ZRCN Inc 8-K, filed Apr 20, 2023
ZRCN Inc. (ZRCN)
About this 8-K
ZRCN Inc filed this 8-K on April 20, 2023, reporting on events of April 13, 2023.
Items reported
- Item 1.01: Entered into a material agreement
- Item 2.01: Completed an acquisition or sale of assets
- Item 3.02: Unregistered sale of equity
- Item 3.03: Change to shareholders' rights
- Item 5.01: Change in control
- Item 5.02: Director or officer change, or executive pay
- Item 5.03: Charter or bylaw amendment, or fiscal year change
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date
of Report (date of earliest event reported):
(Exact name of Registrant as specified in its charter)
| (State
or other jurisdiction of incorporation) |
(Commission File Number) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices and zip code)
Registrant’s telephone number, including area code:
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
| Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) | |
| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) | |
| Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) | |
| Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Securities registered under Section 12(b) of the Exchange Act: None
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| N/A | N/A | N/A |
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $0.0001 per share
(Title of class)
Item 1.01 Entry into a Material Definitive Agreement.
The information contained in Item 2.01 below relating to the various agreements described therein is incorporated herein by reference.
Item 2.01 Completion of Acquisition or Disposition of Assets.
Merger Agreement
On April 13, 2023, pursuant to an Agreement and Plan of Merger (the “Merger Agreement”), dated as of April 13, 2023, by and among ZRCN, Inc. (f/k/a Harmony Energy Technologies Corp.) (the “Company”), ZRCN, Inc., a California corporation and a direct, wholly owned subsidiary of the Company (“Merger Sub”), and Zircon Corporation, a California corporation (“Zircon” or “Zircon Corp.”), upon the terms and subject to the satisfaction of the conditions described in the Merger Agreement, including approval of the transaction by Zircon’s shareholders, Merger Sub will be merged with and into Zircon (the “Merger”), with Zircon surviving the Merger as a wholly-owned subsidiary of the Company. The shareholders of Zircon will become the majority owners of the Company’s outstanding common stock upon the closing of the Merger. Terms of the Merger include a payment of approximately an aggregate of $180,000 to certain creditors of the Company from Zircon, which is intended to repay certain of the Company’s payables at closing.
Prior to the execution of the Merger Agreement, the Board of Directors of the Company (the “Board”), unanimously (i) determined that the terms and provisions of the Merger Agreement and the transactions contemplated thereby, including the Merger, are fair to, advisable and in the best interests of the Company and its shareholders, (ii) approved and declared advisable the Merger Agreement and the transactions contemplated thereby, including the Merger, and (iii) determined that it is advisable and in the best interests of the Company and its shareholders to enter into the Merger Agreement and to consummate the transactions contemplated thereby, including the Merger.
Pursuant to the Merger Agreement, each share of common stock of Zircon, par value $0.0001 per share (the “Zircon Common Stock”) (other than any cancelled shares (as defined in the Merger Agreement) and Dissenting Shares (as defined in the Merger Agreement)), issued and outstanding immediately prior to the effective time of the Merger (the “Effective Time”) shall be automatically converted into the right to receive an aggregate of 177,339,233 shares of common stock, par value $0.0001 per share, of the Company (“Company Common Stock”). As a result, immediately following the Effective Time, the former Zircon shareholders will hold approximately 90% of the outstanding shares of Company Common Stock and the shareholders of the Company will retain ownership of approximately 10% of the outstanding shares of Company Common Stock. In addition, at the closing of the Merger, the Company will issue certain consultants and advisors warrants to purchase an aggregate of 4,308,177 shares of Company Common Stock (the “Consultant Warrants”). The Consultant Warrants will be a ten year warrant, and will have an exercise price of $0.01 per share. Upon completion of the Merger, the Company agreed to change its name to ZRCN Inc., as further described in Item 3.03 and Item 5.03 below.
The closing is subject to satisfaction or waiver of certain conditions including, among other things, (i) the required approvals by the Zircon shareholders, (ii) the accuracy of the representations and warranties, subject to certain materiality qualifications, (iii) compliance by the parties with their respective covenants, (iv) no law or order preventing the merger and related transactions, and (v) execution of certain Warrant Exchange Agreements and Debt Settlement Agreements (each as defined below).
On April 14, 2023, the Company completed its business combination with Zircon in accordance with the terms of the Merger Agreement, pursuant to which Merger Sub merged with and into Zircon, with Zircon surviving as a wholly-owned subsidiary of the Company.
The foregoing description of the Merger Agreement is not complete and is qualified in its entirety by reference to the Merger Agreement, which is attached hereto as Exhibit 2.1 to this report and incorporated herein by reference.
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The Merger Agreement (and the foregoing description of the Merger Agreement and the transactions contemplated thereby) has been included to provide investors and shareholders with information regarding the terms of the Merger Agreement and the transactions contemplated thereby. It is not intended to provide any other factual information about the Company and Zircon. The representations, warranties and covenants contained in the Merger Agreement were made only as of specified dates for the purposes of the Merger Agreement, were solely for the benefit of the parties to the Merger Agreement and may be subject to qualifications and limitations agreed upon by such parties. In particular, in reviewing the representations, warranties and covenants contained in the Merger Agreement and discussed in the foregoing description, it is important to bear in mind that such representations, warranties and covenants were negotiated with the principal purpose of allocating risk between the parties, rather than establishing matters as facts. Such representations, warranties and covenants may also be subject to a contractual standard of materiality different from those generally applicable to shareholders and reports and documents filed with the SEC. Investors and shareholders are not third-party beneficiaries under the Merger Agreement. Accordingly, investors and shareholders should not rely on such representations, warranties and covenants as characterizations of the actual state of facts or circumstances described therein. Information concerning the subject matter of such representations, warranties and covenants may change after the date of the Merger Agreement, which subsequent information may or may not be fully reflected in the parties’ public disclosures.
Warrant Exchange Agreement
In connection with the Merger, the Company entered into a warrant exchange agreement, dated April 14, 2023 (the “Warrant Exchange Agreement”), with certain Holders of the Company’s warrants under which such holders will receive 470,188 shares of Common Stock in exchange for their warrants. The foregoing description of the Warrant Exchange Agreement is not complete and is qualified in its entirety by reference to the form of Warrant Exchange Agreement which is attached hereto as Exhibit 10.1 to this report and incorporated herein by reference.
The issuance of shares of our Common Stock pursuant to the Warrant Exchange Agreements was not registered under the Securities Act, in reliance upon the exemption from registration provided by Section 3(a)(9) or Section 4(a)(2) of the Securities Act, which exempts transactions by an issuer not involving any public offering, and Rule 506(b) of Regulation D promulgated by the SEC. These securities may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirement, and are subject to further contractual restrictions on transfer as described below.
Debt Settlement Agreement
In connection with the Merger, the Company entered into debt settlement agreements (the “Debt Settlement Agreements”) with certain creditors of the Company under which the Company agreed to make certain payments over the next 12 months to the creditors in satisfaction of an aggregate of $576,881 which was owed to them. The foregoing description of the Debt Settlement Agreements is not complete and is qualified in its entirety by reference to the form of Debt Settlement Agreement which is attached hereto as Exhibit 10.2 to this report and incorporated herein by reference.
Escrow Agreement
In connection with the Merger, on April 14, 2023 we entered into an escrow agreement (the “Escrow Agreement”) with Christian Guilbaud, Kenneth Charles Grainger, Demin Huang and Rui Zhi, each as a “Guarantor” and collectively, the “Guarantors,” Zircon Corporation and Anthony L.G., PLLC, as escrow agent (the “Escrow Agent”) under which the Guarantors have agreed to place an aggregate of 3,877,440 shares of Company Common Stock that was issuable to them in connection with the Merger into escrow with the Escrow Agent for the purposes of supporting the indemnification obligations of the Company under the Merger Agreement. The foregoing description of the Escrow Agreement is not complete and is qualified in its entirety by reference to the form of Escrow Agreement which is attached hereto as Exhibit 10.3 to this report and incorporated herein by reference.
DESCRIPTION OF BUSINESS
Zircon was founded in 1977 as a start-up in Northern California (Silicon Valley). In 1980, Zircon introduced the market’s first capacitor plate based stud finder to detect changes in the dielectric constant of a wall. With the “Stud Sensor”, Zircon singlehandedly opened an entirely new market segment to the electronics industry: the hardware business. Zircon then set out to develop novel stud finders, metal detectors and electrical scanners for use in the home and commercial repair, construction, improvement, and interior decor industry which includes both professionals and do-it-yourselfers.
Zircon products are sold and marketed to both do-it-yourself (DIY) retail and professional consumers through third-party retailers and distributors worldwide and sold direct to consumers through the company’s website at www.zircon.com.
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Zircon designed and manufactured the original StudSensor™ stud finder, and is committed to providing innovative, proprietary, affordable, and easy-to-use technology to the world’s toolboxes. Zircon’s patented technology solves everyday problems for DIYers, the professional construction trades, and home décor installers worldwide.
Zircon develops, owns, and continuously refines the proprietary and licensed technologies and designs for all its products. Sensor development, custom mixed-mode ASICs (chips), software, firmware and ergonomic design are major components of the company’s overall IP portfolio and strategy.
Zircon’s intellectual property portfolio consists of approximately 113 individual patents, including at least 83 US patents, 26 Canadian patents and 4 China patents, 19 trademarks and tradenames, including 13 registered trademarks, and 6 unregistered tradenames.
Zircon products are available to retail and professional consumers directly through its website, and through multi-decade relationships with major online and offline physical retailers like Home Depot, Lowes, Menards, Walmart, ACE, Amazon and many others.
Zircon has announced a new product technology and associated new products based on its proprietary ‘Superscan’ technology. The company is accepting pre-orders for its new products and expects to deliver products from this new line to retail customers and distributors in fiscal 2nd quarter of 2023.
Zircon intends to invest in this and other new technologies, and deploy a full line of new products to complement its existing product portfolio, enter new markets, and significantly expand penetration into the company’s existing global markets.
New markets for Zircon products and technology could include inspection data sales to the insurance industry, commercial building certification and testing, public infrastructure assessment, Building Information Modelling, and other areas where the company believes its unique technology could be beneficial.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the beneficial ownership of the Company’s Common Stock immediately after the closing of the Merger on April 14, 2023:
| ● | each person, or group of affiliated persons, who is the beneficial owner of more than 5% of the outstanding common stock of the Company; | |
| ● | each executive officer and director of the Company; and | |
| ● | all of the Company’s executive officers and directors as a group. |
Beneficial ownership is determined according to the rules of the SEC and generally means that a person has beneficial ownership of a security if he, she or it possesses sole or shared voting or investment power of that security, including securities that are exercisable or convertible, as the case may be, within 60 days of April 14, 2023. Shares of common stock issuable pursuant to such securities are deemed outstanding for computing the percentage of the person holding such securities and the percentage of any group of which the person is a member but are not deemed outstanding for computing the percentage of any other person. Except as indicated by the footnotes below, the combined Company believes, based on the information furnished to it, that the persons named in the table below have sole voting and investment power with respect to all shares of common stock shown that they beneficially own, subject to community property laws where applicable. The information does not necessarily indicate beneficial ownership for any other purpose, including for purposes of Section 13(d) and 13(g) of the Securities Act.
The percentage of shares beneficially owned is based on 198,964,500 shares of Company Common Stock outstanding upon the closing of the Merger.
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Unless otherwise noted below, the address of the persons listed on the table is c/o ZRCN Inc., 1580 Dell Avenue, Campbell, CA. 95008.
| Beneficial ownership representing less than 1% is denoted with an asterisk (*). |
| Beneficial Ownership | ||||||||
| Name of Beneficial Owner | Shares | % | ||||||
| Greater than 5% Stockholders: | ||||||||
| Stauss 2014 Revocable Trust (1) | 79,802,655 | 40.11 | % | |||||
| Kurt Stauss | 35,467,847 | 17.83 | % | |||||
| Eric Stauss | 35,467,847 | 17.83 | % | |||||
| Current Executive Officers and Directors: | ||||||||
| John Stauss (1) | 79,802,655 | 40.11 | % | |||||
| Ronald Bourque | 0 | * | ||||||
| Robert Wyler | 26,600,884 | 13.37 | % | |||||
| All current executive officers and directors as a group (3 persons) | 106,403,539 | 53.48 | % | |||||
| (1) | John Stauss, as a trustee of the Stauss 2014 Revocable Trust, has the voting power to vote and dispose of the shares held in such trust. |
Item 3.02 Unregistered Sales of Equity Securities.
Information concerning the Company’s issuance of Company Common Stock pursuant to the Merger Agreement and any Warrant Exchange Agreement, together with any Consultant Warrants is set forth under Item 2.01 above and is incorporated herein by reference. A copy of the Consultant Warrants is attached hereto as Exhibit 4.1 to this report and incorporated herein by reference.
The securities issued and sold is this transaction were not registered under the Securities Act, or the securities laws of any state, and were offered and sold in reliance on the exemption from registration afforded by Section 3(a)(9) or Section 4(a)(2) of the Securities Act, which exempts transactions by an issuer not involving any public offering, and Rule 506(b) of Regulation D promulgated by the SEC. This Current Report shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall such securities be offered or sold in the United States absent registration or an applicable exemption from the registration requirements and certificates evidencing such shares contain a legend stating the same.
Item 3.03 Material Modification to Rights of Security Holders
On April 18, 2023, in connection with the Merger, the Company filed an amendment to the Certificate of Incorporation with the Secretary of State of the State of Delaware to change the Company’s name from “Harmony Energy Technologies Corp.” to “ZRCN Inc.” The Name Change did not alter the voting powers or relative rights of the Company Common Stock.
The foregoing description of the Name Change does not purport to be complete and is qualified in its entirety by reference to the complete text of the amendment to the Certificate of Incorporation, which is filed herewith as Exhibit 3.1, and incorporated herein by reference.
Item 5.01 Changes in Control of Registrant.
The information set forth under Item 2.01 of this Current Report on Form 8-K is incorporated by reference into this Item 5.01.
In accordance with the Merger Agreement, on April 14, 2023, at the Effective Time, each of the directors of the Company resigned from the Board. Following such resignations and effective as of the Effective Time, the following individuals, all of whom were directors of Zircon prior to the Merger, were appointed to the Board: John Stauss, whose term expires at the Company’s next annual meeting of stockholders. In addition, Zircon has appointed two additional members of the Board as discussed in Item 5.02 below. The appointment of these additional members is subject to compliance with Rule 14f-1 under the Securities Exchange Act of 1934, as amended.
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Item 5.02 Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.
Resignations of Executive Officers and Directors
In accordance with the Merger Agreement, on April 14, 2023, at the Effective Time, (i) Kenneth Charles Grainger resigned as President & Chief Executive Officer and Demin (Fleming) Huang resigned as Chief Financial Officer and Secretary and (ii) Kenneth Charles Grainger and Christian Guilbaud resigned from the Board, which resignations were not the result of any disagreements with the Company relating to the Company’s operations, policies or practices.
Appointment of Certain Officers and Directors
In accordance with the Merger Agreement, on April 14, 2023, the Board appointed the following officers of the Company, effective at the Effective Time: John Stauss as Chairman and Chief Executive Officer, Ronald Bourque as President, Chief Financial Officer and Chief Operating Officer and Robert Wyler as General Counsel and Secretary.
In addition, in accordance with the Merger Agreement, on April 14, 2023, the Board appointed John Stauss as a director of the Company, effective at the Effective Time. On April 17, 2023, the Board appointed Ronald Bourque and Robert Wyler to the Board, subject to compliance with Rule 14f-1 under the Exchange Act.
No person appointed as an officer and director of the Company in connection with the Merger Agreement has any family relationship with any director, executive officer or person nominated or chosen by the Company to become a director or executive officer. There is no understanding or arrangement between any person appointed as an officer and director of the Company and any other person pursuant to which any such person was selected as an executive officer of the Company. There are no transactions in which any of Messrs. Stauss, Bourque and Wyler has an interest requiring disclosure under Item 404(a) of Regulation S-K.
John Stauss, age 65, was appointed on April 13, 2023, to serve as our Chief Executive Officer, Chairman and a Director, effective immediately. Mr. Stauss originally joined Zircon in 1984 as Operations Manager. In 1989, he was promoted to President where he served in that capacity until 2000. Mr. Stauss stepped down as President but remained a Director of the company from 2000 – 2006. In 2006, John returned to Zircon as its Chairman and CEO, where he has continually sought to set broad performance objectives for the Zircon to deliver excellence with a high degree of focus on consistent profitability, technical superiority, intellectual property development, industrial design and industry-leading vendor and end-user support. Mr. Stauss graduated from Homestead Highschool in 1975 and Cal Poly, San Luis Obispo with a Bachelors in Biochemistry in 1982 and a Masters in Business Administration (MBA) in 1984.
Ronald Bourque, age 72, was appointed on April 13, 2023, to serve as our Chief Financial Officer and President, effective immediately. Mr. Bourque was also appointed to serve as a director of the Company, subject to compliance with Rule 14f-1 under the Exchange Act. Mr. Bourque joined Zircon in 1985 and is the company’s Chief Operating Officer and President. Ron is responsible for all facets of the company’s operations, including management of all critical finance and production related activities, such as procurement, inventory, HR, facilities management, sales and customer service, as well as all F, P & A functions, audit, A/R, A/P and manufacturing operations. Prior to Zircon, Mr. Bourque held various senior management roles with high volume electronic and electronic hand-tool manufacturers. Mr. Bourque received a Bachelor of Science with a concentration in management and a minor in accounting, from San Jose State University in June, 1975. He earned his Masters in Business Administration (MBA) from San Jose State University in 1984. Ron also served in the US Navy from 1968 – 1972, where he received a Letter of Commendation and was honorably discharged. Mr. Bourque is a Vietnam veteran.
Robert Wyler, age 79, was appointed on April 13, 2023, to serve as our General Counsel and Secretary, effective immediately. Mr. Wyler was also appointed to serve as a director of the Company, subject to compliance with Rule 14f-1 under the Exchange Act. Mr. Wyler is a co-Founder of Zircon Corporation and is currently Vice President and Secretary, as well as the company’s General Counsel and a Director. Bob has served in various senior leadership and legal roles with domestic and international technology companies, including Varian Associates, a public company based in Palo Alto and Litronix, Inc. of Cupertino, CA., where he was responsible for supervision and management of all of the company’s legal matters both in the US and also across Litronix’s international operations in Europe, Malaysia, Singapore and Mauritius. Mr. Wyler received a Bachelor of Science in Mechanical Engineering from Stanford University in 1965, and a Juris Doctorate (JD) from Hastings College of Law in San Francisco in 1968.
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Family Relationships
No family relationships exist between any of our current or former directors or executive officers.
Involvement in Certain Legal Proceedings
There are no material proceedings to which any director or executive officer or any associate of any such director or officer is a party adverse to our Company or has a material interest adverse to our Company.
Related Party Transactions
The following is a summary of transactions since March 31, 2021, to which the Company has been a participant, in which:
● the amounts exceeded or will exceed the lesser of $120,000 or one percent of the average of the Company’s total assets at year-end for the last two completed fiscal years; and
● any of its current directors, executive officers or holders of more than 5% of the respective capital stock, or any member of the immediate family of the foregoing persons, had or will have a direct or indirect material interest.
Affiliated Entities
Zircon is a member of a controlled group of companies and has revenue and cost-sharing activities with other members of the controlled group. Results of operations and financial condition may not represent amounts that would have been reported if the company operated as an unaffiliated entity.
Zircon has an exclusive manufacturing and technical assistance agreement with Zircon de Mexico S.A. de C.V. (the “contractor”), an entity which is owned by certain shareholders of Zircon.
Under the terms of the agreement, Zircon provides materials, technical assistance, and expertise to the contractor, and the contractor assembles certain of Zircon’s products. Zircon paid the contractor for costs incurred in manufacturing Zircon’s products, as defined in the contract, plus a profit percentage of approximately 5% of actual cost during the 9 month periods ended December 31, 2022 and 2021. Total payments including the profit percentage amounted to $1,862,179 and $1,987,013 for the 9 month periods ended December 31, 2022 and 2021, respectively. As of December 31, 2022 and 2021, Zircon had a payable to the contractor of approximately $89,331 and $33,046, respectively.
Zircon has a note payable to the contractor. The note was established for the purpose of reducing the payable balance and to satisfy the company’s lender’s requirements. During the period December 31, 2021, Zircon increased the borrowings by $400,000 to reduce the payable balance and to control the timing of the expected cash payments. The outstanding loan balance on December 31, 2022 was at $800,000. The note bears interest at the current Federal funds rate not to exceed 5% and is limited to an increase of no more than 2% annually. The entire principal balance is due and payable in December 2024 and is subordinated to the line of credit agreement the company has with the bank.
In September 2017, an affiliated company, Zircon Corporation Limited, was established in the United Kingdom to facilitate the sale of Zircon’s products to European customers and operations began during the year ended March 31, 2019. The ownership structure of the affiliate is similar to the ownership of Zircon. The company pays certain administrative and selling expenses of the affiliate. During the 9 month periods ended December 31, 2022 and 2021, the company recorded sales to the affiliate of approximately $5,611 and $38,457, respectively. As of December 31, 2022 and 2021, the company had a receivable from the affiliate of approximately $95,400 and $175,751, respectively.
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Notes Payable
Zircon has notes payable to the Stauss Family Administrative Trust to repay loans made to Zircon. During the year ended March 31, 2022, Zircon management made a one time unscheduled payment of $247,755. The remaining principal balance of $907,420 is due and payable in December 2024. Interest accrued at 5.5% per annum is paid quarterly and included in accrued expenses. The note is subordinated to the line of credit payable to the bank and no payment is to be made on the note without prior approval from the bank.
Item 5.03 Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year.
Amendments to Articles of Incorporation
In connection with the Merger, on April 18, 2023, we filed a certificate of amendment to our certificate of incorporation to change our corporate name to ZRCN, Inc.
Change in Fiscal Year
Effective Change in Fiscal Year
Effective April 14, 2023, our board of directors approved the change in our fiscal year end from December 31 to March 31.
Item 9.01 Financial Statements and Exhibits.
| a) | Financial Statements of Business Acquired. |
The following financial statements of Zircon are being filed as exhibits to this Current Report on Form 8-K:
| (i) | The audited financial statements of Zircon as of and for the years ended March 31, 2022 and 2021 and related notes, are attached as Exhibit 99.1 to this Report. | |
| (ii) | The unaudited financial statements of Zircon as of and for the nine month period ended December 31, 2022 and 2021 and related notes are attached as Exhibit 99.2 to this Report. |
| (b) | Pro Forma Financial Information |
In accordance with Item 9(b)(2) of Form 8-K, we will file unaudited pro forma consolidated financial statements of the Company and Zircon by amendment as soon as possible, but not later than June 27, 2023.
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| (d) | Exhibits |
† Certain of the schedules to this exhibit have been omitted in accordance with Regulation S-K Item 601(b)(2). The Company hereby undertakes to furnish supplementally a copy of all omitted schedules to the SEC upon its request.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Company has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| ZRCN, Inc. | ||
| Date: April 19, 2023 | By: | /s/ John Stauss |
| John Stauss | ||
| Chief Executive Officer | ||
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Exhibit 2.1
Agreement and Plan of Merger
Dated as of April 13, 2023
Table of Contents
| Article I. The Merger | 1 | |
| Section 1.01 | Effective Time of the Merger. | 1 |
| Section 1.02 | Closing. | 1 |
| Section 1.03 | Effects of the Merger. | 2 |
| Section 1.04 | Directors and Officers of the Surviving Corporation and Harmony. | 2 |
| Section 1.05 | Name of Harmony. | 2 |
| Article II. Conversion of Securities | 2 | |
| Section 2.01 | Conversion of Capital Stock. | 2 |
| Section 2.02 | Dissenting Shares. | 4 |
| Article III. Representations and Warranties of Zircon | 5 | |
| Section 3.01 | Organization, Standing and Power. | 5 |
| Section 3.02 | Capitalization. | 6 |
| Section 3.03 | Subsidiaries. | 7 |
| Section 3.04 | Authority; No Conflict; Required Filings and Consents. | 7 |
| Section 3.05 | Financial Statements; Information Provided. | 8 |
| Section 3.06 | No Undisclosed Liabilities. | 9 |
| Section 3.07 | Absence of Certain Changes or Events. | 9 |
| Section 3.08 | Taxes. | 9 |
| Section 3.09 | Owned and Leased Real Properties. | 11 |
| Section 3.10 | Intellectual Property. | 11 |
| Section 3.11 | Contracts. | 14 |
| Section 3.12 | Litigation. | 16 |
| Section 3.13 | Environmental Matters. | 16 |
| Section 3.14 | Employee Benefit Plans. | 17 |
| Section 3.15 | Compliance with Laws. | 19 |
| Section 3.16 | Permits and Regulatory Matters. | 19 |
| Section 3.17 | Employees. | 20 |
| Section 3.18 | Insurance. | 20 |
| Section 3.19 | Brokers; Fees and Expenses. | 21 |
| Section 3.20 | Certain Business Relationships with Affiliates. | 21 |
| Section 3.21 | Controls and Procedures, Certifications and Other Matters. | 21 |
| Section 3.22 | Books and Records. | 21 |
| Section 3.23 | Data Protection. | 21 |
| Section 3.24 | No Other Representations or Warranties. | 21 |
| Article IV. Representations and Warranties of Harmony and the Merger Sub | 22 | |
| Section 4.01 | Organization, Standing and Power. | 22 |
| Section 4.02 | Capitalization. | 23 |
| Section 4.03 | Subsidiaries. | 24 |
| Section 4.04 | Authority; No Conflict; Required Filings and Consents. | 25 |
| i |
| Section 4.05 | SEC Filings; Financial Statements; Information Provided. | 25 |
| Section 4.06 | No Undisclosed Liabilities. | 29 |
| Section 4.07 | Absence of Certain Changes or Events. | 29 |
| Section 4.08 | Taxes. | 29 |
| Section 4.09 | Owned and Leased Real Properties. | 32 |
| Section 4.10 | Intellectual Property. | 32 |
| Section 4.11 | Contracts. | 32 |
| Section 4.12 | Litigation. | 34 |
| Section 4.13 | Environmental Matters. | 34 |
| Section 4.14 | Employee Benefit Plans. | 35 |
| Section 4.15 | Compliance With Laws. | 35 |
| Section 4.16 | Permits and Regulatory Matters. | 35 |
| Section 4.17 | Employees. | 35 |
| Section 4.18 | Insurance. | 36 |
| Section 4.19 | Section 203 of the DGCL. | 36 |
| Section 4.20 | Brokers; Fees and Expenses. | 37 |
| Section 4.21 | Operations of Merger Sub. | 37 |
| Section 4.22 | Controls and Procedures, Certifications and Other Matters. | 37 |
| Section 4.23 | Books and Records. | 37 |
| Section 4.24 | Subsidies. | 38 |
| Section 4.25 | Data Protection. | 38 |
| Section 4.26 | Certain Business Relationships with Affiliates. | 38 |
| Section 4.27 | Acknowledgement by Harmony. | 38 |
| Section 4.28 | Compliance with Anti-Corruption Laws. | 39 |
| Section 4.29 | OFAC. | 39 |
| Section 4.30 | Liabilities. | 39 |
| Section 4.31 | Bank Accounts and Safe Deposit Boxes. | 39 |
| Section 4.32 | Investment Company. | 39 |
| Section 4.33 | Bankruptcy and Indebtedness. | 39 |
| Section 4.34 | No SEC or FINRA Inquiries. | 39 |
| Section 4.35 | No Other Representations or Warranties. | 39 |
| Article V. Conduct of Business | 40 | |
| Section 5.01 | Covenants of Zircon. | 40 |
| Section 5.02 | Covenants of Harmony and Merger Sub. | 43 |
| Section 5.03 | Confidentiality. | 45 |
| Article VI. Additional Agreements | 46 | |
| Section 6.01 | No Solicitation. | 46 |
| Section 6.02 | Access to Information; Cooperation. | 48 |
| Section 6.03 | Legal Conditions to Merger. | 48 |
| Section 6.04 | Public Disclosure. | 49 |
| Section 6.05 | Tax Matters. | 49 |
| Section 6.06 | Affiliate Legends. | 50 |
| Section 6.07 | Notification of Certain Matters. | 50 |
| ii |
| Section 6.08 | Employee Communications. | 50 |
| Section 6.09 | FIRPTA Tax Certificates. | 50 |
| Section 6.10 | State Takeover Laws. | 50 |
| Section 6.11 | Section 16 Matters. | 51 |
| Section 6.12 | Termination of Certain Agreements and Rights. | 51 |
| Section 6.13 | Filing of Schedule 14f-1. | 51 |
| Section 6.14 | Disclosure. | 51 |
| Section 6.15 | Harmony SEC Documents. | 51 |
| Section 6.16 | Bank Accounts. | 51 |
| Article VII. Conditions to Merger | 52 | |
| Section 7.01 | Conditions to Each Party’s Obligation To Effect the Merger. | 52 |
| Section 7.02 | Additional Conditions to the Obligations of Harmony and Merger Sub. | 53 |
| Section 7.03 | Additional Conditions to the Obligations of Zircon. | 54 |
| Article VIII. Termination and Amendment | 55 | |
| Section 8.01 | Termination. | 55 |
| Section 8.02 | Effect of Termination. | 56 |
| Section 8.03 | Fees and Expenses. | 56 |
| Section 8.04 | Amendment. | 56 |
| Section 8.05 | Extension; Waiver. | 56 |
| Section 8.06 | Procedure for Termination, Amendment, Extension or Waiver. | 56 |
| Section 8.07 | Specific Enforcement. | 56 |
| Article IX. Indemnification | 57 | |
| Section 9.01 | Survival. | 57 |
| Section 9.02 | Indemnification by Harmony. | 57 |
| Section 9.03 | Indemnification by Zircon. | 57 |
| Section 9.04 | Indemnification Procedures. | 58 |
| Section 9.05 | Limitations on Indemnification. | 59 |
| Section 9.06 | General Indemnification Provisions. | 59 |
| Section 9.07 | Escrow; Timing of Payment; Right to Set-Off. | 60 |
| Section 9.08 | Exclusive Remedies. | 60 |
| Article X. Miscellaneous | 61 | |
| Section 10.01 | Notices. | 61 |
| Section 10.02 | Entire Agreement. | 62 |
| Section 10.03 | No Third-Party Beneficiaries. | 62 |
| Section 10.04 | Assignment | 62 |
| Section 10.05 | Severability. | 62 |
| Section 10.06 | Counterparts and Signature. | 63 |
| Section 10.07 | Interpretation. | 63 |
| Section 10.08 | Arm’s Length Bargaining; No Presumption Against Drafter. | 63 |
| Section 10.09 | Governing Law. | 64 |
| Section 10.10 | Remedies; Specific Performance. | 64 |
| Section 10.11 | Further Assurances. | 64 |
| Section 10.12 | Limitation on Damages. | 64 |
| Section 10.13 | Submission to Jurisdiction. | 65 |
| Section 10.14 | WAIVER OF JURY TRIAL. | 65 |
| Section 10.15 | Disclosure Schedule. | 65 |
Exhibits
| Exhibit A | Form of Warrant Exchange Agreement |
| Exhibit B | Form of Debt Settlement Agreement |
| Exhibit C | Form of Escrow Agreement |
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AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this “Agreement”), dated as of April 13, 2023 (the “Effective Date”), is entered into by and among Harmony Energy Technologies Corp., a Delaware corporation (“Harmony”); ZRCN Inc., a California corporation and a wholly owned subsidiary of Harmony (the “Merger Sub”); and Zircon Corporation, a California corporation (“Zircon)”. Harmony, Merger Sub and Zircon may be referred to herein individually as a “Party” and collectively as the “Parties”.
WHEREAS, the Board of Directors of Harmony (the “Harmony Board”) and the Board of Directors of Zircon (the “Zircon Board”) have each (i) determined that the Merger is fair to, and in the best interests of, their respective corporations and stockholders and (ii) approved this Agreement, the Merger and the actions contemplated by this Agreement;
WHEREAS, the combination of Harmony and Zircon shall be effected through a merger (the “Merger”) of Merger Sub into Zircon in accordance with the terms of this Agreement, the General Corporation Law of the State of Delaware (the “DGCL”) and the California Corporations Code (the “CCC”), as a result of which Zircon will become a wholly owned subsidiary of Harmony;
WHEREAS, for United States federal income tax purposes, it is intended that (i) the Merger shall qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code”) and a transaction under Section 351 of the Code, (ii) Harmony, Merger Sub, Zircon and holders of the Zircon Common Stock are parties to such reorganization within the meaning of Section 368(b) of the Code; and (iii) this Agreement constitutes a “plan of reorganization” for purposes of Sections 354, 361 and 368 of the Code and within the meaning of Treasury Regulations Section 1.368-2(g) ; and
NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth below, Harmony, Merger Sub and Zircon agree as follows:
Article I. The Merger
Section 1.01 Effective Time of the Merger. Upon the terms and subject to the conditions set forth in this Agreement, on the Closing Date the Parties will cause the Merger to be consummated by executing and filing a certificate of merger in accordance with the relevant provisions of the CCC (the “Certificate of Merger”). The Merger shall become effective upon the due filing of the Certificate of Merger with the Secretary of State of the State of California or at such subsequent time or date as Harmony and Zircon shall agree and specify in the Certificate of Merger (the “Effective Time”).
Section 1.02 Closing. Subject to the satisfaction or waiver (to the extent permitted by law) of the conditions set forth in Article VII, the closing of the Merger (the “Closing”) will take place at 12:00 p.m., Eastern time, on a date to be specified by Harmony and Zircon (the “Closing Date”), which shall be no later than the second Business Day after satisfaction or waiver of the conditions set forth in Article VII (other than those conditions that by their nature are to be satisfied at the Closing, but subject to the fulfillment or waiver of such conditions), at the offices of Sheppard, Mullin, Richter & Hampton LLP, 30 Rockefeller Plaza, New York, New York, 10112, unless another date, place or time is agreed to in writing by Harmony and Zircon. For the purposes of this Agreement, the term “Business Day” shall mean any day other than a Saturday, Sunday or other day on which commercial banking institutions in New York, New York are authorized or permitted by law to be closed.
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Section 1.03 Effects of the Merger.
| (a) | At the Effective Time, (i) the separate existence of Merger Sub shall cease, and Merger Sub shall be merged with and into Zircon (Zircon, as the surviving corporation following the Merger, is sometimes referred to herein as the “Surviving Corporation”) and (ii) the articles of incorporation of Zircon in effect as of immediately prior to the Effective Time shall be amended and restated in its entirety to read as set forth in Exhibit A-1, and, as so amended, shall be the certificate of incorporation of the Surviving Corporation. In addition, the bylaws of Zircon, as in effect immediately prior to the Effective Time, shall be amended and restated to read as set forth in Exhibit A-2, and, as so amended, shall be the bylaws of the Surviving Corporation. |
| (b) | At and after the Effective Time, the officers and directors of the Surviving Corporation shall be authorized to execute and deliver, in the name and on behalf of the Surviving Corporation, Merger Sub or Zircon, any deeds, bills of sale, assignments or assurances and to take and do, in the name and on behalf of the Surviving Corporation, Merger Sub or Zircon, any other actions and things necessary to vest, perfect or confirm of record or otherwise in the Surviving Corporation any and all right, title and interest in, to and under any of the rights, properties or assets acquired or to be acquired by the Surviving Corporation as a result of, or in connection with, the Merger. |
Section 1.04 Directors and Officers of the Surviving Corporation and Harmony.
| (a) | As of the Effective Time, the officers and directors of Zircon shall remain in place as the officers and directors of the Surviving Corporation until replaced in accordance with the articles of incorporation and bylaws of Zircon. |
| (b) | As of the Effective Time, Harmony shall undertake such actions as required to name persons nominated by Zircon to the Board of Directors of Harmony and to positions as officers of Harmony, all as identified in Section 1.04 of the Zircon Disclosure Schedule, and all other directors and officers of Harmony shall thereafter resign. |
Section 1.05 Name of Harmony. In connection with the Closing, Harmony shall file a certificate of amendment to its certificate of incorporation immediately following the Effective Time to change the name of Harmony to ZRCN, Inc.
Article II. Conversion of Securities
Section 2.01 Conversion of Capital Stock. As of the Effective Time, by virtue of the Merger and without any action on the part of the holder of any shares of capital stock of Zircon or the holder of any shares of capital stock of Merger Sub:
| (a) | Capital Stock of Merger Sub. Each share of the common stock, $0.0001 par value per share, of Merger Sub issued and outstanding immediately prior to the Effective Time shall be converted into and become one fully paid and nonassessable share of common stock, no par value per share, of the Surviving Corporation. |
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| (b) | Cancellation of Treasury Stock and Harmony Owned Stock. All shares of Zircon Capital Stock that are held in treasury, any shares of Zircon Common Stock owned by Harmony, Merger Sub or any other Subsidiary of Harmony, immediately prior to the Effective Time shall be cancelled and shall cease to exist, and no stock of Harmony or other consideration shall be delivered in exchange therefor. |
| (c) | Exchange Ratio for Zircon Common Stock. Subject to Section 2.02, all issued and outstanding shares of Zircon Common Stock (other than shares to be cancelled in accordance with Section 2.01(b) and any Dissenting Shares) shall collectively be automatically converted into the right to receive a total of 177,339,233 shares of common stock, par value $0.0001 per share, of Harmony (“Harmony Common Stock”) to be apportioned pro rata between the outstanding shares of Zircon Common Stock. As of the Effective Time, all such shares of Zircon Common Stock shall cease to be outstanding and shall automatically be cancelled and shall cease to exist, and each holder of a certificate representing any such shares of Zircon Common Stock shall cease to have any rights with respect thereto, except the right to receive the shares of Harmony Common Stock pursuant to this Section 2.01(c) and any cash in lieu of fractional shares of Harmony Common Stock to be issued or paid in consideration therefor and any amounts payable pursuant to Section 2.02 upon the surrender of such certificate in accordance with Section 2.02, without interest. |
| (d) | Harmony Debt and Warrants. |
| (i) | As of the Effective Time and as a condition to the Closing (but, subject to Section 2.01(d)(iii)) each warrant of Harmony shall be exchanged for shares of Harmony Common Stock, pursuant to a Warrant Exchange Agreement in the form as attached hereto as Exhibit A (the “Warrant Exchange Agreements”). |
| (ii) | At the Closing, certain loans and notes outstanding in Harmony, totaling $576,881 will be fully settled, pursuant to a Debt Settlement Agreement in the form as attached hereto as Exhibit B (the “Debt Settlement Agreements”). |
| (iii) | The Parties acknowledge and agree that one holder of warrants of Harmony for a total of 355,000 shares of Harmony Common Stock (the “Excluded Warrants”), or the representatives of such holder (the “Excluded Holder”) may not be able to execute a Warrant Exchange Agreement prior to the Closing. In the event that, as of the Closing, the Excluded Holder has not executed a Warrant Exchange Agreement, such that the warrants held by the Excluded Holder remain outstanding as of the Closing, then, the Closing shall nevertheless occur and following the Closing the Parties shall reasonably cooperate to obtain executed an Warrant Exchange Agreements from the Excluded Holder. The Excluded Warrants will be expired by February 4, 2024. In the event that the Excluded Holder has not executed a Warrant Exchange Agreement following the Closing and the Excluded Warrants are exercised in whole or in part prior to their expiration, then upon any such exercise of the Excluded Warrants a number of Escrow Shares (as defined below) equal to the number of shares of Common Stock issued pursuant to the Excluded Warrants less the number of shares of Common Stock that would have been issued with respect to the Excluded Warrants exercised had the Warrant Exchange Agreement been executed and completed with respect to the Excluded Warrants, shall be released from the Escrow Account (as defined below) to Harmony upon receipt by the Escrow Agent (as defined below) of joint written instructions by each of the Guarantors (as defined below), Harmony and Zircon. |
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Section 2.02 Dissenting Shares.
| (a) | For purposes of this Agreement, “Dissenting Shares” shall mean shares of Zircon Capital Stock issued and outstanding immediately prior to the Effective Time that are held as of the Effective Time by a holder who has not voted in favor of the Merger or consented thereto in writing and who has made a proper demand for appraisal of such shares in accordance with Chapter 13 of the CCC (until such time as such holder fails to perfect or otherwise loses such holder’s appraisal rights under the CCC with respect to such shares, at which time such shares shall cease to be Dissenting Shares). Dissenting Shares will only entitle the holder thereof to such rights as are granted by the CCC to a holder thereof and shall not be converted into or represent the right to receive Harmony Common Stock unless the stockholder holding such Dissenting Shares shall have forfeited his, her or its right to appraisal under the CCC or properly withdrawn his, her or its demand for appraisal. If such stockholder has so forfeited or withdrawn his, her or its right to appraisal of Dissenting Shares, then (i) as of the occurrence of such event, such holder’s Dissenting Shares shall cease to be Dissenting Shares and shall be deemed to have been converted, as of the Effective Time, into and represent the right to receive Harmony Common Stock issuable in respect of such Zircon Capital Stock pursuant to Section 2.01(c), without interest, and (ii) promptly following the occurrence of such event, Harmony shall deliver a certificate representing Harmony Common Stock to which such stockholder is entitled pursuant to Section 2.01(c) as well as any cash or other distributions to which such holder of Zircon Common Stock may be entitled to under this Article II if not previously delivered. |
| (b) | Zircon shall give Harmony (i) prompt notice of any written demands for appraisal of any Zircon Common Stock, withdrawals of such demands and any other instruments that relate to such demands received by Zircon and (ii) the opportunity to direct all negotiations and proceedings with respect to demands for appraisal under the CCC. Zircon shall not, except with the prior written consent of Harmony (which consent will not be unreasonably withheld, conditioned or delayed) or where required by applicable law, make any payment with respect to any demands for appraisal of Zircon Capital Stock or settle or offer to settle any such demands. |
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Article III. Representations and Warranties of Zircon
Zircon represents and warrants to Harmony and Merger Sub that the statements contained in this Article III are true and correct, except as set forth herein or in the disclosure schedule delivered and/or otherwise made available by Zircon to Harmony and Merger Sub as of the Effective Date (the “Zircon Disclosure Schedule”). For purposes hereof, the phrase “to the knowledge of Zircon” and similar expressions mean the actual knowledge of the persons identified on Section K of the Zircon Disclosure Schedule for this purpose, and such knowledge as such persons would reasonably be expected to have obtained in the course of their performance of their positions at Zircon (after due inquiry).
