of its knowledge and belief, each of the undersigned certifies that the
information set forth in this statement is true, complete and correct.
Dated: June 29, 2007
AIRWORKS FUNDING LLLP
By: Compass Partners, L.L.C., its General Partner
By:_ /s/ Richard Perlman __________
Name: Richard Perlman
Title: President
COMPASS PARTNERS, L.L.C.
By: _ /s/ Richard Perlman __________
Name: Richard Perlman
Title: President
RICHARD PERLMAN
_ /s/ Richard Perlman __________
Exhibit 1
CONSENT AND AGREEMENT TO JOINT FILING
Pursuant to Rule 13d-1(k)(1)(iii) of Regulation 13D-G of the Rules and Regulations of the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended, each of the undersigned persons does
hereby consent to and agree to jointly file with the Securities and Exchange Commission a Schedule 13D on behalf of
each of them with respect to their beneficial ownership of common stock, par value $0.001 per share, of Kronos
Advanced Technologies, Inc., and any future amendments thereto as may be required from time to time.
Dated: June 29, 2007
AIRWORKS FUNDING LLLP
By: Compass Partners, L.L.C., its General Partner
By: _ /s/ Richard Perlman __________
Name: Richard Perlman
Title: President
COMPASS PARTNERS, L.L.C.
By: _ /s/ Richard Perlman __________
Name: Richard Perlman
Title: President
RICHARD PERLMAN
_ /s/ Richard Perlman __________
Exhibit 2
FUNDING AGREEMENT
among
KRONOS ADVANCED TECHNOLOGIES, INC.,
AIRWORKS FUNDING LLLP,
SANDS BROTHERS VENTURE CAPITAL LLC,
SANDS BROTHERS VENTURE CAPITAL II LLC,
SANDS BROTHERS VENTURE CAPITAL III LLC,
SANDS BROTHERS VENTURE CAPITAL IV LLC,
CRITICAL CAPITAL GROWTH FUND, L.P.,
and
RS PROPERTIES I LLC
DATED JUNE 19, 2007
FUNDING AGREEMENT
THIS FUNDING AGREEMENT (this “ Agreement ”) is made as of June 19, 2007 by and among Kronos Advanced Technologies,
Inc., a Nevada corporation (“ Borrower ”), AirWorks Funding LLLP, a Georgia limited liability limited partnership (“ AirWorks ”), Sands
Brothers Venture Capital LLC, a New York limited liability company (“ Sands I ”), Sands Brothers Venture Capital II LLC, a New York
limited liability company (“ Sands II ”), Sands Brothers Venture Capital III LLC, a New York limited liability company (“ Sands III ”), Sands
Brothers Venture Capital IV LLC, a New York limited liability company (“ Sands IV ”), Critical Capital Growth Fund, L.P., a Delaware
limited partnership and a debenture licensed U.S. Small Business Investment Company (“ CCGF ”) and RS Properties I LLC, a Delaware
limited liability company (“ RS Properties ”) (AirWorks, Sands I, Sands II, Sands III, Sands IV, CCGF and RS Properties are individually
referred to herein as, a “ Lender ” and collectively as, the “ Lenders ”).
RECITALS:
A.
Borrower has authorized the issuance of (i) a secured convertible promissory note in the principal amount of $859,000 to Sands I, Sands
II, Sands III, Sands IV and CCGF (the “ Sands Entity Note ”), (ii) a secured convertible promissory note in the principal amount of up
to $6,480,000 to RS Properties (the “ RS Properties Note ”), and (iii) a secured convertible promissory note in the principal amount of
up to $10,820,000 to AirWorks (the “ AirWorks Note ”) (each of the Sands Entity Note, the RS Properties Note and the AirWorks Note
are referred to herein individually as, a “ Note ” and collectively as, the “ Notes ”) evidencing loans in the aggregate principal amount of
up to $18,159,000 made available by Lenders to Borrower, convertible into shares of Borrower’s Common Stock, par value $0.001 per
share (the “ Common Stock ”) (as converted, the “ Conversion Shares ”) at a conversion price per share of $0.0028, as adjusted in
accordance with the terms hereof and of the Notes.
B.
Lenders desire to loan up to $18,159,000 in the aggregate to Borrower, and Borrower desires to borrow up to $18,159,000 in the
aggregate from Lenders, pursuant to the terms and conditions set forth in the Transaction Documents.
NOW, THEREFORE, in consideration of the premises and mutual covenants contained in this Agreement, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
1.1 Certain Definitions. Capitalized terms used and not otherwise defined in this Agreement shall have the meanings ascribed to
them below.
“ Act ” means the Securities Act of 1933, as amended.
-1-
“ Affiliate ” means, with respect to a specified Person, a Person that directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with, the Person specified.
“ Benefit Plan ” means with respect to Borrower each written or oral plan, fund, program, Contract or scheme, in each case, that is
currently or in the past was, sponsored or maintained or required to be sponsored or maintained by Borrower or to which Borrower makes or
has in the past made, or has or has had in the past an obligation to make, contributions providing for employee benefits or for the remuneration,
direct or indirect, of the employees, former employees, officers, contingent workers or leased employees of Borrower or the dependents of any
of them, including each written or oral deferred compensation, bonus, incentive compensation, pension, retirement, stock purchase, stock
option and other equity compensation plan, “welfare” plan (within the meaning of Section 3(1) of ERISA, determined without regard to
whether such plan is subject to ERISA); each “pension” plan (within the meaning of Section 3(2) of ERISA, determined without regard to
whether such plan is subject to ERISA); each severance plan or Contract; and each health, vacation, summer hours, supplemental
unemployment benefit, hospitalization insurance, medical, dental, legal program, agreement or arrangement.
“ CERCLA ” means the Comprehensive Environmental Response Compensation and Liability Act, as amended, 42 U.S.C. §9601 et
seq.
“ Closing ” means the First Closing and any Subsequent Closing .
“ Code ” means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute.
“ Contract ” means any agreement, lease (including all real and personal property leases), policy, plan, instrument, contract, note,
power of attorney, insurance policy covenant, guaranty, arrangement, escrow account, commitment or other instrument.
“ Environmental Claim ” means any and all actions, suits, demands, demand letters, claims, Liens, notices of potential responsibility,
noncompliance or violation, investigations or proceedings brought by any Person relating in any way to any Environmental Law or any
environmental permit, including, without limitation (a) for enforcement, cleanup, removal, response, remedial or other actions or damages
pursuant to any applicable Environmental Law, and (b) seeking damages, contribution, indemnification, cost recovery, compensation or
injunctive relief in relation to the presence of Hazardous Substances.
“ Environmental Laws ” means all Laws relating to pollution or protection of human health or the environment (including ambient air,
surface water, ground water, drinking supply water, land or soil, surface or subsurface strata or medium, or any other environmental medium),
including all Laws which are administered, interpreted, or enforced by the United States Environmental Protection Agency or state or local
agencies with jurisdiction over and including common law in respect of, pollution or protection of human health or the environment, including
CERCLA, the Resource Conservation and Recovery Act, as amended, 42 U.S.C. 6901 et seq., and other Laws relating to emissions, discharges,
releases, or threatened releases of any Hazardous Substances, or otherwise relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport, or handling of any Hazardous Substances.
-2-
“ ERISA ” means the Employee Retirement Income Security Act of 1974, as amended.
“ ERISA Affiliate ” means any Person (whether incorporated or unincorporated), that together with Borrower, would be deemed a
“single employer” within the meaning of Section 414 of the Code.
“ ERISA Affiliate Plan ” means each Benefit Plan sponsored or maintained or required to be sponsored or maintained at any time by
any ERISA Affiliate, or to which such ERISA Affiliate makes or has made, or has or has had an obligation to make, contributions at any time.
“ Exchange Act ” means the Securities Exchange Act of 1934, together with the rules and regulations thereunder.
“ GAAP ” shall mean accounting principles generally accepted in the United States of America.
“ Governmental Entity ” means any federal, state or local or foreign government or any court, administrative or arbitrative agency or
commission or other governmental authority or agency, domestic or foreign.
“ Hazardous Substances ” means (a) any substance or material identified in CERCLA; (b) any substance or material that may be toxic,
a pollutant or a contaminant under any applicable Law, including but not limited to petroleum products; (c) asbestos, radon, urea formaldehyde,
poly-chlorinated biphenyls, lead or electromagnetic waves; (d) mold, mildew or other fungal growth; and (e) any other waste, pollutant,
hazardous substance, toxic, flammable, explosive, reactive, corrosive, infectious, radioactive, carcinogenic or mutagenic substance, hazardous
waste, special waste, industrial substance, by-product, process intermediate product or waste, chemical liquids or solids, liquid or gaseous
products, or any constituent of any such substance or waste, the generation, use, handling, storage, treatment, transport or disposal of which is
any way governed by or subject to any Laws.
“ Intellectual Property ” means all United States and non-United States (a) patents and patent applications, whether or not patents are
issued on such patent applications and whether or not such patents or applications are modified, withdrawn or resubmitted, (b) registered and
unregistered trade names, trade dress, trademarks, service marks and service names (and all applications for registration of the same) and all
goodwill associated therewith, (c) designs and design rights, whether or not such designs or design rights are the subject of any patents or
patent or other applications for registration, (d) copyrights and copyright registrations (and all applications for registration of the same) and
works of authorship (whether or not copyrighted or copyrightable), (e) trade secrets, know-how, formulae, patterns, compilations, devices,
methods, techniques or processes, and confidential or proprietary information, (f) inventions, processes and designs (whether or not patentable
or reduced to practice), (g) any Software, (h) domain names or uniform resource locators used in connection with any global computer or
electronic network (including, without limitation, the Internet and the World Wide Web), together with all translations, adaptations, derivations
and combinations thereof, and including all goodwill associated therewith, all applications, registrations and renewals in connection therewith,
and all source code, object code, data and documentation relating thereto, and (i) all other intellectual property rights and assets.
-3-
“ Laws ” means all laws, codes, statutes, ordinances, orders, judgments, decrees, administrative or judicial promulgations, injunctions,
determinations, approvals, rules, regulations, permits, certificates, licenses and authorizations of all Governmental Entities with jurisdiction
over Borrower or its assets or business.
“ Leased Real Property ” means all parcels of real property used or held for use in connection with Borrower’s business and leased by
Borrower (together with all fixtures and improvements thereon).
“ Licenses ” means all notifications, licenses, permits (including environmental, construction and operation permits), franchises,
registrations, certificates, approvals, exemptions, classifications, registrations and other similar documents, rights and authorizations issued by
any Governmental Entity.
“ Liens ” means all mortgages, liens, pledges, security interests, charges, claims, restrictions and encumbrances of any nature
whatsoever.
“ Loan ” means collectively the loans made available by Lenders to Borrower, evidenced by the Notes, in the aggregate principal
amount of up to Eighteen Million One Hundred Fifty-Nine Thousand Dollars ($18,159,000).
“ Material Adverse Effect ” means, when taken together with all other states of fact, changes, events, effects, developments or
occurrences, any material adverse effect on the condition (financial or otherwise), prospects, operations, properties, business or assets of
Borrower.
“ Maturity Date ” means June 19, 2010
“ NCL ” means the Nevada Corporation Law, as amended.
“ Option Plan ” means Borrower’s
2007 Incentive Stock Option Plan, as amended.
“ Permitted Liens ” means (a) Liens for taxes not yet due and payable, (b) statutory Liens of landlords and (c) Liens of carriers,
warehousemen, mechanics, materialmen and repairmen incurred in the ordinary course of business consistent with past practice and not yet
delinquent.
“ Person ” means an individual, sole proprietorship, partnership, corporation, association, institution, joint stock company, limited
liability company, trust, joint venture, unincorporated organization, or Governmental Entity or any other legal entity.
“ SBA ” means the U.S. Small Business Administration.
“ SEC ” shall mean the Securities and Exchange Commission, or any successor organization.
-4-
“ Securities Act ” means the Securities Act of 1933, together with the rules and regulations thereunder.
“ Software ” means any and all (a) computer programs, including any and all software implementations of algorithms, models and
methodologies, whether in source code or object code, (b) databases and compilations, including any and all data and collections of data,
whether machine readable or otherwise, (c) descriptions, flow-charts and other work product used to design, plan, organize and develop any of
the foregoing, (d) the technology supporting and content contained on any owned or operated Internet site(s), and (e) all documentation,
including user manuals and training materials, relating to any of the foregoing.
“ Subsequent Closing ” means the closing of any Subsequent Tranche.
“ Subsequent Closing Date ” means the date on which any Subsequent Closing occurs.
“ Taxes ” means all federal, state, local or foreign income, gross receipts, windfall profits, severance, property, production, sales, use,
license, excise, franchise, employment, premium, recording, documentary, documentary stamps, real estate transfer, transfer, back-up
withholding or similar taxes imposed on the income, properties or operations of Borrower, together with any interest, additions, or penalties
with respect thereto and with respect to any information reporting requirements imposed by the Code or any similar provision of foreign, state
or local law, together with any interest in respect of such additions or penalties.
“ Tax Returns ” means all reports and returns with respect to Taxes that are required to be filed with any taxing authority or retained
by or with respect to Borrower, including without limitation consolidated federal income tax returns of Borrower that are includible therein.
“ Transaction Documents ” means, collectively, this Agreement, the Notes, the Security Agreement, the Registration Rights
Agreement and all other documents or instruments executed in connection with the transactions contemplated by this Agreement.
1.2 Other Definitions. In addition to the terms defined in Section 1.1 , certain other terms are defined elsewhere in this Agreement,
and, whenever such terms are used in this Agreement, they shall have their respective defined meanings, unless the context expressly or by
necessary implication otherwise requires. The definitions of such terms are set forth in the sections listed below.
Term
Agreement
AirWorks Note
Borrower
Borrower Counsel Opinion
Borrower Financial Statements
Borrower Officer’s Certificate
Borrower Reports
CCGF
Section
Preamble
Recitals
Preamble
6.2(b)
3.7
6.2(d)
3.6
Preamble
-5-
Closing Date(s)
Common Stock
Conversion Shares
Fairness Opinion
First Closing
First Closing Date
First Tranche
Lender(s)
Lender Officer’s Certificate
Letter Agreements
Litigation
Material Contracts
Nevada Opinion
Note(s)
Registration Rights Agreement
RS Properties Note
Sands I
Sands II
Sands III
Sands IV
Sands Entity Note
SBIA
Security Agreement
Subsequent Tranche(s)
Voting Agreement
Work-for-Hire Agreement
3.3
Recitals
Recitals
6.2(f)
2.3
2.3
2.1(a)
Preamble
6.3(a)
2.4(a)(iii)
3.15(a)
3.12(a)
6.2(c)
Recitals
2.4(a)(iv)
Recitals
Preamble
Preamble
Preamble
Preamble
Recitals
3.30(a)
2.4(a)(v)
2.1(b)
2.4(a)(ii)
3.16(d)
ARTICLE II
AUTHORIZATION; PURCHASE AND SALE; CLOSING
2.1 Term Loan. Lenders agree, subject to the terms and conditions of this Agreement and in reliance upon the representations and
warranties of Borrower contained herein, to make the Loan as follows:
(a)
The first installment of the Loan, totaling Four Million Two Hundred Fifty-Nine Thousand Dollars ($4,259,000) (the “
First Tranche ”), shall be advanced by Lenders on the First Closing Date and each Lender shall advance on the First Closing Date the following
amounts: Sands I, Sands II, Sands III, Sands IV and CCGF shall collectively advance Eight Hundred Fifty-Nine Thousand Dollars ($859,000),
RS Properties shall advance Nine Hundred Twenty Thousand Dollars ($920,000) and AirWorks shall advance Two Million Four Hundred
Eighty Thousand Dollars ($2,480,000).
-6-
(b)
Any other installments of the Loan, totaling in the aggregate up to Thirteen Million Nine Hundred Thousand Dollars
($13,900,000.00) (each, a “ Subsequent Tranche ” and collectively, the “ Subsequent Tranches ”), may be advanced by AirWorks up to Eight
Million Three Hundred Forty Thousand Dollars ($8,340,000) and by RS Properties up to Five Million Five Hundred Sixty Thousand Dollars
($5,560,000), in whole or in part, at any time prior to the Maturity Date in the sole discretion of AirWorks and RS Properties, respectively,
even if not requested by Borrower, and if so advanced, Borrower shall be obligated to accept such amount. Each of AirWorks and RS
Properties shall maintain a record of all advances of the Loan made to Borrower by it, and such record shall be conclusive evidence of the
advances of the Loan made to Borrower.
2.2
Notes. The Loan shall be evidenced by the Notes.
2.3 Closing. The closing of the First Tranche of the Loan (the “ First Closing ”) shall take place at the offices of Paul, Hastings,
Janofsky & Walker LLP, 600 Peachtree Street, N.E., Suite 2400, Atlanta, Georgia 30308, simultaneously with the execution hereof (the “ First
Closing Date ”).
2.4
First Closing Deliveries.
(a) At the First Closing, Borrower shall deliver to Lenders:
(i)
the Sands Entity Note, the RS Properties Note and the AirWorks Note, each duly executed by Borrower;
(ii)
the Voting Agreement, in substantially the form attached hereto as Exhibit A , duly executed by each of Daniel Dwight,
James McDermott, Milton Segal, Richard Tusing, Igor Krichtafovitch, William Poster, Richard Sun and Frederic
Gumbinner (the “ Voting Agreement ”) ;
(iii)
the Letter Agreements, in substantially the form attached hereto as Exhibit B , duly executed by each of Eagle Rock Group
LLC, The Wall Street Group, Daniel Dwight, Richard Tusing, Igor Krichtafovitch, Karl Winkler, Vladimir Gorobets,
Jacob Oharah, Sergey Karpov, Vladimir Bibikov, Terence Tam, Maciej Ziomkowski, Vladislov Korlov, James
McDermott, Milton Segal, William Poster, J. Alexander Chriss, Richard Sun and Frederic Gumbinner (collectively, the “
Letter Agreements ”)
(iv)
the Registration Rights Agreement, in the form attached hereto as Exhibit C , duly executed by Borrower (the “
Registration Rights Agreement ”);
-7-
(v)
the Security Agreement, in the form attached hereto as Exhibit D , duly executed by Borrower (the “ Security Agreement
”);
(vi)
the Patent Security Agreement, in the form attached hereto as Exhibit E , duly executed by Borrower (the “ Patent
Security Agreement ”);
(vii)
Borrower Counsel Opinion and Nevada Opinion;
(viii)
the Fairness Opinion;
(ix)
Borrower Officer’s Certificate;
(x)
a certificate by the Secretary of Borrower, dated as of the First Closing Date, as to (A) the good standing of Borrower in
its jurisdiction of incorporation, (B) no amendments to Borrower’s charter documents between the date hereof and the
First Closing Date that would adversely affect Borrower’s obligations under this Agreement were approved by the Board
of Directors or shareholders or filed with the Secretary of State of the State of Nevada, (C) the effectiveness of resolutions
of Borrower’s board of directors authorizing the execution, delivery and performance of this Agreement by Borrower
passed in connection with this Agreement and the transactions contemplated hereby, and (D) the incumbency of such
officer of Borrower executing this Agreement or any other document on behalf of Borrower;
(xi)
confidentiality agreements, in such form as is acceptable to Lenders in their reasonable discretion, from each employee of
Borrower;
(xii)
such other documents as may be required under this Agreement or as a Lender or its counsel may reasonably request.
(b)
At the First Closing, each of the Lenders, severally and not jointly, shall deliver to Borrower:
(i)
such Lender’s portion of the aggregate amount of the First Tranche by wire transfer of immediately available funds,
subject to Section 5.12;
(ii)
the Registration Rights Agreement;
(iii)
the Security Agreement;
(iv)
the Patent Security Agreement;
-8-
(v)
Lender Officer’s Certificate executed by an officer of such Lender, dated as of the First Closing Date; and
(vi) such other documents as may be required by this Agreement.
2.5
Subsequent Closing Deliveries .
(a) At each Subsequent Closing, Borrower shall deliver to AirWorks, RS Properties or their respective designees:
(i)
Borrower Officer’s Certificate, dated as of such Subsequent Closing Date;
(ii)
a certificate by the Secretary of Borrower, dated as of the Second Closing Date, as to (A) the good standing of Borrower in
its jurisdiction of incorporation, (B) no amendments to Borrower’s charter documents between the date hereof and such
Subsequent Closing Date that would adversely affect Borrower’s obligations under this Agreement were approved by the
Board of Directors or shareholders or filed with the Secretary of State of the State of Nevada, (C) the effectiveness of
resolutions of Borrower’s board of directors authorizing the execution, delivery and performance of this Agreement by
Borrower passed in connection with this Agreement and the transactions contemplated hereby, (D) the incumbency of such
officer of Borrower executing this Agreement or any other document on behalf of Borrower, (E) no defaults have occurred
or are occurring with respect to the Notes and (F) setting forth all adjustments to the Conversion Price (as defined in the
Notes) required to be made by Borrower pursuant to the terms of the Notes since the preceding Closing Date; and
(iii)
such other documents as may be required under this Agreement, the AirWorks Note, the RS Properties Note or as
AirWorks or RS Properties or their respective designees or counsel may reasonably request.
(b) At each Subsequent Closing, AirWorks, RS Properties or their respective designees, severally and not jointly, shall deliver to
Borrower:
(i)
the amount of the Subsequent Tranche to be delivered at such Subsequent Closing, as determined in the sole discretion of
AirWorks and RS Properties;
(ii)
a Lender Officer’s Certificate executed by an officer of AirWorks, RS Properties or their respective designees, as the case
may be, dated as of such Subsequent Closing Date; and
(iii)
such other documents as may be required by this Agreement or the Notes.
-9-
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF BORROWER
Borrower hereby represents and warrants to each of the Lenders as of the First Closing Date and to AirWorks or RS Properties, as the
case may be, as of each Subsequent Closing Date as follows:
3.1 Organization; Power; Standing. Borrower is a corporation duly organized, validly existing in good standing under the laws of
the State of Nevada, with its principal executive offices located in Belmont, Massachusetts. Borrower has full corporate power and authority to
own or lease all of its properties and assets, and to carry on its business as it is now being conducted. Borrower is duly qualified to do business
and is in good standing in the jurisdictions described on Schedule 3.1 , except where failure to qualify would not have, or would not reasonably
be expected to have, a Material Adverse Effect on Borrower, which constitute all the jurisdictions in which the ownership of its property or the
conduct of its business requires such qualification. Except as set forth on Schedule 3.1 , Borrower does not have any subsidiaries, does not
exercise voting control, directly or indirectly, over any other corporation or business entity, does not own or control any material portion of the
shares of stock, partnership interests, membership interests or other securities of any corporation or other business entity, and does not have any
investment in any other Person.
3.2
Capitalization.
(a)
As of the date hereof, the capital stock of Borrower consists of 500,000,000 authorized shares of Common Stock, of
which 242,342,803 shares are issued and outstanding. All of the outstanding shares of capital stock of Borrower have been duly authorized and
validly issued, are fully paid and nonassessable and were issued in compliance with all applicable federal and state securities laws and not in
violation of any preemptive or similar rights. Schedule 3.2(a) hereto sets forth the number of shares of capital stock held by each of Daniel
Dwight, James McDermott, Milton Segal, Richard Tusing, Igor Krichtafovitch, and William Poster.
(b)
Schedule 3.2(b) hereto sets forth a complete list of all holders of options, warrants and other similar rights to acquire
capital stock of Borrower as of the date of this Agreement, indicating the number of shares of capital stock underlying such options, warrants or
similar rights, vesting schedule, exercise price and expiration date, if applicable, for each such option, warrant or similar right. Except for (i)
the rights created under this Agreement, (ii) the options issued and reserved for issuance under the Option Plan, and (iii) all other options,
warrants and other similar rights set forth on Schedule 3.2(b) , there are no outstanding rights of first refusal, preemptive rights or other rights,
options, warrants, conversion rights or other agreements, either directly or indirectly, for the purchase or acquisition from Borrower of any
shares of its capital stock.
-10-
3.3 Authority; Due Execution. Borrower has the right, power and capacity to execute and deliver this Agreement and the other
agreements entered into in connection with this Agreement and to perform its obligations under this Agreement and the other agreements
entered into in connection with this Agreement to which it is a party to and to consummate the transactions contemplated hereby and thereby.
The execution and delivery of this Agreement and the other agreements entered into in connection with this Agreement by Borrower and the
performance by Borrower of its obligations hereunder and thereunder and the consummation of the transactions provided for herein and therein
have been duly and validly authorized and approved by Borrower’s board of directors and no further consent or authorization is required by the
Borrower, its board of directors or its shareholders. This Agreement has been, and the other agreements entered into in connection with this
Agreement will be as of the First Closing Date and each Subsequent Closing Date (each individually, a “ Closing Date ” and collectively, the “
Closing Dates ”), duly executed and delivered by Borrower and do or will, as the case may be, constitute the valid and binding agreement of
Borrower, enforceable against it in accordance with their respective terms, subject to applicable bankruptcy, insolvency, reorganization,
fraudulent conveyance, moratorium and other similar laws affecting the enforceability of creditors’ rights generally, general equitable
principles and the discretion of courts in granting equitable remedies.
3.4 Validity of the Notes and the Conversion Shares. The issuance of the Notes and the Conversion Shares upon conversion of the
Notes are not and will not be subject to any preemptive rights, rights of first refusal or other preferential rights that have not been waived, and
the Notes when issued, sold and delivered in accordance with the terms of this Agreement and the Conversion Shares when issued upon
conversion of the Notes will be validly issued, fully paid and nonassessable and will be free of any Liens, other than Liens arising as a result of
actions taken by Lenders in their capacity independent of Borrower; provided , however , that the Notes and the Conversion Shares will be
subject to applicable restrictions on transfer under state and federal securities laws.
3.5 Non-Contravention. Except as set forth on Schedule 3.5 , neither the execution and delivery of this Agreement by Borrower nor
the consummation of the transactions contemplated hereby (including, without limitation, the conversion of any Note to Common Stock) does
or would, after the giving of notice or the lapse of time or both, (a) conflict with, result in a breach of, constitute a default under, or violate the
Certificate of Incorporation or the bylaws of Borrower, (b) conflict with, result in a breach of, constitute a default under, or violate any Law
applicable to Borrower, (c) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the
right to accelerate, terminate, amend, modify, cancel or refuse to perform under, or require any notice under any, Contract, commitment,
License or other arrangement, including any express or implied warranty, to which Borrower is a party or by which it is bound or to which any
of its assets is subject, or (d) result in the creation of, or give any party other than the Lenders the right to create, any Lien, other than Permitted
Liens, or other rights upon any right, property or asset of Borrower.
3.6 Borrower Reports. Except as set forth on Schedule 3.6 , Borrower has timely filed (after giving effect to any extensions timely
filed for) all material reports, registrations, statements and other filings, together with any amendments required to be made with respect
thereto, that were required to be filed since December 31, 2004, with the SEC (all such reports being collectively referred to herein as the “
Borrower Reports ”). As of their respective dates (and without giving effect to any amendments or modifications filed after the date of this
Agreement with respect to Borrower Reports filed before the date of this Agreement), each of Borrower Reports and the contents thereof
complied in all material respects with the statutes, rules, regulations and orders enforced or promulgated by the SEC (including Regulation
FD), and, as of the respective date any such Borrower Report was filed, did not contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they
were made, not misleading. Borrower has filed all contracts, agreements and other documents or instruments required to be filed as exhibits to
Borrower Reports. Borrower has furnished or made available to Lenders true and complete copies of any comments, notices or other
correspondence it has received from the staff of the SEC.
-11-
3.7 Borrower Financial Statements. The balance sheets of Borrower contained in Borrower Reports, and the related statements of
earnings, stockholders’ equity and cash flows contained in Borrower Reports (including all notes and schedules related thereto) (such financial
statements, notes and any schedules thereto, being referred to herein as the “ Borrower Financial Statements ”), present fairly, in all material
respects, the financial position and the results of operations and cash flows of Borrower as of the dates, or for the periods, presented therein in
conformity with GAAP applied on a consistent basis during the periods involved, except as otherwise noted therein, including all requirements
of applicable Law (including applicable provisions of the Sarbanes-Oxley Act of 2002 and all regulations of the SEC with respect thereto).
3.8 Absence of Undisclosed Liabilities. Except as set forth on Schedule 3.8 , as of the date hereof, Borrower does not have any
liability or financial obligation, whether accrued, absolute, contingent or otherwise, that was not fully reflected or reserved against in the
Borrower Financial Statements, or disclosed in the accompanying notes thereto, except for liabilities incurred in the ordinary course of business
since December 31, 2006.
3.9 Minute Books and Organizational Documents. Borrower has furnished or made available to Lenders true and complete copies
of its Certificate of Incorporation and bylaws, each as amended to date. Such organizational documents are in full force and effect, and
Borrower is not in violation of any provision of its Certificate of Incorporation or bylaws. The minute books of Borrower contain records that
are accurate in all material respects of all meetings and other corporate actions of its stockholders and board of directors (including committees
of the board of directors) through the date hereof and the signatures contained therein are the true signatures of the Persons whose
signatures they purport to be.
3.10 Absence of Certain Changes. Since December 31, 2006, except as set forth in Borrower’s annual report on Form 10-KSB
dated June 30, 2006 and quarterly reports on Form 10-QSB as filed with the SEC for the quarters ended December 31, 2006 and March 31,
2007, the business of Borrower has been conducted in the ordinary and usual course, consistent with past practice and there has not been: (a)
any event, occurrence, development or state of circumstances or facts which has had or could reasonably be expected to constitute or result in a
Material Adverse Effect on Borrower; or (b) any event, occurrence, development or state of circumstances or facts which would result in a
violation of the covenants set forth in Article V of this Agreement, had such event, occurrence, development or state of circumstances or facts
occurred after the date hereof.
-12-
3.11
Properties; Securities.
(a)
Except as set forth on Schedule 3.11 and except for those properties and assets that have been sold or otherwise disposed
of in the ordinary course of business, Borrower has good and marketable title, free and clear of all Liens, other than Permitted Liens, to all of
the properties and assets, tangible and intangible, reflected in the Borrower Financial Statements as being owned by Borrower as of the dates
thereof, other than those Liens that, individually or in the aggregate, are not reasonably likely to have a Material Adverse Effect on Borrower.
(b)
All buildings and all fixtures, equipment, and other property and assets which are held under leases or subleases by
Borrower are held under valid leases or subleases enforceable in accordance with their respective terms, subject to applicable bankruptcy,
insolvency, reorganization, fraudulent conveyance, moratorium and other similar laws affecting the enforceability of creditors’ rights generally,
general equitable principles and the discretion of courts in granting equitable remedies.
(c)
Borrower has good and marketable title to all securities held by it (except securities sold under repurchase agreements or
held in any fiduciary or agency capacity), free and clear of any Lien, except to the extent such securities are pledged in the ordinary course of
business consistent with commercially reasonable business practices to secure obligations of Borrower. Such securities are valued on the books
of Borrower in accordance with GAAP.
3.12
Material Contracts.
(a)
Schedule 3.12(a) hereto sets forth a complete list of all of the following agreements, commitments, arrangements,
understandings or instruments (whether written or oral) to which Borrower is a party, other than those which are contemplated by this
Agreement (collectively, the “ Material Contracts ”), true, correct and complete copies of which have been provided or made available to
Lender:
(i)
Contracts providing for annual payments in excess of Twenty-Five Thousand Dollars ($25,000) or aggregate payments
in excess of Fifty Thousand Dollars ($50,000);
(ii)
leases or subleases of real property;
(iii)
partnership, joint venture or similar Contracts, or any rights to acquire from any person any capital stock, voting
securities or securities convertible into or exchangeable for capital stock or voting securities of such person;
(iv)
executory Contracts relating to the acquisition or disposition of any business (whether by merger, sale of stock, sale of
assets or otherwise);
-13-
(v)
outstanding indentures, mortgages, promissory notes, loan agreements, guarantees or other Contracts or commitments
for the borrowing of money by Borrower (in any case, whether incurred, assumed, guaranteed or secured by any asset);
(vi)
licenses, franchises or similar Contracts material to Borrower, or any agreement relating to any trade name or
Intellectual Property that is material to Borrower;
(vii)
exclusive dealing arrangements or other Contracts or arrangements containing covenants which limit the ability of
Borrower to compete in any line of business or with any person or which involve any restriction of geographical area
in which, or method by which, Borrower may carry on its business (other than as may be required by law or any
applicable Governmental Entity);
(viii)
Contracts between any Affiliate of Borrower, on the one hand, and Borrower, on the other hand;
(ix)
Contracts, which will survive any Closing, with any director, officer or employee of Borrower, other than those
agreements being executed and delivered in connection with this Agreement;
(x)
collective bargaining agreements;
(xi)
Contracts which will survive any Closing for the employment or other engagement of any individual on a full time,
part time, consulting or other basis;
(xii)
Contracts under which Borrower has advanced or loaned any amount to any of the directors, officers, employees or
independent contractors of Borrower; and
(xiii)
any other Contract that is material to Borrower.
(b)
Except as set forth on Schedule 3.12(b) hereto, and in the case of subparagraphs (ii), (iii) and (iv), in the Borrower
Reports:
(i) each of the Material Contracts is valid, binding and enforceable and in full force and effect, subject to applicable
bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium and other similar laws affecting the
enforceability of creditors’ rights generally, general equitable principles and the discretion of courts in granting equitable
remedies, and subject to the rights of other parties thereto to terminate, will continue to be valid, binding, enforceable and
in full force and effect on substantially identical terms following consummation of the transactions contemplated hereby;
-14-
(ii)
Borrower is not in breach or default and no event has occurred which with notice or lapse of time would constitute a
breach or default, or permit termination, modification or acceleration by any other party under any Material Contract
and no other party is in breach or default and no event has occurred which with notice or lapse of time would constitute
a breach or default, or permit termination, modification or acceleration by Borrower under any Material Contract;
(iii)
Borrower has not and no other party has, repudiated any provision of any Material Contract; and
(iv)
Borrower has not received any written notice that the other party to any Material Contract intends to exercise any
termination rights with respect to any Material Contract.
3.13 No Consents. Except as otherwise set forth on Schedule 3.13 , no permit, consent, approval, novation, authorization or other
order of or filing with any Governmental Entity or any other Person is required in connection with the execution, delivery and consummation
of this Agreement by Borrower and the actions of Borrower contemplated hereby, or to permit Borrower to continue to conduct its business as
currently conducted in all material respects following the consummation of the transactions contemplated hereby other than as a result of any
facts or circumstances relating solely to Lender.
3.14 Related Party Transactions. Schedule 3.14 sets forth all existing transactions, investments and loans, including loan
guarantees existing as of the date hereof, to which Borrower is a party with any director, executive officer or 5% or greater stockholder of
Borrower (or holder of securities that would represent 5% or more of the shares of Borrower on an as-converted basis, including, without
limitation, Cornell Capital Partners, LP and Homedics, Inc.), or any Affiliate of Borrower. All such transactions, investments and loans are on
terms no less favorable to Borrower than could be obtained from unrelated parties.
3.15
Litigation; Regulatory Action. Except as set forth on Schedule 3.15 hereto:
(a)
no litigation, proceeding (administrative or otherwise) or controversy (“ Litigation ”) before any court, arbitrator,
mediator or Governmental Entity is pending against Borrower, any director or officer of Borrower, or, to Borrower’s knowledge, any employee
of Borrower, which relates to Borrower’s activities, business or assets, and, to Borrower’s knowledge, no such Litigation has been threatened;
and
(b)
Borrower is not party or subject to, and none of the properties or assets of Borrower is subject to, any order, decree,
agreement, memorandum of understanding or similar arrangement with, or a commitment letter or similar submission to, any Governmental
Entity, and Borrower has not been advised in writing by any Governmental Entity that such Governmental Entity is contemplating issuing or
requesting (or is considering the appropriateness of issuing or requesting) any such order, decree, agreement, memorandum or understanding,
commitment letter or similar submission.
-15-
3.16
Intellectual Property.
(a)
Schedule 3.16(a) sets forth a complete list of all Intellectual Property which is owned or used by Borrower, all of which,
to Borrower’s knowledge, is valid and is enforceable and in full force and effect. Borrower owns, or has the valid and exclusive right to use and
to transfer, in each case free and clear of all Liens, other than licenses granted by Borrower which are listed on Schedule 3.16(a) , all
Intellectual Property used in its business as it currently is conducted or held for use in such business. Except as set forth on Schedule 3.16(a) ,
the validity and enforceability of such Intellectual Property or Borrower’s title thereto (i) have not been questioned in any prior Litigation, (ii)
are not being questioned in any pending Litigation, and (iii) are not the subject of any threatened or proposed Litigation. Except as set forth on
Schedule 3.16(a) , Borrower is not aware of any information that would, or that another Person has asserted that would, cause any of the
Intellectual Property identified on Schedule 3.16(a) to be invalid or unenforceable. The consummation of the transactions contemplated hereby
(including, without limitation, the conversion of the Note to Common Stock) will not result in any loss or impairment of or to any such
Intellectual Property of Borrower.
(b)
Borrower is not party to, whether as licensor or licensee, and is not bound by or subject to, any license agreement for any
Intellectual Property or process, except as described on Schedule 3.16(b) . With respect to all licenses identified on Schedule 3.16(b) under
which Borrower is the licensor, no claim, request or demand for indemnity for infringement has been made by any licensee. Except as set forth
on Schedule 3.16(b) , Borrower is not aware of any breach or anticipated breach of any license identified on Schedule 3.16(b) , nor has it
received notice of termination of any such license. Borrower has provided to Lender true, correct and complete copies of each license
agreement listed on Schedule 3.16(b) .
(c)
All maintenance fees, annuities, affidavits and renewals due from Borrower or required to be paid by Borrower through
the date of this Agreement with respect to the Intellectual Property identified on Schedule 3.16(a) have been paid or filed.
(d)
Schedule 3.16(d) sets forth a list of each of Borrower’s officers, directors, employees, consultants and independent
contractors who are contractually obligated to disclose and assign all rights with respect to their work for Borrower to Borrower, and to
cooperate with Borrower in obtaining and perfecting ownership of patents, copyrights and other statutory or related rights with respect to such
work (any such contract being referred to herein as a “ Work-for-Hire Agreement ”). Borrower has provided true, correct and complete copies
of any such agreement to Lender. Schedule 3.16(d) also sets forth a list of each of Borrower’s officers, directors, employees, consultants and
independent contractors who provided material assistance to Borrower in connection with, or who otherwise may have a claim to ownership of,
any of Borrower’s patents, copyrights or other related rights, and who are not party to a Work-for-Hire Agreement with Borrower.
(e)
Except as set forth on Schedule 3.16(e) , the conduct of Borrower’s business as currently conducted does not, in any
material respect, infringe upon (either directly or indirectly such as through contributory infringement or inducement to infringe), dilute,
misappropriate or otherwise violate any Intellectual Property owned and controlled by any third party.
-16-
(f)
Except as set forth on Schedule 3.16(f) , (i) to Borrower’s knowledge, no third party is misappropriating, infringing,
diluting, or violating any Intellectual Property owned by or licensed to or by Borrower, and (ii) no claims alleging a third party is
misappropriating, infringing, diluting or violating any Intellectual Property owned by or licensed to or by Borrower have been made against a
third party by Borrower or, to Borrower’s knowledge, the licensor of any Intellectual Property licensed by Borrower.
3.17
Taxes.
(a)
Except as otherwise disclosed on Schedule 3.17(a) :
(i)
all Tax Returns due to have been filed through the date hereof in accordance with any applicable Law have been duly
filed and are correct and complete;
(ii)
all Taxes, deposits or other payments for which Borrower may have any liability through the date hereof (whether or not
shown on any Tax Return) have been paid in full or are accrued as liabilities for Taxes on the books and records of
Borrower;
(iii)
the amounts so paid on or before the date hereof, together with any amounts accrued as liabilities for Taxes (including
Taxes accrued as currently payable) on the books of Borrower, will be adequate based on the tax rates, applicable laws
and regulations in effect on the date hereof to satisfy all material liabilities for Taxes of Borrower in any jurisdiction
through June 19, 2007 including Taxes accruable upon income earned through each Closing;
(iv)
there are not now any extensions of time in effect with respect to the dates on which any Tax Returns were or are due to
be filed;
(v)
all deficiencies asserted as a result of any examination of Tax Return have been paid in full, accrued on the books of
Borrower, or finally settled, and no issue has been raised in any such examination which, by application of the same or
similar principles, reasonably could be expected to result in a proposed deficiency for any other period not so examined;
(vi)
no claims have been asserted and no proposals or deficiencies for any Taxes are being asserted, proposed or threatened,
and no audit or investigation of any Tax Return is currently underway, pending or threatened;
(vii)
no claim has ever been made by any Governmental Entity in a jurisdiction where Borrower does not file Tax Returns
and where it is or may be subject to taxation;
-17-
(viii)
in all material respects, Borrower has withheld and paid all Taxes required to have been paid in connection with
amounts paid or owing to any employee, independent contractor, creditor, stockholder or other third party;
(ix)
there are no outstanding waivers or agreements by Borrower for the extension of time for the assessment of any Taxes
or deficiency thereof, nor are there any requests for rulings, outstanding subpoenas or requests for information, notice
of proposed reassessment of any property owned or leased by Borrower or any other matter pending between Borrower
and any taxing authority;
(x)
there are no Liens for Taxes other than Liens for Taxes which are not yet due and payable, nor are there any Liens
which are pending or threatened;
(xi)
Borrower has not been a member of an affiliated group filing a consolidated federal income tax return;
(xii)
neither Borrower nor Lender, as a consequence of Borrower’s actions prior to any Closing Date, will be obligated to
make a payment to an individual that would be a “parachute payment” as such term is defined in Section 280G of the
Code without regard to whether such payment is to be paid in the future; and
(xiii)
Borrower does not have any liability for the Taxes of any Person (other than for itself) under Treasury Regulation
Section 1.1502-6 (or any similar provision of state, local or foreign law), as a transferee or successor, by contract or
otherwise.
(b)
Borrower has delivered to Lenders true and complete copies of all income Tax Returns (together with any agent’s reports
and any accountants’ work papers) relating to its operations for the years for which Tax Returns are due to have been filed.
3.18
Insurance.
(a)
Schedule 3.18(a) sets forth a list of all insurance policies maintained by or for the benefit of Borrower or its directors,
officers, employees, agents or independent contractors.
(b)
Except as set forth on Schedule 3.18(b) , with respect to each insurance policy maintained by Borrower: (i) such policy is
in full force and effect, and is legal, valid, binding and enforceable as to Borrower and the other party or parties thereto; (ii) subject to the rights
of other parties thereto to terminate, such policy will continue to be legal, valid, binding, enforceable and in full force and effect on
substantially identical terms on each Closing Date (iii) neither Borrower nor, to Borrower’s knowledge, any other party to the policy, is in
breach or default (including with respect to the payment of premiums or the giving of notices) and no event has occurred which, with notice or
the lapse of time or both, would constitute such a breach or default by Borrower, or to Borrower’s knowledge, a breach or default by the other
party to the policy or permit termination, modification or acceleration under the policy; (iv) no party to the policy has repudiated any provision
thereof in writing, and (v) Borrower has not received any written notice that any insurer under the policy intends to exercise any termination
right or fail to renew such policy.
-18-
(c)
Except as set forth on Schedule 3.18(c) , Borrower has been covered during the three (3) year period preceding the date
hereof by insurance in type, scope and amount which (i) meets the minimum requirements of any Contract to which Borrower is a party and (ii)
is customary and commercially reasonable for the business(es) in which Borrower has engaged during such period.
3.19
Financial Controls.
(a)
Borrower has maintained a system of internal accounting controls sufficient to provide reasonable assurances 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 accounting principles generally accepted in the United States of America, and to
maintain accountability for assets, (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.
(b)
No employee of Borrower who serves in an accountancy or a financial management capacity with Borrower has been
convicted of theft, embezzlement, fraud, or any other crime which is considered to be a felony.
(c)
Borrower has made available to Lenders any written reports that Borrower has received from its public accounting firm
since January 1, 2002, regarding critical accounting policies and practices, or alternative treatments of financial information within GAAP that
have been discussed with management of Borrower, ramifications of the use of such alternative disclosures and treatments, and the treatment
preferred by such public accounting firm.
3.20 Compliance with Laws. Except as set forth on Schedule 3.20 , Borrower is in compliance with all Laws, and has obtained and
maintained all permits, licenses and registrations applicable to the conduct of its business, and Borrower has not received written notification
that has not lapsed, been withdrawn or abandoned by any Governmental Entity (i) asserting a material violation or possible violation of any
such Law, (ii) threatening to revoke any permit, license, registration, or other government authorization, or (iii) materially restricting or in any
material way limiting its operations. Borrower is not subject to any regulatory or supervisory cease and desist order, agreement, directive,
memorandum of understanding or commitment, and has not received any written communication requesting that it enter into any of the
foregoing.
3.21 Real Property. Borrower does not own, of record or beneficially, any right, title or interest in any real property (including any
easement, license or right-of-way) or any asset consisting of realty, including appurtenances, improvements or fixtures, nor has it previously
owned, any right, title or interest in any real property, other than leasehold interests with respect to the Leased Real Property pursuant to those
leases set forth on Schedule 3.21 . Borrower is not a fiduciary as to any real property and no purchase of real property has been effected by or
through Borrower by any separate account or commingled fund.
-19-
3.22 Accounts Receivable. All of the accounts receivable of Borrower shown on the balance sheets included in the Borrower
Financial Statements, or arising thereafter, arose in the ordinary course of business. The values at which accounts receivable are carried reflect
the accounts receivable valuation policy of Borrower which is consistent with past practice and in accordance with GAAP (applied on a
consistent basis throughout the period involved).
3.23
Employees; Employment Agreements.
(a)
Schedule 3.23(a) sets forth a true and complete list of (i) all of the employees (whether full-time or part-time),
(ii) independent contractors, (iii) consultants, and (iv) other service providers of Borrower as of the date hereof, specifying their position,
annual salary or hourly wage or other service fee, date of hire or other service commencement date.
(b)
Except as set forth on Schedule 3.23(b) , Borrower is not a party to or bound by any employment agreement or other
arrangement for services, including with respect to a Person acting as a consultant, independent contractor or otherwise. Borrower has provided
to Lender true, correct and complete copies of each such agreement or arrangement that is written, and, other than with respect to common law
employment-at-will arrangements, no such agreement or arrangement exists which is not written.
(c)
Except as set forth on Schedule 3.23(c) , Borrower does not have any agreement providing for severance payments to
terminated employees and Borrower has not made any verbal commitments to any officer, employee, former employee, consultant,
independent contractor or other service provider of Borrower with respect to compensation, promotion, retention, termination, severance or
similar matters in connection with the transactions contemplated hereby or otherwise.
(d)
Except as set forth on Schedule 3.23(d) and any Contracts being executed in connection with this Agreement, Borrower
does not have any Contract obligating it with respect to payments or other rights upon any change in control of Borrower or the transactions
contemplated hereby.
3.24 Labor Relations. Borrower is in compliance in all material respects with all currently applicable laws respecting employment
and employment practices, terms and conditions of employment and wages and hours, including, without limitation, the Immigration Reform
and Control Act, the Worker Adjustment and Retraining Notification Act, any such laws respecting employment discrimination, disability
rights or benefits, equal opportunity, plant closure issues, affirmative action, workers’ compensation, employee benefits, severance payments,
labor relations, employee leave issues, wage and hour standards, occupational safety and health requirements and unemployment insurance and
related matters, and except as set forth on Schedule 3.24 there are no internal complaints by or on behalf of employees in regard to any of the
foregoing. Except as set forth on Schedule 3.24 , Borrower is not currently, and has not in the past been, a party to an arrangement for services
from a professional employer organization. Borrower is not engaged in any unfair labor practice and there is no unfair labor practice complaint
pending or, to Borrower’s knowledge, threatened against Borrower before the National Labor Relations Board. Borrower is not a party to, and
is not bound by, any collective bargaining agreement, Contract or other agreement or understanding with a labor union or labor organization,
nor is it the subject of a proceeding asserting that it has committed an unfair labor practice (within the meaning of the National Labor Relations
Act) or seeking to compel it to bargain with any labor organization as to wages and conditions of employment, nor is there any strike or other
labor dispute involving Borrower pending or, to its knowledge, threatened, nor is Borrower aware of any activity involving its employees
seeking to certify a collective bargaining unit or engaging in any other organization activity.
-20-
3.25
Benefit Plans.
(a)
Schedule 3.25(a) sets forth a true and complete list of each Benefit Plan currently sponsored, maintained or contributed to
by Borrower. Any special tax status enjoyed by such plan is noted on such schedule.
(b)
Except as set forth on Schedule 3.25(b) :
(i)
with respect to each Benefit Plan identified on Schedule 3.25(a) , Borrower has heretofore delivered or made available
to Lenders true and complete copies of the plan documents, any amendments thereto, the summary plan description and
any amendments thereto (or, if the plan is not written, a written description thereof), as reasonably requested by a
Lender;
(ii)
Borrower’s records accurately reflect its employees’ employment histories, including their hours of service and all such
data is maintained in a usable form;
(iii)
no Benefit Plan or ERISA Affiliate Plan is or was at any time subject to Title IV of ERISA, Section 302 of ERISA or
Section 412 of the Code;
(iv)
no Benefit Plan or ERISA Affiliate Plan is or was at any time a “multiemployer plan” as defined in Section 3(37) of
ERISA or a “multiple employer welfare arrangement” as defined in Section 3(40) of ERISA;
(v)
Borrower has not incurred, and, to Borrower’s knowledge, no facts exist which reasonably could be expected to result
in, liability to Borrower as a result of a termination with respect to a Benefit Plan or an ERISA Affiliate Plan;
(vi)
no insurance policy or contract maintained in connection with a Benefit Plan provides for a termination fee or penalty
upon termination of the policy or contract;
-21-
3.26
(vii)
each Benefit Plan has been established, registered, qualified, invested, operated and administered in all material
respects in accordance with its terms and in compliance with ERISA, the Code and all applicable Laws;
(viii)
Borrower has not incurred, and no facts exist which reasonably could be expected to result in any liability to Borrower
with respect to any Benefit Plan or any ERISA Affiliate Plan, including any liability, tax, penalty or fee under ERISA,
the Code or any applicable Law (other than to pay premiums, contributions or benefits in the ordinary course);
(ix)
each Benefit Plan intended to be “qualified” within the meaning of Section 401(a) of the Code is the subject of a
favorable Internal Revenue Service determination, opinion or notification letter indicating that it is so qualified, and
each trust maintained under such a Benefit Plan intended to be exempt from taxation under Section 501(a) of the Code
has received a favorable Internal Revenue Service determination, opinion or notification letter indicating that it is so
tax-exempt, and no fact or circumstance exists that could adversely affect the qualified status of such a Benefit Plan or
the tax-exempt status of such a trust;
(x)
there is no pending or threatened complaint, claim (other than routine claims for benefits), proceeding, examination,
audit, investigation or other proceeding or action of any kind in or before any court, tribunal or governmental agency
with respect to any Benefit Plan and there exists no state of facts which after notice or lapse of time or both reasonably
could be expected to give rise to any such claim, investigation, examination, audit or other proceeding or to affect the
registration of any Benefit Plan required to be registered;
(xi)
no assets of any Benefit Plan are or at any time have been invested in common stock of Borrower; and
(xii)
Schedule 3.25(b) contains the name of each individual currently receiving or entitled to receive continuation coverage
under any Benefit Plan pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended.
Environmental.
(a)
Borrower is and at all times has been in compliance with all Environmental Laws. Borrower has not received any written
communication alleging that it is not in such compliance, and there are no circumstances that would prevent or interfere with the continuation
of such compliance.
-22-
(b)
There are no pending Environmental Claims, Borrower has not received notice of any pending Environmental Claims,
and there are no conditions or facts existing which might reasonably be expected to result in legal, administrative, arbitral or other proceedings
asserting Environmental Claims or other claims, causes of action or governmental investigations of any nature seeking to impose, or that could
result in the imposition of, any liability arising under any Environmental Laws upon (i) Borrower, (ii) any Person whose liability for any
Environmental Claim that Borrower has or may have retained or assumed, either contractually or by operation of law, or (iii) any real or
personal property owned or leased by Borrower, or any real or personal property which Borrower has or is judged to have managed or
supervised. Borrower is not subject to any agreement, order, judgment, decree or memorandum by or with any court, regulatory agency, other
Governmental Entity or third party imposing any liability under any Environmental Laws.
(c)
Borrower is in compliance with all recommendations contained in any environmental audits, analyses and surveys
received by Borrower relating to all real and personal property owned, operated or leased by Borrower.