Section 3.01 Organization, Standing and Power. Zircon is a corporation duly organized, validly existing and in good standing under the laws of the State of California, has all requisite corporate power and authority to own, lease and operate its properties and assets and to carry on its business as currently conducted, and is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction listed on Section 3.01 of the Zircon Disclosure Schedule, which jurisdictions constitute the only jurisdictions in which the character of the properties it owns, operates or leases or the nature of its activities makes such qualification necessary, except for such failures to be so qualified or in good standing, individually or in the aggregate, that have not had, and are not reasonably likely to have, a Zircon Material Adverse Effect. For purposes of this Agreement, the term “Zircon Material Adverse Effect” means any material adverse change, effect, event, circumstance or development that is materially adverse to or has a material adverse effect on the business, assets, liabilities, capitalization, financial condition, or results of operations of Zircon, taken as a whole; provided, however, that none of the following, to the extent arising after the Effective Date, either alone or in combination, shall be deemed to be a Zircon Material Adverse Effect, and none of the following shall be taken into account in determining whether there has been or will be a Zircon Material Adverse Effect: any change or event caused by or resulting from (A) changes in prevailing economic or market conditions in the United States or any other jurisdiction in which such entities have substantial business operations (except to the extent those changes have a disproportionate effect on Zircon relative to the other participants in the industry or industries in which Zircon operates), (B) changes or events affecting the industry or industries in which Zircon operates generally (except to the extent those changes or events have a disproportionate effect on Zircon relative to the other participants in the industry or industries in which Zircon operates), (C) changes in generally accepted accounting principles or requirements (except to the extent those changes have a disproportionate effect on Zircon relative to the other participants in the industry or industries in which Zircon operates), (D) changes in laws, rules or regulations of general applicability or interpretations thereof by any Governmental Entity (including any law, directive, pronouncement or guideline issued by a Governmental Body, the Centers for Disease Control and Prevention or the World Health Organization providing for business closures, changes to business operations, “sheltering-in-place,” curfews or other restrictions that relate to, or arise out of the novel coronavirus, SARS-CoV-2 or COVID-19 (and all related strains and sequences), including any intensification, resurgence or any evolutions or mutations thereof, and/or related or associated epidemics, pandemics, disease outbreaks or public health emergencies (“COVID-19”), including the CARES Act (“COVID-19 Measures”)) (except to the extent those changes have a disproportionate effect on Zircon relative to the other participants in the industry or industries in which Zircon operate), (E) changes in, or effects arising from or relating to, any earthquake, hurricane, tsunami, tornado, flood, mudslide or other natural disaster, epidemic, pandemic or disease outbreak (including COVID-19), weather condition, explosion or fire or other force majeure event or act of God (except to the extent those changes or events have a disproportionate effect on Zircon relative to the other participants in the industry or industries in which Zircon operate), (F) any failure by Zircon to meet any estimates or expectations of Zircon’s revenue, earnings or other financial performance or results of operations for any period, (G) any failure to receive consents or approvals in connection with the agreements listed on Section 3.04(c) of the Zircon Disclosure Schedule or (H) the transactions contemplated by this Agreement, including the Merger, or the announcement or pendency thereof. For the avoidance of doubt, the Parties agree that the terms “material,” “materially” and “materiality” as used in this Agreement with an initial lower case “m” shall have their respective customary and ordinary meanings, without regard to the meanings ascribed to Zircon Material Adverse Effect or Harmony Material Adverse Effect, in each case as defined in this Agreement. Zircon has made available to Harmony complete and accurate copies of its articles of incorporation and bylaws and is not in material default under or in material violation of any provision of either such document.
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Section 3.02 Capitalization.
| (a) | As of the Effective Date, the authorized capital stock of Zircon consists of 20,000,000 shares of Zircon Common Stock. The rights and privileges of Zircon’s Common Stock are set forth in Zircon’s articles of incorporation, as amended. As of the Effective Date, (i) 10,000,000 shares of Zircon Common Stock were issued and outstanding, and (ii) no shares of Zircon Common Stock were held in the treasury of Zircon. |
| (b) | Except as set forth in this Section 3.02, (A) there are no equity securities of any class of Zircon, or any security exchangeable into or exercisable for such equity securities, issued, reserved for issuance or outstanding, and (B) there are no options, warrants, equity securities, calls, rights, commitments or agreements of any character to which Zircon is a party or by which Zircon is bound obligating Zircon to issue, exchange, transfer, deliver or sell, or cause to be issued, exchanged, transferred, delivered or sold, additional shares of capital stock or other equity interests of Zircon or any security or rights convertible into or exchangeable or exercisable for any such shares or other equity interests, or obligating Zircon to grant, extend, accelerate the vesting of, otherwise modify or amend or enter into any such option, warrant, equity security, call, right, commitment or agreement. Except as set forth in Section 3.02(b) of the Zircon Disclosure Schedule: (i) neither Zircon nor any of its Affiliates is a party to or is bound by any, and to the knowledge of Zircon, there are no, agreements or understandings with respect to the voting (including voting trusts and proxies) or sale or transfer (including agreements imposing transfer restrictions) of any shares of capital stock or other equity interests of Zircon; (ii) Zircon does not have any outstanding stock appreciation rights, phantom stock, performance based rights or similar rights or obligations; and (iii) there are no registration rights to which Zircon is a party or by which it or they are bound with respect to any equity security of any class of Zircon. For purposes of this Agreement, the term “Affiliate” when used with respect to any party shall mean any Person (as defined below) who is an “affiliate” of that party within the meaning of Rule 405 promulgated under the Securities Act of 1933, as amended (the “Securities Act”), except as contemplated by this Agreement or described in this Section 3.02(b). |
| (c) | All outstanding shares of Zircon Common Stock are duly authorized, validly issued, fully paid and nonassessable and not subject to or otherwise issued in violation of any purchase option, call option, right of first refusal, preemptive right, subscription right or any similar right under any provision of the CCC, Zircon’s articles of incorporation or bylaws or any agreement to which Zircon is a party or is otherwise bound. As of the Effective Time, there will be no obligations, contingent or otherwise, of Zircon to repurchase, redeem or otherwise acquire any shares of Zircon Common Stock. All outstanding shares of Zircon Common Stock have been offered, issued and sold by Zircon in compliance with all applicable federal and state securities laws. |
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Section 3.03 Subsidiaries. Zircon has no direct or indirect subsidiaries.
Section 3.04 Authority; No Conflict; Required Filings and Consents.
| (a) | Zircon has all requisite corporate power and authority to enter into this Agreement and, subject only to the adoption of this Agreement (the “Zircon Voting Proposal”) by Zircon’s stockholders under the CCC and Zircon’s articles of incorporation (the “Articles”), to consummate the transactions contemplated by this Agreement. Without limiting the generality of the foregoing, the Zircon Board has unanimously (i) determined that the Merger is fair to, and in the best interests of, Zircon and its stockholders, (ii) approved this Agreement, the Merger and the actions contemplated by this Agreement in accordance with the provisions of the CCC, (iii) declared this Agreement advisable, and (iv) determined to recommend that the stockholders of Zircon vote to adopt this Agreement and thereby approve the Merger and such other actions as contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated by this Agreement by Zircon have been duly authorized by all necessary corporate action on the part of Zircon, subject only to the required receipt of the Zircon Stockholder Approval. This Agreement has been duly executed and delivered by Zircon and, assuming the due execution and delivery by Harmony, constitutes the valid and binding obligation of Zircon, enforceable against Zircon in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors’ rights and to general equity principles (the “Bankruptcy and Equity Exception”). |
| (b) | The execution and delivery of this Agreement by Zircon does not, and the consummation by Zircon of the transactions contemplated by this Agreement shall not, (i) conflict with, or result in any violation or breach of, any provision of the Articles or bylaws of Zircon, each as amended, (ii) conflict with, or result in any violation or breach of, or constitute (with or without notice or lapse of time, or both) a default (or give rise to a right of termination, cancellation or acceleration of any obligation or loss of any material benefit) under, or require a consent or waiver under, constitute a change in control under, require the payment of a penalty under or result in the imposition of any mortgage, security interest, pledge, lien, charge or encumbrance of any nature (“Liens”) on Zircon’s assets under any of the terms, conditions or provisions of any Contract required to be disclosed in Section 3.11(d) of the Zircon Disclosure Schedule, or (iii) subject to obtaining the Zircon Stockholder Approval and compliance with the requirements specified in clauses (i) through (iv) of Section 3.04(c), conflict with or violate any permit, concession, franchise, license, judgment, injunction, order, decree, statute, law, ordinance, rule or regulation applicable to Zircon or any of its properties or assets, except in the case of clauses (ii) and (iii) of this Section 3.04(b) for any such conflicts, violations, breaches, defaults, terminations, cancellations, accelerations or losses that, individually or in the aggregate, have not had, and are not reasonably likely to result in, the loss of a material benefit to, or in the creation of any material liability for, Zircon, or would not reasonably be expected to result in a Zircon Material Adverse Effect. Section 3.04(b) of the Zircon Disclosure Schedule lists all consents, waivers and approvals under any of Zircon’s agreements, licenses or leases required to be obtained in connection with the consummation of the transactions contemplated by this Agreement, which, if individually or in the aggregate were not obtained, would result in a loss of a material benefit to, or the creation of any material liability for, Zircon, Harmony or the Surviving Corporation as a result of the Merger. |
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| (c) | No consent, approval, license, permit, order or authorization of, or registration, declaration, notice or filing with, any court, arbitrational tribunal, administrative agency or commission or other governmental or regulatory authority or Regulating Authority (as defined below), agency or instrumentality (a “Governmental Entity”) is required by or with respect to Zircon in connection with the execution and delivery of this Agreement by Zircon or the consummation by Zircon of the transactions contemplated by this Agreement, except for (i) the filing of the Certificate of Merger with the State of California and appropriate corresponding documents with the appropriate authorities of other states in which Zircon is qualified as a foreign corporation to transact business, (ii) such consents, approvals, orders, authorizations, registrations, declarations and filings as may be required under applicable state securities laws and the laws of any foreign country and (iii) such other consents, authorizations, orders, filings, approvals and registrations that, individually or in the aggregate, if not obtained or made, would not result in a loss of a material benefit to, or the creation of any material liability for, Zircon, Harmony or the Surviving Corporation as a result of the Merger. |
| (d) | The affirmative vote in favor of the Zircon Voting Proposal by the holders of a majority of the votes represented by the outstanding shares of Zircon Common Stock, which is to be delivered pursuant to written consents of stockholders in lieu of a meeting (collectively, the “Written Consents”), is the only vote of the holders of any class or series of Zircon’s capital stock or other securities necessary to adopt this Agreement and for consummation by Zircon of the other transactions contemplated by this Agreement required under the CCC and the Articles and Zircon’s bylaws, as amended. There are no bonds, debentures, notes or other indebtedness of Zircon having the right to vote (or convertible into, or exchangeable for, securities having the right to vote) on any matters on which stockholders of Zircon may vote. |
Section 3.05 Financial Statements; Information Provided. Zircon has made available or will make available to Harmony copies of the Financial Statements which are correct and complete in all material respects. The Financial Statements (i) comply as to form in all material respects with all applicable accounting requirements, (ii) were prepared in accordance with United States generally accepted accounting principles (“GAAP”) applied on a consistent basis throughout the periods covered thereby (except as may be indicated in the notes to such financial statements) and (iii) fairly present in all material respects the financial position of Zircon as of the dates thereof and the assets, liabilities, business, financial condition, results of its operations and cash flows for the periods indicated, consistent with the books and records of Zircon, except that the unaudited financial statements do not contain footnotes and are subject to normal and recurring year-end adjustments which will not be material in amount or effect. For purposes of this Agreement, “Financial Statements” means (i) the balance sheets and statements of income, changes in stockholders’ equity and cash flows of Zircon as of the end of and for the fiscal year ended March 31, 2021 and 2022, and (ii) the unaudited balance sheet, consolidated statements of income, changes in stockholders’ equity and cash flows for the nine months of Zircon (the “Zircon Balance Sheet”) as of December 31, 2022 (the “Most Recent Balance Sheet Date”) and the unaudited consolidated statements of income, changes in stockholders’ equity and cash flows for the nine months ended as of the Most Recent Balance Sheet Date.
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Section 3.06 No Undisclosed Liabilities. Zircon does not have any liability that is required to be set forth on a balance sheet of Zircon prepared in accordance with GAAP consistent with past practices as reflected in the Financial Statements and the Zircon Balance Sheet, which are, individually or in the aggregate, material to the business, results of operations or financial condition of Zircon, except for (a) liabilities shown on the Most Recent Balance Sheet, (b) liabilities that have arisen or have been incurred since the Most Recent Balance Sheet Date, entered into in the ordinary course of business consistent in all material respects with past practice (and giving effect to any adjustments and modifications thereto prior to the Effective Date taken in response to or as a result of COVID-19 or any COVID-19 Measure) (as applicable to a party, the “Ordinary Course of Business”), (c) liabilities for transaction expenses incurred in connection with the transactions contemplated by this Agreement, and (d) contractual and other liabilities incurred in the Ordinary Course of Business that are not required by GAAP to be reflected on a balance sheet.
Section 3.07 Absence of Certain Changes or Events. During the period beginning on the Most Recent Balance Sheet Date and ending on the date hereof, Zircon has conducted its business only in the Ordinary Course of Business and, since such date, there has not been (i) any change, event, circumstance, development or effect that, individually or in the aggregate, has had, or is reasonably likely to have, a Zircon Material Adverse Effect; or (ii) except for the execution and delivery of this Agreement, any other action or event that would have required the consent of Harmony pursuant to Section 5.01 (other than clause (A) of Section 5.01(j), or Section 5.01(k) or Section 5.01(l)) had such action or event occurred after the Effective Date.
Section 3.08 Taxes.
| (a) | Zircon has properly filed all material Tax Returns that it was required to file, and all such Tax Returns were true, correct and complete in all material respects. Zircon has paid all material Taxes, whether or not shown on any Tax Return, that were due and payable. Zircon is not nor has it ever been a member of an affiliated group with which it has filed (or been required to file) consolidated, combined, unitary or similar Tax Returns, other than a group of which the common parent is Zircon. With the exception of customary commercial leases or contracts entered into in the Ordinary Course of Business and liabilities thereunder, Zircon (i) has no actual or potential liability under Treasury Regulations Section 1.1502-6 (or any comparable or similar provision of federal, state, local or foreign law), as a transferee or successor, or pursuant to any contractual obligation for any Taxes of any Person other than Zircon, or (ii) is a party to or bound by any Tax indemnity, Tax sharing, Tax allocation or similar agreement. All material Taxes that Zircon was required by law to withhold or collect have been duly withheld or collected and, to the extent required, have been properly paid to the appropriate Governmental Entity. For purposes of this Agreement, (i) “Taxes” shall mean any and all taxes, charges, fees, duties, contributions, levies or other similar assessments or liabilities in the nature of a tax, including, without limitation, income, gross receipts, corporation, ad valorem, premium, value-added, net worth, capital stock, capital gains, documentary, recapture, alternative or add-on minimum, disability, estimated, registration, recording, excise, real property, personal property, sales, use, license, lease, service, service use, transfer, withholding, employment, unemployment, insurance, social security, national insurance, business license, business organization, environmental, workers compensation, payroll, profits, severance, stamp, occupation, windfall profits, customs duties, franchise and other taxes of any kind whatsoever imposed by the United States of America or any state, local or foreign government, or any agency or political subdivision thereof, and any interest, fines, penalties, assessments or additions to tax imposed with respect to such items, and (ii) “Tax Returns” shall mean any and all reports, returns (including information returns), declarations, or statements relating to Taxes, including any schedule or attachment thereto and any amendment thereof, filed with or submitted to a Governmental Entity in connection with the determination, assessment, collection or payment of Taxes or in connection with the administration, implementation or enforcement of or compliance with any legal requirement relating to any Tax. |
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| (b) | Except as set forth in Section 3.08(b) of the Zircon Disclosure Schedule, no examination or audit of any material Tax Return of Zircon by any Governmental Entity is currently in progress or, to the knowledge of Zircon, threatened or contemplated. No deficiencies for material Taxes of Zircon have been claimed, proposed or assessed by any Governmental Entity in writing. Zircon has not been informed in writing by any jurisdiction in which Zircon does not file a Tax Return that the jurisdiction believes that Zircon was required to file any Tax Return that was not filed. Zircon has not (i) waived any statute of limitations with respect to Taxes or agreed to extend the period for assessment or collection of any Taxes, which waiver or extension is still in effect, or (ii) requested any extension of time within which to file any Tax Return, other than routine extensions available as a matter of right which Tax Return has not yet been filed. |
| (c) | Zircon has not constituted either a “distributing corporation” or a “controlled corporation” in a distribution of stock qualifying for tax-free treatment under Section 355 of the Code (or so much of Section 356 of the Code as relates to Section 355 of the Code) in the prior two years. |
| (d) | Zircon has not been a party to any “listed transaction” within the meaning of Treasury Regulation Section 1.6011-4(b)(2). |
| (e) | Neither Zircon nor any of its Affiliates has taken or agreed to take any action, has omitted to take any action, or has any knowledge of any fact or circumstance, the taking, omission, or existence of which, as the case may be, that would reasonably be expected to prevent the Merger from constituting a transaction qualifying as a reorganization under Section 368(a) of the Code. |
| (f) | There are no Liens with respect to Taxes upon any of the assets or properties of Zircon other than with respect to Taxes not yet due and payable. |
Notwithstanding anything herein to the contrary, this Section 3.08 and, to the extent they relate to Taxes, Section 3.14, contain the sole representations concerning Taxes of Zircon.
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Section 3.09 Owned and Leased Real Properties.
| (a) | Zircon neither owns or has ever owned any real property. |
| (b) | Section 3.09(b) of the Zircon Disclosure Schedule sets forth a complete and accurate list of all real property leased, subleased or licensed by Zircon as of the Effective Date (collectively, the “Zircon Leases”) and the location of the premises of such real property. Zircon nor, to the knowledge of Zircon, any other party, is in breach or default and no event has occurred, is pending or, to the knowledge of Zircon, is threatened, which, after the giving of notice, with lapse of time, or otherwise, would constitute any such breach or default under any of Zircon Leases, except where the existence of such breaches or defaults, individually or in the aggregate, has not had, and is not reasonably likely to result in, the loss of a material right or in a material liability of Zircon. Zircon does not lease, sublease or license any real property to any Person other than Zircon. Zircon has made available to Harmony complete and accurate copies of all Zircon Leases. |
Section 3.10 Intellectual Property.
| (a) | Section 3.10(a) of the Zircon Disclosure Schedule lists all Zircon Registrations, in each case enumerating specifically the applicable filing or registration number, title, jurisdiction in which filing was made or from which registration issued, date of filing or issuance, and names of all current applicant(s) and registered owners(s), as applicable. All assignments of Zircon Registrations to Zircon have been properly executed and recorded, or are in process, and all issuance, renewal, maintenance and other payments that have become due with respect thereto have been timely paid by or on behalf of Zircon. To the knowledge of Zircon, all Zircon Registrations are valid and enforceable. |
| (b) | There are no inventorship challenges, inter partes proceedings, opposition or nullity proceedings or interferences declared, commenced or provoked, or, to the knowledge of Zircon, threatened, with respect to any Patent Rights included in the Zircon Registrations other than the current litigation and actions initiated by Zircon to enforce and protect any Zircon Intellectual Property. To the knowledge of Zircon, Zircon has complied with its duty of candor and disclosure to the United States Patent and Trademark Office and any relevant foreign patent office with respect to all patent and trademark applications filed by or on behalf of Zircon and has made no material misrepresentation in such applications. Zircon has no knowledge of any information that would preclude Zircon from having clear title to the Zircon Registrations and intends to continue to seek protection for and enforcement of any Zircon Intellectual Property. |
| (c) | Zircon is the sole and exclusive owner of all Zircon Owned Intellectual Property, free and clear of any Liens, other than any joint owners of the Zircon Owned Intellectual Property that are listed in Section 3.10(c) of the Zircon Disclosure Schedule. |
| (d) | To Zircon’s knowledge, the Zircon Intellectual Property constitutes all Intellectual Property necessary to conduct Zircon’s business in the manner currently conducted and currently proposed by Zircon to be conducted in the future. |
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| (e) | Zircon has taken reasonable measures to protect the proprietary nature of each item of Zircon Owned Intellectual Property, and to maintain in confidence all trade secrets and confidential information comprising a part thereof. To Zircon’s knowledge, there has been no unauthorized disclosure of any third party proprietary or confidential information in the possession, custody or control of Zircon. |
| (f) | To the knowledge of Zircon, the operations of Zircon as currently conducted do not and have not in the past five years infringe(d) or misappropriate(d) the Intellectual Property rights of any individual or entity, or constitute(d) unfair competition or trade practices under the Laws of the jurisdiction in which such operations are conducted. Zircon believes certain individual or entity have infringed, misappropriated or otherwise violated the Zircon Owned Intellectual Property and/or any rights under the Zircon Licensed Intellectual Property that are owned and/or exclusively licensed to Zircon and Zircon has filed or threatened in writing claims alleging that one or more third parties have infringed, misappropriated or otherwise violated any Zircon Intellectual Property, all as set forth in Section 3.10(f) of the Zircon Disclosure Schedule. No individual or entity has filed and served upon Zircon or, to Zircon’s knowledge, threatened or otherwise filed any action or proceeding alleging that Zircon has infringed, misappropriated or otherwise violated any individual’s or entity’s Intellectual Property rights nor has Zircon received any written notification that a license under any other individual’s or entity’s Intellectual Property is or may be required. |
| (g) | To the knowledge and belief of Zircon, one or more individuals or entities are infringing, violating, misappropriating, using in an unauthorized manner or disclosing in an unauthorized manner certain Zircon Owned Intellectual Property or any Zircon Licensed Intellectual Property, all as set forth in Section 3.10(g) of the Zircon Disclosure Schedule. Zircon has made available copies of all correspondence, analyses, legal opinions, complaints, claims, notices or threats prepared or received by Zircon concerning the infringement, violation or misappropriation of any Zircon Intellectual Property. |
| (h) | Section 3.10(h) of the Zircon Disclosure Schedule identifies each license, covenant or other agreement pursuant to which Zircon has assigned, transferred, licensed, distributed or otherwise granted any right or access to any individual or entity, or covenanted not to assert any right, with respect to any past, existing or future Zircon Intellectual Property. |
| (i) | Section 3.10(i) of the Zircon Disclosure Schedule identifies (i) each license or agreement pursuant to which Zircon has obtained rights to any Zircon Licensed Intellectual Property (excluding generally available, off the shelf software programs that are licensed by Zircon pursuant to “shrink wrap” licenses, the total fees associated with which are less than $50,000) and (ii) each agreement, contract, assignment or other instrument pursuant to which Zircon has obtained any joint or sole ownership interest in or to each item of Zircon Owned Intellectual Property. |
| (j) | To Zircon’s knowledge, no Worker of Zircon is in material default or breach of any term of any employment Contract, non-disclosure Contract, assignment of invention Contract or similar Contract between such Worker and Zircon, relating to the protection, ownership, development, use or transfer of Zircon Intellectual Property. Each Worker of Zircon has executed an employment Contract, non-disclosure Contract, assignment of invention Contract or similar Contract assigning to Zircon of any Zircon Owned Intellectual Property that was conceived, developed or created for Zircon by such Worker. |
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| (k) | Neither the negotiation, execution, delivery or performance of this Agreement, nor the consummation of the transactions contemplated hereby, will result in (i) a material breach of or default under any agreement to which Zircon is a party governing any Zircon Intellectual Property, (ii) a material impairment of the rights of Zircon in or to any Zircon Intellectual Property or portion thereof, (iii) the grant or transfer to any third party of any new license or other interest under, the abandonment, assignment to any third party, or modification or loss of any right with respect to, or the creation of any Lien on, any Zircon Intellectual Property, (iv) Zircon or any of its Affiliates being obligated to pay any penalty or new or increased royalty or fee to any individual or entity under any agreement governing any Zircon Intellectual Property, or (v) Zircon or any of its Affiliates being (A) bound by or subject to any noncompete or licensing obligation or covenant not to sue or (B) obligated to license any of its Intellectual Property to (or obligated not to assert its Intellectual Property against) any individual or entity, except in the case of clauses (i) and (ii) of this Section 3.10(k) for any such breach, default or impairment that, individually or in the aggregate, have not had, and are not reasonably likely to result in, the loss of a material benefit to, or in the creation of any material liability for, Zircon. |
| (l) | For purposes of this Agreement, the following terms shall have the following meanings: |
| (i) | “Intellectual Property” shall mean the following subsisting throughout the world: (i) Patent Rights; (ii) Trademarks and all goodwill in the Trademarks; (iii) copyrights, designs, data and database rights and registrations and applications for registration thereof, including moral rights of authors; (iv) mask works and registrations and applications for registration thereof and any other rights in semiconductor topologies under the Laws of any jurisdiction; (v) inventions, invention disclosures, statutory invention registrations, trade secrets and confidential business information, know-how, scientific and technical information, data and technology, including medical, clinical, toxicological and other scientific data, manufacturing and product processes, algorithms, techniques and analytical methodology, research and development information, financial, marketing and business data, pricing and cost information, business and marketing plans and customer and supplier lists and information, whether patentable or nonpatentable, whether copyrightable or noncopyrightable and whether or not reduced to practice; and (vi) other proprietary rights relating to any of the foregoing (including remedies against infringement thereof and rights of protection of interest therein under the Laws of all jurisdictions). |
| (ii) | “Intellectual Property Registrations” shall mean applications and registrations for Patent Rights, Trademarks, copyrights and designs, and mask works. |
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| (iii) | “Law” shall mean each applicable transnational, domestic or foreign federal, state or local law (statutory, common or otherwise) law, order, judgment, rule, code, statute, regulation, requirement, variance, decree, writ, injunction, award, ruling, Permit or ordinance of any Governmental Entity, including any applicable stock exchange rule or requirement. |
| (iv) | “Zircon Intellectual Property” shall mean the Zircon Owned Intellectual Property and the Zircon Licensed Intellectual Property. |
| (v) | “Zircon Licensed Intellectual Property” shall mean all Intellectual Property that is licensed to Zircon by any individual or entity other than Zircon. |
| (vi) | “Zircon Owned Intellectual Property” shall mean all Intellectual Property owned or purported to be owned by Zircon, in whole or in part. |
| (vii) | “Zircon Registrations” shall mean Intellectual Property Registrations that are registered or filed in the name of Zircon, alone or jointly with others. |
| (viii) | “Patent Rights” shall mean all patents, patent applications, utility models, design registrations and certificates of invention and other governmental grants for the protection of inventions or industrial designs (including all related continuations, continuations-in-part, divisionals, reissues and reexaminations). |
| (ix) | “Trademarks” shall mean all registered trademarks and service marks, logos, Internet domain names, social media accounts and identifiers, corporate names and doing business designations and all registrations and applications for registration of the foregoing, common law trademarks and service marks and trade dress. |
| (x) | “Worker” means any individual who is an officer, director, employee (regular, temporary, part-time or otherwise), consultant or independent contractor of Zircon or Harmony or any of its Subsidiaries, as applicable. |
Section 3.11 Contracts.
| (a) | As of the Effective Date, there are no Contracts that are material contracts (as defined in Item 601(b)(10) of Regulation S-K) with respect to Zircon (assuming Zircon was subject to the requirements of the Exchange Act), other than those Contracts identified in Section 3.11(a) of the Zircon Disclosure Schedule. |
| (b) | Zircon has not entered into any transaction that would be subject to proxy statement disclosure pursuant to Item 404 of Regulation S-K (assuming Zircon was subject to the requirements of the Exchange Act), other than as disclosed in Section 3.11(b) of the Zircon Disclosure Schedule. |
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| (c) | Zircon is not a party to any agreement under which a third party would be entitled to receive a license or any other right to Zircon Intellectual Property as a result of the transactions contemplated by this Agreement. |
| (d) | Section 3.11(d) of the Zircon Disclosure Schedule lists the following Contracts of Zircon in effect as of the Effective Date: |
| (i) | any Contract (or group of related Contracts) for the purchase or sale of products or for the furnishing or receipt of services (A) which calls for performance over a period of more than 180 days from the Effective Date, (B) which involves an aggregate of more than $50,000 or (C) in which Zircon has granted manufacturing rights, “most favored nation” pricing provisions or marketing or distribution rights relating to any products or territory or has agreed to purchase a minimum quantity of goods or services or has agreed to purchase goods or services exclusively from a particular party; |
| (ii) | any Contract under which the consequences of a default or termination would reasonably be likely to have a Zircon Material Adverse Effect; |
| (iii) | any Contract that could reasonably be expected to have the effect of prohibiting or impairing the conduct of the business of Zircon or Harmony or any of its Subsidiaries as currently conducted; |
| (iv) | any Contract under which Zircon is restricted from selling, licensing or otherwise distributing any of its technology or products, or providing services to, customers or potential customers or any class of customers, in any geographic area, during any period of time or any segment of the market or line of business; |
| (v) | any dealer, distribution, joint marketing, joint venture, joint development, partnership, strategic alliance, collaboration, development agreement or outsourcing arrangement; |
| (vi) | any Contract for the conduct of research studies, manufacturing, distribution, supply, marketing or co-promotion of any products in development by or which has been or which is being marketed, distributed, supported, sold or licensed out, in each case by or on behalf of Zircon; and |
| (vii) | any Contract that would entitle any third party to receive a license or any other right to Intellectual Property of Harmony or any of Harmony’s Affiliates following the Closing. |
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| (e) | Zircon has made available to Harmony a complete and accurate copy of each Contract listed in Section 3.10(a), Section 3.10(h), Section 3.10(i), Section 3.11(a), Section 3.11(b) and Section 3.11(d) of the Zircon Disclosure Schedule. With respect to each Contract so listed: (i) the Contract is legal, valid, binding and enforceable and in full force and effect against Zircon party thereto, as applicable, and, to the knowledge of Zircon, against each other party thereto, as applicable, subject to the Bankruptcy and Equity Exception; (ii) the Contract will continue to be legal, valid, binding and enforceable and in full force and effect against Zircon and, to the knowledge of Zircon, against each other party thereto, immediately following the Closing in accordance with the terms thereof as in effect immediately prior to the Closing (other than any such Contracts that expire or terminate before such time in accordance with their terms and not as a result of a breach or default by Zircon), in each such case subject to the Bankruptcy and Equity Exception and except to the extent the failure to be in full force and effect, individually or in the aggregate, would not reasonably be likely to have a Zircon Material Adverse Effect; and (iii) neither of Zircon nor, to the knowledge of Zircon, any other party, is in breach or violation of, or default under, any such Contract, and no event has occurred, is pending or, to the knowledge of Zircon, is threatened, which, with or without notice or lapse of time, or both, would constitute a breach or default by Zircon, or, to the knowledge of Zircon, any other party under such Contract, except for such breaches, violations or defaults that, individually or in the aggregate, have not had, and are not reasonably likely to have, a Zircon Material Adverse Effect. |
| (f) | For purposes of this Agreement, the term “Contract” shall mean, with respect to any Person, any written, oral or other agreement, contract, subcontract, lease (whether for real or personal property), mortgage, understanding, arrangement, instrument, note, option, warranty, license, sublicense, insurance policy, benefit plan or commitment or undertaking of any nature to which such Person is a party or by which such Person or any of its assets are bound under applicable law. |
Section 3.12 Litigation. Except as set forth on Section 3.12 of the Zircon Disclosure Schedule, there is no action, suit, proceeding, claim, arbitration or investigation before any Governmental Entity or before any arbitrator that is pending or, to the knowledge of Zircon, threatened or reasonably anticipated against Zircon that (a) seeks either damages in excess of $100,000 or equitable relief or (b) in any manner challenges or seeks to prevent, enjoin, alter or delay the transactions contemplated by this Agreement, except for such actions, suits, proceedings, claims, arbitrations or investigations first arising after the Effective Date that, individually or in the aggregate, have not had, and are not reasonably likely to have, a Zircon Material Adverse Effect. There are no material judgments, orders or decrees outstanding against Zircon.
Section 3.13 Environmental Matters.
| (a) | Except for such matters that, individually or in the aggregate, have not had, and are not reasonably likely to have, a Zircon Material Adverse Effect: |
| (i) | Zircon have complied with all applicable Environmental Laws; |
| (ii) | to the knowledge of Zircon, the properties currently owned, leased or operated by Zircon (including soils, groundwater, surface water, buildings or other structures) are not contaminated with any Hazardous Substances; |
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| (iii) | to the knowledge of Zircon, the properties formerly owned, leased or operated by Zircon were not contaminated with Hazardous Substances during the period of ownership, use or operation by Zircon; |
| (iv) | Zircon is not subject to liability for any Hazardous Substance disposal or contamination on the property of any third party; and |
| (v) | Zircon has not released any Hazardous Substance into the environment. |
| (b) | As of the Effective Date, Zircon has not received any written notice, demand, letter, claim or request for information alleging that Zircon may be in violation of, liable under or have obligations under, any Environmental Law. |
| (c) | Zircon is not subject to any written orders, decrees, injunctions or other arrangements with any Governmental Entity or is subject to any indemnity or other written agreement with any third party relating to liability under any Environmental Law or relating to Hazardous Substances. |
| (d) | For purposes of this Agreement, the term “Environmental Law” means any law, regulation, order, decree, permit, authorization, opinion, common law or agency requirement of any jurisdiction relating to: (i) the protection, investigation or restoration of the environment, human health and safety or natural resources, (ii) the handling, use, storage, treatment, presence, disposal, release or threatened release of any Hazardous Substance or (iii) noise, odor, wetlands, pollution, contamination or any injury or threat of injury to persons or property. |
| (e) | For purposes of this Agreement, the term “Hazardous Substance” means any substance that is: (i) listed, classified, regulated or which falls within the definition of a “hazardous substance,” “hazardous waste” or “hazardous material” pursuant to any Environmental Law; (ii) any petroleum product or by-product, asbestos-containing material, lead-containing paint or plumbing, polychlorinated biphenyls, radioactive materials or radon; or (iii) any other substance that is the subject of regulatory action by any Governmental Entity pursuant to any Environmental Law. |
Section 3.14 Employee Benefit Plans.
| (a) | Section 3.14(a) of the Zircon Disclosure Schedule sets forth a complete and accurate list of all Employee Benefit Plans maintained, or contributed to, by Zircon or any of its respective ERISA Affiliates for the benefit of any current or former employee or other service provider of Zircon (collectively, the “Zircon Employee Plans”). |
| (b) | Each Zircon Employee Plan has been established, maintained and administered in all material respects in accordance with its terms, ERISA, the Code and all other applicable laws and the regulations thereunder and Zircon and its ERISA Affiliates has performed all material obligations with respect to such Zircon Employee Plan and has made all required contributions thereto (or reserved such contributions on the Zircon Balance Sheet). |
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| (c) | With respect to Zircon Employee Plans, there are no benefit obligations for which contributions have not been made or properly accrued and there are no benefit obligations that have not been accounted for by reserves, or otherwise properly footnoted in accordance with GAAP, on the Financial Statements of Zircon, which obligations are reasonably likely, individually or in the aggregate, to have a Zircon Material Adverse Effect. The assets of each Zircon Employee Plan that is funded are reported at their fair market value on the books and records of such Zircon Employee Plan. |
| (d) | All Zircon Employee Plans that are intended to be qualified under Section 401(a) of the Code have received determination letters from the IRS to the effect that such Zircon Employee Plans are qualified and the plans and trusts related thereto are exempt from federal income taxes under Sections 401(a) and 501(a), respectively, of the Code, no such determination letter has been revoked and revocation has not been threatened, and no such Zircon Employee Plan has been amended or operated since the date of its most recent determination letter or application therefor in any respect, and no act or omission has occurred, that would adversely affect its qualification or materially increase its cost. |
| (e) | There are no loans or extensions of credit by Zircon or any of its ERISA Affiliate to any employee or any other service provider to Zircon. |
| (f) | Zircon is in compliance with all applicable provisions of the Affordable Care Act, including reporting requirements and all requirements relating to eligibility waiting periods and the offer of or provision of minimum essential coverage that is compliant with Section 36B(c)(2)(C) of the Code and the regulations issued thereunder to full-time employees as defined in Section 4980H(b)(4) of the Code and the regulations issued thereunder. No material excise tax or penalty under the Affordable Care Act, including Section 4980H of the Code, is outstanding, has accrued, or has arisen and there has been no change in health plan terms or coverage that would reasonably be expected to attract an excise tax under Section 4980H of the Code for the current year. Zircon has not received any written notification from any Governmental Entity concerning potential liability under the Affordable Care Act. |
| (g) | Each Zircon Employee Plan that is a “nonqualified deferred compensation plan” (as defined in Section 409A(d)(1) of the Code) complies in form and operation with Section 409A of the Code and all IRS regulations and other guidance promulgated thereunder. No event has occurred that would be treated by Section 409A(b) of the Code as a transfer of property for purposes of Section 83 of the Code. No stock option or equity unit option granted under any Zircon Employee Plan has an exercise price that has been or may be less than the fair market value of the underlying stock or equity units (as the case may be) as of the date such option was granted or has any feature for the deferral of compensation other than the deferral of recognition of income until the later of exercise or disposition of such option. No nonqualified deferred compensation plan has been administered in a manner that would cause an excise tax to apply to payments to plan participants. |
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| (h) | For purposes of this Agreement, the following terms shall have the following meanings: |
| (i) | “Employee Benefit Plan” means any “employee pension benefit plan” (as defined in Section 3(2) of ERISA), any “employee welfare benefit plan” (as defined in Section 3(1) of ERISA) and any other written or oral plan, agreement or arrangement involving direct or indirect compensation, including insurance coverage, severance benefits, disability benefits, fringe benefits, perquisites, change in control benefits, deferred compensation, bonuses, stock options, stock purchase, phantom stock, stock appreciation or other forms of incentive compensation or post-retirement compensation and all unexpired severance agreements, written or otherwise. |
| (ii) | “ERISA” means the Employee Retirement Income Security Act of 1974, as amended. |
| (iii) | “ERISA Affiliate” means any entity (whether or not incorporated) that is, or at any applicable time was, treated as a “single employer” with Zircon or Harmony, as applicable, or with any of Harmony’s Subsidiaries within the meaning of Section 414 of the Code or Section 4001 of ERISA. |
Section 3.15 Compliance with Laws. Zircon has complied in all material respects with, is not in material violation of, and, as of the Effective Date, has not received any written notice alleging any material violation with respect to, any applicable provisions of any statute, law or regulation with respect to the conduct of its business, or the ownership or operation of its properties or assets (including any COVID-19 Measure).
Section 3.16 Permits and Regulatory Matters.
| (a) | Zircon has submitted all applications and obtained all permits, licenses, registrations, authorizations, certificates, orders, approvals, franchises, variances and other similar rights issued by or obtained from any Governmental Entities (collectively, “Permits”) that are material to the conduct of its business as currently conducted, including all such Permits required by any federal, state or foreign agencies or bodies (the “Regulating Authority”). |
| (b) | All Permits that are necessary for the conduct of the business of Zircon as currently conducted (“Zircon Authorizations”) are in full force and effect, and to the knowledge of Zircon, Zircon has not received notice of any violations or notices of failure to comply in respect of any such Zircon Authorization. No such Zircon Authorization shall cease to be effective as a result of the consummation of the transactions contemplated by this Agreement. Zircon is in compliance in all material respects under any of such Zircon Authorizations. All applications, reports, notices and other documents required to be filed by Zircon with all Governmental Entities have been timely filed and are complete and correct in all material respects as filed or as amended prior to the Effective Date. |
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Section 3.17 Employees.
| (a) | All current and past key employees of Zircon have entered into confidentiality and assignment of inventions agreements with Zircon, a copy or form of which has previously been made available to Harmony. To the knowledge of Zircon, as of the Effective Date, no employee of Zircon is in violation of any term of any patent disclosure agreement, non-competition agreement, or any restrictive covenant to a former employer relating to the right of any such employee to be employed by Zircon because of the nature of the business currently conducted by Zircon or to the use of trade secrets or proprietary information of others. To the knowledge of Zircon, as of the Effective Date, no key employee or group of key employees has any plans to terminate employment with Zircon. |
| (b) | Zircon is not nor has it been a party to or otherwise bound by any collective bargaining agreement, contract or other agreement or understanding with a labor union or labor organization. Zircon is not nor has it been the subject of any proceeding asserting that Zircon has committed an unfair labor practice or is seeking to compel it to bargain with any labor union or labor organization, nor is there or has there been pending or, to the knowledge of Zircon, threatened, any labor strike, dispute, walkout, work stoppage, slow-down or lockout involving Zircon. |
| (c) | To the knowledge of Zircon, Zircon is and has been in material compliance with all applicable Laws related to employment (including verification of employment eligibility), employment practices, terms and conditions of employment and wages and hours (including, without limitation, classification of employees) with respect to any employee (as defined by, or determined in accordance with, applicable Laws). To the knowledge of Zircon, all employees of Zircon are citizens or lawful permanent residents of the United States. |
| (d) | Zircon has not received written notice of any charge or complaint pending before the Equal Employment Opportunity Commission or other Governmental Entity alleging unlawful discrimination, harassment, retaliation or any other violation of or non-compliance with applicable Law relating to the employment, treatment, or termination of any employees of Zircon, nor, to the knowledge of Zircon, has any such charge been threatened. No current or former employee of Zircon has, pursuant to internal complaint procedures, made a written complaint of discrimination, retaliation or harassment, nor to Zircon’s knowledge, has an oral complaint of any of the foregoing been made. |
| (e) | Zircon has not caused a plant closing as defined in the Worker Adjustment and Retraining Notification Act (the “WARN Act”) affecting any site of employment or one or more operating units within any site of employment, or a mass layoff as defined in the WARN Act, nor have any of the foregoing been affected by any transaction or engaged in layoffs or employment terminations sufficient in number to trigger application of any similar foreign, state or local Law. |
Section 3.18 Insurance. Zircon maintains insurance policies (the “Zircon Insurance Policies”) with reputable insurance carriers against all risks of a character and in such amounts as are usually insured against by similarly situated companies in the same or similar businesses. Each Zircon Insurance Policy is in full force and effect. None of the Zircon Insurance Policies shall terminate or lapse (or be affected in any other adverse manner) by reason of any of the transactions contemplated by this Agreement. Zircon has complied in all material respects with the provisions of each Zircon Insurance Policy under which it is the insured party. No insurer under any Zircon Insurance Policy has cancelled or generally disclaimed liability under any such policy or indicated to Zircon any written intent to do so or not to renew any such policy. All claims under the Zircon Insurance Policies have been filed in a timely fashion.
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Section 3.19 Brokers; Fees and Expenses. Except as set forth in Section 3.19 of the Zircon Disclosure Schedule, no agent, broker, investment banker, financial advisor or other firm or Person is or shall be entitled, as a result of any action, agreement or commitment of Zircon or any of its Affiliates, to any broker’s, finder’s, financial advisor’s or other similar fee or commission in connection with any of the transactions contemplated by this Agreement.
Section 3.20 Certain Business Relationships with Affiliates. No Affiliate of Zircon (a) owns any property or right, tangible or intangible, which is used in the business of Zircon, (b) to the knowledge of Zircon, has any claim or cause of action against Zircon or (c) owes any money to, or is owed any money by, Zircon. Section 3.20 of the Zircon Disclosure Schedule describes any material Contracts between Zircon and any Affiliate thereof which were entered into or have been in effect at any time since January 1, 2021, other than (i) any employment Contracts, invention assignment agreements and other Contracts entered into in the Ordinary Course of Business relating to employment, or (ii) Contracts relating to stock purchases and awards, stock options and other equity arrangements, in each case relating to compensation.
Section 3.21 Controls and Procedures, Certifications and Other Matters.
| (a) | Zircon maintains accurate books and records reflecting its assets and liabilities and maintains proper and adequate internal control over financial reporting that provide reasonable assurance that (i) transactions are executed with management’s authorization, (ii) transactions are recorded as necessary to permit preparation of the consolidated financial statements of Zircon and to maintain accountability for Zircon’s consolidated assets, (iii) access to assets of Zircon is permitted only in accordance with management’s authorization, (iv) the reporting of assets of Zircon is compared with existing assets at regular intervals and (v) accounts, notes and other receivables and inventory were recorded accurately, and proper and adequate procedures are implemented to effect the collection thereof on a current and timely basis. |
| (b) | Zircon maintains adequate disclosure controls and procedures designed to ensure that material information relating to Zircon is made known to the President and the Chief Financial Officer of Zircon. |
| (c) | Zircon has not extended or maintained credit, arranged for the extension of credit, modified or renewed an extension of credit, in the form of a personal loan or otherwise, to or for any director or executive officer of Zircon. Section 3.21(c) of the Zircon Disclosure Schedule identifies any loan or extension of credit maintained by Zircon to which the second sentence of Section 13(k)(1) of the Exchange Act applies. |
Section 3.22 Books and Records. The minute books and other similar records of Zircon contain complete and accurate records of all actions taken at any meetings of Zircon’s stockholders, Board of Directors or any committee thereof and of all written consents executed in lieu of the holding of any such meeting. The books and records of Zircon accurately reflect in all material respects the assets, liabilities, business, financial condition and results of operations of Zircon and have been maintained in accordance with good business and bookkeeping practices.
Section 3.23 Data Protection. Zircon has fully complied at all material times and currently fully comply with any data protection and privacy legislation applicable to their businesses including (i) the requirements relating to notification and/or registration of processing of personal data with any applicable national data protection regulator, (ii) all subject information requests from data subjects, (iii) where necessary, the obtaining of consent to data processing and/or direct marketing activity, and (iv) where necessary, the obtaining of any approval, consultation and/or agreement of any applicable works councils or such similar worker representation bodies. Zircon has not received any notice or complaint from any individual, third party and/or regulatory authority alleging non-compliance with any applicable data protection and privacy legislation (including any prohibition or restriction on the transfer of data to any jurisdiction) or claiming compensation for or an injunction in respect of non-compliance with any applicable data protection and privacy legislation.
Section 3.24 No Other Representations or Warranties. Zircon hereby acknowledges and agrees that, except for the representations and warranties contained in this Agreement, none of Harmony, Merger Sub nor any other Person on behalf of Harmony or Merger Sub makes any express or implied representation or warranty with respect to Harmony, Merger Sub or with respect to any other information provided to Zircon or any of its Affiliates in connection with the transactions contemplated hereby, and (subject to the express representations and warranties of Harmony and Merger Sub set forth in Article IV (in each case as qualified and limited by the Harmony Disclosure Schedule)) none of Zircon or any of its Affiliates, stockholders, directors, officers, employees, agents, representatives or advisors, or any other Person, has relied on any such information (including the accuracy or completeness thereof).
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Article IV. Representations and Warranties of Harmony and the Merger Sub
Harmony and Merger Sub represent and warrant to Zircon that the statements contained in this Article IV are true and correct, except as expressly set forth herein or in the disclosure schedule delivered by Harmony and Merger Sub to Zircon on the Effective Date (the “Harmony Disclosure Schedule”). For purposes hereof, the phrase “to the knowledge of Harmony” and similar expressions mean the actual knowledge of the persons identified on Section K of the Harmony Disclosure Schedule for this purpose, and such knowledge as such persons would reasonably be expected to have obtained in the course of their performance of their positions at Harmony (after due inquiry).
Section 4.01 Organization, Standing and Power. Each of Harmony and Merger Sub is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, has all requisite corporate power and authority to own, lease and operate its properties and assets and to carry on its business as currently conducted, and is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction listed on Section 4.01 of the Harmony Disclosure Schedule, which jurisdictions constitute the only jurisdictions in which the character of the respective properties each owns, operates or leases or the nature of its activities makes such qualification necessary, except for such failures to be so qualified or in good standing, individually or in the aggregate, that have not had, and are not reasonably likely to have, a Harmony Material Adverse Effect. For purposes of this Agreement, the term “Harmony Material Adverse Effect” means any material adverse change, effect, event, circumstance or development that is materially adverse to or has a material adverse effect on (i) the business, assets, liabilities, capitalization, financial condition, or results of operations of Harmony or Merger Sub and their Subsidiaries, taken as a whole, or (ii) the ability of Harmony or Merger Sub to consummate the Merger or any of the other transactions contemplated by this Agreement or to perform any of their respective covenants or obligations under this Agreement; provided, however, that none of the following, to the extent arising after the Effective Date, either alone or in combination, shall be deemed to be a Harmony Material Adverse Effect, and none of the following shall be taken into account in determining whether there has been or will be a Harmony Material Adverse Effect: any change or event caused by or resulting from (A) changes in prevailing economic or market conditions in the United States or any other jurisdiction in which such entities have substantial business operations (except to the extent those changes have a disproportionate effect on Harmony or Merger Sub and their respective Subsidiaries relative to the other participants in the industry or industries in which Harmony, Merger Sub and their respective Subsidiaries operate), (B) changes or events affecting the industry or industries in which Harmony and its Subsidiaries operate generally (except to the extent those changes or events have a disproportionate effect on Harmony and its Subsidiaries relative to the other participants in the industry or industries in which Harmony, Merger Sub and their respective Subsidiaries operate), (C) changes in generally accepted accounting principles or requirements (except to the extent those changes have a disproportionate effect on Harmony, Merger Sub and their respective Subsidiaries relative to the other participants in the industry or industries in which Harmony and its Subsidiaries operate), (D) changes in laws, rules or regulations of general applicability or interpretations thereof by any Governmental Entity (including any law, directive, pronouncement or guideline issued by a Governmental Body, the Centers for Disease Control and Prevention or the World Health Organization providing for business closures, changes to business operations, “sheltering-in-place,” curfews or other restrictions that relate to, or arise out of the novel coronavirus, COVID-19, including the COVID-19 Measures (except to the extent those changes have a disproportionate effect on Harmony, Merger Sub and their respective Subsidiaries relative to the other participants in the industry or industries in which Harmony and its Subsidiaries operate), (E) changes in, or effects arising from or relating to, any earthquake, hurricane, tsunami, tornado, flood, mudslide or other natural disaster, epidemic, pandemic or disease outbreak (including COVID-19), weather condition, explosion or fire or other force majeure event or act of God (except to the extent those changes or events have a disproportionate effect on Harmony, Merger Sub and their respective Subsidiaries relative to the other participants in the industry or industries in which Harmony and its Subsidiaries operate), (F) any failure by Harmony to meet any public estimates or expectations of Harmony’s revenue, earnings or other financial performance or results of operations for any period, or (G) any failure by Harmony to meet any guidance, budgets, plans or forecasts of its revenues, earnings, or other financial performance or results of operations (but not, in the case of Clauses (F) through (G), the underlying cause of such changes or failures, unless such changes or failures would otherwise be excepted from this definition), (H) any failure to receive consents or approvals in connection with the agreements listed on Section 4.04(b) of the Harmony Disclosure Schedule or (I) the transactions contemplated by this Agreement, including the Merger, or the announcement or pendency thereof. For the avoidance of doubt, the Parties agree that the terms “material,” “materially” and “materiality” as used in this Agreement with an initial lower case “m” shall have their respective customary and ordinary meanings, without regard to the meanings ascribed to Harmony Material Adverse Effect or Zircon Material Adverse Effect, in each case as defined in this Agreement. Harmony has made available to Zircon complete and accurate copies of its certificate of incorporation and bylaws and is not in material default under or in material violation of any provision of any such documents.
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Section 4.02 Capitalization.
| (a) | As of the Effective Date, the authorized capital stock of Harmony consists of 200,000,000 shares of Harmony Common Stock and no shares of preferred stock. The rights and privileges of Harmony’s Common Stock is as set forth in Harmony’s certificate of incorporation, as amended. As of the close of business on the Business Day prior to the Effective Date, (i) 21,155,079 shares of Harmony Common Stock were issued or outstanding, and (ii) no shares of Harmony Common Stock were held in the treasury of Harmony or by Subsidiaries of Harmony. |
| (b) | As of the Effective Date, the authorized capital stock of Merger Sub consists of 1,000 shares of common stock, par value $0.001 per share (“Merger Sub Common Stock”) and 100 shares of preferred stock, each $0.001 par value per share. The rights and privileges of each class of Merger Sub’s capital stock are as set forth in Merger Sub’s articles of incorporation, as amended. As of the close of business on the Business Day prior to the Effective Date, (i) 100 shares of Merger Sub Common Stock were issued or outstanding, (ii) no shares of Merger Sub Common Stock were held in the treasury of Harmony, Merger Sub, or any of their respective Subsidiaries, and (iii) no shares of preferred stock were issued or outstanding. |
| (c) | Harmony has no options issued or outstanding to acquire any shares of Harmony stock. |
| (d) | Section 4.02(d) of the Harmony Disclosure Schedule lists the number of shares of Harmony Common Stock reserved for future issuance pursuant to warrants or other outstanding rights to purchase shares of Harmony Common Stock outstanding as of the close of business on the Business Day prior to the Effective Date (such outstanding warrants or other rights, the “Harmony Warrants”) and the agreement or other document under which such Harmony Warrants were granted, and the exercise price, the date of grant and the expiration date thereof. Harmony has made available to Zircon accurate and complete copies of the forms of agreements evidencing all Harmony Warrants. |
| (e) | Except as set forth in this Section 4.02, (A) there are no equity securities of any class of Harmony, or any security exchangeable into or exercisable for such equity securities, issued, reserved for issuance or outstanding and (B) there are no options, warrants, equity securities, calls, rights, commitments or agreements of any character to which Harmony or any of its Subsidiaries is a party or by which Harmony or any of its Subsidiaries is bound obligating Harmony or any of its Subsidiaries to issue, exchange, transfer, deliver or sell, or cause to be issued, exchanged, transferred, delivered or sold, additional shares of capital stock or other equity interests of Harmony or any security or rights convertible into or exchangeable or exercisable for any such shares or other equity interests, or obligating Harmony or any of its Subsidiaries to grant, extend, accelerate the vesting of, otherwise modify or amend or enter into any such option, warrant, equity security, call, right, commitment or agreement. Harmony does not have any outstanding stock appreciation rights, phantom stock, performance-based rights or similar rights or obligations. Neither Harmony nor any of its Affiliates is a party to or is bound by any, and to the knowledge of Harmony, there are no, agreements or understandings with respect to the voting (including voting trusts and proxies) or sale or transfer (including agreements imposing transfer restrictions) of any shares of capital stock or other equity interests of Harmony. Except as contemplated by this Agreement or described in this Section 4.02(e), there are no registration rights to which Harmony or any of its Subsidiaries is a party or by which it or they are bound with respect to any equity security of any class of Harmony. Stockholders of Harmony are not entitled to dissenters’ or appraisal rights under applicable state law in connection with the Merger. |
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| (f) | All outstanding shares of Harmony Common Stock, and all shares of Harmony Common Stock subject to issuance as specified in Article II, upon issuance on the terms and conditions specified in the instruments pursuant to which they are issuable, will be, duly authorized, validly issued, fully paid and nonassessable and not subject to or otherwise issued in violation of any purchase option, call option, right of first refusal, preemptive right, subscription right or any similar right under any provision of the DGCL, Harmony’s certificate of incorporation or bylaws, each as amended, or any agreement to which Harmony is a party or is otherwise bound. Other than this Agreement, there are no obligations, contingent or otherwise, of Harmony or Merger Sub or any of their Subsidiaries to repurchase, redeem or otherwise acquire any shares of Harmony or Merger Sub capital stock. All outstanding shares of Harmony Common Stock and of Merger Sub Common Stock have been offered, issued and/or sold, as the case may be, by Harmony or Merger Sub, as the case may be, in compliance with all applicable federal and state securities laws. |
Section 4.03 Subsidiaries.
| (a) | Section 4.03(a) of the Harmony Disclosure Schedule sets forth, for each Subsidiary of Harmony: (i) its name; (ii) the number and type of outstanding equity securities and a list of the holders thereof; and (iii) the jurisdiction of organization. |
| (b) | Each Subsidiary of Harmony is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, has all requisite corporate power and authority to own, lease and operate its properties and assets and to carry on its business as currently conducted, and is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction where the character of its properties owned, operated or leased or the nature of its activities makes such qualification necessary, except for such failures to be so organized, qualified or in good standing, individually or in the aggregate, that have not had, and are not reasonably likely to have, a Harmony Material Adverse Effect. All of the outstanding shares of capital stock and other equity securities or interests of each Subsidiary of Harmony are duly authorized, validly issued, fully paid, nonassessable and free of preemptive rights and all such shares (other than directors’ qualifying shares in the case of non-U.S. Subsidiaries, all of which Harmony has the power to cause to be transferred for no or nominal consideration to Harmony or Harmony’s designee) are owned, of record and beneficially, by Harmony or another of its Subsidiaries free and clear of all Liens, claims, pledges, agreements or limitations in Harmony’s voting rights. There are no outstanding or authorized options, warrants, rights, agreements or commitments to which Harmony or any of its Subsidiaries is a party or which are binding on any of them providing for the issuance, disposition or acquisition of any capital stock of any Subsidiary of Harmony. There are no outstanding stock appreciation, phantom stock or similar rights with respect to any Subsidiary of Harmony. There are no voting trusts, proxies or other agreements or understandings with respect to the voting of any capital stock of any Subsidiary of Harmony. |
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| (c) | Harmony has made available to Zircon complete and accurate copies of the charter, bylaws or other organizational documents, each as amended, of each Subsidiary of Harmony |
| (d) | Harmony does not control directly or indirectly or have any direct or indirect equity participation or similar interest in any corporation, partnership, limited liability company, joint venture, trust or other business association or entity which is not a Subsidiary of Harmony. There are no obligations, contingent or otherwise, of Harmony or any of its Subsidiaries to repurchase, redeem or otherwise acquire any shares of capital stock of any Subsidiary of Harmony or to provide funds to or make any investment (in the form of a loan, capital contribution or otherwise) in any Subsidiary of Harmony or any other entity, other than guarantees of bank obligations of Subsidiaries of Harmony entered into in the Ordinary Course of Business. |
Section 4.04 Authority; No Conflict; Required Filings and Consents.
| (a) | Each of Harmony and Merger Sub has all requisite corporate power and authority to enter into this Agreement and, subject only to the adoption of this Agreement by Harmony in its capacity as the sole stockholder of Merger Sub, to consummate the transactions contemplated by this Agreement. Without limiting the generality of the foregoing, the Harmony Board, at a meeting duly called and held, by the unanimous vote of all directors, determined that the Merger is fair to, and in the best interests of Harmony and its stockholders. The execution and delivery of this Agreement and the consummation of the transactions contemplated by this Agreement by Harmony and Merger Sub have been duly authorized by all necessary corporate action on the part of each of Harmony and Merger Sub, subject only to the adoption of this Agreement by Harmony in its capacity as the sole stockholder of Merger Sub. This Agreement has been duly executed and delivered by each of Harmony and Merger Sub and, assuming the due execution and delivery by Zircon, constitutes the valid and binding obligation of each of Harmony and Merger Sub, enforceable against Harmony and Merger Sub in accordance with its terms, subject to the Bankruptcy and Equity Exception. |
| (b) | The execution and delivery of this Agreement by each of Harmony and Merger Sub do not, and the consummation by Harmony and Merger Sub of the transactions contemplated by this Agreement shall not, (i) conflict with, or result in any violation or breach of, any provision of the certificate of incorporation or bylaws of Harmony or Merger Sub or of the charter, bylaws or other organizational document of any other Subsidiary of Harmony, each as amended, (ii) conflict with, or result in any violation or breach of, or constitute (with or without notice or lapse of time, or both) a default (or give rise to a right of termination, cancellation or acceleration of any obligation or loss of any material benefit) under, or require a consent or waiver under, constitute a change in control under, require the payment of a penalty under or result in the imposition of any Lien on Harmony’s or any of its Subsidiaries’ assets under any of the terms, conditions or provisions of any Contract required to be disclosed in Section 4.11(d) of the Harmony Disclosure Schedule, or (iii) subject to compliance with the requirements specified in clauses (i) through (vii) of Section 4.04(c), conflict with or violate any permit, concession, franchise, license, judgment, injunction, order, decree, statute, law, ordinance, rule or regulation applicable to Harmony or any of its Subsidiaries or any of its or their properties or assets, except in the case of clauses (ii) and (iii) of this Section 4.04(b), for any such conflicts, violations, breaches, defaults, terminations, cancellations, accelerations or losses that, individually or in the aggregate have not had, and are not reasonably likely to result in, the loss of a material benefit to, or in the creation of a material liability for, Harmony or would not reasonably be expected to result in a Harmony Material Adverse Effect. Section 4.04(b) of the Harmony Disclosure Schedule lists all consents, waivers and approvals under any of Harmony’s or any of its Subsidiaries’ agreements, licenses or leases required to be obtained in connection with the consummation of the transactions contemplated by this Agreement, which, if individually or in the aggregate were not obtained, would result in a loss of a material benefit to, or the creation of any material liability for, Harmony, Zircon or the Surviving Corporation as a result of the Merger. |
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| (c) | No consent, approval, license, permit, order or authorization of, or registration, declaration, notice or filing with, any Governmental Entity or any stock market or stock exchange on which shares of Harmony Common Stock are listed for trading is required by or with respect to Harmony or any of its Subsidiaries in connection with the execution and delivery of this Agreement or the consummation by Harmony or Merger Sub of the transactions contemplated by this Agreement, except for (i) the filing of the Certificate of Merger with the California Secretary of State, (ii) the filing of such reports, schedules or materials under Section 13 of or Rule 4a-12 under the Exchange Act and materials under Rule 165 and Rule 425 under the Securities Act as may be required in connection with this Agreement and the transactions contemplated hereby and thereby, (v) such consents, approvals, orders, authorizations, registrations, declarations and filings as may be required under applicable state securities laws and the laws of any foreign country, and (iii) such other consents, authorizations, orders, filings, approvals and registrations that, individually or in the aggregate, if not obtained or made, would not result in a loss of a material benefit to, or the creation of any material liability for, Harmony or Zircon as a result of the Merger. |
Section 4.05 SEC Filings; Financial Statements; Information Provided.
| (a) | Harmony has filed all registration statements, forms, reports, certifications and other documents required to be filed by Harmony and/or in connection with Merger Sub with the SEC since December 27, 2021. All such registration statements, forms, reports and other documents, as amended prior to the date hereof, and those that Harmony may file after the date hereof until the Closing, are referred to herein as the “Harmony SEC Reports.” All of the Harmony SEC Reports (A) were or will be filed on a timely basis, (B) at the time filed (or if amended prior to the date hereof, when so amended), complied, or will comply when filed, as to form in all material respects with the requirements of the Securities Act and the Exchange Act applicable to such Harmony SEC Reports and (C) did not or will not at the time they were filed (or if amended prior to the date hereof, when so amended) or are filed contain any untrue statement of a material fact or omit to state a material fact required to be stated in such Harmony SEC Reports or necessary in order to make the statements in such Harmony SEC Reports, in the light of the circumstances under which they were made, not misleading, in any material respect. |
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| (b) | Each of the consolidated financial statements (including, in each case, any related notes and schedules) contained or to be contained in the Harmony SEC Reports at the time filed (or if amended prior to the date hereof, when so amended) (i) complied or will comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, (ii) were or will be prepared in accordance with GAAP applied on a consistent basis throughout the periods involved and at the dates involved (except as may be indicated in the notes to such financial statements or, in the case of unaudited interim financial statements, as permitted by the SEC on Form 10-Q under the Exchange Act) and (iii) fairly presented or will fairly present in all material respects the consolidated financial position of Harmony and its Subsidiaries as of the dates indicated and the consolidated assets, liabilities, business, financial condition, results of its operations and cash flows for the periods indicated, consistent with the books and records of Harmony and its Subsidiaries, except that the unaudited interim financial statements were or are subject to normal and recurring year-end adjustments. The consolidated balance sheet of Harmony as of December 31, 2022 is referred to herein as the “Harmony Balance Sheet.” |
| (c) | To the best of Harmony’s knowledge and belief, Harmony is not, has never been and as of the Effective Time will not be, a “shell company” (as defined in Rule 405 under the Securities Act). |
| (d) | Kreston GTA, LLP, Harmony’s current auditors, is and has been at all times since its engagement by Harmony (i) “independent” with respect to Harmony within the meaning of Regulation S-X and (ii) in compliance with subsections (g) through (l) of Section 10A of the Exchange Act (to the extent applicable) and the related rules of the SEC and the Public Company Accounting Oversight Board. |
| (e) | Harmony has established and maintains disclosure controls and procedures and internal control over financial reporting (as such terms are defined in paragraphs (e) and (f), respectively, of Rule 13a-15 under the Exchange Act) as required by Rule 13a-15 under the Exchange Act. Harmony’s disclosure controls and procedures are reasonably designed to ensure that all material information required to be disclosed by Harmony in the reports that it files or furnishes under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that all such material information is accumulated and communicated to Harmony’s management as appropriate to allow timely decisions regarding required disclosure and to make the certifications required pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act. Since January 1, 2020, Harmony’s principal executive officer and its principal financial officer have disclosed to Harmony’s auditors and the audit committee of the Harmony Board all known (i) significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting that are reasonably likely to adverse and materially affect the Company’s ability to record, process, summarize and report financial information, (ii) material weaknesses in the design and operation of internal controls over financial reporting, and (iii) any fraud, whether or not material, that involves the management or other employees who have a significant role in Harmony’s internal controls over financial reporting. Each of Harmony and its Subsidiaries have materially complied with or substantially addressed such deficiencies, material weaknesses and/or fraud. |
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| (f) | Harmony is in compliance in all material respects with the applicable provisions of the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act. Each required form, report and document containing financial statements that has been filed with or submitted to the SEC was accompanied by any certifications required to be filed or submitted by Harmony’s principal executive officer and principal financial officer pursuant to the Sarbanes-Oxley Act and, at the time of filing or submission of each such certification, any such certification complied in all material respects with the applicable provisions of the Sarbanes-Oxley Act. Neither Harmony nor any of its executive officers has received written notice from any Governmental Entity challenging or questioning the accuracy, completeness, form or manner of filing of such certifications. |
| (g) | As of the Effective Date, Harmony has timely responded to all comment letters of the staff of the SEC relating to the Harmony SEC Reports, and the SEC has not advised Harmony that any final responses are inadequate, insufficient or otherwise non-responsive. The Harmony has made available to Zircon true, correct and complete copies of all comment letters, written inquiries and enforcement correspondence between the SEC, on the one hand, and Harmony and any of its Subsidiaries, on the other hand, occurring since January 1, 2020 and will, reasonably promptly following the receipt thereof, make available to the Company any such correspondence sent or received after the date hereof. To the knowledge of Harmony, as of the Effective Date, none of the Harmony SEC Reports is the subject of ongoing SEC review or outstanding SEC comment. |
| (h) | Each of the principal executive officer of Harmony and the principal financial officer of Harmony (or each former principal executive officer of Harmony and each former principal financial officer of Harmony, as applicable) has made all certifications required by Rule 13a-14 or 15d-14 under the Exchange Act or Sections 302 and 906 of the Sarbanes-Oxley Act and the rules and regulations of the SEC promulgated thereunder with respect to the Harmony SEC Reports, and the statements contained in such certifications were true and correct on the date such certifications were made. For purposes of this Section 4.05(h), “principal executive officer” and “principal financial officer” has the meanings given to such terms in the Sarbanes-Oxley Act. |
| (i) | Neither Harmony nor any of its Subsidiaries nor, to the knowledge of Harmony, any director, officer, employee, or internal or external auditor of Harmony or any of its Subsidiaries has received or otherwise had or obtained actual knowledge of any substantive material complaint, allegation, assertion or claim, whether written or oral, that Harmony or any of its Subsidiaries has engaged in questionable accounting or auditing practices. |
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Section 4.06 No Undisclosed Liabilities. Harmony does not have any liability that is required to be set forth on a balance sheet of Harmony prepared in accordance with GAAP, which are, individually or in the aggregate, material to the business, results in operations or the financial condition of Harmony except for (a) liabilities shown on the Harmony Balance Sheet, (b) liabilities that have arisen or have been incurred since the date of the Harmony Balance Sheet in the Ordinary Course of Business and (c) liabilities for transaction expenses incurred in connection with the transactions contemplated by this Agreement and alternatives to such transactions. Section 4.06 of the Harmony Disclosure Schedule lists all indebtedness and liabilities of Harmony and Merger Sub and their subsidiaries and sets forth all indebtedness and liabilities held solely at Harmony or exclusively an obligation of Harmony and/or Merger Sub (exclusive of such indebtedness or obligations held solely by any subsidiary for which neither Harmony nor Merger Sub has any obligations). Immediately before and as of the Closing, neither Harmony nor Merger Sub shall have any liabilities or indebtedness.
Section 4.07 Absence of Certain Changes or Events. During the period beginning on the date of the Harmony Balance Sheet and ending on the date hereof, Harmony and its Subsidiaries have conducted their respective businesses only in the Ordinary Course of Business and, since such date, there has not been (i) any change, event, circumstance, development or effect that, individually or in the aggregate, has had, or is reasonably likely to have, a Harmony Material Adverse Effect or (ii) except for the execution and delivery of this Agreement, any other action or event that would have required the consent of Zircon pursuant to Section 5.02 (other than clause (A) of Section 5.02(j) or Section 5.02(k) or Section 5.02(l)) had such action or event occurred after the Effective Date.
Section 4.08 Taxes.
| (a) | Each of Harmony and its Subsidiaries has properly filed on a timely basis all Tax Returns that it was required to file, and all such Tax Returns were true, correct and complete in all respects. Each of Harmony and its Subsidiaries has paid on a timely basis all Taxes, whether or not shown on any Tax Return, that were due and payable. The unpaid Taxes of Harmony and each of its Subsidiaries for Tax periods through the date of the Harmony Balance Sheet do not exceed the accruals and reserves for Taxes (excluding accruals and reserves for deferred Taxes established to reflect timing differences between book and Tax income) set forth on the Harmony Balance Sheet, and all unpaid Taxes of Harmony and each of its Subsidiaries for all Tax periods commencing after the date of the Harmony Balance Sheet arose in the Ordinary Course of Business. Neither Harmony nor any of its Subsidiaries is or has ever been a member of an affiliated group with which it has filed (or been required to file) consolidated, combined, unitary or similar Tax Returns, other than a group of which the common parent is Harmony. With the exception of customary commercial leases or contracts that are not primarily related to Taxes entered into in the Ordinary Course of Business and liabilities thereunder, neither Harmony nor any of its Subsidiaries (i) has any actual or potential liability under Treasury Regulations Section 1.1502-6 (or any comparable or similar provision of federal, state, local or foreign law), as a transferee or successor, pursuant to any contractual obligation, or otherwise for any Taxes of any Person other than Harmony or any of its Subsidiaries, or (ii) is a party to or bound by any Tax indemnity, Tax sharing, Tax allocation or similar agreement. All Taxes that Harmony or any of its Subsidiaries was required by law to withhold or collect have been duly withheld or collected and, to the extent required, have been properly paid to the appropriate Governmental Entity, and each of Harmony and its Subsidiaries has complied with all information reporting and backup withholding requirements, including the maintenance of required records with respect thereto, in connection with amounts paid to any employee, independent contractor, creditor, or other third party. |
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| (b) | Harmony has delivered or made available to Zircon (i) complete and correct copies of all Tax Returns of Harmony and any of its Subsidiaries relating to Taxes for all taxable periods for which the applicable statute of limitations has not yet expired, (ii) complete and correct copies of all private letter rulings, revenue agent reports, information document requests, notices of proposed deficiencies, deficiency notices, protests, petitions, closing agreements, settlement agreements, pending ruling requests and any similar documents submitted by, received by, or agreed to by or on behalf of Harmony or any of its Subsidiaries relating to Taxes for all taxable periods for which the statute of limitations has not yet expired, and (iii) complete and correct copies of all agreements, rulings, settlements or other Tax documents with or from any Governmental Entity relating to Tax incentives of Harmony or any of its Subsidiaries. No examination or audit of any Tax Return of Harmony or any of its Subsidiaries by any Governmental Entity is currently in progress or, to the knowledge of Harmony, threatened or contemplated. No deficiencies for Taxes of Harmony or any of its Subsidiaries have been claimed, proposed or assessed by any Governmental Entity in writing. Neither Harmony nor any of its Subsidiaries has been informed in writing by any jurisdiction in which Harmony or any of its Subsidiaries does not file a Tax Return that the jurisdiction believes that Harmony or any of its Subsidiaries was required to file any Tax Return that was not filed or is subject to Tax in such jurisdiction. Neither Harmony nor any of its Subsidiaries has (i) waived any statute of limitations with respect to Taxes or agreed to extend the period for assessment or collection of any Taxes, which waiver or extension is still in effect, (ii) requested any extension of time within which to file any Tax Return, other than routine extensions available as a matter of right which Tax Return has not yet been filed, or (iii) executed or filed any power of attorney with any taxing authority, which is still in effect. |
| (c) | Neither Harmony nor any of its Subsidiaries has made any payment, is obligated to make any payment, or is a party to any agreement that could obligate it to make any payment that may be treated as an “excess parachute payment” under Section 280G of the Code (without regard to Sections 280G(b)(4) and 280G(b)(5) of the Code). |
| (d) | Neither Harmony nor any of its Subsidiaries has been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(l)(A)(ii) of the Code. |
| (e) | Neither Harmony nor any of its Subsidiaries has distributed to its stockholders or security holders stock or securities of a controlled corporation, nor has stock or securities of Harmony or any of its Subsidiaries been distributed, in a transaction to which Section 355 of the Code applies (i) in the two years prior to the Effective Date or (ii) in a distribution that could otherwise constitute part of a “plan” or “series of related transactions” (within the meaning of Section 355(e) of the Code) that includes the transactions contemplated by this Agreement. |
| (f) | There are no Liens with respect to Taxes upon any of the assets or properties of Harmony or any of its Subsidiaries, other than with respect to Taxes not yet due and payable. |
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| (g) | Neither Harmony nor any of its Subsidiaries will be required to include any item of income in, or exclude any item of deduction from, taxable income for any period (or any portion thereof) ending after the Closing Date as a result of any (i) adjustments under Section 481 of the Code (or any similar adjustments under any provision of the Code or the corresponding foreign, state or local Tax laws), (ii) deferred intercompany gain or any excess loss account described in Treasury Regulations under Section 1502 of the Code (or any corresponding provision of state, local or foreign Tax law), (iii) closing agreement as described in Section 7121 of the Code (or any corresponding or similar provision of state, local or foreign Tax law) executed on or prior to the Closing Date, (iv) installment sale or other open transaction disposition made on or prior to the Closing Date, (v) prepaid amount received on or prior to the Closing Date, or (vi) any election made pursuant to Section 108(i) of the Code on or prior to the Closing Date. |
| (h) | Neither Harmony nor any of its Subsidiaries has participated in any “reportable transaction” as defined in section 1.6011-4(b) of the Treasury Regulations or a “listed transaction” as set forth in section 301.6111-2(b)(2) of the Treasury Regulations or any analogous provision of state or local law. |
| (i) | Neither Harmony nor any of its Subsidiaries (i) is a party to any joint venture, partnership, or other arrangement that is treated as a partnership for federal income Tax purposes or (ii) has made an entity classification (“check-the-box”) election under Section 7701 of the Code. |
| (j) | Neither Harmony nor any of its Subsidiaries (i) is a stockholder of a “specified foreign corporation” (other than the Subsidiaries of Harmony) as defined in Section 965(e) of the Code (or any similar provision of state, local or foreign Law), or (ii) is a stockholder in a “passive foreign investment company” as defined in Section 1297 of the Code. None of Harmony’s Subsidiaries that are or have at any time been controlled foreign corporations (within the meaning of Section 957(c) of the Code) (i) has derived (or been treated for U.S. federal income Tax purposes as deriving) any item of subpart F income (within the meaning of Section 952(a) of the Code, as determined after the application of Section 952(c) of the Code) in any year, or (ii) has made any investment in United States property (within the meaning of Section 956(c) of the Code) at any time. None of Harmony’s Subsidiaries was a deferred foreign income corporation as defined in Section 965(d)(1) of the Code with respect to Harmony or any of its Subsidiaries. |
| (k) | Neither Harmony nor any of its Subsidiaries is subject to Tax in any country other than its country of incorporation, organization or formation by virtue of having employees, a permanent establishment or other place of business in that country. |
| (l) | All related party transactions involving Harmony or any of its Subsidiaries have been conducted at arm’s length in compliance with Section 482 of the Code and the Treasury Regulations promulgated thereunder and any comparable provisions of any other Tax law. Each of Harmony and its Subsidiaries has maintained documentation (including any applicable transfer pricing studies) in connection with such related party transactions in accordance with Sections 482 and 6662 of the Code and the Treasury Regulations promulgated thereunder and any comparable provisions of any other Tax law. |
| (m) | Neither Harmony nor any of its Affiliates has taken or agreed to take any action, has omitted to take any action, or has any knowledge of any fact or circumstance, the taking, omission, or existence of which, as the case may be, that would reasonably be expected to prevent the Merger from constituting a transaction qualifying as a reorganization under Section 368(a) of the Code. |
| (n) | Neither Harmony nor Merger Subsidiary is an investment company as defined in Section 368(a)(2)(F)(iii) and (iv) of the Code. |
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Section 4.09 Owned and Leased Real Properties.
| (a) | Neither Harmony nor any of its Subsidiaries owns or has ever owned any real property. |
| (b) | Section 4.09(b) of the Harmony Disclosure Schedule sets forth a complete and accurate list of all real property leased, subleased or licensed by Harmony or any of its Subsidiaries as of the Effective Date (collectively, the “Harmony Leases”) and the location of the premises of such real property. Neither Harmony nor any of its Subsidiaries nor, to the knowledge of Harmony, any other party is in breach or default and no event has occurred, is pending or, to the knowledge of Harmony, is threatened, which, after the giving of notice, with lapse of time, or otherwise, would constitute any such breach or default under any of under any of the Harmony Leases, except where the existence of such defaults, individually or in the aggregate, has not had, and is not reasonably likely to result in, the loss of a material right or in a material liability of Harmony or any of its Subsidiaries. Neither Harmony nor any of its Subsidiaries leases, subleases or licenses any real property to any Person other than Harmony and its Subsidiaries. Harmony has made available to Zircon complete and accurate copies of all Harmony Leases. |
Section 4.10 Intellectual Property. Harmony owns no Intellectual Property.
Section 4.11 Contracts.
| (a) | As of the Effective Date, there are no Contracts that are material contracts (as defined in Item 601(b)(10) of Regulation S-K) with respect to Harmony, other than those Contracts identified or described in the Harmony SEC Reports filed prior to the date hereof. |
| (b) | Harmony has not entered into any transaction that would be subject to proxy statement disclosure pursuant to Item 404 of Regulation S-K other than as disclosed in an SEC Report filed prior to the date hereof. |
| (c) | Neither Harmony nor any of its Subsidiaries is a party to any agreement under which a third party would be entitled to receive a license or any other right to Harmony Intellectual Property as a result of the transactions contemplated by this Agreement. |
| (d) | Section 4.11(d) of the Harmony Disclosure Schedule lists the following Contracts of Harmony and its Subsidiaries in effect as of the Effective Date: |
| (i) | any Contract (or group of related Contracts) for the purchase or sale of products or for the furnishing or receipt of services (A) which calls for performance over a period of more than 180 days from the Effective Date, (B) which involves an aggregate of more than $50,000 or (C) in which Harmony or any of its Subsidiaries has granted manufacturing rights, “most favored nation” pricing provisions or marketing or distribution rights relating to any products or territory or has agreed to purchase a minimum quantity of goods or services or has agreed to purchase goods or services exclusively from a particular party; |
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| (ii) | any Contract under which the consequences of a default or termination would reasonably be likely to have a Harmony Material Adverse Effect; |
| (iii) | any Contract that could reasonably be expected to have the effect of prohibiting or impairing the conduct of the business of Zircon or any of its Subsidiaries or Harmony or any of its Subsidiaries as currently conducted; |
| (iv) | any Contract under which Harmony or any of its Subsidiaries is restricted from selling, licensing or otherwise distributing any of its technology or products, or providing services to, customers or potential customers or any class of customers, in any geographic area, during any period of time or any segment of the market or line of business; |
| (v) | any dealer, distribution, joint marketing, joint venture, joint development, partnership, strategic alliance, collaboration, development agreement or outsourcing arrangement; |
| (vi) | any Contract for the conduct of research studies, pre-clinical or clinical studies, manufacturing, distribution, supply, marketing or co-promotion of any products in development by or which has been or which is being marketed, distributed, supported, sold or licensed out, in each case by or on behalf of Harmony or any of its Subsidiaries; and |
| (vii) | any Contract that would entitle any third party to receive a license or any other right to Intellectual Property of Zircon or any of Zircon’s Affiliates following the Closing. |
| (e) | Harmony has made available to Zircon a complete and accurate copy of each Contract listed in Section 4.11(d) of the Harmony Disclosure Schedule. With respect to each Contract so listed and those Contracts identified or described in the Harmony SEC Reports filed prior to the date hereof: (i) the Contract is legal, valid, binding and enforceable and in full force and effect against Harmony and/or its Subsidiaries, as applicable, and, to the knowledge of Harmony, against each other party thereto, as applicable, subject to the Bankruptcy and Equity Exception; (ii) the Contract will continue to be legal, valid, binding and enforceable and in full force and effect against Harmony and/or its Subsidiaries, as applicable, and, to the knowledge of Harmony, against each other party thereto, immediately following the Closing in accordance with the terms thereof as in effect immediately prior to the Closing (other than any such Contracts that expire or terminate before such time in accordance with their terms and not as a result of a breach or default by Harmony or any of its Subsidiaries), in each case subject to the Bankruptcy and Equity Exception and except to the extent the failure to be in full force and effect, individually or in the aggregate, would not reasonably be likely to have a Harmony Material Adverse Effect; and (iii) none of Harmony, its Subsidiaries nor, to the knowledge of Harmony, any other party, is in breach or violation of, or default under, any such Contract, and no event has occurred, is pending or, to the knowledge of Harmony, is threatened, which, with or without notice or lapse of time, or both, would constitute a breach or default by Harmony, its Subsidiaries or, to the knowledge of Harmony, any other party under such Contract, except for such breaches, violations or defaults that, individually or in the aggregate, have not had, and are not reasonably likely to have, a Harmony Material Adverse Effect. |
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Section 4.12 Litigation. There is no action, suit, proceeding, claim, arbitration or investigation before any Governmental Entity or before any arbitrator that is pending or, to the knowledge of Harmony, threatened or reasonably anticipated against Harmony or any of its Subsidiaries that (a) seeks either damages in excess of $100,000 or equitable relief or (b) in any manner challenges or seeks to prevent, enjoin, alter or delay the transactions contemplated by this Agreement, except for such actions, suits, proceedings, claims, arbitrations or investigations first arising after the Effective Date that, individually or in the aggregate, have not had, and are not reasonably likely to have, a Harmony Material Adverse Effect. There are no material judgments, orders or decrees outstanding against Harmony or any of its Subsidiaries.