(d)
There are no past or present actions, activities, circumstances, conditions, events or incidents that could reasonably form
the basis of any Environmental Claim, or other claim or action or governmental investigation that could result in the imposition of liability
arising under any Environmental Laws, against Borrower or against any Person whose liability for any Environmental Claim Borrower has or
may have retained or assumed, either contractually or by operation of Law.
(e)
No remediation, removal or cleanup of any Hazardous Substances is being conducted or has been conducted at any time
in the past, in connection with or associated with, the operations or activities of Borrower or any real or personal property at any time owned,
operated or leased by Borrower; provided , however , that, with respect to any time period other than when Borrower owned, operated or leased
such real or personal property, the representations and warranties of this Section 3.26(e) are made to the knowledge of Borrower.
(f)
Hazardous Substances are not and have not been at any time in the past, generated, used, stored, treated, or disposed of in
connection with or associated with the operations or activities of Borrower or any real or personal property at any time owned, operated or
leased by Borrower in any case that could reasonably be expected to require remediation under applicable Environmental Laws or otherwise
result in liability to Borrower; provided , however , that, with respect to any time period other than when Borrower owned, operated or leased
such real or personal property, the representations and warranties of this Section 3.26(f) are made to the knowledge of Borrower.
(g)
No underground or aboveground storage tanks, solid waste management units, landfills or other waste disposal areas,
dikes or impoundments of any kind are located at, on or under any real or personal property at any time owned, operated or leased by
Borrower.
(h)
There are no (i) friable asbestos-containing materials, (ii) lead-based paint, (iii) polychlorinated biphenyls or (iv) mold or
fungi in quantities and of a character (A) for which investigation or remedial actions would be reasonably required, (B) for which investigation
or remedial action has been recommended or undertaken by environmental professionals on behalf of Borrower or (C) that have been the
subject of written, or to the knowledge of Borrower, any other, claim, complaint, allegation, or inquiry made to Borrower present on, in or at
any real or personal property at any time owned, operated or leased by Borrower.
-23-
3.27 State Takeover Laws; Certificate of Incorporation. Borrower has taken all necessary action to exempt this Agreement and
the transactions contemplated hereby (including, without limitation, the issuance of the Conversion Shares upon conversion of the Notes) from,
and this Agreement and the transactions contemplated hereby (including, without limitation, the issuance of the Conversion Shares upon
conversion of the Notes) are exempt from, (a) any applicable state takeover laws, including, without limitation, the provisions of the NCL, (b)
any applicable takeover provisions in Borrower’s Certificate of Incorporation or bylaws, and (c) except as set forth on Schedule 3.27 , any
change of control or other takeover provisions set forth in any Contract to which Borrower is a party or may be bound.
3.28 Offering Exemption. Subject in part to the truth and accuracy of each Lender’s representations set forth in Section 4.2 hereof,
the offer, sale and issuance of the Notes is exempt from the registration requirements of the Securities Act and under applicable state securities
and “blue sky” laws, as currently in effect and, neither Borrower nor any authorized agent acting on its behalf will take any action hereafter that
would cause the loss of such exemption.
3.29 Certain Business Practices. Neither Borrower nor any director, officer, agent or employee of Borrower has (a) used any funds
for unlawful contributions, gifts, entertainment or other unlawful expenses relating to political activity, (b) made any unlawful payment to
foreign or domestic government officials or employees or to foreign or domestic political parties or campaigns or violated any provision of the
Foreign Corrupt Practices Act of 1977, as amended, or (c) made any other unlawful payment.
3.30
U.S. Small Business Administration.
(a)
Borrower, together with its affiliates (as that term is defined in Title 13, Code of Federal Regulations, 121,103), is a
“small business concern” within the meaning of the Small Business Investment Act of 1958, as amended (the “ SBIA ”), and the regulations
thereunder, including title 13, Code of Federal Regulations, 121.301(c). The information set forth in SBA Forms 480, 652 and 1031 regarding
Borrower and its affiliates, when delivered to Lenders will be accurate and complete. Copies of such forms have been completed and executed
by Borrower and delivered to Lenders on or before the date hereof.
(b)
No portion of the proceeds from the Loan will be used by Borrower (i) to provide capital to a corporation licensed under
the SBIA, (ii) outside the United States (except (A) to acquire abroad materials and industrial property rights for a United States domestic
operation or (B) for transfer to a controlled foreign subsidiary of Borrower, so long as at least fifty-one percent (51%) of Borrower’s assets and
activities will remain within the United States) or (iii) for any purpose contrary to the public interest (including, but not limited to, activities
which are in violation of law) or inconsistent with free competitive enterprise, in each case within the meaning of 13 C.F.R. 107.720.
-24-
(c)
Borrower’s primary business activity does not involve, directly or indirectly, providing funds to others, the purchase of or
discounting of debt obligations, factoring or long-term leasing of equipment with no provision for maintenance or repair.
(d)
If Borrower breaches the representations in subsections 3.30(b) or (c) above in any material respect, then in addition to all
other remedies available to Lenders, Lenders may demand that Borrower immediately repurchase all of the Notes acquired by Lenders
hereunder. The purchase price of the Notes shall be the outstanding principal and all accrued interest then remaining unpaid.
(e)
On or before the date of this Agreement, and, in any event, prior to the First Closing, Borrower shall have delivered to
Lenders duplicate originals of (i) an executed copy of SBA Forms 480 Size Status Declaration , (ii) an executed copy of SBA Form 652
Assurance of Compliance for Nondiscrimination , and (iii) the information needed to complete Part A and Part B of SBA Form 1031 Portfolio
Financing Report .
3.31 Full Disclosure. None of the representations and warranties furnished by or on behalf of Borrower to Lender in writing
pursuant to this Agreement or any information contained in the Schedules thereto referred to in this Agreement, contains any untrue statement
of a material fact and, does not omit to state any material fact required or necessary to make any statement, in light of the circumstances under
which such statement is made, not misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF LENDERS
Each of the Lenders hereby represents and warrants to Borrower, severally but not jointly, as follows as of the First Closing Date and
AirWorks or RS Properties, as the case may be, represents and warrants to Borrower, severally but not jointly, as follows as of each Subsequent
Closing Date:
4.1 Power; Authority; Due Execution. Such Lender has the right, power and capacity to execute and deliver this Agreement and
any other agreement entered into in connection with this Agreement and to perform its obligations under this Agreement and any other
agreement entered into in connection with this Agreement to which it is a party to and to consummate the transactions contemplated hereby and
thereby. The execution and delivery of this Agreement and any other agreement entered into in connection with this Agreement by such Lender
and the performance by such Lender of its obligations hereunder and thereunder and the consummation of the transactions provided for herein
and therein have been duly and validly authorized and approved by such Lender. This Agreement has been, and any other agreement entered
into in connection with this Agreement will be as of the applicable Closing Date, duly executed and delivered by such Lender and do or will, as
the case may be, constitute the valid and binding agreement of such Lender, enforceable against it in accordance with their respective terms,
subject to applicable bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting the enforceability of creditors’ rights
generally, general equitable principles and the discretion of courts in granting equitable remedies.
-25-
4.2
Investment Representations.
(a)
Such Lender represents and warrants that the Note issued to it is being acquired for investment only for its own account
and not with a view to the sale or distribution of any part thereof, except to the extent that it serves as a nominee for a limited number of
“accredited investors,” as that term is defined in Rule 501 of Regulation D as promulgated by the SEC pursuant to the Securities Act.
(b)
Such Lender understands that the Note issued to it has not been registered under the Securities Act or any state securities
laws on the grounds that the sale provided for in this Agreement and the issuance of securities hereunder are exempt from registration under the
Securities Act and applicable state securities laws, and that Borrower’s reliance on such exemption is predicated in part on such Lender’s
representations set forth herein.
(c)
Such Lender recognizes that the investment in the Note issued to it involves a special risk, and represents that it has such
knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of its investment in the Note
issued to it, and has the ability to bear the economic risks of its investment. Prior to making a decision to enter into this Agreement, such
Lender was provided the opportunity to ask questions of, and receive answers from, the executive officers of Borrower concerning Borrower,
and to obtain from Borrower information requested from Borrower. Based on the materials provided by Borrower in response to due diligence
requests, such Lender has conducted an investigation to its satisfaction of the investment in the Note issued to it and has received all
information requested from Borrower it considers necessary or appropriate for deciding whether to purchase the Note issued to it; provided ,
however , that no investigation conducted by such Lender shall be deemed to release Borrower in any manner whatsoever from any breach of a
representation or warranty contained in this Agreement. On the basis of the foregoing, and on the basis of the representations, warranties and
covenants of Borrower contained in this Agreement and the other documents and instruments delivered in connection herewith, such Lender
acknowledges that it has, individually or through advisers, such knowledge or experience in financial, tax and business matters to enable it to
understand and evaluate the merits and risks associated with an investment in the Note issued to it.
(d)
Such Lender understands that each certificate representing the Note or the shares into which the Note is convertible will
be endorsed with the following legend:
“THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 OR APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES
HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION OR
RESALE, AND MAY NOT BE SOLD, MORTGAGED, PLEDGED, HYPOTHECATED OR OTHERWISE
TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES
UNDER THE SECURITIES ACT OF 1933, ANY APPLICABLE STATE SECURITIES LAWS, OR THE
AVAILABILITY OF AN EXEMPTION FROM THE REGISTRATION PROVISIONS OF THE SECURITIES
ACT OF 1933 AND APPLICABLE STATE SECURITIES LAWS.”
-26-
(e)
Such Lender and the persons for which it acts as nominee are “accredited investors” within the meaning of Rule 501(a) of
Regulation D of the SEC.
(f)
Such Lender is financially able to hold the Note issued to it for long-term investment, believes that the nature and amount
of the Note issued to it are consistent with its overall investment program and financial position, and recognizes that there are substantial risks
associated with the acquisition of the Note issued to it.
4.3 No Public Market . Each Lender understands that no public market exists for the Notes and there is no assurance that a public
market will ever exist for the Notes.
4.4 Non-Contravention. Neither the execution and delivery of this Agreement by Lenders nor the consummation of the transactions
contemplated hereby does or would, after the giving of notice or the lapse of time or both, (a) conflict with, result in a breach of, constitute a
default under, or violate the organic documents of such Lender, or (b) conflict with, result in a breach of, constitute a default under, or violate
any Law applicable to such Lender, except as would not otherwise have a Material Adverse Effect on such Lender.
4.5 No Consents. No permit, consent, approval, novation, authorization or other order of or filing with any Governmental Entity or
any other Person is required in connection with the execution, delivery and consummation of this Agreement by such Lender and the actions of
such Lender contemplated hereby, other than what may be required as a result of any facts or circumstances relating solely to Borrower.
ARTICLE V
CERTAIN COVENANTS AND AGREEMENTS
5.1 Review of Operations. Each Lender may, so long as any amount is outstanding under the Note issued to it, directly or through
its representatives, review, during normal business hours and upon reasonable notice to Borrower, the premises and books and records of
Borrower to the extent it deems necessary or advisable to familiarize itself with such premises and other matters; such review, and the reviews
made by such Lender or its representatives prior to the date of this Agreement, shall not, however, affect the representations and warranties
made by Borrower in this Agreement or the remedies of such Lender for breaches of those representations and warranties.
5.2
Confidentiality.
(a)
Between the date hereof and the Maturity Date, Lenders and Borrower will maintain in confidence, and will cause the
directors, officers, employees, agents, and advisors of Lenders and Borrower to maintain in confidence, all information provided in connection
herewith, whether written or oral, unless (i) such information is already known to such party or to others not bound by a duty of confidentiality
or such information becomes publicly available through no fault of such party, (ii) the use of such information is necessary or appropriate in
making any filing or obtaining any consent or approval required for the consummation of the transactions contemplated hereby, or (iii) the
furnishing or use of such information is otherwise required by Law.
-27-
(b)
Notwithstanding anything set forth in this Agreement to the contrary (including the confidentiality obligations set forth in
this Section 5.2 ), or in any other agreement executed in connection herewith, Borrower and Lenders (and any directors, officers, employees,
agents or advisors of either of Borrower or Lenders), are hereby expressly authorized to disclose the “tax treatment” and “tax structure” (as
those terms are defined in Treasury Regulation §§1.6011-4(c)(8) and (9), respectively) of the transactions contemplated hereby and all
materials of any kind (including opinions or other tax analyses) that are provided to such Persons relating to such “tax treatment” or “tax
structure” of the transactions contemplated hereby; provided , however , that (i) such disclosure shall not be made until the earliest of (A) the
date of the public announcement of discussions relating to such transactions, (B) the date of the public announcement of such transactions, or
(C) the date of the execution of this Agreement, and (ii) this provision shall not permit disclosure to the extent that nondisclosure is required to
comply with any applicable federal or state securities laws.
5.3
Conduct of Business. Except with the prior written consent of AirWorks, Borrower shall not:
(a)
conduct its business other than in the ordinary and usual course, or fail to use reasonable efforts to preserve intact its
business organizations and assets and maintain its rights, franchises and existing relations with clients, customers, suppliers, employees,
business associates and any independent contractors associated with it, or take any action reasonably likely to have an adverse affect upon the
its ability to perform any of its obligations under this Agreement, or engage in any new lines of business;
(b)
issue, sell or otherwise permit to become outstanding, or authorize the creation of, any (i) additional shares of capital
stock, other than upon exercise of outstanding options and warrants or other outstanding convertible securities, or (ii) securities or obligations
convertible into or exchangeable for, or giving any Person any right to subscribe for or acquire, or any options, calls or commitments relating
to, shares of capital stock (including stock appreciation rights and all similar derivative rights), or enter into any agreement with respect to the
foregoing;
(c)
except as permitted by Section 5.3(g) , permit any additional shares of its capital stock to become subject to new grants of
employee or director stock options, options, calls or commitments, or similar rights;
(d)
make, declare, pay or set aside for payment any dividend on or in respect of, or declare or make any distribution on, any
shares of its capital stock;
(e)
directly or indirectly adjust, split, combine, redeem, reclassify, purchase or otherwise acquire, any shares of its capital
stock;
(f)
enter into, amend, modify or renew any employment, consulting, severance or similar agreements or arrangements with
any of its directors, officers or employees, or grant any salary, pay or wage increase or increase any employee benefit (including incentive or
bonus payments), except (i) for normal individual increases in compensation to employees in the ordinary course of business consistent with
past practice, (ii) for other changes that are required by applicable law, or (iii) for employment or other arrangements for, or grants of awards
to, newly hired employees in the ordinary course of business consistent with past practice and after prior consultation with AirWorks;
-28-
(g)
enter into, establish, adopt or amend (except as may be required by applicable law or for employment or other
arrangements for, or grants of awards to, newly hired employees in the ordinary course of business consistent with past practice and after prior
consultation with AirWorks) any pension, retirement, stock option, stock purchase, savings, profit sharing, deferred compensation, consulting,
bonus, group insurance or other employee benefit, incentive or welfare contract, plan or arrangement, or any trust agreement (or similar
arrangement) related thereto, in respect of any of its directors, officers or employees, or take any action to accelerate the vesting or
exercisability of stock options, restricted stock or other compensation or benefits payable thereunder;
(h)
sell, transfer, mortgage, encumber or otherwise dispose of or discontinue any of its material assets, business or properties
other than in the ordinary course of business;
(i)
acquire any assets, business, securities or properties of any other entity other than in the ordinary course of business;
(j)
amend its Certificate of Incorporation or bylaws;
(k)
implement or adopt any change in its accounting principles, practices or methods, other than as may be required by
GAAP and after notifying AirWorks of any such required change;
(l)
enter into or terminate any Material Contract or amend or modify any of its existing Material Contracts, other than in the
ordinary course of business consistent with past practice, with the exception of any bulk orders for Borrower’s products upon AirWorks’
consent, such consent not to be unreasonably withheld;
(m)
settle any claim, action or proceeding, except for any claim, action or proceeding involving solely money damages to be
paid by Borrower in an amount, individually and in the aggregate for all such settlements, not more than Ten Thousand Dollars ($10,000.00)
and which is not reasonably likely to establish an adverse precedent or basis for subsequent settlements;
(n)
take any action that is intended or reasonably likely to (i) result in any of its representations and warranties set forth in
this Agreement being or becoming untrue in any material respect (excluding any materiality provision relating thereto) at any time at or prior to
the last Closing Date, (ii) result in any of the conditions to the transaction set forth in Article VI not being satisfied, or (iii) result in a violation
of any provision of this Agreement, except, in each case, as may be required by applicable law or regulation;
(o)
incur any indebtedness (including indebtedness relating to acquisitions of its Common Stock) other than as contemplated
hereby or in the ordinary course of business in excess of Ten Thousand Dollars ($10,000.00) in the aggregate;
-29-
(p)
settle, modify or forgive any indebtedness for borrowed money owed to it (including indebtedness relating to acquisitions
of its Common Stock);
(q)
enter into any sale/lease back, synthetic lease, receivables financing or other transaction however entitled which would or
could be excluded from its balance sheet prepared in accordance with GAAP;
(r)
solicit or encourage inquires or proposals with respect to, or furnish any nonpublic information relating to or participate in
any negotiations or discussion concerning, any acquisition or purchase of all or a substantial portion of the assets of, or a substantial equity
interest in, Borrower, or any merger or other business combination with Borrower, other than as contemplated by this Agreement;
(s)
issue or authorize the issuance of stock options under the Option Plan; or
(t)
agree, commit to or enter into any agreement to take any of the actions referred to in this Section 5.3 .
In connection with Borrower’s continued operation of its business between the date hereof and the date on which no amounts due under the
Notes are outstanding, Borrower will confer in good faith on a regular basis with one (1) or more representatives of AirWorks designated to
Borrower regarding operational matters and the general status of ongoing operations. Borrower acknowledges that Lenders do not and will not
waive any rights it may have under this Agreement as a result of such consultations.
5.4 Supplements to Schedules. From time to time, but in no event less than every ninety (90) days, until the date on which no
amounts due under the Notes are outstanding, Borrower shall supplement or amend the Schedules that it has delivered with respect to any
matter first existing or occurring following the date hereof that (a) if existing or occurring at or prior to the date hereof, would have been
required to be set forth or described in the Schedules, or (b) is necessary to correct any information in the Schedules that has been rendered
inaccurate thereby. No supplement or amendment to any Schedule shall have any effect for the purpose of determining satisfaction of the
conditions to closing set forth in Section 6.2 or otherwise.
5.5 Authorization and Reservation of Common Stock. It is the intent of Lenders and Borrower that, upon issuance, the shares
of Common Stock issuable to AirWorks and RS Properties upon conversion of the AirWorks Note and the RS Properties Note in full, assuming
the entire $17,300,000 amount is advanced by AirWorks and RS Properties, (the “ AirWorks and RS Properties Notes Shares ”) will represent,
on an as-converted, fully-diluted basis (taking into account, without limitation, all potentially dilutive securities which are outstanding,
authorized by Borrower, or otherwise required to be issued, as of the First Closing Date, and assuming that all outstanding options, warrants
and other rights for the purchase of capital stock of Borrower shall have been exercised, and all outstanding shares of all series of Borrower’s
preferred stock, if any, have been converted into Common Stock), no less than 93.3% of the outstanding capital stock of Borrower. As soon as
reasonably practicable following the First Closing Date, Borrower shall take such action as is necessary to authorize and reserve a number
of shares of Common Stock sufficient to permit Lenders to convert the Notes in whole. Accordingly, without limiting the generality of the
foregoing, Lenders and Borrower agree that if at any time after the First Closing Date it is determined that the AirWorks and RS Properties
Notes Shares will not, or did not represent, on an as-converted, fully-diluted basis at least 93.3% of the outstanding capital stock of Borrower,
Lenders and Borrower will take all such action as is necessary for Borrower to authorize and reserve, and Borrower shall authorize and reserve
for Lenders, such additional shares of its Common Stock as are necessary for AirWorks and RS Properties to hold, beneficially and of record,
at least 93.3% of the outstanding capital stock of Borrower on an as-converted, fully-diluted basis upon conversion of their respective Notes in
whole.
-30-
5.6
Expansion of Board of Directors; Observer.
(a)
From and after the First Closing Date, Borrower shall take all such actions as are necessary to ensure that AirWorks and
RS Properties have the right to designate a majority of the members of the board of directors of Borrower, including increasing the number of
members of Borrower’s board of directors and electing AirWorks’ and RS Properties’ designees to fill all such vacancies, if necessary.
(b)
For so long as a Lender owns any portion of the Notes or any Conversion Shares, such Lender shall have the right to have
one representative present at all meetings of the Borrower’s board of directors and committees of the Borrower’s board of directors as an
observer.
5.7 Publicity. Except as otherwise required by Law as advised by counsel, neither Lenders nor Borrower shall issue any press
release or make any other public statement, in each case relating to or connected with or arising out of this Agreement or the matters contained
herein, without obtaining the prior written approval of the other party to the contents and the manner of presentation and publication thereof,
which approval shall not be unreasonably withheld.
5.8
Expenses.
(a)
Except as set forth in Section 5.8(b) , Borrower and each of the Lenders shall be responsible for all of its respective costs
and expenses incurred in connection with this Agreement and the consummation of the transactions contemplated hereby.
(b)
Borrower shall pay all reasonable out-of-pocket expenses of Lenders relating to the negotiation and execution of the
Transaction Documents and the closing of the transactions contemplated thereby, including, without limitation, the fees, charges, expenses and
disbursements of Paul, Hastings, Janofsky & Walker LLP and Kilpatrick Stockton LLP, legal counsel to AirWorks, upon the First Closing.
5.9 Cooperation. Lenders and Borrower shall cooperate and use their respective commercially reasonable efforts to take, or cause to
be taken, all appropriate action, and to make, or cause to be made, all filings necessary, proper or advisable under applicable Laws to
consummate and make effective the transactions contemplated by this Agreement, including, their respective commercially reasonable efforts
to obtain, prior to each Closing Date, all consents and approvals of Persons, including Governmental Entities, as are necessary for
consummation of the transactions contemplated by this Agreement with respect to such Closing Date and to fulfill the applicable conditions to
closing.
-31-
5.10 Notification of Certain Matters. Borrower shall give prompt notice to Lenders, and each Lender shall give prompt notice to
Borrower, of (a) the occurrence, or nonoccurrence, of any event which would be likely to cause any representation or warranty on its part
contained in this Agreement to be untrue or inaccurate and (b) any failure by such party to comply with or satisfy any covenant, condition or
agreement to be complied with or satisfied by it hereunder; provided , however , that the delivery of any notice pursuant to this Section 5.10
shall not limit or otherwise affect the remedies available hereunder to the party receiving such notice (including, any condition to closing).
5.11
SBIA Regulatory Compliance.
(a)
Within seventy-five (75) days after the date hereof, Borrower shall provide to Lenders a certificate of Borrower’s chief
financial office and chief executive officer (a) verifying (and describing in reasonable detail) the use of the proceeds of the Lenders’ financing
hereunder to such date and (b) certifying compliance by Borrower with the provisions of this Section 5.11. In addition to any other rights
granted hereunder, Borrower shall at all times provide Lenders and the SBA access to Borrower’s books and records for the purposes of,
without limitation, verifying the use of the proceeds of Lenders’ financing and for all other purposes required by the SBA.
(b)
Promptly after the end of each of Borrower’s fiscal years ( but in any event prior to February 28 of each calendar year)
during which any amounts under the Loan are outstanding, Borrower shall provide to Lenders a written assessment, in form and substance
reasonably satisfactory to Lenders of the economic impact of Lenders’ financing hereunder, specifying the full-time equivalent jobs created or
retained, the impact of the financing on Borrower’s business in terms of expanded revenue and taxes and other appropriate economic benefits,
including, but not limited to, technology development or commercialization, minority business development, urban or rural business
development, expansion of exports and assistance to manufacturing firms.
(c)
Upon the request of Lenders for so long as any amounts under the Notes are outstanding, Borrower will (i) provide to
Lenders such financial statements and other information as Lenders may from time to time reasonably request for the purpose of assessing
Borrower’s financial condition and (ii) furnish to Lenders all information reasonable requested by them in order for them to prepare and file
SBA Form 468 and any other documents, forms or information reasonably requested or required by any Governmental Entity asserting
jurisdiction over Lenders.
(d)
For a period of one year following the date of this Agreement, neither Borrower nor any of its subsidiaries will change its
business activity if such change would render Borrower ineligible to receive financial assistance from a Small Business Investment Company
under the SBIA and the regulations thereunder (within the meanings of 13 C.F.R. 107.720). If Borrower breaches this covenant, then, in
addition to all other remedies available to Lenders, Lenders may demand that Borrower immediately repurchase all Notes acquired by Lenders.
The purchase price of the Notes shall be the outstanding principal and all accrued interest then remaining unpaid.
-32-
5.12
Use of Proceeds. Borrower shall use the proceeds of the First Tranche as follows:
(a)
to repay in full all debt owed by Borrower to FKA Distributing Co.;
(b)
to repay in full all debt owed by Borrower to Cornell Capital Partners, L.P.;
(c)
to pay all legal fees, charges, expenses and disbursements of Paul, Hastings, Janofsky & Walker LLP and Kilpatrick
Stockton LLP that were incurred as a result of their legal representation of AirWorks;
(d)
to pay all legal fees, charges, expenses and disbursements of Kirkpatrick & Lockhart Preston Gates Ellis LLP;
(e)
to pay all fees, charges, expenses and disbursements of the Maxim Group LLC related to the preparation and delivery of
the Fairness Opinion;
(f)
to reimburse Richard E. Perlman for expenses of the Borrower that were paid by Richard E. Perlman on the Borrower’s
(g)
to pay that portion of the broker’s fees due to The Wall Street Group upon the First Closing; and
(h)
for working capital of the Borrower’s business.
behalf;
5.13 Key-Man Life Insurance . Upon receipt of written request from Lenders, Borrower shall acquire a term life insurance policy
with a reasonable coverage amount for key employees identified by Lenders. Each such insurance policy shall be issued by an insurance carrier
that maintains an A.M. Best Rating of “B++” or better and shall name Borrower as the beneficiary of such policy.
5.14 Further Assurances. From and after each Closing Date, Lenders and Borrower agree to execute, acknowledge, deliver and
file, or cause to be executed, acknowledged, delivered and filed, all further instruments, agreement or documents as may be necessary to
consummate the transactions provided for in this Agreement and to do all further things necessary to carry out the purpose and intent of this
Agreement.
ARTICLE VI
CONDITIONS TO CLOSING
6.1 Conditions to Lenders’ and Borrower’s Obligations. The obligations of each Lender and Borrower to effect the transactions
contemplated hereby shall be subject to the satisfaction on or prior to (i) the First Closing Date of the following conditions unless waived by
such Lender and by Borrower and (ii) each Subsequent Closing Date of the following conditions unless waived by AirWorks or RS Properties,
as the case may be, and by Borrower.
-33-
(a)
All approvals of, or declarations or filings with, or expiration of waiting periods imposed by, any Governmental Entity
necessary for the consummation of the transactions contemplated by this Agreement shall have been filed, occurred or been obtained.
(b)
No Governmental Entity of competent jurisdiction shall have enacted, issued, promulgated, enforced or entered any
statute, rule, regulation, judgment, decree, injunction or other order (whether temporary, preliminary or permanent) which is in effect and
prohibits consummation of the transactions contemplated by this Agreement.
6.2 Conditions to Obligations of Lenders. The obligations of each Lender to effect the transactions contemplated hereby are
subject to the satisfaction on or prior to (i) the First Closing Date (unless otherwise specified below) of the following conditions, unless waived
by such Lender and (ii) each Subsequent Closing Date (unless otherwise specified below) of the following conditions, unless waived by
AirWorks or RS Properties, as the case may be.
(a)
Borrower shall have taken all action necessary to authorize the issuance and sale to Lenders of the Notes.
(b)
Lenders shall have received an opinion, dated the First Closing Date, of Kirkpatrick & Lockhart Preston Gates Ellis LLP,
counsel to Borrower, in substantially the form attached hereto as Exhibit F (the “ Borrower Counsel Opinion ”).
(c)
Lenders shall have received an opinion, dated the First Closing Date, of Burton, Bartlett & Glogovac, Nevada counsel to
Borrower, in substantially the form attached hereto as Exhibit G (the “ Nevada Opinion ”).
(d)
(i) The representations and warranties of Borrower set forth in this Agreement shall be true and correct in all material
respects (except that those representations and warranties that are limited by materiality shall be true and correct in all respects) as of the date
of this Agreement and as if made at and as of each Closing Date (except where such representations and warranties are made expressly as of a
specific date), (ii) Borrower shall have performed in all material respects all obligations required to be performed by it under this Agreement
prior to each Closing Date, (iii) since the date of this Agreement, there shall have been no changes in the condition (financial or otherwise),
business, employees, operations, obligations or liabilities of Borrower which, in the aggregate, have had or may be reasonably expected to have
a Material Adverse Effect on Borrower, and (iv) Lenders shall have received a certificate signed an authorized officer of Borrower as of each
Closing Date to such effect (each such certificate being a “ Borrower Officer’s Certificate ”).
(e)
All consents and approvals of third parties required to consummate the transactions contemplated hereby and for Lenders
to operate the business of Borrower as contemplated herein after the each Closing, shall have been obtained.
(f)
Prior to the First Closing Date, Borrower shall have received an opinion of an independent financial advisor, reasonably
acceptable to Lenders, to the effect that, as of the date of such opinion, the terms of the transactions contemplated by this Agreement, including,
without limitation, the terms of the Notes and the conversion of the Notes into the number shares of Common Stock into which the Notes
would be convertible if the entire $18,159,000 amount is advanced by the Lenders, are fair to Borrower and its stockholders from a financial
point of view, and a copy of such opinion shall have been delivered to Lenders (the “ Fairness Opinion ”).
-34-
(g)
Borrower shall have entered into confidentiality agreements, in such form as is acceptable to Lenders in their reasonable
discretion, with each employee of Borrower.
(h)
Borrower shall have delivered, or caused to be delivered, to Lenders each of the documents set forth in Sections 2.4(a)
and 2.5(a), as applicable.
(i)
With respect to the First Closing only, each Lender shall have funded the amounts designated to be delivered by such
Lender pursuant to Section 2.1(a), in accordance with the terms hereof.
6.3 Conditions to Obligations of Borrower. The obligations of Borrower to effect the transactions contemplated hereby are subject
to the satisfaction on or prior to the First Closing Date of the following additional conditions unless waived by Borrower.
(a)
(i)
The representations and warranties of Lenders set forth in this Agreement shall be true and correct in all material
respects as of the date of this Agreement and as if made at and as of the First Closing Date (except where such representations or warranties are
made expressly as of a specific date), (ii) Lenders shall have performed in all material respects all obligations required to be performed by it
under this Agreement prior to the First Closing Date, and (iii) Borrower shall have received a certificate signed by each Lender to such effect
(each, a “ Lender Officer’s Certificate ”).
(b)
Lenders shall have delivered, or caused to be delivered, to Borrower each of the documents set forth in Sections 2.4(b)
and 2.5(b), as applicable.
ARTICLE VII
MISCELLANEOUS
7.1 Survival. This Section 7.1 shall survive the last Closing Date. All other representations, warranties, covenants and agreements in
the Agreement will survive until the earlier of conversion or payment of the Note in whole, provided that no such termination will relieve any
party of any liability or damages resulting from any willful or intentional breach of the Agreement or any willful or intentional material
misstatement or failure to state any item required to be stated therein.
7.2 Entire Agreement; Binding Effect. This Agreement and the documents referred to herein constitute the entire agreement
between the parties with respect to the subject matter hereof, and no party shall be liable or bound to any other party in any manner by any
warranties, representations or covenants with respect to such subject matter, except as specifically set forth herein or therein. The terms and
conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties. Borrower
may not terminate this Agreement prior to the Maturity Date without first obtaining the express written consent of Lender.
-35-
7.3 Third Party Beneficiaries. Nothing in this Agreement, express or implied, is intended to confer upon any third party any rights,
remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement; provided , however ,
that Borrower and AirWorks hereby agree that each individual or entity owning a partnership interest in AirWorks shall be considered a third
party beneficiary under this Agreement.
7.4 Governing Law. This Agreement shall be governed by and construed under the laws of the State of New York as applied to
agreements among residents of New York made and to be performed entirely within the State of New York, and without regard to the
conflicts of law principles as may otherwise be applicable.
7.5 Jurisdiction and Venue; Waiver of Jury Trial. Each party to this Agreement hereby irrevocably agrees that any legal suit,
action or proceeding arising out of or relating to this Agreement or the transactions contemplated hereunder may be brought in the courts of
New York County in the State of New York or of the United States of America for the Southern District of New York, and hereby expressly
submits to the personal jurisdiction and venue of such courts for the purposes thereof and expressly waives any claim of improper venue and
any claim that such courts are an inconvenient forum. Each party hereby irrevocably consents to the service of process of any of the
aforementioned courts in any such suit, action or proceeding, by the mailing of copies thereof by registered or certified mail, postage prepaid,
to its address set forth in this Agreement, such service to become effective ten (10) days after such mailing. IF LITIGATION IS BROUGHT
TO ENFORCE THIS AGREEMENT, EACH PARTY KNOWINGLY AND INTENTIONALLY WAIVES THE RIGHT IT HAS TO A
TRIAL BY JURY. THE PARTIES AGREE THIS PROVISION IS A MATERIAL INDUCEMENT TO THE PARTIES’ ENTERING INTO
THIS AGREEMENT.
7.6 Counterparts and Signature by Facsimile. This Agreement may be executed in two or more counterparts, each of which shall
be deemed an original, but all of which together shall constitute one and the same instrument. The facsimile signature of any party to this
Agreement for purposes of execution or otherwise, is to be considered as an original signature, and the document transmitted is to be
considered to have the same binding effect as an original signature on an original document. At the request of any party, any facsimile or
telecopy document is to be re-executed in original form by the parties who executed the facsimile or telecopy document. No party may raise the
use of a facsimile machine or telecopier or the fact that any signature was transmitted through the use of a facsimile or telecopier machine as a
defense to the enforcement of this Agreement or any notice required thereof.
7.7 Headings. The headings used in this Agreement are used for convenience only and are not to be considered in construing or
interpreting this Agreement.
7.8 Notices. All notices and other communications required or permitted hereunder shall be in writing and shall be deemed
effectively given upon personal delivery, delivery by recognized overnight courier (such as FedEx) or upon receipt of confirmation of delivery
by facsimile, telecopy, or registered or certified mail, return receipt requested, postage prepaid, addressed:
-36-
to Lenders :
AirWorks Funding LLLP
655 Madison Avenue
23rd Floor
New York, New York 10021
Attn: Richard E. Perlman
Telephone: (212) 223-8633
Facsimile: (212) 888-8133
with a copy to :
Paul, Hastings, Janofsky & Walker LLP
600 Peachtree Street
Suite 2400
Atlanta, Georgia 30308
Attn: Reinaldo Pascual
Telephone: (404) 815-2227
Facsimile: (404) 685-5227
with a copy to :
RS Properties I LLC
111 Broadway
8th Floor
New York, New York 10006
Attn: John Lack
Telephone: (212) 542-8201
Facsimile: (212) 542-8212
to Borrower :
Kronos Advanced Technologies, Inc.
494 Common Street, Suite 301
Belmont, MA 02478
Attn: Daniel R. Dwight
Telephone: (617) 364-5087
Facsimile: (617) 364-5085
-37-
with a copy to :
Kirkpatrick & Lockhart Preston Gates Ellis LLP
Miami Center, 20th Floor
201 South Biscayne Blvd.
Miami, FL 33131-2399
Attn: Clayton E. Parker
Telephone: ( 305) 539-3306
Facsimile: (305) 358-7095
7.9 Attorneys’ Fees. Should any litigation or arbitration be commenced between the parties hereto concerning this Agreement, the
party prevailing in such litigation or arbitration shall be entitled, upon final judgment and expiration of all appeals, in addition to such other
relief as may be granted, to a reasonable sum for attorneys’ fees and costs in such litigation or arbitration, which shall be determined by the
court or arbitrator, as the case may be.
7.10 Severability. In case any provision of this Agreement shall be invalid, illegal or unenforceable, it shall to the extent practicable
be modified so as to make it valid, legal and enforceable and to retain as nearly as practicable the intent of the parties, and the validity, legality,
and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.
7.11 Amendments; Waivers; Delays or Omissions. No waiver, amendment, modification or change of any provision of this
Agreement shall be effective unless and until made in writing and signed by AirWorks and Borrower. No delay or omission to exercise any
right, power or remedy accruing to Borrower or a Lender upon any breach, default or noncompliance of Lenders or Borrower under this
Agreement, the Notes or the other Transaction Documents, shall impair any such right, power or remedy, nor shall it be construed to be a
waiver of any such breach, default or noncompliance, or any acquiescence therein, or of any similar breach, default or noncompliance
thereafter occurring. It is further agreed that any waiver, permit, consent or approval of any kind or character on the part of Borrower or
Lenders of any breach, default or noncompliance under this Agreement, the Notes or the other Transaction Documents or any waiver on
Borrower’s or Lenders’ part of any provisions or conditions of this Agreement must be in writing and shall be effective only to the extent
specifically set forth in such writing and that all remedies, either under this Agreement, the Notes, the other Transaction Documents, the
Certificate of Incorporation or bylaws of Borrower, or otherwise afforded to Borrower and Lenders, shall be cumulative and not alternative.
Notwithstanding anything to the contrary contained herein, AirWorks and RS Properties shall have the right, in their sole discretion, to change
the respective amounts that may be advanced by them pursuant to the terms of Section 2.1(b); provided, however, that in no event shall
AirWorks and RS Properties have the right to contribute in excess of $14,200,000 in the aggregate at all Subsequent Closings.
7.12
Finder’s Fees.
(a)
Except for The Wall Street Group, which is entitled to receive a fee equal to three percent (3%) of the first Sixteen
Million Five Hundred Thousand Dollars ($16,500,000) of the Loan that is actually advanced to the Borrower by the Lenders, Borrower (i)
represents and warrants that it has not retained any finder or broker in connection with the transactions contemplated by this Agreement and
(ii) hereby agrees to indemnify and to hold Lenders harmless of and from any liability for any commission or compensation in the nature of a
finder’s fee to any broker or other Person (and the costs and expenses of defending against such liability or asserted liability) for which
Borrower is responsible. Notwithstanding anything to the contrary contained herein, under no circumstance will the amount paid to The Wall
Street Group exceed Four Hundred Ninety-Five Thousand Dollars ($495,000)
-38-
(b)
Each Lender, severally but not jointly, hereby agrees to indemnify and to hold Borrower harmless of and from any
liability for any commission or compensation in the nature of a finder’s fee to any broker or other Person (and the costs and expenses of
defending against such liability or asserted liability) for which such Lender is responsible.
7.13 Assignment. No party hereto may assign any of its rights, duties or obligations hereunder or any part thereof to any other
person or entity; provided, however, that AirWorks shall be permitted to freely assign any of its rights, duties or obligations hereunder.
7.14 Independent Nature of Lenders’ Obligations. The obligations of each Lender under any Transaction Document are several
and not joint with the obligations of any other Lender, and no Lender shall be responsible in any way for the performance of the obligations of
any other Lender under any Transaction Document. Nothing contained herein or in any Transaction Document, and no action taken by any
Lender pursuant hereto or thereto, shall be deemed to constitute the Lenders as a partnership, an association, a joint venture or any other kind of
entity, or create a presumption that the Lenders 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. The Company hereby confirms that it understands and agrees that
the Lenders are not acting as a “group” as that term is used in Section 13(d) of the Exchange Act.
7.15 Construction. Borrower and each of the Lenders have participated jointly in the negotiation and drafting of this Agreement. In
the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by Borrower and
Lender and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions
of this Agreement.
[signatures on following page]
-39-
IN WITNESS WHEREOF, Borrower and Lenders have each executed and delivered this Agreement as of the day and year first
above written.
LENDERS:
AirWorks Funding LLLP
Sands Brothers Venture Capital LLC
By: Compass Partners, LLC, its general
partner
By: /s/ Richard E. Perlman
Name: Richard E. Perlman
Title: President
By: /s/ Scott A Baily
Name: Scott A. Baily
Title: COO
Sands Brothers Venture Capital II LLC
Sands Brothers Venture Capital III LLC
By: /s/ Scott A Baily
Name: Scott A. Baily
Title: COO
By: /s/ Scott A Baily
Name: Scott A. Baily
Title: COO
Sands Brothers Venture Capital IV
LLC
Critical Capital Growth Fund, L.P.
By: /s/ Scott A Baily
Name: Scott A. Baily
Title: COO
By: Critical Capital, L.P., its general partner
By: Critical Capital Corporation, its general partner
By: /s/ Steven B. Sands
Name: Steven B. Sands
Title: Chairman
By: /s/ Charlie L. Robinson
Name: Charles L. Robinson
Title: President
RS Properties I LLC
By: /s/ John Lack
Name: John Lack
Title: Manager
BORROWER:
Kronos Advanced Technologies, Inc.
By: /s/ Richard F. Tusing
Name: Richard F. Tusing
Title: COO
EXHIBITS
Exhibit A
Exhibit B
Exhibit C
Exhibit D
Exhibit E
Exhibit F
Exhibit G
Form of Voting Agreement
Form of Registration Rights Agreement
Form of Letter Agreements
Form of Security Agreement
Form of Patent Security Agreement
Form of Borrower Counsel Opinion
Form of Nevada Opinion
SCHEDULES
Schedule 3.1 Foreign Qualification
Schedule 3.2(a) Capital Stock
Schedule 3.2(b) Options, Warrants and Rights to
Acquire Capital Stock
Schedule 3.5 Non-Contravention
Schedule 3.6 Borrower Reports
Schedule 3.8 Undisclosed Liabilities
Schedule 3.11 Liens
Schedule
List of Material Contracts
3.12(a)
Schedule
Exceptions to Material Contracts
3.12(b)
Schedule 3.13 Consents
Schedule 3.14 Related Party Transactions
Schedule 3.15 Litigation
Schedule
List of Intellectual Property
3.16(a)
Schedule
Intellectual Property Licenses
3.16(b)
Schedule
Confidentiality Agreements
3.16(d)
Schedule
Intellectual Property Infringement
3.16(e)
Schedule
Third Party Intellectual Property
3.16(f)
Infringement
Schedule
Taxes
3.17(a)
Schedule
Insurance Policies
3.18(a)
Schedule
Exceptions to Insurance Policies
3.18(b)
Schedule
Insurance Policy Coverage Exceptions
3.18(c)
Schedule 3.20 Compliance with Laws
Schedule 3.21 Leased Real Property
Schedule
Employees
3.23(a)
Schedule
Employment Agreements
3.23(b)
Schedule
Severance Agreements
3.23(c)
Schedule
Change of Control Agreements
3.23(d)
Schedule 3.24 Labor Relations
Schedule
List of Benefit Plans
3.25(a)
Schedule
Exceptions to Benefit Plans
3.25(b)
Schedule 3.27 Change of Control or Takeover
Provisions
ARTICLE I
1.1
1.2
ARTICLE II
2.1
2.2
2.3
2.4
2.5
ARTICLE III
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
3.10
3.11
3.12
3.13
3.14
3.15
3.16
3.17
3.18
3.19
3.20
3.21
3.22
3.23
DEFINITIONS
Certain Definitions
Other Definitions
AUTHORIZATION; PURCHASE AND SALE; CLOSING
Term Loan
Notes
Closing
First Closing Deliveries
Subsequent Closing Deliveries
REPRESENTATIONS AND WARRANTIES OF BORROWER
Organization; Power; Standing
Capitalization
Authority; Due Execution
Validity of the Notes and the Conversion Shares
Non-Contravention
Borrower Reports
Borrower Financial Statements
Absence of Undisclosed Liabilities
Minute Books and Organizational Documents
Absence of Certain Changes
Properties; Securities
Material Contracts
No Consents
Related Party Transactions
Litigation; Regulatory Action
Intellectual Property
Taxes
Insurance
Financial Controls
Compliance with Laws
Real Property
Accounts Receivable
Employees; Employment Agreements
1
1
5
6
6
7
7
7
9
10
10
10
11
11
11
11
12
12
12
12
13
13
15
15
15
16
17
18
19
19
19
20
20
3.24
3.25
3.26
3.27
3.28
3.29
3.30
3.31
ARTICLE IV
Labor Relations
Benefit Plans
Environmental
State Takeover Laws; Certificate of Incorporation
Offering Exemption
Certain Business Practices
U.S. Small Business Administration
Full Disclosure
REPRESENTATIONS AND WARRANTIES OF LENDERS
4.1
4.2
4.3
4.4
4.5
ARTICLE V
5.1
5.2
5.3
5.4
5.5
5.6
5.7
5.8
5.9
5.10
5.11
5.12
5.13
5.14
ARTICLE VI
6.1
6.2
6.3
Power; Authority; Due Execution
Investment Representations
No Public Market
Non-Contravention
No Consents
CERTAIN COVENANTS AND AGREEMENTS
Review of Operations
Confidentiality
Conduct of Business
Supplements to Schedules
Authorization and Reservation of Common Stock
Expansion of Board of Directors; Observer
Publicity
Expenses
Cooperation
Notification of Certain Matters
SBIA Regulatory Compliance
Use of Proceeds
Key-Man Life Insurance
Further Assurances
CONDITIONS TO CLOSING
Conditions to Lenders’ and Borrower’s Obligations
Conditions to Obligations of Lenders
Conditions to Obligations of Borrower
20
21
22
24
24
24
24
25
25
25
25
26
27
27
27
27
27
27
28
30
30
31
31
31
31
32
32
33
33
33
33
33
34
35
ARTICLE VII
7.1
7.2
7.3
7.4
7.5
7.6
7.7
7.8
7.9
7.10
7.11
7.12
7.13
7.14
7.15
MISCELLANEOUS
Survival
Entire Agreement; Binding Effect
Third Party Beneficiaries
Governing Law
Jurisdiction and Venue; Waiver of Jury Trial
Counterparts and Signature by Facsimile
Headings
Notices
Attorneys’ Fees
Severability
Amendments; Waivers; Delays or Omissions
Finder’s Fees
Assignment
Independent Nature of Lenders’ Obligations
Construction
35
35
35
36
36
36
36
36
36
38
38
38
38
39
39
39
Exhibit 3
THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR APPLICABLE STATE SECURITIES
LAWS, AND MAY NOT BE SOLD, TRANSFERRED, OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH
REGISTRATION OR RECEIPT BY THE MAKER OF AN OPINION OF COUNSEL IN THE FORM, SUBSTANCE AND SCOPE
REASONABLY SATISFACTORY TO THE MAKER THAT THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE
UPON CONVERSION HEREOF MAY BE SOLD, TRANSFERRED, OR OTHERWISE DISPOSED OF, UNDER AN EXEMPTION
FROM REGISTRATION UNDER THE ACT AND SUCH STATE SECURITIES LAWS.
KRONOS ADVANCED TECHNOLOGIES, INC.
Secured Convertible Promissory Note
due June 19, 2010
June 19, 2007
Belmont, Massachusetts
$10,820,000.00
For value received, Kronos Advanced Technologies, Inc., a Nevada corporation whose principal office is located at 464 Common
Street, Box 301, Belmont, Massachusetts 02478 (the “ Maker ”), hereby promises to pay to the order of AirWorks Funding LLLP, a Georgia
limited liability limited partnership, whose principal office is located at 655 Madison Avenue, 23rd Floor, New York, New York 10021
(together with its successors, representatives, and permitted assigns, the “ Holder ”), in accordance with the terms hereinafter provided, the
principal amount of Ten Million Eight Hundred Twenty Thousand Dollars ($10,820,000.00) or so much thereof as may be advanced by the
Holder to Maker in accordance with the provisions of the Funding Agreement, together with interest thereon. This Secured Convertible
Promissory Note (this “ Note ”) is one of the duly authorized Notes of Maker issued in connection with that Funding Agreement of even date
herewith by and among the Maker and the Lenders (the “ Funding Agreement ”).
All payments under or pursuant to this Note shall be made in United States Dollars in immediately available funds to the Holder at the
address of the Holder first set forth above or at such other place as the Holder may designate from time to time in writing to the Maker or by
wire transfer of funds to the Holder’s account, instructions for which are attached hereto as Exhibit A . The outstanding principal balance of
this Note and all accrued interest hereon shall be due and payable on June 19, 2010 (the “ Maturity Date ”) or at such earlier time as provided
herein.
ARTICLE I
GENERAL
Section 1.1
the Funding Agreement.
Definitions . Capitalized terms used but not otherwise defined shall have the meanings ascribed to terms in
Section 1.2
Interest . Beginning on the issuance date of this Note (the “ Issuance Date ”), the outstanding principal
balance of this Note shall bear interest, in arrears, at a rate per annum equal to twelve percent (12%), payable in cash commencing on January
1, 2008 and on the first business day of each following calendar quarter. Interest shall be computed on the basis of a 360-day year of twelve
(12) 30-day months and shall accrue commencing on the Issuance Date. Furthermore, upon the occurrence of an Event of Default (as defined in
Section 2.1 hereof), then to the extent permitted by law, the Maker will pay interest in cash to the Holder, payable on demand, on the
outstanding principal balance of this Note from the date of the Event of Default until such Event of Default is cured at the rate of the lesser of
eighteen percent (18%) per annum and the maximum applicable legal rate per annum.
Section 1.3
Security . This Note and the amounts due hereunder are secured by the Collateral, as defined in that Security
Agreement dated of even date herewith among the Maker and the Lenders.
Section 1.4
Payment on Non-Business Days . Whenever any payment to be made hereunder shall be due on a Saturday,
Sunday or a public holiday under the laws of the State of New York, such payment may be due on the next succeeding business day and such
next succeeding day shall be included in the calculation of the amount of accrued interest payable on such date.
Section 1.5
Transfer . Subject to the provisions of Section 4.8 of this Note, this Note may be transferred or sold or
pledged, hypothecated or otherwise granted as security by the Holder.
Section 1.6
Replacement . Upon receipt of a duly executed, notarized and unsecured written statement from the Holder
with respect to the loss, theft or destruction of this Note (or any replacement hereof) and a standard indemnity, or, in the case of a mutilation of
this Note, upon surrender and cancellation of such Note, the Maker shall issue a new Note, of like tenor and amount, in lieu of such lost, stolen,
destroyed or mutilated Note.
Section 1.7
Record Keeping . The Holder shall maintain a record of all advances made to Maker under this Note, and
such record shall be conclusive evidence of the amounts disbursed to Maker under this Note.