Section 4.13 Environmental Matters.
| (a) | Except for such matters that, individually or in the aggregate, have not had, and are not reasonably likely to have, a Harmony Material Adverse Effect: |
| (i) | Harmony and its Subsidiaries have complied with all applicable Environmental Laws; |
| (ii) | to the knowledge of Harmony, the properties currently owned, leased or operated by Harmony and its Subsidiaries (including soils, groundwater, surface water, buildings or other structures) are not contaminated with any Hazardous Substances; |
| (iii) | to the knowledge of Harmony, the properties formerly owned, leased or operated by Harmony or any of its Subsidiaries were not contaminated with Hazardous Substances during the period of ownership, use or operation by Harmony or any of its Subsidiaries; |
| (iv) | neither Harmony nor any of its Subsidiaries are subject to liability for any Hazardous Substance disposal or contamination on the property of any third party; and |
| (v) | neither Harmony nor any of its Subsidiaries have released any Hazardous Substance into the environment. |
| (b) | As of the Effective Date, neither Harmony nor any of its Subsidiaries has received any written notice, demand, letter, claim or request for information alleging that Harmony or any of its Subsidiaries may be in violation of, liable under or have obligations under, any Environmental Law. |
| (c) | Neither Harmony nor any of its Subsidiaries is subject to any written orders, decrees, injunctions or other arrangements with any Governmental Entity or is subject to any indemnity or other written agreement with any third party relating to liability under any Environmental Law or relating to Hazardous Substances. |
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Section 4.14 Employee Benefit Plans. Harmony has no Employee Benefit Plans maintained, or contributed to, by Harmony or any of its Subsidiaries or any of their respective ERISA Affiliates for the benefit of, any current or former employee or other service provider of Harmony or any of its Subsidiaries.
Section 4.15 Compliance With Laws. Harmony and each of its Subsidiaries has complied in all material respects with, is not in material violation of, and, as of the Effective Date, has not received any notice alleging any material violation with respect to, any applicable provisions of any statute, law or regulation with respect to the conduct of its business, or the ownership or operation of its properties or assets (including any COVID-19 Measure).
Section 4.16 Permits and Regulatory Matters.
| (a) | Harmony and each of its Subsidiaries have all material Permits required to conduct their businesses as currently conducted, including all such Permits required by any Regulatory Authority, or any other Governmental Entity exercising comparable authority (the “Harmony Authorizations”). |
| (b) | Harmony and its Subsidiaries are in compliance in all material respects with the terms of the Harmony Authorizations. No Harmony Authorization shall cease to be effective as a result of the consummation of the transactions contemplated by this Agreement. |
| (c) | All manufacturing, processing, distribution, labeling, storage, testing, specifications, sampling, sale or marketing of products or other business operations performed by or on behalf of Harmony or any of its Subsidiaries are in compliance in all material respects with all applicable laws, rules, regulations or orders issued by the any Governmental Entity having jurisdiction, regulatory or other authority over Harmony or any of its Subsidiaries, as applicable. As of the Effective Date, except as set forth in Section 4.16(c) of the Harmony Disclosure Schedule, neither Harmony nor any of its Subsidiaries has received any written notices or other correspondence from any Governmental Entity and to the knowledge of Harmony, there is no action or proceeding pending or threatened (including any prosecution, injunction, seizure, civil fine, suspension or recall), in each case alleging that Harmony or any of its Subsidiaries is in material noncompliance with any and all applicable laws, regulations or orders implemented by any Governmental Entity. |
Section 4.17 Employees.
| (a) | To the knowledge of Harmony, as of the Effective Date, no employee of Harmony or any Subsidiary of Harmony is in violation of any term of any patent disclosure agreement, non-competition agreement, or any restrictive covenant to a former employer relating to the right of any such employee to be employed by Harmony or any of its Subsidiaries because of the nature of the business currently conducted by Harmony or any of its Subsidiaries or to the use of trade secrets or proprietary information of others. To the knowledge of Harmony, as of the Effective Date, no key employee or group of employees has any plans to terminate employment with Harmony or its Subsidiaries. |
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| (b) | Neither Harmony nor any of its Subsidiaries is or has been a party to or otherwise bound by any collective bargaining agreement, contract or other agreement or understanding with a labor union or labor organization. Neither Harmony nor any of its Subsidiaries is or has been the subject of any proceeding asserting that Harmony or any of its Subsidiaries has committed an unfair labor practice or is seeking to compel it to bargain with any labor union or labor organization, nor is there or has there been pending or, to the knowledge of Harmony, threatened, any labor strike, dispute, walkout, work stoppage, slow-down or lockout involving Harmony or any of its Subsidiaries. |
| (c) | To the knowledge of Harmony, Harmony and its Subsidiaries are and have been in material compliance with all applicable Laws related to employment (including verification of employment eligibility), employment practices, terms and conditions of employment and wages and hours (including, without limitation, classification of employees) with respect to any employee (as defined by, or determined in accordance with, applicable Laws). To the knowledge of Harmony, other than Harmony’s President and Chief Executive Officer, none of the employees of Harmony and its Subsidiaries are citizens or lawful permanent residents of the United States. |
| (d) | Neither Harmony nor any of its Subsidiaries has received written notice of any charge or complaint pending before the Equal Employment Opportunity Commission or other Governmental Entity alleging unlawful discrimination, harassment, retaliation or any other violation of or non-compliance with applicable Law relating to the employment, treatment, or termination of any employees of Harmony or any of its Subsidiaries, nor, to the knowledge of Harmony, has any such charge been threatened. No current or former employee of Harmony or any of its Subsidiaries has, pursuant to internal complaint procedures, made a written complaint of discrimination, retaliation or harassment, nor to Harmony’s knowledge, has an oral complaint of any of the foregoing been made. |
| (e) | Neither Harmony nor any of its Subsidiaries has caused a plant closing as defined in the WARN Act affecting any site of employment or one or more operating units within any site of employment, or a mass layoff as defined in the WARN Act, nor have any of the foregoing been affected by any transaction or engaged in layoffs or employment terminations sufficient in number to trigger application of any similar foreign, state or local Law. |
Section 4.18 Insurance. Harmony does not currently have in place any insurance policies.
Section 4.19 Section 203 of the DGCL. Assuming the accuracy of the representations and warranties of Zircon in Section 3.23, the Harmony Board has taken all actions so that the restrictions contained in Section 203 of the DGCL applicable to a “business combination” (as defined in Section 203 of the DGCL) shall not apply to the execution, delivery or performance of this Agreement or any of the agreements ancillary hereto.
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Section 4.20 Brokers; Fees and Expenses. No agent, broker, investment banker, financial advisor or other firm or Person is or shall be entitled, as a result of any action, agreement or commitment of Harmony or any of its Subsidiaries, to any broker’s, finder’s, financial advisor’s or other similar fee or commission in connection with any of the transactions contemplated by this Agreement. Harmony is not a party to any other agreements with any agent, broker, investment banker, financial advisor or other similar firm or Person that have not been made available to Zircon and which grant to such Person rights after the Closing.
Section 4.21 Operations of Merger Sub. Except as set forth in Section 4.21 of the Harmony Disclosure Schedule, Merger Sub was formed solely for the purpose of engaging in the transactions contemplated by this Agreement, has engaged in no other business activities and has conducted its operations only as contemplated by this Agreement.
Section 4.22 Controls and Procedures, Certifications and Other Matters.
| (a) | Harmony and each of its Subsidiaries maintains accurate books and records reflecting its assets and liabilities and maintains proper and adequate internal control over financial reporting designed to provide assurance that (i) transactions are executed with management’s authorization, (ii) transactions are recorded as necessary to permit preparation of the consolidated financial statements of Harmony and to maintain accountability for Harmony’s consolidated assets, (iii) access to assets of Harmony and its Subsidiaries is permitted only in accordance with management’s authorization, (iv) the reporting of assets of Harmony and its Subsidiaries is compared with existing assets at regular intervals and (v) accounts, notes and other receivables and inventory were recorded accurately, and proper and adequate procedures are implemented to effect the collection thereof on a current and timely basis. |
| (b) | Harmony maintains disclosure controls and procedures required by Rules 13a-15 or 15d-15 under the Exchange Act, and such controls and procedures are effective to ensure that all material information concerning Harmony and its Subsidiaries is made known on a timely basis to the individuals responsible for the preparation of Harmony’s filings with the SEC and other public disclosure documents. |
| (c) | Neither Harmony nor any of its Subsidiaries has, since Harmony became subject to the reporting requirements of Section 13 or Section 15(d) of the Exchange Act, extended or maintained credit, arranged for the extension of credit, modified or renewed an extension of credit, in the form of a personal loan or otherwise, to or for any director or executive officer of Harmony. Section 4.22(c) of the Harmony Disclosure Schedule identifies any loan or extension of credit maintained by Harmony to which the second sentence of Section 13(k)(1) of the Exchange Act applies. |
Section 4.23 Books and Records. The minute books and other similar records of Harmony contain complete and accurate records of all actions taken at any meetings of Harmony’s stockholders, Board of Directors or any committee thereof and of all written consents executed in lieu of the holding of any such meeting. The books and records of Harmony accurately reflect in all material respects the assets, liabilities, business, financial condition and results of operations of Harmony and have been maintained in accordance with good business and bookkeeping practices.
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Section 4.24 Subsidies. All governmental, state or regional subsidies granted to Harmony or any of its Subsidiaries were used in accordance with applicable provisions of any statute, law or regulation or any other public orders or conditions imposed or related to them in conjunction with their granting and, in particular, all conditions imposed by the respective Governmental Entities have been fulfilled and observed. Neither Harmony nor any of its Subsidiaries is under any further obligation to perform any services with regard to such subsidies and no such subsidies have to be repaid by Harmony or any of its Subsidiaries as a result of the negotiation, execution, delivery or performance of this Agreement, or the consummation of the transactions contemplated hereby or any other reason.
Section 4.25 Data Protection. Harmony and its Subsidiaries have fully complied at all material times and currently fully comply with any data protection and privacy legislation applicable to their businesses including (i) the requirements relating to notification and/or registration of processing of personal data with any applicable national data protection regulator, (ii) all subject information requests from data subjects, (iii) where necessary, the obtaining of consent to data processing and/or direct marketing activity, and (iv) where necessary, the obtaining of any approval, consultation and/or agreement of any applicable works councils or such similar worker representation bodies. Neither Harmony nor any of its Subsidiaries has received any notice or complaint from any individual, third party and/or regulatory authority alleging non-compliance with any applicable data protection and privacy legislation (including any prohibition or restriction on the transfer of data to any jurisdiction) or claiming compensation for or an injunction in respect of non-compliance with any applicable data protection and privacy legislation.
Section 4.26 Certain Business Relationships with Affiliates. No Affiliate of Harmony or of any of its Subsidiaries (a) owns any property or right, tangible or intangible, which is used in the business of Harmony or any of its Subsidiaries, (b) to the knowledge of Harmony, has any claim or cause of action against Harmony or any of its Subsidiaries or (c) owes any money to, or is owed any money by, Harmony or any of its Subsidiaries. Section 4.26 of the Harmony Disclosure Schedule describes any material Contracts between Harmony and any Affiliate thereof which were entered into or have been in effect at any time since January 1, 2021, other than (i) any employment Contracts, invention assignment agreements and other Contracts entered into in the Ordinary Course of Business relating to employment, or (ii) Contracts relating to stock purchases and awards, stock options and other equity arrangements, in each case relating to compensation.
Section 4.27 Acknowledgement by Harmony. Harmony acknowledges and agrees that it (i) has conducted its own independent review and analysis of, and, based thereon, has formed an independent judgment concerning, Zircon, its business, assets, condition, operations and prospects and (ii) has been furnished with or given full access to such information about Zircon as Harmony has requested. Harmony acknowledges that, other than as set forth in this Agreement, none of Zircon nor any of its directors, officers, employees, Affiliates, stockholders, agents or representatives makes or has made any representation or warranty, either express or implied, (A) as to the accuracy or completeness of any of the information provided or made available to Harmony or any of its agents, representatives, lenders or Affiliates prior to the execution of this Agreement and (B) with respect to any projections, forecasts, estimates, plans or budgets of future revenues, expenses or expenditures, future results of operations (or any component thereof), future cash flows (or any component thereof) or future financial condition (or any component thereof) of Zircon heretofore delivered to or made available to Harmony or any of its respective agents, representatives, lenders or Affiliates.
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Section 4.28 Compliance with Anti-Corruption Laws. Neither Harmony nor to the knowledge of Harmony, any director, officer, agent, employee or other Person acting on behalf of Harmony has, in the course of its actions for, or on behalf of, Harmony (i) used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expenses relating to political activity; (ii) made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; (iii) violated or is in violation of any applicable U.S. laws; or (iv) made any unlawful bribe, rebate, payoff, influence payment, kickback or other unlawful payment to any foreign or domestic government official or employee.
Section 4.29 OFAC. Neither Harmony, nor to the knowledge of Harmony, any director, officer, agent, employee, affiliate or Person acting on behalf of Harmony, is currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Treasury Department.
Section 4.30 Liabilities. Harmony has no liabilities or obligations of any nature (whether fixed or unfixed, secured or unsecured, known or unknown and whether absolute, accrued, contingent, or otherwise) except for liabilities indebtedness or obligations disclosed to Zircon in writing and set forth in Section 4.30 of the Harmony Disclosure Schedule.
Section 4.31 Bank Accounts and Safe Deposit Boxes. Harmony has such bank accounts at such banks and with such account numbers as set forth in Section 4.31 of the Harmony Disclosure Schedule.
Section 4.32 Investment Company. Neither Harmony nor any subsidiary is an “investment company” within the meaning of the Investment Company Act of 1940, as amended.
Section 4.33 Bankruptcy and Indebtedness. Harmony has not taken any steps to seek protection pursuant to any Law or statute relating to bankruptcy, insolvency, reorganization, receivership, liquidation or winding up, nor does Harmony have any Knowledge or reason to believe that any of its respective creditors intend to initiate involuntary bankruptcy proceedings or any actual knowledge of any fact which would reasonably lead a creditor to do so. There is no outstanding secured and unsecured indebtedness of Harmony, or for which the Company has commitments except as set forth in Section 4.33 of the Harmony Disclosure Schedule. Neither Harmony nor any Subsidiary is in default with respect to any indebtedness.
Section 4.34 No SEC or FINRA Inquiries. Neither Harmony nor any of its present officers or directors is, or has ever been, the subject of any formal or informal inquiry or investigation by the SEC or FINRA.
Section 4.35 No Other Representations or Warranties. Each of Harmony and Merger Sub hereby acknowledges and agrees that, except for the representations and warranties contained in this Agreement, none of Zircon nor any other Person on behalf of Zircon makes any express or implied representation or warranty with respect to Zircon or with respect to any other information provided to Harmony, Merger Sub or any of their Affiliates in connection with the transactions contemplated hereby, and (subject to the express representations and warranties of Zircon set forth in Article III (in each case as qualified and limited by the Zircon Disclosure Schedule)) none of Harmony, Merger Sub or any of their respective Affiliates, stockholders, directors, officers, employees, agents, representatives or advisors, or any other Person, has relied on any such information (including the accuracy or completeness thereof).
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Article V. Conduct of Business
Section 5.01 Covenants of Zircon. Except (i) as set forth in Section 5.01 of the Zircon Disclosure Schedule or (ii) otherwise as expressly provided herein or as consented to in writing by Harmony (which consent shall not be unreasonably withheld, conditioned or delayed), from and after the Effective Date until the earlier of the termination of this Agreement in accordance with its terms and the Effective Time, Zircon shall act and carry on its business in the Ordinary Course of Business, pay its debts and Taxes and perform its other obligations when due (subject to good faith disputes over such debts, Taxes or obligations), comply with applicable laws, rules and regulations, and use commercially reasonable efforts, consistent in all material respects with past practices, to maintain and preserve its business organization, assets and properties, keep available the services of its present officers and key employees and preserve its advantageous business relationships with customers, strategic partners, suppliers, distributors and others having business dealings with it. Without limiting the generality of the foregoing, except as set forth in Section 5.01 of the Zircon Disclosure Schedule, from and after the Effective Date until the earlier of the termination of this Agreement in accordance with its terms and the Effective Time, Zircon shall not, directly or indirectly, do any of the following without the prior written consent of Harmony (which consent shall not, in the case of the actions set forth in Section 5.01(k) and Section 5.01(l), be unreasonably withheld, conditioned or delayed):
| (a) | (i) declare, set aside or pay any dividends on, or make any other distributions (whether in cash, securities or other property) in respect of, any of its capital stock, other than distributions that are reasonably necessary to maintain the S corporation status of Zircon; (ii) split, combine or reclassify any of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock or any of its other securities; or (iii) purchase, redeem or otherwise acquire any shares of its capital stock or any other of its securities or any rights, warrants or options to acquire any such shares or other securities, other than, in the case of this clause (iii), from former employees, directors and consultants in accordance with agreements in effect on the Effective Date providing for the repurchase of shares at no more than the purchase price thereof in connection with any termination of services to Zircon; |
| (b) | except as permitted by Section 5.01(l), issue, deliver, sell, grant, pledge or otherwise dispose of or encumber any shares of its capital stock, any other voting securities or any securities convertible into or exchangeable for, or any rights, warrants or options to acquire, any such shares, voting securities or convertible or exchangeable securities; |
| (c) | amend its articles of incorporation, bylaws or other comparable charter or organizational documents, or effect or be a party to any merger, consolidation, share exchange, business combination, recapitalization, reclassification of shares, stock split or reverse stock split or form any new Subsidiary or acquire any equity interest or other interest in any other Person; |
| (d) | except for purchases of inventory, raw materials and equipment in the Ordinary Course of Business, acquire (i) by merging or consolidating with, or by purchasing all or a substantial portion of the assets or any stock of, or by any other manner, any business or any corporation, partnership, joint venture, limited liability company, association or other business organization or division thereof or (ii) any assets that are material, in the aggregate, to Zircon; |
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| (e) | sell, lease, license, pledge, or otherwise dispose of or encumber any properties or assets of Zircon; |
| (f) | whether or not in the Ordinary Course of Business, sell, dispose of or otherwise transfer any assets material to Zircon (including any accounts, leases, contracts or Intellectual Property or any assets, but excluding the sale or license of products in the Ordinary Course of Business); |
| (g) | (i) incur or suffer to exist any indebtedness for borrowed money other than such indebtedness that existed as of the date of the Zircon Balance Sheet to the extent reflected on the Zircon Balance Sheet or guarantee any such indebtedness of another Person, (ii) issue, sell or amend any debt securities or warrants or other rights to acquire any debt securities of Zircon, guarantee any debt securities of another Person, enter into any “keep well” or other agreement to maintain any financial statement condition of another Person or enter into any arrangement having the economic effect of any of the foregoing, (iii) make any loans, advances (other than routine advances to employees of Zircon in the Ordinary Course of Business) or capital contributions to, or investment in, any other Person, other than Zircon or (iv) enter into any hedging agreement or other financial agreement or arrangement designed to protect Zircon against fluctuations in commodities prices or exchange rates; |
| (h) | make any capital expenditures or other expenditures with respect to property, plant or equipment in excess of $100,000 in the aggregate for Zircon other than as set forth in Zircon’s budget for capital expenditures previously made available to Harmony or the specific capital expenditures disclosed and set forth in Section 5.01(h) of the Zircon Disclosure Schedule; |
| (i) | make any changes in accounting methods, principles or practices, except insofar as may have been required by a change in GAAP or, except as so required, change any assumption underlying, or method of calculating, any bad debt, contingency or other reserve; |
| (j) | except (i) in the Ordinary Course of Business or (ii) terminations as a result of the expiration of any contract that expires in accordance with its terms, (A) modify or amend in any material respect, or terminate, any material contract or agreement to which Zircon is party, or (B) knowingly waive, release or assign any material rights or claims (including any write-off or other compromise of any accounts receivable of Zircon); |
| (k) | (i) enter into any material contract or agreement relating to the rendering of services or the distribution, sale or marketing by third parties of the products, of, or products licensed by, Zircon or (ii) license any material Intellectual Property rights to or from any third party; |
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| (l) | except as required to comply with applicable law or agreements, plans or arrangements existing on the date hereof and either disclosed in the Zircon Disclosure Schedule or not required by this Agreement to be so disclosed, (i) take any action with respect to, adopt, enter into, terminate (other than terminations for cause) or amend any employment, severance or similar agreement or benefit plan for the benefit or welfare of any current or former director, officer, employee or consultant or any collective bargaining agreement, (ii) increase in any material respect the compensation or fringe benefits of, or pay any material bonus to, any director, officer, employee or consultant (except for annual increases of the salaries of non-officer employees in the Ordinary Course of Business), (iii) amend or accelerate the payment, right to payment or vesting of any compensation or benefits, including any outstanding options or restricted stock awards, (iv) pay any material benefit not provided for as of the Effective Date under any benefit plan, (v) grant any awards under any bonus, incentive, performance or other compensation plan or arrangement or benefit plan (including the grant of stock options, stock appreciation rights, stock based or stock related awards, performance units or restricted stock, or the removal of existing restrictions in any benefit plans or agreements or awards made thereunder), or (vi) take any action other than in the Ordinary Course of Business to fund or in any other way secure the payment of compensation or benefits under any employee plan, agreement, contract or arrangement or benefit plan; |
| (m) | make or change any material Tax election, change an annual accounting period, enter into any closing agreement, waive or extend any statute of limitations with respect to Taxes, settle or compromise any material Tax liability, claim or assessment, surrender any right to claim a refund of material Taxes, or amend any income or other material Tax Return, in each case other than in the Ordinary Course of Business and other than specifically contemplated by this Agreement; |
| (n) | initiate, compromise or settle any material litigation or arbitration proceeding; |
| (o) | open or close any facility or office; |
| (p) | fail to use commercially reasonable efforts to maintain insurance at levels substantially comparable to levels existing as of the Effective Date; |
| (q) | fail to pay accounts payable and other obligations in the Ordinary Course of Business; or |
| (r) | authorize any of, or commit or agree, in writing or otherwise, to take any of, the foregoing actions or any action that would make any representation or warranty of Zircon in this Agreement untrue or incorrect in any material respect, or would materially impair, delay or prevent the satisfaction of any conditions in Article VII. |
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Section 5.02 Covenants of Harmony and Merger Sub. Except (i) as set forth in Section 5.02 of the Zircon Disclosure Schedule, or (ii) as expressly provided herein or as consented to in writing by Zircon (which consent shall not be unreasonably withheld, conditioned or delayed), from and after the Effective Date until the earlier of the termination of this Agreement in accordance with its terms and the Effective Time, Harmony and Merger Sub shall, and shall cause each of their respective Subsidiaries to, act and carry on its business in the Ordinary Course of Business, pay its debts and Taxes and perform its other obligations when due (subject to good faith disputes over such debts, Taxes or obligations), comply with applicable laws, rules and regulations, and, use commercially reasonable efforts, consistent in all material respects with past practices, to maintain and preserve its and each of their Subsidiaries’ business organization, assets and properties, keep available the services of its present officers and key employees and preserve its advantageous business relationships with customers, strategic partners, suppliers, distributors and others having business dealings with it. Without limiting the generality of the foregoing, except as set forth in Section 5.02 of the Harmony Disclosure Schedule from and after the Effective Date until the earlier of the termination of this Agreement in accordance with its terms and the Effective Time, Harmony and Merger Sub shall not, and shall not permit any of their respective Subsidiaries to, directly or indirectly, do any of the following without the prior written consent of Zircon (which consent shall not, in the case of the actions set forth in Section 5.02(k) and Section 5.02(l), be unreasonably withheld, conditioned or delayed):
| (a) | (i) declare, set aside, or pay any dividends on, or make any other distributions (whether in cash, securities, or other property) in respect of, any of its capital stock; (ii) split, combine or reclassify any of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock or any of its other securities; or (iii) purchase, redeem or otherwise acquire any shares of its capital stock or any other of its securities or any rights, warrants or options to acquire any such shares or other securities, other than, in the case of this clause (ii), from former employees, directors and consultants in accordance with agreements in effect on the Effective Date providing for the repurchase of shares in connection with any termination of services to Harmony or any of its Subsidiaries; |
| (b) | issue, deliver, sell, grant, pledge or otherwise dispose of or encumber any shares of its capital stock, any other voting securities or any securities convertible into or exchangeable for, or any rights, warrants or options to acquire, any such shares, voting securities or convertible or exchangeable securities (in each case other than the issuance of shares of Harmony Common Stock upon the exercise of Harmony Warrants outstanding on the Effective Date and set forth in Section 4.02(c) or Section 4.02(d) of the Harmony Disclosure Schedule in accordance with their present terms (including cashless exercises)); |
| (c) | amend its certificate of incorporation, bylaws or other comparable charter or organizational documents, or effect or be a party to any merger, consolidation, share exchange, business combination, recapitalization, reclassification of shares, stock split or reverse stock split or form any new Subsidiary or acquire any equity interest or other interest in any other Person; |
| (d) | except for purchases of inventory and raw materials in the Ordinary Course of Business, acquire (i) by merging or consolidating with, or by purchasing all or a substantial portion of the assets or any stock of, or by any other manner, any business or any corporation, partnership, joint venture, limited liability company, association or other business organization or division thereof or (ii) any assets that are material, in the aggregate, to Harmony and its Subsidiaries, taken as a whole; |
| (e) | sell, lease, license, pledge, or otherwise dispose of or encumber any properties or assets of Harmony or of any of its Subsidiaries; |
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| (f) | whether or not in the Ordinary Course of Business, sell, dispose of or otherwise transfer any assets material to Harmony and its Subsidiaries, taken as a whole (including any accounts, leases, contracts or Intellectual Property or any assets or the stock of any of its Subsidiaries, but excluding the sale or license of products in the Ordinary Course of Business); |
| (g) | (i) incur or suffer to exist any indebtedness for borrowed money other than such indebtedness that existed as of the date of the Harmony Balance Sheet to the extent reflected on the Harmony Balance Sheet or guarantee any such indebtedness of another Person, (ii) issue, sell or amend any debt securities or warrants or other rights to acquire any debt securities of Harmony or any of its Subsidiaries, guarantee any debt securities of another Person, enter into any “keep well” or other agreement to maintain any financial statement condition of another Person or enter into any arrangement having the economic effect of any of the foregoing, (iii) make any loans, advances (other than routine advances to employees of Harmony in the Ordinary Course of Business) or capital contributions to, or investment in, any other Person, other than Harmony or any of its direct or indirect wholly owned Subsidiaries or (iv) enter into any hedging agreement or other financial agreement or arrangement designed to protect Harmony or its Subsidiaries against fluctuations in commodities prices or exchange rates; |
| (h) | make any capital expenditures or other expenditures with respect to property, plant or equipment in excess of $100,000 in the aggregate for Harmony and its Subsidiaries, taken as a whole, other than as set forth in Harmony’s budget for capital expenditures previously made available to Zircon or the specific capital expenditures disclosed and set forth in Section 5.02 of the Harmony Disclosure Schedule; |
| (i) | make any changes in accounting methods, principles or practices, except insofar as may have been required by the SEC or a change in GAAP or, except as so required, change any assumption underlying, or method of calculating, any bad debt, contingency or other reserve; |
| (j) | except (i) in the Ordinary Course of Business or (ii) terminations as a result of the expiration of any contract that expires in accordance with its terms, (A) modify or amend in any material respect, or terminate, any material contract or agreement to which Harmony or any of its Subsidiaries is party, or (B) knowingly waive, release or assign any material rights or claims (including any write-off or other compromise of any accounts receivable of Harmony of any of its Subsidiaries); |
| (k) | (i) enter into any material contract or agreement relating to the rendering of services or the distribution, sale or marketing by third parties of the products, of, or products licensed by, Harmony or any of its Subsidiaries or (ii) license any material Intellectual Property rights to or from any third party; |
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| (l) | except as required to comply with applicable law or agreements, plans or arrangements existing on the date hereof and either disclosed in the Harmony Disclosure Schedule, not required by this Agreement to be so disclosed or disclosed in the Harmony SEC Reports filed or furnished prior to the Effective Date, (i) take any action with respect to, adopt, enter into, terminate (other than terminations for cause) or amend any employment, severance or similar agreement or benefit plan for the benefit or welfare of any current or former director, officer, employee or consultant or any collective bargaining agreement, (ii) increase in any material respect the compensation or fringe benefits of, or pay any material bonus to, any director, officer, employee or consultant (except for annual increases of the salaries of non-officer employees in the Ordinary Course of Business), (iii) amend or accelerate the payment, right to payment or vesting of any compensation or benefits, including any outstanding options or restricted stock awards, (iv) pay any material benefit not provided for as of the Effective Date under any benefit plan, (v) grant any awards under any bonus, incentive, performance or other compensation plan or arrangement or benefit plan (including the grant of stock options, stock appreciation rights, stock based or stock related awards, performance units or restricted stock, or the removal of existing restrictions in any benefit plans or agreements or awards made thereunder), (vi) hire any additional officers or other employees, or any consultants or independent contractors, in each case, other than as set forth on Section 5.02(l) of the Harmony Disclosure Schedule and employees, consultants or independent contractors hired to fill open position created as a result of the separation of service of an officer, employee, consultant or independent contractor, as applicable, after the Effective Date, or (vii) take any action other than in the Ordinary Course of Business to fund or in any other way secure the payment of compensation or benefits under any employee plan, agreement, contract or arrangement or benefit plan; |
| (m) | make or change any Tax election, change an annual accounting period, enter into any closing agreement, waive or extend any statute of limitations with respect to Taxes, settle or compromise any Tax liability, claim or assessment, surrender any right to claim a refund of Taxes, or amend any income or other Tax Return; |
| (n) | commence any offering of shares of Harmony Common Stock pursuant to any Employee Stock Purchase Plan; |
| (o) | initiate, compromise or settle any material litigation or arbitration proceeding; |
| (p) | open or close any facility or office; |
| (q) | fail to use commercially reasonable efforts to maintain insurance at levels substantially comparable to levels existing as of the Effective Date; |
| (r) | fail to pay accounts payable and other obligations in the Ordinary Course of Business |
| (s) | authorize any of, or commit or agree, in writing or otherwise, to take any of, the foregoing actions or any action that would make any representation or warranty of Harmony in this Agreement untrue or incorrect in any material respect, or would materially impair, delay or prevent the satisfaction of any conditions in Article VII. |
Section 5.03 Confidentiality. The Parties acknowledge that Harmony and Zircon have previously executed a non-disclosure agreement, effective as of December 9, 2022 (the “NDA Agreement”), which NDA Agreement shall continue in full force and effect in accordance with its terms, except as expressly modified by this Agreement.
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Article VI. Additional Agreements
Section 6.01 No Solicitation.
| (a) | No Solicitation or Negotiation. |
| (i) | Except as set forth in this Section 6.01, until the Effective Time or the earlier termination of this Agreement as set forth herein, each of Zircon, Harmony and its respective Subsidiaries shall not, and each of Zircon and Harmony shall use reasonable best efforts to cause their respective directors, officers, members, employees, agents, attorneys, consultants, contractors, accountants, financial advisors and other authorized representatives (“Representatives”) not to, directly or indirectly: |
| (A) | solicit, seek or initiate or knowingly take any action to facilitate or encourage any offers, inquiries or the making of any proposal or offer that constitutes, or could reasonably be expected to lead to, any Acquisition Proposal, or engage, participate in, or knowingly facilitate, any discussions or negotiations regarding, or furnish any nonpublic information to any Person in connection with any inquiries, proposals or offers that constitute or could reasonably be expected to lead to, an Acquisition Proposal; |
| (B) | enter into, continue or otherwise participate or engage in any discussions or negotiations regarding any Acquisition Proposal, or furnish to any Person any non-public information or afford any Person other than Harmony or Zircon, as applicable, access to such Party’s property, books or records (except pursuant to a request by a Governmental Entity) in connection with any offers, inquiries or the making of any proposal or offer that constitutes, or could reasonably be expected to lead to, any Acquisition Proposal; |
| (C) | take any action to make the provisions of any takeover statute inapplicable to any transactions contemplated by an Acquisition Proposal; or |
| (D) | publicly propose to do any of the foregoing described in Section 6.01(a)(i)(A), Section 6.01(a)(i)(B) or Section 6.01(a)(i)(C). |
| (ii) | Notwithstanding the foregoing or anything to the contrary set forth in this Agreement, subject to compliance with Section 6.01(b), each of Harmony and Zircon may (A) furnish non-public information with respect to Harmony and its Subsidiaries or Zircon, as the case may be, to any Qualified Person (and the Representatives of such Qualified Person), or (B) engage in discussions or negotiations (including solicitation of revised Acquisition Proposals) with any Qualified Person (and the Representatives of such Qualified Person) regarding any such Acquisition Proposal; provided that (x) either Zircon or Harmony (as applicable) receives from the Qualified Person an executed confidentiality agreement on the terms not less restrictive than exist in the Confidentiality Agreement and continuing additional provisions that expressly permit such Party to comply with this terms of this Section 6.01 (a copy of which shall be provided to the other Party), (y) the Party seeking to make use of this proviso has not otherwise materially breached this Section 6.01 with respect to such Acquisition Proposal or the Person making such Acquisition Proposal, and (z) the Zircon Board or Harmony Board (as applicable) has determined that taking such actions would be required to prevent a breach of its fiduciary duties under applicable law. It is understood and agreed that any violation of the restrictions in this Section 6.01 (or action that, if taken by Harmony or Zircon, as applicable, would constitute such a violation) by any Representatives of Harmony or Zircon shall be deemed to be a breach of this Section 6.01 by Harmony or Zircon, as applicable. |
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| (b) | Notices of Proposals. Each Party will as promptly as reasonably practicable (and in any event within twenty-four (24) hours after receipt) (i) notify the other Party of its receipt of any Acquisition Proposal and (ii) provide to the other Party a copy of such Acquisition Proposal (if written), or a summary of the material terms and conditions of such Acquisition Proposal (if oral), including the identity of the Person making such Acquisition Proposal, and copies of all written communications with such Person with respect to such actual or potential Acquisition Proposal. Such Party in receipt of an Acquisition Proposal shall notify the other Party, in writing, of any decision of its board of directors as to whether to consider any Acquisition Proposal or to enter into discussions or negotiations concerning any Acquisition Proposal or to provide non-public information with respect to such to any Person, which notice shall be given as promptly as practicable after such determination was reached (and in any event no later than 24 hours after such determination was reached). Such Party in receipt of an Acquisition Proposal will (A) provide the other Party with written notice setting forth such information as is reasonably necessary to keep such other Party informed of the material terms of any such Acquisition Proposal and of any material amendments or modifications thereto, (B) keep such other Party informed as promptly as practicable with respect to any changes to the material terms of an Acquisition Proposal submitted to such Party (and in any event within twenty-four (24) hours following any such changes), including by providing a copy of all written proposals and a summary of all oral proposals or material oral modifications to an earlier written proposal, in each case relating to any Acquisition Proposal, (C) prior to, or substantially concurrently with, the provision of any non-public information of such Party to any such Person, provide such information the other Party (including by posting such information to an electronic data room), to the extent such information has not previously been made available the other Party, and (D) promptly (and in any event within twenty-four (24) hours of such determination) notify the other Party of any determination by such Party’s Board of Directors that such Acquisition Proposal constitutes a Superior Proposal. |
| (c) | Cessation of Ongoing Discussions. Each of Harmony and Zircon shall, and shall direct its Representatives to, cease immediately all discussions and negotiations that commenced prior to the Effective Date regarding any proposal that constitutes, or could reasonably be expected to lead to, an Acquisition Proposal; provided, however, that the foregoing shall not in any way limit or modify the rights of any Party under the other provisions of this Section 6.01. Harmony and Zircon will each immediately revoke or withdraw access of any Person (other than Harmony, Zircon and their respective Representatives) to any data room (virtual or actual) containing any non-public information with respect to Harmony and request from each third party (other than Harmony, Zircon and their Representatives) the prompt return or destruction of all non-public information with respect to Harmony or Zircon, as applicable, previously provided to such Person. |
| (d) | Definitions. For purposes of this Agreement, the following terms shall have the following meanings: |
| (i) | “Acquisition Proposal” means, with respect to Harmony or Zircon, (a) any inquiry, proposal or offer for a merger, consolidation, dissolution, sale of substantial assets, recapitalization, share exchange, tender offer or other business combination involving such Party and its Subsidiaries (other than mergers, consolidations, recapitalizations, share exchanges or other business combinations involving solely such Party and/or one or more Subsidiaries of such Party), (b) any proposal for the issuance by such Party of fifteen percent (15%) or more of its equity securities or (c) any proposal or offer to acquire in any manner, directly or indirectly, fifteen percent (15%) or more of the equity securities or consolidated total assets of such Party and its Subsidiaries, in each case other than the transactions contemplated by this Agreement, provided that commitments to participate in the Post-Closing Financing shall not be considered an Acquisition Proposal. |
| (ii) | “Intervening Event” means a material event, change in circumstances or development (other than any event, change, circumstance or development resulting from a material breach of this Agreement by the Party seeking to claim an Intervening Event) that (a) is materially adverse to Harmony or Zircon (as applicable), (b) with respect to Harmony that neither occurred nor was reasonably foreseeable to the Harmony Board prior to the Effective Date and with respect to Zircon was not reasonably foreseeable to Zircon Board prior to the Effective Date and (c) does not relate to an Acquisition Proposal; provided, however, the receipt, existence or terms of an Acquisition Proposal or Superior Proposal or any matter relating thereto shall not constitute an Intervening Event. |
| (iii) | “Qualified Person” means any Person making an unsolicited Acquisition Proposal that the Harmony Board or the Zircon Board, as applicable, determines in good faith (after consultation with outside counsel and its financial advisors) is, or could reasonably be expected to lead to, a Superior Proposal, and such Acquisition Proposal has not resulted from a breach by Harmony or Zircon, as applicable, of its obligations under Section 6.01(a). |
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Section 6.02 Access to Information; Cooperation.
| (a) | Subject to compliance with applicable confidentiality obligations owed to third parties in effect as of the Effective Date, each of Harmony and Zircon shall (and Harmony shall cause each of its Subsidiaries to) afford to the other Party’s officers, employees, accountants, counsel and other representatives, reasonable access, during normal business hours during the period prior to the Effective Time, to all its properties, books, contracts, commitments, personnel and records and, during such period, each of Harmony and Zircon shall (and Harmony shall cause each of its Subsidiaries to) furnish promptly to the other Party all information concerning its business, properties, assets and personnel as the other Party may reasonably request. Each of Harmony and Zircon will hold any such information which is nonpublic in confidence in accordance with the Confidentiality Agreement. No information or knowledge obtained in any investigation pursuant to this Section 6.02 or otherwise shall affect or be deemed to modify any representation or warranty contained in this Agreement or the conditions to the obligations of the Parties to consummate the Merger. Without limiting the generality of the foregoing, from the Effective Date until the Effective Time, each of Harmony and Zircon shall promptly provide the other Party with copies of: (a) unaudited monthly financial statements or management accounts, when available; (b) any written materials or communications sent by or on behalf of such Party to its stockholders; (c) any notice, report or other document filed with or sent to, or received from, any Governmental Entity in connection with the Merger or any of the other transactions contemplated by this Agreement; and (d) any material notice, report or other document received from any Governmental Entity. |
Section 6.03 Legal Conditions to Merger.
| (a) | Subject to the terms hereof Zircon and Harmony shall each use commercially reasonable efforts to (i) take, or cause to be taken, all actions, and do, or cause to be done, and to assist and cooperate with the other parties in doing, all things necessary, proper or advisable to consummate and make effective the transactions contemplated hereby as promptly as practicable, (ii) as promptly as practicable, obtain from any Governmental Entity or any other third party any consents, licenses, permits, waivers, approvals, authorizations, or orders required to be obtained or made by Zircon or Harmony and/or any of its Subsidiaries in connection with the authorization, execution and delivery of this Agreement and the consummation of the transactions contemplated hereby, (iii) as promptly as practicable, make all necessary filings, and thereafter make any other required submissions, with respect to this Agreement and the Merger required under (A) the Securities Act and the Exchange Act, and any other applicable federal or state securities laws, and (B) any other applicable law and (iv) execute or deliver any additional instruments necessary to consummate the transactions contemplated by, and to fully carry out the purposes of, this Agreement. Zircon and Harmony shall reasonably cooperate with each other in connection with the making of all such filings. Zircon and Harmony shall use their respective commercially reasonable efforts to furnish to each other all information required for any application or other filing to be made pursuant to the rules and regulations of any applicable law in connection with the transactions contemplated by this Agreement. |
| (b) | Each of Zircon and Harmony shall give (or Harmony shall cause its Subsidiaries to give) any notices to third parties, and use, and cause its respective Subsidiaries to use, their reasonable best efforts to obtain any third party consents related to or required in connection with the Merger that are (i) necessary to consummate the transactions contemplated hereby, (ii) disclosed or required to be disclosed in the Zircon Disclosure Schedule or the Harmony Disclosure Schedule, as the case may be, or (iii) required to prevent the occurrence of an event that may have a Zircon Material Adverse Effect or a Harmony Material Adverse Effect from occurring prior to or after the Effective Time. |
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Section 6.04 Public Disclosure. Except as may be required by applicable law or stock market regulations, (i) the press release announcing the execution of this Agreement shall be issued only in such form as shall be mutually agreed upon by Harmony and Zircon and, (ii) both Zircon and Harmony shall use reasonable best efforts to consult with one another before issuing any press release or otherwise making any public statement with respect to the Merger or this Agreement and shall not issue any such press release or make any such public statement prior to using such efforts.
Section 6.05 Tax Matters.
| (a) | Each of Harmony, Merger Sub and Zircon shall use their reasonable best efforts to cause the Merger to qualify, and agree not to, and not to permit or cause any of their Affiliates or Harmony’s Subsidiaries to, take any action which to its knowledge could reasonably be expected to prevent or impede the Merger from qualifying, as a “reorganization” within the meaning of Section 368(a) of the Code and a transaction under Section 351 of the Code. This Agreement is intended to constitute, and the Parties hereby adopt this Agreement as, a “plan of reorganization” within the meaning of Treasury Regulation Sections 1.368-2(g) and 1.368-3(a). Each of Harmony, Merger Sub and Zircon shall report the Merger as a reorganization within the meaning of Section 368(a) of the Code unless otherwise required pursuant to a “determination” within the meaning of Section 1313(a) of the Code, including attaching the statement described in Treasury Regulations Section 1.368-3(a) on or with its Tax Return for the taxable year of the Merger. |
| (b) | Notwithstanding anything to the contrary contained herein, any transfer, documentary, sales, use, stamp, registration, value added or other similar Taxes incurred in connection with the Transactions (collectively, “Transfer Taxes”) will be borne fifty percent (50%) by the holders of the Zircon Common Stock and fifty percent (50%) by Harmony. The Party primarily responsible under applicable Law for the filing of any Tax Return in respect of such Transfer Taxes shall be responsible for the timely preparation and filing of any such Tax Return. The Parties shall reasonably cooperate as necessary to enable the timely preparation and filing of such Tax Returns and mitigate any such Transfer Taxes. |
| (c) | Neither Harmony nor its Affiliates shall liquidate the surviving corporation, make (or cause to be made) any Tax election, including any election under Section 336 or 338 of the Code (or any corresponding or similar provision of state, local, foreign or other Law), with respect to the Zircon with an effect on or before the Closing Date, amend any Tax Return, consent to the waiver or extension of the statute of limitations relating to Taxes of Harmony or its Subsidiaries, take any Tax position on any Tax Return, compromise or settle any Tax liability, or discuss, correspond or participate in any sponsored voluntary compliance, amnesty, self-correction or similar program, in each case if such action would reasonably be expected to result in increases in the Tax Liabilities of the Harmony Stockholders. |
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Section 6.06 Affiliate Legends. Section 6.06 of the Zircon Disclosure Schedule sets forth a list of those Persons who are, in Zircon’s reasonable judgment, “affiliates” of Zircon within the meaning of Rule 145 promulgated under the Securities Act (“Rule 145 Affiliates”). Zircon shall notify Harmony in writing regarding any change in the identity of its Rule 145 Affiliates prior to the Closing Date. Harmony shall be entitled to place appropriate legends on the certificates evidencing any shares of Harmony Common Stock to be received by Rule 145 Affiliates of Zircon in the Merger reflecting the restrictions set forth in Rule 145 promulgated under the Securities Act and to issue appropriate stop transfer instructions to the transfer agent for Harmony Common Stock.
Section 6.07 Notification of Certain Matters. Harmony shall give prompt notice to Zircon, and Zircon shall give prompt notice to Harmony, upon becoming aware of the occurrence, or failure to occur, of any event, which occurrence or failure to occur would be reasonably likely to cause (a) (i) any representation or warranty of such Party contained in this Agreement that is qualified as to materiality to be untrue or inaccurate in any respect or (ii) any other representation or warranty of such Party contained in this Agreement to be untrue or inaccurate in any material respect, in each case, at any time from and after the Effective Date until the Effective Time, or (b) any material failure of Harmony and Merger Sub or Zircon, as the case may be, or of any officer, director, employee or agent thereof, to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it under this Agreement.
Section 6.08 Employee Communications. Harmony and Zircon will use reasonable best efforts to consult with each other, and will consider in good faith each other’s advice, prior to sending any notices or other communication materials to its employees regarding this Agreement, the Merger or the effects thereof on the employment, compensation or benefits of its employees.
Section 6.09 FIRPTA Tax Certificates. On or prior to the Closing, Zircon shall deliver to Harmony a properly executed certification that shares of Zircon Capital Stock are not “U.S. real property interests” in accordance with the Treasury Regulations under Sections 897 and 1445 of the Code, together with a notice to the IRS (which shall be filed by Harmony with the IRS following the Closing) in accordance with the provisions of Section 1.897-2(h)(2) of the Treasury Regulations.
Section 6.10 State Takeover Laws. If any “fair price,” “business combination” or “control share acquisition” statute or other similar statute or regulation is or may become applicable to any of the transactions contemplated by this Agreement, the Parties shall use their respective reasonable best efforts to (a) take such actions as are reasonably necessary so that the transactions contemplated hereunder may be consummated as promptly as practicable on the terms contemplated hereby and (b) otherwise take all such actions as are reasonably necessary to eliminate or minimize the effects of any such statute or regulation on such transactions.
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Section 6.11 Section 16 Matters. Prior to the Effective Time, Harmony shall take all such steps as may be required to cause any acquisitions of Harmony Common Stock (and any options to purchase the same) in connection with this Agreement and the transactions contemplated hereby, by each individual who is reasonably expected to become subject to the reporting requirements of Section 16(a) of the Exchange Act with respect to Harmony following the Merger, to be exempt under Rule 16b-3 promulgated under the Exchange Act.
Section 6.12 Termination of Certain Agreements and Rights. Zircon shall cause any stockholders’ agreements, voting agreements, registration rights agreements, co-sale agreements and any other similar agreements, if any, between Zircon and any holders of Zircon Capital Stock set forth in Section 3.02 of the Zircon Disclosure Schedule, including any such agreement granting any Person investor rights, rights of first refusal, registration rights or director election rights (collectively, the “Investor Agreements”), to be terminated immediately prior to the Effective Time.
Section 6.13 Filing of Schedule 14f-1. Harmony shall as promptly as practicable after the Closing Date, but in no event later than five (5) days after the Closing Date, file the Schedule 14f-1 with the SEC with respect to the transactions described in this Agreement. On or prior to the Closing Date, Zircon shall provide all information to Harmony as reasonably required in order to file the Schedule 14f-1 with the SEC.
Section 6.14 Disclosure. The Parties shall use their commercially reasonable efforts to agree to the text of any press release and Harmony’s Form 8-K announcing the execution and delivery of this Agreement. Without limiting any Party’s obligations under the Confidentiality Agreement, no Party shall, and no Party shall permit any of its Subsidiaries or any Representative of such Party to, issue any press release or file or make any disclosure (to any customers or employees of such Party, to the public or otherwise) regarding the Contemplated Transactions unless: (a) the other Party shall have approved such press release or disclosure in writing, such approval not to be unreasonably conditioned, withheld or delayed; or (b) such Party shall have determined in good faith, upon the advice of outside legal counsel, that such disclosure is required by applicable Law and, to the extent practicable, before such press release or disclosure is issued, filed or made, such Party advises the other Party, and uses reasonable efforts to obtain the other Party’s approval, of the text of such press release or disclosure; provided, however, that each of Zircon and Harmony may make any public statement in response to specific questions by the press, analysts, investors or those attending industry conferences or financial analyst conference calls, so long as any such statements are consistent with previous press releases, public disclosures or public statements made by the Company or Harmony in compliance with this Section 6.14.
Section 6.15 Harmony SEC Documents. From the Effective Date to the Effective Time or earlier termination of this Agreement, Harmony shall timely file with the SEC all SEC Documents required to be filed by it under the Exchange Act or the Securities Act. As of its filing date, or if amended after the Effective Date, as of the date of the last such amendment, each filing made with the SEC filed by Harmony with the SEC (a) shall comply in all material respects with the applicable requirements of the Exchange Act and the Securities Act, and (b) shall not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading.
Section 6.16 Bank Accounts. On or prior to the Closing Date, Harmony shall take appropriate steps to transfer all cash on hand and maintained in the bank accounts identified in Schedule 4.22 to one bank account as identified by Zircon. Following execution of this Agreement, Harmony shall take all necessary steps, as soon as commercially practicable after the Closing Date, to close all bank accounts in the name of Harmony and shall provide evidence of such closures to Zircon, in form and substance reasonably acceptable to Zircon.
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Article VII. Conditions to Merger
Section 7.01 Conditions to Each Party’s Obligation To Effect the Merger. The respective obligations of each Party to effect the Merger shall be subject to the satisfaction prior to the Closing Date of the following conditions:
| (a) | Stockholder Approval. The Zircon Voting Proposal shall have been approved by means of the Written Consents by the requisite vote of the stockholders of Zircon under applicable law and Zircon’s articles of incorporation, as amended. |
| (c) | Governmental Approvals. Other than the filing of the Certificate of Merger, all authorizations, consents, orders or approvals of, or declarations or filings with, or expirations of waiting periods imposed by, any Governmental Entity in connection with the Merger and the consummation of the other transactions contemplated by this Agreement. |
| (d) | No Injunctions. No Governmental Entity of competent jurisdiction shall have enacted, issued, promulgated, enforced or entered any order, executive order, stay, decree, judgment or injunction (preliminary or permanent) or statute, rule or regulation which is in effect and which has the effect of making the Merger illegal or otherwise prohibiting consummation of the Merger. |
| (e) | Warrant Exchanges. The Warrant Exchange Agreements shall have been executed and the warrant exchanges as set forth therein shall have been completed or shall be completed substantially simultaneously with the Closing. |
| (f) | Settlement Agreements. The Debt Settlement Agreements shall have been executed and the transactions as set forth therein shall have been completed or shall be completed substantially simultaneously with the Closing. |
| (g) | Debt Repayment. At or simultaneously with the Closing, Zircon shall pay the operating liabilities of Harmony, up to and including an aggregate of $179,762 through December 31, 2022. |
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Section 7.02 Additional Conditions to the Obligations of Harmony and Merger Sub. The obligations of Harmony and Merger Sub to effect the Merger shall be subject to the satisfaction on or prior to the Closing Date of each of the following additional conditions, any of which may be waived in writing exclusively by Harmony and Merger Sub:
| (a) | Representations and Warranties. The representations and warranties of Zircon set forth in this Agreement and in any certificate or other writing delivered by Zircon pursuant hereto shall be true and correct (i) as of the Effective Date (except in the case of this clause (i), (A) to the extent such representations and warranties are specifically made as of a particular date, in which case such representations and warranties shall be true and correct as of such date and (B) where the failure to be true and correct, individually or in the aggregate, has not had, and is not reasonably likely to have, a Zircon Material Adverse Effect) and (ii) as of the Closing Date as though made on and as of the Closing Date (except in the case of this clause (ii), (A) to the extent such representations and warranties are specifically made as of a particular date, in which case such representations and warranties shall be true and correct as of such date, (B) for changes expressly provided for in this Agreement and (C) where the failure to be true and correct, individually or in the aggregate, has not had, and is not reasonably likely to have, a Zircon Material Adverse Effect); provided, however, that the representations and warranties made by Zircon in Section 3.01, Section 3.02, Section 3.03, Section 3.04(a), Section 3.04(d), Section 3.07 and Section 3.19 shall not be subject to the qualifications set forth in clauses (i)(B) and (ii)(C) above; provided, further, that the representations and warranties set forth in Section 3.02(a) shall be true and correct except for such inaccuracies as are in the aggregate de minimis; provided, further, that for purposes of determining accuracy of such representations and warranties, any update of or modification to the Zircon Disclosure Schedule made or purported to have been after the Effective Date shall be disregarded; and provided further that notwithstanding the foregoing and for the avoidance of doubt, the representations and warranties of Zircon shall be construed in accordance with Section 5.02, such that Zircon’s acts and omissions undertaken in accordance with Section 5.02 shall not in itself constitute a breach of any representation or warranty of Zircon. |
| (b) | Performance of Obligations of Zircon. Zircon shall have performed in all material respects all obligations required to be performed by it under this Agreement on or prior to the Closing Date. |
| (c) | No Zircon Material Adverse Effect. No Zircon Material Adverse Effect shall have occurred since the Effective Date and be continuing. |
| (d) | Third-Party Consents. Zircon shall have obtained any required consent or approval of any third party (other than a Governmental Entity) the failure of which to obtain, individually or in the aggregate, is reasonably likely to have a Zircon Material Adverse Effect. |
| (e) | Officers’ Certificate. Harmony shall have received an officers’ certificate duly executed by each of the Chief Executive Officer and Chief Financial Officer of Zircon to the effect that the conditions of Section 7.02(a), Section 7.02(b) and Section 7.02(c) have been satisfied. |
| (f) | Harmony Liabilities. At the Effective Time, the operating liabilities of Harmony shall not be greater than $179,762, except for amounts that become due in the normal course and are or have been promptly presented to Zircon for acceptance and any required approval to pay. |
| (g) | Audited Financials. Zircon shall have provided to Harmony audited financial statements for Zircon and related auditor reports thereon for each of the two most recently ended fiscal years and any other period audited or unaudited but reviewed financials are required to be included in the SEC Reports following the Closing pursuant to applicable law, and unaudited statements for any other required interim periods. |
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Section 7.03 Additional Conditions to the Obligations of Zircon. The obligation of Zircon to effect the Merger shall be subject to the satisfaction on or prior to the Closing Date of each of the following additional conditions, any of which may be waived, in writing, exclusively by Zircon:
| (a) | Representations and Warranties. The representations and warranties of Harmony and Merger Sub set forth in this Agreement and in any certificate or other writing delivered by Harmony or Merger Sub pursuant hereto shall be true and correct (i) as of the Effective Date (except in the case of this clause (i), (A) to the extent such representations and warranties are specifically made as of a particular date, in which case such representations and warranties shall be true and correct as of such date and (B) where the failure to be true and correct, individually or in the aggregate, has not had, and is not reasonably likely to have, a Harmony Material Adverse Effect) and (ii) as of the Closing Date as though made on and as of the Closing Date (except in the case of this clause (ii), (A) to the extent such representations and warranties are specifically made as of a particular date, in which case such representations and warranties shall be true and correct as of such date, (B) for changes contemplated by this Agreement and (C) where the failure to be true and correct, individually or in the aggregate, has not had, and is not reasonably likely to have, a Harmony Material Adverse Effect); provided, however, that the representations and warranties made by Harmony and Merger Sub in Section 4.01, Section 4.02, Section 4.03(b), Section 4.04(a), Section 4.07 and Section 4.20 shall not be subject to the qualifications set forth in clauses (i)(B) and (ii)(C) above; provided, further, that the representations and warranties set forth in Section 4.02(a) shall be true and correct except for such inaccuracies as are in the aggregate de minimis; provided, further, that for purposes of determining accuracy of such representations and warranties, any update of or modification to the Harmony Disclosure Schedule made or purported to have been after the Effective Date shall be disregarded. |
| (b) | Performance of Obligations of Harmony and Merger Sub. Harmony and Merger Sub shall have performed in all material respects all obligations required to be performed by them under this Agreement on or prior to the Closing Date. |
| (c) | No Harmony Material Adverse Effect. No Harmony Material Adverse Effect shall have occurred since the Effective Date and be continuing. |
| (d) | Third-Party Consents. Harmony shall have obtained any consent or approval of any third party (other than a Governmental Entity) the failure of which to obtain, individually or in the aggregate, is reasonably likely to have an Harmony Material Adverse Effect (it being understood and agreed that the failure to obtain or effect any or all of the consents and approvals listed in Section 4.04(b) of the Harmony Disclosure Schedule will be reasonably likely to have a Harmony Material Adverse Effect) |
| (e) | Officers’ Certificate. Zircon shall have received an officers’ certificate duly executed by each of the Chief Executive Officer and Chief Financial Officer of Harmony to the effect that the conditions of Section 7.03(a), Section 7.03(b) and Section 7.03(c) have been satisfied. |
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Article VIII. Termination and Amendment
Section 8.01 Termination. This Agreement may be terminated by Harmony or by Zircon at any time prior to the Effective Time by written notice by the terminating Party to the other Parties), whether before or, subject to the terms hereof, after approval of the Zircon Voting Proposal by the stockholders of Zircon, as follows:
| (a) | by mutual written consent of Harmony and Zircon; |
| (b) | by either Harmony or Zircon if a Governmental Entity of competent jurisdiction shall have issued a nonappealable final order, decree or ruling or taken any other nonappealable final action, in each case having the effect of permanently restraining, enjoining or otherwise prohibiting the Merger; provided, however, that a Party shall not be permitted to terminate this Agreement pursuant to this Section 8.01(b) if the issuance of any such order, decree, ruling or other action is attributable to the failure of such Party (or any Affiliate of such Party) to perform in any material respect any covenant in this Agreement required to be performed by such Party (or any Affiliate of such Party) at or prior to the Effective Time; |
| (c) | by Harmony, if there has been a material breach of or material failure to perform any representation, warranty, covenant or agreement set forth in this Agreement (other than those referred to elsewhere in this Section 8.01 on the part of Zircon, which breach would cause the conditions set forth in Section 7.02(a) or Section 7.02(b) not to be satisfied, and which breach has not been cured, if capable of cure, within 10 days of written notice thereof from Harmony to Zircon; and provided that neither Harmony nor Merger Sub is then in material breach of any representation, warranty or covenant under this Agreement (it being understood that, in each case, this Agreement shall not terminate pursuant to this Section 8.01(c) as a result of such particular breach or failure if such breach or failure is cured prior to such termination becoming effective); |
| (d) | by Zircon, if there has been a material breach of or material failure to perform any representation, warranty, covenant or agreement set forth in this Agreement (other than those referred to elsewhere in this Section 8.01 on the part of Harmony, which breach would cause the conditions set forth in Section 7.03(a) or Section 7.03(b) not to be satisfied, and which breach has not been cured, if capable of cure, within 10 days of written notice thereof from Zircon to Harmon; and provided that Zircon is not then in material breach of any representation, warranty or covenant under this Agreement (it being understood that, in each case, this Agreement shall not terminate pursuant to this Section 8.01(d) as a result of such particular breach or failure if such breach or failure is cured prior to such termination becoming effective); |
| (e) | By Harmony or by Zircon if the Closing has not occurred by April 30, 2023, provided that (i) Harmony shall not have the right to terminate this Agreement pursuant to the provisions of this Section 8.01(e) if the reason for the failure of the Closing to occur was a breach of the provisions of this Agreement by Harmony or Merger Sub; and (ii) Zircon shall not have the right to terminate this Agreement pursuant to the provisions of this Section 8.01(e) if the reason for the failure of the Closing to occur was a breach of the provisions of this Agreement by Zircon; |
| (f) | By Zircon, if there shall have occurred a Harmony Material Adverse Effect; or |
| (g) | By Harmony, if there shall have occurred a Zircon Material Adverse Effect. |
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Section 8.02 Effect of Termination. In the event of termination of this Agreement as provided in Section 8.01, this Agreement shall immediately become void and there shall be no liability or obligation on the part of Harmony, Zircon, Merger Sub or their respective officers, directors, stockholders or Affiliates; provided that (a) any such termination shall not relieve any Party from liability for any knowing and intentional breach of this Agreement, fraud or intentional misconduct occurring prior to such termination; and (b) the provisions of Section 5.03 (Confidentiality), this Section 8.02 (Effect of Termination), Section 8.03 (Fees and Expenses) and Article IX (Miscellaneous) of this Agreement and the Confidentiality Agreement shall remain in full force and effect and survive any termination of this Agreement.
Section 8.03 Fees and Expenses. Except as specifically set forth herein, all fees and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the Party incurring such expenses, whether or not the Merger is consummated.
Section 8.04 Amendment. This Agreement may be amended by the Parties, by action taken or authorized by their respective Boards of Directors, at any time before or after approval of the matters presented in connection with the Merger by the stockholders of Zircon, but, after any such approval, no amendment shall be made which by law requires further approval by such stockholders without such further approval. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the Parties.
Section 8.05 Extension; Waiver. At any time prior to the Effective Time, the Parties, by action taken or authorized by their respective Boards of Directors, may, to the extent legally allowed, (a) extend the time for the performance of any of the obligations or other acts of the other Parties, (b) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto and (c) waive compliance with any of the agreements or conditions contained herein. Any agreement on the part of a Party to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such Party. Such extension or waiver shall not be deemed to apply to any time for performance, inaccuracy in any representation or warranty, or noncompliance with any agreement or condition, as the case may be, other than that which is specified in the extension or waiver. The failure of any Party to assert any of its rights under this Agreement or otherwise shall not constitute a waiver of such rights.
Section 8.06 Procedure for Termination, Amendment, Extension or Waiver. A termination of this Agreement pursuant to Section 8.01, an amendment, modification or supplement of this Agreement pursuant to Section 8.04 or an extension or waiver of this Agreement pursuant to Section 8.05 shall, in order to be effective, require action by the respective Boards of Directors of the applicable Parties.
Section 8.07 Specific Enforcement. Notwithstanding the foregoing, the Parties acknowledge and agree that (i) if Harmony has a right to terminate this Agreement pursuant to the provisions of Section 8.01(c), Harmony may elect not to terminate this Agreement and may instead seek to specifically enforce this Agreement pursuant to the provisions of Section 10.10; and (ii) if Zircon has a right to terminate this Agreement pursuant to the provisions of Section 8.01(d), Zircon may elect not to terminate this Agreement and may instead seek to specifically enforce this Agreement pursuant to the provisions of Section 10.10.
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Article IX. Indemnification
Section 9.01 Survival. All representations and warranties of Harmony and Zircon contained in this Agreement (including all schedules, exhibits and annexes hereto and all certificates, documents, instruments and undertakings furnished pursuant to this Agreement) shall survive the Closing through and until the 12-month anniversary of the Closing Date ((the date until each such representation shall survive is herein referred to as the “Survival Date”) (if written notice of a claim for breach of any representation or warranty has been given on or before the applicable Survival Date for such representation or warranty, then the relevant representations and warranties shall survive as to such claim, until the claim has been finally resolved). All covenants, obligations and agreements of the parties contained in this Agreement (including all schedules, exhibits and annexes hereto and all certificates, documents, instruments and undertakings furnished pursuant to this Agreement), including any indemnification obligations, shall survive the Closing and continue until fully performed in accordance with their terms.
Section 9.02 Indemnification by Harmony. Except as otherwise limited by this Article IX, Harmony shall indemnify, defend and hold harmless Zircon and its Representatives and any successor or assign thereof (collectively, the “Zircon Indemnitees”) from and against, and pay or reimburse Zircon Indemnitees for, any and all losses, Actions (as defined below), Orders (as defined below), Liabilities (as defined below), damages, diminution in value, Taxes, interest, penalties, Liens, amounts paid in settlement and reasonable costs and expenses (including reasonable expenses of investigation and court costs and reasonable attorneys’ fees and expenses), (any of the foregoing, a “Loss”) suffered or incurred by, or imposed upon, any Zircon Indemnitee arising in whole or in part out of or resulting directly or indirectly from: (a) any inaccuracy in or breach of any representation or warranty made by Harmony in this Agreement (including all schedules, exhibits and annexes hereto and all certificates, documents, instruments and undertakings furnished pursuant to this Agreement to which Harmony is a party or made in connection herewith) occurring prior to the Closing; or (b) any nonfulfillment or breach of any covenant, obligation or agreement made by or on behalf of Harmony in this Agreement (including all schedules, exhibits and annexes hereto and all certificates, documents, instruments and undertakings furnished pursuant to this Agreement to which Harmony is a party or made in connection herewith and therewith) occurring prior to the Closing. For purposes herein, (i) “Action” means any legal action, suit, claim, investigation, hearing or proceeding, including any audit, claim or assessment for Taxes or otherwise; (ii) “Order” means any decree, order, judgment, writ, award, injunction, rule, injunction, stay, decree, judgment or restraining order or consent of or by an governmental authority; and (iii) “Liabilities” means any liabilities, obligations or commitments of any nature whatsoever, asserted or unasserted, known or unknown, absolute or contingent, accrued or unaccrued, matured or unmatured or otherwise.
Section 9.03 Indemnification by Zircon. Except as otherwise limited by this Article IX, Zircon shall indemnify, defend and hold harmless Harmony and its Representatives and any successor or permitted assign thereof (collectively, the “Harmony Indemnitees”) from and against, and pay or reimburse Harmony Indemnitees for, any and all Losses, suffered or incurred by, or imposed upon, any Harmony Indemnitee arising in whole or in part out of or resulting directly or indirectly from: (a) any inaccuracy in or breach of any representation or warranty made by Zircon in this Agreement (including all schedules, exhibits and annexes hereto and all certificates, documents, instruments and undertakings furnished pursuant to this Agreement to which Zircon is a party or made in connection herewith); or (b) any nonfulfillment or breach of any covenant, obligation or agreement made by or on behalf of Zircon in this Agreement (including all schedules, exhibits and annexes hereto and all certificates, documents, instruments and undertakings furnished pursuant to this Agreement to which Zircon is a party or made in connection herewith and therewith).
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Section 9.04 Indemnification Procedures.
| (a) | For the purposes of this Agreement, (i) the term “Indemnitee” shall refer to the Person or Persons indemnified, or entitled, or claiming to be entitled, to be indemnified, pursuant to the provisions of Section 9.02 or Section 9.03, as the case may be, and (ii) the term “Indemnitor” shall refer to the Person or Persons having the actual or alleged obligation to indemnify pursuant to such provisions. |
| (b) | In order to make a claim for indemnification hereunder, the Indemnitee must provide written notice (a “Claim Notice”) of such claim to the Indemnitor (and with respect to any claim against Harmony prior to the Expiration Date, the Escrow Agent), which Claim Notice shall include (i) a reasonable description of the facts and circumstances which relate to the subject matter of such indemnification claim to the extent then known and (ii) the amount of Losses suffered by the Indemnitee in connection with the claim to the extent known or reasonably estimable (provided, that the Indemnitee may thereafter in good faith adjust the amount of Losses with respect to the claim by providing a revised Claim Notice to the Indemnitor and, if applicable, the Escrow Agent); provided, that the copy of any Claim Notice provided to the Escrow Agent shall be redacted for any confidential or proprietary information of the Indemnitor or the Indemnitees described in clause (i) above. |
| (c) | In the case of any claim for indemnification under this Agreement arising from a claim of a third party (including any Governmental Entity), an Indemnitee must give a Claim Notice the Indemnitor of such third party claim promptly (and in any event within thirty (30) days) after the Indemnitee’s receipt of notice of such claim; provided, that the failure to timely provide such notice will not relieve an Indemnitor of its indemnification obligations except to the extent that the Indemnitor is actually harmed thereby. The Indemnitor will have the right to defend and to direct the defense against any such claim in its name and at its expense, and with counsel selected by the Indemnitor unless: (i) the Indemnitor fails to acknowledge fully its obligations to the Indemnitee within fifteen (15) days after receiving notice of such third party claim or contests, in whole or in part, its indemnification obligations therefor; (ii) if the Indemnitor is Harmony, (A) the applicable third party claimant is a Governmental Entity or a then-current customer of Zircon or any of its Affiliates or (B) an adverse judgment with respect to the claim will establish a precedent materially adverse to the continuing business interests of Zircon or its Affiliates; (iii) there is a conflict of interest between the Indemnitor and the Indemnitee in the conduct of such defense such that representation of both Indemnitor and Indemnitee by the same counsel would violate professional standards of conduct for attorneys in the jurisdiction where the Indemnitor’s counsel is practicing on behalf of the Indemnitor; (iv) the applicable third party alleges claims of fraud, willful misconduct or intentional misrepresentation; (v) such claim is criminal in nature, could reasonably be expected to lead to criminal proceedings, or seeks an injunction or other equitable relief against the Indemnitee; or (vi) the claim seeks or is reasonably expected to seek damages or other amounts that would result in all or any portion of the Indemnitee’s right to indemnification for such claim (when combined in the aggregate with the amount of all other pending and finally determined claims against the Indemnitor) being either (A) if the Indemnitor is Harmony, in excess of the then remaining Escrow Shares (as defined below) unless Harmony provides evidence reasonably acceptable to Zircon of Harmony’s ability to pay all potential amounts with respect to such claim and all other pending and finally determined claims against Harmony, along with security or an escrow arrangement reasonably acceptable to Zircon for such amounts, or (B) limited by the Indemnification Cap. If the Indemnitor elects, and is entitled, to compromise or defend such claim, it will within fifteen (15) days (or sooner, if the nature of the claim so requires) notify the Indemnitee of its intent to do so, and the Indemnitee will, at the request and expense of the Indemnitor, cooperate in the defense of such claim. If the Indemnitor elects not to, or is not entitled under this Section 9.04 to, compromise or defend such claim, fails to notify the Indemnitee of its election as herein provided or refuses to acknowledge or contests its obligation to indemnify under this Agreement, the Indemnitee may pay, compromise or defend such claim. Notwithstanding anything to the contrary contained herein, the Indemnitor will have no indemnification obligations with respect to any such claim which has been or will be settled by the Indemnitee without the prior written consent of the Indemnitor (which consent will not be unreasonably withheld, delayed or conditioned); provided, however, that notwithstanding the foregoing, the Indemnitee will not be required to refrain from paying any claim which has matured by a court judgment or decree, unless an appeal is duly taken therefrom and exercise thereof has been stayed, nor will it be required to refrain from paying any claim where the delay in paying such claim would result in the foreclosure of a Lien upon any of the property or assets then held by the Indemnitee or where any delay in payment would cause the Indemnitee material economic loss. The Indemnitor’s right to direct the defense will include the right to compromise or enter into an agreement settling any claim by a third party; provided, further, that no such compromise or settlement will obligate the Indemnitee to agree to any settlement that requires the taking or restriction of any action (including the payment of money and competition restrictions) by the Indemnitee (other than the delivery of a release for such claim and customary confidentiality obligations), except with the prior written consent of the Indemnitee (such consent not to be unreasonably withheld, conditioned or delayed). Notwithstanding the Indemnitor’s right to compromise or settle in accordance with the immediately preceding sentence, the Indemnitor may not settle or compromise any claim over the objection of the Indemnitee; provided, however, that consent by the Indemnitee to settlement or compromise will not be unreasonably withheld, delayed or conditioned. The Indemnitee will have the right to participate in the defense of any claim with counsel selected by it subject to the Indemnitor’s right to direct the defense. The fees and disbursements of such counsel will be at the expense of the Indemnitee; provided, however, that, in the case of any claim which seeks injunctive or other equitable relief against the Indemnitee, the fees and disbursements of such counsel will be at the expense of the Indemnitor. |
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| (d) | With respect to any direct indemnification claim under this Agreement that does not arise from a third-party claim, the Indemnitor will have a period of thirty (30) days after receipt of the Claim Notice within which to respond thereto. If the Indemnitor does not respond within such thirty (30) days, the Indemnitor will be deemed to have accepted responsibility for the Losses set forth in the Claim Notice and will have no further right to contest the validity of the Claim Notice. If the Indemnitor responds within such thirty (30) days after the receipt of the Claim Notice and rejects such claim in whole or in part, the Indemnitee will be free to pursue such remedies as may be available to it under this Agreement (including any exhibits, schedules and/or other agreements entered into in connections with the transactions contemplated hereby) or applicable Law. |
Section 9.05 Limitations on Indemnification.
| (a) | Harmony shall not be liable for an indemnification claim made under Section 9.02 (a) for which a claim for indemnification is not asserted hereunder on or before the applicable Survival Date; (b) unless and until the aggregate amount of Losses incurred by Zircon Indemnitees in the aggregate exceeds Fifty Thousand U.S. Dollars ($50,000) (the “Basket”) in which case Harmony shall be obligated to the applicable Zircon Indemnitees for the amount of all Losses in excess of the Basket; or (c) to the extent Losses incurred by Zircon Indemnitees in the aggregate exceed an amount equal to the value of the Escrow Shares, as such value is determined as set forth in Section 9.07(a) (the “Indemnification Cap”). |
| (b) | Zircon shall not be liable for an indemnification claim made under Section 9.03 (a) for which a claim for indemnification is not asserted hereunder on or before the applicable Survival Date; (b) unless and until the aggregate amount of Losses incurred by Harmony Indemnitees in the aggregate exceeds the Basket, in which case Zircon shall be obligated to the applicable Harmony Indemnitees for the amount of all Losses in excess of the Basket; or (c) to the extent Losses incurred by Harmony Indemnitees in the aggregate exceed an amount equal to the Indemnification Cap. |
Section 9.06 General Indemnification Provisions. The amount of any Losses suffered or incurred by any Indemnitee shall be reduced by the amount of any insurance proceeds or other cash receipts paid to the Indemnitee or any Affiliate thereof as a reimbursement with respect to such Losses (and no right of subrogation shall accrue to any insurer hereunder, except to the extent that such waiver of subrogation would prejudice any applicable insurance coverage), including any indemnification received by the Indemnitee or such Affiliate from an unrelated party with respect to such Losses, net of the costs of collection and any related anticipated future increases in insurance premiums resulting from such Loss or insurance payment. No investigation or knowledge by a Party of a breach of a representation or warranty of another Party hereto shall affect the representations and warranties of the breaching Party or the recourse available to such first Party or any of its “Indemnitees” under any provision of this Agreement (including this Article IX) with respect thereto. In any claim for indemnification under this Agreement, no Person shall be required to indemnify any Person for punitive damages or special damages, unless such punitive damages, or special damages are actually awarded and paid to a third party.
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Section 9.07 Escrow; Timing of Payment; Right to Set-Off.
| (a) | All claims for indemnification by a Zircon Indemnitee pursuant to this Article IX shall first be asserted against the Escrow Shares in accordance with this Agreement (including the schedules, exhibits and annexes hereto) and the Escrow Agreement (as defined below). With respect to any indemnification payment that includes Escrow Shares, the value of each Escrow Share for purposes of determining the indemnification payment shall be $0.28. Any indemnification obligation of an Indemnitor under this Article will be paid within five (5) Business Days after the determination of such obligation in accordance with Section 9.04 (and Zircon and Harmony will provide or cause to be provided to the Escrow Agent any written instructions or other information or documents required by the Escrow Agent to do so). |
| (b) | At the Closing, Zircon, Harmony and the Guarantors (as defined below) shall enter into an Escrow Agreement in the form attached as Exhibit C hereto (the “Escrow Agreement”) with a mutually agreeable escrow agent (together with any successor escrow agent, the “Escrow Agent”), pursuant to which each of Christian Guilbaud, Kenneth Charles Grainger, Demin Huang and Rui Zhu (each a “Guarantor” and collectively, the “Guarantors”) shall, at the Closing, deliver, or cause to be delivered, an aggregate of 3,877,440 shares of Harmony’s Common Stock (the “Escrow Shares”) to the Escrow Agent, to be held by the Escrow Agent in the Escrow Account, together with any interest and earnings thereon, and disbursed therefrom in accordance with the terms and conditions of this Agreement and the Escrow Agreement. In the event that Harmony becomes obligated to pay any indemnification hereunder the Zircon Indemnitees, such indemnification shall be paid solely by transfer of the applicable Escrow Shares to the applicable Zircon Indemnity, which transfer shall be apportioned amongst the Guarantors pro rata based on the initial number of Escrow Shares owned by each of the Guarantors, as set forth in the Escrow Agreement, and such transfer shall be deemed full and complete satisfaction of the indemnity obligations of Harmony hereunder, and any indemnification obligations of the Guarantors or Harmony shall be limited to the transfer of the applicable Escrow Shares and in no event shall Harmony or any Guarantor have any liability in excess thereof. In the event that the Escrow Shares cannot be transferred to a Zircon Indemnity for any reason, then the applicable Escrow Shares shall be redeemed by Harmony at a price of $0.0001 per share, and such redemption shall be deemed full and complete satisfaction of the indemnity obligations of Harmony and the Guarantors hereunder. |
| (c) | The Escrow Shares shall no longer be subject to any claim that is first made after the date which is twelve (12) months after the Closing Date (the “Expiration Date”); provided, however, with respect to any claims made in accordance with this Agreement on or prior to the Expiration Date (including those that are revised or adjusted in accordance with this Article after the Expiration Date) that remain unresolved as of the end of the Expiration Date (“Pending Claims”), all or a portion of the Escrow Shares reasonably necessary to satisfy such Pending Claims (as determined with respect to any indemnification claims based on the amount of the indemnification claim included in the Claim Notice provided by a Zircon Indemnitee, as it may be revised or adjusted in accordance with this Article IX) shall remain in the Escrow Account until such time as such Pending Claim shall have been finally resolved pursuant to the provisions of this Agreement. After the Expiration Date, any Escrow Shares remaining in the Escrow Account that are not subject to (i) Pending Claims or (ii) resolved but unpaid claims in favor of any Zircon Indemnitees, shall be disbursed by the Escrow Agent to Guarantors, based on the respective number of Escrow Shares remaining as to each Guarantor, after receipt by the Escrow Agent of joint written instructions by each of the Guarantors, Harmony and Zircon. Promptly after the final resolution of all Pending Claims and the payment of all obligations in connection therewith, the Escrow Agent shall disburse any Escrow Shares remaining in the Escrow Account to the Guarantors, based on the respective number of Escrow Shares remaining as to each Guarantor, upon receipt of joint written instruction by each of the Guarantors, Harmony and Zircon to the Escrow Agent. |
Section 9.08 Exclusive Remedies. Except as otherwise set forth herein, the Parties acknowledge and agree that their sole and exclusive remedy with respect to any and all claims (other than claims arising from intentional fraud on the part of a Party hereto in connection with the transactions contemplated by this Agreement) for any breach of any representation, warranty, covenant, agreement or obligation set forth herein or otherwise relating to the subject matter of this Agreement, shall be pursuant to the indemnification provisions set forth in this Article IX. In furtherance of the foregoing, each Party hereby waives, to the fullest extent permitted under Law, any and all rights, claims and causes of action for any breach of any representation, warranty, covenant, agreement or obligation set forth herein or otherwise relating to the subject matter of this Agreement it may have against the other Party hereto and its Affiliates and each of their respective Representatives arising under or based upon any Law, except pursuant to the indemnification provisions set forth in this Article IX. Nothing in this Section 9.08 shall limit any Person’s right to seek and obtain any equitable relief to which any Person shall be entitled pursuant to this Agreement.
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Article X. Miscellaneous
Section 10.01 Notices.
| (a) | All notices and other communications hereunder shall be in writing and shall be deemed duly delivered (i) three (3) Business Days after being sent by registered or certified mail, return receipt requested, postage prepaid, (ii) one (1) Business Day after being sent for next Business Day delivery, fees prepaid, via a reputable overnight courier service, or (ii) upon receipt of a delivery receipt if sent via email, in each case to the intended recipient as set forth below: |
If to Harmony or Merger Sub, to:
Harmony Energy Technology Corp.
165 Broadway, 23rd Floor
New York, NY 10006
Attn: Demin (Fleming) Huang
Email: fleming.huang@hetcusa.com
with a copy (which shall not constitute notice) to:
Anthony L.G., PLLC
Attn: Laura Anthony
625 N. Flagler Drive, Suite 600
West Palm Beach, FL 33401
Email: Lanthony@anthonypllc.com
If to Zircon, to:
Zircon Corporation
1580 Dell Avenue
Campbell, CA 95609
Attn: John Stauss, Chief Executive Officer
Email: john.stauss@zircon.com
with a copy (which shall not constitute notice) to:
Sheppard, Mullin, Richter & Hampton LLP
30 Rockefeller Plaza, 39th Floor
New York, NY 10112-0015
Attn: Richard A. Friedman, Esq. and Stephen A. Cohen, Esq.
Email: rafriedman@sheppardmullin.com and scohen@sheppardmullin.com
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| (b) | Any Party may change the address to which notices and other communications hereunder are to be delivered by giving the other Parties notice in the manner herein set forth. |
Section 10.02 Entire Agreement. This Agreement (including the Schedules, Annexes and Exhibits hereto and the documents and instruments referred to herein that are to be delivered at the Closing) constitutes the entire agreement among the Parties to this Agreement and supersedes any prior understandings, agreements or representations by or among the Parties, or any of them, written or oral, with respect to the subject matter hereof and the Parties expressly disclaim reliance on any such prior understandings, agreements or representations to the extent not embodied in this Agreement. Notwithstanding the foregoing, the Confidentiality Agreement shall remain in effect in accordance with its terms.
Section 10.03 No Third-Party Beneficiaries. Other than as specifically set forth herein, this Agreement is not intended to, and shall not, confer upon any other Person any rights or remedies hereunder.
Section 10.04 Assignment. This Agreement shall be binding upon and shall inure to the benefit of the Parties and their respective successors and permitted assigns. No Party shall have any power or any right to assign or transfer, in whole or in part, this Agreement, or any of its rights or any of its obligations hereunder, including, without limitation, any right to pursue any claim for damages pursuant to this Agreement or the transactions contemplated herein, or to pursue any claim for any breach or default of this Agreement, or any right arising from the purported assignor’s due performance of its obligations hereunder, without the prior written consent of the other Party and any such purported assignment in contravention of the provisions herein shall be null and void and of no force or effect.
Section 10.05 Severability. Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. If the final judgment of a court of competent jurisdiction declares that any term or provision hereof is invalid or unenforceable, the Parties agree that the court making such determination shall have the power to limit the term or provision, to delete specific words or phrases, or to replace any invalid or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this Agreement shall be enforceable as so modified. In the event such court does not exercise the power granted to it in the prior sentence, the Parties agree to replace such invalid or unenforceable term or provision with a valid and enforceable term or provision that will achieve, to the extent possible, the economic, business and other purposes of such invalid or unenforceable term.
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Section 10.06 Counterparts and Signature. This Agreement may be executed in two or more counterparts (including by facsimile or by an electronic scan delivered by electronic mail), each of which shall be deemed an original but all of which together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each of the Parties and delivered to the other Parties, it being understood that all Parties need not sign the same counterpart. This Agreement may be executed and delivered by facsimile or by an electronic scan delivered by electronic mail. This Agreement (or any such counterpart) may be executed by electronic signature (including any electronic signature complying with the ESIGN Act of 2000, such as www.docusign.com) or delivered by electronic transmission (including by facsimile or electronic mail), and when so executed or delivered shall have been duly and validly executed or delivered, and be valid and effective, for all purposes.
Section 10.07 Interpretation. When reference is made in this Agreement to an Article or a Section, such reference shall be to an Article or Section of this Agreement, unless otherwise indicated. The table of contents, table of defined terms and headings contained in this Agreement are for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement. The language used in this Agreement shall be deemed to be the language chosen by the Parties to express their mutual intent, and no rule of strict construction shall be applied against any Party. Whenever the context may require, any pronouns used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns and pronouns shall include the plural, and vice versa. Any reference to any federal, state, local or foreign statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. Whenever the words “include,” “includes” or “including” are used in this Agreement, they shall be deemed to be followed by the words “without limitation.” Where this Agreement refers to information that was “made available,” that means that such information was either (i) provided directly to Harmony or Zircon, as applicable, by the other Party, (ii) included in the virtual data rooms established by Harmony and Zircon created for the purposes of providing information to the other Party in connection with this Agreement at least three (3) Business Days prior to the execution and delivery of this Agreement or (iii) solely with respect to information made available by Harmony, filed with and publicly available on the SEC’s EDGAR system prior to the Effective Date. When used in the Agreement, “Person” shall mean any natural person, corporation, exempted company, limited liability company, partnership, exempted limited partnership, association, trust or other entity, including a Governmental Entity, as applicable. No summary of this Agreement prepared by any Party shall affect the meaning or interpretation of this Agreement.
Section 10.08 Arm’s Length Bargaining; No Presumption Against Drafter. This Agreement has been negotiated at arm’s-length by parties of equal bargaining strength, each represented by counsel or having had but declined the opportunity to be represented by counsel and having participated in the drafting of this Agreement. This Agreement creates no fiduciary or other special relationship between the Parties, and no such relationship otherwise exists. No presumption in favor of or against any Party in the construction or interpretation of this Agreement or any provision hereof shall be made based upon which Person might have drafted this Agreement or such provision.