-2-
ARTICLE II
EVENTS OF DEFAULT; REMEDIES
Section 2.1
Events of Default . The occurrence of any of the following events shall be an “ Event of Default ” under this
Note:
(a)
the Maker shall fail to make any principal or interest payments on the date such payments are due and such default is
not fully cured within seven (7) business days after the occurrence thereof; or
(b)
the suspension from listing, without subsequent listing on any one of, or the failure of the Common Stock of the
Maker (the “ Common Stock ”) to be listed or quoted on at least one of the NASD Over-The-Counter Bulletin Board (the “ OTC Bulletin
Board ”), the American Stock Exchange, the NASDAQ National Market, the Nasdaq Global Select Market, the Nasdaq Global Market, the
Nasdaq Capital Market or The New York Stock Exchange, Inc.; or
(c)
the Maker’s notice to the Holder, including by way of public announcement, at any time, of Maker’s inability to
comply (including for any of the reasons described in Section 3.6(a) hereof) or its intention not to comply with proper requests for conversion
of this Note into shares of Common Stock; or
(d)
the Maker shall fail to (i) timely deliver the shares of Common Stock upon conversion of the Note, (ii) file a
registration statement in accordance with the terms of the Registration Rights Agreement or (iii) make the payment of any fees and/or
liquidated damages under this Note, the Funding Agreement, the Registration Rights Agreement or other Transaction Documents, which failure
in the case of items (i) and (iii) of this Section 2.1(d) is not remedied within ten (10) business days after the incurrence thereof and, solely with
respect to item (iii) above, after the Holder delivers written notice to the Maker of the occurrence thereof; or
(e)
while a registration statement is required to be maintained effective pursuant to the terms of the Registration Rights
Agreement, the effectiveness of such registration statement lapses for any reason (including, without limitation, the issuance of a stop order) or
is unavailable to the Holder for sale of the Registrable Securities (as defined in the Registration Rights Agreement) in accordance with the
terms of the Registration Rights Agreement, and such lapse or unavailability continues for a period of ten (10) consecutive Trading Days; or
(f)
default shall be made in the performance or observance of (i) any covenant, condition or agreement contained in this
Note (other than as set forth in clause (f) of this Section 2.1) and such default is not fully cured within twenty (20) business days after the
Holder delivers written notice to the Maker of the occurrence thereof or (ii) any covenant, condition or agreement contained in the Funding
Agreement, the Registration Rights Agreement or any other Transaction Document which is not covered by any other provisions of this Section
2.1 and such default is not fully cured within twenty (20) business days after the Holder delivers written notice to the Maker of the occurrence
thereof; or
-3-
(g)
any material representation or warranty made by the Maker herein or in the Funding Agreement, the Registration
Rights Agreement, or any other Transaction Document shall prove to have been false or incorrect or breached by Maker and the Holder
delivers written notice to the Maker of the occurrence thereof; or
(h)
the Maker shall (A) default in any payment of any amount or amounts of principal of or interest on any Indebtedness
(other than the Indebtedness hereunder) the aggregate principal amount of which Indebtedness is in excess of $50,000 or (B) default in the
observance or performance of any other agreement or condition relating to any Indebtedness or contained in any instrument or agreement
evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition
is to cause, or to permit the holder or holders or beneficiary or beneficiaries of such Indebtedness to cause with the giving of notice if required,
such Indebtedness to become due prior to its stated maturity; or
(i)
the Maker shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian,
trustee or liquidator of itself or of all or a substantial part of its property or assets, (ii) make a general assignment for the benefit of its creditors,
(iii) commence a voluntary case under the United States Bankruptcy Code (as now or hereafter in effect) or under the comparable laws of any
jurisdiction (foreign or domestic), (iv) file a petition seeking to take advantage of any bankruptcy, insolvency, moratorium, reorganization or
other similar law affecting the enforcement of creditors’ rights generally, (v) acquiesce in writing to any petition filed against it in an
involuntary case under United States Bankruptcy Code (as now or hereafter in effect) or under the comparable laws of any jurisdiction (foreign
or domestic), (vi) issue a notice of bankruptcy or winding down of its operations or issue a press release regarding same, or (vii) take any action
under the laws of any jurisdiction (foreign or domestic) analogous to any of the foregoing; or
(j)
a proceeding or case shall be commenced in respect of the Maker, without its application or consent, in any court of
competent jurisdiction, seeking (i) the liquidation, reorganization, moratorium, dissolution, winding up, or composition or readjustment of its
debts, (ii) the appointment of a trustee, receiver, custodian, liquidator or the like of it for all or any substantial part of its assets in connection
with the liquidation or dissolution of the Maker or (iii) similar relief in respect of it under any law providing for the relief of debtors, and such
proceeding or case described in clause (i), (ii) or (iii) shall continue undismissed, or unstayed and in effect, for a period of thirty (30) days or
any order for relief shall be entered in an involuntary case under United States Bankruptcy Code (as now or hereafter in effect) or under the
comparable laws of any jurisdiction (foreign or domestic) against the Maker or action under the laws of any jurisdiction (foreign or domestic)
analogous to any of the foregoing shall be taken with respect to the Maker and shall continue undismissed, or unstayed and in effect for a
period of thirty (30) days; or
(k)
the failure of the Maker to instruct its transfer agent to remove any legends from shares of Common Stock eligible to
be sold under Rule 144 of the Securities Act and issue such unlegended certificates to the Holder within five (5) business days of the Holder’s
request so long as the Holder has provided reasonable assurances to the Maker that such shares of Common Stock can be sold pursuant to Rule
144; or
-4-
(l)
the Maker ceases to operate its business as a going concern; or
(m)
the Security Agreement, or any other security agreement, pledge agreement, collateral assignment, mortgage,
control agreement or other grants or transfers for security executed and delivered by Maker or any other obligor creating (or purporting to
create) a Lien in favor of the Holder (collectively, the “ Security Documents ”), at any time for any reason cease to be in full force and effect,
or shall cease to grant to the Holder the Liens, rights, powers and privileges purported to be created thereby, superior to and prior to the rights
of all third Persons other than the holders of Permitted Liens and subject to no other Liens other than Permitted Liens; or
(n)
the Maker or any other obligor, directly or indirectly, contest in any manner the effectiveness, validity, binding
nature or enforceability of the Security Agreement or any of the other Security Documents.
Section 2.2
Remedies Upon An Event of Default . If an Event of Default shall have occurred and shall be continuing, the
Holder of this Note may at any time at its option, (a) declare the entire unpaid principal balance of this Note, together with all interest accrued
hereon, due and payable, and thereupon, the same shall be accelerated and so be due and payable, without presentment, demand, protest, or
notice, all of which are hereby expressly unconditionally and irrevocably waived by the Maker, (b) demand that the principal amount of this
Note then outstanding shall be converted into shares of Common Stock at a Conversion Price per share calculated pursuant to Section 3.1
hereof assuming that the date that the Event of Default occurs is the Conversion Date (as defined in Section 3.1 hereof), or (c) exercise or
otherwise enforce any one or more of the Holder’s rights, powers, privileges, remedies and interests under this Note, the Funding Agreement,
the Security Agreement, the Registration Rights Agreement, the Security Documents, any other Transaction Document or applicable law. No
course of delay on the part of the Holder shall operate as a waiver thereof or otherwise prejudice the right of the Holder. No remedy conferred
hereby shall be exclusive of any other remedy referred to herein or now or hereafter available at law, in equity, by statute or otherwise.
ARTICLE III
CONVERSION; ANTIDILUTION; PREPAYMENT
Section 3.1
Conversion Option . At any time on or after the Issuance Date, this Note shall be convertible (in whole or in
part), at the option of the Holder into such number of fully paid and non-assessable shares of Common Stock as is determined by dividing (x)
that portion of the outstanding principal balance under this Note as of such date that the Holder elects to convert by (y) the Conversion Price (as
defined in Section 3.2(a) hereof) then in effect on the date on which the Holder faxes a notice of conversion in the form attached hereto (the “
Conversion Notice ”), duly executed, to the Maker (facsimile number (617) 364-5085, Attn.: Chief Executive Officer) (the “ Conversion Date
”), provided, however, that the Conversion Price shall be subject to adjustment as described in Section 3.4 of this Note. The Holder shall
deliver this Note to the Maker at the address designated in the Funding Agreement at such time that this Note is fully converted. With respect to
partial conversions of this Note, the Maker shall keep written records of the amount of this Note converted as of each Conversion Date.
-5-
Section 3.2
(a)
Conversion Price .
The term “ Conversion Price ” shall mean $0.0028, subject to adjustment under Section 3.4 hereof.
(b)
Notwithstanding the foregoing, it is the intent of the Maker and the Holder that the Conversion Price equal an
amount that results in the shares of Common Stock issuable to Lender upon conversion of this Note (i) in full will represent, on an
as-converted, fully-diluted basis (taking into account, without limitation, all potentially dilutive securities which are outstanding, authorized by
the Maker, or otherwise required to be issued, as of the First Closing Date, and assuming that all outstanding options, warrants and other rights
for the purchase of capital stock of the Maker shall have been exercised, and all outstanding shares of all series of the Maker’s preferred stock,
if any, have been converted into Common Stock), no less than 58.35% of the outstanding capital stock of the Maker and (ii) in part will
represent, on an as-converted, fully-diluted basis (taking into account, without limitation, all potentially dilutive securities which are
outstanding, authorized by the Maker, or otherwise required to be issued, as of the First Closing Date, and assuming that all outstanding
options, warrants and other rights for the purchase of capital stock of the Maker shall have been exercised, and all outstanding shares of all
series of the Maker’s preferred stock, if any, have been converted into Common Stock), no less than the product of (A) 58.35% of the
outstanding capital stock of the Maker and (B) a fraction, the numerator of which is equal to the amount of this Note that is converted and the
denominator of which is equal to $10,820,000.
Section 3.3
Mechanics of Conversion .
(a)
Not later than three (3) Trading Days after any Conversion Date (the “ Delivery Date ”), the Maker shall deliver to
the Holder by (i) express courier a certificate or certificates representing the number of shares of Common Stock being acquired upon the
conversion of all or part of this Note, or (ii) provided that Maker’s designated transfer agent participates in the DTC Fast Automated Securities
Transfer Program, at all times after the Holder has notified the Maker that this clause (ii) shall apply, credit the number of shares of Common
Stock to which the Holder shall be entitled to the Holder’s or its designee’s balance account with The Depository Trust Corporation through its
Deposit Withdrawal Agent Commission System. If in the case of any Conversion Notice such certificate, certificates or shares are not delivered
to or as directed by the Holder by the Delivery Date, the Holder shall be entitled by written notice to the Maker at any time on or before its
receipt of such certificate or certificates thereafter, to rescind such conversion, in which event the Maker shall immediately return this Note
tendered for conversion, whereupon the Maker and the Holder shall each be restored to their respective positions immediately prior to the
delivery of such notice of revocation, except that any amounts described in Sections 3.3(b) shall be payable through the date notice of
rescission is given to the Maker. The Maker shall upon request of the Holder, use its best efforts to deliver Conversion Shares hereunder
electronically through the Depository Trust Company.
(b)
The Maker understands that a delay in the delivery of the shares of Common Stock upon conversion of this Note
beyond the Delivery Date could result in economic loss to the Holder. If the Maker fails to deliver to the Holder a certificate or certificates
pursuant to this Section by the Delivery Date, the Maker shall pay to the Holder, in cash, an amount per
-6-
Trading Day for each Trading Day until such certificates are delivered, together with interest on such amount at a rate of 10% per annum,
accruing until such amount and any accrued interest thereon is paid in full, equal to the greater of (A) the sum of (i) 1% of the aggregate
principal amount of this Note requested to be converted for the first five (5) Trading Days after the Delivery Date and (ii) 2% of the aggregate
principal amount of this Note requested to be converted for each Trading Day thereafter and (B) $2,000 per day (which amount shall be paid as
liquidated damages and not as a penalty). Nothing herein shall limit a Holder’s right to pursue actual damages for the Maker’s failure to deliver
certificates representing shares of Common Stock upon conversion within the period specified herein and the 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).
Notwithstanding anything to the contrary contained herein, the Holder shall be entitled to withdraw a Conversion Notice, and upon such
withdrawal the Maker shall only be obligated to pay the liquidated damages accrued in accordance with this Section 3.3(b) through the date the
Conversion Notice is withdrawn.
Section 3.4
(a)
Adjustment of Conversion Price .
The Conversion Price shall be subject to adjustment from time to time as follows:
(i)
Adjustments for Additional Issuances of Common Stock . In the event that the Maker at any time after the
First Closing Date issues additional shares of Common Stock (including additional shares of Common Stock deemed to be issued) without
consideration or for a consideration per share less than the Conversion Price then in effect, then the Conversion Price shall be reduced,
concurrently with such issuance, to a price (calculated to the nearest hundredth of one cent) equal to the consideration per share received by the
Maker upon such issuance of additional shares of Common Stock. For purposes of this Section 3.4, shares of Common Stock shall be deemed
to be issued if the Maker or any of its subsidiaries issues additional shares of Common Stock or rights, warrants, options or other securities or
debt convertible, exercisable or exchangeable for shares of Common Stock or otherwise entitling any Person to acquire shares of Common
Stock (collectively, “ Common Stock Equivalents ”). For purposes of this Section 3.4, in connection with any issuance or deemed issuance of
any Common Stock, (A) the maximum number of shares of Common Stock potentially issuable at any time upon conversion, exercise or
exchange of such Common Stock Equivalents (the “ Deemed Number ”) the shall be deemed to be outstanding upon issuance of such Common
Stock Equivalents, (B) the consideration deemed to have been received by the Maker applicable to such Common Stock shall equal the
minimum dollar value of consideration payable to the Maker to purchase such Common Stock Equivalents and to convert, exercise or exchange
them into Common Stock (net of any discounts, fees, commissions and other expenses), divided by the Deemed Number, and (C) no further
adjustment shall be made to the Conversion Price upon the actual issuance of Common Stock upon conversion, exercise or exchange of such
Common Stock Equivalents.
(ii)
Adjustments for Subdivisions, Common Stock Dividends, Combinations or Consolidations of Common
Stock . In the event the outstanding shares of Common Stock shall be subdivided or increased, by stock split or stock dividend, into a greater
number of shares of Common Stock, the Conversion Price then in effect shall concurrently with the effectiveness of such subdivision or
payment of such stock dividend, be proportionately decreased. In the event the outstanding shares of Common Stock shall be combined or
consolidated, by reclassification or otherwise, into a lesser number of shares of Common Stock, the Conversion Price then in effect shall,
concurrently with the effectiveness of such combination or consolidation, be proportionately increased.
-7-
(iii)
Adjustments for Reclassification, Exchange and Substitution . If the Common Stock shall be changed into
the same or a different number of shares of any other class or classes of stock, whether by capital reorganization, reclassification or otherwise
(other than a subdivision or combination or shares provided for above), the Conversion Price then in effect shall, concurrently with the
effectiveness of such reorganization or reclassification, be proportionately adjusted such that the Common Stock issuable upon conversion of
this Note shall be convertible into, in lieu of the number of shares of Common Stock which the Holder would otherwise have been entitled to
receive, a number of shares of such other class or classes of stock equivalent to the number of shares of Common Stock that would have been
subject to receipt by the Holder upon conversion of this Note immediately before that change.
(iv)
Adjustments for Merger, Sale, Lease or Conveyance . In the event of any consolidation with or merger of
the Maker with or into another entity, or in case of any sale, lease or conveyance to another person or entity of the assets of the Maker as an
entirety or substantially as an entirety, the Common Stock issuable upon conversion of this Note shall after the date of such consolidation,
merger, sale, lease or conveyance be convertible into the number of shares of stock or other securities or property (including cash) to which the
Common Stock issuable (at the time of such consolidation, merger, sale, lease or conveyance) upon conversion of this Note would have been
entitled upon such consolidation, merger, sale, lease or conveyance; and in any such case, if necessary, the provisions set forth herein with
respect to the rights and interests thereafter of the Holder shall be appropriately adjusted so as to be applicable, as nearly as may reasonably be,
to any shares of stock or other securities or property thereafter deliverable on the conversion of this Note.
(v)
Other Provisions Applicable to Adjustment Under this Section . The following provisions will be
applicable to the adjustments in Conversion Price as provided in this Section 3.4:
(1)
The number of shares of Common Stock at any time outstanding shall not include any shares
thereof then directly or indirectly owned or held by or for the account of the Maker.
(2)
In case the Maker shall take any action affecting the outstanding number of shares of Common
Stock other than an action described in any of the foregoing subsections above, inclusive, which would have an inequitable effect on the
Holder, the Conversion Price shall be adjusted in such manner and at such time as the Board of Directors of the Maker on the advice of the
Maker’s independent public accountants may in good faith determine to be equitable in the circumstances.
(3)
No adjustment of the Conversion Price shall be made if the amount of any such adjustment would
be an amount less than one percent (1%) of the Conversion Price then in effect, but any such amount shall be carried forward and an adjustment
with respect thereof shall be made at the time of and together with any subsequent adjustment which, together with such amount and any other
amount or amounts so carried forward, shall aggregate an increase or decrease of one percent (1%) or more.
-8-
(4)
The Conversion Price shall not be adjusted upward except in the event of a combination of the
outstanding shares of Common Stock into a smaller number of shares of Common Stock.
(b)
Record Date . In the event that the Maker shall propose at any time:
(i)
to declare any dividend or distribution (other than by purchase of Common Stock of employees, officers
and directors pursuant to the termination of such persons or pursuant to the Maker’s exercise of rights of first refusal with respect to Common
Stock held by such persons) upon its Common Stock, whether in cash, property, stock or other securities, whether or not a regular cash
dividend and whether or not out of earnings or earned surplus;
(ii)
change in the Common Stock; or
to effect any reclassification or recapitalization of its Common Stock shares outstanding involving a
(iii)
to merge or consolidate with or into any other entity, or sell, lease or convey all or substantially all its
property or business, or to liquidate, dissolve or wind up; then, in connection with each such event, this Maker shall send to the Holder:
(1)
at least twenty (20) days’ prior written notice of the date on which a record shall be taken for such
dividend or distribution (and specifying the date on which the holders of Common Stock shall be entitled thereto) or for determining rights to
vote in respect of the matters referred to in (i) and (ii) above; and
(2)
in the case of the matters referred to in (ii) and (iii) above, at least twenty (20) days’ prior written
notice of the date when the same shall take place (and specifying the date on which the holders of Common Stock shall be entitled to exchange
their Common Stock for securities or other property deliverable upon the occurrence of such event).
Each such written notice shall be given by first class mail, postage prepaid, addressed to the Holder at the address first set forth above. Any
such action shall at all times be subject to the voting rights and other rights, preferences and privileges of the Holder set forth herein.
(c)
No Impairment . The Maker shall not, by amendment of its Certificate of Incorporation or through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action (other than actions
taken in good faith), avoid the observance or performance of any of the terms to be observed or performed hereunder by the Maker but will at
all times in good faith assist in carrying out all the provisions of this Section 3.4 and in taking all such action as may be necessary or
appropriate in order to protect the conversion rights of the Holder against impairment.
(d)
Certificates as to Adjustments . Upon the occurrence of each adjustment or readjustment of the Conversion Price
pursuant to this section, the Maker at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof
and furnish to the Holder a certificate setting forth such adjustment or readjustment in accordance with the terms hereof and showing in detail
the facts upon which such adjustment or readjustment is based. The Maker shall, upon the written request at any time of the Holder, furnish or
cause to be furnished to the Holder a like certificate setting forth (A) such adjustments and readjustments, (B) the Conversion Price at the time
in effect, and (C) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon
the conversion of this Note.
-9-
(e)
Issue Taxes . The Maker shall pay any and all issue and other taxes, excluding federal, state or local income taxes,
that may be payable in respect of any issue or delivery of shares of Common Stock on conversion of this Note pursuant thereto; provided ,
however , that the Maker shall not be obligated to pay any transfer taxes resulting from any transfer requested by the Holder in connection with
any such conversion.
(f)
Fractional Shares . No fractional shares of Common Stock shall be issued upon conversion of this Note. In lieu of any
fractional shares to which the Holder would otherwise be entitled, the Maker shall pay cash equal to the product of such fraction multiplied by
the average of the Closing Bid Price of the Common Stock into which this Note is convertible for the five (5) consecutive Trading Days
immediately preceding the Conversion Date. The term “ Closing Bid Price ” shall mean, on any particular date (i) the last closing bid price per
share of the Common Stock on such date on the OTC Bulletin Board or another registered national stock exchange on which the Common
Stock is then listed, or if there is no such price on such date, then the last closing bid price on such exchange or quotation system on the date
nearest preceding such date, or (ii) if the Common Stock is not listed then on the OTC Bulletin Board or any registered national stock
exchange, the last trading price for a share of Common Stock in the over-the-counter market, as reported by the OTC Bulletin Board or in the
National Quotation Bureau Incorporated or similar organization or agency succeeding to its functions of reporting prices) at the close of
business on such date, or (iii) if the Common Stock is not then reported by the OTC Bulletin Board or the National Quotation Bureau
Incorporated (or similar organization or agency succeeding to its functions of reporting prices), then the average of the “Pink Sheet” quotes for
the relevant conversion period, as determined in good faith by the Holder, or (iv) if the Common Stock is not then publicly traded the fair
market value of a share of Common Stock as determined by the Holder and reasonably acceptable to the Maker.
(g)
Reservation of Common Stock .
(i)
In the event that at anytime when this Note shall be outstanding, the Maker shall not have sufficient
authorized but unissued Common Stock for the purpose of effecting the conversion of all amounts outstanding under this Note at such time
(without regard to any limitations on conversion) (an “ Authorized Share Failure ”), it shall immediately reserve and keep available such
number of its duly authorized shares of Common Stock as is in fact available as of that date and shall immediately take all action necessary to
increase the number of its authorized shares of Common Stock until such time as the Maker’s Certificate of Incorporation shall have been
amended to increase the number of authorized shares of Common Stock to such number as would, at a minimum, permit the reservation by the
Maker of sufficient shares to allow conversion of all amounts outstanding under this Note as provided herein.
-10-
Without limiting the generality of the foregoing sentence, as soon as practicable after the occurrence of an Authorized Share Failure, but in no
event later than 60 days after the occurrence of such Authorized Share Failure, the Maker shall (A) hold a meeting of its stockholders or (B)
obtain a majority written consent of its stockholders, for the authorization of an increase in the number of authorized shares of Common Stock.
In connection with such meeting, the Maker shall provide each stockholder with a proxy statement and shall use its best efforts to solicit its
stockholders’ approval of such increase in authorized shares of Common Stock and to cause its board of directors to recommend to the
stockholders that they approve such proposal. The inability of the Maker to reserve the required number of shares of Common Stock required
by this Section 3.4(g) shall have no impact on the rank, rights, preferences and privileges of this Note, which shall be interpreted and applied as
if the Maker had sufficient shares of Common Stock authorized but unissued to effect any conversion. Before taking any action which would
cause an adjustment reducing the Conversion Price below the then par value of the shares of Common Stock issuable upon conversion of this
Note or which would cause the effective purchase price for the Common Stock to be less than the par value of the shares of Common Stock, the
Maker shall take any and all corporate action which may, in the opinion of its counsel, be necessary in order that the Maker may validly and
legally issue fully paid and nonassessable shares of such Common Stock at such adjusted Conversion Price or effective purchase price, as the
case may be.
(h)
Regulatory Compliance . If any shares of Common Stock to be reserved for the purpose of conversion of this Note
require registration or listing with or approval of any governmental authority, stock exchange or other regulatory body under any federal or
state law or regulation or otherwise before such shares may be validly issued or delivered upon conversion, the Maker shall, at its sole cost and
expense, in good faith and as expeditiously as possible, endeavor to secure such registration, listing or approval, as the case may be.
Section 3.5
Preemptive Rights .
(a)
Except as set forth in Section 3.5(c), the Maker shall not issue or sell any shares of Common Stock or other
securities, or any rights or options to purchase Common Stock or other securities, or any debt or shares convertible into or exchangeable for
Common Stock or other securities, whether now or hereafter authorized and whether unissued or in the treasury (collectively, “ Preemptive
Shares ”), unless the Holder shall first have been given the right to acquire, at a price no less favorable than that at which such Preemptive
Shares are to be offered to others, a portion of the Preemptive Shares, as provided in Section 3.5(b).
(b)
The Maker shall give the Holder prior written notice of any proposed issuance or sale described in Section 3.5(a),
including the price at which such securities are to be offered and the time period for the offering, and the Holder shall have thirty (30) days
from the giving of such notice within which to elect to acquire that number of the Preemptive Shares equal to the product of the total number of
Preemptive Shares being offered and a fraction, determined as of the time immediately prior to the issuance of the Preemptive Shares, the
numerator of which is equal to the sum of (i) the number of shares of Common Stock then outstanding as a result of the conversion of this
Note, and (ii) the number of shares of Common Stock into which this Note could be converted, and the denominator of which is equal to the
sum of (x) the number of shares of Common Stock then outstanding, (y) the number of shares of
-11-
Common Stock into which this Note could be converted, and (z) the number of shares of Common Stock issuable upon conversion or exercise
of all outstanding options, warrants and other rights for the purchase of capital stock of the Company, and all outstanding shares of all series of
preferred stock (such number of Preemptive Shares being referred to herein as the “ Common Stock Preemptive Shares ”). The Holder may
acquire that portion of the Common Stock Preemptive Shares being offered equal to its percentage ownership of the outstanding Common
Stock immediately preceding the issuance of the Preemptive Shares. If any transaction specified by the Maker in any such notice shall not be
consummated within one hundred twenty (120) days from the date of such notice, the Corporation shall again comply with the provisions of
this Section 3.5 with respect to such transaction, and the Holder shall again have preemptive rights hereunder with respect to the transaction,
regardless of whether any such stockholder had previously exercised or failed to exercise such rights. Any purchase of securities pursuant to the
exercise of preemptive rights shall be consummated simultaneously with, and shall be conditioned upon, consummation of the transaction
proposed by the Maker.
(c)
The restrictions contained in, and preemptive rights granted under, this Section 3.5 shall not apply to:
(i)
shares of Common Stock issued upon conversion of this Note;
(ii)
shares of capital stock of the Maker issued in a public offering occurring after the date hereof that results
in aggregate gross proceeds to the Maker of at least Fifty Million Dollars ($50,000,000); or
(iii)
shares of Common Stock issued upon the exercise or conversion of outstanding options, warrants or other
Common Stock equivalents in existence on the Issuance Date.
The rights granted to the Holder under this Section 3.5 may be waived with respect to any Preemptive Shares by a written waiver executed by
the Holder.
Section 3.6
Prepayment . The Maker shall not be permitted to prepay some or all of the principal and accrued interest
outstanding under this Note at any time prior to the date that is six (6) months after the First Closing Date but shall be permitted to prepay some
or all of the principal and accrued interest outstanding under this Note at any time after such date; provided, however, that (i) in advance of any
such prepayment, the Maker shall deliver to the Holder a written notice (the “ Prepayment Notice ”) setting forth the Maker’s intention to make
such prepayment and the amount thereof, and (ii) the Holder shall have the right to convert some or all of the amount proposed to be prepaid
into such number of shares of Common Stock as is determined by dividing the amount to be converted by the Conversion Price then in effect.
The Holder shall exercise the conversion right set forth in this Section 3.6 by notifying the Maker in writing within sixty (60) Trading Days of
the Holder’s receipt of Prepayment Notice. In the event that the Maker prepays some, but not all, of the principal and accrued interest
outstanding under this Note, such prepaid amount shall be applied first to the amount owing on the date on which the Maker’s final payment is
due hereunder and then to amounts owing on any preceding dates on which the Maker is required to make payments hereunder.
-12-
Section 3.7
No Rights as Shareholder . Nothing contained in this Note shall be construed as conferring upon the Holder,
prior to the conversion of this Note, the right to vote or to receive dividends or to consent or to receive notice as a shareholder in respect of any
meeting of shareholders for the election of directors of the Maker or of any other matter, or any other rights as a shareholder of the Maker.
ARTICLE IV
MISCELLANEOUS
Section 4.1
Notices . Any notice, demand, request, waiver or other communication required or permitted to be given
hereunder shall be in writing and shall be effective (a) upon hand delivery, telecopy or facsimile at the address or number first set forth above
(if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such
delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the second
business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such
mailing, whichever shall first occur.
Section 4.2
Governing Law . This Note shall be governed by and construed in accordance with the internal laws of the
State of New York, without giving effect to any of the conflicts of law principles which would result in the application of the substantive law of
another jurisdiction. This Note shall not be interpreted or construed with any presumption against the party causing this Note to be drafted.
Section 4.3
Headings . Article and section headings in this Note are included herein for purposes of convenience of
reference only and shall not constitute a part of this Note for any other purpose.
Section 4.4
Remedies, Characterizations, Other Obligations, Breaches and Injunctive Relief . The remedies provided in
this Note shall be cumulative and in addition to all other remedies available under this Note, at law or in equity (including, without limitation, a
decree of specific performance and/or other injunctive relief), no remedy contained herein shall be deemed a waiver of compliance with the
provisions giving rise to such remedy and nothing herein shall limit a Holder’s right to pursue actual damages for any failure by the Maker to
comply with the terms of this Note. Amounts set forth or provided for herein with respect to payments, conversion and the like (and the
computation thereof) shall be the amounts to be received by the Holder thereof and shall not, except as expressly provided herein, be subject to
any other obligation of the Maker (or the performance thereof). The Maker acknowledges that a breach by it of its obligations hereunder will
cause irreparable and material harm to the Holder and that the remedy at law for any such breach may be inadequate. Therefore the Maker
agrees that, in the event of any such breach or threatened breach, the Holder shall be entitled, in addition to all other available rights and
remedies, at law or in equity, to seek and obtain such equitable relief, including but not limited to an injunction restraining any such breach or
threatened breach, without the necessity of showing economic loss and without any bond or other security being required.
-13-
Section 4.5
Enforcement Expenses . The Maker agrees to pay all costs and expenses of enforcement of this Note,
including, without limitation, reasonable attorneys’ fees and expenses.
Section 4.6
Binding Effect . The obligations of the Maker and the Holder set forth herein shall be binding upon the
successors and permitted assigns of each such party.
Section 4.7
the Maker and the Holder.
Amendments . This Note may not be modified or amended in any manner except in a writing executed by
Section 4.8
Compliance with Securities Laws . The Holder of this Note acknowledges that this Note is being acquired
solely for the Holder’s own account and not as a nominee for any other party, and for investment, and that the Holder shall not offer, sell or
otherwise dispose of this Note. This Note and any Note issued in substitution or replacement therefor shall be stamped or imprinted with a
legend in substantially the following form:
THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION HEREOF
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
“ACT”), OR APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR RECEIPT BY THE MAKER OF
AN OPINION OF COUNSEL IN THE FORM, SUBSTANCE AND SCOPE REASONABLY
SATISFACTORY TO THE MAKER THAT THIS NOTE AND THE SHARES OF COMMON STOCK
ISSUABLE UPON CONVERSION HEREOF HAVE MAY BE SOLD, TRANSFERRED,
HYPOTHECATED OR OTHERWISE DISPOSED OF, UNDER AN EXEMPTION FROM
REGISTRATION UNDER THE ACT AND SUCH STATE SECURITIES LAWS.
Section 4.9
Consent to Jurisdiction . Each of the Maker and the Holder (i) hereby irrevocably submits to the exclusive
jurisdiction of the United States District Court sitting in the Southern District of New York and the courts of the State of New York located in
New York county for the purposes of any suit, action or proceeding arising out of or relating to this Note and (ii) hereby waives, and agrees not
to assert in any such suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of such court, that the suit, action or
proceeding is brought in an inconvenient forum or that the venue of the suit, action or proceeding is improper. Each of the Maker and the
Holder consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address in effect
for notices to it under the Funding Agreement and agrees that such service shall constitute good and sufficient service of process and notice
thereof. Nothing in this Section 4.9 shall affect or limit any right to serve process in any other manner permitted by law. Each of the Maker and
the Holder hereby agree that the prevailing party in any suit, action or proceeding arising out of or relating to this Note shall be entitled to
reimbursement for reasonable legal fees from the non-prevailing party.
-14-
Section 4.10
Parties in Interest . This Note shall be binding upon, inure to the benefit of and be enforceable by the
Maker, the Holder and their respective successors and permitted assigns.
Section 4.11
Failure or Indulgence Not Waiver . No failure or delay on the part of the Holder in the exercise of any
power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or
privilege preclude other or further exercise thereof or of any other right, power or privilege.
Section 4.12
Maker Waivers . Except as otherwise specifically provided herein, the Maker and all others that may become
liable for all or any part of the obligations evidenced by this Note, hereby waive presentment, demand, notice of nonpayment, protest and all
other demands’ and notices in connection with the delivery, acceptance, performance and enforcement of this Note, and do hereby consent to
any number of renewals of extensions of the time or payment hereof and agree that any such renewals or extensions may be made without
notice to any such persons and without affecting their liability herein and do further consent to the release of any person liable hereon, all
without affecting the liability of the other persons, firms or Maker liable for the payment of this Note, AND DO HEREBY WAIVE TRIAL BY
JURY.
(a)
No delay or omission on the part of the Holder in exercising its rights under this Note, or course of conduct relating
hereto, shall operate as a waiver of such rights or any other right of the Holder, nor shall any waiver by the Holder of any such right or rights on
any one occasion be deemed a waiver of the same right or rights on any future occasion.
(b)
THE MAKER ACKNOWLEDGES THAT THE TRANSACTION OF WHICH THIS NOTE IS A PART IS A
COMMERCIAL TRANSACTION, AND TO THE EXTENT ALLOWED BY APPLICABLE LAW, HEREBY WAIVES ITS RIGHT TO
NOTICE AND HEARING WITH RESPECT TO ANY PREJUDGMENT REMEDY WHICH THE HOLDER OR ITS SUCCESSORS OR
ASSIGNS MAY DESIRE TO USE.
Section 4.13
Definitions . For the purposes hereof, the following terms shall have the following meanings:
“ business day ” means any day other than a Saturday, Sunday or other day on which banks in New York City, New York are
authorized or required by law to close.
“ Indebtedness ” of any Person means without duplication (A) all indebtedness for borrowed money, (B) all obligations
issued, undertaken or assumed as the deferred purchase price of property or services (other than trade payables entered into in the ordinary
course of business), (C) all reimbursement or payment obligations with respect to letters of credit, surety bonds and other similar instruments,
(D) all obligations evidenced by notes, bonds, debentures or similar instruments, including obligations so evidenced incurred in connection
with the acquisition of property, assets or businesses, (E) all indebtedness created or arising under any conditional sale or other title retention
agreement, or incurred as financing, in either case with respect to any property or assets acquired with the proceeds of such indebtedness (even
though the rights and remedies of the seller or bank under such agreement in the event of default are limited to repossession or sale of such
property), (F) all monetary obligations under any leasing
-15-
or similar arrangement which, in connection with GAAP, is classified as a capital lease, (G) all indebtedness referred to in clauses (A) through
(F) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien
upon or in any property or assets (including accounts and contract rights) owned by any Person, even though the Person which owns such
assets or property has not assumed or become liable for the payment of such indebtedness, and (H) all Contingent Obligations in respect of
indebtedness or obligations of others of the kinds referred to in clauses (A) through (G) above. For purposes of the definition of Indebtedness, “
Contingent Obligation ” means, as to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to any
indebtedness, lease, dividend or other obligation of another Person if the primary purpose or intent of the Person incurring such liability, or the
primary effect thereof, is to provide assurance to the obligee of such liability that such liability will be paid or discharged, or that any
agreements relating thereto will be complied with, or that the holders of such liability will be protected (in whole or in part) against loss with
respect thereto.
“ Person ” means an individual or a corporation, partnership, trust, incorporated or unincorporated association, joint venture,
limited liability company, joint stock company, government (or an agency or political subdivision thereof) or other entity of any kind.
“ Trading Day ” means (a) a day on which the Common Stock is traded on the OTC Bulletin Board, or (b) if the Common
Stock is not traded on the OTC Bulletin Board, a day on which the Common Stock is quoted in the over-the-counter market as reported by the
National Quotation Bureau Incorporated (or any similar organization or agency succeeding its functions of reporting prices); provided ,
however , that in the event that the Common Stock is not listed or quoted as set forth in (a) or (b) hereof, then Trading Day shall mean any day
except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the State of New York are
authorized or required by law or other government action to close.
-16-
IN WITNESS WHEREOF, this Note is executed and delivered by a duly authorized and empowered officer of the Maker as of the
date first written above.
KRONOS ADVANCED TECHNOLOGIES, INC.
By: /s/ Richard F. Tusing
Name: Richard F. Tusing
Title: Chief Operating Officer
-17-
EXHIBIT A
WIRE INSTRUCTIONS
Payee:____________________________________________________________________
Bank:_____________________________________________________________________
Address:___________________________________________________________________
Bank No.:___________________________________________________________________
Account No.:________________________________________________________________
Account Name:______________________________________________________________
FORM OF
NOTICE OF CONVERSION
(To be Executed by the Registered Holder in order to Convert the Note)
The undersigned hereby irrevocably elects to convert $ ________________ of the principal amount of the above Note No. ___ into shares of
Common Stock of Kronos Advanced Technologies, Inc. (the “Maker”) according to the conditions hereof, as of the date written below.
Date of Conversion _________________________________________________________________
Applicable Conversion Price __________________________________________________________
Number of shares of Common Stock beneficially owned or deemed beneficially owned by the Holder on the Date of Conversion:
_____________
Signature _______________________________________________________________________
[Name]
Address: _______________________________________________________________________
_______________________________________________________________________
Exhibit 4
THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR APPLICABLE STATE SECURITIES
LAWS, AND MAY NOT BE SOLD, TRANSFERRED, OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH
REGISTRATION OR RECEIPT BY THE MAKER OF AN OPINION OF COUNSEL IN THE FORM, SUBSTANCE AND SCOPE
REASONABLY SATISFACTORY TO THE MAKER THAT THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE
UPON CONVERSION HEREOF MAY BE SOLD, TRANSFERRED, OR OTHERWISE DISPOSED OF, UNDER AN EXEMPTION
FROM REGISTRATION UNDER THE ACT AND SUCH STATE SECURITIES LAWS.
KRONOS ADVANCED TECHNOLOGIES, INC.
Secured Convertible Promissory Note
due December 31, 2007
June 19, 2007
Belmont, Massachusetts
$859,000
For value received, Kronos Advanced Technologies, Inc., a Nevada corporation whose principal office is located at 464 Common
Street, Box 301, Belmont, Massachusetts 02478 (the “ Maker ”), hereby promises to pay to the order of Sands Brothers Venture Capital LLC, a
New York limited liability company (“ Sands I ”), Sands Brothers Venture Capital II LLC, a New York limited liability company (“ Sands II
”), Sands Brothers Venture Capital III LLC, a New York limited liability company (“ Sands III ”), Sands Brothers Venture Capital IV LLC, a
New York limited liability company (“ Sands IV ”) and Critical Capital Growth Fund, L.P., a Delaware limited partnership and a debenture
licensed U.S. Small Business Investment Company (“ CCGF ”) (Sands I, Sands II, Sands III, Sands IV, and CCGF, together with their
respective successors, representatives, and permitted assigns, are collectively referred to as, the “ Holder ”), in accordance with the terms
hereinafter provided, the principal amount of Eight Hundred Fifty-Nine Thousand Dollars ($859,000.00) or so much thereof as may be
advanced by the Holder to Maker in accordance with the provisions of the Funding Agreement, together with interest thereon. This Secured
Convertible Promissory Note (this “ Note ”) is one of the duly authorized Notes of Maker issued in connection with that Funding Agreement of
even date herewith by and among the Maker and the Lenders (the “ Funding Agreement ”).
All payments under or pursuant to this Note shall be made in United States Dollars in immediately available funds to the Holder at the
address of the Holder first set forth above or at such other place as the Holder may designate from time to time in writing to the Maker or by
wire transfer of funds to the Holder’s account, instructions for which are attached hereto as Exhibit A . The outstanding principal balance of
this Note and all accrued interest hereon shall be due and payable on December 31, 2007 (the “ Maturity Date ”) or at such earlier time as
provided herein.
-1-
ARTICLE I
GENERAL
Section 1.1
the Funding Agreement.
Definitions . Capitalized terms used but not otherwise defined shall have the meanings ascribed to terms in
Section 1.2
Interest . Beginning on the issuance date of this Note (the “ Issuance Date ”), the outstanding principal
balance of this Note shall bear interest, in arrears, at a rate per annum equal to twelve percent (12%), payable in cash commencing on July 1,
2007 and on the first business day of each following month. Interest shall be computed on the basis of a 360-day year of twelve (12) 30-day
months and shall accrue commencing on the Issuance Date. Furthermore, upon the occurrence of an Event of Default (as defined in Section 2.1
hereof), then to the extent permitted by law, the Maker will pay interest in cash to the Holder, payable on demand, on the outstanding principal
balance of this Note from the date of the Event of Default until such Event of Default is cured at the rate of the lesser of eighteen percent (18%)
per annum and the maximum applicable legal rate per annum.
Section 1.3
Security . This Note and the amounts due hereunder are secured by the Collateral, as defined in that Security
Agreement dated of even date herewith among the Maker and the Lenders.
Section 1.4
Payment on Non-Business Days . Whenever any payment to be made hereunder shall be due on a Saturday,
Sunday or a public holiday under the laws of the State of New York, such payment may be due on the next succeeding business day and such
next succeeding day shall be included in the calculation of the amount of accrued interest payable on such date.
Section 1.5
Transfer . Subject to the provisions of Section 4.8 of this Note, this Note may be transferred or sold or
pledged, hypothecated or otherwise granted as security by the Holder.
Section 1.6
Replacement . Upon receipt of a duly executed, notarized and unsecured written statement from the Holder
with respect to the loss, theft or destruction of this Note (or any replacement hereof) and a standard indemnity, or, in the case of a mutilation of
this Note, upon surrender and cancellation of such Note, the Maker shall issue a new Note, of like tenor and amount, in lieu of such lost, stolen,
destroyed or mutilated Note.
Section 1.7
Record Keeping . The Holder shall maintain a record of all advances made to Maker under this Note, and
such record shall be conclusive evidence of the amounts disbursed to Maker under this Note.
ARTICLE II
EVENTS OF DEFAULT; REMEDIES
Section 2.1
Events of Default . The occurrence of any of the following events shall be an “ Event of Default ” under this
Note:
-2-
(a)
the Maker shall fail to make any principal or interest payments on the date such payments are due and such default is
not fully cured within seven (7) business days after the occurrence thereof; or
(b)
the suspension from listing, without subsequent listing on any one of, or the failure of the Common Stock of the
Maker (the “ Common Stock ”) to be listed or quoted on at least one of the NASD Over-The-Counter Bulletin Board (the “ OTC Bulletin
Board ”), the American Stock Exchange, the NASDAQ National Market, the Nasdaq Global Select Market, the Nasdaq Global Market, the
Nasdaq Capital Market or The New York Stock Exchange, Inc.; or
(c)
the Maker’s notice to the Holder, including by way of public announcement, at any time, of Maker’s inability to
comply (including for any of the reasons described in Section 3.6(a) hereof) or its intention not to comply with proper requests for conversion
of this Note into shares of Common Stock; or
(d)
the Maker shall fail to (i) timely deliver the shares of Common Stock upon conversion of the Note, (ii) file a
registration statement in accordance with the terms of the Registration Rights Agreement or (iii) make the payment of any fees and/or
liquidated damages under this Note, the Funding Agreement, the Registration Rights Agreement or other Transaction Documents, which failure
in the case of items (i) and (iii) of this Section 2.1(d) is not remedied within ten (10) business days after the incurrence thereof and, solely with
respect to item (iii) above, after the Holder delivers written notice to the Maker of the occurrence thereof; or
(e)
while a registration statement is required to be maintained effective pursuant to the terms of the Registration Rights
Agreement, the effectiveness of such registration statement lapses for any reason (including, without limitation, the issuance of a stop order) or
is unavailable to the Holder for sale of the Registrable Securities (as defined in the Registration Rights Agreement) in accordance with the
terms of the Registration Rights Agreement, and such lapse or unavailability continues for a period of ten (10) consecutive Trading Days; or
(f)
default shall be made in the performance or observance of (i) any covenant, condition or agreement contained in this
Note (other than as set forth in clause (f) of this Section 2.1) and such default is not fully cured within twenty (20) business days after the
Holder delivers written notice to the Maker of the occurrence thereof or (ii) any covenant, condition or agreement contained in the Funding
Agreement, the Registration Rights Agreement or any other Transaction Document which is not covered by any other provisions of this Section
2.1 and such default is not fully cured within twenty (20) business days after the Holder delivers written notice to the Maker of the occurrence
thereof; or
(g)
any material representation or warranty made by the Maker herein or in the Funding Agreement, the Registration
Rights Agreement, or any other Transaction Document shall prove to have been false or incorrect or breached by Maker and the Holder
delivers written notice to the Maker of the occurrence thereof; or
(h)
the Maker shall (A) default in any payment of any amount or amounts of principal of or interest on any Indebtedness
(other than the Indebtedness hereunder) the aggregate principal amount of which Indebtedness is in excess of $50,000 or (B) default in the
observance or performance of any other agreement or condition relating to any Indebtedness or contained in any instrument or agreement
evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition
is to cause, or to permit the holder or holders or beneficiary or beneficiaries of such Indebtedness to cause with the giving of notice if required,
such Indebtedness to become due prior to its stated maturity; or
-3-
(i)
the Maker shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian,
trustee or liquidator of itself or of all or a substantial part of its property or assets, (ii) make a general assignment for the benefit of its creditors,
(iii) commence a voluntary case under the United States Bankruptcy Code (as now or hereafter in effect) or under the comparable laws of any
jurisdiction (foreign or domestic), (iv) file a petition seeking to take advantage of any bankruptcy, insolvency, moratorium, reorganization or
other similar law affecting the enforcement of creditors’ rights generally, (v) acquiesce in writing to any petition filed against it in an
involuntary case under United States Bankruptcy Code (as now or hereafter in effect) or under the comparable laws of any jurisdiction (foreign
or domestic), (vi) issue a notice of bankruptcy or winding down of its operations or issue a press release regarding same, or (vii) take any action
under the laws of any jurisdiction (foreign or domestic) analogous to any of the foregoing; or
(j)
a proceeding or case shall be commenced in respect of the Maker, without its application or consent, in any court of
competent jurisdiction, seeking (i) the liquidation, reorganization, moratorium, dissolution, winding up, or composition or readjustment of its
debts, (ii) the appointment of a trustee, receiver, custodian, liquidator or the like of it for all or any substantial part of its assets in connection
with the liquidation or dissolution of the Maker or (iii) similar relief in respect of it under any law providing for the relief of debtors, and such
proceeding or case described in clause (i), (ii) or (iii) shall continue undismissed, or unstayed and in effect, for a period of thirty (30) days or
any order for relief shall be entered in an involuntary case under United States Bankruptcy Code (as now or hereafter in effect) or under the
comparable laws of any jurisdiction (foreign or domestic) against the Maker or action under the laws of any jurisdiction (foreign or domestic)
analogous to any of the foregoing shall be taken with respect to the Maker and shall continue undismissed, or unstayed and in effect for a
period of thirty (30) days; or
(k)
the failure of the Maker to instruct its transfer agent to remove any legends from shares of Common Stock eligible to
be sold under Rule 144 of the Securities Act and issue such unlegended certificates to the Holder within five (5) business days of the Holder’s
request so long as the Holder has provided reasonable assurances to the Maker that such shares of Common Stock can be sold pursuant to Rule
144; or
(l)
the Maker ceases to operate its business as a going concern; or
(m)
the Security Agreement, or any other security agreement, pledge agreement, collateral assignment, mortgage,
control agreement or other grants or transfers for security executed and delivered by Maker or any other obligor creating (or purporting to
create) a Lien in favor of the Holder (collectively, the “ Security Documents ”), at any time for any reason cease to be in full force and effect,
or shall cease to grant to the Holder the Liens, rights, powers and privileges purported to be created thereby, superior to and prior to the rights
of all third Persons other than the holders of Permitted Liens and subject to no other Liens other than Permitted Liens; or
-4-
(n)
the Maker or any other obligor, directly or indirectly, contest in any manner the effectiveness, validity, binding
nature or enforceability of the Security Agreement or any of the other Security Documents.
Section 2.2
Remedies Upon An Event of Default . If an Event of Default shall have occurred and shall be continuing,
the Holder of this Note may at any time at its option, (a) declare the entire unpaid principal balance of this Note, together with all interest
accrued hereon, due and payable, and thereupon, the same shall be accelerated and so be due and payable, without presentment, demand,
protest, or notice, all of which are hereby expressly unconditionally and irrevocably waived by the Maker, (b) demand that the principal amount
of this Note then outstanding shall be converted into shares of Common Stock at a Conversion Price per share calculated pursuant to Section
3.1 hereof assuming that the date that the Event of Default occurs is the Conversion Date (as defined in Section 3.1 hereof), or (c) exercise or
otherwise enforce any one or more of the Holder’s rights, powers, privileges, remedies and interests under this Note, the Funding Agreement,
the Security Agreement, the Registration Rights Agreement, the Security Documents, any other Transaction Document or applicable law. No
course of delay on the part of the Holder shall operate as a waiver thereof or otherwise prejudice the right of the Holder. No remedy conferred
hereby shall be exclusive of any other remedy referred to herein or now or hereafter available at law, in equity, by statute or otherwise.
ARTICLE III
CONVERSION; ANTIDILUTION; PREPAYMENT
Section 3.1
Conversion Option . In the event that all of the principal and accrued interest due hereunder is not paid in
full on or prior to the Maturity Date, the Holder shall have the right to convert this Note at any time after the Maturity Date into such number of
fully paid and non-assessable shares of Common Stock as is determined by dividing (x) that portion of the outstanding principal balance under
this Note as of such date that the Holder elects to convert by (y) the Conversion Price (as defined in Section 3.2(a) hereof) then in effect on the
date on which the Holder faxes a notice of conversion in the form attached hereto (the “ Conversion Notice ”), duly executed, to the Maker
(facsimile number (617) 364-5085 Attn.: Chief Executive Officer) (the “ Conversion Date ”), provided, however, that the Conversion Price
shall be subject to adjustment as described in Section 3.4 of this Note. The Holder shall deliver this Note to the Maker at the address designated
in the Funding Agreement at such time that this Note is fully converted. With respect to partial conversions of this Note, the Maker shall keep
written records of the amount of this Note converted as of each Conversion Date. Notwithstanding anything contained herein to the contrary,
the Holder shall have no right to convert this Note into shares of Common Stock unless the Maker fails to pay all of the principal and accrued
interest due hereunder on or prior to the Maturity Date.
-5-
Section 3.2
Conversion Price . The term “ Conversion Price ” shall mean $0.0028, subject to adjustment under Section
Section 3.3
Mechanics of Conversion .
3.4 hereof.
(a)
Not later than three (3) Trading Days after any Conversion Date (the “ Delivery Date ”), the Maker shall deliver to
the Holder by (i) express courier a certificate or certificates representing the number of shares of Common Stock being acquired upon the
conversion of all or part of this Note, or (ii) provided that Maker’s designated transfer agent participates in the DTC Fast Automated Securities
Transfer Program, at all times after the Holder has notified the Maker that this clause (ii) shall apply, credit the number of shares of Common
Stock to which the Holder shall be entitled to the Holder’s or its designee’s balance account with The Depository Trust Corporation through its
Deposit Withdrawal Agent Commission System. If in the case of any Conversion Notice such certificate, certificates or shares are not delivered
to or as directed by the Holder by the Delivery Date, the Holder shall be entitled by written notice to the Maker at any time on or before its
receipt of such certificate or certificates thereafter, to rescind such conversion, in which event the Maker shall immediately return this Note
tendered for conversion, whereupon the Maker and the Holder shall each be restored to their respective positions immediately prior to the
delivery of such notice of revocation, except that any amounts described in Sections 3.3(b) shall be payable through the date notice of
rescission is given to the Maker. The Maker shall upon request of the Holder, use its best efforts to deliver Conversion Shares hereunder
electronically through the Depository Trust Company.
(b)
The Maker understands that a delay in the delivery of the shares of Common Stock upon conversion of this Note
beyond the Delivery Date could result in economic loss to the Holder. If the Maker fails to deliver to the Holder a certificate or certificates
pursuant to this Section by the Delivery Date, the Maker shall pay to the Holder, in cash, an amount per Trading Day for each Trading Day
until such certificates are delivered, together with interest on such amount at a rate of 10% per annum, accruing until such amount and any
accrued interest thereon is paid in full, equal to the greater of (A) the sum of (i) 1% of the aggregate principal amount of this Note requested to
be converted for the first five (5) Trading Days after the Delivery Date and (ii) 2% of the aggregate principal amount of this Note requested to
be converted for each Trading Day thereafter and (B) $2,000 per day (which amount shall be paid as liquidated damages and not as a penalty).
Nothing herein shall limit a Holder’s right to pursue actual damages for the Maker’s failure to deliver certificates representing shares of
Common Stock upon conversion within the period specified herein and the 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). Notwithstanding anything to the
contrary contained herein, the Holder shall be entitled to withdraw a Conversion Notice, and upon such withdrawal the Maker shall only be
obligated to pay the liquidated damages accrued in accordance with this Section 3.3(b) through the date the Conversion Notice is withdrawn.
Section 3.4
(a)
Adjustment of Conversion Price .
The Conversion Price shall be subject to adjustment from time to time as follows:
-6-
(i)
Adjustments for Additional Issuances of Common Stock . In the event that the Maker at any time after the
First Closing Date issues additional shares of Common Stock (including additional shares of Common Stock deemed to be issued) without
consideration or for a consideration per share less than the Conversion Price then in effect, then the Conversion Price shall be reduced,
concurrently with such issuance, to a price (calculated to the nearest hundredth of one cent) equal to the consideration per share received by the
Maker upon such issuance of additional shares of Common Stock. For purposes of this Section 3.4, shares of Common Stock shall be deemed
to be issued if the Maker or any of its subsidiaries issues additional shares of Common Stock or rights, warrants, options or other securities or
debt convertible, exercisable or exchangeable for shares of Common Stock or otherwise entitling any Person to acquire shares of Common
Stock (collectively, “ Common Stock Equivalents ”). For purposes of this Section 3.4, in connection with any issuance or deemed issuance of
any Common Stock, (A) the maximum number of shares of Common Stock potentially issuable at any time upon conversion, exercise or
exchange of such Common Stock Equivalents (the “ Deemed Number ”) the shall be deemed to be outstanding upon issuance of such Common
Stock Equivalents, (B) the consideration deemed to have been received by the Maker applicable to such Common Stock shall equal the
minimum dollar value of consideration payable to the Maker to purchase such Common Stock Equivalents and to convert, exercise or exchange
them into Common Stock (net of any discounts, fees, commissions and other expenses), divided by the Deemed Number, and (C) no further
adjustment shall be made to the Conversion Price upon the actual issuance of Common Stock upon conversion, exercise or exchange of such
Common Stock Equivalents.