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Section 10.09 Governing Law. All matters arising out of or relating to this Agreement and the transactions contemplated hereby (including its interpretation, construction, performance and enforcement) shall be governed by and construed in accordance with the internal laws of the State of Delaware without giving effect to any choice or conflict of law provision or rule (whether of the State of Delaware or any other jurisdiction) that would cause the application of laws of any jurisdictions other than those of the State of Delaware.
Section 10.10 Remedies; Specific Performance. Except as otherwise provided herein, any and all remedies herein expressly conferred upon a Party will be deemed cumulative with and not exclusive of any other remedy conferred hereby, or by law or equity upon such Party, and the exercise by a Party of any one remedy will not preclude the exercise of any other remedy. The Parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the Parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement, this being in addition to any other remedy to which they are entitled at law or in equity. Each Party agrees to waive any requirement for the security or posting of any bond in connection with any such equitable remedy, and agrees that it will not oppose the granting of an injunction, specific performance or other equitable relief on the basis that (a) the other Party has an adequate remedy at law, or (b) an award of specific performance is not an appropriate remedy for any reason at law or equity.
Section 10.11 Further Assurances. From and after the Effective Date, each Party shall execute and deliver such documents and take such action, as may reasonably be considered within the scope of such Party’s obligations hereunder, necessary to effectuate the transactions contemplated herein.
Section 10.12 Limitation on Damages. In no event will any Party be liable to any other Party under or in connection with this Agreement or in connection with the transactions contemplated herein for special, general, indirect or consequential damages, including damages for lost profits or lost opportunity, even if the Party sought to be held liable has been advised of the possibility of such damage.
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Section 10.13 Submission to Jurisdiction. Each of the Parties (a) consents to submit itself to the exclusive personal jurisdiction of the state or federal courts a federal court sitting in Santa Clara County, California in any action or proceeding arising out of or relating to this Agreement or any of the transactions contemplated by this Agreement, (b) agrees that all claims in respect of such action or proceeding shall be heard and determined in any such court, (c) agrees that it shall not attempt to deny or defeat such personal jurisdiction by motion or other request for leave from any such court and (d) agrees not to bring any action or proceeding arising out of or relating to this Agreement or any of the transaction contemplated by this Agreement in any other court. Each of the Parties waives any defense of inconvenient forum to the maintenance of any action or proceeding so brought and waives any bond, surety or other security that might be required of any other Party with respect thereto. Any Party may make service on another Party by sending or delivering a copy of the process to the Party to be served at the address and in the manner provided for the giving of notices in Article IX. Nothing in this Section 10.13, however, shall affect the right of any Party to serve legal process in any other manner permitted by law.
Section 10.14 WAIVER OF JURY TRIAL. EACH OF THE PARTIES HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THE ACTIONS OF THE PARTIES IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE AND ENFORCEMENT OF THIS AGREEMENT. EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS Section 10.14. Each of the Parties acknowledge that each has been represented in connection with the signing of this waiver by independent legal counsel selected by the respective Party and that such Party has discussed the legal consequences and import of this waiver with legal counsel. Each of the Parties further acknowledge that each has read and understands the meaning of this waiver and grants this waiver knowingly, voluntarily, without duress and only after consideration of the consequences of this waiver with legal counsel.
Section 10.15 Disclosure Schedule. Each of the Zircon Disclosure Schedule and the Harmony Disclosure Schedule shall be arranged in sections corresponding to the numbered sections contained in this Agreement, and the disclosure in any section shall qualify only (a) the corresponding section of this Agreement and (b) the other sections of this Agreement, to the extent that it is reasonably apparent from a reading of such disclosure that it also qualifies or applies to such other sections or is specifically so noted therein. The inclusion of any information in the Zircon Disclosure Schedule or the Harmony Disclosure Schedule, as applicable, shall not be deemed to be an admission or acknowledgment, in and of itself, that such information is required by the terms hereof to be disclosed, is material, has resulted in or would result in a Zircon Material Adverse Effect or a Harmony Material Adverse Effect, as applicable, or is outside the Ordinary Course of Business.
[Remainder of Page Intentionally Left Blank; Signature Page Follows]
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IN WITNESS WHEREOF, the Parties have executed this Agreement as of the Effective Date.
| HARMONY ENERGY TECHNOLOGIES CORP. | ||
| By: | /s/ Demin (Fleming) Huang | |
| Name: | Demin (Fleming) Huang | |
| Title: | Chief Executive Officer, President and Secretary | |
| ZRCN Inc. | ||
| By: | /s/ Demin (Fleming) Huang | |
| Name: | Demin (Fleming) Huang | |
| Title: | Chief Executive Officer, President and Secretary | |
| ZIRCON CORPORATION | ||
| By: | /s/ John Stauss | |
| Name: | John Stauss | |
| Title: | Chief Executive Officer | |
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Exhibit A
Form of Warrant Exchange Agreement
(Attached)
Exhibit B
Form of Debt Settlement Agreement
(Attached)
Exhibit C
Form of Escrow Agreement
(Attached)
Exhibit 3.1
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
HARMONY ENERGY TECHNOLOGIES CORPORATION
Harmony Energy Technologies Corporation (the “Corporation”), a corporation duly organized and existing under the General Corporation Law of the State of Delaware, does hereby certify that:
FIRST: The Certificate of Incorporation of the Corporation, as amended, is hereby amended solely to reflect a change in the name of the Corporation by replacing Article 1 thereof with the following:
“The name of this Corporation is ZRCN Inc.”
SECOND: The Board of Directors of the Corporation has adopted a resolution approving and declaring advisable the amendment described herein in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware.
THIRD: The amendment described herein has been duly adopted in accordance with Section 242 of the General Corporation Law of the State of Delaware.
FOURTH: That this Certificate of Amendment shall be effective on and as of the date of filing with the Delaware Secretary of State.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be executed by its duly authorized officer on this 18th day of April, 2023.
| /s/ John Stauss | |
| John Stauss, CEO |
Exhibit 4.1
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY APPLICABLE STATE SECURITIES LAWS. SUCH SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT PURPOSES AND MAY NOT BE OFFERED FOR SALE, SOLD, DELIVERED AFTER SALE, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FILED BY THE ISSUER WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION COVERING SUCH SECURITIES UNDER THE SECURITIES ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER THAT SUCH REGISTRATION IS NOT REQUIRED.
WARRANT
TO PURCHASE COMMON STOCK
OF
Harmony Energy Technologies Corp.
| Warrant No. A-_______ | ______ Shares of Common Stock |
This is to Certify That, FOR VALUE RECEIVED, , or its assigns (“Holder”), is entitled to purchase, subject to the provisions of this Warrant, from Harmony Energy Technologies Corp., a Delaware corporation (the “Company”), shares of fully paid, validly issued and nonassessable shares of the common stock, par value $0.001 per share, of the Company (“Common Stock”) at an exercise price of $0.01 per share. The number of shares of Common Stock to be received upon the exercise of this Warrant and the price to be paid for each share of Common Stock may be adjusted from time to time as hereinafter set forth. The shares of Common Stock deliverable upon such exercise, and as adjusted from time to time pursuant to Section (h) hereof or as otherwise provided herein, are hereinafter sometimes referred to as “Warrant Shares” and the exercise price per share of Common Stock acquirable upon exercise hereof as in effect at any time and as adjusted from time to time is hereinafter sometimes referred to as the “Exercise Price.”
This Warrant to Purchase Common Stock (this “Warrant”) is being issued pursuant to that certain Merger Agreement dated April 13, 2023, to which the Company and the Holder are parties (the “Engagement Agreement”), and will constitute payment of fees due to the Holder pursuant to the Engagement Agreement.
(a) EXERCISE OF WARRANT.
(1) This Warrant may be exercised for a period of ten (10) years from the date of issuance in whole or in part at any time or from time to time from sixty (60) calendar days after the date hereof up to and including April 14, 2033 (the “Exercise Period”); provided, however, that (A) if either such day is a day on which banking institutions in the State of California are authorized by law to close, then on the next succeeding day which shall not be such a day, and (B) in the event of any merger, consolidation or sale of all or substantially all the assets of the Company as an entirety, resulting in any distribution to the Company’s stockholders, prior to termination of the Exercise Period, or any reclassification or recapitalization or similar transaction (each of the foregoing, a “Major Transaction”), the Holder shall have the right to exercise this Warrant commencing at such time through the termination of the Exercise Period into the kind and amount of shares of stock and other securities and property (including cash) receivable had the Holder exercised this Warrant immediately prior to such Major Transaction or any record date established to determine the receipt of any payment or distribution in respect thereof. This Warrant may be exercised by presentation and surrender hereof to the Company at its principal office with the Purchase Form annexed hereto duly executed and accompanied by payment of the Exercise Price for the number of Warrant Shares specified in such form. As soon as practicable after each such exercise of this Warrant, but not later than three (3) business days following the receipt of good and available funds unless exercised on a cashless basis as defined by Section (a)(2) hereof, the Company shall issue and deliver to the Holder a certificate or certificates for the Warrant Shares issuable upon such exercise, registered in the name of the Holder or its designee. If this Warrant should be exercised in part only, the Company shall, upon surrender of this Warrant for cancellation, execute and deliver a new Warrant evidencing the rights of the Holder thereof to purchase the balance of the Warrant Shares purchasable hereunder. As of the end of business on the date of receipt by the Company of this Warrant at its office in proper form for exercise, the Holder shall be deemed to be the holder of record of the shares of Common Stock or other property issuable upon such exercise, notwithstanding that the stock transfer books of the Company shall then be closed or that certificates representing such shares or other property shall not then be physically delivered to the Holder.
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(2) At any time during the Exercise Period, the Holder may, at its option, exercise this Warrant on a cashless basis by exchanging this Warrant, in whole or in part (a “Warrant Exchange”), into the number of Warrant Shares determined in accordance with this Section (a)(2), by surrendering this Warrant at the principal office of the Company or at the office of its stock transfer agent, accompanied by a notice stating such Holder’s intent to effect such exchange, the number of Warrant Shares to be exchanged and the date on which the Holder requests that such Warrant Exchange occur (the “Notice of Exchange”). The Warrant Exchange shall take place on the date specified in the Notice of Exchange or, if later, the date the Notice of Exchange is received by the Company (the “Exchange Date”). Certificates for the shares issuable upon such Warrant Exchange and, if this Warrant should be exercised in part only, a new Warrant evidencing the rights of the Holder thereof to purchase the balance of the Warrant Shares purchasable hereunder, shall be issued as of the Exchange Date and delivered to the Holder within seven (7) days following the Exchange Date. In connection with any Warrant Exchange, this Warrant shall represent the right to subscribe for and acquire the number of Warrant Shares equal to the number of shares determined pursuant to the following formula:
| X | = Y (A - B) | ||
| A |
| where, | ||
| X = | the number of shares of Common Stock to be issued to Holder; | |
| Y = | the number of shares of Common Stock as to which this Warrant is to be exercised (as indicated on the Notice of Exchange); | |
| A = | the Fair Market Value (as defined below) of a share of Common Stock as determined as of the date immediately preceding the date of the Notice of Exchange, as applicable; and | |
| B = | the Exercise Price. |
For purposes herein, “Fair Market Value” shall equal the value determined by the first of the following that applies: (a) If the Common Stock is then listed or quoted on a Trading Market (as defined below), the daily average closing price of the Common Stock on the Trading Market for the five (5) trading days immediately preceding the date of the Notice of Exchange, (b) if the Common Stock is not then listed on a Trading Market and if the Common Stock traded in the over-the-counter market, as reported by the OTCQX or OTCQB Markets, the average closing price of the Common Stock on the OTCQX or OTCQB Markets for the five (5) trading days immediately preceding the date of the Notice of Exchange, as reported by Bloomberg Financial L.P.; (c) if the Common Stock is not then listed or quoted on a Trading Market or on the OTCQX or OTCQB Markets and if prices for the Common Stock are then reported in the “Pink Sheets” published by the OTC Markets Group (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price of one share of Common Stock so reported, as reported by Bloomberg Financial L.P.; or (d) in all other cases as reasonably determined in good faith by the Company’s Board of Directors with the concurrence of the Holder. For purposes herein, “Trading Market” means whichever of the New York Stock Exchange, NYSE American, or the Nasdaq Stock Market (including the Nasdaq Capital Market), on which the Common Stock is listed or quoted for trading on the date in question.
(b) REPRESENTATIONS OF HOLDER. The Holder (i) is a “sophisticated investor,” as defined in Rule 501 promulgated under the Securities Act of 1933, as amended (the “1933 Act”), (ii) understands the risks of, and other considerations relating to, a purchase of this Warrant, (iii) understands that the Warrants and/or the Warrant Shares may not be sold, transferred, hypothecated or pledged, except pursuant to an effective registration statement under the 1933 Act and under any applicable state securities law, or pursuant to an available exemption from the registration requirements of the 1933 Act and any applicable state securities laws, in all cases established to the satisfaction of the Company, and (v) the Holder has been given the opportunity to obtain such additional information that it believes is necessary.
(c) RESERVATION OF SHARES. The Company shall at all times that this Warrant is exercisable by the Holder, reserve for issuance and/or delivery upon exercise of the this Warrant such number of shares of Common Stock as shall be required for issuance and delivery upon exercise of this Warrant.
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(d) LIMITATIONS ON NUMBER OF SHARES ISSUABLE. The Company shall not effect any exercise of this Warrant, and the Holder shall not have the right to exercise any portion of this Warrant, to the extent that after giving effect to such issuance after exercise as set forth on the applicable Purchase Form of Notice of Exchange, as applicable, the Holder (together with the Holder’s Affiliates (as defined below), and any other Persons (as defined below) acting as a group together with the Holder or any of the Holder’s Affiliates (such Persons, “Attribution Parties”), would beneficially own in excess of the Beneficial Ownership Limitation (as defined below). For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates and Attribution Parties shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which such determination is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (i) exercise of the remaining, nonexercised portion of this Warrant beneficially owned by the Holder or any of its Affiliates or Attribution Parties and (ii) exercise or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any debt, preferred stock, rights, options, warrants or other instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, Common Stock) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its Affiliates or Attribution Parties. Except as set forth in the preceding sentence, for purposes of this Section (d), beneficial ownership shall be calculated in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended and the rules and regulations promulgated thereunder (the “Exchange Act”), it being acknowledged by the Holder that the Company is not representing to the Holder that such calculation is in compliance with Section 13(d) of the Exchange Act and the Holder is solely responsible for any schedules required to be filed in accordance therewith. To the extent that the limitation contained in this Section (d) applies, the determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates and Attribution Parties) and of which portion of this Warrant is exercisable shall be in the sole discretion of the Holder, and the submission of a Notice of Exercise or Purchase Form, as applicable, shall be deemed to be the Holder’s determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates and Attribution Parties) and of which portion of this Warrant is exercisable, in each case subject to the Beneficial Ownership Limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination. In addition, a determination as to any group status as contemplated above shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. For purposes of this Section (d), in determining the number of outstanding shares of Common Stock, Holder may rely on the number of outstanding shares of Common Stock as reflected in (A) the Company’s most recent periodic or annual report filed with the Securities and Exchange Commission, as the case may be, (B) a more recent public announcement by the Company or (C) a more recent written notice by the Company or its transfer agent setting forth the number of shares of Common Stock outstanding. Upon the written or oral request of Holder, the Company shall within two business days confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Warrant, by the Holder or its Affiliates or Attribution Parties since the date as of which such number of outstanding shares of Common Stock was reported. The “Beneficial Ownership Limitation” shall be 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon exercise of this Warrant, provided, further, however, that the Beneficial Ownership Limitation may be increased by the Holder, at the election of the Holder, on not less than 61 days’ prior notice to the Company, and the Beneficial Ownership Limitation shall continue to apply until such 61st day (or such later date, as determined by the Holder, as may be specified in such notice of waiver). The provisions of this Section (d) shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section (d) to correct this Section (d) (or any portion hereof) which may be defective or inconsistent with the intended Beneficial Ownership Limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such limitation. The limitations contained in this Section (d) shall apply to a successor holder of this Warrant. For purposes herein (i) “Affiliate” means, with respect to a specified Person, any other Person that directly or indirectly Controls, is Controlled by or is under common Control with, the specified Person; “Control” means (a) the possession, directly or indirectly, of the power to vote 10% or more of the securities or other equity interests of a Person having ordinary voting power, (b) the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, by contract or otherwise, or (c) being a director, officer, executor, trustee or fiduciary (or their equivalents) of a Person or a Person that controls such Person; and “Person” means a natural person, a corporation, a limited liability company, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or any agency or instrumentality thereof
(e) FRACTIONAL SHARES. No fractional shares or strips representing fractional shares shall be issued upon the exercise of this Warrant. With respect to any fraction of a share called for upon any exercise hereof, the Company shall pay to the Holder an amount in cash equal to such fraction multiplied by the then Fair Market Value of a share of Common Stock.
(f) LOSS OR DESTRUCTION OF WARRANT. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of reasonably satisfactory indemnification, and upon surrender and cancellation of this Warrant, if mutilated, the Company will execute and deliver a new Warrant of like tenor and date. Any such new Warrant executed and delivered shall constitute an additional contractual obligation on the part of the Company, whether or not this Warrant so lost, stolen, destroyed, or mutilated shall be at any time enforceable by anyone.
(g) RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be entitled to any rights of a shareholder in the Company, either at law or equity, and the rights of the Holder are limited to those expressed in this Warrant and are not enforceable against the Company except to the extent set forth herein.
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(h) ANTI-DILUTION PROVISIONS. In case the Company shall hereafter (i) declare a dividend or make a distribution on its outstanding Common Stock in shares of Common Stock, (ii) subdivide or reclassify its outstanding Common Stock into a greater number of shares, (iii) combine or reclassify its outstanding Common Stock into a smaller number of shares, or (iv) issue by reclassification of shares of the Common Stock any shares of capital stock of the Company, then in each case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event, and the number of shares issuable upon exercise of this Warrant shall be proportionately adjusted such that the aggregate Exercise Price of this Warrant shall remain unchanged. Any adjustment made pursuant to this Section (h) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification. Notwithstanding the foregoing, in no event shall the Exercise Price be less than the par value of the Common Stock. Adjustment pursuant to this Section (h) shall be made successively whenever any event listed above shall occur.
(i) NOTICES TO WARRANT HOLDER. So long as this Warrant shall be outstanding, (i) if the Company shall pay any dividend or make any distribution upon the Common Stock or (ii) if the Company shall offer to the holders of Common Stock for subscription or purchase by them any share of any class or any other rights or (iii) if any capital reorganization of the Company, reclassification of the capital stock of the Company, consolidation or merger of the Company with or into another corporation, sale, lease or transfer of all or substantially all of the property and assets of the Company to another corporation, or voluntary or involuntary dissolution, liquidation or winding up of the Company shall be effected, then in any such case, the Company shall cause to be mailed to the Holder, at least twenty days prior to the earlier of the dates specified in (x) and (y) below, as the case may be, a notice containing a brief description of the proposed action and stating the date on which (x) a record is to be taken for the purpose of such dividend, distribution or rights, or (y) such reclassification, reorganization, consolidation, merger, conveyance, lease, dissolution, liquidation or winding up is to take place and the date, if any is to be fixed, as of which the holders of Common Stock or other securities shall receive cash or other property deliverable upon such reclassification, reorganization, consolidation, merger, conveyance, dissolution, liquidation or winding up.
(j) RECLASSIFICATION, REORGANIZATION OR MERGER. In case of any reclassification, capital reorganization or other change of outstanding Common Stock of the Company, or in case of any consolidation or merger of the Company with or into another corporation (other than a merger with a subsidiary in which merger the Company is the continuing corporation or a merger in which the Common Stock of the Company outstanding immediately prior thereto represents immediately thereafter (either by remaining outstanding or by being converted into voting securities of the surviving or acquiring entity) 50% or more of the combined voting power and economic interests in the Company or such surviving or acquiring entity outstanding immediately after such transaction and economic interests in the Company or such surviving or acquiring entity outstanding immediately after such transaction and which does not result in any reclassification, capital reorganization or other change of outstanding Common Stock of the class issuable upon exercise of this Warrant) or in case of any sale, lease or conveyance to another corporation of the property of the Company in the entirety (a “Reorganization”), the Company shall, as a condition precedent to such transaction, cause effective provisions to be made so that the Holder shall have the right thereafter by exercising this Warrant at any time prior to the expiration of the Warrant, to purchase the kind and amount of shares of stock and other securities and property receivable upon such reclassification, capital reorganization and other change, consolidation, merger, sale or conveyance by a holder of the number of shares of Common Stock that might have been purchased upon exercise of this Warrant immediately prior to such Reorganization. Any such provision shall include provision for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Warrant. The foregoing provisions of this Section (j) shall similarly apply to successive reclassifications, capital reorganizations and changes of Common Stock and to successive consolidations, mergers, sales or conveyances. In the event that in connection with any such capital reorganization or reclassification, consolidation, merger, sale or conveyance, additional shares of Common Stock shall be issued in exchange, conversion, substitution or payment, in whole or in part, for a security of the Company other than Common Stock, any such issue shall be treated as an issue of Common Stock covered by the provisions of Section (h) hereof.
(k) NO NET-CASH SETTLEMENT. Except as expressly provided herein, in no event will the Holder be entitled to receive a net-cash settlement or other consideration in lieu of physical settlement in securities.
(l) MODIFICATION OF AGREEMENT. The provisions of this Warrant may from time to time be amended, modified or waived, only by the Company and the Holder, in writing.
(m) TRANSFER OF WARRANT. This Warrant shall inure to the benefit of the successors to and assigns of the Holder; provided, however, this Warrant may not be pledged, sold, assigned or otherwise transferred, directly or indirectly, by operation of law, change of control, or otherwise, except in compliance with applicable registration requirements of securities laws or an available exemption therefrom. This Warrant and all rights hereunder are registrable at the office or agency of the Company referred to below by the Holder in person or by its duly authorized attorney, upon surrender of this Warrant properly endorsed accompanied by an assignment form in a form approved by the Company, duly executed by the transferring Holder and the transferee.
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(n) REGISTER OF WARRANTS. The Company shall maintain, at the principal office of the Company (or such other office as it may designate by notice to the Holder), a register in which the Company shall record the name and address of the person in whose name this Warrant has been issued, as well as the name and address of each successor and prior owner of such Warrant. The Company shall be entitled to treat the Person in whose name this Warrant is so registered as the sole and absolute owner of this Warrant for all purposes.
(o) WARRANT AGENT. The Company may, by written notice to the Holder, appoint the transfer agent and registrar for the Common Stock as the Company’s agent for the purpose of issuing Common Stock (or other securities) on the exercise of this Warrant pursuant to paragraph(a), and the Company may, by written notice to the Holder, appoint an agent having an office in the United States of America for the purpose of replacing this Warrant pursuant to paragraph (e), or any of the foregoing, and thereafter any such replacement shall be made at such office by such agent.
(p) NOTICES, ETC. All notices and other communications from the Company to the Holder shall be mailed by first class certified mail, postage prepaid, to the address below, or at such other address as may have been furnished to the Company in writing by the Holder. Prior to any such notice, notices to the Holder shall be sent to:
[Holder]
Attn: [Name]
[Address]
[City, State Zip]
Ph. [Phone]
Email. [Email]
[Signatures appear on the following page.]
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IN WITNESS WHEREOF, the parties hereto have executed this Warrant on April 14, 2023.
| HOLDER: | ||
| [HOLDER NAME] | ||
| By: | ||
| Name: | [SIGNATORY NAME] | |
| Title: | [SIGNATORY TITLE] | |
| COMPANY: | ||
| Harmony Energy Technologies Corp. | ||
| By: | ||
| Name: | Demin (Fleming) Huang | |
| Title: | Chief Financial Officer | |
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PURCHASE FORM / EXCHANGE NOTICE [circle one]
| (1) | The undersigned hereby irrevocably elects to exercise the within Warrant to the extent of purchasing shares of Common Stock of Harmony Energy Technologies Corp. (or such number of shares of Common Stock or other securities or property to which the undersigned is entitled in lieu thereof or in addition thereto under the provisions of the Warrant). |
| (2) | The undersigned hereby elects to make payment (Please check one): |
| ☐ | on a cashless basis pursuant to the provisions of Section (a)(2) of the Warrant. |
| ☐ | with the enclosed bank draft, certified check or money order payable to the Company in payment of the exercise price determined under, and on the terms specified in, the Warrant. |
| (3) | The undersigned hereby irrevocably directs that the said shares be issued and delivered as follows: |
| Name(s) in Full | Address(es) | Number of Shares | S.S. or IRS # | |||
| (4) | If the Warrant was not exercised in full, please check the following: |
The undersigned hereby irrevocably directs that any remaining portion of the warrant be issued and delivered as follows:
| Name(s) in Full | Address(es) | Number of Shares | S.S. or IRS # | |||
| Signature of Holder | |
| Print Name |
| 7 |
Exhibit 10.1
Warrant Exchange Agreement
by and among
Harmony Energy Technologies Corp
And
XXX
TABLE OF CONTENTS
| PAGE | ||
| Article I. | Definitions and Interpretations | 1 |
| Section 1.01 | Definitions. | 1 |
| Section 1.02 | Interpretive Provisions. | 3 |
| Article II. | The Transactions | 3 |
| Section 2.01 | Exchange. | 3 |
| Section 2.02 | Closing | 4 |
| Section 2.03 | Holder Deliverables at the Closing. | 4 |
| Section 2.04 | Company Deliverables at the Closing. | 5 |
| Section 2.05 | Additional Documents. | 5 |
| Section 2.06 | Taxes. | 5 |
| Article III. | Representations and Warranties of Holder | 5 |
| Section 3.01 | Corporate Existence and Power. | 5 |
| Section 3.02 | Due Authorization. | 5 |
| Section 3.03 | Valid Obligation | 5 |
| Section 3.04 | No Conflict With Other Instruments | 6 |
| Section 3.05 | Governmental Authorization. | 6 |
| Section 3.06 | Right and Title to Warrants. | 6 |
| Section 3.07 | Investment Representations | 6 |
| Section 3.08 | Approval of Agreement | 8 |
| Section 3.09 | No Brokers. | 8 |
| Article IV. | Representations and Warranties of the Company | 8 |
| Section 4.01 | Corporate Existence and Power | 8 |
| Section 4.02 | Due Authorization. | 8 |
| Section 4.03 | Valid Obligation | 8 |
| Section 4.04 | No Conflict With Other Instruments | 8 |
| Section 4.05 | Governmental Authorization. | 9 |
| Section 4.06 | Validity of Shares. | 9 |
| Section 4.07 | Approval of Agreement | 9 |
| Section 4.08 | No Brokers. | 9 |
| Article V. | Additional Covenants of the Parties | 9 |
| Section 5.01 | Third Party Consents and Certificates. | 9 |
| Section 5.02 | Notices of Certain Events. | 9 |
| Article VI. | Conditions to the Closing | 9 |
| Section 6.01 | Conditions to the Obligations of all of the Parties. | 9 |
| Section 6.02 | Conditions to the Obligations of the Company for the Closing. | 10 |
| Section 6.03 | Conditions to the Obligations of Holder for the Closing | 10 |
| Article VII. | Termination; Survival | 10 |
| Section 7.01 | Termination | 10 |
| Section 7.02 | Specific Enforcement. | 11 |
| Section 7.03 | Survival After Termination. | 11 |
| i |
| Article VIII. | Indemnification | 11 |
| Section 8.01 | Indemnification of Company. | 11 |
| Section 8.02 | Indemnification of Holder. | 12 |
| Section 8.03 | Procedure. | 12 |
| Section 8.04 | Periodic Payments. | 13 |
| Section 8.05 | Insurance. | 14 |
| Section 8.06 | Time Limit. | 14 |
| Section 8.07 | Effect of Investigation. | 14 |
| Section 8.08 | Exclusive Remedy. | 14 |
| Article IX. | Miscellaneous | 14 |
| Section 9.01 | Notices | 14 |
| Section 9.02 | Governing Law; Jurisdiction. | 15 |
| Section 9.03 | Waiver of Jury Trial. | 15 |
| Section 9.04 | Arbitration. | 16 |
| Section 9.05 | Limitation on Damages. | 17 |
| Section 9.06 | Attorneys’ Fees | 17 |
| Section 9.07 | Third Party Beneficiaries | 17 |
| Section 9.08 | Expenses | 17 |
| Section 9.09 | Entire Agreement | 17 |
| Section 9.10 | Survival | 17 |
| Section 9.11 | Amendment; Waiver: Remedies | 17 |
| Section 9.12 | Arm’s Length Bargaining; No Presumption Against Drafter. | 18 |
| Section 9.13 | Headings. | 18 |
| Section 9.14 | No Assignment or Delegation. | 18 |
| Section 9.15 | Commercially Reasonable Efforts | 18 |
| Section 9.16 | Further Assurances. | 18 |
| Section 9.17 | Specific Performance. | 18 |
| Section 9.18 | Counterparts | 18 |
Exhibits
| Exhibit A | Warrants |
| Exhibit B | Assignment of Warrants |
| ii |
Warrant Exchange Agreement
Dated as of [__], 2023
This Warrant Exchange Agreement (this “Agreement”) is entered into as of the date first set forth above (the “Effective Date”) by and between (i) Harmony Energy Technologies Corp, a Delaware corporation (the “Company”); and (ii) XXX (“Holder”). Each of the Company and Holder may be referred to herein collectively as the “Parties” and separately as a “Party”.
WHEREAS, Holder holds certain warrants of the Company and, pursuant to the terms and conditions herein, the Parties desire to undertake certain transactions pursuant to which such warrants shall be exchanged for certain shares of stock of the Company;
NOW THEREFORE, on the stated premises and for and in consideration of the mutual covenants and agreements hereinafter set forth and the mutual benefits to the Parties to be derived herefrom, and intending to be legally bound hereby, it is hereby agreed as follows:
Article I. Definitions and Interpretations
Section 1.01 Definitions. In addition to the other terms defined herein, the following terms, as used herein, have the following meanings
| (a) | “Action” means any legal action, suit, claim, investigation, hearing or proceeding, including any audit, claim or assessment for Taxes or otherwise. | |
| (b) | “Affiliate” means, with respect to any Person, any other Person directly or indirectly Controlling, Controlled by, or under common Control with such Person. | |
| (c) | “Business Day” means any day that is not a Saturday, Sunday or other day on which banking institutions in Delaware are authorized or required by law or executive order to close. | |
| (d) | “Common Stock” means the common stock, par value $0.0001 per share, of the Company. | |
| (e) | “Company Board” means the Board of Directors of the Company. | |
| (f) | “Contract” means any contract, lease, deed, mortgage, license, instrument, note, commitment, undertaking, indenture, joint venture and all other agreements, commitments and legally binding arrangements, whether written or oral. | |
| (g) | “Control” of a Person means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by Contract, or otherwise, with “Controlled”, “Controlling” and “under common Control with” have correlative meanings; and provided that, without limiting the foregoing a Person (the “Controlled Person”) shall be deemed Controlled by (a) any other Person (the “10% Owner”) (i) owning beneficially, as meant in Rule 13d-3 under the Exchange Act, securities entitling such Person to cast 10% or more of the votes for election of directors or equivalent governing authority of the Controlled Person or (ii) entitled to be allocated or receive 10% or more of the profits, losses, or distributions of the Controlled Person; (b) an officer, director, general partner, partner (other than a limited partner), manager, or member (other than a member having no management authority that is not a 10% Owner ) of the Controlled Person; or (c) a spouse, parent, lineal descendant, sibling, aunt, uncle, niece, nephew, mother-in-law, father-in-law, sister-in-law, or brother-in-law of an Affiliate of the Controlled Person or a trust for the benefit of an Affiliate of the Controlled Person or of which an Affiliate of the Controlled Person is a trustee. |
| 1 |
| (h) | “Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. | |
| (i) | “Governmental Authority” means any federal, state, local or foreign government or political subdivision thereof, or any agency or instrumentality of such government or political subdivision, or any self-regulated organization or other non-governmental regulatory authority or quasi-governmental authority (to the extent that the rules, regulations or orders of such organization or authority have the force of Law), or any arbitrator, court or tribunal of competent jurisdiction. | |
| (j) | “Law” means any domestic or foreign, federal, state, municipality or local law, statute, ordinance, code, rule, or regulation. | |
| (k) | “Lien” means any security interest, pledge, mortgage, lien, charge, limitation, condition, equitable interest, option, easement, encroachment, right of first refusal, or similar adverse claim or restriction, pledge, charge, security interest or encumbrance of any kind, including any restriction on transfer or other assignment, as security or otherwise, and any conditional sale or voting agreement or proxy, including any agreement to give any of the foregoing of or relating to use, quiet enjoyment, voting, receipt of income or exercise of any other attribute of ownership. | |
| (l) | “Person” means an individual, corporation, partnership (including a general partnership, limited partnership or limited liability partnership), limited liability company, association, trust or other entity or organization, including a government, domestic or foreign, or political subdivision thereof, or an agency or instrumentality thereof. | |
| (m) | “Regulation S” means Regulation S promulgated under the Securities Act. | |
| (n) | “Representative” means, with respect to any Person, any and all directors, officers, employees, consultants, financial advisors, counsel, accountants and other agents of such Person. | |
| (o) | “SEC” means the U.S. Securities and Exchange Commission. | |
| (p) | “Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. | |
| (q) | “Tax(es)” means any federal, state, local or foreign tax, charge, fee, levy, custom, duty, deficiency, or other assessment of any kind or nature imposed by any Taxing Authority (including any income (net or gross), gross receipts, profits, windfall profit, sales, use, goods and services, ad valorem, franchise, license, withholding, employment, social security, workers compensation, unemployment compensation, payroll, transfer, excise, import, real property, personal property, intangible property, occupancy, recording, minimum, alternative minimum, environmental or estimated tax), including any liability therefor as a transferee (including under Section 6901 of the Internal Revenue Code of 1986, as amended, or similar provision of applicable Law) or successor, as a result of Treasury Regulation Section 1.1502-6 or similar provision of applicable Law or as a result of any Tax sharing, indemnification or similar agreement, together with any interest, penalty, additions to tax or additional amount imposed with respect thereto. |
| 2 |
| (r) | “Taxing Authority” means the Internal Revenue Service and any other Governmental Authority responsible for the collection, assessment or imposition of any Tax or the administration of any Law relating to any Tax. | |
| (s) | “Termination Date” means the April 15, 2023. | |
| (t) | “Transaction Documents” means this Agreement, the Assignment and any other certificate, agreement or document entered into or delivered in connection with the transactions as contemplated herein or therein. | |
| (u) | “Transactions” means the transactions contemplated by the Transaction Documents. |
Section 1.02 Interpretive Provisions. Unless the express context otherwise requires (i) the words “hereof,” “herein,” and “hereunder” and words of similar import, when used in this Agreement, shall refer to this Agreement as a whole and not to any particular provision of this Agreement; (ii) terms defined in the singular shall have a comparable meaning when used in the plural, and vice versa; (iii) the terms “Dollars” and “$” mean United States Dollars; (iv) references herein to a specific Section, Subsection, Recital or Exhibit shall refer, respectively, to Sections, Subsections, Recitals or Exhibits of this Agreement; (v) wherever the word “include,” “includes,” or “including” is used in this Agreement, it shall be deemed to be followed by the words “without limitation”; (vi) references herein to any gender shall include each other gender; (vii) references herein to any Person shall include such Person’s heirs, executors, personal Representatives, administrators, successors and assigns; provided, however, that nothing contained herein is intended to authorize any assignment or transfer not otherwise permitted by this Agreement; (viii) references herein to a Person in a particular capacity or capacities shall exclude such Person in any other capacity; (ix) references herein to any Contract or agreement (including this Agreement) mean such Contract or agreement as amended, supplemented or modified from time to time in accordance with the terms thereof; (x) with respect to the determination of any period of time, the word “from” means “from and including” and the words “to” and “until” each means “to but excluding”; (xi) references herein to any Law or any license mean such Law or license as amended, modified, codified, reenacted, supplemented or superseded in whole or in part, and in effect from time to time; and (xii) references herein to any Law shall be deemed also to refer to all rules and regulations promulgated thereunder.
Article II. The Transactions
Section 2.01 Exchange.
| (a) | The Parties acknowledge and agree that, as of the Effective Date, Holder is the holder of a certain warrant or certain warrants of the Company, as applicable, as identified on Exhibit A attached hereto (collectively and as applicable, the “Warrants”). | |
| (b) | On the terms and subject to the conditions set forth in this Agreement, at the Closing (as defined below), Holder, shall sell, assign, transfer and deliver to the Company, free and clear of all Liens, pledges, encumbrances, charges, restrictions or known claims of any kind, nature, or description, all of the Warrants. |
| 3 |
| (c) | At the Closing, all of the Warrants shall be exchanged for a number of shares of Common Stock equal to 10% of the number of shares of Common Stock which the Holder has a right to acquire pursuant to the Warrants, and therefore for YYY shares of Common Stock (the “Shares”). | |
| (d) | Following the Closing, the Warrants shall be deemed automatically terminated and null and void and of no further force or effect. | |
| (e) | The exchange as set forth in this Section 2.01, subject to the other terms and conditions herein, is referred to collectively herein as the “Exchange”. | |
| (f) | The Parties acknowledge and agree that the Company is currently a party to the Agreement and Plan of Merger, dated as of April 13, 2023 by and between (i) the Company; (ii) ZRCN Inc., a California corporation and a wholly owned subsidiary of the Company; and (ii) Zircon Corporation, a California corporation (“Zircon”), pursuant to which Zircon will merged with and into Merger Sub, with Zircon surviving and continuing its operations as a wholly owned subsidiary of the Company (the “Zircon Transactions”). In addition to the other conditions to the Closing as set forth herein, the Parties agree that the Closing hereunder shall occur substantially simultaneously with closing of the Zircon Transactions, and shall be conditioned thereon. | |
| (g) | The Parties intend that the Exchange is being made in reliance upon the exemption from registration provided by Section 3(a)(9) of the Securities Act and the Parties agree not to take any position contrary thereto. |
Section 2.02 Closing. The closing of the Transactions (the “Closing”) shall occur on the second Business Day following the satisfaction or waiver (by the Party for whose benefit the conditions exist) of the conditions to Closing set forth in Section 6.01, Section 6.02 and Section 6.03, or at such other date, time or place as the Parties may agree (the date and time at which the Closing is actually held being the “Closing Date”), via the exchange of electronic documents and other items as required herein, and provided that the Parties acknowledge and agree that the conditions to the Closing as set forth in Section 6.01(a) shall not be subject to the two Business Day prior satisfaction, and will be satisfied, if at all, at the Closing.
Section 2.03 Holder Deliverables at the Closing. At the Closing, Holder shall deliver to the Company the following:
| (a) | The Assignment of Warrants in the form as attached hereto as Exhibit B (the “Assignment”), duly completed and executed by Holder or an authorized officer or manager of Holder if Holder is an entity. | |
| (b) | A certificate of Holder or an authorized officer or manager of Holder if Holder is an entity, dated as of the Closing Date, and: |
| (i) | certifying that the conditions set forth in Section 6.02(a) and Section 6.02(b) have been satisfied and that the statements therein are true and correct; and | |
| (ii) | if Holder is an entity, attaching a certificate of status issued by the Secretary of State of the State of Holder’s organization, dated as of a date within 5 days of the Closing Date. |
| 4 |
Section 2.04 Company Deliverables at the Closing. At the Closing, the Company shall:
| (a) | Issue the Shares to the Holder and record the Holder as the beneficial owner of the Shares in the books and records of the Company, and the Parties agree that the Shares shall not be certificated. | |
| (b) | Deliver to the Holder a certificate of the Secretary of the Company, dated as of the Closing Date, and: |
| (i) | certifying that the conditions set forth in Section 6.03(a) and Section 6.03(b) have been satisfied and that the statements therein are true and correct; and | |
| (ii) | attaching a certificate of status issued by the Delaware Secretary of State for the Company, dated as of a date within 5 days of the Closing Date. |
Section 2.05 Additional Documents. At and following the Closing, the Parties shall execute, acknowledge, and deliver (or shall ensure to be executed, acknowledged, and delivered), any and all certificates, opinions, financial statements, schedules, agreements, resolutions, rulings or other instruments required by this Agreement to be so delivered at or prior to or following the Closing, together with such other items as may be reasonably requested by the Parties and their respective legal counsel in order to effectuate or evidence the Transactions.
Section 2.06 Taxes. Each Party will directly pay any sales, use, value added, transfer, stamp, registration, documentary, excise, real property transfer or gains, or similar Taxes incurred or payable by such Party as a result of the Transactions.
Article III. Representations and Warranties of Holder
As an inducement to, and to obtain the reliance of the Company, Holder represents and warrants to the Company, as of the Effective Date and as of the Closing Date, except as otherwise specifically set forth below as to representations and warranties which speak solely with respect to a particular date as follows:
Section 3.01 Corporate Existence and Power. Holder is a natural person or is an entity duly organized, validly existing, and in good standing under the Laws of the state of its organization, and has the power and is duly authorized under all applicable Laws, regulations, ordinances, and orders of public authorities to carry on its business in all material respects as it is now being conducted. Holder has full power and authority to carry on its businesses as it is now being conducted and as now proposed to be conducted and to own or lease its properties and assets.
Section 3.02 Due Authorization. If Holder is an entity, the execution, delivery and performance of this Agreement does not, and the consummation of the Transactions will not, violate any provision of the Holder organizational or governing documents (the “Organizational Documents”). Holder has taken all actions required by Law, its Organizational Documents (if applicable) or otherwise to authorize the execution, delivery and performance of this Agreement and to consummate the Transactions.
Section 3.03 Valid Obligation. This Agreement and all Transaction Documents executed by Holder in connection herewith constitute the valid and binding obligations of Holder, enforceable in accordance with its or their terms, except as may be limited by bankruptcy, insolvency, moratorium or other similar Laws affecting the enforcement of creditors’ rights generally and subject to the qualification that the availability of equitable remedies is subject to the discretion of the court before which any proceeding therefore may be brought.
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Section 3.04 No Conflict With Other Instruments. The execution of this Agreement by Holder and the consummation of the Transactions by Holder will not result in the breach of any term or provision of, constitute a default under, or terminate, accelerate or modify the terms of, any indenture, mortgage, deed of trust, or other material agreement or instrument to which Holder is a party or to which any of their respective assets, properties or operations are subject.
Section 3.05 Governmental Authorization. Neither the execution, delivery nor performance of this Agreement by the Holder requires any consent, approval, license or other action by or in respect of, or registration, declaration or filing with any Governmental Authority.
Section 3.06 Right and Title to Warrants. Holder legally and beneficially owns the Warrants and no other person or entity has any rights therein or thereto. There are no Liens or other encumbrances of any kind on the Warrants and Holder has the sole right to dispose of the Warrants. There are no outstanding options, warrants or other similar agreements with respect to the Warrants. Upon delivery of the Assignment to the Company, the Company shall acquire good and valid title to such Warrants, free and clear of all Liens.
Section 3.07 Investment Representations.
| (a) | Investment Purpose. Holder understands and agrees that the consummation of the Transactions including the delivery of the Shares to Holder in exchange for the Warrants as contemplated hereby, constitutes the offer and sale of securities under the Securities Act and applicable state statutes and that the Shares are being acquired by Holder are being acquired by Holder for Holder’s own account and not with a present view towards the public sale or distribution thereof, except pursuant to sales registered or exempted from registration under the Securities Act. | |
| (b) | Investor Status. Holder is an ‘accredited investor’ as that term is defined in Rule 501(a) of Regulation D promulgated pursuant to the Securities Act. | |
| (c) | Information. Holder has been furnished with all documents and materials relating to the business, finances and operations of the Company and its subsidiaries and information that Holder requested and deemed material to making an informed decision regarding the acquisition of the Shares, this Agreement and the underlying transactions. | |
| (d) | Reliance on Exemptions. Holder understands that the Shares are being offered and sold to Holder in reliance upon specific exemptions from the registration requirements of United States federal and state securities Laws and that the Company is relying upon the truth and accuracy of, and Holder’s compliance with, the representations, warranties, agreements, acknowledgments and understandings of Holder set forth herein in order to determine the availability of such exemptions and the eligibility of Holder to acquire the Shares. | |
| (e) | Information. Holder and Holder’s advisors, if any, have been furnished with all materials relating to the business, finances and operations of the Company and materials relating to the offer and sale of the Shares which have been requested by Holder or Holder’s advisors. Holder and Holder’s advisors, if any, have been afforded the opportunity to ask questions of the Company. Holder understands that the investment in the Shares involves a significant degree of risk. Holder is not aware of any facts that may constitute a breach of any of the Company’s representations and warranties made herein. Holder has received and has reviewed the SEC Reports. |
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| (f) | Governmental Review. Holder understands that no United States federal or state agency or any other government or governmental agency has passed upon or made any recommendation or endorsement of the Shares. | |
| (g) | Transfer or Resale. Holder understands that (i) the sale or re-sale of the Shares has not been and is not being registered under the Securities Act or any applicable state securities Laws, and the Shares may not be transferred unless (a) the Shares are sold pursuant to an effective registration statement under the Securities Act, (b) Holder shall have delivered to the Company, at the cost of Holder, an opinion of counsel that shall be in form, substance and scope customary for opinions of counsel in comparable transactions to the effect that the Shares to be sold or transferred may be sold or transferred pursuant to an exemption from such registration, which opinion shall be accepted by the Company, (c) the Shares are sold or transferred to an “affiliate” (as defined in Rule 144 promulgated under the Securities Act (or a successor rule) (“Rule 144”)) of Holder who agree to sell or otherwise transfer the Shares only in accordance with this Section 3.07 and who is an accredited investor (as defined in the Securities Act), (d) the Shares are sold pursuant to Rule 144, or (e) the Shares are sold pursuant to Regulation S and Holder shall have delivered to the Company, at the cost of Holder, an opinion of counsel that shall be in form, substance and scope customary for opinions of counsel in corporate transactions, which opinion shall be accepted by the Company; (ii) any sale of such Shares made in reliance on Rule 144 may be made only in accordance with the terms of said Rule and further, if said Rule is not applicable, any re-sale of such Shares under circumstances in which the seller (or the person through whom the sale is made) may be deemed to be an underwriter (as that term is defined in the Securities Act) may require compliance with some other exemption under the Securities Act or the rules and regulations of the SEC thereunder; and (iii) neither the Company nor any other person is under any obligation to register such Shares under the Securities Act or any state securities Laws or to comply with the terms and conditions of any exemption thereunder (in each case). Notwithstanding the foregoing or anything else contained herein to the contrary, the Shares may be pledged as collateral in connection with a bona fide margin account or other lending arrangement. | |
| (h) | Legends. Holder understands that the Shares, until such time as the Shares have been registered under the Securities Act, or may be sold pursuant to Rule 144 or Regulation S without any restriction as to the number of securities as of a particular date that can then be immediately sold, may bear a standard Rule 144 legend and a stop-transfer order may be placed against transfer of the certificates for such Shares. | |
| (i) | Removal. The legend(s) referenced in Section 3.07(h) shall be removed and the Company shall issue a certificate without such legend to the Holder of any Shares upon which it is stamped, if, unless otherwise required by applicable state securities Laws, (a) the Shares are registered for sale under an effective registration statement filed under the Securities Act or otherwise may be sold pursuant to Rule 144 or Regulation S without any restriction as to the number of securities as of a particular date that can then be immediately sold, or (b) such Holder provides the Company with an opinion of counsel, in form, substance and scope customary for opinions of counsel in comparable transactions, to the effect that a public sale or transfer of such Shares may be made without registration under the Securities Act, which opinion shall be accepted by the Company so that the sale or transfer is effected. Holder agrees to sell all Shares, including those represented by a certificate(s) from which the legend has been removed, in compliance with applicable prospectus delivery requirements, if any. |
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Section 3.08 Approval of Agreement. If Holder is an entity, the Board of Directors, managers, or other governing body or persons of Holder have authorized the execution and delivery of this Agreement by Holder and have approved this Agreement and the Transactions.
Section 3.09 No Brokers. Holder has not retained any broker or finder in connection with any of the Transactions, and Holder has not incurred or agreed to pay, or taken any other action that would entitle any Person to receive, any brokerage fee, finder’s fee or other similar fee or commission with respect to any of the Transactions.
Article IV. Representations and Warranties of the Company
As an inducement to, and to obtain the reliance of Holder, the Company represents and warrants to Holder as of the Effective Date and as of the Closing Date except as otherwise specifically set forth below as to representations and warranties which speak solely with respect to a particular date, and other than as set forth in the reports and filings made by the Company with the SEC pursuant to the Securities Act or the Exchange Act (the “SEC Reports”), as follows:
Section 4.01 Corporate Existence and Power. The Company is a corporation duly organized, validly existing, and in good standing under the Laws of the State of Delaware and has the corporate power and is duly authorized under all applicable Laws, regulations, ordinances, and orders of public authorities to carry on its business in all material respects as it is now being conducted. The SEC Reports contain copies of the articles of incorporation and bylaws of the Company as in effect on the Effective Date (the “Company Organizational Documents”). The execution and delivery of this Agreement does not, and the consummation of the Transactions will not, violate any provision of the Company Organizational Documents. The Company has taken all action required by Law, the Company Organizational Documents, or otherwise to authorize the execution and delivery of this Agreement, and the Company has full power, authority, and legal right and has taken all action required by Law, the Company Organizational Documents or otherwise to consummate the Transactions.
Section 4.02 Due Authorization. The execution, delivery and performance of this Agreement does not, and the consummation of the Transactions will not, violate any provision of the Company Organizational Documents. The Company has taken all actions required by Law, the Company Organizational Documents or otherwise to authorize the execution, delivery and performance of this Agreement and to consummate the Transactions.
Section 4.03 Valid Obligation. This Agreement and all agreements and other documents executed by the Company in connection herewith constitute the valid and binding obligations of the Company, enforceable in accordance with its or their terms, except as may be limited by bankruptcy, insolvency, moratorium or other similar Laws affecting the enforcement of creditors’ rights generally and subject to the qualification that the availability of equitable remedies is subject to the discretion of the court before which any proceeding therefor may be brought.
Section 4.04 No Conflict With Other Instruments. The execution of this Agreement by the Company and the consummation of the Transactions by the Company will not result in the breach of any term or provision of, constitute a default under, or terminate, accelerate or modify the terms of, any indenture, mortgage, deed of trust, or other material agreement or instrument to which the Company is a party or to which any of its assets, properties or operations are subject.
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Section 4.05 Governmental Authorization. Neither the execution, delivery nor performance of this Agreement by the Company requires any consent, approval, license or other action by or in respect of, or registration, declaration or filing with any Governmental Authority.
Section 4.06 Validity of Shares. The Shares to be delivered at the Closing shall be duly and validly issued, fully paid and non-assessable and free and clear of any Liens other than those imposed by applicable Laws or the Company Organizational Documents.
Section 4.07 Approval of Agreement. The Company Board has authorized the execution and delivery of this Agreement by the Company and has approved this Agreement and the Transactions.
Section 4.08 No Brokers. The Company has not retained any broker or finder in connection with any of the Transactions, and the Company has not incurred or agreed to pay, or taken any other action that would entitle any Person to receive, any brokerage fee, finder’s fee or other similar fee or commission with respect to any of the Transactions.
Article V. Additional Covenants of the Parties
Section 5.01 Third Party Consents and Certificates. The Company and Holder agree to cooperate with each other in order to obtain any consents to this Agreement and the Transactions.
Section 5.02 Notices of Certain Events. In addition to any other notice required to be given by the terms of this Agreement, each of the Parties shall promptly notify each of the other Parties of:
| (a) | any notice or other communication from any Person alleging that the consent of such Person is or may be required in connection with any of the Transactions; | |
| (b) | any notice or other communication from any governmental or regulatory agency or authority in connection with the Transactions; and | |
| (c) | any actions, suits, claims, investigations or proceedings commenced or, to its knowledge threatened against, relating to or involving or otherwise affecting such Party that, if pending on the date of this Agreement, would have been required to have been disclosed pursuant hereto or that relates to the consummation of the Transactions. |
Article VI. Conditions to the Closing
Section 6.01 Conditions to the Obligations of all of the Parties. The obligations of all of the Parties to consummate the Closing are subject to the satisfaction, or waiver by each of the Parties, at or before the Closing Date, of all the following conditions:
| (a) | The Zircon Transactions shall be closing substantially simultaneously as the Closing hereunder. | |
| (b) | No provisions of any applicable Law, and no decree, order, judgment, writ, award, injunction, rule,, stay, or restraining order or consent of or by an Governmental Authority shall prohibit or impose any condition or prohibition on the consummation of the Closing. |
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| (c) | There shall not be any Action brought by a third-party non-Affiliate to enjoin or otherwise restrict the consummation of the Closing. | |
| (d) | The Parties shall have received all necessary approvals from all required Governmental Authorities to consummate the Transactions. | |
| (e) | The Company Board shall have approved this Agreement and the Transactions and shall not have withdrawn such approval. |
Section 6.02 Conditions to the Obligations of the Company for the Closing. The obligations of the Company to consummate the Closing are subject to the satisfaction (or waiver by the Company), at or before the Closing Date, of the following conditions:
| (a) | The representations and warranties made by Holder in this Agreement shall have been true and correct when made and shall be true and correct in all material respects (other than representations and warranties which are qualified as to materiality and the representations and warranties in Section 3.06 and Section 3.07, which shall each be true and correct in all respects) at the Closing Date with the same force and effect as if such representations and warranties were made at and as of the Closing Date, except for changes therein permitted by this Agreement; and | |
| (b) | Holder shall have performed or complied with all covenants and conditions required by this Agreement to be performed or complied with by Holder prior to or at the Closing. |
Section 6.03 Conditions to the Obligations of Holder for the Closing. The obligations of Holder to consummate the Closing are subject to the satisfaction (or waiver by Holder, at or before the Closing Date, of the following conditions:
| (a) | The representations and warranties made by the Company in this Agreement shall have been true and correct when made and shall be true and correct in all material respects at the Closing Date with the same force and effect as if such representations and warranties were made at and as of the Closing Date, except for changes therein permitted by this Agreement; and | |
| (b) | The Company shall have performed or complied with all covenants and conditions required by this Agreement to be performed or complied with by the Company prior to or at the Closing. |
Article VII. Termination; Survival
Section 7.01 Termination. This Agreement may be terminated at any time prior to the Closing:
| (a) | By the mutual written consent of the Company and Holder; | |
| (b) | By the Company (i) if the conditions to the Closing as set forth in Section 6.01 and Section 6.02 have not been satisfied or waived by the Company, which waiver the Company may give or withhold in its sole discretion, by the Termination Date, provided, however, that the Company may not terminate this Agreement pursuant to this clause (i) of this Section 7.01(b) if the reason for the failure of any such condition to occur was the breach of the terms of this Agreement by the Company; or (ii) if there has been a material violation, breach or inaccuracy of any representation, warranty, covenant or agreement of the Holder contained in this Agreement, which violation, breach or inaccuracy would cause any of the conditions set forth in Section 6.02 not to be satisfied, and such violation, breach or inaccuracy has not been waived by the Company or cured by Holder, applicable, within five (5) Business Days after receipt by Holder of written notice thereof from the Company or is not reasonably capable of being cured prior to the Termination Date; |
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| (c) | By Holder (i) if the conditions to Closing as set forth in Section 6.01 and Section 6.03 have not been satisfied or waived by Holder, which waiver Holder may give or withhold in its sole discretion, by the Termination Date, provided, however, that Holder may not terminate this Agreement pursuant to this clause (i) of this Section 7.01(c) if the reason for the failure of any such condition to occur was the breach of the terms of this Agreement by Holder; or (ii) if there has been a material violation, breach or inaccuracy of any representation, warranty, covenant or agreement of the Company contained in this Agreement, which violation, breach or inaccuracy would cause any of the conditions set forth in Section 6.03 not to be satisfied, and such violation, breach or inaccuracy has not been waived by Holder or cured by the Company, applicable, within five (5) Business Days after receipt by the Company of written notice thereof from Holder or is not reasonably capable of being cured prior to the Termination Date; or | |
| (d) | By any Party, if a court of competent jurisdiction or other Governmental Authority shall have issued an order or taken any other action permanently restraining, enjoining or otherwise prohibiting the Transactions and such order or action shall have become final and nonappealable. |
Section 7.02 Specific Enforcement. Notwithstanding the foregoing, the Parties acknowledge and agree that (i) if the Company has a right to terminate this Agreement pursuant to the provisions of clause (ii) of Section 7.01(b), the Company may elect not to terminate this Agreement and may instead seek to specifically enforce this Agreement pursuant to the provisions of Section 9.17; and (ii) if Holder has a right to terminate this Agreement pursuant to the provisions of clause (ii) of Section 7.01(c), Holder may elect not to terminate this Agreement and may instead seek to specifically enforce this Agreement pursuant to the provisions of Section 9.17.
Section 7.03 Survival After Termination. If this Agreement is terminated in accordance with Section 7.01, this Agreement shall become void and of no further force and effect with no liability to any Person on the part of any Party hereto (or any officer, agent, employee, direct or indirect holder of any equity interest or securities, or Affiliates of any Party); provided, however, that this Section 7.03 and Article IX shall survive the termination of this Agreement and nothing herein shall relieve any Party from any liability for fraud or any breach of the provisions of this Agreement occurring prior to the termination of this Agreement.
Article VIII. Indemnification
Section 8.01 Indemnification of Company. Provided that the Closing occurs, Holder hereby agrees to indemnify and hold harmless to the fullest extent permitted by applicable law the Company, each of its Affiliates and each of its and their respective members, managers, partners, directors, officers, employees, shareholders, attorneys, agents and permitted assignees (each a “Company Indemnified Party”), against and in respect of any and all out-of-pocket loss, cost, payments, demand, penalty, forfeiture, expense, liability, judgment, deficiency or damage, and diminution in value or claim (including actual costs of investigation and attorneys’ fees and other costs and expenses) (all of the foregoing collectively, “Losses” and each individually a “Loss”) incurred or sustained by any Company Indemnified Party as a result of or in connection with any breach, inaccuracy or nonfulfillment or the alleged breach, inaccuracy or nonfulfillment of any of the representations, warranties, covenants and agreements of Holder contained herein or in any of the additional agreements or any certificate or other writing delivered pursuant hereto.
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Section 8.02 Indemnification of Holder. Provided that the Closing occurs, the Company hereby agrees to indemnify and hold harmless to the fullest extent permitted by applicable law Holder and each of its officers, directors, employees, shareholders, attorneys, agents and permitted assignees (each a “Holder Indemnified Party”), against and in respect of any and all Losses incurred or sustained by any Holder Indemnified Party as a result of or in connection with any breach, inaccuracy or nonfulfillment or the alleged breach, inaccuracy or nonfulfillment of any of the representations, warranties, covenants and agreements of the Company contained herein or in any of the additional agreements or any certificate or other writing delivered pursuant hereto.
Section 8.03 Procedure. The following shall apply with respect to all claims by any Holder Indemnified Party or Company Indemnified Party for indemnification with respect to actions by third-parties (with any references herein to an “Indemnified Party” being a reference to a Holder Indemnified Party or a Company Indemnified Party, as applicable, and any references herein to an “Indemnifying Party” being a reference to the Company or Holder, as applicable):
| (a) | Third-Party Claims. If any Indemnified Party receives notice of the assertion or commencement of any Action made or brought by any Person who is not a party to this Agreement or an Affiliate of a party to this Agreement or a Representative of the foregoing (a “Third-Party Claim”) against such Indemnified Party with respect to which the Indemnifying Party is obligated to provide indemnification under this Agreement, the Indemnified Party shall give the Indemnifying Party reasonably prompt written notice thereof, but in any event not later than thirty (30) calendar days after receipt of such notice of such Third-Party Claim. The failure to give such prompt written notice shall not, however, relieve the Indemnifying Party of its indemnification obligations, except and only to the extent that the Indemnifying Party forfeits rights or defenses by reason of such failure. Such notice by the Indemnified Party shall describe the Third-Party Claim in reasonable detail, shall include copies of all material written evidence thereof and shall indicate the estimated amount, if reasonably practicable, of the Loss that has been or may be sustained by the Indemnified Party. The Indemnifying Party shall have the right to participate in, or by giving written notice to the Indemnified Party, to assume the defense of any Third-Party Claim at the Indemnifying Party’s expense and by the Indemnifying Party’s own counsel, and the Indemnified Party shall cooperate in good faith in such defense. In the event that the Indemnifying Party assumes the defense of any Third-Party Claim, subject to Section 8.03(b), it shall have the right to take such action as it deems necessary to avoid, dispute, defend, appeal or make counterclaims pertaining to any such Third-Party Claim in the name and on behalf of the Indemnified Party. The Indemnified Party shall have the right to participate in the defense of any Third-Party Claim with counsel selected by it subject to the Indemnifying Party’s right to control the defense thereof, provided that the fees and disbursements of such counsel shall be at the expense of the Indemnified Party. |
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| (b) | Settlement of Third-Party Claims. Notwithstanding any other provision of this Agreement, the Indemnifying Party shall not enter into settlement of any Third-Party Claim without the prior written consent of the Indemnified Party, except as provided in this Section 8.03(b). If a firm offer is made to settle a Third-Party Claim without leading to liability or the creation of a financial or other obligation on the part of the Indemnified Party and provides, in customary form, for the unconditional release of each Indemnified Party from all liabilities and obligations in connection with such Third-Party Claim and the Indemnifying Party desires to accept and agree to such offer, the Indemnifying Party shall give written notice to that effect to the Indemnified Party. If the Indemnified Party consents to such firm offer the Indemnifying Party may settle the Third-Party Claim upon the terms set forth in such firm offer to settle such Third-Party Claim. If the Indemnified Party objects to such offer, or does not provide a response to such firm offer within ten days after its receipt of such notice (in which case the Indemnified Party shall be deemed to not have consented to such offer), the Indemnified Party shall thereafter assume the defense of such Third-Party Claim and shall continue to contest or defend such Third-Party Claim and in such event the maximum liability of the Indemnifying Party as to such Third-Party Claim shall not exceed the amount of such settlement offer. If the Indemnified Party has assumed the defense pursuant to this Section 8.03(b), the Indemnified Party shall not agree to any settlement without the written consent of the Indemnifying Party (which consent shall not be unreasonably withheld or delayed). | |
| (c) | Direct Claims. Any Action by an Indemnified Party on account of a Loss which does not result from a Third-Party Claim (a “Direct Claim”) shall be asserted by the Indemnified Party giving the Indemnifying Party reasonably prompt written notice thereof, but in any event not later than thirty (30) calendar days after the Indemnified Party becomes aware of such Direct Claim. The failure to give such prompt written notice shall not, however, relieve the Indemnifying Party of its indemnification obligations, except and only to the extent that the Indemnifying Party forfeits rights or defenses by reason of such failure. Such notice by the Indemnified Party shall describe the Direct Claim in reasonable detail, shall include copies of all material written evidence thereof and shall indicate the estimated amount, if reasonably practicable, of the Loss that has been or may be sustained by the Indemnified Party. The Indemnifying Party shall have thirty (30) calendar days after its receipt of such notice to respond in writing to such Direct Claim. The Indemnified Party shall allow the Indemnifying Party and its professional advisors to investigate the matter or circumstance alleged to give rise to the Direct Claim, and whether and to what extent any amount is payable in respect of the Direct Claim and the Indemnified Party shall assist the Indemnifying Party’s investigation by giving such information and assistance as the Indemnifying Party or any of its professional advisors may reasonably request. If the Indemnifying Party does not so respond within such thirty (30) calendar day period, the Indemnifying Party shall be deemed to have accepted liability for such claim, in which case the Indemnified Party shall be free to pursue such remedies as may be available to the Indemnified Party on the terms and subject to the provisions of this Agreement. | |
| (d) | Cooperation. Upon a reasonable request made by the Indemnifying Party, each Indemnified Party seeking indemnification hereunder in respect of any Direct Claim, hereby agrees to consult with the Indemnifying Party and act reasonably to take actions reasonably requested by the Indemnifying Party in order to attempt to reduce the amount of Losses in respect of such Direct Claim. Any costs or expenses associated with taking such actions shall be included as Losses hereunder. |
Section 8.04 Periodic Payments. Any indemnification required by this Article VIII for costs, disbursements or expenses of any Indemnified Party in connection with investigating, preparing to defend or defending any Action shall be made by periodic payments by the Indemnifying Party to each Indemnified Party during the course of the investigation or defense, as and when bills are received or costs, disbursements or expenses are incurred.
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Section 8.05 Insurance. Any indemnification payments hereunder shall take into account any insurance proceeds or other third-party reimbursement actually received.
Section 8.06 Time Limit. The obligations of Holder and the Company under Section 8.01 and Section 8.02 respectively shall expire two (2) years from the Closing Date, except with respect to (i) an indemnification claim asserted in accordance with the provisions of this Article VIII which remains unresolved, for which the obligation to indemnify shall continue until such claim is resolved; and (ii) resolved claims for which payment has not yet been paid to the Indemnified Party.
Section 8.07 Effect of Investigation. The representations, warranties and covenants of the Indemnifying Party, and any Indemnified Party’s right to indemnification with respect thereto, shall not be affected or deemed waived by reason of any investigation made by or on behalf of the any Indemnified Party or by reason of the fact that such Indemnified Party knew or should have known that any such representation or warranty is, was or might be inaccurate.
Section 8.08 Exclusive Remedy. In the event that the Closing occurs, the indemnification provisions contained in this Article VIII shall be the sole and exclusive remedy of the Parties with respect to the Transactions for any and all breaches or alleged breaches of any representations, warranties, covenants or agreements of the Parties hereto or any other provision of this Agreement or arising out of the Transactions, except (i) with respect to any equitable remedy to which such Party may be entitled to with respect to any claims or causes of action arising from the breach of any covenants or agreement of a Party that is to be performed subsequent to the Closing Date, or (ii) with respect to a Party, an actual and intentional fraud with respect to this Agreement and the Transactions. In furtherance of the foregoing, each Party hereto, for itself and on behalf of its Affiliates, hereby waives, from and after the Closing, to the fullest extent permitted under applicable law and except as otherwise specified in this Article VIII, any and all rights, claims and causes of action it may have against any other Party hereto relating to the subject matter of this Agreement or any other agreement, certificate or other document or instrument delivered pursuant to this Agreement, arising under or based upon any applicable law.
Article IX. Miscellaneous
Section 9.01 Notices.
| (a) | Any notice or other communications required or permitted hereunder shall be in writing and shall be sufficiently given if personally delivered to it or sent by email, overnight courier or registered mail or certified mail, postage prepaid, addressed as follows: |
If to the Company, to:
Harmony Energy Technologies Corp
Attention: Demin (Fleming) Huang
165 Broadway, Floor 23
New York, NY 10006
Email: fleming.huang@hetcusa.com
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If to Holder, to the address as set forth on the signature page hereof.
| (b) | Any Party may change its address for notices hereunder upon notice to each other Party in the manner for giving notices hereunder. | |
| (c) | Any notice hereunder shall be deemed to have been given (i) upon receipt, if personally delivered, (ii) on the day after dispatch, if sent by overnight courier, (iii) upon dispatch, if transmitted by email with return receipt requested and received and (iv) three (3) days after mailing, if sent by registered or certified mail. |
Section 9.02 Governing Law; Jurisdiction. This Agreement, and any and all claims, proceedings or causes of action relating to this Agreement or arising from this Agreement or the transactions contemplated herein, including, without limitation, tort claims, statutory claims and contract claims, shall be interpreted, construed, governed and enforced under and solely in accordance with the substantive and procedural laws of the State of Delaware, in each case as in effect from time to time and as the same may be amended from time to time, and as applied to agreements performed wholly within the State of Delaware. Subject to the provisions of Section 9.04, each of the Parties (a) irrevocably consents and agrees that any legal or equitable action or proceedings arising under or in connection with this Agreement shall be brought exclusively in the state or federal courts of the United States with jurisdiction in New York City, New York. By execution and delivery of this Agreement, each Party hereto irrevocably submits to and accepts, with respect to any such action or proceeding, generally and unconditionally, the jurisdiction of the aforesaid courts, and irrevocably waives any and all rights such Party may now or hereafter have to object to such jurisdiction.
Section 9.03 Waiver of Jury Trial.
| (a) | EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREIN (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS Section 9.03(a). | |
| (b) | Each of the Parties acknowledge that each has been represented in connection with the signing of this waiver by independent legal counsel selected by the respective Party and that such Party has discussed the legal consequences and import of this waiver with legal counsel. Each of the Parties further acknowledges that each has read and understands the meaning of this waiver and grants this waiver knowingly, voluntarily, without duress and only after consideration of the consequences of this waiver with legal counsel. |
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Section 9.04 Arbitration.
| (a) | The Parties shall promptly submit any dispute, claim, or controversy arising out of or relating to this Agreement (including with respect to the meaning, effect, validity, termination, interpretation, performance, or enforcement of this Agreement) or any alleged breach thereof (including any action in tort, contract, equity, or otherwise), to binding arbitration before one arbitrator (the “Arbitrator”). Binding arbitration shall be the sole means of resolving any dispute, claim, or controversy arising out of or relating to this Agreement (including with respect to the meaning, effect, validity, termination, interpretation, performance or enforcement of this Agreement) or any alleged breach thereof (including any claim in tort, contract, equity, or otherwise). | |
| (b) | If the Parties cannot agree upon the Arbitrator within ten (10) Business Days of the commencement of the efforts to so agree on an Arbitrator, each of the Company and Holder shall select one arbitrator and the two arbitrators so selected shall select the sole Arbitrator who shall hear and resolve the dispute. | |
| (c) | The laws of the State of Delaware shall apply to any arbitration hereunder. In any arbitration hereunder, this Agreement and any agreement contemplated hereby shall be governed by the laws of the State of Delaware applicable to a contract negotiated, signed, and wholly to be performed in the State of Delaware, which laws the Arbitrator shall apply in rendering his decision. The Arbitrator shall issue a written decision, setting forth findings of fact and conclusions of law, within sixty (60) days after he shall have been selected. The Arbitrator shall have no authority to award punitive or other exemplary damages. | |
| (d) | The arbitration shall be held in New York City, New York in accordance with and under the then-current provisions of the rules of the American Arbitration Association, except as otherwise provided herein. | |
| (e) | On application to the Arbitrator, any Party shall have rights to discovery to the same extent as would be provided under the Federal Rules of Civil Procedure, and the Federal Rules of Evidence shall apply to any arbitration under this Agreement; provided, however, that the Arbitrator shall limit any discovery or evidence such that his decision shall be rendered within the period referred to in Section 9.04(b). | |
| (f) | The Arbitrator may, at his discretion and at the expense of the Party who will bear the cost of the arbitration, employ experts to assist him in his determinations. | |
| (g) | The costs of the arbitration proceeding and any proceeding in court to confirm any arbitration award or to obtain relief, as applicable (including actual attorneys’ fees and costs), shall be borne by the unsuccessful Party and shall be awarded as part of the Arbitrator’s decision, unless the Arbitrator shall otherwise allocate such costs in such decision. The determination of the Arbitrator shall be final and binding upon the Parties and not subject to appeal. | |
| (h) | Any judgment upon any award rendered by the Arbitrator may be entered in and enforced by any court of competent jurisdiction. The Parties expressly consent to the non-exclusive jurisdiction of the courts (Federal and state) located in New York City, New York to enforce any award of the Arbitrator or to render any provisional, temporary, or injunctive relief in connection with or in aid of the Arbitration. The Parties expressly consent to the personal and subject matter jurisdiction of the Arbitrator to arbitrate any and all matters to be submitted to arbitration hereunder. None of the Parties hereto shall challenge any arbitration hereunder on the grounds that any party necessary to such arbitration (including the Parties) shall have been absent from such arbitration for any reason, including that such Party shall have been the subject of any bankruptcy, reorganization, or insolvency proceeding. |
| 16 |
Section 9.05 Limitation on Damages. In no event will any Party be liable to any other Party under or in connection with this Agreement or in connection with the Transactions for special, general, indirect or consequential damages, including damages for lost profits or lost opportunity, even if the Party sought to be held liable has been advised of the possibility of such damage.
Section 9.06 Attorneys’ Fees. In the event that any Party institutes any action or suit to enforce this Agreement or to secure relief from any default hereunder or breach hereof, the prevailing Party shall be reimbursed by the losing Party for all costs, including reasonable attorneys’ fees, incurred in connection therewith and in enforcing or collecting any judgment rendered therein.
Section 9.07 Third Party Beneficiaries. This Agreement is strictly between the Parties, and except as specifically provided herein, no other Person and no director, officer, shareholder, member, employee, agent, independent contractor or any other Person shall be deemed to be a third-party beneficiary of this Agreement.
Section 9.08 Expenses. Subject to Article VIII and Section 9.06, whether or not the Exchange is consummated and other than as specifically set forth herein, each of the Parties will bear their own respective expenses, including legal, accounting and professional fees, incurred in connection with the Exchange or any of the other Transactions.
Section 9.09 Entire Agreement. This Agreement and the other agreements and documents references herein represent the entire agreement between the Parties relating to the subject matter thereof and supersede all prior agreements, understandings and negotiations, written or oral, with respect to such subject matter, provided that the Parties acknowledge and agree that the Company and Holder have entered into that certain Mutual Non-Disclosure Agreement, dated June 9, 2022, which shall remain in full force and effect in accordance with its terms.
Section 9.10 Survival. The representations and warranties of the respective Parties herein shall survive the Closing Date and the consummation of the Transactions for a period of two years. The covenants and other agreements of the respective Parties herein shall survive the Closing until fully performed, or for the maximum period permitted by applicable Laws, whichever is less.
Section 9.11 Amendment; Waiver: Remedies.
| (a) | This Agreement may be amended, modified, superseded, terminated or cancelled, and any of the terms, covenants, representations, warranties or conditions hereof may be waived, only by a written instrument executed by both of the Parties. | |
| (b) | Every right and remedy provided herein shall be cumulative with every other right and remedy, whether conferred herein, at law, or in equity, and may be enforced concurrently herewith, and no waiver by any Party of the performance of any obligation by the other shall be construed as a waiver of the same or any other default then, theretofore, or thereafter occurring or existing. | |
| (c) | Neither any failure or delay in exercising any right or remedy hereunder or in requiring satisfaction of any condition herein nor any course of dealing shall constitute a waiver of or prevent any Party from enforcing any right or remedy or from requiring satisfaction of any condition. No notice to or demand on a Party waives or otherwise affects any obligation of that Party or impairs any right of the Party giving such notice or making such demand, including any right to take any action without notice or demand not otherwise required by this Agreement. No exercise of any right or remedy with respect to a breach of this Agreement shall preclude exercise of any other right or remedy, as appropriate to make the aggrieved Party whole with respect to such breach, or subsequent exercise of any right or remedy with respect to any other breach. |
| 17 |
Section 9.12 Arm’s Length Bargaining; No Presumption Against Drafter. This Agreement has been negotiated at arm’s-length by parties of equal bargaining strength, each represented by counsel or having had but declined the opportunity to be represented by counsel and having participated in the drafting of this Agreement. This Agreement creates no fiduciary or other special relationship between the Parties, and no such relationship otherwise exists. No presumption in favor of or against any Party in the construction or interpretation of this Agreement or any provision hereof shall be made based upon which Person might have drafted this Agreement or such provision.
Section 9.13 Headings. The headings contained in this Agreement are intended solely for convenience and shall not affect the rights of the Parties.
Section 9.14 No Assignment or Delegation. This Agreement shall be binding upon and shall inure to the benefit of the Parties and their respective successors and permitted assigns. No Party shall have any power or any right to assign or transfer, in whole or in part, this Agreement, or any of its rights or any of its obligations hereunder, including, without limitation, any right to pursue any claim for damages pursuant to this Agreement or the transactions contemplated herein, or to pursue any claim for any breach or default of this Agreement, or any right arising from the purported assignor’s due performance of its obligations hereunder, without the prior written consent of the other Parties and any such purported assignment in contravention of the provisions herein shall be null and void and of no force or effect.
Section 9.15 Commercially Reasonable Efforts. Subject to the terms and conditions herein provided, each Party shall use their respective commercially reasonable efforts to perform or fulfill all conditions and obligations to be performed or fulfilled by it under this Agreement so that the Transactions shall be consummated as soon as practicable, and to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable under applicable Laws and regulations to consummate and make effective this Agreement and the Transactions.
Section 9.16 Further Assurances. From and after the Effective Date, each Party shall execute and deliver such documents and take such action, as may reasonably be considered within the scope of such Party’s obligations hereunder, necessary to effectuate the Transactions.
Section 9.17 Specific Performance. The Parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed by them in accordance with the terms hereof or were otherwise breached and that each Party hereto shall be entitled to an injunction or injunctions, specific performance and other equitable relief to prevent breaches of the provisions hereof and to enforce specifically the terms and provisions hereof, without the proof of actual damages, in addition to any other remedy to which they are entitled at law or in equity. Each Party agrees to waive any requirement for the security or posting of any bond in connection with any such equitable remedy, and agrees that it will not oppose the granting of an injunction, specific performance or other equitable relief on the basis that (a) the other Party has an adequate remedy at law, or (b) an award of specific performance is not an appropriate remedy for any reason at law or equity.
Section 9.18 Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original and all of which taken together shall be but a single instrument. Counterparts may be delivered via facsimile, electronic mail (including pdf or any electronic signature complying with the U.S. federal ESIGN Act of 2000, e.g., www.docusign.com) or other transmission method and any counterpart so delivered shall be deemed to have been duly and validly delivered and be valid and effective for all purposes.
[Signatures Appear on Following Pages]
| 18 |
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the Effective Date.
| Harmony Energy Technologies Corp | ||
| By: | ||
| Name: | Demin (Fleming) Huang | |
| Title: | Chief Financial Officer | |
| Holder: XXX | ||
| By: | ||
| Name: | XXX | |
| Address for notices: | ||
| XXX | ||
| Email: | ||
| 19 |
Exhibit A
Warrants
| Series No. | Name | Issue Date | Expiry Date | Strike Price | Warrant Shares | |||||||||
| 2021-2-1 | Adrien Pichette | 2021/07/08 | 2024-07-07 | $ | 0.250000 | 150,000 | ||||||||
| 2021-2-4 | Alain Guilbaud | 2021/07/08 | 2024-07-07 | $ | 0.250000 | 100,000 | ||||||||
| 2020-1 | Christian Guilbaud | 2020/12/28 | 2023-12-27 | $ | 0.250000 | 225,000 | ||||||||
| 2021-2-3 | Christian Guilbaud | 2021/07/08 | 2024-07-07 | $ | 0.250000 | 80,000 | ||||||||
| 2021-3-5 | Christian Guilbaud | 2021/09/27 | 2023-09-26 | $ | 0.250000 | 750,000 | ||||||||
| 2022-1-1 | Christian Guilbaud | 2022/09/16 | 2024-09-15 | $ | 0.250000 | 150,000 | ||||||||
| 2021-3-4 | Daniel Asselin | 2021/09/27 | 2023-09-26 | $ | 0.250000 | 60,000 | ||||||||
| 2021-3-7 | Dongqing Liu | 2021/09/27 | 2023-09-26 | $ | 0.250000 | 131,880 | ||||||||
| 2020-1 | Hugo Gagne | 2020/12/28 | 2023-12-27 | $ | 0.250000 | 225,000 | ||||||||
| 2021-2-5 | Hugo Gagne | 2021/07/08 | 2024-07-07 | $ | 0.250000 | 500,000 | ||||||||
| 2022-1-2 | Hugo Gagne | 2022/09/16 | 2024-09-15 | $ | 0.250000 | 325,000 | ||||||||
| 2021-2-6 | Julie Dufresne | 2021/07/08 | 2024-07-07 | $ | 0.250000 | 20,000 | ||||||||
| 2021-3-6 | Kenneth Grainger | 2021/09/27 | 2023-09-26 | $ | 0.250000 | 40,000 | ||||||||
| 2020-1 | Malcolm Finlay | 2020/12/28 | 2023-12-27 | $ | 0.250000 | 10,000 | ||||||||
| 2020-1 | Mohand Yahiaoui | 2020/12/28 | 2023-12-27 | $ | 0.250000 | 225,000 | ||||||||
| 2021-1 | Nansen Li | 2021/02/05 | 2024-02-04 | $ | 0.250000 | 60,000 | ||||||||
| 2020-1 | Nick Zeng | 2020/12/28 | 2023-12-27 | $ | 0.250000 | 275,000 | ||||||||
| 2021-1 | Nick Zeng | 2021/02/05 | 2024-02-04 | $ | 0.250000 | 80,000 | ||||||||
| 2021-2-2 | Patrick Guilbeault | 2021/07/08 | 2024-07-07 | $ | 0.250000 | 150,000 | ||||||||
| 2020-1 | Samuel Guilbaud | 2020/12/28 | 2023-12-27 | $ | 0.250000 | 40,000 | ||||||||
| 2021-3-1 | Wei Zhang | 2021/09/27 | 2023-09-26 | $ | 0.250000 | 1,000,000 | ||||||||
| 2021-3-3 | Xiaojing Tian | 2021/09/27 | 2023-09-26 | $ | 0.250000 | 300,000 | ||||||||
| 2021-3-2 | Yi Li | 2021/09/27 | 2023-09-26 | $ | 0.250000 | 100,000 | ||||||||
| 2021-1 | Zhongke Sheng | 2021/02/05 | 2024-02-04 | $ | 0.250000 | 60,000 | ||||||||
| Total: | 5,056,880 | |||||||||||||
| 20 |
Exhibit B
Assignment of Warrants
Dated as of [______________], 2023
Assignor: XXX
This Assignment of Warrants (“Assignment”) dated as of the date set forth above, is entered into by and between the person or entity named above (“Assignor”), and Harmony Energy Technologies Corp, a Delaware corporation (“Assignee”). This Assignment is entered into pursuant to the Warrant Exchange Agreement by and between Assignor and Assignee, dated as of [__], 2023 (the “Exchange Agreement”). Defined terms used herein without definition shall have the meanings as set forth in the Exchange Agreement.
Assignor, for and in consideration of the sum of Ten and No/100 Dollars ($10.00) and other good and valuable consideration received from or on behalf of the Assignee at or before the ensealing and delivery of these presents, the receipt and sufficiency whereof is hereby acknowledged, hereby assigns, transfers and sets over unto the Assignee all its right, title and interest in and to the warrants held by Assignor as attached to the Exchange Agreement as Exhibit A (the “Warrants”).
Assignor, in connection with its assignment of the Warrants, does hereby represent and warrant to, covenant and agree with, the Assignee that immediately prior to this Agreement:
1. Assignor has good and unencumbered right title and interest in the Warrants, as well as lawful authority to execute this Assignment;
2. All representations, warranties and covenants of Assignor herein and under the Exchange Agreement are true and correct, and are made as an inducement of and to Assignee to accept this Assignment and Assignor’s liability as to said representations and warranties shall survive the delivery of this Assignment; and
3. This Assignment may be executed in any number of counterparts, each of which shall be deemed an original, and all of which taken together shall constitute one and the same instrument. Facsimile signatures hereupon shall be deemed their originals for all purposes.
TO HAVE AND TO HOLD the same unto the Assignee, its legal representatives, successors, heirs and assigns forever.
[Remainder of page intentionally left blank. Signature page follows.]
| 21 |
IN WITNESS WHEREOF, the Assignor has caused this Assignment to be executed on the day and year first above written.
| Holder: XXX | ||
| By: | ||
| Name: | XXX | |
| STATE OF | ||
| COUNTY OF |
Sworn to and subscribed before me this ____ day of _______________, 2023, by XXX, who is personally known to me or who has produced ________________________ as identification.