(ii)
Adjustments for Subdivisions, Common Stock Dividends, Combinations or Consolidations of Common
Stock . In the event the outstanding shares of Common Stock shall be subdivided or increased, by stock split or stock dividend, into a greater
number of shares of Common Stock, the Conversion Price then in effect shall concurrently with the effectiveness of such subdivision or
payment of such stock dividend, be proportionately decreased. In the event the outstanding shares of Common Stock shall be combined or
consolidated, by reclassification or otherwise, into a lesser number of shares of Common Stock, the Conversion Price then in effect shall,
concurrently with the effectiveness of such combination or consolidation, be proportionately increased.
(iii)
Adjustments for Reclassification, Exchange and Substitution . If the Common Stock shall be changed into
the same or a different number of shares of any other class or classes of stock, whether by capital reorganization, reclassification or otherwise
(other than a subdivision or combination or shares provided for above), the Conversion Price then in effect shall, concurrently with the
effectiveness of such reorganization or reclassification, be proportionately adjusted such that the Common Stock issuable upon conversion of
this Note shall be convertible into, in lieu of the number of shares of Common Stock which the Holder would otherwise have been entitled to
receive, a number of shares of such other class or classes of stock equivalent to the number of shares of Common Stock that would have been
subject to receipt by the Holder upon conversion of this Note immediately before that change.
-7-
(iv)
Adjustments for Merger, Sale, Lease or Conveyance . In the event of any consolidation with or merger of
the Maker with or into another entity, or in case of any sale, lease or conveyance to another person or entity of the assets of the Maker as an
entirety or substantially as an entirety, the Common Stock issuable upon conversion of this Note shall after the date of such consolidation,
merger, sale, lease or conveyance be convertible into the number of shares of stock or other securities or property (including cash) to which the
Common Stock issuable (at the time of such consolidation, merger, sale, lease or conveyance) upon conversion of this Note would have been
entitled upon such consolidation, merger, sale, lease or conveyance; and in any such case, if necessary, the provisions set forth herein with
respect to the rights and interests thereafter of the Holder shall be appropriately adjusted so as to be applicable, as nearly as may reasonably be,
to any shares of stock or other securities or property thereafter deliverable on the conversion of this Note.
(v)
Other Provisions Applicable to Adjustment Under this Section . The following provisions will be
applicable to the adjustments in Conversion Price as provided in this Section 3.4:
(1)
The number of shares of Common Stock at any time outstanding shall not include any shares
thereof then directly or indirectly owned or held by or for the account of the Maker.
(2)
In case the Maker shall take any action affecting the outstanding number of shares of Common
Stock other than an action described in any of the foregoing subsections above, inclusive, which would have an inequitable effect on the
Holder, the Conversion Price shall be adjusted in such manner and at such time as the Board of Directors of the Maker on the advice of the
Maker’s independent public accountants may in good faith determine to be equitable in the circumstances.
(3)
No adjustment of the Conversion Price shall be made if the amount of any such adjustment would
be an amount less than one percent (1%) of the Conversion Price then in effect, but any such amount shall be carried forward and an adjustment
with respect thereof shall be made at the time of and together with any subsequent adjustment which, together with such amount and any other
amount or amounts so carried forward, shall aggregate an increase or decrease of one percent (1%) or more.
(4)
The Conversion Price shall not be adjusted upward except in the event of a combination of the
outstanding shares of Common Stock into a smaller number of shares of Common Stock.
(b)
Record Date . In the event that the Maker shall propose at any time:
(i)
to declare any dividend or distribution (other than by purchase of Common Stock of employees, officers
and directors pursuant to the termination of such persons or pursuant to the Maker’s exercise of rights of first refusal with respect to Common
Stock held by such persons) upon its Common Stock, whether in cash, property, stock or other securities, whether or not a regular cash
dividend and whether or not out of earnings or earned surplus;
(ii)
change in the Common Stock; or
to effect any reclassification or recapitalization of its Common Stock shares outstanding involving a
-8-
(iii)
to merge or consolidate with or into any other entity, or sell, lease or convey all or substantially all its
property or business, or to liquidate, dissolve or wind up; then, in connection with each such event, this Maker shall send to the Holder:
(1)
at least twenty (20) days’ prior written notice of the date on which a record shall be taken for such
dividend or distribution (and specifying the date on which the holders of Common Stock shall be entitled thereto) or for determining rights to
vote in respect of the matters referred to in (i) and (ii) above; and
(2)
in the case of the matters referred to in (ii) and (iii) above, at least twenty (20) days’ prior written
notice of the date when the same shall take place (and specifying the date on which the holders of Common Stock shall be entitled to exchange
their Common Stock for securities or other property deliverable upon the occurrence of such event).
Each such written notice shall be given by first class mail, postage prepaid, addressed to the Holder at the address first set forth above. Any
such action shall at all times be subject to the voting rights and other rights, preferences and privileges of the Holder set forth herein.
(c)
No Impairment . The Maker shall not, by amendment of its Certificate of Incorporation or through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action (other than actions
taken in good faith), avoid the observance or performance of any of the terms to be observed or performed hereunder by the Maker but will at
all times in good faith assist in carrying out all the provisions of this Section 3.4 and in taking all such action as may be necessary or
appropriate in order to protect the conversion rights of the Holder against impairment.
(d)
Certificates as to Adjustments . Upon the occurrence of each adjustment or readjustment of the Conversion Price
pursuant to this section, the Maker at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof
and furnish to the Holder a certificate setting forth such adjustment or readjustment in accordance with the terms hereof and showing in detail
the facts upon which such adjustment or readjustment is based. The Maker shall, upon the written request at any time of the Holder, furnish or
cause to be furnished to the Holder a like certificate setting forth (A) such adjustments and readjustments, (B) the Conversion Price at the time
in effect, and (C) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon
the conversion of this Note.
(e)
Issue Taxes . The Maker shall pay any and all issue and other taxes, excluding federal, state or local income taxes,
that may be payable in respect of any issue or delivery of shares of Common Stock on conversion of this Note pursuant thereto; provided ,
however , that the Maker shall not be obligated to pay any transfer taxes resulting from any transfer requested by the Holder in connection with
any such conversion.
(f)
Fractional Shares . No fractional shares of Common Stock shall be issued upon conversion of this Note. In lieu of any
fractional shares to which the Holder would otherwise be entitled, the Maker shall pay cash equal to the product of such fraction multiplied by
the average of the Closing Bid Price of the Common Stock into which this Note is convertible
-9-
for the five (5) consecutive Trading Days immediately preceding the Conversion Date. The term “ Closing Bid Price ” shall mean, on any
particular date (i) the last closing bid price per share of the Common Stock on such date on the OTC Bulletin Board or another registered
national stock exchange on which the Common Stock is then listed, or if there is no such price on such date, then the last closing bid price on
such exchange or quotation system on the date nearest preceding such date, or (ii) if the Common Stock is not listed then on the OTC Bulletin
Board or any registered national stock exchange, the last trading price for a share of Common Stock in the over-the-counter market, as reported
by the OTC Bulletin Board or in the National Quotation Bureau Incorporated or similar organization or agency succeeding to its functions of
reporting prices) at the close of business on such date, or (iii) if the Common Stock is not then reported by the OTC Bulletin Board or the
National Quotation Bureau Incorporated (or similar organization or agency succeeding to its functions of reporting prices), then the average of
the “Pink Sheet” quotes for the relevant conversion period, as determined in good faith by the Holder, or (iv) if the Common Stock is not then
publicly traded the fair market value of a share of Common Stock as determined by the Holder and reasonably acceptable to the Maker.
(g)
Reservation of Common Stock .
(i)
In the event that at anytime when this Note shall be outstanding, the Maker shall not have sufficient
authorized but unissued Common Stock for the purpose of effecting the conversion of all amounts outstanding under this Note at such time
(without regard to any limitations on conversion) (an “ Authorized Share Failure ”), it shall immediately reserve and keep available such
number of its duly authorized shares of Common Stock as is in fact available as of that date and shall immediately take all action necessary to
increase the number of its authorized shares of Common Stock until such time as the Maker’s Certificate of Incorporation shall have been
amended to increase the number of authorized shares of Common Stock to such number as would, at a minimum, permit the reservation by the
Maker of sufficient shares to allow conversion of all amounts outstanding under this Note as provided herein. Without limiting the generality of
the foregoing sentence, as soon as practicable after the occurrence of an Authorized Share Failure, but in no event later than 60 days after the
occurrence of such Authorized Share Failure, the Maker shall (A) hold a meeting of its stockholders or (B) obtain a majority written consent of
its stockholders, for the authorization of an increase in the number of authorized shares of Common Stock. In connection with such meeting,
the Maker shall provide each stockholder with a proxy statement and shall use its best efforts to solicit its stockholders’ approval of such
increase in authorized shares of Common Stock and to cause its board of directors to recommend to the stockholders that they approve such
proposal. The inability of the Maker to reserve the required number of shares of Common Stock required by this Section 3.4(g) shall have no
impact on the rank, rights, preferences and privileges of this Note, which shall be interpreted and applied as if the Maker had sufficient shares
of Common Stock authorized but unissued to effect any conversion. Before taking any action which would cause an adjustment reducing the
Conversion Price below the then par value of the shares of Common Stock issuable upon conversion of this Note or which would cause the
effective purchase price for the Common Stock to be less than the par value of the shares of Common Stock, the Maker shall take any and all
corporate action which may, in the opinion of its counsel, be necessary in order that the Maker may validly and legally issue fully paid and
nonassessable shares of such Common Stock at such adjusted Conversion Price or effective purchase price, as the case may be.
-10-
(h)
Regulatory Compliance . If any shares of Common Stock to be reserved for the purpose of conversion of this Note
require registration or listing with or approval of any governmental authority, stock exchange or other regulatory body under any federal or
state law or regulation or otherwise before such shares may be validly issued or delivered upon conversion, the Maker shall, at its sole cost and
expense, in good faith and as expeditiously as possible, endeavor to secure such registration, listing or approval, as the case may be.
Section 3.5
Preemptive Rights .
(a)
Except as set forth in Section 3.5(c), the Maker shall not issue or sell any shares of Common Stock or other
securities, or any rights or options to purchase Common Stock or other securities, or any debt or shares convertible into or exchangeable for
Common Stock or other securities, whether now or hereafter authorized and whether unissued or in the treasury (collectively, “ Preemptive
Shares ”), unless the Holder shall first have been given the right to acquire, at a price no less favorable than that at which such Preemptive
Shares are to be offered to others, a portion of the Preemptive Shares, as provided in Section 3.5(b).
(b)
The Maker shall give the Holder prior written notice of any proposed issuance or sale described in Section 3.5(a),
including the price at which such securities are to be offered and the time period for the offering, and the Holder shall have thirty (30) days
from the giving of such notice within which to elect to acquire that number of the Preemptive Shares equal to the product of the total number of
Preemptive Shares being offered and a fraction, determined as of the time immediately prior to the issuance of the Preemptive Shares, the
numerator of which is equal to the sum of (i) the number of shares of Common Stock then outstanding as a result of the conversion of this
Note, and (ii) the number of shares of Common Stock into which this Note could be converted, and the denominator of which is equal to the
sum of (x) the number of shares of Common Stock then outstanding, (y) the number of shares of Common Stock into which this Note could be
converted, and (z) the number of shares of Common Stock issuable upon conversion or exercise of all outstanding options, warrants and other
rights for the purchase of capital stock of the Company, and all outstanding shares of all series of preferred stock (such number of Preemptive
Shares being referred to herein as the “ Common Stock Preemptive Shares ”). The Holder may acquire that portion of the Common Stock
Preemptive Shares being offered equal to its percentage ownership of the outstanding Common Stock immediately preceding the issuance of
the Preemptive Shares. If any transaction specified by the Maker in any such notice shall not be consummated within one hundred twenty (120)
days from the date of such notice, the Corporation shall again comply with the provisions of this Section 3.5 with respect to such transaction,
and the Holder shall again have preemptive rights hereunder with respect to the transaction, regardless of whether any such stockholder had
previously exercised or failed to exercise such rights. Any purchase of securities pursuant to the exercise of preemptive rights shall be
consummated simultaneously with, and shall be conditioned upon, consummation of the transaction proposed by the Maker.
(c)
The restrictions contained in, and preemptive rights granted under, this Section 3.5 shall not apply to:
(i)
shares of Common Stock issued upon conversion of this Note;
-11-
(ii)
shares of capital stock of the Maker issued in a public offering occurring after the date hereof that results
in aggregate gross proceeds to the Maker of at least Fifty Million Dollars ($50,000,000); or
(iii)
shares of Common Stock issued upon the exercise or conversion of outstanding options, warrants or other
Common Stock equivalents in existence on the Issuance Date.
The rights granted to the Holder under this Section 3.5 may be waived with respect to any Preemptive Shares by a written waiver executed by
the Holder.
Section 3.6
Prepayment . The Maker shall be permitted to prepay some or all of the principal and accrued interest
outstanding under this Note at any time prior to the Maturity Date, without penalty. In the event that the Maker prepays some, but not all, of the
principal and accrued interest outstanding under this Note, such prepaid amount shall be applied first to the amount owing on the date on which
the Maker’s final payment is due hereunder and then to amounts owing on any preceding dates on which the Maker is required to make
payments hereunder.
Section 3.7
No Rights as Shareholder . Nothing contained in this Note shall be construed as conferring upon the Holder,
prior to the conversion of this Note, the right to vote or to receive dividends or to consent or to receive notice as a shareholder in respect of any
meeting of shareholders for the election of directors of the Maker or of any other matter, or any other rights as a shareholder of the Maker.
ARTICLE IV
MISCELLANEOUS
Section 4.1
Notices . Any notice, demand, request, waiver or other communication required or permitted to be given
hereunder shall be in writing and shall be effective (a) upon hand delivery, telecopy or facsimile at the address or number first set forth above
(if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such
delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the second
business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such
mailing, whichever shall first occur.
Section 4.2
Governing Law . This Note shall be governed by and construed in accordance with the internal laws of the
State of New York, without giving effect to any of the conflicts of law principles which would result in the application of the substantive law of
another jurisdiction. This Note shall not be interpreted or construed with any presumption against the party causing this Note to be drafted.
Section 4.3
Headings . Article and section headings in this Note are included herein for purposes of convenience of
reference only and shall not constitute a part of this Note for any other purpose.
-12-
Section 4.4
Remedies, Characterizations, Other Obligations, Breaches and Injunctive Relief . The remedies provided in
this Note shall be cumulative and in addition to all other remedies available under this Note, at law or in equity (including, without limitation, a
decree of specific performance and/or other injunctive relief), no remedy contained herein shall be deemed a waiver of compliance with the
provisions giving rise to such remedy and nothing herein shall limit a Holder’s right to pursue actual damages for any failure by the Maker to
comply with the terms of this Note. Amounts set forth or provided for herein with respect to payments, conversion and the like (and the
computation thereof) shall be the amounts to be received by the Holder thereof and shall not, except as expressly provided herein, be subject to
any other obligation of the Maker (or the performance thereof). The Maker acknowledges that a breach by it of its obligations hereunder will
cause irreparable and material harm to the Holder and that the remedy at law for any such breach may be inadequate. Therefore the Maker
agrees that, in the event of any such breach or threatened breach, the Holder shall be entitled, in addition to all other available rights and
remedies, at law or in equity, to seek and obtain such equitable relief, including but not limited to an injunction restraining any such breach or
threatened breach, without the necessity of showing economic loss and without any bond or other security being required.
Section 4.5
Enforcement Expenses . The Maker agrees to pay all costs and expenses of enforcement of this Note,
including, without limitation, reasonable attorneys’ fees and expenses.
Section 4.6
Binding Effect . The obligations of the Maker and the Holder set forth herein shall be binding upon the
successors and permitted assigns of each such party.
Section 4.7
the Maker and the Holder.
Amendments . This Note may not be modified or amended in any manner except in a writing executed by
Section 4.8
Compliance with Securities Laws . The Holder of this Note acknowledges that this Note is being acquired
solely for the Holder’s own account and not as a nominee for any other party, and for investment, and that the Holder shall not offer, sell or
otherwise dispose of this Note. This Note and any Note issued in substitution or replacement therefor shall be stamped or imprinted with a
legend in substantially the following form:
THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION HEREOF
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
“ACT”), OR APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR RECEIPT BY THE MAKER OF
AN OPINION OF COUNSEL IN THE FORM, SUBSTANCE AND SCOPE REASONABLY
SATISFACTORY TO THE MAKER THAT THIS NOTE AND THE SHARES OF COMMON STOCK
ISSUABLE UPON CONVERSION HEREOF HAVE MAY BE SOLD, TRANSFERRED,
HYPOTHECATED OR OTHERWISE DISPOSED OF, UNDER AN EXEMPTION FROM
REGISTRATION UNDER THE ACT AND SUCH STATE SECURITIES LAWS.
-13-
Section 4.9
Consent to Jurisdiction . Each of the Maker and the Holder (i) hereby irrevocably submits to the exclusive
jurisdiction of the United States District Court sitting in the Southern District of New York and the courts of the State of New York located in
New York county for the purposes of any suit, action or proceeding arising out of or relating to this Note and (ii) hereby waives, and agrees not
to assert in any such suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of such court, that the suit, action or
proceeding is brought in an inconvenient forum or that the venue of the suit, action or proceeding is improper. Each of the Maker and the
Holder consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address in effect
for notices to it under the Funding Agreement and agrees that such service shall constitute good and sufficient service of process and notice
thereof. Nothing in this Section 4.9 shall affect or limit any right to serve process in any other manner permitted by law. Each of the Maker and
the Holder hereby agree that the prevailing party in any suit, action or proceeding arising out of or relating to this Note shall be entitled to
reimbursement for reasonable legal fees from the non-prevailing party.
Section 4.10
Parties in Interest . This Note shall be binding upon, inure to the benefit of and be enforceable by the
Maker, the Holder and their respective successors and permitted assigns.
Section 4.11
Failure or Indulgence Not Waiver . No failure or delay on the part of the Holder in the exercise of any
power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or
privilege preclude other or further exercise thereof or of any other right, power or privilege.
Section 4.12
Maker Waivers . Except as otherwise specifically provided herein, the Maker and all others that may
become liable for all or any part of the obligations evidenced by this Note, hereby waive presentment, demand, notice of nonpayment, protest
and all other demands’ and notices in connection with the delivery, acceptance, performance and enforcement of this Note, and do hereby
consent to any number of renewals of extensions of the time or payment hereof and agree that any such renewals or extensions may be made
without notice to any such persons and without affecting their liability herein and do further consent to the release of any person liable hereon,
all without affecting the liability of the other persons, firms or Maker liable for the payment of this Note, AND DO HEREBY WAIVE TRIAL
BY JURY.
(a)
No delay or omission on the part of the Holder in exercising its rights under this Note, or course of conduct relating
hereto, shall operate as a waiver of such rights or any other right of the Holder, nor shall any waiver by the Holder of any such right or rights on
any one occasion be deemed a waiver of the same right or rights on any future occasion.
(b)
THE MAKER ACKNOWLEDGES THAT THE TRANSACTION OF WHICH THIS NOTE IS A PART IS A
COMMERCIAL TRANSACTION, AND TO THE EXTENT ALLOWED BY APPLICABLE LAW, HEREBY WAIVES ITS RIGHT TO
NOTICE AND HEARING WITH RESPECT TO ANY PREJUDGMENT REMEDY WHICH THE HOLDER OR ITS SUCCESSORS OR
ASSIGNS MAY DESIRE TO USE.
-14-
Section 4.13
Definitions . For the purposes hereof, the following terms shall have the following meanings:
“ business day ” means any day other than a Saturday, Sunday or other day on which banks in New York City, New York are
authorized or required by law to close.
“ Indebtedness ” of any Person means without duplication (A) all indebtedness for borrowed money, (B) all obligations
issued, undertaken or assumed as the deferred purchase price of property or services (other than trade payables entered into in the ordinary
course of business), (C) all reimbursement or payment obligations with respect to letters of credit, surety bonds and other similar instruments,
(D) all obligations evidenced by notes, bonds, debentures or similar instruments, including obligations so evidenced incurred in connection
with the acquisition of property, assets or businesses, (E) all indebtedness created or arising under any conditional sale or other title retention
agreement, or incurred as financing, in either case with respect to any property or assets acquired with the proceeds of such indebtedness (even
though the rights and remedies of the seller or bank under such agreement in the event of default are limited to repossession or sale of such
property), (F) all monetary obligations under any leasing or similar arrangement which, in connection with GAAP, is classified as a capital
lease, (G) all indebtedness referred to in clauses (A) through (F) above secured by (or for which the holder of such Indebtedness has an existing
right, contingent or otherwise, to be secured by) any Lien upon or in any property or assets (including accounts and contract rights) owned by
any Person, even though the Person which owns such assets or property has not assumed or become liable for the payment of such
indebtedness, and (H) all Contingent Obligations in respect of indebtedness or obligations of others of the kinds referred to in clauses (A)
through (G) above. For purposes of the definition of Indebtedness, “ Contingent Obligation ” means, as to any Person, any direct or indirect
liability, contingent or otherwise, of that Person with respect to any indebtedness, lease, dividend or other obligation of another Person if the
primary purpose or intent of the Person incurring such liability, or the primary effect thereof, is to provide assurance to the obligee of such
liability that such liability will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such
liability will be protected (in whole or in part) against loss with respect thereto.
“ Person ” means an individual or a corporation, partnership, trust, incorporated or unincorporated association, joint venture,
limited liability company, joint stock company, government (or an agency or political subdivision thereof) or other entity of any kind.
“ Trading Day ” means (a) a day on which the Common Stock is traded on the OTC Bulletin Board, or (b) if the Common
Stock is not traded on the OTC Bulletin Board, a day on which the Common Stock is quoted in the over-the-counter market as reported by the
National Quotation Bureau Incorporated (or any similar organization or agency succeeding its functions of reporting prices); provided ,
however , that in the event that the Common Stock is not listed or quoted as set forth in (a) or (b) hereof, then Trading Day shall mean any day
except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the State of New York are
authorized or required by law or other government action to close.
-15-
IN WITNESS WHEREOF, this Note is executed and delivered by a duly authorized and empowered officer of the Maker as of the
date first written above.
KRONOS ADVANCED TECHNOLOGIES, INC.
By: /s/ Richard F. Tusing
Name: Richard R. Tusing
Title: Chief Operating Officer
Sands Note
-16-
EXHIBIT A
WIRE INSTRUCTIONS
Payee: _________________________________________________________
Bank: __________________________________________________________
Address: _______________________________________________________
________________________________________________
Bank No.: ______________________________________________________
Account No.: ___________________________________________________
Account Name: __________________________________________________
-17-
FORM OF
NOTICE OF CONVERSION
(To be Executed by the Registered Holder in order to Convert the Note)
The undersigned hereby irrevocably elects to convert $ ________________ of the principal amount of the above Note No. ___ into shares of
Common Stock of Kronos Advanced Technologies, Inc. (the “Maker”) according to the conditions hereof, as of the date written below.
Date of Conversion _______________________________________________________________
Applicable Conversion Price ________________________________________________________
Number of shares of Common Stock beneficially owned or deemed beneficially owned by the Holder on the Date of Conversion:
_______________
Signature ______________________________________________________________________
[Name]
Address: ______________________________________________________________________
_____________________________________________________________
Exhibit 5
THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR APPLICABLE STATE SECURITIES
LAWS, AND MAY NOT BE SOLD, TRANSFERRED, OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH
REGISTRATION OR RECEIPT BY THE MAKER OF AN OPINION OF COUNSEL IN THE FORM, SUBSTANCE AND SCOPE
REASONABLY SATISFACTORY TO THE MAKER THAT THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE
UPON CONVERSION HEREOF MAY BE SOLD, TRANSFERRED, OR OTHERWISE DISPOSED OF, UNDER AN EXEMPTION
FROM REGISTRATION UNDER THE ACT AND SUCH STATE SECURITIES LAWS.
KRONOS ADVANCED TECHNOLOGIES, INC.
Secured Convertible Promissory Note
due June 19, 2010
June 19, 2007
Belmont, Massachusetts
$6,480,000.00
For value received, Kronos Advanced Technologies, Inc., a Nevada corporation whose principal office is located at 464 Common
Street, Box 301, Belmont, Massachusetts 02478 (the “ Maker ”), hereby promises to pay to the order of RS Properties I LLC, a Delaware
limited liability company (together with its successors, representatives, and permitted assigns, collectively, the “ Holder ”), in accordance with
the terms hereinafter provided, the principal amount of Six Million Four Hundred Eighty Thousand Dollars ($6,480,000.00) or so much thereof
as may be advanced by the Holder to Maker in accordance with the provisions of the Funding Agreement, together with interest thereon. This
Secured Convertible Promissory Note (this “ Note ”) is one of the duly authorized Notes of Maker issued in connection with that Funding
Agreement of even date herewith by and among the Maker and the Lenders (the “ Funding Agreement ”).
All payments under or pursuant to this Note shall be made in United States Dollars in immediately available funds to the Holder at the
address of the Holder first set forth above or at such other place as the Holder may designate from time to time in writing to the Maker or by
wire transfer of funds to the Holder’s account, instructions for which are attached hereto as Exhibit A . The outstanding principal balance of
this Note and all accrued interest hereon shall be due and payable on June 19, 2010 (the “ Maturity Date ”) or at such earlier time as provided
herein.
ARTICLE I
GENERAL
Section 1.1
the Funding Agreement.
Definitions . Capitalized terms used but not otherwise defined shall have the meanings ascribed to terms in
Section 1.2
Interest . Beginning on the issuance date of this Note (the “ Issuance Date ”), the outstanding principal
balance of this Note shall bear interest, in arrears, at a rate per annum equal to twelve percent (12%), payable in cash commencing on January
1, 2008 and on the first business day of each following calendar quarter. Interest shall be computed on the basis of a 360-day year of twelve
(12) 30-day months and shall accrue commencing on the Issuance Date. Furthermore, upon the occurrence of an Event of Default (as defined in
Section 2.1 hereof), then to the extent permitted by law, the Maker will pay interest in cash to the Holder, payable on demand, on the
outstanding principal balance of this Note from the date of the Event of Default until such Event of Default is cured at the rate of the lesser of
eighteen percent (18%) per annum and the maximum applicable legal rate per annum.
Section 1.3
Security . This Note and the amounts due hereunder are secured by the Collateral, as defined in that Security
Agreement dated of even date herewith among the Maker and the Lenders.
Section 1.4
Payment on Non-Business Days . Whenever any payment to be made hereunder shall be due on a Saturday,
Sunday or a public holiday under the laws of the State of New York, such payment may be due on the next succeeding business day and such
next succeeding day shall be included in the calculation of the amount of accrued interest payable on such date.
Section 1.5
Transfer . Subject to the provisions of Section 4.8 of this Note, this Note may be transferred or sold or
pledged, hypothecated or otherwise granted as security by the Holder.
Section 1.6
Replacement . Upon receipt of a duly executed, notarized and unsecured written statement from the Holder
with respect to the loss, theft or destruction of this Note (or any replacement hereof) and a standard indemnity, or, in the case of a mutilation of
this Note, upon surrender and cancellation of such Note, the Maker shall issue a new Note, of like tenor and amount, in lieu of such lost, stolen,
destroyed or mutilated Note.
Section 1.7
Record Keeping . The Holder shall maintain a record of all advances made to Maker under this Note, and
such record shall be conclusive evidence of the amounts disbursed to Maker under this Note.
ARTICLE II
EVENTS OF DEFAULT; REMEDIES
Section 2.1
Events of Default . The occurrence of any of the following events shall be an “ Event of Default ” under this
Note:
(a)
the Maker shall fail to make any principal or interest payments on the date such payments are due and such default is
not fully cured within seven (7) business days after the occurrence thereof; or
-2-
(b)
the suspension from listing, without subsequent listing on any one of, or the failure of the Common Stock of the
Maker (the “ Common Stock ”) to be listed or quoted on at least one of the NASD Over-The-Counter Bulletin Board (the “ OTC Bulletin
Board ”), the American Stock Exchange, the NASDAQ National Market, the Nasdaq Global Select Market, the Nasdaq Global Market, the
Nasdaq Capital Market or The New York Stock Exchange, Inc.; or
(c)
the Maker’s notice to the Holder, including by way of public announcement, at any time, of Maker’s inability to
comply (including for any of the reasons described in Section 3.6(a) hereof) or its intention not to comply with proper requests for conversion
of this Note into shares of Common Stock; or
(d)
the Maker shall fail to (i) timely deliver the shares of Common Stock upon conversion of the Note, (ii) file a
registration statement in accordance with the terms of the Registration Rights Agreement or (iii) make the payment of any fees and/or
liquidated damages under this Note, the Funding Agreement, the Registration Rights Agreement or other Transaction Documents, which failure
in the case of items (i) and (iii) of this Section 2.1(d) is not remedied within ten (10) business days after the incurrence thereof and, solely with
respect to item (iii) above, after the Holder delivers written notice to the Maker of the occurrence thereof; or
(e)
while a registration statement is required to be maintained effective pursuant to the terms of the Registration Rights
Agreement, the effectiveness of such registration statement lapses for any reason (including, without limitation, the issuance of a stop order) or
is unavailable to the Holder for sale of the Registrable Securities (as defined in the Registration Rights Agreement) in accordance with the
terms of the Registration Rights Agreement, and such lapse or unavailability continues for a period of ten (10) consecutive Trading Days; or
(f)
default shall be made in the performance or observance of (i) any covenant, condition or agreement contained in this
Note (other than as set forth in clause (f) of this Section 2.1) and such default is not fully cured within twenty (20) business days after the
Holder delivers written notice to the Maker of the occurrence thereof or (ii) any covenant, condition or agreement contained in the Funding
Agreement, the Registration Rights Agreement or any other Transaction Document which is not covered by any other provisions of this Section
2.1 and such default is not fully cured within twenty (20) business days after the Holder delivers written notice to the Maker of the occurrence
thereof; or
(g)
any material representation or warranty made by the Maker herein or in the Funding Agreement, the Registration
Rights Agreement, or any other Transaction Document shall prove to have been false or incorrect or breached by Maker and the Holder
delivers written notice to the Maker of the occurrence thereof; or
(h)
the Maker shall (A) default in any payment of any amount or amounts of principal of or interest on any Indebtedness
(other than the Indebtedness hereunder) the aggregate principal amount of which Indebtedness is in excess of $50,000 or (B) default in the
observance or performance of any other agreement or condition relating to any Indebtedness or contained in any instrument or agreement
evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition
is to cause, or to permit the holder or holders or beneficiary or beneficiaries of such Indebtedness to cause with the giving of notice if required,
such Indebtedness to become due prior to its stated maturity; or
-3-
(i)
the Maker shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian,
trustee or liquidator of itself or of all or a substantial part of its property or assets, (ii) make a general assignment for the benefit of its creditors,
(iii) commence a voluntary case under the United States Bankruptcy Code (as now or hereafter in effect) or under the comparable laws of any
jurisdiction (foreign or domestic), (iv) file a petition seeking to take advantage of any bankruptcy, insolvency, moratorium, reorganization or
other similar law affecting the enforcement of creditors’ rights generally, (v) acquiesce in writing to any petition filed against it in an
involuntary case under United States Bankruptcy Code (as now or hereafter in effect) or under the comparable laws of any jurisdiction (foreign
or domestic), (vi) issue a notice of bankruptcy or winding down of its operations or issue a press release regarding same, or (vii) take any action
under the laws of any jurisdiction (foreign or domestic) analogous to any of the foregoing; or
(j)
a proceeding or case shall be commenced in respect of the Maker, without its application or consent, in any court of
competent jurisdiction, seeking (i) the liquidation, reorganization, moratorium, dissolution, winding up, or composition or readjustment of its
debts, (ii) the appointment of a trustee, receiver, custodian, liquidator or the like of it for all or any substantial part of its assets in connection
with the liquidation or dissolution of the Maker or (iii) similar relief in respect of it under any law providing for the relief of debtors, and such
proceeding or case described in clause (i), (ii) or (iii) shall continue undismissed, or unstayed and in effect, for a period of thirty (30) days or
any order for relief shall be entered in an involuntary case under United States Bankruptcy Code (as now or hereafter in effect) or under the
comparable laws of any jurisdiction (foreign or domestic) against the Maker or action under the laws of any jurisdiction (foreign or domestic)
analogous to any of the foregoing shall be taken with respect to the Maker and shall continue undismissed, or unstayed and in effect for a
period of thirty (30) days; or
(k)
the failure of the Maker to instruct its transfer agent to remove any legends from shares of Common Stock eligible
to be sold under Rule 144 of the Securities Act and issue such unlegended certificates to the Holder within five (5) business days of the
Holder’s request so long as the Holder has provided reasonable assurances to the Maker that such shares of Common Stock can be sold
pursuant to Rule 144; or
(l)
the Maker ceases to operate its business as a going concern; or
(m)
the Security Agreement, or any other security agreement, pledge agreement, collateral assignment, mortgage,
control agreement or other grants or transfers for security executed and delivered by Maker or any other obligor creating (or purporting to
create) a Lien in favor of the Holder (collectively, the “ Security Documents ”), at any time for any reason cease to be in full force and effect,
or shall cease to grant to the Holder the Liens, rights, powers and privileges purported to be created thereby, superior to and prior to the rights
of all third Persons other than the holders of Permitted Liens and subject to no other Liens other than Permitted Liens; or
-4-
(n)
the Maker or any other obligor, directly or indirectly, contest in any manner the effectiveness, validity, binding
nature or enforceability of the Security Agreement or any of the other Security Documents.
Section 2.2
Remedies Upon An Event of Default . If an Event of Default shall have occurred and shall be continuing,
the Holder of this Note may at any time at its option, (a) declare the entire unpaid principal balance of this Note, together with all interest
accrued hereon, due and payable, and thereupon, the same shall be accelerated and so be due and payable, without presentment, demand,
protest, or notice, all of which are hereby expressly unconditionally and irrevocably waived by the Maker, (b) demand that the principal amount
of this Note then outstanding shall be converted into shares of Common Stock at a Conversion Price per share calculated pursuant to Section
3.1 hereof assuming that the date that the Event of Default occurs is the Conversion Date (as defined in Section 3.1 hereof), or (c) exercise or
otherwise enforce any one or more of the Holder’s rights, powers, privileges, remedies and interests under this Note, the Funding Agreement,
the Security Agreement, the Registration Rights Agreement, the Security Documents, any other Transaction Document or applicable law. No
course of delay on the part of the Holder shall operate as a waiver thereof or otherwise prejudice the right of the Holder. No remedy conferred
hereby shall be exclusive of any other remedy referred to herein or now or hereafter available at law, in equity, by statute or otherwise.
ARTICLE III
CONVERSION; ANTIDILUTION; PREPAYMENT
Section 3.1
Conversion Option . At any time on or after the Issuance Date, this Note shall be convertible (in whole or in
part), at the option of the Holder into such number of fully paid and non-assessable shares of Common Stock as is determined by dividing (x)
that portion of the outstanding principal balance under this Note as of such date that the Holder elects to convert by (y) the Conversion Price (as
defined in Section 3.2(a) hereof) then in effect on the date on which the Holder faxes a notice of conversion in the form attached hereto (the “
Conversion Notice ”), duly executed, to the Maker (facsimile number (617) 364-5085, Attn.: Chief Executive Officer) (the “ Conversion Date
”), provided, however, that the Conversion Price shall be subject to adjustment as described in Section 3.4 of this Note. The Holder shall
deliver this Note to the Maker at the address designated in the Funding Agreement at such time that this Note is fully converted. With respect to
partial conversions of this Note, the Maker shall keep written records of the amount of this Note converted as of each Conversion Date.
Section 3.2
(a)
Conversion Price .
The term “ Conversion Price ” shall mean $0.0028, subject to adjustment under Section 3.4 hereof.
(b)
Notwithstanding the foregoing, it is the intent of the Maker and the Holder that the Conversion Price equal an
amount that results in the shares of Common Stock issuable to Lender upon conversion of this Note (i) in full will represent, on an
as-converted, fully-diluted basis (taking into account, without limitation, all potentially dilutive securities which are outstanding, authorized by
the Maker, or otherwise required to be issued, as of the First Closing
-5-
ate, and assuming that all outstanding options, warrants and other rights for the purchase of capital stock of the Maker shall have been
exercised, and all outstanding shares of all series of the Maker’s preferred stock, if any, have been converted into Common Stock), no less than
34.95% of the outstanding capital stock of the Maker and (ii) in part will represent, on an as-converted, fully-diluted basis (taking into account,
without limitation, all potentially dilutive securities which are outstanding, authorized by the Maker, or otherwise required to be issued, as of
the First Closing Date, and assuming that all outstanding options, warrants and other rights for the purchase of capital stock of the Maker shall
have been exercised, and all outstanding shares of all series of the Maker’s preferred stock, if any, have been converted into Common Stock),
no less than the product of (A) 34.95% of the outstanding capital stock of the Maker and (B) a fraction, the numerator of which is equal to the
amount of this Note that is converted and the denominator of which is equal to $6,480,000.
Section 3.3
Mechanics of Conversion .
(a)
Not later than three (3) Trading Days after any Conversion Date (the “ Delivery Date ”), the Maker shall deliver to
the Holder by (i) express courier a certificate or certificates representing the number of shares of Common Stock being acquired upon the
conversion of all or part of this Note, or (ii) provided that Maker’s designated transfer agent participates in the DTC Fast Automated Securities
Transfer Program, at all times after the Holder has notified the Maker that this clause (ii) shall apply, credit the number of shares of Common
Stock to which the Holder shall be entitled to the Holder’s or its designee’s balance account with The Depository Trust Corporation through its
Deposit Withdrawal Agent Commission System. If in the case of any Conversion Notice such certificate, certificates or shares are not delivered
to or as directed by the Holder by the Delivery Date, the Holder shall be entitled by written notice to the Maker at any time on or before its
receipt of such certificate or certificates thereafter, to rescind such conversion, in which event the Maker shall immediately return this Note
tendered for conversion, whereupon the Maker and the Holder shall each be restored to their respective positions immediately prior to the
delivery of such notice of revocation, except that any amounts described in Sections 3.3(b) shall be payable through the date notice of
rescission is given to the Maker. The Maker shall upon request of the Holder, use its best efforts to deliver Conversion Shares hereunder
electronically through the Depository Trust Company.
(b)
The Maker understands that a delay in the delivery of the shares of Common Stock upon conversion of this Note
beyond the Delivery Date could result in economic loss to the Holder. If the Maker fails to deliver to the Holder a certificate or certificates
pursuant to this Section by the Delivery Date, the Maker shall pay to the Holder, in cash, an amount per Trading Day for each Trading Day
until such certificates are delivered, together with interest on such amount at a rate of 10% per annum, accruing until such amount and any
accrued interest thereon is paid in full, equal to the greater of (A) the sum of (i) 1% of the aggregate principal amount of this Note requested to
be converted for the first five (5) Trading Days after the Delivery Date and (ii) 2% of the aggregate principal amount of this Note requested to
be converted for each Trading Day thereafter and (B) $2,000 per day (which amount shall be paid as liquidated damages and not as a penalty).
Nothing herein shall limit a Holder’s right to pursue actual damages for the Maker’s failure to deliver certificates representing shares of
Common Stock upon conversion within the period specified herein and the 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). Notwithstanding anything to the
contrary contained herein, the Holder shall be entitled to withdraw a Conversion Notice, and upon such withdrawal the Maker shall only be
obligated to pay the liquidated damages accrued in accordance with this Section 3.3(b) through the date the Conversion Notice is withdrawn.
-6-
Section 3.4
(a)
Adjustment of Conversion Price .
The Conversion Price shall be subject to adjustment from time to time as follows:
(i) Adjustments for Additional Issuances of Common Stock . In the event that the Maker at any time after the
First Closing Date issues additional shares of Common Stock (including additional shares of Common Stock deemed to be issued) without
consideration or for a consideration per share less than the Conversion Price then in effect, then the Conversion Price shall be reduced,
concurrently with such issuance, to a price (calculated to the nearest hundredth of one cent) equal to the consideration per share received by the
Maker upon such issuance of additional shares of Common Stock. For purposes of this Section 3.4, shares of Common Stock shall be deemed
to be issued if the Maker or any of its subsidiaries issues additional shares of Common Stock or rights, warrants, options or other securities or
debt convertible, exercisable or exchangeable for shares of Common Stock or otherwise entitling any Person to acquire shares of Common
Stock (collectively, “ Common Stock Equivalents ”). For purposes of this Section 3.4, in connection with any issuance or deemed issuance of
any Common Stock, (A) the maximum number of shares of Common Stock potentially issuable at any time upon conversion, exercise or
exchange of such Common Stock Equivalents (the “ Deemed Number ”) the shall be deemed to be outstanding upon issuance of such Common
Stock Equivalents, (B) the consideration deemed to have been received by the Maker applicable to such Common Stock shall equal the
minimum dollar value of consideration payable to the Maker to purchase such Common Stock Equivalents and to convert, exercise or exchange
them into Common Stock (net of any discounts, fees, commissions and other expenses), divided by the Deemed Number, and (C) no further
adjustment shall be made to the Conversion Price upon the actual issuance of Common Stock upon conversion, exercise or exchange of such
Common Stock Equivalents.
(ii) Adjustments for Subdivisions, Common Stock Dividends, Combinations or Consolidations of Common
Stock . In the event the outstanding shares of Common Stock shall be subdivided or increased, by stock split or stock dividend, into a greater
number of shares of Common Stock, the Conversion Price then in effect shall concurrently with the effectiveness of such subdivision or
payment of such stock dividend, be proportionately decreased. In the event the outstanding shares of Common Stock shall be combined or
consolidated, by reclassification or otherwise, into a lesser number of shares of Common Stock, the Conversion Price then in effect shall,
concurrently with the effectiveness of such combination or consolidation, be proportionately increased.
(iii) Adjustments for Reclassification, Exchange and Substitution . If the Common Stock shall be changed into
the same or a different number of shares of any other class or classes of stock, whether by capital reorganization, reclassification or otherwise
(other than a subdivision or combination or shares provided for above), the Conversion Price then in effect shall, concurrently with the
effectiveness of such reorganization or reclassification, be proportionately adjusted such that the Common Stock issuable upon conversion of
this Note shall be convertible into, in lieu of the number of shares of Common Stock which the Holder would otherwise have been entitled to
receive, a number of shares of such other class or classes of stock equivalent to the number of shares of Common Stock that would have been
subject to receipt by the Holder upon conversion of this Note immediately before that change.
-7-
(iv) Adjustments for Merger, Sale, Lease or Conveyance . In the event of any consolidation with or merger of
the Maker with or into another entity, or in case of any sale, lease or conveyance to another person or entity of the assets of the Maker as an
entirety or substantially as an entirety, the Common Stock issuable upon conversion of this Note shall after the date of such consolidation,
merger, sale, lease or conveyance be convertible into the number of shares of stock or other securities or property (including cash) to which the
Common Stock issuable (at the time of such consolidation, merger, sale, lease or conveyance) upon conversion of this Note would have been
entitled upon such consolidation, merger, sale, lease or conveyance; and in any such case, if necessary, the provisions set forth herein with
respect to the rights and interests thereafter of the Holder shall be appropriately adjusted so as to be applicable, as nearly as may reasonably be,
to any shares of stock or other securities or property thereafter deliverable on the conversion of this Note.
(v) Other Provisions Applicable to Adjustment Under this Section . The following provisions will be applicable
to the adjustments in Conversion Price as provided in this Section 3.4:
(1)
The number of shares of Common Stock at any time outstanding shall not include any shares
thereof then directly or indirectly owned or held by or for the account of the Maker.
(2)
In case the Maker shall take any action affecting the outstanding number of shares of Common
Stock other than an action described in any of the foregoing subsections above, inclusive, which would have an inequitable effect on the
Holder, the Conversion Price shall be adjusted in such manner and at such time as the Board of Directors of the Maker on the advice of the
Maker’s independent public accountants may in good faith determine to be equitable in the circumstances.
(3)
No adjustment of the Conversion Price shall be made if the amount of any such adjustment would
be an amount less than one percent (1%) of the Conversion Price then in effect, but any such amount shall be carried forward and an adjustment
with respect thereof shall be made at the time of and together with any subsequent adjustment which, together with such amount and any other
amount or amounts so carried forward, shall aggregate an increase or decrease of one percent (1%) or more.
(4)
The Conversion Price shall not be adjusted upward except in the event of a combination of the
outstanding shares of Common Stock into a smaller number of shares of Common Stock.
(b)
Record Date . In the event that the Maker shall propose at any time:
-8-
(i) to declare any dividend or distribution (other than by purchase of Common Stock of employees, officers and
directors pursuant to the termination of such persons or pursuant to the Maker’s exercise of rights of first refusal with respect to Common Stock
held by such persons) upon its Common Stock, whether in cash, property, stock or other securities, whether or not a regular cash dividend and
whether or not out of earnings or earned surplus;
(ii)
to effect any reclassification or recapitalization of its Common Stock shares outstanding involving a change
in the Common Stock; or
(iii) to merge or consolidate with or into any other entity, or sell, lease or convey all or substantially all its
property or business, or to liquidate, dissolve or wind up; then, in connection with each such event, this Maker shall send to the Holder:
(1)
at least twenty (20) days’ prior written notice of the date on which a record shall be taken for such
dividend or distribution (and specifying the date on which the holders of Common Stock shall be entitled thereto) or for determining rights to
vote in respect of the matters referred to in (i) and (ii) above; and
(2
in the case of the matters referred to in (ii) and (iii) above, at least twenty (20) days’ prior written
notice of the date when the same shall take place (and specifying the date on which the holders of Common Stock shall be entitled to exchange
their Common Stock for securities or other property deliverable upon the occurrence of such event).
Each such written notice shall be given by first class mail, postage prepaid, addressed to the Holder at the address first set forth above. Any
such action shall at all times be subject to the voting rights and other rights, preferences and privileges of the Holder set forth herein.
(c)
No Impairment . The Maker shall not, by amendment of its Certificate of Incorporation or through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action (other than actions
taken in good faith), avoid the observance or performance of any of the terms to be observed or performed hereunder by the Maker but will at
all times in good faith assist in carrying out all the provisions of this Section 3.4 and in taking all such action as may be necessary or
appropriate in order to protect the conversion rights of the Holder against impairment.
(d)
Certificates as to Adjustments . Upon the occurrence of each adjustment or readjustment of the Conversion Price
pursuant to this section, the Maker at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof
and furnish to the Holder a certificate setting forth such adjustment or readjustment in accordance with the terms hereof and showing in detail
the facts upon which such adjustment or readjustment is based. The Maker shall, upon the written request at any time of the Holder, furnish or
cause to be furnished to the Holder a like certificate setting forth (A) such adjustments and readjustments, (B) the Conversion Price at the time
in effect, and (C) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon
the conversion of this Note.
-9-
(e)
Issue Taxes . The Maker shall pay any and all issue and other taxes, excluding federal, state or local income taxes,
that may be payable in respect of any issue or delivery of shares of Common Stock on conversion of this Note pursuant thereto; provided ,
however , that the Maker shall not be obligated to pay any transfer taxes resulting from any transfer requested by the Holder in connection with
any such conversion.
(f)
Fractional Shares . No fractional shares of Common Stock shall be issued upon conversion of this Note. In lieu of any
fractional shares to which the Holder would otherwise be entitled, the Maker shall pay cash equal to the product of such fraction multiplied by
the average of the Closing Bid Price of the Common Stock into which this Note is convertible for the five (5) consecutive Trading Days
immediately preceding the Conversion Date. The term “ Closing Bid Price ” shall mean, on any particular date (i) the last closing bid price per
share of the Common Stock on such date on the OTC Bulletin Board or another registered national stock exchange on which the Common
Stock is then listed, or if there is no such price on such date, then the last closing bid price on such exchange or quotation system on the date
nearest preceding such date, or (ii) if the Common Stock is not listed then on the OTC Bulletin Board or any registered national stock
exchange, the last trading price for a share of Common Stock in the over-the-counter market, as reported by the OTC Bulletin Board or in the
National Quotation Bureau Incorporated or similar organization or agency succeeding to its functions of reporting prices) at the close of
business on such date, or (iii) if the Common Stock is not then reported by the OTC Bulletin Board or the National Quotation Bureau
Incorporated (or similar organization or agency succeeding to its functions of reporting prices), then the average of the “Pink Sheet” quotes for
the relevant conversion period, as determined in good faith by the Holder, or (iv) if the Common Stock is not then publicly traded the fair
market value of a share of Common Stock as determined by the Holder and reasonably acceptable to the Maker.
(g)
Reservation of Common Stock .
(i)
In the event that at anytime when this Note shall be outstanding, the Maker shall not have sufficient
authorized but unissued Common Stock for the purpose of effecting the conversion of all amounts outstanding under this Note at such time
(without regard to any limitations on conversion) (an “ Authorized Share Failure ”), it shall immediately reserve and keep available such
number of its duly authorized shares of Common Stock as is in fact available as of that date and shall immediately take all action necessary to
increase the number of its authorized shares of Common Stock until such time as the Maker’s Certificate of Incorporation shall have been
amended to increase the number of authorized shares of Common Stock to such number as would, at a minimum, permit the reservation by the
Maker of sufficient shares to allow conversion of all amounts outstanding under this Note as provided herein. Without limiting the generality of
the foregoing sentence, as soon as practicable after the occurrence of an Authorized Share Failure, but in no event later than 60 days after the
occurrence of such Authorized Share Failure, the Maker shall (A) hold a meeting of its stockholders or (B) obtain a majority written consent of
its stockholders, for the authorization of an increase in the number of authorized shares of Common Stock. In connection with such meeting,
the Maker shall provide each stockholder with a proxy statement and shall use its best efforts to solicit its stockholders’ approval of such
increase in authorized shares of Common Stock and to cause its board of directors to recommend to the stockholders that they approve such
proposal. The inability of the Maker to reserve the required number of shares of Common Stock required by this Section 3.4(g) shall have no
impact on the rank, rights, preferences and privileges of this Note, which shall be interpreted and applied as if the Maker had sufficient
-10-
shares of Common Stock authorized but unissued to effect any conversion. Before taking any action which would cause an adjustment reducing
the Conversion Price below the then par value of the shares of Common Stock issuable upon conversion of this Note or which would cause the
effective purchase price for the Common Stock to be less than the par value of the shares of Common Stock, the Maker shall take any and all
corporate action which may, in the opinion of its counsel, be necessary in order that the Maker may validly and legally issue fully paid and
nonassessable shares of such Common Stock at such adjusted Conversion Price or effective purchase price, as the case may be.
(h)
Regulatory Compliance . If any shares of Common Stock to be reserved for the purpose of conversion of this Note
require registration or listing with or approval of any governmental authority, stock exchange or other regulatory body under any federal or
state law or regulation or otherwise before such shares may be validly issued or delivered upon conversion, the Maker shall, at its sole cost and
expense, in good faith and as expeditiously as possible, endeavor to secure such registration, listing or approval, as the case may be.
Section 3.5
Preemptive Rights .
(a)
Except as set forth in Section 3.5(c), the Maker shall not issue or sell any shares of Common Stock or other
securities, or any rights or options to purchase Common Stock or other securities, or any debt or shares convertible into or exchangeable for
Common Stock or other securities, whether now or hereafter authorized and whether unissued or in the treasury (collectively, “ Preemptive
Shares ”), unless the Holder shall first have been given the right to acquire, at a price no less favorable than that at which such Preemptive
Shares are to be offered to others, a portion of the Preemptive Shares, as provided in Section 3.5(b).
(b)
The Maker shall give the Holder prior written notice of any proposed issuance or sale described in Section 3.5(a),
including the price at which such securities are to be offered and the time period for the offering, and the Holder shall have thirty (30) days
from the giving of such notice within which to elect to acquire that number of the Preemptive Shares equal to the product of the total number of
Preemptive Shares being offered and a fraction, determined as of the time immediately prior to the issuance of the Preemptive Shares, the
numerator of which is equal to the sum of (i) the number of shares of Common Stock then outstanding as a result of the conversion of this
Note, and (ii) the number of shares of Common Stock into which this Note could be converted, and the denominator of which is equal to the
sum of (x) the number of shares of Common Stock then outstanding, (y) the number of shares of Common Stock into which this Note could be
converted, and (z) the number of shares of Common Stock issuable upon conversion or exercise of all outstanding options, warrants and other
rights for the purchase of capital stock of the Company, and all outstanding shares of all series of preferred stock (such number of Preemptive
Shares being referred to herein as the “ Common Stock Preemptive Shares ”). The Holder may acquire that portion of the Common Stock
Preemptive Shares being offered equal to its percentage ownership of the outstanding Common Stock immediately preceding the issuance of
the Preemptive Shares. If any transaction specified by the Maker in any such notice shall not be consummated within one hundred twenty (120)
days from the date of such notice, the Corporation shall again comply with the provisions of this Section 3.5 with respect to such transaction,
and the Holder shall again have preemptive rights hereunder with respect to the transaction, regardless of whether any such stockholder had
previously exercised or failed to exercise such rights. Any purchase of securities pursuant to the exercise of preemptive rights shall be
consummated simultaneously with, and shall be conditioned upon, consummation of the transaction proposed by the Maker.
-11-
(c)
The restrictions contained in, and preemptive rights granted under, this Section 3.5 shall not apply to:
(i)
shares of Common Stock issued upon conversion of this Note;
(ii) shares of capital stock of the Maker issued in a public offering occurring after the date hereof that results in
aggregate gross proceeds to the Maker of at least Fifty Million Dollars ($50,000,000); or
(iii) shares of Common Stock issued upon the exercise or conversion of outstanding options, warrants or other
Common Stock equivalents in existence on the Issuance Date.
The rights granted to the Holder under this Section 3.5 may be waived with respect to any Preemptive Shares by a written waiver executed by
the Holder.
Section 3.6
Prepayment . The Maker shall not be permitted to prepay some or all of the principal and accrued interest
outstanding under this Note at any time prior to the date that is six (6) months after the First Closing Date but shall be permitted to prepay some
or all of the principal and accrued interest outstanding under this Note at any time after such date; provided, however, that (i) in advance of any
such prepayment, the Maker shall deliver to the Holder a written notice (the “ Prepayment Notice ”) setting forth the Maker’s intention to make
such prepayment and the amount thereof, and (ii) the Holder shall have the right to convert some or all of the amount proposed to be prepaid
into such number of shares of Common Stock as is determined by dividing the amount to be converted by the Conversion Price then in effect.
The Holder shall exercise the conversion right set forth in this Section 3.6 by notifying the Maker in writing within sixty (60) Trading Days of
the Holder’s receipt of Prepayment Notice. In the event that the Maker prepays some, but not all, of the principal and accrued interest
outstanding under this Note, such prepaid amount shall be applied first to the amount owing on the date on which the Maker’s final payment is
due hereunder and then to amounts owing on any preceding dates on which the Maker is required to make payments hereunder.
Section 3.7
No Rights as Shareholder . Nothing contained in this Note shall be construed as conferring upon the Holder,
prior to the conversion of this Note, the right to vote or to receive dividends or to consent or to receive notice as a shareholder in respect of any
meeting of shareholders for the election of directors of the Maker or of any other matter, or any other rights as a shareholder of the Maker.
-12-
ARTICLE IV
MISCELLANEOUS
Section 4.1
Notices . Any notice, demand, request, waiver or other communication required or permitted to be given
hereunder shall be in writing and shall be effective (a) upon hand delivery, telecopy or facsimile at the address or number first set forth above
(if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such
delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the second
business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such
mailing, whichever shall first occur.
Section 4.2
Governing Law . This Note shall be governed by and construed in accordance with the internal laws of the
State of New York, without giving effect to any of the conflicts of law principles which would result in the application of the substantive law of
another jurisdiction. This Note shall not be interpreted or construed with any presumption against the party causing this Note to be drafted.
Section 4.3
Headings . Article and section headings in this Note are included herein for purposes of convenience of
reference only and shall not constitute a part of this Note for any other purpose.
Section 4.4
Remedies, Characterizations, Other Obligations, Breaches and Injunctive Relief . The remedies provided in
this Note shall be cumulative and in addition to all other remedies available under this Note, at law or in equity (including, without limitation, a
decree of specific performance and/or other injunctive relief), no remedy contained herein shall be deemed a waiver of compliance with the
provisions giving rise to such remedy and nothing herein shall limit a Holder’s right to pursue actual damages for any failure by the Maker to
comply with the terms of this Note. Amounts set forth or provided for herein with respect to payments, conversion and the like (and the
computation thereof) shall be the amounts to be received by the Holder thereof and shall not, except as expressly provided herein, be subject to
any other obligation of the Maker (or the performance thereof). The Maker acknowledges that a breach by it of its obligations hereunder will
cause irreparable and material harm to the Holder and that the remedy at law for any such breach may be inadequate. Therefore the Maker
agrees that, in the event of any such breach or threatened breach, the Holder shall be entitled, in addition to all other available rights and
remedies, at law or in equity, to seek and obtain such equitable relief, including but not limited to an injunction restraining any such breach or
threatened breach, without the necessity of showing economic loss and without any bond or other security being required.
Section 4.5
Enforcement Expenses . The Maker agrees to pay all costs and expenses of enforcement of this Note,
including, without limitation, reasonable attorneys’ fees and expenses.
Section 4.6
Binding Effect . The obligations of the Maker and the Holder set forth herein shall be binding upon the
successors and permitted assigns of each such party.
Section 4.7
the Maker and the Holder.
Amendments . This Note may not be modified or amended in any manner except in a writing executed by
-13-
Section 4.8
Compliance with Securities Laws . The Holder of this Note acknowledges that this Note is being acquired
solely for the Holder’s own account and not as a nominee for any other party, and for investment, and that the Holder shall not offer, sell or
otherwise dispose of this Note. This Note and any Note issued in substitution or replacement therefor shall be stamped or imprinted with a
legend in substantially the following form:
THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION HEREOF
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
“ACT”), OR APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR RECEIPT BY THE MAKER OF
AN OPINION OF COUNSEL IN THE FORM, SUBSTANCE AND SCOPE REASONABLY
SATISFACTORY TO THE MAKER THAT THIS NOTE AND THE SHARES OF COMMON STOCK
ISSUABLE UPON CONVERSION HEREOF HAVE MAY BE SOLD, TRANSFERRED,
HYPOTHECATED OR OTHERWISE DISPOSED OF, UNDER AN EXEMPTION FROM
REGISTRATION UNDER THE ACT AND SUCH STATE SECURITIES LAWS.
Section 4.9
Consent to Jurisdiction . Each of the Maker and the Holder (i) hereby irrevocably submits to the exclusive
jurisdiction of the United States District Court sitting in the Southern District of New York and the courts of the State of New York located in
New York county for the purposes of any suit, action or proceeding arising out of or relating to this Note and (ii) hereby waives, and agrees not
to assert in any such suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of such court, that the suit, action or
proceeding is brought in an inconvenient forum or that the venue of the suit, action or proceeding is improper. Each of the Maker and the
Holder consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address in effect
for notices to it under the Funding Agreement and agrees that such service shall constitute good and sufficient service of process and notice
thereof. Nothing in this Section 4.9 shall affect or limit any right to serve process in any other manner permitted by law. Each of the Maker and
the Holder hereby agree that the prevailing party in any suit, action or proceeding arising out of or relating to this Note shall be entitled to
reimbursement for reasonable legal fees from the non-prevailing party.
Section 4.10
Parties in Interest . This Note shall be binding upon, inure to the benefit of and be enforceable by the
Maker, the Holder and their respective successors and permitted assigns.
Section 4.11
Failure or Indulgence Not Waiver . No failure or delay on the part of the Holder in the exercise of any
power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or
privilege preclude other or further exercise thereof or of any other right, power or privilege.
-14-
Section 4.12
Maker Waivers . Except as otherwise specifically provided herein, the Maker and all others that may
become liable for all or any part of the obligations evidenced by this Note, hereby waive presentment, demand, notice of nonpayment, protest
and all other demands’ and notices in connection with the delivery, acceptance, performance and enforcement of this Note, and do hereby
consent to any number of renewals of extensions of the time or payment hereof and agree that any such renewals or extensions may be made
without notice to any such persons and without affecting their liability herein and do further consent to the release of any person liable hereon,
all without affecting the liability of the other persons, firms or Maker liable for the payment of this Note, AND DO HEREBY WAIVE TRIAL
BY JURY.
(a)
No delay or omission on the part of the Holder in exercising its rights under this Note, or course of conduct relating
hereto, shall operate as a waiver of such rights or any other right of the Holder, nor shall any waiver by the Holder of any such right or rights on
any one occasion be deemed a waiver of the same right or rights on any future occasion.
(b)
THE MAKER ACKNOWLEDGES THAT THE TRANSACTION OF WHICH THIS NOTE IS A PART IS A
COMMERCIAL TRANSACTION, AND TO THE EXTENT ALLOWED BY APPLICABLE LAW, HEREBY WAIVES ITS RIGHT TO
NOTICE AND HEARING WITH RESPECT TO ANY PREJUDGMENT REMEDY WHICH THE HOLDER OR ITS SUCCESSORS OR
ASSIGNS MAY DESIRE TO USE.
Section 4.13
Definitions . For the purposes hereof, the following terms shall have the following meanings:
“ business day ” means any day other than a Saturday, Sunday or other day on which banks in New York City, New York are
authorized or required by law to close.
“ Indebtedness ” of any Person means without duplication (A) all indebtedness for borrowed money, (B) all obligations
issued, undertaken or assumed as the deferred purchase price of property or services (other than trade payables entered into in the ordinary
course of business), (C) all reimbursement or payment obligations with respect to letters of credit, surety bonds and other similar instruments,
(D) all obligations evidenced by notes, bonds, debentures or similar instruments, including obligations so evidenced incurred in connection
with the acquisition of property, assets or businesses, (E) all indebtedness created or arising under any conditional sale or other title retention
agreement, or incurred as financing, in either case with respect to any property or assets acquired with the proceeds of such indebtedness (even
though the rights and remedies of the seller or bank under such agreement in the event of default are limited to repossession or sale of such
property), (F) all monetary obligations under any leasing or similar arrangement which, in connection with GAAP, is classified as a capital
lease, (G) all indebtedness referred to in clauses (A) through (F) above secured by (or for which the holder of such Indebtedness has an existing
right, contingent or otherwise, to be secured by) any Lien upon or in any property or assets (including accounts and contract rights) owned by
any Person, even though the Person which owns such assets or property has not assumed or become liable for the payment of such
indebtedness, and (H) all Contingent Obligations in respect of indebtedness or obligations of others of the kinds referred to in clauses (A)
through (G) above. For purposes of the definition of Indebtedness, “ Contingent Obligation ” means, as to any Person, any direct or indirect
liability, contingent or otherwise, of that Person with respect to any indebtedness, lease,
-15-
dividend or other obligation of another Person if the primary purpose or intent of the Person incurring such liability, or the primary effect
thereof, is to provide assurance to the obligee of such liability that such liability will be paid or discharged, or that any agreements relating
thereto will be complied with, or that the holders of such liability will be protected (in whole or in part) against loss with respect thereto.
“ Person ” means an individual or a corporation, partnership, trust, incorporated or unincorporated association, joint venture,
limited liability company, joint stock company, government (or an agency or political subdivision thereof) or other entity of any kind.
“ Trading Day ” means (a) a day on which the Common Stock is traded on the OTC Bulletin Board, or (b) if the Common
Stock is not traded on the OTC Bulletin Board, a day on which the Common Stock is quoted in the over-the-counter market as reported by the
National Quotation Bureau Incorporated (or any similar organization or agency succeeding its functions of reporting prices); provided ,
however , that in the event that the Common Stock is not listed or quoted as set forth in (a) or (b) hereof, then Trading Day shall mean any day
except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the State of New York are
authorized or required by law or other government action to close.
-16-
IN WITNESS WHEREOF, this Note is executed and delivered by a duly authorized and empowered officer of the Maker as of the
date first written above.
KRONOS ADVANCED TECHNOLOGIES, INC.
By: /s/ Richard F. Tusing
Name: Richard F. Tusing
Title: Chief Operating Officer
RS Properties Note
-17-
EXHIBIT A
WIRE INSTRUCTIONS
Payee: ____________________________________________________
Bank: ____________________________________________________
Address: _________________________________________________
___________________________________________
Bank No.: _______________________________________________
Account No.: ____________________________________________
Account Name: ___________________________________________
FORM OF
NOTICE OF CONVERSION
(To be Executed by the Registered Holder in order to Convert the Note)
The undersigned hereby irrevocably elects to convert $ ________________ of the principal amount of the above Note No. ___ into shares of
Common Stock of Kronos Advanced Technologies, Inc. (the “Maker”) according to the conditions hereof, as of the date written below.
Date of Conversion ________________________________________________________
Applicable Conversion Price _________________________________________________
Number of shares of Common Stock beneficially owned or deemed beneficially owned by the Holder on the Date of Conversion:
______________
Signature ____________________________________________________________________
[Name]
Address: ____________________________________________________________________
____________________________________________________________
Exhibit 6
SECURITY AGREEMENT
THIS SECURITY AGREEMENT dated as of June 19, 2007 (this “ Agreement ”), is by and among Kronos Advanced
Technologies, Inc., a Nevada corporation with its chief executive office and principal place of business located at 464 Common Street, Box
301, Belmont, Massachusetts 02478 (the “ Debtor ”) and Kronos Air Technologies, Inc. a Nevada corporation with its chief executive office
and principal place of business located at 15241 NE 90th Street, Redmond, Washington 98052 (the “ Subsidiary ” and collectively with the
Debtor, the “ Pledgors ”), and AirWorks Funding LLLP, a Georgia limited liability limited partnership, (“ AirWorks ”), Sands Brothers
Venture Capital LLC, a New York limited liability company (“ Sands I ”) Sands Brothers Venture Capital II LLC, a New York limited liability
company (“ Sands II ”), Sands Brothers Venture Capital III LLC, a New York limited liability company (“ Sands III ”), Sands Brothers Venture
Capital IV LLC, a New York limited liability company (“ Sands IV ”), Critical Capital Growth Fund, L.P., a Delaware limited partnership and
a debenture licensed U.S. Small Business Investment Company (“ CCGF ”) and RS Properties I LLC, a Delaware limited liability company (“
RS Properties ”). AirWorks, Sands I, Sands II, Sands III, Sands IV, CCGF and RS Properties are collectively referred to herein as the “ Secured
Parties .”
WHEREAS , pursuant to those certain Secured Convertible Promissory Notes, dated June 19, 2007 (the “ Notes ”), the Secured
Parties loaned to the Debtor the principal amount of $18,159,000 or so much thereof as may be advanced by the Secured Parties to the Debtor
pursuant to the terms thereof;
WHEREAS, the Subsidiary is a direct subsidiary of the Debtor and has determined that its execution, delivery and performance of
this Agreement directly or indirectly benefits, and is within the corporate purposes and in the best interest of, it;
WHEREAS, the Secured Parties would not have advanced funds to the Debtor under the Notes without Debtor’s and Subsidiary’s
execution and delivery of this Agreement;
WHEREAS , in order to secure the Debtor’s obligations under the Notes, the Pledgors have agreed to execute and deliver this
Agreement; and
WHEREAS, this Agreement is subject to the terms and conditions of that certain Intercreditor Agreement of even date herewith by
and among the Secured Parties.
NOW, THEREFORE, in consideration of the above premises and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by the Pledgors, the Pledgors hereby agree with the Secured Parties as follows:
Section 1.
(a)
Definitions .
For the purposes of this Agreement:
“ Applicable Law ” means all applicable provisions of constitutions, statutes, laws, rules, regulations and orders of all governmental
bodies and all orders, rulings and decrees of all courts and arbitrators.
“ Business Day ” means any day other than a Saturday, Sunday or other day on which banks in New York, New York are authorized
or required by law to close.
“ Collateral ” means the following properties, assets and rights of each of the Pledgors, wherever located, whether now owned or
hereafter acquired or arising, and all proceeds and products thereof: all personal and fixture property of every kind and nature, including,
without limitation, all goods (including inventory, equipment and any accessions thereto), instruments (including promissory notes),
documents, accounts, chattel paper (whether tangible or electronic), deposit accounts, letter-of-credit rights (whether or not the letter of credit is
evidenced by a writing), commercial tort claims, intellectual property (including, without limitation, patents), securities of United States
Persons and all other investment property, supporting obligations, any other contract rights or rights to the payment of money, insurance claims
and proceeds, tort claims, and all general intangibles, and all products and proceeds of the foregoing, in any form, including insurance proceeds
and all claims against third parties for loss or damage to or destruction of or other involuntary conversion of any kind or nature of any or all of
the other Collateral.
“ Event of Default ” means the occurrence or existence of an Event of Default under any Note.
“ Lien ”, as applied to the property of any Person, means any security interest, lien, encumbrance, mortgage, deed to secure debt, deed
of trust, pledge, charge, conditional sale or other title retention agreement, or other encumbrance of any kind covering any property of such
Person, or upon the income or profits therefrom or any agreement to convey any of the foregoing or any other agreement or interest covering
the property of a Person which is intended to provide collateral security for the obligation of such Person.
“ Obligations ” means, individually and collectively:
(i) all obligations of either of the Pledgors owing to the Secured Parties under or with respect to this Agreement or, only
with respect to the Debtor, the Notes; and
(ii)
all renewals, substitutions, modifications, extensions and supplements to any of the foregoing.
“ Permitted Liens ” means:
(i) Liens securing taxes, assessments and other governmental charges or levies not yet due and payable or the claims of, or
obligations owing to, materialmen, mechanics, carriers, warehousemen or landlords for labor, materials, supplies or rentals incurred in the
ordinary course of business but not yet due and payable;
(ii) Liens consisting of deposits or pledges made, in the ordinary course of business, in connection with, or to secure
payment of, obligations under workmen’s compensation, unemployment insurance or similar legislation;
(iii)
Liens which in the sole judgment of the Secured Parties do not materially detract from the value of the Collateral;
-2-
(iv)
Liens in favor of the Secured Parties;
(v)
Liens in favor of FKA Distributing Co.; and
(vi) Purchase money security interests and Liens to secure the Debtor’s performance of equipment leases arising in the
ordinary course of business; provided that such Liens do not extend to any property or assets which is not acquired property (in the case of
purchase money security interest) or is not leased property (in the case of equipment leases) subject to such purchase or lease.
“ Person ” means an individual, corporation, partnership, limited liability company, association, trust or unincorporated organization,
or a government or any agency or political subdivision thereof.
“ UCC ” means the Uniform Commercial Code of the State of New York, as in effect from time to time.
(b)
Unless otherwise set forth herein to the contrary, all terms not otherwise defined herein and which are defined in the UCC are
used herein with the meanings ascribed to them in the UCC. However, if a term is defined in Article 9 of the UCC differently than in another
Article of the UCC, the term has the meaning specified in Article 9 of the UCC.
Section 2.
Grant of Security . To secure the prompt and complete payment, observance and performance when due (whether at stated
maturity, by acceleration or otherwise) of all of the Obligations, each of the Pledgors hereby collaterally assigns and pledges to the Secured
Parties, and grants to the Secured Parties a security interest and Lien in and to, the Collateral. The Secured Parties acknowledge that the
attachment of their security interest in any commercial tort claim as original collateral is subject to the Debtor’s compliance with Section 4(a).
Section 3.
Authorization to File Financing Statements . Each of the Pledgors hereby irrevocably authorizes the Secured Parties at any
time and from time to time to file in any Uniform Commercial Code jurisdiction any initial financing statements and amendments thereto that
(a) indicate the Collateral (i) as all assets of such Pledgor or words of similar effect, regardless of whether any particular asset comprised in the
Collateral falls within the scope of Article 9 of the UCC or Article 9 of the Uniform Commercial Code of such other jurisdiction, or (ii) as
being of an equal or lesser scope or with greater detail, and (b) contain any other information required by part 5 of Article 9 of the UCC or the
analogous part of Article 9 of the Uniform Commercial Code of such other jurisdiction for the sufficiency or filing office acceptance of any
financing statement or amendment. Each Pledgor agrees to furnish any such information to the Secured Parties promptly upon request.
Section 4.
Other Actions . Further to ensure the attachment, perfection and priority of, and the ability of the Secured Parties to enforce,
the Secured Parties’ security interest in the Collateral, each Pledgor agrees, in each case at such Pledgor’s own expense, to take the following
actions with respect to the following Collateral:
(a)
Commercial Tort Claims . If such Pledgor shall at any time hold or acquire a commercial tort claim, such Pledgor shall
immediately notify the Secured Parties in a writing signed by such Pledgor of the brief details 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 Secured Parties.
-3-
(b)
Actions as to any and all Collateral . Such Pledgor agrees to take any other action reasonably requested by the Secured Parties
to ensure the attachment, perfection and, priority of, and the ability of the Secured Parties to enforce, the Secured Parties’ security interest in
any and all of the Collateral, including, without limitation, the execution and delivery of patent security agreements (substantially in the form
attached hereto as Exhibit A ) for filing with the United States Patent and Trademark Office and fully executed deposit control agreements in
form and substance reasonable acceptable to the Secured Parties with respect to any deposit accounts of the Pledgors.
Section 5.
Representations and Warranties Regarding Legal Status .
(a)
The Debtor represents and warrants to the Secured Parties as follows: (a) the correct legal name of the Debtor is set forth in
the introductory paragraph of this Agreement, and the Debtor does not conduct and, during the five-year period immediately preceding the date
of this Agreement, has not conducted, business under any trade name other than Technology Selection, Inc., TSET, Inc. and as set forth in the
introductory paragraph of this Agreement, (b) the Internal Revenue Service taxpayer identification number of the Debtor is 87-0440410, (c) the
Debtor is a corporation, duly incorporated, validly existing and in good standing under the laws of the State of Nevada, and (d) the Debtor’s
place of business is accurately set forth in the introductory paragraph hereof.
(b)
The Subsidiary represents and warrants to the Secured Parties as follows: (a) the correct legal name of the Subsidiary is set
forth in the introductory paragraph of this Agreement, and the Subsidiary does not conduct and, during the five-year period immediately
preceding the date of this Agreement, has not conducted, business under any trade name other than as set forth in the introductory paragraph of
this Agreement, (b) the Internal Revenue Service taxpayer identification number of the Subsidiary is 91-2046697 (c) the Subsidiary is a
corporation, duly incorporated, validly existing and in good standing under the laws of the State of Nevada, and (d) the Subsidiary’s place of
business is accurately set forth in the introductory paragraph hereof.
(c)
Each of the Pledgors represents and warrants to the Secured Parties (i) it is a corporation duly organized and in good standing
under the laws of its state of incorporation, and is duly qualified as a foreign corporation and in good standing in all states or other jurisdictions
where the nature and extent of the business transacted by it or the ownership of assets makes such qualification necessary, except for those
jurisdictions in which the failure to so qualify would not have a material adverse effect on its financial condition, results of operation or
business or the rights of Secured Parties in or to any of the Collateral; (ii) the execution, delivery and performance of this Agreement and the
transactions contemplated hereunder (A) are all within its corporate or other powers, (B) have been duly authorized, (C) are not in
contravention of law or the terms of its certificate of incorporation, by-laws, or other organizational documentation, or any indenture,
agreement or undertaking to which it is a party or by which it or its property are bound and (D) will not result in the creation or imposition of,
or require or give rise to any obligation to grant, any lien, security interest, charge or other encumbrance upon any its property; and (iii) this
Agreement constitutes the legal, valid and binding obligations of such Pledgor enforceable against such Pledgor in accordance with the terms
hereof.
-4-
Section 6.
Covenants Regarding Legal Status . Each of the Pledgors covenants with the Secured Parties as follows: (a) without
providing at least 15 Business Days prior written notice to the Secured Parties, such Pledgor will not change its name, its place of business or,
if more than one, chief executive office, or its mailing address or organizational identification number if it has one, and (b) without providing at
least 15 Business Days prior written notice to the Secured Parties, such Pledgor will not change its type of organization, jurisdiction of
organization or other legal structure.
Section 7.
Representations and Warranties Regarding Collateral, Etc . Each of the Pledgors further represents and warrants to the
Secured Parties as follows: (a) such Pledgor is the owner of the Collateral pledged by it, free from any Lien, except for Permitted Liens,
(b) none of the Collateral pledged by it constitutes or is the proceeds of “farm products” as defined in § 9-102(a)(34) of the UCC, (c) none of
the account debtors or other persons obligated on any of the Collateral pledged by it is a governmental authority covered by the Federal
Assignment of Claims Act or like federal, state or local statute or rule in respect of such Collateral, (d) such Pledgor does not hold any
commercial tort claim, and (e) to the best of such Pledgor’s knowledge, such Pledgor has at all times operated its business in compliance in all
material respects with all Applicable Laws.
Section 8.
Covenants Regarding Collateral Generally . Each of the Pledgors further covenants with the Secured Parties as follows:
(a) other than Permitted Liens, such Pledgor shall not pledge, mortgage or create, or suffer to exist any Lien in the Collateral in favor of any
Person, (b) such Pledgor shall keep the Collateral in good order and repair and will not use the same in violation of any Applicable Law or any
policy of insurance thereon, (c) such Pledgor shall permit the Secured Parties, or their designees, to inspect the Collateral at any reasonable
time upon reasonable prior notice, wherever located, (d) such Pledgor shall not sell, transfer or otherwise dispose, or offer to sell, transfer or
otherwise dispose, of the Collateral or any interest therein except for (i) sales and leases of inventory in the ordinary course of business and
(ii) so long as no Event of Default has occurred and is continuing, sales or other dispositions of obsolescent items of equipment in the ordinary
course of business consistent with past practices and (e) the equipment constituting Collateral shall remain personal property and such Pledgor
shall not permit any such equipment to be or become a part of or affixed to any real property.
Section 9.
Rights and Remedies . Upon the occurrence and during the continuance of an Event of Default, the Secured Parties, without
any other notice to or demand upon the Pledgors, shall have in any jurisdiction in which enforcement hereof is sought, in addition to the rights
and remedies of the Secured Parties under the UCC and any additional rights and remedies as may be provided to the Secured Parties in any
jurisdiction in which Collateral is located or enforcement is sought, including, without limitation, the right to take possession of the Collateral,
and for that purpose the Secured Parties may, so far as the Pledgors can give authority therefor, enter upon any premises on which the
Collateral may be situated and remove the same therefrom. The Secured Parties may in their discretion require the Pledgors to assemble all or
any part of the Collateral at such location or locations within the jurisdiction(s) of each Pledgor’s principal office(s) or at such other locations
as the Secured Parties may reasonably designate. Unless the
-5-
Collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, the Secured Parties
shall give to the Pledgors at least five (5) Business Days prior written notice of the time and place of any public sale of Collateral or of the time
after which any private sale or any other intended disposition is to be made. Each of the Pledgors hereby expressly acknowledges that five (5)
Business Days prior written notice of such sale or sales shall be reasonable notice. In addition, each of the Pledgors waives any and all rights
that it may have to a judicial hearing in advance of the enforcement of any of the Secured Parties’ rights and remedies hereunder, including,
without limitation, the Secured Parties’ right following an Event of Default to take immediate possession of the Collateral and to exercise their
rights and remedies with respect thereto .
Section 10.
No Waiver by Secured Parties, Etc . The Secured Parties shall not be deemed to have waived any of their rights and
remedies in respect of the Obligations or the Collateral unless such waiver shall be in writing and signed by the Secured Parties. No delay or
omission on the part of the Secured Parties in exercising any right or remedy shall operate as a waiver of such right or remedy or any other
right or remedy. A waiver on any one occasion shall not be construed as a bar to or waiver of any right or remedy on any future occasion. All
rights and remedies of the Secured Parties with respect to the Obligations or the Collateral, whether evidenced hereby or by any other
instrument or papers, shall be cumulative and may be exercised singularly, alternatively, successively or concurrently at such time or at such
times as the Secured Parties deem expedient.
Section 11.
Suretyship Waivers by Pledgors . Each of the Pledgors waives demand, notice, protest, notice of acceptance of this
Agreement, notice of loans made, credit extended, Collateral received or delivered or other action taken in reliance hereon and all other
demands and notices of each description. With respect to both the Obligations and the Collateral, each of the Pledgors assents to any extension
or postponement of the time of payment or any other indulgence, to any substitution, exchange or release of or failure to perfect any security
interest in any Collateral, to the addition or release of any party or person primarily or secondarily liable, to the acceptance of partial payment
thereon and the settlement, compromising or adjusting of any thereof, all in such manner and at such time or times as the Secured Parties may
deem advisable. The Secured Parties shall not have any duty as to the collection or protection of the Collateral or any income therefrom, the
preservation of rights against prior parties, or the preservation of any rights pertaining thereto beyond any duties imposed by Applicable Law.
Each of the Pledgors further waives any and all other suretyship defenses.
Section 12.
Marshalling . The Secured Parties shall not be required to marshal any present or future collateral security (including but not
limited to the Collateral) for, or other assurances of payment of, the Obligations or any of them or to resort to such collateral security or other
assurances of payment in any particular order, and all of the rights and remedies of the Secured Parties hereunder and of the Secured Parties in
respect of such collateral security and other assurances of payment shall be cumulative and in addition to all other rights and remedies, however
existing or arising. To the extent that it lawfully may, each of the Pledgors hereby agrees that it will not invoke any Applicable Law relating to
the marshalling of collateral which might cause delay in or impede the enforcement of the Secured Parties’ rights and remedies under this
Agreement or under any other instrument creating or evidencing any of the Obligations or under which any of the Obligations is outstanding or
by which any of the Obligations is secured or payment thereof is otherwise assured, and, to the extent that it lawfully may, each of the Pledgors
hereby irrevocably waives the benefits of all such laws.
-6-
Section 13.
Proceeds of Dispositions; Expenses . The Pledgors, jointly and severally, agree to pay to the Secured Parties on demand any
and all expenses, including attorneys’ fees and disbursements, incurred or paid by the Secured Parties in protecting, preserving or enforcing the
Secured Parties’ rights and remedies under or in respect of any of the Obligations or any of the Collateral. After deducting all of said expenses,
the residue of any proceeds of collection or sale or other disposition of Collateral shall, to the extent actually received in cash, be applied to the
payment of the Obligations in such order or preference as the Secured Parties may determine, proper allowance and provision being made for
any Obligations not then due. Upon the final payment and satisfaction in full of all of the Obligations and after making any payments required
by Sections 9-608(a)(1)(C) or 9-615(a)(3) of the UCC, any excess shall be returned to the Pledgors. In the absence of final payment and
satisfaction in full of all of the Obligations, the Pledgors shall remain liable for any deficiency.
Section 14.
Pledgors Remain Liable . Anything herein to the contrary notwithstanding (a) each Pledgor will remain liable under the
contracts and agreements included in the Collateral to the extent set forth therein, to the same extent as if this Agreement had not been
executed; (b) the exercise by the Secured Parties of any of their rights hereunder will not release any Pledgor from any of its duties or
obligations under any such contracts or agreements included in the Collateral; and (c) no Secured Party will have any obligation or liability
under any contracts or agreements included in the Collateral by reason of this Agreement, nor will any Secured Party be obligated to perform
any of the obligations or duties of any Pledgor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder.
Section 15.
Postponement of Subrogation, etc . Each Pledgor hereby agrees that it will not exercise any rights against any other Pledgor
which it may acquire by reason of any payment made hereunder, whether by way of subrogation, reimbursement or otherwise, until the full
satisfaction of all Obligations. Any amount paid to any Pledgor on account of any payment made hereunder prior to the full and complete
satisfaction of the all the Obligations shall be held in trust for the benefit of the Secured Parties and shall immediately be paid to the Secured
Parties. In furtherance of the foregoing, at all times prior to the full and complete satisfaction of all of the Obligations, each Pledgor shall
refrain from taking any action or commencing any proceeding against any other Pledgor (or its successors or assigns, whether in connection
with a bankruptcy proceeding or otherwise) to recover any amounts in respect of payments made under this Agreement to any Secured Party.
Section 16.
Power of Attorney . Each Pledgor hereby irrevocably designates and appoints each of the Secured Parties as such Pledgor’s
true and lawful attorney-in-fact, and authorizes the Secured Parties, in Pledgor’s or each Secured Party’s name, to: (a) at any time an Event of
Default exists or has occurred and is continuing (i) demand payment on receivables or other Collateral, (ii) enforce payment of receivables by
legal proceedings or otherwise, (iii) exercise all of such Pledgor’s rights and remedies to collect any receivable or other Collateral, (iv) sell or
assign any receivable upon such terms, for such amount and at such time or times as the Secured Parties deems advisable, (v) settle, adjust,
compromise, extend or renew an account, (vi) discharge and release any receivable, (vii) prepare, file and sign such Pledgor’s name on any
-7-
proof of claim in bankruptcy or other similar document against an account debtor or other obligor in respect of any receivables or other
Collateral, (viii) notify the post office authorities to change the address for delivery of remittances from account debtors or other obligors in
respect of receivables or other proceeds of Collateral to an address designated by Secured Parties, and open and dispose of all mail addressed to
such Pledgor and handle and store all mail relating to the Collateral; (ix) at any time to take control in any manner of any item of payment in
respect of receivables or constituting Collateral or otherwise received in or for deposit in any deposit accounts maintained by such Pledgor or
otherwise received by the Secured Parties, (x) have access to any lockbox or postal box into which remittances from account debtors or other
obligors in respect of receivables or other proceeds of Collateral are sent or received, (xi) endorse such Pledgor’s name upon any items of
payment in respect of receivables or constituting Collateral or otherwise received by the Secured Parties and deposit the same in Secured
Parties’ account for application to the Obligations, (xii) endorse such Pledgor’s name upon any chattel paper, document, instrument, invoice, or
similar document or agreement relating to any receivable or any goods pertaining thereto or any other Collateral, including any warehouse or
other receipts, or bills of lading and other negotiable or non-negotiable documents, and (xiii) sign such Pledgor’s name on any verification of
receivables and notices thereof to account debtors or any secondary obligors or other obligors in respect thereof and (b) do all acts and things
which are necessary, in the Secured Parties’ determination, to fulfill such Pledgor’s obligations under this Agreement and the other Transaction
Documents. Each Pledgor hereby releases each Secured Party and its officers, employees and designees from any liabilities arising from any
act or acts under this power of attorney and in furtherance thereof, whether of omission or commission, except as a result of such Secured
Party’s own gross negligence or willful misconduct as determined pursuant to a final non-appealable order of a court of competent jurisdiction.
Section 17.
Right to Cure . The Secured Parties may, but are not required to, at any time an Event of Default exists or has occurred and is
continuing (a) upon notice to any Pledgor, cure any material default by such Pledgor under any material agreement with a third party that
materially affects the Collateral, its value or the ability of the Secured Parties to collect, sell or otherwise dispose of the Collateral or the rights
and remedies of the Secured Parties therein or the ability of such Pledgor to perform its obligations hereunder or under the other Transaction
Documents, (b) pay or bond on appeal any judgment entered against any Pledgor, (c) discharge taxes, liens, security interests or other
encumbrances at any time levied on or existing with respect to the Collateral and (d) pay any amount, incur any expense or perform any act
which, in the Secured Parties’ judgment, is necessary or appropriate to preserve, protect, insure or maintain the Collateral and the rights of the
Secured Parties with respect thereto. The Secured Parties may add any amounts so expended to the Obligations and charge the applicable
Pledgor therefor, such amounts to be repayable by such Pledgor on demand. The Secured Parties shall be under no obligation to effect such
cure, payment or bonding and shall not, by doing so, be deemed to have assumed any obligation or liability of any Pledgor. Any payment made
or other action taken by the Secured Parties under this Section shall be without prejudice to any right to assert an Event of Default hereunder
and to proceed accordingly.
-8-
Section 18.
Governing Law; Consent to Jurisdiction; Jury Trial Waiver . THIS AGREEMENT IS INTENDED TO TAKE
EFFECT AS A SEALED INSTRUMENT AND SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE CONFLICT OF LAW PRINCIPLES THEREOF . EACH
OF THE PARTIES HERETO AGREES TO SUBMIT TO THE JURISDICTION OF THE COURTS OF THE STATE OF NEW
YORK IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT. Each of the parties hereto
hereby irrevocably consents to the non-exclusive jurisdiction of the Supreme Court of New York, New York County and the United States
District Court of New York, New York County and waives trial by jury in any action or proceeding with respect to this Agreement. EACH
PLEDGOR HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF
ACTION (A) ARISING UNDER THIS AGREEMENT OR (B) IN ANY WAY CONNECTED WITH OR RELATED OR
INCIDENTAL TO THE DEALINGS OF SUCH PLEDGOR AND SECURED PARTIES IN RESPECT OF THIS AGREEMENT OR
THE TRANSACTIONS RELATED HERETO WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER IN
CONTRACT, TORT, EQUITY OR OTHERWISE.
Section 19.
Amendments, Etc . No amendment or waiver of any provision of this Agreement or consent to any departure by either of the
Pledgors herefrom shall in any event be effective unless the same shall be in writing and signed by the parties hereto, and then such waiver or
consent shall be effective only in the specific instance and for the specific purpose for which given.
Section 20.
Notices . Unless otherwise provided herein, communications provided for hereunder shall be in writing and shall be mailed,
couriered, telecopied or delivered, to any party at its address for notices set forth in the Funding Agreement (and in the case of the Subsidiary,
to the address of the Debtor set forth in the Funding Agreement), or, as to each party, at such other address as shall be designated by such party
in a written notice to the other parties. All such notices and other communications to the Pledgors or the Secured Parties shall be deemed given
when delivered personally, mailed by certified mail (postage pre-paid and return receipt requested), sent by overnight courier service or faxed
(transmission confirmed), or otherwise actually received.
Section 21.
Severability . Whenever possible, each provision of this Agreement shall be interpreted in such a manner as to be effective
and valid under Applicable Law, but if any provision of this Agreement shall be prohibited by or invalid under Applicable Law, such
provisions shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the
remaining provisions of this Agreement.
-9-
Section 22.
Relationship with Intercreditor Agreement . ANYTHING HEREIN TO THE CONTRARY NOTWITHSTANDING,
THE LIENS AND SECURITY INTERESTS SECURING THE OBLIGATIONS AND THE EXERCISE OF ANY RIGHT OR
REMEDY WITH RESPECT THERETO ARE SUBJECT TO THE PROVISIONS OF THAT CERTAIN INTERCREDITOR
AGREEMENT DATED AS OF JUNE ___, 2007 (AS AMENDED, RESTATED, SUPPLEMENTED, OR OTHERWISE MODIFIED
FROM TIME TO TIME, THE “ INTERCREDITOR AGREEMENT ” ), AMONG SANDS I, SANDS II, SANDS III, SANDS IV AND
CCGF , AS FIRST LIEN CREDITORS, AND AIRWORKS FUNDING LLLP AND RS PROPERTIES I LLC, AS SECOND LIEN
CREDITORS. IN THE EVENT OF ANY CONFLICT BETWEEN THE TERMS OF THE INTERCREDITOR AGREEMENT AND
THIS AGREEMENT, THE TERMS OF THE INTERCREDITOR AGREEMENT SHALL GOVERN AND CONTROL.
Section 23.
Counterparts . This Agreement may be executed in several counterparts, each of which shall be an original and all of which,
taken together, shall constitute one and the same instrument.
Section 24.
Miscellaneous . The headings of each section of this Agreement are for convenience only and shall not define or limit the
provisions thereof. This Agreement and all rights and obligations hereunder shall be binding upon each of the Pledgors and its successors and
assigns (including, without limitation, trustees and liquidators), and shall inure to the benefit of the Secured Parties and their successors and
assigns (including, without limitation, trustees and liquidators).
[Signatures on Next Page]
-10-
IN WITNESS WHEREOF , each of the Secured Party and the Pledgors has caused this Agreement to be duly executed and delivered
under seal by its duly authorized officer as of the day first above written.
KRONOS ADVANCED TECHNOLOGIES, INC.
By: /s/ Richard F. Tusing
Name: Richard F. Tusing
Title: COO
KRONOS AIR TECHNOLOGIES, INC.
By: /s/ Richard F. Tusing
Name: Richard F. Tusing
Title: COO
AIRWORKS FUNDING LLLP
By: Compass Partners, LLC, its general partner
By:
/s/ Richard E. Perlman
Name: Richard E. Perlman
Title: President
SANDS BROTHERS VENTURE CAPITAL LLC
By: /s/ Scott A. Baily
Name: Scott A. Baily
Title:
COO
SANDS BROTHERS VENTURE CAPITAL II LLC
By: /s/ Scott A. Baily
Name: Scott A. Baily
Title: COO
-11-
SANDS BROTHERS VENTURE CAPITAL III LLC
By: /s/ Scott A. Baily
Name: Scott A. Baily
Title: COO
SANDS BROTHERS VENTURE CAPITAL IV LLC
By: /s/ Scott A. Baily
Name: Scott A. Baily
Title: COO
CRITICAL CAPITAL GROWTH FUND, L.P.
By: Critical Capital, L.P., its General Partner
By: Critical Capital Corporation, its General Partner
By: /s/ Steven B. Sands
Name: Steven B. Sands
Title:
Chairman
By: /s/ Charles L. Robinson
Name: Charles L. Robinson
Title: President
RS PROPERTIES I LLC
By: /s/ John Lack
Name: John Lack
Title: Manager
Exhibit 7
INTERCREDITOR AGREEMENT
This INTERCREDITOR AGREEMENT (this “ Agreement ”) is entered into as of June 19, 2007, among Sands Brothers Venture
Capital LLC, a New York limited liability company (“ Sands I ”), Sands Brothers Venture Capital II LLC, a New York limited liability
company (“ Sands II ”), Sands Brothers Venture Capital III LLC, a New York limited liability company (“ Sands III ”), Sands Brothers Venture
Capital IV LLC, a New York limited liability company (“ Sands IV ”), Critical Capital Growth Fund, L.P., a Delaware limited partnership and
a debenture licensed U.S. Small Business Investment Company (“ CCGF ”), AirWorks Funding LLLP, a Georgia limited liability limited
partnership (“ AirWorks ”) and RS Properties I LLC, a Delaware limited liability company (“ RS Properties ”) (Sands I, Sands II, Sands III,
Sands IV, CCGF, AirWorks and RS Properties are collectively, the “ First Lien Creditors ,” and each, a “ First Lien Creditor ”), Richard A.
Sun, an individual resident of the State of Virginia (“ Sun ”) and Fredric R. Gumbinner, an individual resident of the State of Virginia (“
Gumbinner ” and together with Sun, collectively, “ Second Lien Creditors ” and each, a “ Second Lien Creditor ”), in light of the following:
RECITALS
A.
Kronos Advanced Technologies, Inc., a Nevada corporation (“ Borrower ”), has issued to each of the First Lien Creditors
and Second Lien Creditors certain Secured Convertible Promissory Notes in the aggregate principal amount of $18,359,000, including those
certain Convertible Promissory Notes dated as of April 27, 2007 made by Borrower in favor of Sun and Gumbinner, respectively.
B.
As security for the prompt payment and performance of the Obligations (as hereinafter defined), Borrower and Kronos Air
Technologies, Inc., a Nevada corporation (the “ Subsidiary ”, and together with Borrower, collectively, “ Obligors ” and each, an “ Obligor ”),
have granted Secured Creditors (as hereinafter defined) a security interest in all of the Collateral (as hereinafter defined) for the benefit of
Secured Creditors.
C.
First Lien Creditors have entered into a separate Intercreditor Agreement among themselves pursuant to which First Lien
Creditors have evidenced their mutual agreement and understanding with respect to the priority of the security interests among First Lien
Creditors (the “ First Lien Intercreditor Agreement ”).
D.
First Lien Creditors and Second Lien Creditors wish to agree as to their respective rights, priorities, and interests with
respect to the liens upon and security interests in the Collateral as between First Lien Creditors, on the one hand, and Second Lien Creditors, on
the other hand.
AGREEMENT
In consideration of the foregoing, the mutual covenants contained herein, and for other good and valuable consideration, the receipt
of which First Lien Creditors and Second Lien Creditors hereby acknowledge, First Lien Creditors and Second Lien Creditors hereby agree as
follows:
1.
Definitions .
(a)
Capitalized terms used but not defined herein shall have the meanings given to them in the Funding Agreement. In
addition, the following terms, as used in this Agreement, shall have the following meanings:
1
“ Bankruptcy Code ” means Title 11 of the United States Code entitled “Bankruptcy”, as now or hereafter in effect, or any
successor statute.
“ Bankruptcy Law ” means the Bankruptcy Code and any other federal, state, or foreign law for the relief of debtors.
“ Collateral ” shall mean all assets of the Obligors and all proceeds thereof.
“ Control Collateral ” means any Collateral consisting of a certificated security, investment property, a deposit account, and
any other Collateral as to which a Lien may be perfected through physical possession or control by the secured party, or any agent therefor.
“ Discharge of First Lien Obligations ” means (a) payment in full in cash of the principal of and interest (including interest
accruing on or after the commencement of any Insolvency Proceeding, whether or not a claim for such interest is, or would be, allowed in such
Insolvency Proceeding) constituting First Lien Obligations and termination of all commitments to lend or otherwise extend credit by First Lien
Creditors under the Note Documents and (b) payment in full in cash of all other First Lien Obligations that are due and payable or otherwise
accrued and owing at or prior to the time such principal and interest are paid (including legal fees and other expenses, costs or charges accruing
on or after the commencement of any Insolvency Proceeding, whether or not a claim for such fees, expenses, costs or charges is, or would be,
allowed in such Insolvency Proceeding).
“ Disposition ” or “ Dispose ” means the sale, assignment, transfer, license, lease (as lessor), or other disposition of any
property by any Person (or the granting of any option or other right to do any of the foregoing).
“ Distribution ” means any payment or distribution by any Person of assets of any kind or character (whether in cash,
securities, assets, by set-off, or otherwise and including by purchase redemption or other acquisition).
“ Enforcement Action ” means: (a) the exercise of any right of set-off for the collection of any amounts due in respect of the
Second Lien Obligations; (b) exercise of any Secured Creditor Remedy; or (c) in the event of an Insolvency Proceeding: (i) prosecuting a
motion for relief from the automatic stay to exercise an Enforcement Action, (ii) objecting to First Lien Creditors’ motion for relief from the
automatic stay to foreclose on and sell any of the Collateral or (iii) seeking to provide debtor in possession loans or advances to an Obligor
wherein First Lien Creditors’ liens would be subordinated in priority. Notwithstanding the foregoing, none of the following shall constitute an
“Enforcement Action” for purposes of this Agreement: (x) the delivery of any notice of default or other notice to an Obligor pursuant to or in
connection with any Note Document; (y) the acceleration of the Second Lien Obligations; and (z) the filing by any Second Lien Creditor of a
proof of claim in an Insolvency Proceeding, which proof of claim indicates the subordination of such Second Lien Creditor’s Lien on the
Collateral pursuant hereto.
“ First Lien Note Documents ” means, collectively, the Funding Agreement, the First Lien Notes and the Security Agreement
, together with any amendments, supplements, restatements or other modifications thereof .
“ First Lien Notes ” means, collectively, those Second Convertible Promissory Notes of even date herewith made by
Borrower in favor of First Lien Creditors.
2
“ First Lien Obligations ” means, individually and collectively all obligations of either of the Obligors owing to First Lien
Creditors under or with respect to the Security Agreement or, only with respect to the Borrower, the First Lien Notes and all renewals,
substitutions, modifications, extensions and supplements to any of the foregoing.
“ Funding Agreement ” means that certain Funding Agreement of even date herewith by and among Borrower and First Lien
Creditors.
“ Insolvency Proceeding ” means: (a) any voluntary or involuntary case or proceeding under the Bankruptcy Law with
respect to any Obligor; (b) any other voluntary or involuntary insolvency or Insolvency Proceeding or proceeding, or any receivership,
liquidation or other similar case or proceeding with respect to any Obligor or with respect to a material portion of its assets; (c) any liquidation,
dissolution or winding up of any Obligor, whether voluntary or involuntary and whether or not involving insolvency or bankruptcy; or (d) any
assignment for the benefit of creditors or any other marshaling of assets and liabilities of any Obligor.
“ Note Documents ” means the First Lien Note Documents and the Second Lien Notes.
“ Obligations ” means, individually and collectively, the First Lien Obligations and the Second Lien Obligations.
“ Second Lien Notes ” means, individually and collectively, those Secured Convertible Promissory Notes dated as of April
27, 2007 made by Borrower in favor of Second Lien Creditors.
“ Second Lien Obligations ” means, individually and collectively, all obligations of Borrower under or with respect to the
Second Lien Notes, and all renewals, substitutions, modifications, extensions, and supplements to any of the foregoing.
“ Secured Creditor ” means any of First Lien Creditors or Second Lien Creditors, or any successor or assignee of any of
them, in its capacity as a secured creditor under the Note Documents.
“ Secured Creditor Remedies ” means any action by a Secured Creditor in furtherance of the sale, foreclosure, realization
upon, or the repossession or liquidation of any of the Collateral, including without limitation, (a) the exercise of any remedies or rights of a
“Secured Creditor” under Article 9 of the UCC, such as the notification of account debtors; (b) the exercise of any remedies available to a
judgment creditor; or (c) any other remedy available in respect of the Collateral available to such Secured Creditor under any Note Document
to which it is a party.
“ Security Agreement ” means that certain Security Agreement of even date herewith by and among Borrower and First Lien
Creditors.
“ UCC ” shall have the meaning given to such term in the Security Agreement.
(b)
Unless otherwise set forth herein to the contrary, all terms not otherwise defined herein and which are defined in
the UCC are used herein with the meanings ascribed to them in the UCC. However, if a term is defined in Article 9 of the UCC differently
than in another Article of the UCC, the term has the meaning specified in Article 9 of the UCC.
2.
Permitted Liens and Relative Priorities.
3
(a)
As between the Secured Creditors, notwithstanding (i) the terms (including the description of collateral), dating,
execution, or delivery of any document, instrument, or agreement; the time, order, occurrence, method, or manner of grant, attachment or
perfection of any security interest or lien; the time of filing or recording of any financing statements, assignments, deeds of trust, mortgages,
or any other documents, instruments, or agreements under the UCC or any other applicable law, (ii) the existence of (or the order in which
any Secured Creditor becomes a party to or a beneficiary of) any collateral agency arrangement with any party other than a Secured Creditor,
or the appointment of such other party as a collateral agent to perfect the Secured Creditors’ liens and security interests, in all or in any part
of the Collateral, (iii) the existence of any control agreement in favor of any Secured Creditor or (iv) any provision of the UCC or any other
applicable statute, rule, law, or court decision to the contrary, the Secured Creditors agree that, as to the Collateral of each Obligor:
(i)
First Lien Creditors shall have a first priority security interest in and lien on the Collateral to secure the First
Lien Obligations; and
(ii)
Second Lien Creditors shall have a junior and subordinate security interest in and lien on the Collateral to secure
the Second Lien Obligations.
(b)
For purposes of the foregoing allocation of priorities, any claim or a right to a set-off shall be treated in all respects
as a security interest and no claimed right of set-off shall be asserted to defeat or diminish the rights or priorities provided for herein.
(c)
Each Second Lien Creditor agrees that it will not take any Enforcement Action until the Discharge of the First Lien
Obligations.
3.
No Alteration of Priority . The lien and security interest priorities provided in Section 2 shall not be altered or otherwise
affected by any amendment, modification, supplement, extension, renewal, restatement, or refinancing of any of the Secured Creditor
indebtedness, nor by any action or inaction which any Secured Creditor may take or fail to take in respect of the Collateral, or otherwise. Each
Second Lien Creditor agrees that it will not directly or indirectly take any action to contest or challenge the validity, legality, perfection,
priority, avoidability, or enforceability of the liens or security interests of First Lien Creditors upon the Collateral or seek to have the same
avoided, disallowed, set aside, or otherwise invalidated in any judicial proceeding or otherwise.
4.
Payments Made to Second Lien Creditors . Notwithstanding anything to the contrary in this Agreement, each Second Lien
Creditor shall be entitled to receive and retain payments of principal and interest made by Borrower to such Second Lien Creditor during the
term of this Agreement.
5.
Agent for Perfection . Each Secured Creditor agrees to hold (or cause to be held) all Control Collateral in its possession,
custody, or control (or in the possession, custody, or control of agents, bailees, or other similar third parties) as non-fiduciary agent for the other
Secured Creditors solely for the purpose of perfecting the security interest granted to each in such Control Collateral subject to the terms and
conditions of this Agreement. No Secured Creditor shall have any obligation whatsoever to the others to assure that the Control Collateral is
genuine or owned by any Obligor or any other Person or to preserve their respective rights or benefits or those of any Person. The duties or
responsibilities of each Secured Creditor under this Section 5 are and shall be limited solely to holding or maintaining control of the Control
Collateral as non-fiduciary agent for the other Secured Creditors for purposes of perfecting the Liens held by First Lien Creditors or Second
Lien Creditors, as applicable. First Lien Creditors are not and shall not be deemed to be a fiduciary of any kind for Second Lien Creditors or
any other Person.
4
6.
Management of Collateral . Notwithstanding anything to the contrary contained in any of the Note Documents, until Discharge
of the First Lien Obligations has occurred: (a) First Lien Creditors shall have the exclusive right to manage the Collateral, including the
exclusive right to perform and enforce the terms of the Note Documents with respect to the Collateral and to exercise and enforce all privileges
and rights thereunder according to First Lien Creditors’ sole discretion, including, without limitation, the exclusive right to enforce or settle
insurance claims with respect to the Collateral, to pay, compromise, or settle competing claims, liens, or security interests affecting the
Collateral, to take or retake control or possession of the Collateral, and to hold, prepare for sale, sell, lease, or liquidate the Collateral; (b)
neither Second Lien Creditors nor any Person acting on their behalf shall exercise any Secured Party Remedies with respect to the Collateral;
and (c) any and all proceeds of the Collateral which shall come into the possession, control, or custody of any Second Lien Creditor will be
deemed to have been received for the account of any First Lien Creditor and shall be immediately delivered or paid, as applicable, over to First
Lien Creditors. In connection with the provisions of Second 6(a) , each Second Lien Creditor waives any and all rights to affect the method or
challenge the appropriateness of any action by First Lien Creditors with respect to the Collateral, and waives any claims or defenses it may
have against First Lien Creditors, including any such claims or defenses based on any actions or omissions of any such person, in connection
with the perfection, maintenance, enforcement, foreclosure, sale, liquidation, or release of any lien or security interest therein by First Lien
Creditors, or any modification or waiver of any Note Documents, except as provided or limited under this Agreement.
7.
Sale of Collateral . Until the Discharge of the First Lien Obligations has occurred: (a) only First Lien Creditors shall have the
right to restrict or permit, or approve or disapprove, the sale or disposition of the Collateral; and (b) immediately upon the sale or disposition of
such Collateral by any Obligor with the consent of First Lien Creditors or by or on behalf of First Lien Creditors in connection with the
exercise of its Secured Creditor Remedies, each Second Lien Creditor’s lien and security interest upon the Collateral sold shall be
automatically, unconditionally and simultaneously released, and each Second Lien Creditor will promptly deliver (at Obligors’ expense) such
release, reconveyance, and termination documents as any First Lien Creditor or any Obligor may reasonably require in connection therewith.
8.
Insurance . In the event of the occurrence of a fire or other casualty resulting in damage to all or any portion of any Collateral
(collectively, a “ Casualty ”):
(a)
each Second Lien Creditor hereby waives any right to participate or join in any adjustment, compromise or
settlement of any claims resulting from a Casualty with respect to any Collateral;
(b)
all proceeds received or to be received on account of a Casualty shall be applied in the manner or manners
provided for in the Note Documents; and
(c)
each Second Lien Creditor agrees to execute and deliver to First Lien Creditors any documents, instruments,
agreements or further assurances reasonably required to effectuate any of the foregoing.
9.
Insolvency Proceeding .
(a)
0 Enforceability and Continuing Priority . This Agreement shall be applicable both before and after the
commencement of any Insolvency Proceeding and all converted or succeeding cases in respect thereof. The relative rights of First Lien
Creditors and Second Lien Creditors in or to any distributions from or in respect of any Collateral or proceeds of Collateral shall continue after
the commencement of any Insolvency Proceeding. Accordingly, the provisions of this Agreement are intended to be and shall be enforceable as
a subordination agreement within the meaning of Section 510 of the Bankruptcy Code.
5
(b)
Financing . Until Discharge of the First Lien Obligations has occurred, if any Obligor shall be subject to any
Insolvency Proceeding and First Lien Creditors consent to the use of cash collateral (as such term is defined in Section 363(a) of the
Bankruptcy Code; herein, “ Cash Collateral ”) on which any First Lien Creditor has a Lien or to permit any Obligor to obtain financing
provided by any First Lien Creditor under Section 364 of the Bankruptcy Code or any similar Bankruptcy Law (such financing, together with
any Cash Collateral use, collectively a “ DIP Financing ”), then each Second Lien Creditor agrees that it will consent to such Cash Collateral
use and raise no objection to such DIP Financing and, to the extent the Liens securing the First Lien Obligations are discharged, subordinated
to or pari passu with such DIP Financing, each Second Lien Creditor will subordinate its Liens in the Collateral to the Liens securing such
DIP Financing. If any First Lien Creditor offers to provide DIP Financing that meets the requirements set forth above, each Second Lien
Creditor agrees that it shall not, directly or indirectly, (x) provide or offer to provide DIP Financing or support any DIP Financing secured by a
Lien senior to or pari passu with the Liens securing the First Lien Obligations, or (y) request or accept any form of adequate protection or any
other relief except as provided in Section 9(e)(ii) . In connection with any DIP Financing, if any Liens on the Collateral held by First Lien
Creditors are subject to a surcharge or are subordinated to an administrative priority claim, a professional fee “carve out,” or fees owed to the
United States Trustee, then the Liens on the Collateral of each Second Lien Creditor shall also be subordinated to such interest or claim and
shall remain subordinated to the Liens on the Collateral of First Lien Creditors consistent with this Agreement.
(c)
Sales . Until Discharge of the First Lien Obligations has occurred, each Second Lien Creditor agrees that it will
consent to the Disposition of, and will not object or oppose a motion to Dispose of, any Collateral free and clear of the Liens or the claims that
are in favor of such Second Lien Creditor under Section 363 of the Bankruptcy Code if First Lien Creditors have consented to such Disposition
of such assets free and clear of the Liens of the claims that are in favor of First Lien Creditors.
(d)
Relief from the Automatic Stay . Until Discharge of the First Lien Obligations has occurred, each Second Lien
Creditor agrees that it shall not seek (or support any other person seeking) relief from the automatic stay or any other stay in any Insolvency
Proceeding in respect of the Collateral, without the prior written consent of First Lien Creditors.
(e)
Adequate Protection .
(i)
First Lien Creditors . In any Insolvency Proceeding involving an Obligor, each Second Lien Creditor agrees that it shall not contest
(or support any other person contesting):
(A)
any request by any First Lien Creditor for adequate protection (whether in the form of payments, liens, a priority administrative
expense claim or otherwise);
(B)
any objection by any First Lien Creditor to any motion, relief, action, or proceeding based on any First Lien Creditor claiming a
lack of adequate protection (whether in the form of payments, liens, a priority administrative expense claim or otherwise);
(C)
the payment of interest, fees, expenses, or other amounts to any First Lien Creditor under Section 506(b) or 506(c) of the
Bankruptcy Code or otherwise.
(ii)
(A)
Second Lien Creditors . In any Insolvency Proceeding involving an Obligor:
Replacement Liens .
6
(1)
Until Discharge of the First Lien Obligations has occurred, if any First Lien Creditor is granted adequate protection in the form of
a replacement Lien (on existing or future assets of Obligors) in connection with any DIP Financing, then each Second Lien Creditor shall also
be entitled to seek, without objection from First Lien Creditors, adequate protection in the form of a replacement Lien (on existing or future
assets of Obligors), which replacement Lien, if obtained, shall be subordinate to the Liens securing the First Lien Obligations and the Liens
securing such DIP Financing on the same basis as the other Liens securing the Second Lien Obligations are subordinate to the First Lien
Obligations under this Agreement; and
(2)
In the event that Second Lien Creditors are granted adequate protection in the form of a replacement Lien (on existing or future
assets of Obligors), then each Second Lien Creditor agrees that each First Lien Creditor shall also be entitled to seek, without objection from
Second Lien Creditors, a senior adequate protection Lien on existing or future assets of Obligors as security for the First Lien Obligations and
for any DIP Financing provided by any First Lien Creditor. Any adequate protection Lien on such existing or future assets securing the Second
Lien Obligations shall be subordinated (i) to the Lien on such collateral securing the First Lien Obligations and any such DIP Financing
provided by any First Lien Creditor, and (ii) to any other Liens granted to any First Lien Creditor as adequate protection on the same basis as
the other Liens securing the Second Lien Obligations are so subordinated to such First Lien Obligations under this Agreement.
(B)
No Distributions . In any Insolvency Proceeding involving an Obligor, Second Lien Creditors shall seek neither (a) adequate
protection in the form of Distributions in respect of the Second Lien Obligations nor (b) adequate protection in the form of Distributions with
respect to their rights to the Collateral.
(iii)
Allowance of Postpetition Accrual . Second Lien Creditors shall not object to, oppose or challenge any claim by any First Lien
Creditor for allowance in any Insolvency Proceeding of First Lien Obligations consisting of post-petition interest, fees, or expenses.
(f)
Section 1111(b) of the Bankruptcy Code . Second Lien Creditors shall not object to, oppose, support any objection,
or take any other action to impede, the right of any First Lien Creditor to make an election under Section 1111(b)(2) of the Bankruptcy Code.
Each Second Lien Creditor waives any claim it may hereafter have against any First Lien Creditor arising out of the election by any First Lien
Creditor of the application of Section 1111(b)(2) of the Bankruptcy Code.
(g)
No Waiver . Nothing contained herein shall prohibit or in any way limit First Lien Creditors from objecting in any
Insolvency Proceeding involving an Obligor to any action taken by any Second Lien Creditor, including the seeking by such Second Lien
Creditor of adequate protection or the assertion by such Second Lien Creditor of any of its rights and remedies under the Note Documents.
(h)
Avoidance Issues . If any First Lien Creditor is required in any Insolvency Proceeding or otherwise to turn over,
disgorge or otherwise pay to the estate of any Obligor any amount paid in respect of the First Lien Obligations (a “ First Lien Creditor
Recovery ”), then such First Lien Creditor shall be entitled to a reinstatement of First Lien Obligations with respect to all such recovered
amounts, and all rights, interests, priorities and privileges recognized in this Agreement shall apply with respect to any such First Lien Creditor
Recovery. If this Agreement shall have been terminated prior to such First Lien Creditor Recovery, this Agreement shall be reinstated in full
force and effect, and such prior termination shall not diminish, release, discharge, impair, or otherwise affect the obligations of the parties
hereto from such date of reinstatement. Collateral or proceeds thereof received by any Second Lien Creditor after a Discharge of First Lien
Obligations and prior to the reinstatement of such First Lien Obligations shall be delivered to First Lien Creditors upon such reinstatement in
accordance with Section 9(j) .
7
(i)
Plan of Reorganization .
(a)
If, in any Insolvency Proceeding, debt obligations of the reorganized debtor secured by Liens upon any property of the reorganized
debtor are distributed pursuant to a plan of reorganization or similar dispositive restructuring plan, both on account of First Lien Obligations
and on account of Second Lien Obligations, then, to the extent the debt obligations distributed on account of the First Lien Obligations and on
account of the Second Lien Obligations are secured by Liens upon the same property, the provisions of this Agreement will survive the
distribution of such debt obligations pursuant to such plan and will apply with like effect to the Liens securing such debt obligations, and
(b)
No Second Lien Creditor shall propose or support any plan of reorganization that is inconsistent with the priorities or other
provisions of this Agreement.
(j)
Payments Held in Trust/Turnover . In the event that, notwithstanding the foregoing provisions of this Section 9 , any
Distribution in respect of the Second Lien Obligations prohibited by this Agreement shall be received by any Second Lien Creditor before there
has been a Discharge of the First Lien Obligations, such Distribution shall be held in trust for the benefit of and shall be paid over to or
delivered to First Lien Creditors, until there has been a Discharge of the First Lien Obligations.
10.
Notice of Default and Certain Events . Each Second Lien Creditor shall promptly notify First Lien Creditors in writing of
the occurrence of any of the following as applicable:
11.
(a)
any default or event of default under the Second Lien Note issued to such Second Lien Creditor; or
(b)
the demand for payment of, acceleration of or termination of any of the Second Lien Obligations.
Further Assurances .
(a)
Additional Documents . Each Second Lien Creditor agrees to execute and deliver, upon the request of First Lien
Creditors, such documents and instruments (appropriate for filing, if requested) as may be necessary or appropriate to fully implement or to
fully evidence the understandings and agreements contained in this Agreement. Without limiting the foregoing, in the event that all or part of
any of the First Lien Obligations is hereafter refinanced, each Second Lien Creditor agrees to enter into one or more new agreements with the
refinancing lender or lenders on terms identical to those of this Agreement.
(b)
Attorney in Fact . Each First Lien Creditor is hereby irrevocably constituted and appointed the attorney-in-fact of
each Second Lien Creditor in order to take all action, either in such First Lien Creditor’s name or in the name of such Second Lien Creditor,
which in such First Lien Creditor’s reasonable opinion is necessary or desirable to enable such First Lien Creditor to obtain all Distributions
that are to be turned over to such First Lien Creditor pursuant to this Agreement.
12.
Representations; Warranties . Each Second Lien Creditor represents and warrants to each First Lien Creditor that: (a) such
Second Lien Creditor is the holder of the liens and security interests which secure or will secure the Second Lien Obligations; (b) there do not
exist any currently effective subordinations of the Second Lien Obligations or of such Second Lien Creditor’s liens and security interests in the
Collateral; (c) such Second Lien Creditor is currently informed of the financial condition of each Obligor and of all other circumstances which
bear upon the risk of nonpayment of the First Lien Obligations; and (d) it has full right, power, and authority to enter into this Agreement and,
to the extent such Second Lien Creditor is an agent or trustee for other parties, that this Agreement shall fully bind all such other parties.
8
13.
Modification of First Lien Obligations . Each Second Lien Creditor agrees that each First Lien Creditor shall have absolute
power and discretion, without notice to such Second Lien Creditor, to deal in any manner with the First Lien Obligations, including, but not by
way of limitation, the power and discretion to do any of the following: (a) any demand for payment of any First Lien Obligations may be
rescinded in whole or in part, and any First Lien Obligations may be continued, and the First Lien Obligations or the liability of any Obligor
upon or for any part thereof, or any Collateral or guaranty therefor, or right of offset with respect thereto, may, from time to time, in whole or in
part, be renewed, modified, accelerated, compromised, waived, surrendered, or released; and (b) the First Lien Notes issued to First Lien
Creditors may be amended, modified, supplemented, or terminated, in whole or in part, as First Lien Creditors may deem advisable from time
to time, and any Collateral may be sold, exchanged, waived, surrendered, or released. Each Second Lien Creditor will remain bound under this
Agreement, and the subordination provided for herein shall not be impaired, abridged, released, or otherwise affected notwithstanding any such
renewal, modification, acceleration, compromise, amendment, supplement, termination, sale, exchange, waiver, surrender, or release. All
dealings between First Lien Creditors and any Obligor shall be deemed to have been consummated in reliance upon this Agreement.
14.
Waivers by Second Lien Creditors .
(a)
First Lien Obligations .
(i)
All First Lien Obligations at any time incurred by any Obligor shall be deemed to have been incurred, and all First Lien
Obligations held by First Lien Creditors shall be deemed to have been extended, acquired or obtained, as applicable, in reliance
upon this Agreement, and each Second Lien Creditor hereby waives (i) notice of acceptance, or proof of reliance, by each First Lien
Creditors of this Agreement, and (ii) notice of the existence, renewal, extension, accrual, creation, or non-payment of all or any part
of the First Lien Obligations. Nothing contained in this Agreement shall preclude any First Lien Creditor from discontinuing the
extension of credit to any Obligor (whether under the Note Documents or otherwise) or from taking (without notice to any Second
Lien Creditor, any Obligor, or any other Person) any other action in respect of the First Lien Obligations or the Collateral which any
First Lien Creditor is otherwise entitled to take with respect to the First Lien Obligations or the Collateral.
(ii)
None of First Lien Creditors or any of their affiliates, directors, officers, employees, or agents shall be liable for failure to
demand, collect, or realize upon any of the Collateral or any Proceeds or for any delay in doing so or shall be under any obligation
to sell or otherwise Dispose of any Collateral or Proceeds thereof or to take any other action whatsoever with regard to the
Collateral or any part or Proceeds thereof. If any First Lien Creditor should exercise any of its contractual rights or remedies under
the Note Documents (subject to the express terms and conditions hereof), First Lien Creditors shall not have any liability
whatsoever to any Second Lien Creditor as a result of such action, omission, or exercise. First Lien Creditors will be entitled to
manage and supervise their loans and extensions of credit under the Note Documents as First Lien Creditors may, in their sole
discretion, deem appropriate, and First Lien Creditors may manage their loans and extensions of credit without regard to any rights
or interests that any Second Lien Creditor may have in the Collateral or otherwise except as otherwise expressly set forth in this
Agreement. Each Second Lien Creditor agrees that First Lien Creditors shall not incur any liability as a result of a sale, lease,
license, application or other Disposition of all or any portion of the Collateral or any part or Proceeds thereof. First Lien Creditors
may, from time to time, enter into agreements and settlements with Obligors as they may determine in their sole discretion without
impairing any of the subordinations, priorities, rights or obligations of the parties under this Agreement, including, without
limitation, substituting Collateral, releasing any Lien and releasing any Obligor. Each Second Lien Creditor waives any and all
rights it may have to require any First Lien Creditor to marshal assets, to exercise rights or remedies in a particular manner, or to
forbear from exercising such rights and remedies in any particular manner or order.
9
(b)
Notice of Acceptance and Other Waivers . To the fullest extent permitted by applicable law, each Second Lien Creditor
hereby waives: (i) notice of acceptance hereof; (ii) notice of any loans or other financial accommodations made or extended under the First
Lien Notes, or the creation or existence of any First Lien Obligations; (iii) notice of the amount of the First Lien Obligations; (iv) notice of any
adverse change in the financial condition of any Obligor or of any other fact that might increase such Second Lien Creditor’s risk hereunder;
(v) notice of presentment for payment, demand, protest, and notice thereof as to the First Lien Notes; and (vi) all other notices (except if such
notice is specifically required to be given to such Second Lien Creditor under this Agreement or any Note Document) and demands to which
such Second Lien Creditor might otherwise be entitled.
(c)
Lawsuits; Defenses; Set-off . To the fullest extent permitted by applicable law, each Second Lien Creditor (i) waives the
right by statute or otherwise to require any First Lien Creditor to institute suit against any Obligor or to exhaust any rights and remedies which
any First Lien Creditor has or may have against any Obligor; (ii) waives any defense arising by reason of any disability or other defense (other
than the defense that the Discharge of the First Lien Obligations has occurred (subject to the provisions of Section 9(c) ) of any Obligor or by
reason of the cessation from any cause whatsoever of the liability of such Obligor in respect thereof, (iii) waives any rights to assert against any
First Lien Creditor any defense (legal or equitable), set-off, counterclaim, or claim which such Second Lien Creditor may now or at any time
hereafter have against any Obligor or any other party liable to any First Lien Creditor or such Second Lien Creditor, (iv) waives any defense
arising by reason of any claim or defense based upon an election of remedies by any First Lien Creditor; and (vi) waives the benefit of any
statute of limitations affecting such Second Lien Creditor’s obligations hereunder or the enforcement thereof, and any act which shall defer or
delay the operation of any statute of limitations applicable to the First Lien Obligations shall similarly operate to defer or delay the operation of
such statute of limitations applicable to such Second Lien Creditor’s obligations hereunder.
(d)
Subrogation . Solely after Discharge of the First Lien Obligations shall have occurred, Second Lien Creditors shall be
subrogated to the rights of First Lien Creditors to the extent that distributions otherwise payable to Second Lien Creditors have been applied to
the payment of the First Lien Obligations in accordance with the provisions of this Agreement. First Lien Creditors shall have no obligation or
duty to protect any of Second Lien Creditors’ rights of subrogation arising pursuant to this Agreement or under any applicable law, nor shall
First Lien Creditors be liable for any loss to, or impairment of, any subrogation rights held by Second Lien Creditors.
(e)
ELECTION OF REMEDIES . WITHOUT LIMITING THE GENERALITY OF ANY OTHER WAIVER OR OTHER
PROVISION SET FORTH IN THIS AGREEMENT, EACH SECOND LIEN CREDITOR WAIVES, TO THE FULLEST EXTENT
PERMITTED BY LAW, ALL RIGHTS AND DEFENSES ARISING OUT OF AN ELECTION OF REMEDIES BY FIRST LIEN
CREDITOR, EVEN THOUGH THAT ELECTION OF REMEDIES HAS DESTROYED THE RIGHTS OF SUBROGATION OF SECOND
LIEN CREDITORS AND REIMBURSEMENT AGAINST ANY OBLIGOR BY THE OPERATION OF ANY APPLICABLE LAW.
10
15.
Parties Intended to be Benefited . All of the understandings, covenants, and agreements contained herein are solely for the
benefit of First Lien Creditors and Second Lien Creditors, and there are no other parties, including Obligors or any of the creditors, successors,
or assigns of Obligors, which are intended to be benefited, in any way, by this Agreement.
16.
No Limitation Intended . Nothing contained in this Agreement is intended to or shall affect or limit, in any way, the rights that
the Secured Creditors have with respect to any third parties. The Secured Creditors hereby specifically reserve all of their respective rights
against Obligors and all other third parties. The First Lien Creditors hereby acknowledge that each of them have received, or had an
opportunity to receive, and have had an opportunity to review the Second Lien Notes and documents related thereto and acknowledge and
ratify such agreements and the terms thereof except as specifically modified herein.
17.
Notices . All notices and other communications required or permitted hereunder shall be in writing and shall be deemed
effectively given upon personal delivery, delivery by recognized overnight courier (such as FedEx) or upon receipt of confirmation of delivery
by facsimile, telecopy, or registered or certified mail, return receipt requested, postage prepaid, addressed:
to First Lien Creditors :
AirWorks Funding LLLP
655 Madison Avenue
23rd Floor
New York, New York 10021
Attn: Richard E. Perlman
Telephone: (212) 223-8633
Facsimile: (212) 888-8133
with a copy to :
Paul, Hastings, Janofsky & Walker LLP
600 Peachtree Street
Suite 2400
Atlanta, Georgia 30308
Attn: Reinaldo Pascual
Telephone: (404) 815-2227
Facsimile: (404) 685-5227
with a copy to :
RS Properties I LLC
111 Broadway
8th Floor
New York, New York 10006
Attn: John Lack
Telephone: (212) 542-8201
Facsimile: (212) 542-8212
11
to Second Lien Creditors :
Richard A. Sun
10182 Castlewood Lane
Oakton, VA 22124
Telephone: (___) _____-__________
Facsimile: (___) _____-__________
and :
Fredric R. Gumbinner
11200 Sorrel Ridge Lane
Oakton, VA 22124
Telephone: (703) 577-6696
Facsimile: (703) 262-6696
18.
Severability . Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Agreement 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 provision or the remaining provisions of
this Agreement.
19.
Complete Agreement . Except with respect to the First Lien Intercreditor Agreement, this Agreement constitutes the complete
agreement and understanding of each of the Secured Creditors and supersedes all prior or contemporaneous oral and written negotiations,
agreements and understandings, express or implied, with respect to the subject matter hereof.
20.
Successors and Assigns . This Agreement shall be binding upon, and inure to the benefit of, the successors and assigns of First Lien
Creditors and Second Lien Creditors. Each Second Lien Creditor agrees that it shall not assign or transfer any of the Second Lien Obligations
or any of its rights under the Note Documents (including any liens and security interests in the Collateral) without (a) prior notice being given
to First Lien Creditors and (b) such assignment or transfer being made expressly subject to the terms of this Agreement.
21.
Waiver of Jury Trial . EACH SECURED CREDITOR HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF
ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (A) ARISING UNDER THIS AGREEMENT OR ANY OTHER
INSTRUMENT, DOCUMENT, OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR (B) IN ANY WAY
CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF FIRST LIEN CREDITORS AND SECOND LIEN
CREDITORS WITH RESPECT TO THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED
OR DELIVERED BY THEM IN CONNECTION HEREWITH, OR THE TRANSACTIONS RELATED HERETO OR THERETO, IN EACH
CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR TORT OR
OTHERWISE. EACH SECURED CREDITOR HEREBY AGREES AND CONSENTS THAT ANY CLAIM, DEMAND, ACTION OR
CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT JURY, AND THAT EITHER OF THEM MAY FILE AN
ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT TO
THE WAIVER OF RIGHT TO TRIAL BY JURY.
12
22.
Waivers, Amendments, Choice of Law, etc . Any waiver or amendment hereunder must be evidenced by a signed writing of a party to
be bound thereby, and shall only be effective in the specific instance. This Agreement shall be governed by and construed under the laws of the
State of New York as applied to agreements among residents of New York made and to be performed entirely within the State of New York.
Each party to this Agreement hereby irrevocably agrees that any legal suit, action or proceeding arising out of or relating to this Agreement or
the transactions contemplated hereunder may be brought in the courts of New York County in the State of New York or of the United States of
America for the Southern District of New York, and hereby expressly submits to the personal jurisdiction and venue of such courts for the
purposes thereof and expressly waives any claim of improper venue and any claim that such courts are an inconvenient forum. Each party
hereby irrevocably consents to the service of process of any of the aforementioned courts in any such suit, action or proceeding, by the mailing
of copies thereof by registered or certified mail, postage prepaid, to its address set forth in the Funding Agreement, such service to become
effective ten (10) days after such mailing. The headings in this Agreement are for convenience of reference only, and shall not alter or
otherwise affect the meaning hereof.
23.
Construction . Unless the context of this Agreement clearly requires otherwise, references to the plural include the singular,
the singular includes the plural, the part includes the whole, “including” is not limiting, and “or” has the inclusive meaning represented by the
phrase “and/or.” The words “hereof,” “herein,” “hereby,” “hereunder,” and similar terms in this Agreement refer to this Agreement as a whole
and not to any particular provision of this Agreement. Article, section, subsection, exhibit, and schedule references are to this Agreement unless
otherwise specified.
24.
Costs and Attorneys Fees . In the event it becomes necessary for any First Lien Creditor to commence or become a party to
any proceeding or action to enforce the provisions of this Agreement, the court or body before which the same shall be tried shall award to such
First Lien Creditor all costs and expenses thereof, including, but not limited to, reasonable attorneys’ fees, the usual and customary and
lawfully recoverable court costs, and all other expenses in connection therewith.
25.
Information Concerning Financial Condition . Each Second Lien Creditor hereby assumes responsibility for keeping itself
informed of the financial condition of Obligors and of all other circumstances bearing upon the risk of nonpayment of the Second Lien
Obligations, and agrees that First Lien Creditors have and shall have no duty to advise any Second Lien Creditor of information known to First
Lien Creditors regarding such condition or any such circumstances. In the event that First Lien Creditors, in their sole discretion, undertake, at
any time or from time to time, to provide any such information to any Second Lien Creditor, then First Lien Creditors shall not be under any
obligation (a) to provide any such information to any Second Lien Creditor on any subsequent occasion, (b) to undertake any investigation, or
(c) to disclose any information which, pursuant to its commercial finance practices, First Lien Creditors wish to maintain confidential. Each
Second Lien Creditor acknowledges and agrees that First Lien Creditors have not made any warranties or representations with respect to the
legality, validity, enforceability, collectibility or perfection of the First Lien Obligations or any liens or security interests held in connection
therewith.
13
26.
Counterparts . This Agreement may be executed in any number of counterparts, and by First Lien Creditors and Second Lien
Creditors in separate counterparts, each of which shall be an original, but all of which shall together constitute one and the same Agreement.
Delivery of an executed counterpart of a signature page of this Agreement or any document or instrument delivered in connection herewith by
telecopy or electronic transmission shall be effective as delivery of a manually executed counterpart of this Agreement or such other document
or instrument, as applicable.
[Remainder of page intentionally left blank]
14
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first herein above set
forth.
FIRST LIEN CREDITORS:
SANDS BROTHERS VENTURE CAPITAL LLC
By:
/s/ Scott A. Bailey
Name: Scott A. Bailey
Its: COO
SANDS BROTHERS VENTURE CAPITAL II LLC
By:
/s/ Scott A. Bailey
Name: Scott A. Bailey
Its: COO
SANDS BROTHERS VENTURE CAPITAL III LLC
By:
/s/ Scott A. Bailey
Name: Scott A. Bailey
Its: COO
SANDS BROTHERS VENTURE CAPITAL IV LLC
By:
/s/ Scott A. Bailey
Name: Scott A. Bailey
Its: COO
CRITICAL CAPITAL GROWTH FUND, L.P.
By: Critical Capital, L.P., its general partner
By: Critical Capital Corporation, its general partner
By:
/s/ Steven B. Sands
Name: Steven B. Sands
Its: Chairman
By:
/s/ Charles L. Robinson
Name: Charles L. Robinson
Its: President
AIRWORKS FUNDING LLLP
By: Compass Partners, LLC, its general partner
By:
/s/ Richard E. Perlman
Name: Richard E. Perlman
Its: President
S-1
Sun and Gumbinner Intercreditor Agreement
RS PROPERTIES I LLC
By:
/s/ John Lack
Name: John Lack
Its: Manager
SECOND LIEN CREDITORS:
/s/ Richard A. Sun
Richard A. Sun
/s/ Fredric R. Gumbinner by Richard A. Sun AIF
Richard A. Sun, as attorney-in-fact for Fredric R. Gumbinner
S-2
Sun and Gumbinner Intercreditor Agreement
ACKNOWLEDGMENT
Each of the undersigned hereby acknowledges receipt of a copy of the foregoing Intercreditor Agreement (initially capitalized terms
used without definitions herein shall have the meaning ascribed to such terms in the Intercreditor Agreement) and consents thereto, and agrees
to recognize all rights granted thereby to the parties thereto, and will not do any act or perform any obligation which is not in accordance with
the agreements set forth in such Intercreditor Agreement. Each of the undersigned further acknowledges that no Obligor is an intended
beneficiary under the Intercreditor Agreement.
Dated as of June 19, 2007.
KRONOS ADVANCED TECHNOLOGIES, INC.
By:
/s/ Richard F. Tusing
Name: Richard F. Tusing
Its: COO
KRONOS AIR TECHNOLOGIES, INC.
By:
/s/ Richard F. Tusing
Name: Richard F. Tusing
Its: COO
S-3
Sun and Gumbinner Intercreditor Agreement
Exhibit 8
INTERCREDITOR AGREEMENT
This INTERCREDITOR AGREEMENT (this “ Agreement ”) is entered into as of June 19, 2007, among Sands Brothers Venture
Capital LLC, a New York limited liability company (“ Sands I ”), Sands Brothers Venture Capital II LLC, a New York limited liability
company (“ Sands II ”), Sands Brothers Venture Capital III LLC, a New York limited liability company (“ Sands III ”), Sands Brothers Venture
Capital IV LLC, a New York limited liability company (“ Sands IV ”), and Critical Capital Growth Fund, L.P., a Delaware limited partnership
and a debenture licensed U.S. Small Business Investment Company (“ CCGF ”) (Sands I, Sands II, Sands III, Sands IV and CCGF are
collectively, the “ First Lien Creditors ,” and each, a “ First Lien Creditor ”), AirWorks Funding LLLP, a Georgia limited liability limited
partnership (“ AirWorks ”) and RS Properties I LLC, a Delaware limited liability company (“ RS Properties ”, and together with AirWorks,
collectively, “ Second Lien Creditors ” and each, a “ Second Lien Creditor ”), in light of the following:
RECITALS
A.
Kronos Advanced Technologies, Inc., a Nevada corporation (“ Borrower ”), has issued to First Lien Creditors and each of Second Lien
Creditors those certain Secured Convertible Promissory Notes dated the date hereof in the aggregate amount of $18,159,000 pursuant to that
certain Funding Agreement dated as of the date hereof among Borrower, First Lien Creditors and Second Lien Creditors (as amended,
supplemented, restated or otherwise modified from time to time, the “ Funding Agreement ”).
B.
As security for the prompt payment and performance of the Obligations (as hereinafter defined), Borrower and Kronos Air Technologies,
Inc., a Nevada corporation (the “ Subsidiary ”, and together with Borrower, collectively, “ Obligors ” and each, an “ Obligor ”), have granted
Secured Creditors (as hereinafter defined) a security interest in all of the Collateral (as hereinafter defined) for the benefit of Secured Creditors
pursuant to that certain Security Agreement dated as of the date hereof among Obligors and Secured Creditors (as amended, supplemented,
restated or otherwise modified from time to time, the “ Security Agreement ”).
C.
First Lien Creditors and Second Lien Creditors wish to agree as to their respective rights, priorities, and interests with respect to the liens
upon and security interests in the Collateral.
AGREEMENT
In consideration of the foregoing, the mutual covenants contained herein, and for other good and valuable consideration, the receipt
of which First Lien Creditors and Second Lien Creditors hereby acknowledge, First Lien Creditors and Second Lien Creditors hereby agree as
follows:
1.
Definitions .
(a)
Capitalized terms used but not defined herein shall have the meanings given to them in the Funding Agreement. In
addition, the following terms, as used in this Agreement, shall have the following meanings:
“ Bankruptcy Code ” means Title 11 of the United States Code entitled “Bankruptcy”, as now or hereafter in effect, or any
successor statute.
“ Bankruptcy Law ” means the Bankruptcy Code and any other federal, state, or foreign law for the relief of debtors.
1
“ Collateral ” shall have the meaning given to such term in the Security Agreement.
“ Control Collateral ” means any Collateral consisting of a certificated security, investment property, a deposit account, and
any other Collateral as to which a Lien may be perfected through physical possession or control by the secured party, or any agent therefor.
“ Discharge of First Lien Obligations ” means (a) payment in full in cash of the principal of and interest (including interest
accruing on or after the commencement of any Insolvency Proceeding, whether or not a claim for such interest is, or would be, allowed in such
Insolvency Proceeding) constituting First Lien Obligations and termination of all commitments to lend or otherwise extend credit by First Lien
Creditors under the Note Documents and (b) payment in full in cash of all other First Lien Obligations that are due and payable or otherwise
accrued and owing at or prior to the time such principal and interest are paid (including legal fees and other expenses, costs or charges accruing
on or after the commencement of any Insolvency Proceeding, whether or not a claim for such fees, expenses, costs or charges is, or would be,
allowed in such Insolvency Proceeding).
“ Disposition ” or “ Dispose ” means the sale, assignment, transfer, license, lease (as lessor), or other disposition of any
property by any Person (or the granting of any option or other right to do any of the foregoing).
“ Distribution ” means any payment or distribution by any Person of assets of any kind or character (whether in cash,
securities, assets, by set-off, or otherwise and including by purchase redemption or other acquisition).
“ Enforcement Action ” means: (a) the exercise of any right of set-off for the collection of any amounts due in respect of the
Second Lien Obligations; (b) exercise of any Secured Creditor Remedy; or (c) in the event of an Insolvency Proceeding: (i) prosecuting a
motion for relief from the automatic stay to exercise an Enforcement Action, (ii) objecting to First Lien Creditors’ motion for relief from the
automatic stay to foreclose on and sell any of the Collateral or (iii) seeking to provide debtor in possession loans or advances to an Obligor
wherein First Lien Creditors’ liens would be subordinated in priority. Notwithstanding the foregoing, none of the following shall constitute an
“Enforcement Action” for purposes of this Agreement: (x) the delivery of any notice of default or other notice to an Obligor pursuant to or in
connection with any Note Document; (y) the acceleration of the Second Lien Obligations; and (z) the filing by any Second Lien Creditor of a
proof of claim in an Insolvency Proceeding, which proof of claim indicates the subordination of such Second Lien Creditor’s Lien on the
Collateral pursuant hereto.
“ First Lien Obligations ” means any and all Obligations of Obligors owed to First Lien Creditors under the Note Documents
(but excluding any Obligations owed to a First Lien Creditor by virtue of its partnership interest in Airworks).
“ Insolvency Proceeding ” means: (a) any voluntary or involuntary case or proceeding under the Bankruptcy Law with
respect to any Obligor; (b) any other voluntary or involuntary insolvency or Insolvency Proceeding or proceeding, or any receivership,
liquidation or other similar case or proceeding with respect to any Obligor or with respect to a material portion of its assets; (c) any liquidation,
dissolution or winding up of any Obligor, whether voluntary or involuntary and whether or not involving insolvency or bankruptcy; or (d) any
assignment for the benefit of creditors or any other marshaling of assets and liabilities of any Obligor.
2
“ Note Documents ” means, collectively, the Funding Agreement, the Notes and the Security Agreement and all other notes,
mortgages, deeds of trust, instruments, guarantees and other agreements, documents and instruments at any time executed or delivered by any
Obligor or any other person with, to or in favor of a Secured Creditor in connection therewith or related thereto , together with any
amendments, supplements, restatements or other modifications thereof .
“ Obligations ” shall have the meaning given to such term in the Security Agreement.
“ Second Lien Obligations ” means any and all Obligations of Obligors owed to Second Lien Creditors under the Note
Documents.
“ Secured Creditor ” means any of First Lien Creditors or Second Lien Creditors, or any successor or assignee of any of
them, in its capacity as a secured creditor under the Note Documents.
“ Secured Creditor Remedies ” means any action by a Secured Creditor in furtherance of the sale, foreclosure, realization
upon, or the repossession or liquidation of any of the Collateral, including without limitation, (a) the exercise of any remedies or rights of a
“Secured Creditor” under Article 9 of the UCC, such as the notification of account debtors; (b) the exercise of any remedies available to a
judgment creditor; or (c) any other remedy available in respect of the Collateral available to such Secured Creditor under any Note Document
to which it is a party.
“ UCC ” shall have the meaning given to such term in the Security Agreement.
(b) Unless otherwise set forth herein to the contrary, all terms not otherwise defined herein and which are defined in the
UCC are used herein with the meanings ascribed to them in the UCC. However, if a term is defined in Article 9 of the UCC differently than in
another Article of the UCC, the term has the meaning specified in Article 9 of the UCC.
2.
Permitted Liens and Relative Priorities .
(a)
As between the Secured Creditors, notwithstanding (i) the terms (including the description of collateral), dating,
execution, or delivery of any document, instrument, or agreement; the time, order, occurrence, method, or manner of grant, attachment or
perfection of any security interest or lien; the time of filing or recording of any financing statements, assignments, deeds of trust, mortgages,
or any other documents, instruments, or agreements under the UCC or any other applicable law, (ii) the existence of (or the order in which
any Secured Creditor becomes a party to or a beneficiary of) any collateral agency arrangement with any party other than a Secured Creditor,
or the appointment of such other party as a collateral agent to perfect the Secured Creditors’ liens and security interests, in all or in any part
of the Collateral, (iii) the existence of any control agreement in favor of any Secured Creditor or (iv) any provision of the UCC or any other
applicable statute, rule, law, or court decision to the contrary, the Secured Creditors agree that, as to the Collateral of each Obligor:
(i)
First Lien Creditors shall have a first priority security interest in and lien on the Collateral to secure the First
Lien Obligations; and
(ii)
Second Lien Creditors shall have a junior and subordinate security interest in and lien on the Collateral to
secure the Second Lien Obligations.
3
(b)
For purposes of the foregoing allocation of priorities, any claim or a right to a set-off shall be treated in all respects
as a security interest and no claimed right of set-off shall be asserted to defeat or diminish the rights or priorities provided for herein.
(c)
Each Second Lien Creditor agrees that it will not take any Enforcement Action until the Discharge of First Lien
Obligations. Notwithstanding the foregoing, if an Insolvency Proceeding shall be commenced against any Obligor, each Second Lien Creditor
shall be entitled to file proofs of claims and commence other proceedings in order to evidence and protect its interest in the Collateral so long
as such filings are not in any manner inconsistent with the provisions of this Agreement.
3.
No Alteration of Priority . The lien and security interest priorities provided in Section 2 shall not be altered or otherwise
affected by any amendment, modification, supplement, extension, renewal, restatement, or refinancing of any of the Secured Creditor
Indebtedness, nor by any action or inaction which any Secured Creditor may take or fail to take in respect of the Collateral, or otherwise. Each
Secured Creditor agrees that it will not directly or indirectly take any action to contest or challenge the validity, legality, perfection, priority,
avoidability, or enforceability of the liens or security interests of the other Secured Creditors upon the Collateral or seek to have the same
avoided, disallowed, set aside, or otherwise invalidated in any judicial proceeding or otherwise.
4.
Payments Made to Second Lien Creditors . Notwithstanding anything to the contrary in this Agreement, each Second Lien
Creditor shall be entitled to receive and retain payments of principal and interest made by Borrower to such Second Lien Creditor during the
term of this Agreement; provided, however, that in the event there exists a default with respect to the First Lien Obligations, no Second Lien
Creditor shall be entitled to receive and retain payments of principal and interest made by Borrower to any Second Lien Creditor until such
time as such default is cured.
5.
Agent for Perfection . Each Secured Creditor agrees to hold (or cause to be held) all Control Collateral in its possession,
custody, or control (or in the possession, custody, or control of agents, bailees, or other similar third parties) as non-fiduciary agent for the other
Secured Creditors solely for the purpose of perfecting the security interest granted to each in such Control Collateral subject to the terms and
conditions of this Agreement. No Secured Creditor shall have any obligation whatsoever to the others to assure that the Control Collateral is
genuine or owned by any Obligor or any other Person or to preserve their respective rights or benefits or those of any Person. The duties or
responsibilities of each Secured Creditor under this Section 5 are and shall be limited solely to holding or maintaining control of the Control
Collateral as non-fiduciary agent for the other Secured Creditors for purposes of perfecting the Lien held by First Lien Creditors or Second
Lien Creditors, as applicable. First Lien Creditors are not and shall not be deemed to be a fiduciary of any kind for Second Lien Creditors or
any other Person.
6.
Management of Collateral . Notwithstanding anything to the contrary contained in any of the Note Documents, until Discharge
of First Lien Obligations has occurred: (a) First Lien Creditors shall have the exclusive right to manage the Collateral, including the exclusive
right to perform and enforce the terms of the Note Documents with respect to the Collateral and to exercise and enforce all privileges and rights
thereunder according to First Lien Creditors’ sole discretion, including, without limitation, the exclusive right to enforce or settle insurance
claims with respect to the Collateral, to pay, compromise, or settle competing claims, liens, or security interests affecting the Collateral, to take
or retake control or possession of the Collateral, and to hold, prepare for sale, sell, lease, or liquidate the Collateral; (b) neither Second Lien
Creditors nor any Person acting on their behalf shall exercise any Secured Party Remedies with respect to the Collateral; and (c) any and all
proceeds of the Collateral which shall come into the possession, control, or custody of any Second Lien Creditor will be deemed to have been
received for the account of any First Lien Creditor and shall be immediately delivered or paid, as applicable, over to First Lien Creditors. In
connection with the provisions of Section 6(a) , each Second Lien Creditor waives any and all rights to affect the method or challenge the
appropriateness of any action by First Lien Creditors with respect to the Collateral, and waives any claims or defenses it may have against First
Lien Creditors, including any such claims or defenses based on any actions or omissions of any such person, in connection with the perfection,
maintenance, enforcement, foreclosure, sale, liquidation, or release of any lien or security interest therein by First Lien Creditors, or any
modification or waiver of any Note Documents, except as provided or limited under this Agreement.
4
7.
Sale of Collateral . Until the Discharge of the First Lien Obligations has occurred: (a) only First Lien Creditors shall have the
right to restrict or permit, or approve or disapprove, the sale or disposition of the Collateral; and (b) immediately upon the sale or disposition of
such Collateral by any Obligor with the consent of First Lien Creditors or by or on behalf of First Lien Creditors in connection with the
exercise of its Secured Creditor Remedies, each Second Lien Creditor’s lien and security interest upon the Collateral sold shall be
automatically, unconditionally and simultaneously released, and each Second Lien Creditor will promptly deliver (at Obligors’ expense) such
release, reconveyance, and termination documents as any First Lien Creditor or any Obligor may reasonably require in connection therewith.
8.
Insurance . In the event of the occurrence of a fire or other casualty resulting in damage to all or any portion of any Collateral
(collectively, a “ Casualty ”):
(a)
until the Discharge of the First Lien Obligations has occurred, each Second Lien Creditor hereby waives any right
to participate or join in any adjustment, compromise or settlement of any claims resulting from a Casualty with respect to any Collateral;
(b)
all proceeds received or to be received on account of a Casualty shall be applied in the manner or manners
provided for in the Note Documents and in this Agreement; and
(c)
until the Discharge of the First Lien Obligations has occurred, each Second Lien Creditor agrees to promptly
execute and deliver to First Lien Creditors any documents, instruments, agreements or further assurances reasonably required to effectuate any
of the foregoing.
9.
Insolvency Proceeding .
(a)
Enforceability and Continuing Priority . This Agreement shall be applicable both before and after the commencement
of any Insolvency Proceeding and all converted or succeeding cases in respect thereof. The relative rights of First Lien Creditors and Second
Lien Creditors in or to any distributions from or in respect of any Collateral or proceeds of Collateral shall continue after the commencement of
any Insolvency Proceeding. Accordingly, the provisions of this Agreement are expressly intended to be and shall be enforceable as a
subordination agreement within the meaning of Section 510 of the Bankruptcy Code.
(b)
Financing . Until Discharge of the First Lien Obligations has occurred, if any Obligor shall be subject to any
Insolvency Proceeding and First Lien Creditors consent to the use of cash collateral (as such term is defined in Section 363(a) of the
Bankruptcy Code; herein, “ Cash Collateral ”) on which any First Lien Creditor has a Lien or to permit any Obligor to obtain financing
provided by any First Lien Creditor under Section 364 of the Bankruptcy Code or any similar Bankruptcy Law (such financing, together with
any Cash Collateral use, collectively a “ DIP Financing ”), then each Second Lien Creditor agrees that it will consent to such Cash Collateral
use and raise no objection to such DIP Financing, provided, the Second Lien Creditors retain a subordinate security interest in the collateral
(including proceeds thereof) and obtains a replacement security interest on post-petition Collateral to the same extent as existed prior to the
commencement of the Insolvency Proceeding, and, to the extent the Liens securing the First Lien Obligations are subordinated to or
pari passu with such DIP Financing, each Second Lien Creditor will subordinate its Liens in the Collateral to the Liens securing such DIP
Financing. If any First Lien Creditor offers to provide DIP Financing that meets the requirements set forth above, each Second Lien Creditor
agrees that it shall not, directly or indirectly, (x) provide or offer to provide DIP Financing or support any DIP Financing secured by a Lien
senior to or pari passu with the Liens securing the First Lien Obligations, or (y) request or accept any form of adequate protection or any
other relief except as provided in Section 9(e)(ii) . In connection with any DIP Financing, if any Liens on the Collateral held by First Lien
Creditors are subject to a surcharge or are subordinated to an administrative priority claim, a professional fee “carve out,” or fees owed to the
United States Trustee, then the Liens on the Collateral of each Second Lien Creditor shall also be subordinated to such interest or claim and
shall remain subordinated to the Liens on the Collateral of First Lien Creditors consistent with this Agreement.
5
(c)
Sales . Until Discharge of the First Lien Obligations has occurred, each Second Lien Creditor agrees that it will
consent to the Disposition of, and will not object or oppose a motion to Dispose of, any Collateral free and clear of the Liens or the claims that
are in favor of such Second Lien Creditor under Section 363 of the Bankruptcy Code if First Lien Creditors have consented to such Disposition
of such assets free and clear of the Liens of the claims that are in favor of First Lien Creditors.
(d)
Relief from the Automatic Stay . Until Discharge of the First Lien Obligations has occurred, each Second Lien
Creditor agrees that it shall not seek (or support any other person seeking) relief from the automatic stay or any other stay in any Insolvency
Proceeding in respect of the Collateral, without the prior written consent of First Lien Creditors.
(e)
Adequate Protection .
(i)
First Lien Creditors . In any Insolvency Proceeding involving an Obligor, each Second Lien Creditor agrees that it shall not contest
(or support any other person contesting):
(A)
any request by any First Lien Creditor for adequate protection (whether in the form of payments, liens, a priority administrative
expense claim or otherwise);
(B)
any objection by any First Lien Creditor to any motion, relief, action, or proceeding based on any First Lien Creditor claiming a
lack of adequate protection (whether in the form of payments, liens, a priority administrative expense claim or otherwise);
(C)
the payment of interest, fees, expenses, or other amounts to any First Lien Creditor under Section 506(b) or 506(c) of the
Bankruptcy Code or otherwise.
(ii)
(A)
Second Lien Creditors . In any Insolvency Proceeding involving an Obligor:
Replacement Liens .
(1)
Until Discharge of the First Lien Obligations has occurred, if any First Lien Creditor is granted adequate protection in the form of
a replacement Lien (on existing or future assets of Obligors) in connection with any DIP Financing, then each Second Lien Creditor shall also
be entitled to seek, without objection from First Lien Creditors, adequate protection in the form of a replacement Lien (on existing or future
assets of Obligors), which replacement Lien, if obtained, shall be subordinate to the Liens securing the First Lien Obligations and the Liens
securing such DIP Financing on the same basis as the other Liens securing the Second Lien Obligations are subordinate to the First Lien
Obligations under this Agreement; and
6
(2)
In the event that Second Lien Creditors are granted adequate protection in the form of a replacement Lien (on existing or future
assets of Obligors), then each Second Lien Creditor agrees that each First Lien Creditor shall also be entitled to seek, without objection from
Second Lien Creditors, a senior adequate protection Lien on existing or future assets of Obligors as security for the First Lien Obligations and
for any DIP Financing provided by any First Lien Creditor. Any adequate protection Lien on such existing or future assets securing the Second
Lien Obligations shall be subordinated (i) to the Lien on such collateral securing the First Lien Obligations and any such DIP Financing
provided by any First Lien Creditor, and (ii) to any other Liens granted to any First Lien Creditor as adequate protection on the same basis as
the other Liens securing the Second Lien Obligations are so subordinated to such First Lien Obligations under this Agreement.
(B)
No Distributions . Until the Discharge of the First Lien Obligations has occurred, in any Insolvency Proceeding involving an
Obligor, Second Lien Creditors shall seek neither (a) adequate protection in the form of Distributions in respect of the Second Lien Obligations
nor (b) adequate protection in the form of Distributions with respect to their rights to the Collateral.
(iii)
Allowance of Postpetition Accrual . Second Lien Creditors shall not object to, oppose or challenge any claim by any First Lien
Creditor for allowance in any Insolvency Proceeding of First Lien Obligations consisting of post-petition interest, fees, or expenses.
(f)
Section 1111(b) of the Bankruptcy Code . Second Lien Creditors shall not object to, oppose, support any objection,
or take any other action to impede, the right of any First Lien Creditor to make an election under Section 1111(b)(2) of the Bankruptcy Code.
Each Second Lien Creditor waives any claim it may hereafter have against any First Lien Creditor arising out of the election by any First Lien
Creditor of the application of Section 1111(b)(2) of the Bankruptcy Code.
(g)
No Waiver . Except as otherwise provide in this Agreement, nothing contained herein shall prohibit or in any way
limit First Lien Creditors from objecting in any Insolvency Proceeding involving an Obligor to any action taken by any Second Lien Creditor,
including the seeking by such Second Lien Creditor of adequate protection or the assertion by such Second Lien Creditor of any of its rights
and remedies under the Note Documents.
(h)
Avoidance Issues . If any First Lien Creditor is required in any Insolvency Proceeding or otherwise to turn over,
disgorge or otherwise pay to the estate of any Obligor any amount paid in respect of the First Lien Obligations (a “ First Lien Creditor
Recovery ”), then such First Lien Creditor shall be entitled to a reinstatement of First Lien Obligations with respect to all such recovered
amounts, and all rights, interests, priorities and privileges recognized in this Agreement shall apply with respect to any such First Lien Creditor
Recovery. If this Agreement shall have been terminated prior to such First Lien Creditor Recovery, this Agreement shall be reinstated in full
force and effect, and such prior termination shall not diminish, release, discharge, impair, or otherwise affect the obligations of the parties
hereto from such date of reinstatement. Collateral or proceeds thereof received by any Second Lien Creditor after a Discharge of First Lien
Obligations and prior to the reinstatement of such First Lien Obligations shall be delivered to First Lien Creditors upon such reinstatement in
accordance with Section 9(j) .
7
(i)
Plan of Reorganization .
(a)
If, in any Insolvency Proceeding, debt obligations of the reorganized debtor secured by Liens upon any property of the reorganized
debtor are distributed pursuant to a plan of reorganization or similar dispositive restructuring plan, both on account of First Lien Obligations
and on account of Second Lien Note Obligations, then, to the extent the debt obligations distributed on account of the First Lien Obligations
and on account of the Second Lien Note Obligations are secured by Liens upon the same property, the parties hereto expressly agree that the
provisions of this Agreement will survive the distribution of such debt obligations pursuant to such plan and will apply with like effect to the
Liens securing such debt obligations, and
(b)
No Second Lien Creditor shall propose or support any plan of reorganization that is inconsistent with the priorities or other
provisions of this Agreement.
(j)
Payments Held in Trust/Turnover . In the event that, notwithstanding the foregoing provisions of this Section 9 , any
Distribution in respect of the Second Lien Obligations prohibited by this Agreement shall be received by any Second Lien Creditor before there
has been a Discharge of the First Lien Obligations, such Distribution shall be held in trust for the benefit of and shall be paid over to or
delivered to First Lien Creditors, until there has been a Discharge of the First Lien Obligations.
10.
Notice of Default and Certain Events; Right to Cure . Each Secured Creditor shall promptly notify the other Secured
Creditors in writing of the occurrence of any of the following as applicable:
(a)
any default or event of default under the Note issued to such Secured Creditor; or
(b)
the demand for payment of, acceleration of or termination of any of the Obligations.
Each of the Second Lien Creditors shall have the right, but not any obligation, to cure any events of default under the Note Documents
for the account of the Obligors within fifteen (15) days after the receipt by such Second Lien Creditor of written notice of such event of default
from the Secured Creditor or thereafter with the consent of the Secured Creditors. In no event shall any Second Lien Creditor, by virtue of the
payment of amounts or performance of any obligation required to be paid or performed by any Obligor, be deemed to have assumed any
obligations of any Obligor to the Secured Creditors or any other person.
11.
Further Assurances .
(a)
Additional Documents . Each Second Lien Creditor agrees to execute and deliver, upon the request of First Lien
Creditors, such documents and instruments (appropriate for filing, if requested) as may be necessary or appropriate to fully implement or to
fully evidence the understandings and agreements contained in this Agreement. Without limiting the foregoing, in the event that all or part of
any of the First Lien Obligations is hereafter refinanced, each Second Lien Creditor agrees to enter into one or more new agreements with the
refinancing lender or lenders on terms identical to those of this Agreement.
8
(b)`
Legending Documents, Instruments . Each party hereto agrees that the Security Agreement shall include the
following language:
“ Anything herein to the contrary notwithstanding, the liens and security interests securing the Obligations and the exercise of
any right or remedy with respect thereto are subject to the provisions of that certain Intercreditor Agreement dated as of June
___, 2007 (as amended, restated, supplemented, or otherwise modified from time to time, the “ Intercreditor Agreement ”),
among Sands I, Sands II, Sands III, Sands IV and CCGF , as First Lien Creditors, and AirWorks Funding LLLP and RS
Properties I LLC, as Second Lien Creditors. In the event of any conflict between the terms of the Intercreditor Agreement and
this Agreement, the terms of the Intercreditor Agreement shall govern and control. ”
(c)
Attorney in Fact . Each First Lien Creditor is hereby irrevocably constituted and appointed the attorney-in-fact of
each Second Lien Creditor in order to take all action, either in such First Lien Creditor’s name or in the name of such Second Lien Creditor,
which in such First Lien Creditor’s reasonable opinion is necessary or desirable to enable such First Lien Creditor to obtain all Distributions
that are to be turned over to such First Lien Creditor pursuant to this Agreement.
12.
Representations; Warranties . Each Second Lien Creditor represents and warrants to each First Lien Creditor that: (a) such
Second Lien Creditor is the holder of the liens and security interests which secure or will secure the Second Lien Obligations; (b) there do not
exist any currently effective subordinations of the Second Lien Obligations or of such Second Lien Creditor’s liens and security interests in the
Collateral; (c) such Second Lien Creditor is currently informed of the financial condition of each Obligor and of all other circumstances which
a diligent inquiry would reveal and which bear upon the risk of nonpayment of the First Lien Obligations; and that such Second Lien Creditor
will continue to keep informed of each Obligor’s financial condition and of all other circumstances which bear upon the risk of nonpayment or
nonperformance of the First Lien Obligations; and (d) it has full right, power, and authority to enter into this Agreement and, to the extent such
Second Lien Creditor is an agent or trustee for other parties, that this Agreement shall fully bind all such other parties.
13.
Modification of First Lien Obligations . Each Second Lien Creditor agrees that each First Lien Creditor shall have absolute power and
discretion, without notice to such Second Lien Creditor, to deal in any manner with the First Lien Obligations, including, but not by way of
limitation, the power and discretion to do any of the following: (a) any demand for payment of any First Lien Obligations may be rescinded in
whole or in part, and any First Lien Obligations may be continued, and the First Lien Obligations or the liability of any Obligor upon or for any
part thereof, or any Collateral or guaranty therefor, or right of offset with respect thereto, may, from time to time, in whole or in part, be
renewed, modified, accelerated, compromised, waived, surrendered, or released; and (b) the Note issued to First Lien Creditors may be
amended, modified, supplemented, or terminated, in whole or in part, as First Lien Creditors may deem advisable from time to time, and any
Collateral may be sold, exchanged, waived, surrendered, or released. Each Second Lien Creditor will remain bound under this Agreement, and
the subordination provided for herein shall not be impaired, abridged, released, or otherwise affected notwithstanding any such renewal,
modification, acceleration, compromise, amendment, supplement, termination, sale, exchange, waiver, surrender, or release. All dealings
between First Lien Creditors and any Obligor shall be deemed to have been consummated in reliance upon this Agreement.
14.
Waivers by Second Lien Creditors .
9
(a)
First Lien Obligations .
(i)
All First Lien Obligations at any time incurred by any Obligor shall be deemed to have been incurred, and all First Lien
Obligations held by First Lien Creditors shall be deemed to have been extended, acquired or obtained, as applicable, in reliance
upon this Agreement, and each Second Lien Creditor hereby waives (i) notice of acceptance, or proof of reliance, by each First Lien
Creditors of this Agreement, and (ii) notice of the existence, renewal, extension, accrual, creation, or non-payment of all or any part
of the First Lien Obligations. Nothing contained in this Agreement shall preclude any First Lien Creditor from discontinuing the
extension of credit to any Obligor (whether under the Note Documents or otherwise) or from taking (without notice to any Second
Lien Creditor, any Obligor, or any other Person) any other action in respect of the First Lien Obligations or the Collateral which any
First Lien Creditor is otherwise entitled to take with respect to the First Lien Obligations or the Collateral.
(ii)
None of First Lien Creditors or any of their affiliates, directors, officers, employees, or agents shall be liable for failure to
demand, collect, or realize upon any of the Collateral or any Proceeds or for any delay in doing so or shall be under any obligation
to sell or otherwise Dispose of any Collateral or Proceeds thereof or to take any other action whatsoever with regard to the
Collateral or any part or Proceeds thereof. If any First Lien Creditor should exercise any of its contractual rights or remedies under
the Note Documents (subject to the express terms and conditions hereof), First Lien Creditors shall not have any liability
whatsoever to any Second Lien Creditor as a result of such action, omission, or exercise. First Lien Creditors will be entitled to
manage and supervise their loans and extensions of credit under the Note Documents as First Lien Creditors may, in their sole
discretion, deem appropriate, and First Lien Creditors may manage their loans and extensions of credit without regard to any rights
or interests that any Second Lien Creditor may have in the Collateral or otherwise except as otherwise expressly set forth in this
Agreement. Each Second Lien Creditor agrees that First Lien Creditors shall not incur any liability as a result of a sale, lease,
license, application or other Disposition of all or any portion of the Collateral or any part or Proceeds thereof. Until the Discharge of
the First Lien Obligations has occurred, First Lien Creditors may, from time to time, enter into agreements and settlements with
Obligors as they may determine in their sole discretion without impairing any of the subordinations, priorities, rights or obligations
of the parties under this Agreement, including, without limitation, substituting Collateral, releasing any Lien and releasing any
Obligor. Each Second Lien Creditor waives any and all rights it may have to require any First Lien Creditor to marshal assets, to
exercise rights or remedies in a particular manner, or to forbear from exercising such rights and remedies in any particular manner
or order.
(b)
Notice of Acceptance and Other Waivers . To the fullest extent permitted by applicable law, each Second Lien Creditor
hereby waives: (i) notice of acceptance hereof; (ii) notice of any loans or other financial accommodations made or extended under the Note
issued to First Lien Creditors, or the creation or existence of any First Lien Obligations; (iii) notice of the amount of the First Lien Obligations;
(iv) notice of any adverse change in the financial condition of any Obligor or of any other fact that might increase such Second Lien Creditor’s
risk hereunder; (v) notice of presentment for payment, demand, protest, and notice thereof as to the Note issued to First Lien Creditors; and (vi)
all other notices (except if such notice is specifically required to be given to such Second Lien Creditor under this Agreement or any Note
Document) and demands to which such Second Lien Creditor might otherwise be entitled.
10
(c)
Lawsuits; Defenses; Set-off . To the fullest extent permitted by applicable law, each Second Lien Creditor (i) waives the
right by statute or otherwise to any require any First Lien Creditor to institute suit against any Obligor or to exhaust any rights and remedies
which any First Lien Creditor has or may have against any Obligor; (ii) waives any defense arising by reason of any disability or other defense
(other than the defense that the Discharge of the First Lien Obligations has occurred (subject to the provisions of Section 9(c) ) of any Obligor
or by reason of the cessation from any cause whatsoever of the liability of such Obligor in respect thereof, (iii) waives any rights to assert
against any First Lien Creditor any defense (legal or equitable), set-off, counterclaim, or claim which such Second Lien Creditor may now or at
any time hereafter have against any Obligor or any other party liable to any First Lien Creditor or such Second Lien Creditor, (iv) waives any
defense arising by reason of any claim or defense based upon an election of remedies by any First Lien Creditor; and (vi) waives the benefit of
any statute of limitations affecting such Second Lien Creditor’s obligations hereunder or the enforcement thereof, and any act which shall defer
or delay the operation of any statute of limitations applicable to the First Lien Obligations shall similarly operate to defer or delay the operation
of such statute of limitations applicable to such Second Lien Creditor’s obligations hereunder.
(d)
Subrogation . Solely after Discharge of the First Lien Obligations shall have occurred, Second Lien Creditors shall be
subrogated to the rights of First Lien Creditors to the extent that distributions otherwise payable to Second Lien Creditors have been applied to
the payment of the First Lien Obligations in accordance with the provisions of this Agreement. First Lien Creditors shall have no obligation or
duty to protect any of Second Lien Creditors’ rights of subrogation arising pursuant to this Agreement or under any applicable law, nor shall
First Lien Creditors be liable for any loss to, or impairment of, any subrogation rights held by Second Lien Creditors.
(e)
ELECTION OF REMEDIES . WITHOUT LIMITING THE GENERALITY OF ANY OTHER WAIVER OR OTHER
PROVISION SET FORTH IN THIS AGREEMENT, EACH SECOND LIEN CREDITOR WAIVES, TO THE FULLEST EXTENT
PERMITTED BY LAW, ALL RIGHTS AND DEFENSES ARISING OUT OF AN ELECTION OF REMEDIES BY FIRST LIEN
CREDITOR, EVEN THOUGH THAT ELECTION OF REMEDIES HAS DESTROYED THE RIGHTS OF SUBROGATION OF SECOND
LIEN CREDITORS AND REIMBURSEMENT AGAINST ANY OBLIGOR BY THE OPERATION OF ANY APPLICABLE LAW.
15.
Parties Intended to be Benefited . All of the understandings, covenants, and agreements contained herein are solely for the
benefit of First Lien Creditors and Second Lien Creditors, and there are no other parties, including Obligors or any of the creditors, successors,
or assigns of Obligors, which are intended to be benefited, in any way, by this Agreement.
16.
No Limitation Intended . Nothing contained in this Agreement is intended to or shall affect or limit, in any way, the rights that
the Secured Creditors have with respect to any third parties. The Secured Creditors hereby specifically reserve all of their respective rights
against Obligors and all other third parties.
17.
Notices . Notices shall be delivered to the parties hereto as provided in Section 7.8 of the Funding Agreement.
18.
Severability . Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Agreement 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 provision or the remaining provisions of
this Agreement.
11
19.
Complete Agreement . This Agreement constitutes the complete agreement and understanding of each of the Secured Creditors and
supersedes all prior or contemporaneous oral and written negotiations, agreements and understandings, express or implied, with respect to the
subject matter hereof.
20.
Successors and Assigns . This Agreement shall be binding upon, and inure to the benefit of, the successors and assigns of First Lien
Creditors and Second Lien Creditors. Each Second Lien Creditor agrees that it shall not assign or transfer any of the Second Lien Obligations
or any of its rights under the Note Documents (including any liens and security interests in the Collateral) without (a) prior notice being given
to First Lien Creditors and (b) such assignment or transfer being made expressly subject to the terms of this Agreement.
21.
Waiver of Jury Trial . EACH SECURED CREDITOR HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF
ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (A) ARISING UNDER THIS AGREEMENT OR ANY OTHER
INSTRUMENT, DOCUMENT, OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR (B) IN ANY WAY
CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF FIRST LIEN CREDITORS AND SECOND LIEN
CREDITORS WITH RESPECT TO THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED
OR DELIVERED BY THEM IN CONNECTION HEREWITH, OR THE TRANSACTIONS RELATED HERETO OR THERETO, IN EACH
CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR TORT OR
OTHERWISE. EACH SECURED CREDITOR HEREBY AGREES AND CONSENTS THAT ANY CLAIM, DEMAND, ACTION OR
CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT JURY, AND THAT EITHER OF THEM MAY FILE AN
ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT TO
THE WAIVER OF RIGHT TO TRIAL BY JURY.
22.
Waivers, Amendments, Choice of Law, etc . Any waiver or amendment hereunder must be evidenced by a signed writing of a party to
be bound thereby, and shall only be effective in the specific instance. This Agreement shall be governed by and construed under the laws of the
State of New York as applied to agreements among residents of New York made and to be performed entirely within the State of New York.
Each party to this Agreement hereby irrevocably agrees that any legal suit, action or proceeding arising out of or relating to this Agreement or
the transactions contemplated hereunder may be brought in the courts of New York County in the State of New York or of the United States of
America for the Southern District of New York, and hereby expressly submits to the personal jurisdiction and venue of such courts for the
purposes thereof and expressly waives any claim of improper venue and any claim that such courts are an inconvenient forum. Each party
hereby irrevocably consents to the service of process of any of the aforementioned courts in any such suit, action or proceeding, by the mailing
of copies thereof by registered or certified mail, postage prepaid, to its address set forth in the Funding Agreement, such service to become
effective ten (10) days after such mailing. The headings in this Agreement are for convenience of reference only, and shall not alter or
otherwise affect the meaning hereof.
23.
Construction . Unless the context of this Agreement clearly requires otherwise, references to the plural include the singular,
the singular includes the plural, the part includes the whole, “including” is not limiting, and “or” has the inclusive meaning represented by the
phrase “and/or.” The words “hereof,” “herein,” “hereby,” “hereunder,” and similar terms in this Agreement refer to this Agreement as a whole
and not to any particular provision of this Agreement. Article, section, subsection, exhibit, and schedule references are to this Agreement unless
otherwise specified.
12
24.
Costs and Attorneys Fees . In the event it becomes necessary for any First Lien Creditor to commence or become a party to
any proceeding or action to enforce the provisions of this Agreement, the court or body before which the same shall be tried shall award to such
First Lien Creditor all costs and expenses thereof, including, but not limited to, reasonable attorneys’ fees, the usual and customary and
lawfully recoverable court costs, and all other expenses in connection therewith.
25.
Information Concerning Financial Condition . Each Second Lien Creditor hereby assumes responsibility for keeping itself
informed of the financial condition of Obligors and of all other circumstances bearing upon the risk of nonpayment of the Second Lien
Obligations, and agrees that First Lien Creditors have and shall have no duty to advise any Second Lien Creditor of information known to First
Lien Creditors regarding such condition or any such circumstances. In the event that First Lien Creditors, in their sole discretion, undertake, at
any time or from time to time, to provide any such information to any Second Lien Creditor, then First Lien Creditors shall not be under any
obligation (a) to provide any such information to any Second Lien Creditor on any subsequent occasion, (b) to undertake any investigation, or
(c) to disclose any information which, pursuant to its commercial finance practices, First Lien Creditors wish to maintain confidential. Each
Second Lien Creditor acknowledges and agrees that First Lien Creditors have not made any warranties or representations with respect to the
legality, validity, enforceability, collectibility or perfection of the First Lien Obligations or any liens or security interests held in connection
therewith.
26.
Counterparts . This Agreement may be executed in any number of counterparts, and by First Lien Creditors and Second Lien
Creditors in separate counterparts, each of which shall be an original, but all of which shall together constitute one and the same Agreement.
Delivery of an executed counterpart of a signature page of this Agreement or any document or instrument delivered in connection herewith by
telecopy or electronic transmission shall be effective as delivery of a manually executed counterpart of this Agreement or such other document
or instrument, as applicable.
[Remainder of page intentionally left blank]
13
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first herein above set
forth.
FIRST LIEN CREDITORS:
SANDS BROTHERS VENTURE CAPITAL LLC
By:
/s/ Scott A. Bailey
Name: Scott A. Bailey
Its: COO
SANDS BROTHERS VENTURE CAPITAL II LLC
By:
/s/ Scott A. Bailey
Name: Scott A. Bailey
Its: COO
SANDS BROTHERS VENTURE CAPITAL III LLC
By:
/s/ Scott A. Bailey
Name: Scott A. Bailey
Its: COO
SANDS BROTHERS VENTURE CAPITAL IV LLC
By:
/s/ Scott A. Bailey
Name: Scott A. Bailey
Its: COO
CRITICAL CAPITAL GROWTH FUND, L.P.
By: Critical Capital, L.P., its general partner
By: Critical Capital Corporation, its general partner
By:
/s/ Steven B. Sands
Name: Steven B. Sands
Its: Chairman
By:
/s/ Charles L. Robinson
Name: Charles L. Robinson
Its: President
S-1
Lenders Intercreditor Agreement
SECOND LIEN CREDITORS:
AIRWORKS FUNDING LLLP
By: Compass Partners, LLC, its general partner
By:
/s/ Richard E. Perlman
Name: Richard E. Perlman
Its: President
RS PROPERTIES I LLC
By:
/s/ John Lack
Name: John Lack
Its: Manager
S-2
Lenders Intercreditor Agreement
ACKNOWLEDGMENT
Each of the undersigned hereby acknowledges receipt of a copy of the foregoing Intercreditor Agreement (initially capitalized terms
used without definitions herein shall have the meaning ascribed to such terms in the Intercreditor Agreement) and consents thereto, and agrees
to recognize all rights granted thereby to the parties thereto, and will not do any act or perform any obligation which is not in accordance with
the agreements set forth in such Intercreditor Agreement. Each of the undersigned further acknowledges that no Obligor is an intended
beneficiary under the Intercreditor Agreement.
Dated as of June 19, 2007.
KRONOS ADVANCED TECHNOLOGIES, INC.
By:
/s/ Richard F. Tusing
Name: Richard F. Tusing
Its: COO
KRONOS AIR TECHNOLOGIES, INC.
By:
/s/ Richard F. Tusing
Name: Richard F. Tusing
Its: COO
S-3
Lenders Intercreditor Agreement
Exhibit 9
VOTING AND SUPPORT AGREEMENT
THIS VOTING AND SUPPORT AGREEMENT (this “ Agreement ”), dated as of June 19, 2007, is made and entered into by and among
Kronos Advanced Technologies, Inc., a Nevada corporation (“ Company ”), and each of the undersigned holders of securities of the Company
who are signatories hereto (each, a “ Security Holder ”).
WHEREAS, contemporaneously with the execution of this Agreement, the Company and each Security Holder have entered into a Funding
Agreement pursuant to which the Company is able to obtain secured convertible debt financing from the Security Holders (collectively referred
to herein as, the “ Lenders ”) in an amount up to $18,159,000 (the “ Financing ”);
WHEREAS, the Financing was made pursuant to, among other documents, the Funding Agreement and the Security Agreement of even date
herewith by and among the Company, its subsidiaries and the Lenders (the “ Security Agreement ”) and the Secured Convertible Promissory
Notes of even date herewith made by the Company in favor of the Lenders (the “ Notes ”); and
WHEREAS, each Security Holder owns securities of the Company and desires to enter into this Agreement pursuant to which he, she or it
agrees, among other things, to vote all of the Subject Shares (as defined in Section 1(c)) held by such Security Holder in favor of the actions
contemplated hereby.
NOW, THEREFORE, in consideration of the foregoing and of the promises, representations, warranties and agreements contained herein, and
intending to be legally bound hereby, the parties agree as follows:
1. Representations and Warranties of Security Holder . Each Security Holder hereby represents and warrants to the Company as of
the date hereof, as follows:
(a)
Organization . Such Security Holder (to the extent such Security Holder is not a natural person) is duly organized, validly
existing and in good standing under the laws of the state of its organization.
(b)
Authority . Such Security Holder has all requisite power and authority (if not a natural person) or capacity (if a natural
person) to enter into this Agreement and to consummate the transactions contemplated hereby. This Agreement has been duly executed and
delivered by such Security Holder and constitutes a valid and binding obligation of such Security Holder in accordance with its terms. The
execution and delivery of this Agreement does not and compliance with the terms hereof will not (i) conflict with, result in any violation of, or
constitute (with or without notice or lapse of time or both) a default under, any provision of any trust agreement, loan or credit agreement,
bond, note, mortgage, indenture, lease or other contract or agreement to which such Security Holder is a party or applicable to the Subject
Shares held by such Security Holder, (ii) require any filing with, or permit, authorization, consent or approval of, any federal, state or local
government or any court, tribunal, administrative agency or commission or other governmental or regulatory authority or agency, domestic or
foreign, or (iii) violate any judgment, order, writ, injunction, decree, law, statute, rule or regulation applicable to such Security Holder or the
Subject Shares held by such Security Holder.
(c)
The Subject Shares . Such Security Holder is the record and beneficial owner (as such term is defined in Rule 13d-3 of
the Securities Exchange Act of 1934) of, and has good and marketable title to, the number of shares of the Company’s common stock, $0.001
par value per share (the “ Company Stock ”), set forth opposite his, her or its name on the signature page hereto (such shares of the Company’s
common stock, together with any other shares of capital stock of the Company acquired by such Security Holder after the date hereof and
during the term of this Agreement, by conversion of the Notes, purchase, exercise of stock options or otherwise, collectively referred to herein
as the “ Subject Shares ”), free and clear of any liens or other encumbrances whatsoever. Such Security Holder does not own, of record or
beneficially, any shares of the Company’s capital stock other than the Subject Shares held by such Security Holder; and, such Security Holder
does not have any voting rights with respect to any shares of the Company’s capital stock other than the Subject Shares held by such Security
Holder , pursuant to any voting agreement or otherwise. As of the date hereof and for so long as this Agreement remains in effect, except for
this Agreement or as otherwise permitted by this Agreement, such Security Holder has full legal power, authority and right to vote all of the
Subject Shares held by such Security Holder in favor of the approval and authorization of the actions contemplated hereby (collectively, the “
Proposed Actions ”) without the consent or approval of, or any other action on the part of, any other person or entity. Without limiting the
generality of the foregoing, such Security Holder has not entered into any voting agreement (other than this Agreement) with any person or
entity with respect to any of the Subject Shares held by such Security Holder, granted any person or entity any proxy (revocable or irrevocable)
or other power of attorney with respect to any of the Subject Shares held by such Security Holder, deposited any of the Subject Shares held by
such Security Holder in a voting trust or entered into any arrangement or agreement with any person or entity limiting or affecting his, her or its
legal power, authority or right to vote the Subject Shares held by such Security Holder on any matter.
2.
Voting of Shares .
(a)
Subject to the provisions of Section 9, and without in any way limiting any Security Holder’s right to vote the Subject
Shares held by such Security Holder in his, her or its sole discretion on any other matters that may be submitted to a shareholder vote, consent
or other approval (including by written consent) in a manner that is not inconsistent with such Security Holder’s obligations under this
Agreement, each Security Holder hereby irrevocably and unconditionally agrees that, during the period beginning on the date hereof and
ending on the earlier to occur of (Y) the date on which all of the matters set forth in Sections 2(a)(1)-(5) below have been approved by the
stockholders of the Company or (Z) August 1, 2008 (the “ Expiration Date ”), at any meeting of the stockholders of the Company called to vote
upon (1) a slate of directors of the Company’s board of directors as proposed by AirWorks Funding LLLP, a Georgia limited liability limited
partnership (“AirWorks”), (2) adjusting the size of the Company’s board of directors such that upon the election of the slate of directors
proposed by AirWorks, such directors hold a majority of the seats on the Company’s board of directors, (3) approving an amendment to the
Company’s articles of incorporation to increase the Company’s authorized common stock to a number of shares necessary to allow the Lenders
to convert the entire amount of the Financing into shares of the common stock of the Company as provided in the Notes and in the Funding
Agreement, (4) reincorporating the Company in Delaware and/or (5) a reverse stock split proposed by AirWorks or the Company’s board of
directors, the approval of any of the foregoing or any rescission or withdrawal of such approval, or at any adjournment thereof, or in any other
circumstances upon which a vote, consent or other approval (including written consent) with respect to such actions, each Security Holder shall
vote (or cause to be voted) the Subject Shares held by such Security Holder:
(i) in favor of a slate of directors of the Company’s board of directors as proposed by AirWorks and RS
Properties I LLC, a Delaware limited liability company (“ RS Properties ”);
(ii) in favor of adjusting the size of the Company’s board of directors such that upon the election of the slate of
directors proposed by AirWorks and RS Properties, such directors hold a majority of the seats on the Company’s board of directors;
(iii) in favor of approving an amendment to the Company’s articles of incorporation to increase the Company’s
authorized common stock to a number of shares necessary to allow the Lenders to convert the entire amount of the Financing into shares of
common stock of the Company as provided in the Notes and the Funding Agreement;
(iv)
in favor of reincorporating the Company in Delaware;
(v)
in favor of a reverse stock split proposed by AirWorks or the Company’s board of directors; and
(vi) against any action or transaction that may reasonably be expected to impede, interfere with, delay, postpone
or attempt to discourage the consummation of any of the foregoing.
3.
Covenants of the Security Holder . Each Security Holder covenants and agrees that, until the Expiration Date, he, she or it will:
(a)
subject to the provisions of Section 5, not sell, transfer (including by testamentary succession or otherwise by operation of
law), pledge, hypothecate, encumber, assign, tender or otherwise dispose of, or enter into any contract, option or other arrangement or
understanding with respect to the sale, transfer, pledge, hypothecation, encumbrance, assignment, tender or other disposition of, any of the
securities of the Company or Subject Shares held by such Security Holder or any right, title or interest therein; and
(b)
other than as expressly contemplated by this Agreement, not grant any powers of attorney or proxies or consents in
respect of any of the securities of the Company or Subject Shares held by such Security Holder, deposit any of the securities of the Company or
Subject Shares held by such Security Holder into a voting trust, enter into a voting agreement with respect to any of the securities of the
Company or the Subject Shares held by such Security Holder or otherwise restrict his, her or its ability freely to exercise all voting rights with
respect to the securities of the Company or Subject Shares held by such Security Holder, or commit any other act that could restrict or
otherwise affect his, her or its legal power, authority and right to vote the securities of the Company or Subject Shares held by such Security
Holder.
4. Certain Events . In the event of any stock split, stock dividend, merger, reorganization, recapitalization or other change in the
capital structure of the Company affecting the Company Stock, or the acquisition of additional shares of Company Stock or securities of the
Company by each Security Holder, the number of securities of the Company or Subject Shares held by such Security Holder shall be adjusted
appropriately and this Agreement and the obligations hereunder shall attach to any additional securities of the Company or shares of Company
Stock of the Company issued to or acquired by such Security Holder.
5. Assignment . Each Security Holder agrees that this Agreement and the obligations hereunder shall attach to the securities of the
Company and Subject Shares held by such Security Holder and shall be binding upon any person or entity to which legal or beneficial
ownership of or the right and ability to vote the securities of the Company or Subject Shares held by such Security Holder shall pass, whether
by operation of law or otherwise, including such Security Holder’s successors. Neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any Security Holder, on the one hand, without the prior written consent of the Company nor by the
Company, on the other hand, without the prior written consent of such Security Holder. Subject to the preceding sentence, this Agreement will
be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns.
6.
General Provisions .
(a)
Amendments . This Agreement may not be amended except by an instrument in writing signed by each of the parties
hereto.
(b)
Notice . All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be
deemed given if delivered personally or sent by overnight courier (providing proof of delivery) to each party hereto at his, her or its address set
forth below such party’s name on the signature page hereto (or at such address for a party as shall be specified by like notice).
(c)
Interpretation . When a reference is made in this Agreement to a Section, such reference shall be to a Section of this
Agreement unless otherwise indicated. The headings contained in this Agreement are for reference purposes only and shall not affect in any
way the meaning or interpretation of this Agreement. Wherever the words “include, or “including” are used in this Agreement, they shall be
deemed to be followed by the words “without limitation.”
(d)
Counterparts . This Agreement may be executed in one or more counterparts, all of which shall be considered one and the
same agreement, and shall become effective when one or more of the counterparts have been signed by each of the parties and delivered to the
other party.
(e)
Entire Agreement; No Third Party Beneficiaries . This Agreement (i) constitutes the entire agreement and supersedes all
prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof and (ii) is not intended
to confer upon any person other than the parties hereto any rights or remedies hereunder.
(f)
Governing Law . This Agreement shall be governed by, and construed in accordance with the laws of the State of New
York, regardless of the laws that might otherwise govern under applicable principles of conflicts of law thereof.
7. Enforcement . The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement
(including the provisions of Section 2) were not performed in accordance with their specific terms or were otherwise breached. It is accordingly
agreed that the parties shall be entitled to specific performance and injunctive relief to prevent any threatened breach of this Agreement.
8. Severability . In the event that any provisions of this Agreement or the application thereof becomes or is declared by a court of
competent jurisdiction to be illegal, void or unenforceable, the remainder of this Agreement shall continue in full force and effect and the
application of such provision to other persons or circumstances will be interpreted so as to effect the intent of the parties hereto. The parties
further agree to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision that will achieve, to the
fullest extent possible, the original intent of the parties.
9. Fiduciary Duties . Each Security Holder is signing this Agreement solely in such Security Holder’s capacity as an owner of his,
her or its respective securities of the Company and/or Subject Shares, and nothing in this Agreement shall prohibit, prevent or preclude such
Security Holder from taking or not taking any action in his, her or its capacity as an officer of director of the Company, to the extent any such
action is not in conflict with provisions hereof.
[Remainder of page intentionally left blank]
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first written above.
COMPANY :
Kronos Advanced Technologies,
Inc.
By: /s/ Richard F. Tusing
Name: Richard F. Tusing
Title:
COO
464 Common Street,
Address:
Suite 301
Belmont, MA 02478
SECURITY HOLDERS:
Security Holder
AIRWORKS FUNDING LLLP
Number of Shares
of Common Stock
Owned
0
By: Compass Partners, LLC, its General Partner
By: /s/ Richard E. Perlman
Name: Richard E. Perlman
Title: President
SANDS BROTHERS VENTURE CAPITAL LLC
0
By: /s/ Scott A. Baily
Name: Scott A. Baily
Title: COO
SANDS BROTHERS VENTURE CAPITAL II LLC
0
By: /s/ Scott A. Baily
Name: Scott A. Baily
Title: COO
SANDS BROTHERS VENTURE CAPITAL III LLC
0
By: /s/ Scott A. Baily
Name: Scott A. Baily
Title: COO
SANDS BROTHERS VENTURE CAPITAL IV LLC
0
By: /s/ Scott A. Baily
Name: Scott A. Baily
Title: COO
CRITICAL CAPITAL GROWTH FUND, L.P.
0
By: Critical Capital, L.P., its General Partner
By: Critical Capital Corporation, its General Partner
By: /s/ Steven B. Sands
Name: Steven B. Sands
Title: Chairman
By: /s/ Charles L. Robinson
Name: Charles L. Robinson
Title: President
RS PROPERTIES I LLC
By: /s/ John Lack
Name: John Lack
Title: Manager
0
Exhibit 10
VOTING AND SUPPORT AGREEMENT
THIS VOTING AND SUPPORT AGREEMENT (this “ Agreement ”), dated as of June 19, 2007, is made and entered into by and among
Kronos Advanced Technologies, Inc., a Nevada corporation (“ Company ”), and each of the undersigned holders of securities of the Company
who are signatories hereto (each, a “ Security Holder ”).
WHEREAS, contemporaneously with the execution of this Agreement, the Company and each Security Holder have entered into letter
agreements pursuant to which each Security Holder has agreed to take, or refrain from taking, certain actions to allow the Company to obtain
secured convertible debt financing from AirWorks Funding LLLP (“ AirWorks ”) and other individuals and entities (AirWorks and such
other individuals and entities are collectively referred to herein as, the “ Lenders ”) in an amount up to $18,159,000 (the “ Financing ”);
WHEREAS, the Financing was made pursuant to, among other documents, the Funding Agreement and the Security Agreement of even date
herewith by and among the Company and the Lenders (the “ Funding Agreement ” and the “ Security Agreement ”) and the Secured
Convertible Promissory Notes of even date herewith made by the Company in favor of AirWorks and the Lenders (the “ Notes ”); and
WHEREAS, each Security Holder owns securities of the Company and desires to enter into this Agreement pursuant to which he, she or it
agrees, among other things, to vote all of the Subject Shares (as defined in Section 1(c)) held by such Security Holder in favor of the actions
contemplated hereby.
NOW, THEREFORE, in consideration of the foregoing and of the promises, representations, warranties and agreements contained herein, and
intending to be legally bound hereby, the parties agree as follows:
1.
Representations and Warranties of Security Holder . Each Security Holder hereby represents and warrants to the Company as
of the date hereof, as follows:
(a)
Organization . Such Security Holder (to the extent such Security Holder is not a natural person) is duly organized,
validly existing and in good standing under the laws of the state of its organization.
(b)
Authority . Such Security Holder has all requisite power and authority (if not a natural person) or capacity (if a
natural person) to enter into this Agreement and to consummate the transactions contemplated hereby. This Agreement has been duly executed
and delivered by such Security Holder and constitutes a valid and binding obligation of such Security Holder in accordance with its terms. The
execution and delivery of this Agreement does not and compliance with the terms hereof will not (i) conflict with, result in any violation of, or
constitute (with or without notice or lapse of time or both) a default under, any provision of any trust agreement, loan or credit agreement,
bond, note, mortgage, indenture, lease or other contract or agreement to which such Security Holder is a party or applicable to the Subject
Shares held by such Security Holder, (ii) require any filing with, or permit, authorization, consent or approval of, any federal, state or local
government or any court, tribunal, administrative agency or commission or other governmental or regulatory authority or agency, domestic or
foreign, or (iii) violate any judgment, order, writ, injunction, decree, law, statute, rule or regulation applicable to such Security Holder or the
Subject Shares held by such Security Holder.
(c)
The Subject Shares . Such Security Holder is the record and beneficial owner (as such term is defined in Rule 13d-3
of the Securities Exchange Act of 1934) of, and has good and marketable title to, the number of shares of the Company’s common stock,
$0.001 par value per share (the “ Company Stock ”), set forth opposite his, her or its name on the signature page hereto (such shares of the
Company’s common stock, together with any other shares of capital stock of the Company acquired by such Security Holder after the date
hereof and during the term of this Agreement, by conversion of the Notes, purchase, exercise of stock options or otherwise, collectively
referred to herein as the “ Subject Shares ”), free and clear of any liens or other encumbrances whatsoever. Such Security Holder does not own,
of record or beneficially, any shares of the Company’s capital stock other than the Subject Shares held by such Security Holder; and, such
Security Holder does not have any voting rights with respect to any shares of the Company’s capital stock other than the Subject Shares held by
such Security Holder , pursuant to any voting agreement or otherwise. As of the date hereof and for so long as this Agreement remains in
effect, except for this Agreement or as otherwise permitted by this Agreement, such Security Holder has full legal power, authority and right to
vote all of the Subject Shares held by such Security Holder in favor of the approval and authorization of the actions contemplated hereby
(collectively, the “ Proposed Actions ”) without the consent or approval of, or any other action on the part of, any other person or entity.
Without limiting the generality of the foregoing, such Security Holder has not entered into any voting agreement (other than this Agreement)
with any person or entity with respect to any of the Subject Shares held by such Security Holder, granted any person or entity any proxy
(revocable or irrevocable) or other power of attorney with respect to any of the Subject Shares held by such Security Holder, deposited any of
the Subject Shares held by such Security Holder in a voting trust or entered into any arrangement or agreement with any person or entity
limiting or affecting his, her or its legal power, authority or right to vote the Subject Shares held by such Security Holder on any matter.
2.
Voting of Shares .
(a)
Subject to the provisions of Section 9, and without in any way limiting any Security Holder’s right to vote the
Subject Shares held by such Security Holder in his, her or its sole discretion on any other matters that may be submitted to a shareholder vote,
consent or other approval (including by written consent) in a manner that is not inconsistent with such Security Holder’s obligations under this
Agreement, each Security Holder hereby irrevocably and unconditionally agrees that, during the period beginning on the date hereof and
ending on the earlier to occur of (Y) the date on which all of the matters set forth in Sections 2(a)(1)-(5) below have been approved by the
stockholders of the Company or (Z) August 1, 2008 (the “ Expiration Date ”), at any meeting of the stockholders of the Company called to vote
upon (1) a slate of directors of the Company’s board of directors as proposed by AirWorks, subject to the composition of such slate’s
compliance with all applicable laws and regulations, (2) adjusting the size of the Company’s board of directors such that upon the election of
the slate of directors proposed by AirWorks, such directors hold a majority of the seats on the Company’s board of
directors, (3) approving an amendment to the Company’s articles of incorporation to increase the Company’s authorized common stock to a
number of shares necessary to allow the Lenders to convert the entire amount of the Financing into shares of the common stock of the
Company as provided in the Notes and in the Funding Agreement, (4) reincorporating the Company in Delaware, subject to the Company’s
board of director’s recommendation of such action and/or (5) a reverse stock split proposed by AirWorks or the Company’s board of directors,
the approval of any of the foregoing or any rescission or withdrawal of such approval, or at any adjournment thereof, or in any other
circumstances upon which a vote, consent or other approval (including written consent) with respect to such actions, each Security Holder shall
vote (or cause to be voted) the Subject Shares held by such Security Holder:
(i) in favor of a slate of directors of the Company’s board of directors as proposed by AirWorks, subject to the
composition of such slate’s compliance with all applicable laws and regulations;
(ii) in favor of adjusting the size of the Company’s board of directors such that upon the election of the slate of
directors proposed by AirWorks, such directors hold a majority of the seats on the Company’s board of directors;
(iii) in favor of approving an amendment to the Company’s articles of incorporation to increase the Company’s
authorized common stock to a number of shares necessary to allow the Lenders to convert the entire amount of the Financing into shares of
common stock of the Company as provided in the Notes and the Funding Agreement;
(iv) in favor of reincorporating the Company in Delaware, subject to the Company’s board of director’s
recommendation of such action;
(v)
in favor of a reverse stock split proposed by AirWorks or the Company’s board of directors; and
(vi) against any action or transaction that may reasonably be expected to impede, interfere with, delay, postpone or
attempt to discourage the consummation of any of the foregoing.
3.
Covenants of the Security Holder . Each Security Holder covenants and agrees that, until the Expiration Date, he, she or it will:
(a)
subject to the provisions of Section 5, not sell, transfer (including by testamentary succession or otherwise by
operation of law), pledge, hypothecate, encumber, assign, tender or otherwise dispose of, or enter into any contract, option or other
arrangement or understanding with respect to the sale, transfer, pledge, hypothecation, encumbrance, assignment, tender or other disposition of,
any of the securities of the Company or Subject Shares held by such Security Holder or any right, title or interest therein; and
(b)
other than as expressly contemplated by this Agreement, not grant any powers of attorney or proxies or consents in
respect of any of the securities of the Company or Subject Shares held by such Security Holder, deposit any of the securities of the Company or
Subject Shares held by such Security Holder into a voting trust, enter into a voting agreement with respect to any of the securities of the
Company or the Subject Shares held by such Security Holder or otherwise restrict his, her or its ability freely to exercise all voting rights with
respect to the securities of the Company or Subject Shares held by such Security Holder, or commit any other act that could restrict or
otherwise affect his, her or its legal power, authority and right to vote the securities of the Company or Subject Shares held by such Security
Holder.
4.
Certain Events . In the event of any stock split, stock dividend, merger, reorganization, recapitalization or other change in the
capital structure of the Company affecting the Company Stock, or the acquisition of additional shares of Company Stock or securities of the
Company by each Security Holder, the number of securities of the Company or Subject Shares held by such Security Holder shall be adjusted
appropriately and this Agreement and the obligations hereunder shall attach to any additional securities of the Company or shares of Company
Stock of the Company issued to or acquired by such Security Holder.
5.
Assignment . Each Security Holder agrees that this Agreement and the obligations hereunder shall attach to the securities of the
Company and Subject Shares held by such Security Holder and shall be binding upon any person or entity to which legal or beneficial
ownership of or the right and ability to vote the securities of the Company or Subject Shares held by such Security Holder shall pass, whether
by operation of law or otherwise, including such Security Holder’s successors. Neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any Security Holder, on the one hand, without the prior written consent of the Company nor by the
Company, on the other hand, without the prior written consent of such Security Holder. Subject to the preceding sentence, this Agreement will
be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns.
6.
General Provisions .
(a)
Amendments . This Agreement may not be amended except by an instrument in writing signed by each of the parties
hereto.
(b)
Notice . All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be
deemed given if delivered personally or sent by overnight courier (providing proof of delivery) to each party hereto at his, her or its address set
forth below such party’s name on the signature page hereto (or at such address for a party as shall be specified by like notice).
(c)
Interpretation . When a reference is made in this Agreement to a Section, such reference shall be to a Section of this
Agreement unless otherwise indicated. The headings contained in this Agreement are for reference purposes only and shall not affect in any
way the meaning or interpretation of this Agreement. Wherever the words “include, or “including” are used in this Agreement, they shall be
deemed to be followed by the words “without limitation.”
(d)
Counterparts . This Agreement may be executed in one or more counterparts, all of which shall be considered one
and the same agreement, and shall become effective when one or more of the counterparts have been signed by each of the parties and
delivered to the other party.
(e)\
Entire Agreement; No Third Party Beneficiaries . This Agreement (i) constitutes the entire agreement and
supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof and (ii) is
not intended to confer upon any person other than the parties hereto any rights or remedies hereunder.
(f)
Governing Law . This Agreement shall be governed by, and construed in accordance with the laws of the State of
New York, regardless of the laws that might otherwise govern under applicable principles of conflicts of law thereof.
7.
Enforcement . The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement
(including the provisions of Section 2) were not performed in accordance with their specific terms or were otherwise breached. It is accordingly
agreed that the parties shall be entitled to specific performance and injunctive relief to prevent any threatened breach of this Agreement.
8.
Severability . In the event that any provisions of this Agreement or the application thereof becomes or is declared by a court of
competent jurisdiction to be illegal, void or unenforceable, the remainder of this Agreement shall continue in full force and effect and the
application of such provision to other persons or circumstances will be interpreted so as to effect the intent of the parties hereto. The parties
further agree to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision that will achieve, to the
fullest extent possible, the original intent of the parties.
9.
Fiduciary Duties . Each Security Holder is signing this Agreement solely in such Security Holder’s capacity as an owner of his,
her or its respective securities of the Company and/or Subject Shares, and nothing in this Agreement shall prohibit, prevent or preclude such
Security Holder from taking or not taking any action in his, her or its capacity as an officer of director of the Company, to the extent any such
action is not in conflict with provisions hereof.
***************
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first written above.
COMPANY :
Kronos Advanced Technologies, Inc.
By: /s/ Daniel Dwight
Name: Daniel Dwight
Title: President and CEO
Address: 464 Common Street, Suite 301
Belmont, MA 02478
STOCKHOLDERS:
Security Holder
Shares of Stock Held
by Security Holder
/s/ Daniel R. Dwight
Subject Shares
Options to Purchase
Shares of Stock Held
by Security Holder
1,201,926
7,191,206
294,118
638,459
-
573,500
852,752
3,391,756
1,053,000
4,955,726
Daniel R. Dwight
Address: 464 Common Street, Suite 301
Belmont, MA 02478
/s/ James McDermott
James McDermott
Address: 464 Common Street, Suite 301
Belmont, MA 02478
/s/ Milton Segal
Milton Segal
Address: 464 Common Street, Suite 301
Belmont, MA 02478
/s/ Richard Tusing
Richard Tusing
Address: 464 Common Street, Suite 301
Belmont, MA 02478
/s/ Igor Krichtafovitch
Igor Krichtafovitch
Address: 15241 NE 90 th Street
Redmond, WA 98052
Exhibit 11
VOTING AND SUPPORT AGREEMENT
THIS VOTING AND SUPPORT AGREEMENT (this “ Agreement ”), dated as of June 19, 2007, is made and entered into by and among
Kronos Advanced Technologies, Inc., a Nevada corporation (“ Company ”), and each of the undersigned holders of securities of the Company
who are signatories hereto (each, a “ Security Holder ”).
WHEREAS, contemporaneously with the execution of this Agreement, the Company and each Security Holder have entered into letter
agreements pursuant to which each Security Holder has agreed to take, or refrain from taking, certain actions to allow the Company to obtain
secured convertible debt financing from AirWorks Funding LLLP (“ AirWorks ”) and other individuals and entities (AirWorks and such
other individuals and entities are collectively referred to herein as, the “ Lenders ”) in an amount up to $18,159,000 (the “ Financing ”);
WHEREAS, the Financing was made pursuant to, among other documents, the Funding Agreement and the Security Agreement of even date
herewith by and among the Company and the Lenders (the “ Funding Agreement ” and the “ Security Agreement ”) and the Secured
Convertible Promissory Notes of even date herewith made by the Company in favor of AirWorks and the Lenders (the “ Notes ”); and
WHEREAS, each Security Holder owns securities of the Company and desires to enter into this Agreement pursuant to which he, she or it
agrees, among other things, to vote all of the Subject Shares (as defined in Section 1(c)) held by such Security Holder in favor of the actions
contemplated hereby.
NOW, THEREFORE, in consideration of the foregoing and of the promises, representations, warranties and agreements contained herein, and
intending to be legally bound hereby, the parties agree as follows:
1. Representations and Warranties of Security Holder . Each Security Holder hereby represents and warrants to the Company as of
the date hereof, as follows:
(a)
Organization . Such Security Holder (to the extent such Security Holder is not a natural person) is duly organized, validly
existing and in good standing under the laws of the state of its organization.
(b)
Authority . Such Security Holder has all requisite power and authority (if not a natural person) or capacity (if a natural
person) to enter into this Agreement and to consummate the transactions contemplated hereby. This Agreement has been duly executed and
delivered by such Security Holder and constitutes a valid and binding obligation of such Security Holder in accordance with its terms. The
execution and delivery of this Agreement does not and compliance with the terms hereof will not (i) conflict with, result in any violation of, or
constitute (with or without notice or lapse of time or both) a default under, any provision of any trust agreement, loan or credit agreement,
bond, note, mortgage, indenture, lease or other contract or agreement to which such Security Holder is a party or applicable to the Subject
Shares held by such Security Holder, (ii) require any filing with, or permit, authorization, consent or approval of, any federal, state or local
government or any court, tribunal, administrative agency or commission or other governmental or regulatory authority or agency, domestic or
foreign, or (iii) violate any judgment, order, writ, injunction, decree, law, statute, rule or regulation applicable to such Security Holder or the
Subject Shares held by such Security Holder.
(c)
The Subject Shares . Such Security Holder is the record and beneficial owner (as such term is defined in Rule 13d-3 of
the Securities Exchange Act of 1934) of, and has good and marketable title to, the number of shares of the Company’s common stock, $0.001
par value per share (the “ Company Stock ”), set forth opposite his, her or its name on the signature page hereto (such shares of the Company’s
common stock, together with any other shares of capital stock of the Company acquired by such Security Holder after the date hereof and
during the term of this Agreement, by conversion of the Notes, purchase, exercise of stock options or otherwise, collectively referred to herein
as the “ Subject Shares ”), free and clear of any liens or other encumbrances whatsoever. Such Security Holder does not own, of record or
beneficially, any shares of the Company’s capital stock other than the Subject Shares held by such Security Holder; and, such Security Holder
does not have any voting rights with respect to any shares of the Company’s capital stock other than the Subject Shares held by such Security
Holder , pursuant to any voting agreement or otherwise. As of the date hereof and for so long as this Agreement remains in effect, except for
this Agreement or as otherwise permitted by this Agreement, such Security Holder has full legal power, authority and right to vote all of the
Subject Shares held by such Security Holder in favor of the approval and authorization of the actions contemplated hereby (collectively, the “
Proposed Actions ”) without the consent or approval of, or any other action on the part of, any other person or entity. Without limiting the
generality of the foregoing, such Security Holder has not entered into any voting agreement (other than this Agreement) with any person or
entity with respect to any of the Subject Shares held by such Security Holder, granted any person or entity any proxy (revocable or irrevocable)
or other power of attorney with respect to any of the Subject Shares held by such Security Holder, deposited any of the Subject Shares held by
such Security Holder in a voting trust or entered into any arrangement or agreement with any person or entity limiting or affecting his, her or its
legal power, authority or right to vote the Subject Shares held by such Security Holder on any matter.
2.
Voting of Shares .
(a)
Subject to the provisions of Section 9, and without in any way limiting any Security Holder’s right to vote the Subject
Shares held by such Security Holder in his, her or its sole discretion on any other matters that may be submitted to a shareholder vote, consent
or other approval (including by written consent) in a manner that is not inconsistent with such Security Holder’s obligations under this
Agreement, each Security Holder hereby irrevocably and unconditionally agrees that, during the period beginning on the date hereof and
ending on the earlier to occur of (Y) the date on which all of the matters set forth in Sections 2(a)(1)-(5) below have been approved by the
stockholders of the Company or (Z) August 1, 2008 (the “ Expiration Date ”), at any meeting of the stockholders of the Company called to vote
upon (1) a slate of directors of the Company’s board of directors as proposed by AirWorks, (2) adjusting the size of the Company’s board of
directors such that upon the election of the slate of directors proposed by AirWorks, such directors hold a majority of the seats on the
Company’s board of directors, (3) approving an amendment to the Company’s articles of incorporation to increase the Company’s authorized
common stock to a number of shares necessary to allow the Lenders to convert the entire amount of the Financing into shares of the common
stock of the Company as provided in the Notes and in the Funding Agreement, (4) reincorporating the Company in Delaware and/or (5) a
reverse stock split proposed by AirWorks or the Company’s board of directors, the approval of any of the foregoing or any rescission or
withdrawal of such approval, or at any adjournment thereof, or in any other circumstances upon which a vote, consent or other approval
(including written consent) with respect to such actions, each Security Holder shall vote (or cause to be voted) the Subject Shares held by such
Security Holder:
(i)
in favor of a slate of directors of the Company’s board of directors as proposed by AirWorks;
(ii) in favor of adjusting the size of the Company’s board of directors such that upon the election of the slate of
directors proposed by AirWorks, such directors hold a majority of the seats on the Company’s board of directors;
(iii) in favor of approving an amendment to the Company’s articles of incorporation to increase the Company’s
authorized common stock to a number of shares necessary to allow the Lenders to convert the entire amount of the Financing into shares of
common stock of the Company as provided in the Notes and the Funding Agreement;
(iv)
in favor of reincorporating the Company in Delaware;
(v)
in favor of a reverse stock split proposed by AirWorks or the Company’s board of directors; and
(vi) against any action or transaction that may reasonably be expected to impede, interfere with, delay, postpone
or attempt to discourage the consummation of any of the foregoing.
3.
Covenants of the Security Holder . Each Security Holder covenants and agrees that, until the Expiration Date, he, she or it will:
(a)
subject to the provisions of Section 5, not sell, transfer (including by testamentary succession or otherwise by operation of
law), pledge, hypothecate, encumber, assign, tender or otherwise dispose of, or enter into any contract, option or other arrangement or
understanding with respect to the sale, transfer, pledge, hypothecation, encumbrance, assignment, tender or other disposition of, any of the
securities of the Company or Subject Shares held by such Security Holder or any right, title or interest therein; and
(b)
other than as expressly contemplated by this Agreement, not grant any powers of attorney or proxies or consents in
respect of any of the securities of the Company or Subject Shares held by such Security Holder, deposit any of the securities of the Company or
Subject Shares held by such Security Holder into a voting trust, enter into a voting agreement with respect to any of the securities of the
Company or the Subject Shares held by such Security Holder or otherwise restrict his, her or its ability freely to exercise all voting rights with
respect to the securities of the Company or Subject Shares held by such Security Holder, or commit any other act that could restrict or
otherwise affect his, her or its legal power, authority and right to vote the securities of the Company or Subject Shares held by such Security
Holder.
4. Certain Events . In the event of any stock split, stock dividend, merger, reorganization, recapitalization or other change in the
capital structure of the Company affecting the Company Stock, or the acquisition of additional shares of Company Stock or securities of the
Company by each Security Holder, the number of securities of the Company or Subject Shares held by such Security Holder shall be adjusted
appropriately and this Agreement and the obligations hereunder shall attach to any additional securities of the Company or shares of Company
Stock of the Company issued to or acquired by such Security Holder.
5. Assignment . Each Security Holder agrees that this Agreement and the obligations hereunder shall attach to the securities of the
Company and Subject Shares held by such Security Holder and shall be binding upon any person or entity to which legal or beneficial
ownership of or the right and ability to vote the securities of the Company or Subject Shares held by such Security Holder shall pass, whether
by operation of law or otherwise, including such Security Holder’s successors. Neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any Security Holder, on the one hand, without the prior written consent of the Company nor by the
Company, on the other hand, without the prior written consent of such Security Holder. Subject to the preceding sentence, this Agreement will
be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns.
6.
General Provisions .
(a)
Amendments . This Agreement may not be amended except by an instrument in writing signed by each of the parties
hereto.
(b)
Notice . All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be
deemed given if delivered personally or sent by overnight courier (providing proof of delivery) to each party hereto at his, her or its address set
forth below such party’s name on the signature page hereto (or at such address for a party as shall be specified by like notice).
(c)
Interpretation . When a reference is made in this Agreement to a Section, such reference shall be to a Section of this
Agreement unless otherwise indicated. The headings contained in this Agreement are for reference purposes only and shall not affect in any
way the meaning or interpretation of this Agreement. Wherever the words “include, or “including” are used in this Agreement, they shall be
deemed to be followed by the words “without limitation.”
(d)
Counterparts . This Agreement may be executed in one or more counterparts, all of which shall be considered one and the
same agreement, and shall become effective when one or more of the counterparts have been signed by each of the parties and delivered to the
other party.
(e)
Entire Agreement; No Third Party Beneficiaries . This Agreement (i) constitutes the entire agreement and supersedes all
prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof and (ii) is not intended
to confer upon any person other than the parties hereto any rights or remedies hereunder.
(f)
Governing Law . This Agreement shall be governed by, and construed in accordance with the laws of the State of New
York, regardless of the laws that might otherwise govern under applicable principles of conflicts of law thereof.
7. Enforcement . The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement
(including the provisions of Section 2) were not performed in accordance with their specific terms or were otherwise breached. It is accordingly
agreed that the parties shall be entitled to specific performance and injunctive relief to prevent any threatened breach of this Agreement.
8. Severability . In the event that any provisions of this Agreement or the application thereof becomes or is declared by a court of
competent jurisdiction to be illegal, void or unenforceable, the remainder of this Agreement shall continue in full force and effect and the
application of such provision to other persons or circumstances will be interpreted so as to effect the intent of the parties hereto. The parties
further agree to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision that will achieve, to the
fullest extent possible, the original intent of the parties.
9. Fiduciary Duties . Each Security Holder is signing this Agreement solely in such Security Holder’s capacity as an owner of his,
her or its respective securities of the Company and/or Subject Shares, and nothing in this Agreement shall prohibit, prevent or preclude such
Security Holder from taking or not taking any action in his, her or its capacity as an officer of director of the Company, to the extent any such
action is not in conflict with provisions hereof.
***************
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first written above.
COMPANY :
Kronos Advanced Technologies, Inc.
By: /s/ Richard F. Tusing
Name: Richard F. Tusing
Title: COO
Address:
464 Common Street, Suite 301
Belmont, MA 02478
STOCKHOLDERS:
Security Holder
Subject Shares
Shares of Stock Held
by Security Holder
/s/ Richard A. Sun
Richard A. Sun
Address:
4,587,400
Options to
Purchase
Shares of
Stock Held
by Security
Holder
-
10182 Castlewood Lane
Oakton, VA 22124
/s/ Richard A. Sun
Richard A. Sun, as attorney-in-fact for Fredric R.
Gumbinner
Address:
11200 Sorrel Ridge Lane
Oakton, VA 22124
601,500
-
Exhibit 12
PROXY
THIS PROXY (this “ Proxy ”), dated as of June 19, 2007, is made and entered into by and among Kronos Advanced Technologies, Inc., a
Nevada corporation (“ Company ”), and each of the undersigned holders of securities of the Company who are signatories hereto (each, a “
Security Holder ”).
WHEREAS, contemporaneously with the execution of this Agreement, the Company and each Security Holder have entered into a Voting
Agreement of even date herewith (the “ Voting Agreement ”) pursuant to which each Security Holder has agreed to vote (i) in favor of a slate
of directors of the Company’s board of directors as proposed by AirWorks Funding LLLP (“ AirWorks ”), subject to the composition of such
slate’s compliance with all applicable laws and regulations, (ii) in favor of adjusting the size of the Company’s board of directors such that
upon the election of the slate of directors proposed by AirWorks, such directors hold a majority of the seats on the Company’s board of
directors, (iii) in favor of approving an amendment to the Company’s articles of incorporation to increase the Company’s authorized common
stock to a number of shares necessary to allow the Lenders (as below defined) to convert the entire amount of the Financing (as below defined)
into shares of common stock of the Company as provided in the Funding Agreement (as below defined), (iv) in favor of reincorporating the
Company in Delaware, subject to the Company’s board of director’s recommendation of such action (v) in favor of a reverse stock split
proposed by AirWorks or the Company’s board of directors and (vi) against any action or transaction that may reasonably be expected to
impede, interfere with, delay, postpone or attempt to discourage the consummation of any of the foregoing., or refrain from taking, certain
actions to allow the Company to obtain secured convertible debt financing from AirWorks and other individuals and entities (AirWorks and
such other individuals and entities are collectively referred to herein as, the “ Lenders ”) in an amount up to $18,159,000 (the “ Financing ”)
pursuant to the terms of that certain Funding Agreement of even date herewith (the “ Funding Agreement ”);
WHEREAS, each Security Holder owns securities of the Company and desires to enter into this Proxy pursuant to which he, she or it agrees,
among other things, that Richard E. Perlman may vote all of the Subject Shares (as defined in the Voting Agreement) held by such Security
Holder in favor of the actions contemplated by the Voting Agreement; and
WHEREAS, the Lenders would not provide the Financing in the absence of this Proxy, and the Security Holders hereby acknowledge that
each of them will derive a benefit as a result of the Financing.
NOW, THEREFORE, in consideration of the foregoing and of the promises, representations, warranties and agreements contained herein, and
intending to be legally bound hereby, the parties agree as follows:
1.
Proxy . By executing this Proxy, each Security Holder hereby irrevocably appoints Richard E. Perlman, the attorney, agent and
proxy for the undersigned and in the name, place and stead of the undersigned, in respect of any of the matters set forth in clauses (i) through
(vi) of the first “Whereas” clause above set forth, to vote or, if applicable, to give written consent, with respect to all the Subject Shares owned
by such Security Holder which such
Security Holder is or may be entitled to vote at any meeting of the Company held after the date hereof, whether annual or special and whether
or not an adjourned meeting, or, if applicable, to give written consent with respect thereto. This proxy is coupled with an interest, shall be
irrevocable and binding on any successor in interest of each Security Holder and shall not be terminated by operation of law upon the
occurrence of any event, including the death or incapacity of any Security Holder. The proxy granted hereby and set forth herein shall operate
to revoke any prior proxy as to the Subject Shares heretofore granted by any Security Holder. This proxy shall terminate on the Expiration Date
(as defined in the Voting Agreement). This proxy has been executed in accordance with Section 78.355 of the Nevada Revised Statutes.
2.
General Provisions .
(a)
Amendments . This Proxy may not be amended except by an instrument in writing signed by each of the parties
hereto.
(b)
Notice . All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be
deemed given if delivered personally or sent by overnight courier (providing proof of delivery) to each party hereto at his, her or its address set
forth below such party’s name on the signature page hereto (or at such address for a party as shall be specified by like notice).
(c)
Interpretation . When a reference is made in this Proxy to a Section, such reference shall be to a Section of this Proxy
unless otherwise indicated. The headings contained in this Proxy are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Proxy. Wherever the words “include, or “including” are used in this Proxy, they shall be deemed to be followed by the
words “without limitation.”
(d)
Counterparts . This Proxy may be executed in one or more counterparts, all of which shall be considered one and the
same agreement, and shall become effective when one or more of the counterparts have been signed by each of the parties and delivered to the
other party.
(e)
Entire Agreement; No Third Party Beneficiaries . This Proxy (i) constitutes the entire agreement and supersedes all
prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof and (ii) is not intended
to confer upon any person other than the parties hereto any rights or remedies hereunder.
(f)
Governing Law . This Proxy shall be governed by, and construed in accordance with the laws of the State of New
York, regardless of the laws that might otherwise govern under applicable principles of conflicts of law thereof.
3.
Enforcement . The parties agree that irreparable damage would occur in the event that any of the provisions of this Proxy
(including the provisions of Section 2) were not performed in accordance with their specific terms or were otherwise breached. It is accordingly
agreed that the parties shall be entitled to specific performance and injunctive relief to prevent any threatened breach of this Agreement.
4.
Severability . In the event that any provisions of this Proxy or the application thereof becomes or is declared by a court of
competent jurisdiction to be illegal, void or unenforceable, the remainder of this Proxy shall continue in full force and effect and the application
of such provision to other persons or circumstances will be interpreted so as to effect the intent of the parties hereto. The parties further agree to
replace such void or unenforceable provision of this Proxy with a valid and enforceable provision that will achieve, to the fullest extent
possible, the original intent of the parties.
5.
Fiduciary Duties . Each Security Holder is signing this Proxy solely in such Security Holder’s capacity as an owner of his, her
or its respective securities of the Company and/or Subject Shares, and nothing in this Proxy shall prohibit, prevent or preclude such Security
Holder from taking or not taking any action in his, her or its capacity as an officer of director of the Company, to the extent any such action is
not in conflict with provisions hereof.
***************
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first written above.
COMPANY :
Kronos Advanced Technologies, Inc.
By:
/s/ Richard F. Tusing
Name: Richard F. Tusing
Title: COO
Address: 464 Common Street, Suite 301
Belmont, MA 02478
STOCKHOLDERS:
Security Holder
/s/ Daniel R. Dwight
Subject Shares
Shares of Stock Held
by Security Holder
Options to Purchase
Shares of Stock Held
by Security Holder
1,201,926
7,191,206
Daniel R. Dwight
Address: 464 Common Street, Suite 301
Belmont, MA 02478
/s/ James McDermott
294,118
638,459
-
573,500
James McDermott
Address: 464 Common Street, Suite 301
Belmont, MA 02478
/s/ Milton Segal
Milton Segal
Address: 464 Common Street, Suite 301
Belmont, MA 02478
Security Holder
Subject Shares
Shares of Stock Held
by Security Holder
/s/ Richard Tusing
Options to Purchase
Shares of Stock Held
by Security Holder
852,752
3,391,756
1,053,000
4,955,726
4,587,400
-
601,500
-
Richard Tusing
Address: 464 Common Street, Suite 301
Belmont, MA 02478
/s/ Igor Krichtafovitch
Igor Krichtafovitch
Address: 15241 NE 90 th Street\
Redmond, WA 98052
/s/ Richard A. Sun
Richard A. Sun
Address: 10182 Castlewood Lane
Oakton, VA 22124
/s/ Richard A. Sun
Richard A. Sun, as attorney-in-fact for
Fredric R. Gumbinner
Address: 11200 Sorrel Ridge Lane
Oakton, VA 22124
Exhibit 13
AIRWORKS FUNDING LLLP
655 Madison Avenue
23rd Floor
New York, N.Y. 10021
June 19, 2007
RS Properties I LLC
c/o Mr. John Lack
111 Broadway, 8th Floor
New York, NY 10006
Re:
Funding Agreement dated June 19, 2007 by and among Kronos Advanced Technologies, Inc. (“Kronos”), AirWorks Funding
LLLP (“AirWorks”), RS Properties I, LLC (“RS Properties”) and several other lenders (collectively, the “Lenders”) (the
“Funding Agreement”)
Dear Mr. Lack:
The purpose of this letter is to memorialize certain mutual agreements we have reached regarding our obligations under the Funding
Agreement as follows:
1. We agree that all advances made at Subsequent Closings (as defined in the Funding Agreement) will be made sixty percent
(60%) by AirWorks and forty percent (40%) by RS Properties. If either AirWorks or RS Properties refuses or is unable to make its share of any
such advance (the “Defaulting Party”), the other (the “Non-Defaulting Party”) shall be entitled to advance itself the Defaulting Party’s share of
the advance (the “Defaulted Amount”), and the amount that the Defaulting Party is entitled to advance pursuant to Section 2.1(b) shall be
automatically decreased, and the amount that the Non-Defaulting Party is entitled to advance shall be automatically increased, by the Defaulted
Amount. The Defaulting Party hereby agrees to execute such additional assignments and other documentation as may be requested by the
Non-Defaulting Party or as may be necessary to properly reflect the foregoing, including proper amendments to or assignments of its Note (as
defined in the Funding Agreement).
2. RS Properties and AirWorks will, immediately after the First Closing (as defined in the Funding Agreement) convert a sufficient
principal amount of Notes (as defined in the Funding Agreement) to secure more than fifty percent (50%) voting control of Kronos. AirWorks
will convert sixty percent (60%) and RS Properties forty percent (40%) of the amount necessary to secure such controlling position. If at any
time prior to the increase in the authorized capital stock of Kronos, it is necessary for RS Properties and AirWorks to convert additional
amounts to continue to have control, they will do so in the same proportion. In furtherance of the foregoing, we also agree to enter into a voting
agreement providing that we will vote our respective Kronos shares:
RS Properties I LLC
June 19, 2007
Page 2
(i) in favor of a slate of directors of the Kronos’ board of directors as proposed by AirWorks and RS Properties, it being
understood that subject to regulatory requirements and each party’s ability to waive this requirement, such slate will have sixty percent (60%)
of the directors designated by AirWorks and forty percent (40%) designated by RS Properties;
(ii) in favor of adjusting the size of the Kronos’ board of directors such that upon the election of the slate of directors
proposed as provided above, such directors hold at least a majority of the seats on the Kronos’ board of directors;
(iii) in favor of approving an amendment to the Kronos’ articles of incorporation to increase Kronos’ authorized common
stock to a number of shares necessary to allow the Lenders to convert the entire amount of the amounts advanced under the Funding Agreement
into shares Kronos common stock as provided in the Notes and the Funding Agreement;
(iv)
in favor of reincorporating Kronos in Delaware;
(v)
in favor of any reverse stock split proposed by AirWorks or the Company’s board of directors; and
(vi) against any action or transaction that may reasonably be expected to impede, interfere with, delay, postpone or attempt
to discourage the consummation of any of the foregoing.
3. We agree that if a combination of Barry Salzman and Henry Schein, Inc. or any of its subsidiaries, affiliates or joint ventures
decides to become a limited partner in AirWorks, the amount which RS Properties is entitled to advance in Subsequent Closings shall be
decreased, and the amount AirWorks is entitled to advance shall be increased, by forty percent (40%) of the amount contributed by
Salzman/Schein to AirWorks. RS Properties agrees to execute such additional, consents, assignments or other documents as may be requested
by AirWorks or may be necessary to properly reflect the foregoing, including proper amendments or assignments of the parties respective
Notes.
Our signatures below evidence our agreement as set forth above. This Letter Agreement may be executed in two counterparts, each of which
shall be an original, but both of which together shall constitute one and the same instrument.
[Signatures Appear on Next Page)
RS PROPERTIES I LLC
AIRWORKS FUNDING LLLP
By: /s/ John Lack
Name: John Lack
Title: Manager
By: /s/ Richard E. Perlman
Name: Richard E. Perlman
Title: President
Exhibit 14
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this “Agreement”), dated as of June 19, 2007, is by and among Kronos
Advanced Technologies, Inc., a Nevada corporation (“ Company ”), and AirWorks Funding LLLP, a Georgia limited liability limited
partnership (“ AirWorks ”), Sands Brothers Venture Capital LLC, a New York limited liability company (“ Sands I ”) Sands Brothers Venture
Capital II LLC, a New York limited liability company (“ Sands II ”), Sands Brothers Venture Capital III LLC, a New York limited liability
company (“ Sands III ”), Sands Brothers Venture Capital IV LLC, a New York limited liability company (“ Sands IV ”), Critical Capital
Growth Fund, L.P., a Delaware limited partnership and a debenture licensed U.S. Small Business Investment Company (“ CCGF ”) and RS
Properties I LLC, a Delaware limited liability company (“ RS Properties ”). AirWorks, Sands II, Sands III, Sands IV, CCGF and RS Properties
are collectively referred to herein as the “ Stockholders ”).
WHEREAS , this Agreement is being entered into pursuant to that certain Funding Agreement of even date herewith by and among
Company and the Stockholders and those certain Secured Convertible Promissory Notes of even date herewith made by Company in favor of
the Stockholders (the “ Notes ”).
NOW THEREFORE , for and in consideration of the premises, the mutual promises herein contained, and for other good and
valuable consideration, the receipt and adequacy of which are acknowledged, the parties agree as follows:
1.
Certain Definitions . As used in this Agreement, the following initially capitalized terms shall have the following meanings:
(a)
“ Affiliate ” means, with respect to any person, any other person who, directly or indirectly, is in control of, is
controlled by or is under common control with such person.
(b)
“ Holder(s) ” means the Stockholders and their successors and assigns who are holders of Registrable Securities,
including, without limitation, each individual or entity owning a partnership or membership interest of AirWorks, Sands I, Sands II, Sands III,
Sands IV, CCGF or RS Properties.
(c)
“ Registrable Securities ” means (x) shares of Company’s common stock, par value $0.001 per share (“ Common
Stock ”) owned by the Holders at any time, (y) shares of Common Stock issued or issuable to the Holders upon conversion or exchange of any
securities of the Company, including, without limitation, the Notes, and (z) any other securities issued or issuable to the Holders of such shares
of Common Stock (or such shares into which or for which such shares are so changed, converted or exchanged) upon any reclassification, share
combination, share subdivision, share dividend, merger, consolidation or similar transactions or events; provided that any such securities shall
cease to be Registrable Securities if (i) a registration statement with respect to the sale of such securities shall have become effective under the
Securities Act (as defined below) and such securities shall have been disposed of in accordance with the plan of distribution set forth in such
registration statement, (ii) such securities shall have been transferred pursuant to Rule 144 (as defined below), (iii) the rights and obligations
related thereto under this Agreement shall have been transferred in violation of Section 9, (iv) at any time the total number of Registrable
Securities held by the Holder may then be distributed by the Holder in one transaction pursuant to Rule 144, or (v) at such time that such
securities are no longer outstanding.
(d)
“ Registration Expenses ” means all reasonable expenses incurred by Company in connection with any registration of
Registrable Securities pursuant to this Agreement including, without limitation, the following: (i) SEC filing fees; (ii) the fees, disbursements
and expenses of Company’s counsel(s) and accountants in connection with the registration of the Registrable Securities to be disposed of under
the Securities Act; (iii) all expenses of Company and its agents and representatives in connection with the preparation, printing and filing of the
registration statement, any preliminary prospectus or final prospectus and amendments and supplements thereto and the mailing and delivering
of a reasonable number of copies thereof to any Holders, underwriters and dealers and all actual expenses incidental to delivery of the
Registrable Securities; (iv) the cost of producing blue sky memoranda (but specifically not including legal investment or foreign blue sky
memoranda); (v) all expenses in connection with the qualification of the Registrable Securities to be disposed of for offering and sale under
state securities laws; (vi) the filing fees incident to securing any required review by the National Association of Securities Dealers, Inc. of the
terms of the sale of the Registrable Securities to be disposed of; (vii) the expenses of Company’s transfer agent and registrar appointed in
connection with such offering; (viii) all engraving and printing expenses for the Company securities being offered; and (ix) all fees and
expenses payable in connection with the listing of the Registrable Securities on each securities exchange or inter-dealer quotation system on
which a class of common equity securities of Company is then listed.
(e)
“ Rule 144 ” means Rule 144 promulgated under the Securities Act (as defined below), or any successor rule to
(f)
“ SEC ” means the United States Securities and Exchange Commission.
(g)
“ Securities Act ” means the Securities Act of 1933, as amended, or any successor statute.
similar effect.
2.
Demand Registration .
(a)
At any time following the date of this Agreement and upon written notice from a Holder or Holders of at least twenty
percent (20%) of the Registrable Securities (without giving effect to any limitation on exercise or conversion) in the manner set forth in Section
11(h) hereof requesting that Company effect the registration under the Securities Act of any or all of the Registrable Securities held by such
Holder as described in Section 2(b) (which notice shall specify the intended method or methods of disposition of such Registrable Securities),
Company shall use its reasonable best efforts to effect, in the manner set forth in Section 5, the registration under the Securities Act of such
Registrable Securities for disposition in accordance with the intended method or methods of disposition stated in such request; provided that:
-2-
(i) if, prior to receipt of a registration request pursuant to this Section 2(a), Company had commenced a financing
plan and held or identified a date to hold a formal “all hands” meeting with outside advisors, including an underwriter if such
financing plan is an underwritten offering, and, in the good faith business judgment of Company’s underwriter (or outside advisors, if
no underwriter), a registration at the time and on the terms requested could materially and adversely affect or interfere with such
financing plan of Company or its subsidiaries (a “ Transaction Blackout ”), Company shall not be required to effect a registration
pursuant to this Section 2(a) until the earliest of (A) the abandonment of such offering or (B) sixty (60) days after the termination of
such offering; provided that Company shall only be permitted to delay a requested registration under this Section 2(a), whether in
reliance on this subsection (i) or on subsection (ii) below, twice during the term of this Agreement.
(ii) if, while a registration request is pending pursuant to this Section 2(a), Company has determined in good faith
that (A) the filing of a registration statement could jeopardize or delay any contemplated material transaction other than a financing
plan involving Company or would require the disclosure of material information that Company had a bona fide business purpose for
preserving as confidential; or (B) Company then is unable to comply with SEC requirements applicable to the requested registration
(notwithstanding its reasonable best efforts to so comply), Company shall not be required to effect a registration pursuant to this
Section 2(a) until the earlier of (A) the date upon which such contemplated transaction is completed or abandoned or such material
information is otherwise disclosed to the public or ceases to be material or Company reasonably is able to so comply with applicable
SEC requirements, as the case may be, and (B) thirty (30) days after Company makes such good-faith determination; provided that
Company shall only be permitted to delay a requested registration under this Section 2(a), whether in reliance on this subsection (ii) or
on subsection (i) above, twice during the term of this Agreement.
(iii) Company shall not be obligated to file more than two (2) registration statements under the Securities Act
relating to a registration request pursuant to this Section 2(a) and shall not be obligated in any event if such a registration request is for
a number of Registrable Securities which have an aggregate market value less than $1 million. If such a request shall be for an
underwritten offering, such a request must be for a number of Registrable Securities which have an aggregate market value of at least
$5 million.
(b)
Notwithstanding any other provision of this Agreement to the contrary, a registration requested by a Holder pursuant
to this Section 2 shall not be deemed to have been effected (and, therefore, not requested for purposes of Section 2(a)): (A) if it is withdrawn by
the requesting Holder based upon material adverse information relating to Company that is (x) different from the information known to the
Holder or Holders requesting registration at the time of their request for registration, or (y) promptly disclosed by Company to the Holder at the
time of their request for registration; (B) if, when effective, it includes fewer than ninety (90%) percent of the number of shares of Registrable
Securities which were the subject matter of the request; (C) if after it has become effective such registration is interfered with by any stop
order, injunction or other order or requirement of the SEC or other governmental agency or court for any reason other than a misrepresentation
or an omission by such Holder and, as a result thereof, less than ninety (90%) percent of the Registrable Securities requested to be registered
can be completely distributed in accordance with the plan of distribution set forth in the related registration statement.
-3-
(c)
In the event that any registration pursuant to this Section 2 shall involve, in whole or in part, an underwritten
offering, Company shall have the right to designate the underwriter or underwriters, including the lead managing underwriter of such
underwritten offering, subject to the reasonable approval of the Holders.
(d)
Holders other than the Holder initiating the demand pursuant to Section 2(a) and holders of other registrable
securities with the right to participate in a Company registration statement shall have the right to include their shares of Registrable Securities
or other registrable securities, as the case may be, in any registration pursuant to Section 2(a). In connection with those registrations in which
multiple Holders or holders of other registrable securities with the right to participate in such registration (“ Piggy-back Rights Holders ”)
participate, in the event the facilitating broker/dealer or, in an underwritten offering, the lead managing underwriter advises that marketing
factors require a limitation on the number of shares to be sold, the number of shares to be included in the sale or underwriting and registration
shall be allocated pro rata among the Holders and the holders seeking registration pursuant to piggy-back registration rights otherwise granted
by Company on the basis of the estimated proceeds from the sale of the securities covered by such registration.
(e)
Company shall have the right to cause the registration of additional securities for sale for the account of Company in
any registration of Registrable Securities requested by a Holder pursuant to Section 2(a) which involves an underwritten offering; provided that
Company shall not have the right to cause the registration of such additional securities if such Holder is advised in writing (with a copy to
Company) by the lead managing underwriter designated pursuant to Section 2(c) that, in such firm’s good faith opinion, registration of such
securities in addition to those securities included pursuant to Sections 2(a)-(d) hereof would materially adversely affect the offering and sale of
the Registrable Securities then contemplated by such Holder.
3.
Piggy-back Registration . At any time during the term of this Agreement if Company proposes to register any of its Company
Stock or any other of its common equity securities (but not including debt instruments or preferred stock convertible into its common equity
securities) (collectively, “ Other Securities ”) under the Securities Act (other than a registration on Form S-4 or S-8 or any successor form
thereto), whether or not for sale for its own account, in a manner which would permit registration of Registrable Securities for sale for cash to
the public under the Securities Act, it will each such time give prompt written notice to each Holder of its intention to do so at least ten (10)
days prior to the anticipated filing date of the registration statement relating to such registration. Such notice shall offer each such Holder the
opportunity to include in such registration statement such number of Registrable Securities as each such Holder may request. Upon the written
request of any such Holder, made no later than 5:00 p.m. New York City, New York time on the fifth (5 th ) day after such Holder’s receipt of
Company’s notice (which request shall specify the number of Registrable Securities intended to be disposed of and the intended method of
disposition thereof), Company shall use its reasonable best efforts to effect, in the manner set forth in Section 5, in connection with the
registration of the Other Securities, the registration under the Securities Act of all Registrable Securities which Company has been so requested
to register, to the extent required to permit the disposition (in accordance with such intended methods thereof) of the Registrable Securities so
requested to be registered; provided that:
-4-
(a)
if at any time after giving written notice of its intention to register any securities and prior to the effective date of
such registration, Company shall determine for any reason not to register or to delay registration of such securities, Company may, at its
election, give written notice of such determination to the Holder and, thereupon, (A) in the case of a determination not to register, Company
shall be relieved of its obligation to register any Registrable Securities in connection with such registration and (B) in the case of a
determination to delay such registration, Company shall be permitted to delay registration of any Registrable Securities requested to be
included in such registration for the same period as the delay in registering such Other Securities;
(b)
if the registration referred to in the first sentence of this Section 3 is to be an underwritten registration, and the
managing underwriter advises Company in writing that, in such firm’s opinion, such offering would be materially and adversely affected by the
inclusion therein of the Registrable Securities requested to be included therein, Company shall include in such registration: (1) first, all
securities Company proposes to sell for its own account (“ Company Securities ”) if Company Securities are proposed to be included in such
registration, (2) second, up to the full number of Registrable Securities in excess of the number or dollar amount of Company Securities, which,
in the good faith opinion of such managing underwriter, can be so sold without materially and adversely affecting such offering (and, if less
than the full number of such Registrable Securities, allocated among the Holders of such Registrable Securities and holders (other than
Company) of Other Securities to be included in such registration pursuant to agreements with Company (“ Other Holders ”) pro rata on the
basis of the net proceeds from the sale thereof), and (3) third, all other securities proposed to be registered. Notwithstanding any other provision
in this Agreement to the contrary, Company shall not be required to include Registrable Securities in any registration statement if the inclusion
of such Registrable Securities would violate the provisions of any agreements or arrangements pursuant to which such registration is being
effected or entered into in connection with such registration;
(c)
Company shall not be required to effect any registration of Registrable Securities under this Section 3 incidental to
the registration of any of its securities in connection with mergers, acquisitions, dividend reinvestment plans or stock option or award or other
executive or employee benefit or compensation plans; and
(d)
no registration of Registrable Securities effected under this Section 3 shall relieve Company of its obligation to effect
a registration of Registrable Securities pursuant to Section 2 hereof.
4.
Expenses . Company agrees to pay all Registration Expenses with respect to an offering pursuant to Section 2 and Section 3
hereof (but not any fees or expenses of counsel to any Holder or the Holders or any commissions or underwriting discount in connection with
an offering which shall be the expense of the Holder(s)).
-5-
5.
Registration and Qualification . If and whenever Company is required to use its reasonable best efforts to effect the
registration of any Registrable Securities under the Securities Act as provided in Section 2 or 3 hereof, Company shall:
(a)
prepare and file a registration statement under the Securities Act relating to the Registrable Securities to be offered as
soon as practicable, but in no event later than forty-five (45) days (ninety (90) days if the applicable registration form is other than Form S-3)
after the date notice is given, and use its reasonable best efforts to cause the same to become effective as promptly as practicable;
(b)
prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus
used in connection therewith as may be necessary to keep such registration statement continuously effective until the earlier of (x) all
Registrable Securities covered by such registration statement have been sold or (y) when all Registrable Securities are eligible for resale
pursuant to subsection (k) of Rule 144 of the Securities Act;
(c)
furnish to the Holders and to any underwriter of such Registrable Securities such number of conformed copies of
such registration statement and of each such amendment and supplement thereto (in each case including all exhibits), such number of copies of
the prospectus included in such registration statement (including each preliminary prospectus and any summary prospectus), in conformity with
the requirements of the Securities Act, and such other documents, as the Holders or such underwriter may reasonably request in order to
facilitate the public sale of the Registrable Securities, and a copy of any and all transmittal letters or other correspondence to, or received from,
the SEC or any other governmental agency or self-regulatory body or other body having jurisdiction (including any domestic or foreign
securities exchange) relating to such offering;
(d)
use its reasonable best efforts to register or qualify all Registrable Securities covered by such registration statement
under the securities or blue sky laws of such United States jurisdictions as the Holders or any underwriter of such Registrable Securities shall
request, and use its best efforts to obtain all appropriate registrations, permits and consents required in connection therewith, and do any and all
other acts and things which may be necessary or advisable to enable the Holders or any such underwriter to consummate the disposition in such
jurisdictions of its Registrable Securities covered by such registration statement; provided that Company shall not for any such purpose be
required to register or qualify generally to do business as a foreign corporation in any jurisdiction wherein it is not so qualified, or to subject
itself to taxation in any such jurisdiction, or to consent to general service of process in any such jurisdiction;
(e)
in connection with any underwritten offering, (i) use its reasonable best efforts to furnish an opinion of counsel for
Company addressed to the underwriters and each Holder of Registrable Securities included in such registration (each a “ Selling Holder ”) and
dated the date of the closing under the underwriting agreement (if any) (or if such offering is not underwritten, dated the effective date of the
registration statement), and (ii) use its reasonable best efforts to furnish a “cold comfort” letter addressed to each Selling Holder, if permissible
under applicable accounting practices, and signed by the independent public accountants who have audited Company’s financial statements
included in such registration statement, in each such case covering substantially the same matters with respect to such registration statement
(and the prospectus included therein) as are customarily covered in opinions of issuer’s counsel and in accountants’ letters delivered to
underwriters in underwritten public offerings of securities and such other matters as the Selling Holders may reasonably request and, in the case
of such accountants’ letter, with respect to events subsequent to the date of such financial statements;
-6-
(f)
immediately notify the Selling Holders in writing (i) at any time when a prospectus relating to a registration pursuant
to Section 2 or 3 hereof is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus
included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not
misleading, and (ii) of any request by the SEC or any other regulatory body or other body having jurisdiction for any amendment of or
supplement to any registration statement or other document relating to such offering, and in either such case (i) or (ii) at the request of the
Selling Holders, subject to Section 4 hereof, prepare and furnish to the Selling Holders a reasonable number of copies of a supplement to or an
amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such Registrable Securities, such
prospectus shall not include an untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they are made, not misleading;
(g)
list all such Registrable Securities covered by such registration on each national securities exchange and United
States inter-dealer quotation system on which a class of common equity securities of Company is then listed, with expenses in connection
therewith to be paid in accordance with Section 4 hereof; and
(h)
furnish unlegended certificates representing ownership of the Registrable Securities (including, without limitation,
upon conversion of the Notes) being sold in such denominations as shall be requested by the Selling Holders or the underwriters with expenses
therewith to be paid in accordance with Section 4 hereof.
6.
Underwriting, Due Diligence .
(a)
If requested by the underwriters for any underwritten offering of Registrable Securities pursuant to a registration
requested under this Agreement, Company shall enter into an underwriting agreement with such underwriters for such offering, such agreement
to contain such representations and warranties by Company and such other terms and provisions as are customarily contained in underwriting
agreements with respect to secondary distributions, including, without limitation, indemnities and contribution substantially to the effect and to
the extent provided in Section 7 hereof and the provision of opinions of counsel and accountants’ letters to the effect and to the extent provided
in Section 5(e) hereof. The Selling Holders on whose behalf the Registrable Securities are to be distributed by such underwriters shall be
parties to any such underwriting agreement and the representations and warranties by, and the other agreements on the part of, Company to and
for the benefit of such underwriters, shall also be made to and for the benefit of such Selling Holders. Such underwriting agreement shall also
contain such representations and warranties by the Selling Holders on whose behalf the Registrable Securities are to be distributed as are
customarily contained in underwriting agreements with respect to secondary distributions. Selling Holders may require that any additional
securities included in an offering proposed by a Holder be included on the same terms and conditions as the Registrable Securities that are
included therein.
-7-
(b)
In the event that any registration pursuant to Section 3 shall involve, in whole or in part, an underwritten offering,
Company may require the Registrable Securities requested to be registered pursuant to Section 3 to be included in such underwriting on the
same terms and conditions as shall be applicable to the other securities being sold through underwriters under such registration. If requested by
the underwriters for such underwritten offering, the Selling Holders on whose behalf the Registrable Securities are to be distributed shall enter
into an underwriting agreement with such underwriters, such agreement to contain such representations and warranties by the Selling Holders
and such other terms and provisions as are customarily contained in underwriting agreements with respect to secondary distributions, including,
without limitation, indemnities and contribution substantially to the effect and to the extent provided in Section 7 hereof. Such underwriting
agreement shall also contain such representations and warranties by Company and such other person or entity for whose account securities are
being sold in such offering as are customarily contained in underwriting agreements with respect to secondary distributions.
(c)
In connection with the preparation and filing of each registration statement registering Registrable Securities under
the Securities Act, Company shall give, subject to all parties executing confidentiality agreements with Company on terms reasonably
acceptable to Company, the Holders of such Registrable Securities and the underwriters, if any, and their respective counsel and accountants,
such reasonable and customary access to its books and records and such opportunities to discuss the business of Company with its officers and
the independent public accountants who have certified Company’s financial statements as shall be necessary, in the opinion of such Holder and
such underwriters or their respective counsel, to conduct a reasonable investigation within the meaning of the Securities Act.
7.
Indemnification and Contribution .
(a)
In the case of each offering of Registrable Securities made pursuant to this Agreement, Company agrees to
indemnify and hold harmless each Holder, its officers and directors, managers, employees, partners and members, as the case may be, each
underwriter of Registrable Securities so offered and each person, if any, who controls any of the foregoing persons within the meaning of the
Securities Act, from and against any and all claims, liabilities, losses, damages, expenses and judgments, joint or several, to which they or any
of them may become subject, under the Securities Act or otherwise, including any amount paid in settlement of any litigation commenced or
threatened, and shall promptly reimburse them, as and when incurred, for any reasonable legal or other expenses incurred by them in
connection with investigating any claims and defending any actions, insofar as such losses, claims, damages, liabilities or actions shall arise out
of, or shall be based upon, any untrue statement or alleged untrue statement of a material fact contained in the registration statement (or in any
preliminary or final prospectus included therein) or any amendment thereof or supplement thereto, or in any document incorporated by
reference therein, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the
statements therein not
-8-
misleading; provided , however , that Company shall not be liable to a particular Holder in any such case to the extent that any such loss, claim,
damage, liability or action arises out of, or is based upon, any untrue statement or alleged untrue statement, or any omission, if such statement
or omission shall have been made in reliance upon and in conformity with information relating to such Holder furnished to Company in writing
by or on behalf of such Holder specifically for use in the preparation of the registration statement (or in any preliminary or final prospectus
included therein) or any amendment thereof or supplement thereto. Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of a Holder and shall survive the transfer of such securities. The foregoing indemnity agreement is in
addition to any liability which Company may otherwise have to each Holder, its officers and directors, members employees, partners and
managers, as the case may be, underwriters of the Registrable Securities or any controlling person of the foregoing; provided , further , that, as
to any underwriter or any person controlling any underwriter, this indemnity does not apply to any loss, liability, claim, damage or expense
arising out of or based upon any untrue statement or alleged untrue statement or omission or alleged omission in any preliminary prospectus if
a copy of a prospectus was not sent or given by or on behalf of an underwriter to such person asserting such loss, claim, damage, liability or
action at or prior to the written confirmation of the sale of the Registrable Securities as required by the Securities Act and such untrue statement
or omission had been corrected in such prospectus.
(b)
In the case of each offering made pursuant to this Agreement, each Holder of Registrable Securities included in such
offering, by exercising its registration rights hereunder, agrees to indemnify and hold harmless Company, its officers, directors, agents and
Affiliates and each person, if any, who controls any of the foregoing within the meaning of the Securities Act (and if requested by the
underwriters, each underwriter who participates in the offering and each person, if any, who controls any such underwriter within the meaning
of the Securities Act), from and against any and all claims, liabilities, losses, damages, expenses and judgments, joint or several, to which they
or any of them may become subject under the Securities Act or otherwise, including any amount paid in settlement of any litigation
commenced or threatened, and shall promptly reimburse them, as and when incurred, for any reasonable legal or other expenses incurred by
them in connection with investigating any claims and defending any actions, insofar as any such losses, claims, damages, liabilities or actions
shall arise out of, or shall be based upon, any untrue statement or alleged untrue statement of a material fact contained in the registration
statement (or in any preliminary or final prospectus included therein) or any amendment thereof or supplement thereto, or any omission or
alleged omission to state therein a material fact relating to the Holder required to be stated therein or necessary to make the statements therein
not misleading, but in each case only to the extent that such untrue statement of a material fact is contained in, or such material fact relating to
the Holder is omitted from, information relating to such Holder furnished in writing to Company by or on behalf of such Holder specifically for
use in the preparation of such registration statement (or in any preliminary or final prospectus included therein). The foregoing indemnity is in
addition to any liability which such Holder may otherwise have to Company, or any of its directors, officers or controlling persons; provided ,
however , that, as to any underwriter or any person controlling any underwriter, this indemnity does not apply to any loss, liability, claim,
damage or expense arising out of or based upon any untrue statement or alleged untrue statement or omission or alleged omission in any
preliminary prospectus if a copy of a prospectus was not sent to or given by or on behalf of an underwriter to such person asserting such loss,
claim, damage, liability or action at or prior to the written confirmation of the sale of the Registrable Securities as required by the Securities
Act and such untrue statement or omission had been corrected in such prospectus. In no event shall the liability of any Holder be greater in
amount than the dollar amount of the net proceeds received by such Holder upon the sale of the Registrable Securities giving rise to such
indemnification obligation.
-9-
(c)
Procedure for Indemnification . Each party indemnified under paragraph (a) or (b) of this Section 7 shall, promptly
after receipt of notice of any claim or the commencement of any action against such indemnified party in respect of which indemnity may be
sought, notify the indemnifying party in writing of the claim or the commencement thereof; provided that the failure to notify the indemnifying
party shall not relieve it from any liability which it may have to an indemnified party on account of the indemnity agreement contained in
paragraph (a) or (b) of this Section 7, except to the extent the indemnifying party was prejudiced by such failure, and in no event shall relieve
the indemnifying party from any other liability which it may have to such indemnified party. If any such claim or action shall be brought
against an indemnified party, and it shall notify the indemnifying party thereof, the indemnifying party shall be entitled to participate therein,
and, to the extent that it wishes, jointly with any other similarly notified indemnifying party, to assume the defense thereof with counsel
reasonably satisfactory to the indemnified party. After notice from the indemnifying party to the indemnified party of its election to assume the
defense of such claim or action, the indemnifying party shall not be liable to the indemnified party under this Section 7 for any legal or other
expenses subsequently incurred by the indemnified party in connection with the defense thereof other than reasonable costs of investigation;
provided that each indemnified party, its employees, officers and directors, if any, and each person, if any, who controls such indemnified party
within the meaning of the Securities Act, shall have the right to employ separate counsel reasonably approved by the indemnifying party to
represent them if the named parties to any action (including any impleaded parties) include both such indemnified party and an indemnifying
party or an affiliate of an indemnifying party, and such indemnified party shall have been advised by counsel either (i) that there are one or
more legal defenses available to such indemnified party that are different from or additional to those available to such indemnifying party or
such affiliate or (ii) a conflict may exist between such indemnified party and such indemnifying party or such affiliate, and in that event the
fees and expenses of one such separate counsel for all such indemnified parties shall be paid by the indemnifying party. An indemnified party
will not enter into any settlement agreement which is not approved by the indemnifying party, such approval not to be unreasonably withheld.
The indemnifying party may not agree to any settlement of any such claim or action which provides for any remedy or relief other than
monetary damages for which the indemnifying party shall be responsible hereunder, without the prior written consent of the indemnified party,
which consent shall not be unreasonably withheld. In any action hereunder as to which the indemnifying party has assumed the defense thereof
with counsel reasonably satisfactory to the indemnified party, the indemnified party shall continue to be entitled to participate in the defense
thereof, with counsel of its own choice, but, except as set forth above, the indemnifying party shall not be obligated hereunder to reimburse the
indemnified party for the costs thereof. In all instances, the indemnified party shall cooperate fully with the indemnifying party or its counsel in
the defense of each claim or action.
-10-
If the indemnification provided for in this Section 7 shall for any reason be unavailable to an indemnified party in respect of any loss,
claim, damage or liability, or any action in respect thereof, referred to herein, then each indemnifying party shall, in lieu of indemnifying such
indemnified party, contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability, or
action in respect thereof, in such proportion as shall be appropriate to reflect the relative fault of the indemnifying party on the one hand and the
indemnified party on the other with respect to the statements or omissions which resulted in such loss, claim, damage or liability, or action in
respect thereof, as well as any other relevant equitable considerations. The relative fault shall be determined by reference to whether the untrue
or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the
indemnifying party on the one hand or the indemnified party on the other, the intent of the parties and their relative knowledge, access to
information and opportunity to correct or prevent such statement or omission, but not by reference to any indemnified party’s stock ownership
in Company. The amount paid or payable by an indemnified party as a result of the loss, claim, damage or liability, or action in respect thereof,
referred to above in this paragraph shall be deemed to include, for purposes of this paragraph, any legal or other expenses reasonably incurred
by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the foregoing, no Holder
shall be required to contribute, in the aggregate, any amount in excess of the amount by which the net proceeds actually received by such
Holder from the sale of the Registrable Securities giving rise to such indemnification obligation exceeds the amount of any damages that such
Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation.
8.
Rule 144 . Company shall take such measures and timely file such information, documents and reports as shall be required by
the SEC as a condition to the availability of Rule 144 and to remain in compliance with the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder.
9.
Transfer of Registration Rights . A Holder may not transfer all or any portion of its rights and obligations under this
Agreement to any transferee without the prior written consent of Company, which consent shall not be unreasonably withheld; provided,
however, that AirWorks shall have the right to assign any or all of its rights and obligations hereunder to any individual or entity owning a
partnership interest of AirWorks.
10.
Limitations on Subsequent Registration Rights . From and after the date of this Agreement, the Company shall not, without the
prior written consent of the Holder or Holders of 51% of the Registrable Securities then outstanding, enter into any agreement with any holder
or prospective holder of any securities of the Company that would allow such holder or prospective holder (i) to include such securities in any
registration unless, under the terms of such agreement, such holder or prospective holder may include such securities in any such registration
only to the extent that the inclusion of such securities will not reduce the number of the Registrable Securities of the Holders that are included
or (ii) to demand registration of any securities held by such holder or prospective holder .
-11-
11.
Miscellaneous .
(a)
Injunctions . Each party acknowledges and agrees that irreparable damage would occur in the event that any of the
provisions of this Agreement was not performed in accordance with its specific terms or was otherwise breached. Therefore, each party shall be
entitled to an injunction or injunctions to prevent breaches of the provisions of this Agreement and to enforce specifically the terms and
provisions hereof in any court having jurisdiction, such remedy being in addition to any other remedy to which such party may be entitled at
law or in equity.
(b)
Severability . If any term or provision of this Agreement shall be held by a court of competent jurisdiction to be
invalid, void or unenforceable, the remainder of the terms and provisions set forth herein shall remain in full force and effect and shall in no
way be affected, impaired or invalidated, and each of the parties shall use its best efforts to find and employ an alternative means to achieve the
same or substantially the same result as that contemplated by such term or provision.
(c)
Further Assurances . Subject to the specific terms of this Agreement, each of the parties hereto shall make, execute,
acknowledge and deliver such other instruments and documents, and take all such other actions, as may be reasonably required in order to
effectuate the purposes of this Agreement and to consummate the transactions contemplated hereby.
(d)
Waivers, etc . No failure or delay on the part of either party (or the intended third-party beneficiaries referred to
herein) in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or
power, or any abandonment or discontinuance of steps to enforce such a right or power preclude any other or further exercise thereof or the
exercise of any other right or power. No modification or waiver of any provision of this Agreement nor consent to any departure therefrom
shall in any event be effective unless the same shall be in writing and signed by an authorized officer of each of the parties, and then such
waiver or consent shall be effective only in the specific instance and for the purpose for which given.
(e)
Entire Agreement . This Agreement contains the entire understanding of the parties with respect to its subject matter.
This Agreement supersedes all prior agreements and understandings between the parties, whether written or oral, with respect to the subject
matter hereof. The paragraph headings contained in this Agreement are for reference purposes only, and shall not affect in any manner the
meaning or interpretation of this Agreement.
(f)
Counterparts . For the convenience of the parties, this Agreement may be executed in any number of counterparts,
each of which shall be deemed to be an original but all of which together shall be one and the same instrument.
(g)
Amendment . This Agreement may be amended only by a written instrument duly executed by an authorized officer
of each of Company and the Holders of at least 51% of the Registrable Securities.
-12-
(h)
Notices . Unless expressly provided herein, all notices, claims, certificates, requests, demands and other
communications hereunder shall be in writing and shall be deemed to be duly given (i) when personally delivered, (ii) if mailed by registered or
certified mail, postage prepaid, return receipt requested, on the date the return receipt is executed or the letter refused by the addressee or its
agent, (iii) if given by telex or telecopier, once such notice or other communication is transmitted to the telex or telecopier number specified
below and the appropriate answer back or telephonic confirmation is received; provided that such notice or other communication is mailed in
accordance with clause (ii) hereof or (iv) if sent by overnight courier which delivers only upon the signed receipt of the addressee, on the date
the receipt acknowledgment is executed or refused by the addressee or its agent:
if to the Stockholders:
AirWorks Funding LLLP
655 Madison Avenue
23rd Floor
New York, New York 10021
Attention: Richard E. Perlman
Telephone: (212) 223-8633
Facsimile: (212) 888-8133
with a copy to:
Paul, Hastings, Janofsky & Walker LLP
600 Peachtree Street
Suite 2400
Atlanta, Georgia 30308
Attention: Reinaldo Pascual
Telephone: (404) 815-2227
Facsimile: (404) 685-5227
with a copy to:
RS Properties I LLC
111 Broadway
8th Floor
New York, New York 10006
Attention: John Lack
Telephone: (212) 542-8201
Facsimile: (212) 542-8212
if to Company to:
Kronos Advanced Technologies, Inc.
494 Common Street, Suite 301
Belmont, MA 02478
Attention: Daniel R. Dwight
Telephone: (___) ___-____
Facsimile: (___) ___-____
-13-
with a copy to:
Kirkpatrick & Lockhart Preston Gates Ellis LLP
Miami Center, 20th Floor
201 South Biscayne Blvd.
Miami, FL 33131-2399
Attention: Clayton E. Parker
Telephone: ( 305) 539-3306
Facsimile: (305) 358-7095
(i)
Governing Law . This Agreement is executed by Company in, and shall be construed in accordance with and
governed by the laws of the State of New York without giving effect to the principles of conflicts of laws thereof.
(j)
Term . This Agreement shall be effective as to each Stockholder that is a party to this Agreement upon the issuance
of any Registrable Securities to such Stockholder and shall remain in full force and effect until there are no Registrable Securities outstanding
or until terminated by the mutual agreement of Company and the Holders.
(k)
Assignment . The Holders may not assign their rights, duties or obligations hereunder or any part thereof to any other
person or entity; provided, however, that a Holder shall be permitted to assign its rights, duties and obligations hereunder in connection with
the transfer of Registrable Securities owned by such Holder. This agreement and all of the obligations hereunder, shall be binding upon and
enforceable against all permitted assigns and transferees.
[Signatures on next page]
-14-
IN WITNESS WHEREOF, the Stockholders and Company have caused this Agreement to be duly executed by their
authorized representatives as of the date first above written.
STOCKHOLDERS:
AIRWORKS FUNDING LLLP
By: Compass Partners, LLC, its general partner
By: /s/ Richard E. Perlman
Name: Richard E. Perlman
Title: President
SANDS BROTHERS VENTURE CAPITAL LLC
By: /s/ Scott A. Baily
Name: Scott A. Baily
Title: COO
SANDS BROTHERS VENTURE CAPITAL II LLC
By: /s/ Scott A. Baily
Name: Scott A. Baily
Title: COO
SANDS BROTHERS VENTURE CAPITAL III LLC
By: /s/ Scott A. Baily
Name: Scott A. Baily
Title: COO
SANDS BROTHERS VENTURE CAPITAL IV LLC
By: /s/ Scott A. Baily
Name: Scott A. Baily
Title: COO
CRITICAL CAPITAL GROWTH FUND, L.P.
By: Critical Capital, L.P., its General Partner
By: Critical Capital Corporation, its General Partner
By: /s/ Steven B. Sands
Name: Steven B. Sands
Title: Chairman
By: /s/ Charles L. Robinson
Name: Charles L. Robinson
Title: President
RS PROPERTIES I LLC
By: /s/ John Lack
Name: John Lack
Title: Manager
COMPANY:
KRONOS ADVANCED TECHNOLOGIES, INC.
By: /s/ Richard F. Tusing
Name: Richard F. Tusing
Title: COO
Exhibit 15
INFORMATION REGARDING RS PROPERTIES AND THE SANDS ENTITIES
RS Properties I LLC (“RS Properties”)
40 Wall Street
26th floor
New York, New York 10005
RS Properties is an independent investment fund making investments in, among other things, real estate and
securities. John Lack is the sole officer and manager of RS Properties.
Sands Brothers Venture Capital, LLC (“SBVC I”), (ii) Sands Brothers Venture Capital II LLC (“SBVC II”), (iii) Sands
Brothers Venture Capital III LLC (“SBVC III”), (iv) Sands Brothers Venure Capital IV LLC (“SBVC IV”), (v) Critical
Capital Growth Fund, L.P. (“Critical Capital” and together with SBVC I, Sands II, SBVC III, SBVC IV and Critical
Capital, the “Critical Capital Entities”)
90 Park Avenue
31st Floor
New York, New York 10016
The principal business of the Critical Capital Entities is that of a private investment entity engaging in the
purchase and sale of securities. Steven Sands is a manager of each of SB Venture Capital Management LLC, SB
Venture Capital Management II LLC, SB Venture Capital Management III LLC and SB Venture Capital
Management IV LLC, each a New York limited liability company and each the member-manager of SBVC I,
SBVC II, SBVC III and SBVC IV, respectively.