Notary’s Signature: ________________________________
Print Notary’s Name: ________________________________
NOTARY PUBLIC, State of _________________________
My commission expires:
| 22 |
Exhibit 10.2
Debt Settlement and Release Agreement
by and among
Harmony Energy Technologies Corp
And
[__________________]
TABLE OF CONTENTS
| PAGE | ||
| Article I. | Definitions and Interpretations | 1 |
| Section 1.01 | Definitions. | 1 |
| Section 1.02 | Interpretive Provisions. | 3 |
| Article II. | The Transactions | 3 |
| Section 2.01 | Settlement. | 3 |
| Section 2.02 | Closing | 3 |
| Section 2.03 | Creditor Deliverables at the Closing. | 4 |
| Section 2.04 | Company Actions and Deliverables at the Closing. | 4 |
| Section 2.05 | Additional Documents. | 4 |
| Section 2.06 | Taxes. | 4 |
| Article III. | Representations and Warranties of Creditor | 4 |
| Section 3.01 | Corporate Existence and Power. | 4 |
| Section 3.02 | Due Authorization. | 5 |
| Section 3.03 | Valid Obligation | 5 |
| Section 3.04 | No Conflict With Other Instruments | 5 |
| Section 3.05 | Governmental Authorization. | 5 |
| Section 3.06 | Right and Title to Debt and Instruments. | 5 |
| Section 3.07 | Approval of Agreement | 5 |
| Section 3.08 | No Brokers. | 5 |
| Article IV. | Representations and Warranties of the Company | 5 |
| Section 4.01 | Corporate Existence and Power | 6 |
| Section 4.02 | Due Authorization. | 6 |
| Section 4.03 | Valid Obligation | 6 |
| Section 4.04 | No Conflict With Other Instruments | 6 |
| Section 4.05 | Governmental Authorization. | 6 |
| Section 4.06 | Approval of Agreement | 6 |
| Section 4.07 | No Brokers. | 6 |
| Article V. | Additional Covenants of the Parties | 6 |
| Section 5.01 | Third Party Consents and Certificates. | 6 |
| Section 5.02 | Notices of Certain Events. | 7 |
| Section 5.03 | Release of Claims at the Closing. | 7 |
| Article VI. | Conditions to the Closing | 8 |
| Section 6.01 | Conditions to the Obligations of all of the Parties. | 8 |
| Section 6.02 | Conditions to the Obligations of the Company for the Closing. | 9 |
| Section 6.03 | Condition to the Obligations of Creditor for the Closing | 9 |
| Article VII. | Termination; Survival | 9 |
| Section 7.01 | Termination | 9 |
| Section 7.02 | Specific Enforcement. | 10 |
| Section 7.03 | Survival After Termination. | 10 |
| Article VIII. | Indemnification | 11 |
| Section 8.01 | Indemnification of Company. | 11 |
| Section 8.02 | Indemnification of Creditor. | 11 |
| i |
| Section 8.03 | Procedure. | 11 |
| Section 8.04 | Periodic Payments. | 13 |
| Section 8.05 | Insurance. | 13 |
| Section 8.06 | Time Limit. | 13 |
| Section 8.07 | Effect of Investigation. | 13 |
| Section 8.08 | Exclusive Remedy. | 13 |
| Article IX. | Miscellaneous | 13 |
| Section 9.01 | Notices | 13 |
| Section 9.02 | Governing Law; Jurisdiction. | 14 |
| Section 9.03 | Waiver of Jury Trial. | 14 |
| Section 9.04 | Arbitration. | 15 |
| Section 9.05 | Limitation on Damages. | 16 |
| Section 9.06 | Attorneys’ Fees | 16 |
| Section 9.07 | Third Party Beneficiaries | 16 |
| Section 9.08 | Expenses | 16 |
| Section 9.09 | Entire Agreement | 16 |
| Section 9.10 | Survival | 16 |
| Section 9.11 | Amendment; Waiver; Remedies. | 16 |
| Section 9.12 | Arm’s Length Bargaining; No Presumption Against Drafter. | 17 |
| Section 9.13 | Headings. | 17 |
| Section 9.14 | No Assignment or Delegation. | 17 |
| Section 9.15 | Commercially Reasonable Efforts | 17 |
| Section 9.16 | Further Assurances. | 17 |
| Section 9.17 | Specific Performance. | 17 |
| Section 9.18 | Counterparts | 17 |
Exhibit
| Exhibit A | Debt; Instruments; Payment Amount; Wire Instructions |
| ii |
Debt Settlement and Release Agreement
Dated as of [_______], 2023
This Debt Settlement and Release Agreement (this “Agreement”) is entered into as of the date first set forth above (the “Effective Date”) by and between (i) Harmony Energy Technologies Corp, a Delaware corporation (the “Company”); and (ii) [____________________], a [_______________] (“Creditor”). Each of the Company and Creditor may be referred to herein collectively as the “Parties” and separately as a “Party”.
WHEREAS, the Company is indebted to Creditor for certain amounts and, pursuant to the terms and conditions herein, the Parties desire to undertake certain transactions pursuant to which such debts shall be settled as set forth herein;
NOW THEREFORE, on the stated premises and for and in consideration of the mutual covenants and agreements hereinafter set forth and the mutual benefits to the Parties to be derived herefrom, and intending to be legally bound hereby, it is hereby agreed as follows:
Article I. Definitions and Interpretations
Section 1.01 Definitions. In addition to the other terms defined herein, the following terms, as used herein, have the following meanings
| (a) | “Action” means any legal action, suit, claim, investigation, hearing or proceeding, including any audit, claim or assessment for Taxes or otherwise. |
| (b) | “Affiliate” means, with respect to any Person, any other Person directly or indirectly Controlling, Controlled by, or under common Control with such Person. |
| (c) | “Business Day” means any day that is not a Saturday, Sunday or other day on which banking institutions in Delaware are authorized or required by law or executive order to close. |
| (d) | “Common Stock” means the common stock, par value $0.0001 per share, of the Company. |
| (e) | “Company Board” means the Board of Directors of the Company. |
| (f) | “Contract” means any contract, lease, deed, mortgage, license, instrument, note, commitment, undertaking, indenture, joint venture and all other agreements, commitments and legally binding arrangements, whether written or oral. |
| (g) | “Control” of a Person means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by Contract, or otherwise, with “Controlled”, “Controlling” and “under common Control with” have correlative meanings; and provided that, without limiting the foregoing a Person (the “Controlled Person”) shall be deemed Controlled by (a) any other Person (the “10% Owner”) (i) owning beneficially, as meant in Rule 13d-3 under the Exchange Act, securities entitling such Person to cast 10% or more of the votes for election of directors or equivalent governing authority of the Controlled Person or (ii) entitled to be allocated or receive 10% or more of the profits, losses, or distributions of the Controlled Person; (b) an officer, director, general partner, partner (other than a limited partner), manager, or member (other than a member having no management authority that is not a 10% Owner ) of the Controlled Person; or (c) a spouse, parent, lineal descendant, sibling, aunt, uncle, niece, nephew, mother-in-law, father-in-law, sister-in-law, or brother-in-law of an Affiliate of the Controlled Person or a trust for the benefit of an Affiliate of the Controlled Person or of which an Affiliate of the Controlled Person is a trustee. |
| 1 |
| (h) | “Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. |
| (i) | “Governmental Authority” means any federal, state, local or foreign government or political subdivision thereof, or any agency or instrumentality of such government or political subdivision, or any self-regulated organization or other non-governmental regulatory authority or quasi-governmental authority (to the extent that the rules, regulations or orders of such organization or authority have the force of Law), or any arbitrator, court or tribunal of competent jurisdiction. |
| (j) | “Law” means any domestic or foreign, federal, state, municipality or local law, statute, ordinance, code, rule, or regulation. |
| (k) | “Lien” means any security interest, pledge, mortgage, lien, charge, limitation, condition, equitable interest, option, easement, encroachment, right of first refusal, or similar adverse claim or restriction, pledge, charge, security interest or encumbrance of any kind, including any restriction on transfer or other assignment, as security or otherwise, and any conditional sale or voting agreement or proxy, including any agreement to give any of the foregoing of or relating to use, quiet enjoyment, voting, receipt of income or exercise of any other attribute of ownership. |
| (l) | “Person” means an individual, corporation, partnership (including a general partnership, limited partnership or limited liability partnership), limited liability company, association, trust or other entity or organization, including a government, domestic or foreign, or political subdivision thereof, or an agency or instrumentality thereof. |
| (m) | “Representative” means, with respect to any Person, any and all directors, officers, employees, consultants, financial advisors, counsel, accountants and other agents of such Person. |
| (n) | “Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. |
| (o) | “Tax(es)” means any federal, state, local or foreign tax, charge, fee, levy, custom, duty, deficiency, or other assessment of any kind or nature imposed by any Taxing Authority (including any income (net or gross), gross receipts, profits, windfall profit, sales, use, goods and services, ad valorem, franchise, license, withholding, employment, social security, workers compensation, unemployment compensation, payroll, transfer, excise, import, real property, personal property, intangible property, occupancy, recording, minimum, alternative minimum, environmental or estimated tax), including any liability therefor as a transferee (including under Section 6901 of the Internal Revenue Code of 1986, as amended, or similar provision of applicable Law) or successor, as a result of Treasury Regulation Section 1.1502-6 or similar provision of applicable Law or as a result of any Tax sharing, indemnification or similar agreement, together with any interest, penalty, additions to tax or additional amount imposed with respect thereto. |
| 2 |
| (p) | “Taxing Authority” means the Internal Revenue Service and any other Governmental Authority responsible for the collection, assessment or imposition of any Tax or the administration of any Law relating to any Tax. |
| (q) | “Termination Date” means the April 13, 2023. |
| (r) | “Transaction Documents” means this Agreement, and any other certificate, agreement or document entered into or delivered in connection with the transactions as contemplated herein or therein. |
| (s) | “Transactions” means the transactions contemplated by the Transaction Documents. |
Section 1.02 Interpretive Provisions. Unless the express context otherwise requires (i) the words “hereof,” “herein,” and “hereunder” and words of similar import, when used in this Agreement, shall refer to this Agreement as a whole and not to any particular provision of this Agreement; (ii) terms defined in the singular shall have a comparable meaning when used in the plural, and vice versa; (iii) the terms “Dollars” and “$” mean United States Dollars; (iv) references herein to a specific Section, Subsection, Recital or Exhibit shall refer, respectively, to Sections, Subsections, Recitals or Exhibits of this Agreement; (v) wherever the word “include,” “includes,” or “including” is used in this Agreement, it shall be deemed to be followed by the words “without limitation”; (vi) references herein to any gender shall include each other gender; (vii) references herein to any Person shall include such Person’s heirs, executors, personal Representatives, administrators, successors and assigns; provided, however, that nothing contained herein is intended to authorize any assignment or transfer not otherwise permitted by this Agreement; (viii) references herein to a Person in a particular capacity or capacities shall exclude such Person in any other capacity; (ix) references herein to any Contract or agreement (including this Agreement) mean such Contract or agreement as amended, supplemented or modified from time to time in accordance with the terms thereof; (x) with respect to the determination of any period of time, the word “from” means “from and including” and the words “to” and “until” each means “to but excluding”; (xi) references herein to any Law or any license mean such Law or license as amended, modified, codified, reenacted, supplemented or superseded in whole or in part, and in effect from time to time; and (xii) references herein to any Law shall be deemed also to refer to all rules and regulations promulgated thereunder.
Article II. The Transactions
Section 2.01 Settlement.
| (a) | The Parties acknowledge and agree that, as of the Effective Date, the Company is indebted to Creditor in the amount as set forth on Exhibit A (the “Debt”), which is owed pursuant to the notes, agreements or other instruments as set forth on Exhibit A, if any (as applicable, the “Instruments”). |
| (b) | On the terms and subject to the conditions set forth in this Agreement, in full and complete satisfaction of the Debt and the obligations of the Company pursuant to the Instruments, the Company shall pay to Creditor the sum as set forth on Exhibit A (the “Settlement Payment”), as follows: |
| (i) | 25% of the Settlement Payment shall be paid at the Closing (as defined below); |
| (ii) | 18.75% of the Settlement Payment shall be paid on the last Business Day of the first full calendar quarter commencing after the Closing Date (as defined below); |
| (iii) | 18.75% of the Settlement Payment shall be paid on the last Business Day of the second full calendar quarter commencing after the Closing Date (as defined below); |
| (iv) | 18.75% of the Settlement Payment shall be paid on the last Business Day of the third full calendar quarter commencing after the Closing Date (as defined below); and |
| (v) | 18.75% of the Settlement Payment shall be paid on the last Business Day of the fourth full calendar quarter commencing after the Closing Date (as defined below). |
| (c) | Notwithstanding the foregoing, the Parties acknowledge and agree that the Company may pre-pay any part of or all of the Settlement Payment in advance of the dates as required in Section 2.01(b). |
| (d) | Effective as of the Closing, the Debt shall be deemed paid in full, provided that the obligations of the Company to make the Settlement Payment as set forth herein shall survive, and all of the Instruments, if any, shall be deemed terminated and shall be null and void and of no force or effect. Effective as of the Closing, the Holder hereby irrevocably waive any and all breaches, damages, claims or events of default under each and every of the Instruments, which are hereby waived in their entirety. |
| (e) | The Parties acknowledge and agree that the Company is currently a party to the Agreement and Plan of Merger, dated as of April 13, 2023 by and between (i) the Company; (ii) ZRCN Inc., a California corporation and a wholly owned subsidiary of the Company; and (ii) Zircon Corporation, a California corporation (“Zircon”), pursuant to which Zircon will merged with and into Merger Sub, with Zircon surviving and continuing its operations as a wholly owned subsidiary of the Company (the “Zircon Transactions”). In addition to the other conditions to the Closing as set forth herein, the Parties agree that the Closing hereunder shall occur substantially simultaneously with closing of the Zircon Transactions, and shall be conditioned thereon. |
Section 2.02 Closing. The closing of the Transactions (the “Closing”) shall occur on the second Business Day following the satisfaction or waiver (by the Party for whose benefit the conditions exist) of the conditions to Closing set forth in Section 6.01, Section 6.02 and Section 6.03, or at such other date, time or place as the Parties may agree (the date and time at which the Closing is actually held being the “Closing Date”), via the exchange of electronic documents and other items as required herein, and provided that the Parties acknowledge and agree that the condition to the Closing as set forth in Section 6.01(a) shall not be subject to the two Business Day prior satisfaction, and will be satisfied, if at all, at the Closing.
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Section 2.03 Creditor Deliverables at the Closing. At the Closing, Creditor shall deliver to the Company a certificate of Holder or an authorized officer or manager of Holder if Holder is an entity, dated as of the Closing Date, and:
| (a) | certifying that the conditions set forth in Section 6.02(a) and Section 6.02(b) have been satisfied and that the statements therein are true and correct; |
| (b) | if Creditor is an entity, attaching a certificate of status issued by the Secretary of State of the State of Creditor’s organization, dated as of a date within 5 days of the Closing Date; and |
| (c) | A copy of Creditor’s signed W-9 or similar instrument if a foreign person or entity. |
Section 2.04 Company Actions and Deliverables at the Closing. At the Closing, the Company shall:
| (a) | Pay to Creditor the initial portion of the Settlement Payment as set forth in Section 2.01(b)(i) to the Creditor pursuant to the wire instructions as set forth on Exhibit A. |
| (b) | Deliver to the Creditor a certificate of the Secretary of the Company, dated as of the Closing Date, and: |
| (i) | certifying that the conditions set forth in Section 6.03(a) and Section 6.03(b) have been satisfied and that the statements therein are true and correct; and |
| (ii) | attaching a certificate of status issued by the Delaware Secretary of State for the Company, dated as of a date within 5 days of the Closing Date. |
Section 2.05 Additional Documents. At and following the Closing, the Parties shall execute, acknowledge, and deliver (or shall ensure to be executed, acknowledged, and delivered), any and all certificates, opinions, financial statements, schedules, agreements, resolutions, rulings or other instruments required by this Agreement to be so delivered at or prior to or following the Closing, together with such other items as may be reasonably requested by the Parties and their respective legal counsel in order to effectuate or evidence the Transactions.
Section 2.06 Taxes. Each Party will directly pay any sales, use, value added, transfer, stamp, registration, documentary, excise, real property transfer or gains, or similar Taxes incurred or payable by such Party as a result of the Transactions.
Article III. Representations and Warranties of Creditor
As an inducement to, and to obtain the reliance of the Company, Creditor represents and warrants to the Company, as of the Effective Date and as of the Closing Date, except as otherwise specifically set forth below as to representations and warranties which speak solely with respect to a particular date as follows:
Section 3.01 Corporate Existence and Power. Creditor is a natural person or is an entity duly organized, validly existing, and in good standing under the Laws of the state of its organization, and has the power and is duly authorized under all applicable Laws, regulations, ordinances, and orders of public authorities to carry on its business in all material respects as it is now being conducted. Creditor has full power and authority to carry on its businesses as it is now being conducted and as now proposed to be conducted and to own or lease its properties and assets.
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Section 3.02 Due Authorization. If Creditor is an entity, the execution, delivery and performance of this Agreement does not, and the consummation of the Transactions will not, violate any provision of the Creditor organizational or governing documents (the “Organizational Documents”). Creditor has taken all actions required by Law, its Organizational Documents (if applicable) or otherwise to authorize the execution, delivery and performance of this Agreement and to consummate the Transactions.
Section 3.03 Valid Obligation. This Agreement and all Transaction Documents executed by Creditor in connection herewith constitute the valid and binding obligations of Creditor, enforceable in accordance with its or their terms, except as may be limited by bankruptcy, insolvency, moratorium or other similar Laws affecting the enforcement of creditors’ rights generally and subject to the qualification that the availability of equitable remedies is subject to the discretion of the court before which any proceeding therefore may be brought.
Section 3.04 No Conflict With Other Instruments. The execution of this Agreement by Creditor and the consummation of the Transactions by Creditor will not result in the breach of any term or provision of, constitute a default under, or terminate, accelerate or modify the terms of, any indenture, mortgage, deed of trust, or other material agreement or instrument to which Creditor is a party or to which any of their respective assets, properties or operations are subject.
Section 3.05 Governmental Authorization. Neither the execution, delivery nor performance of this Agreement by the Creditor requires any consent, approval, license or other action by or in respect of, or registration, declaration or filing with any Governmental Authority.
Section 3.06 Right and Title to Debt and Instruments. Creditor legally and beneficially owns the Debt and no other person or entity has any rights therein or thereto. There are no Liens or other encumbrances of any kind on the Debt and Creditor has the sole right to settle the Debt as set forth herein. There are no outstanding options, warrants or other similar agreements with respect to the Debt.
Section 3.07 Approval of Agreement. If Creditor is an entity, the Board of Directors, managers, or other governing body or persons of Creditor have authorized the execution and delivery of this Agreement by Creditor and have approved this Agreement and the Transactions.
Section 3.08 No Brokers. Creditor has not retained any broker or finder in connection with any of the Transactions, and Creditor has not incurred or agreed to pay, or taken any other action that would entitle any Person to receive, any brokerage fee, finder’s fee or other similar fee or commission with respect to any of the Transactions.
Article IV. Representations and Warranties of the Company
As an inducement to, and to obtain the reliance of Creditor, the Company represents and warrants to Creditor as of the Effective Date and as of the Closing Date except as otherwise specifically set forth below as to representations and warranties which speak solely with respect to a particular date, and other than as set forth in the reports and filings made by the Company with the U.S. Securities and Exchange Commission pursuant to the Securities Act of 1933 as amended, or the Exchange Act (the “SEC Reports”), as follows:
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Section 4.01 Corporate Existence and Power. The Company is a corporation duly organized, validly existing, and in good standing under the Laws of the State of Delaware and has the corporate power and is duly authorized under all applicable Laws, regulations, ordinances, and orders of public authorities to carry on its business in all material respects as it is now being conducted. The SEC Reports contain copies of the articles of incorporation and bylaws of the Company as in effect on the Effective Date (the “Company Organizational Documents”). The execution and delivery of this Agreement does not, and the consummation of the Transactions will not, violate any provision of the Company Organizational Documents. The Company has taken all action required by Law, the Company Organizational Documents, or otherwise to authorize the execution and delivery of this Agreement, and the Company has full power, authority, and legal right and has taken all action required by Law, the Company Organizational Documents or otherwise to consummate the Transactions.
Section 4.02 Due Authorization. The execution, delivery and performance of this Agreement does not, and the consummation of the Transactions will not, violate any provision of the Company Organizational Documents. The Company has taken all actions required by Law, the Company Organizational Documents or otherwise to authorize the execution, delivery and performance of this Agreement and to consummate the Transactions.
Section 4.03 Valid Obligation. This Agreement and all agreements and other documents executed by the Company in connection herewith constitute the valid and binding obligations of the Company, enforceable in accordance with its or their terms, except as may be limited by bankruptcy, insolvency, moratorium or other similar Laws affecting the enforcement of creditors’ rights generally and subject to the qualification that the availability of equitable remedies is subject to the discretion of the court before which any proceeding therefore may be brought.
Section 4.04 No Conflict With Other Instruments. The execution of this Agreement by the Company and the consummation of the Transactions by the Company will not result in the breach of any term or provision of, constitute a default under, or terminate, accelerate or modify the terms of, any indenture, mortgage, deed of trust, or other material agreement or instrument to which the Company is a party or to which any of its assets, properties or operations are subject.
Section 4.05 Governmental Authorization. Neither the execution, delivery nor performance of this Agreement by the Company requires any consent, approval, license or other action by or in respect of, or registration, declaration or filing with any Governmental Authority.
Section 4.06 Approval of Agreement. The Company Board has authorized the execution and delivery of this Agreement by the Company and has approved this Agreement and the Transactions.
Section 4.07 No Brokers. The Company has not retained any broker or finder in connection with any of the Transactions, and the Company has not incurred or agreed to pay, or taken any other action that would entitle any Person to receive, any brokerage fee, finder’s fee or other similar fee or commission with respect to any of the Transactions.
Article V. Additional Covenants of the Parties
Section 5.01 Third Party Consents and Certificates. The Company and Creditor agree to cooperate with each other in order to obtain any required third party consents to this Agreement and the Transactions.
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Section 5.02 Notices of Certain Events. In addition to any other notice required to be given by the terms of this Agreement, each of the Parties shall promptly notify each of the other Parties of:
| (a) | any notice or other communication from any Person alleging that the consent of such Person is or may be required in connection with any of the Transactions; |
| (b) | any notice or other communication from any governmental or regulatory agency or authority in connection with the Transactions; and |
| (c) | any actions, suits, claims, investigations or proceedings commenced or, to its knowledge threatened against, relating to or involving or otherwise affecting such Party that, if pending on the date of this Agreement, would have been required to have been disclosed pursuant hereto or that relates to the consummation of the Transactions. |
Section 5.03 Release of Claims at the Closing.
| (a) | Effective as of the Closing Date and conditioned on the occurrence of the Closing, conditioned thereon, the Company, for itself and its Affiliates, and for each of their respective predecessors, successors, assigns, heirs, representatives, officers, directors, managers and agents and for all related parties, and all persons acting by, through, under or in concert with any of them in both their official and personal capacities (collectively, the “Company Parties”) hereby irrevocably, unconditionally and forever release, discharge and remise Creditor and its Affiliates, and each of their respective predecessors, successors, assigns, heirs, representatives, officers, directors, shareholders, managers, members, partners, and agents and for all related parties and all persons acting by, through, under or in concert with any of them in both their official and personal capacities (collectively, the “Creditor Parties”), from all claims of any type and all manner of action and actions, cause and causes of action, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, wrongs, liabilities, obligations, liens, expenses, costs, interest, fines, fees, charges, penalties, undertakings, warranties, remedies, promises, sums of money, damages (including past, present and future damages as well as direct, indirect, consequential, liquidated, unliquidated and punitive damages), judgments, executions, claims and demands whatsoever, in law or in equity, whether known or unknown, discoverable or undiscoverable, concealed or obvious, foreseen or unforeseen, choate or inchoate, disputed or undisputed, whether absolute or contingent, direct or indirect, matured or unmatured, suspected to exist or not suspected to exist, anticipated or unanticipated, whether contractual, quasi-contractual, extra-contractual or in tort, in law or in equity that any of the Company Parties may have now or may have in the future, against any of the Creditor Parties to the extent that those claims arose, may have arisen, or are based on events which occurred at any point in the past up to and including the Closing Date, including, without limitation, any such matters related to or arising out of the Debt or the Instruments or the transactions contemplated therein, but excluding any claims arising out of or pertaining to the enforcement of this Agreement (collectively, the “Company Released Claims”). The Company represents and warrant that no Company Released Claim released herein has been assigned, expressly, impliedly, or by operation of law, and that all Company Released Claims released herein are owned by the Company, which has the respective sole authority to release them. The Company agrees that the Company shall forever refrain and forebear from commencing, instituting or prosecuting any lawsuit action or proceeding, judicial, administrative or otherwise collect or enforce any Company Released Claim, which is released and discharged herein. |
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| (b) | Effective as of the Effective Date, the Creditor, for itself and all other Creditor Parties, and each of their respective predecessors, successors, assigns, heirs, representatives, officers, directors, managers and agents and for all related parties, and all persons acting by, through, under or in concert with any of them in their official and personal capacities hereby irrevocably, unconditionally and forever releases, discharges and remises each and all of the Company Parties from all claims of any type and all manner of action and actions, cause and causes of action, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, wrongs, liabilities, obligations, liens, expenses, costs, interest, fines, fees, charges, penalties, undertakings, warranties, remedies, promises, sums of money, damages (including past, present and future damages as well as direct, indirect, consequential, liquidated, unliquidated and punitive damages), judgments, executions, claims and demands whatsoever, in law or in equity, whether known or unknown, discoverable or undiscoverable, concealed or obvious, foreseen or unforeseen, choate or inchoate, disputed or undisputed, whether absolute or contingent, direct or indirect, matured or unmatured, suspected to exist or not suspected to exist, anticipated or unanticipated, whether contractual, quasi-contractual, extra-contractual or in tort, in law or in equity that any of the Creditor Parties may have now or may have in the future, against any of the Company Parties to the extent that those claims arose, may have arisen, or are based on events which occurred at any point in the past up to and including the Closing Date, including, without limitation, any such matters related to or arising out of the Debt or the Instruments or the transactions contemplated therein, but excluding any claims arising out of or pertaining to the enforcement of this Agreement (collectively, the “Creditor Released Claims”). Creditor represents and warrants that no Creditor Released Claim released herein has been assigned, expressly, impliedly, or by operation of law, and that all Creditor Released Claims released herein are owned collectively by Creditor, who has the sole authority to release them. Creditor agrees that it shall forever refrain and forebear from commencing, instituting or prosecuting any lawsuit action or proceeding, judicial, administrative or otherwise collect or enforce any Creditor Released Claim which is released and discharged herein. |
| (c) | Covenant Not to File a Claim and Indemnification. |
| (i) | The Company agrees, as of the Closing Date and conditioned on the occurrence of the Closing, not to file for itself or on behalf of any of the other Company Parties, and agrees not to be a party to or assist in, any suit, claim, charge, complaint, action, or cause of action against any of the Creditor Parties related to the Company Released Claims, and further agrees to indemnify and save harmless such Creditor Parties from and against any and all losses, including, without limitation, the cost of defense and legal fees, occurring as a result of any claims, charges, complaints, actions, or causes of action made or brought by any of the Company Parties against any of the Creditor Parties in violation of the terms and conditions of this Agreement. In the event that any of the Company Parties brings a suit, or is a party to any suit or assists in any suit, against any of the Creditor Parties in violation of this covenant, the Company agrees to pay any and all costs of the Creditor Parties, including attorneys’ fees, incurred by such Creditor Parties in challenging such action. Each of the Creditor Parties is an intended third-party beneficiary of this Agreement. |
| (ii) | Creditor agrees, as of the Closing Date and conditioned on the occurrence of the Closing, not to file for itself or on behalf of any of the other Creditor Parties, and agrees not to be a party to or assist in, any suit, claim, charge, complaint, action, or cause of action against any of the Company Parties related to the Creditor Released Claims, and further agrees to indemnify and save harmless such the Company Parties from and against any and all losses, including, without limitation, the cost of defense and legal fees, occurring as a result of any claims, charges, complaints, actions, or causes of action made or brought by any of the Creditor Parties against any of the Company Parties in violation of the terms and conditions of this Agreement. In the event that any of the Creditor Parties brings a suit, or is a party to any suit or assists in any suit, against any of the Company Parties in violation of this covenant, Creditor agrees to pay any and all costs of the Company Parties, including attorneys’ fees, incurred by such the Company Parties in challenging such action. Each of the Company Parties is an intended third-party beneficiary of this Agreement. |
| (d) | Compromise. This is a compromise and settlement of potential or actual disputed claims and is made solely for the purpose of avoiding the uncertainty, expense, and inconvenience of future litigation. Neither this Agreement nor the furnishing of any consideration concurrently with the execution hereof shall be deemed or construed at any time or for any purpose as an admission by any Party of any liability or obligation of any kind. Any such liability or wrongdoing is expressly denied. The Parties acknowledge that this Agreement was reached after good faith settlement negotiations and after each Party had an opportunity to consult legal counsel. This Agreement extends to, and is for the benefit of, the Parties, their respective successors, assigns and agents and anyone claiming by, through or under the Parties. |
| (e) | Waiver of California Civil Code Section 1542. To the extent that the laws of the State of California may apply hereto for any reason (provided that the Parties acknowledge and agree that this Agreement is intended to be governed by the laws of the State of Delaware, without application of the conflicts of laws provisions thereof), each of the Parties hereby waives any and all rights which it may have with respect to this Agreement or the subject matter hereof, under the provisions of Section 1542 of the Civil Code of the State of California as now worded and as hereafter amended, which section provides that: “A general release does not extend to claims that the creditor or releasing party does not know or suspect to exist in his or her favor at the time of executing the release and that, if known by him or her, would have materially affected his or her settlement with the debtor or released party.” |
Article VI. Conditions to the Closing
Section 6.01 Conditions to the Obligations of all of the Parties. The obligations of all of the Parties to consummate the Closing are subject to the satisfaction, or waiver by each of the Parties, at or before the Closing Date, of all the following conditions:
| (a) | The Zircon Transactions shall be closing substantially simultaneously as the Closing hereunder. |
| (b) | No provisions of any applicable Law, and no decree, order, judgment, writ, award, injunction, rule, stay, or restraining order or consent of or by any Governmental Authority shall prohibit or impose any condition or prohibition on the consummation of the Closing. |
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| (c) | There shall not be any Action brought by a third-party non-Affiliate to enjoin or otherwise restrict the consummation of the Closing. |
| (d) | The Parties shall have received all necessary approvals from all required Governmental Authorities to consummate the Transactions. |
| (e) | The Company Board shall have approved this Agreement and the Transactions and shall not have withdrawn such approval. |
Section 6.02 Conditions to the Obligations of the Company for the Closing. The obligations of the Company to consummate the Closing are subject to the satisfaction (or waiver by the Company), at or before the Closing Date, of the following conditions:
| (a) | The representations and warranties made by Creditor in this Agreement shall have been true and correct when made and shall be true and correct in all material respects (other than representations and warranties which are qualified as to materiality and the representations and warranties in Section 3.06, which shall each be true and correct in all respects) at the Closing Date with the same force and effect as if such representations and warranties were made at and as of the Closing Date, except for changes therein permitted by this Agreement; and |
| (b) | Creditor shall have performed or complied with all covenants and conditions required by this Agreement to be performed or complied with by Creditor prior to or at the Closing. |
Section 6.03 Condition to the Obligations of Creditor for the Closing. The obligations of Creditor to consummate the Closing are subject to the satisfaction (or waiver by Creditor, at or before the Closing Date, of the following conditions:
| (a) | The representations and warranties made by the Company in this Agreement shall have been true and correct when made and shall be true and correct in all material respects at the Closing Date with the same force and effect as if such representations and warranties were made at and as of the Closing Date, except for changes therein permitted by this Agreement; and |
| (b) | The Company shall have performed or complied with all covenants and conditions required by this Agreement to be performed or complied with by the Company prior to or at the Closing. |
Article VII. Termination; Survival
Section 7.01 Termination. This Agreement may be terminated at any time prior to the Closing:
| (a) | By the mutual written consent of the Company and Creditor; |
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| (b) | By the Company (i) if the conditions to the Closing as set forth in Section 6.01 and Section 6.02 have not been satisfied or waived by the Company, which waiver the Company may give or withhold in its sole discretion, by the Termination Date, provided, however, that the Company may not terminate this Agreement pursuant to this clause (i) of this Section 7.01(b) if the reason for the failure of any such condition to occur was the breach of the terms of this Agreement by the Company; or (ii) if there has been a material violation, breach or inaccuracy of any representation, warranty, covenant or agreement of the Creditor contained in this Agreement, which violation, breach or inaccuracy would cause any of the conditions set forth in Section 6.02 not to be satisfied, and such violation, breach or inaccuracy has not been waived by the Company or cured by Creditor, applicable, within five (5) Business Days after receipt by Creditor of written notice thereof from the Company or is not reasonably capable of being cured prior to the Termination Date; |
| (c) | By Creditor (i) if the conditions to Closing as set forth in Section 6.01 and Section 6.03 have not been satisfied or waived by Creditor, which waiver Creditor may give or withhold in its sole discretion, by the Termination Date, provided, however, that Creditor may not terminate this Agreement pursuant to this clause (i) of this Section 7.01(c) if the reason for the failure of any such condition to occur was the breach of the terms of this Agreement by Creditor; or (ii) if there has been a material violation, breach or inaccuracy of any representation, warranty, covenant or agreement of the Company contained in this Agreement, which violation, breach or inaccuracy would cause any of the conditions set forth in Section 6.03 not to be satisfied, and such violation, breach or inaccuracy has not been waived by Creditor or cured by the Company, applicable, within five (5) Business Days after receipt by the Company of written notice thereof from Creditor or is not reasonably capable of being cured prior to the Termination Date; or |
| (d) | By any Party, if a court of competent jurisdiction or other Governmental Authority shall have issued an order or taken any other action permanently restraining, enjoining or otherwise prohibiting the Transactions and such order or action shall have become final and nonappealable. |
Section 7.02 Specific Enforcement. Notwithstanding the foregoing, the Parties acknowledge and agree that (i) if the Company has a right to terminate this Agreement pursuant to the provisions of clause (ii) of Section 7.01(b), the Company may elect not to terminate this Agreement and may instead seek to specifically enforce this Agreement pursuant to the provisions of Section 9.17; and (ii) if Creditor has a right to terminate this Agreement pursuant to the provisions of clause (ii) of Section 7.01(c), Creditor may elect not to terminate this Agreement and may instead seek to specifically enforce this Agreement pursuant to the provisions of Section 9.17.
Section 7.03 Survival After Termination. If this Agreement is terminated in accordance with Section 7.01, this Agreement shall become void and of no further force and effect with no liability to any Person on the part of any Party hereto (or any officer, agent, employee, direct or indirect holder of any equity interest or securities, or Affiliates of any Party); provided, however, that this Section 7.03 and Article IX shall survive the termination of this Agreement and nothing herein shall relieve any Party from any liability for fraud or any breach of the provisions of this Agreement occurring prior to the termination of this Agreement.
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Article VIII. Indemnification
Section 8.01 Indemnification of Company. Provided that the Closing occurs, Creditor hereby agrees to indemnify and hold harmless to the fullest extent permitted by applicable law the Company, each of its Affiliates and each of its and their respective members, managers, partners, directors, officers, employees, shareholders, attorneys, agents and permitted assignees (each a “Company Indemnified Party”), against and in respect of any and all out-of-pocket loss, cost, payments, demand, penalty, forfeiture, expense, liability, judgment, deficiency or damage, and diminution in value or claim (including actual costs of investigation and attorneys’ fees and other costs and expenses) (all of the foregoing collectively, “Losses” and each individually a “Loss”) incurred or sustained by any Company Indemnified Party as a result of or in connection with any breach, inaccuracy or nonfulfillment or the alleged breach, inaccuracy or nonfulfillment of any of the representations, warranties, covenants and agreements of Creditor contained herein or in any of the additional agreements or any certificate or other writing delivered pursuant hereto.
Section 8.02 Indemnification of Creditor. Provided that the Closing occurs, the Company hereby agrees to indemnify and hold harmless to the fullest extent permitted by applicable law Creditor and each of its officers, directors, employees, shareholders, attorneys, agents and permitted assignees (each a “Creditor Indemnified Party”), against and in respect of any and all Losses incurred or sustained by any Creditor Indemnified Party as a result of or in connection with any breach, inaccuracy or nonfulfillment or the alleged breach, inaccuracy or nonfulfillment of any of the representations, warranties, covenants and agreements of the Company contained herein or in any of the additional agreements or any certificate or other writing delivered pursuant hereto.
Section 8.03 Procedure. The following shall apply with respect to all claims by any Creditor Indemnified Party or Company Indemnified Party for indemnification with respect to actions by third-parties (with any references herein to an “Indemnified Party” being a reference to a Creditor Indemnified Party or a Company Indemnified Party, as applicable, and any references herein to an “Indemnifying Party” being a reference to the Company or Creditor, as applicable):
| (a) | Third-Party Claims. If any Indemnified Party receives notice of the assertion or commencement of any Action made or brought by any Person who is not a party to this Agreement or an Affiliate of a party to this Agreement or a Representative of the foregoing (a “Third-Party Claim”) against such Indemnified Party with respect to which the Indemnifying Party is obligated to provide indemnification under this Agreement, the Indemnified Party shall give the Indemnifying Party reasonably prompt written notice thereof, but in any event not later than thirty (30) calendar days after receipt of such notice of such Third-Party Claim. The failure to give such prompt written notice shall not, however, relieve the Indemnifying Party of its indemnification obligations, except and only to the extent that the Indemnifying Party forfeits rights or defenses by reason of such failure. Such notice by the Indemnified Party shall describe the Third-Party Claim in reasonable detail, shall include copies of all material written evidence thereof and shall indicate the estimated amount, if reasonably practicable, of the Loss that has been or may be sustained by the Indemnified Party. The Indemnifying Party shall have the right to participate in, or by giving written notice to the Indemnified Party, to assume the defense of any Third-Party Claim at the Indemnifying Party’s expense and by the Indemnifying Party’s own counsel, and the Indemnified Party shall cooperate in good faith in such defense. In the event that the Indemnifying Party assumes the defense of any Third-Party Claim, subject to Section 8.03(b), it shall have the right to take such action as it deems necessary to avoid, dispute, defend, appeal or make counterclaims pertaining to any such Third-Party Claim in the name and on behalf of the Indemnified Party. The Indemnified Party shall have the right to participate in the defense of any Third-Party Claim with counsel selected by it subject to the Indemnifying Party’s right to control the defense thereof, provided that the fees and disbursements of such counsel shall be at the expense of the Indemnified Party. |
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| (b) | Settlement of Third-Party Claims. Notwithstanding any other provision of this Agreement, the Indemnifying Party shall not enter into settlement of any Third-Party Claim without the prior written consent of the Indemnified Party, except as provided in this Section 8.03(b). If a firm offer is made to settle a Third-Party Claim without leading to liability or the creation of a financial or other obligation on the part of the Indemnified Party and provides, in customary form, for the unconditional release of each Indemnified Party from all liabilities and obligations in connection with such Third-Party Claim and the Indemnifying Party desires to accept and agree to such offer, the Indemnifying Party shall give written notice to that effect to the Indemnified Party. If the Indemnified Party consents to such firm offer the Indemnifying Party may settle the Third-Party Claim upon the terms set forth in such firm offer to settle such Third-Party Claim. If the Indemnified Party objects to such offer, or does not provide a response to such firm offer within ten days after its receipt of such notice (in which case the Indemnified Party shall be deemed to not have consented to such offer), the Indemnified Party shall thereafter assume the defense of such Third-Party Claim and shall continue to contest or defend such Third-Party Claim and in such event the maximum liability of the Indemnifying Party as to such Third-Party Claim shall not exceed the amount of such settlement offer. If the Indemnified Party has assumed the defense pursuant to this Section 8.03(b), the Indemnified Party shall not agree to any settlement without the written consent of the Indemnifying Party (which consent shall not be unreasonably withheld or delayed). |
| (c) | Direct Claims. Any Action by an Indemnified Party on account of a Loss which does not result from a Third-Party Claim (a “Direct Claim”) shall be asserted by the Indemnified Party giving the Indemnifying Party reasonably prompt written notice thereof, but in any event not later than thirty (30) calendar days after the Indemnified Party becomes aware of such Direct Claim. The failure to give such prompt written notice shall not, however, relieve the Indemnifying Party of its indemnification obligations, except and only to the extent that the Indemnifying Party forfeits rights or defenses by reason of such failure. Such notice by the Indemnified Party shall describe the Direct Claim in reasonable detail, shall include copies of all material written evidence thereof and shall indicate the estimated amount, if reasonably practicable, of the Loss that has been or may be sustained by the Indemnified Party. The Indemnifying Party shall have thirty (30) calendar days after its receipt of such notice to respond in writing to such Direct Claim. The Indemnified Party shall allow the Indemnifying Party and its professional advisors to investigate the matter or circumstance alleged to give rise to the Direct Claim, and whether and to what extent any amount is payable in respect of the Direct Claim and the Indemnified Party shall assist the Indemnifying Party’s investigation by giving such information and assistance as the Indemnifying Party or any of its professional advisors may reasonably request. If the Indemnifying Party does not so respond within such thirty (30) calendar day period, the Indemnifying Party shall be deemed to have accepted liability for such claim, in which case the Indemnified Party shall be free to pursue such remedies as may be available to the Indemnified Party on the terms and subject to the provisions of this Agreement. |
| (d) | Cooperation. Upon a reasonable request made by the Indemnifying Party, each Indemnified Party seeking indemnification hereunder in respect of any Direct Claim, hereby agrees to consult with the Indemnifying Party and act reasonably to take actions reasonably requested by the Indemnifying Party in order to attempt to reduce the amount of Losses in respect of such Direct Claim. Any costs or expenses associated with taking such actions shall be included as Losses hereunder. |
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Section 8.04 Periodic Payments. Any indemnification required by this Article VIII for costs, disbursements or expenses of any Indemnified Party in connection with investigating, preparing to defend or defending any Action shall be made by periodic payments by the Indemnifying Party to each Indemnified Party during the course of the investigation or defense, as and when bills are received or costs, disbursements or expenses are incurred.
Section 8.05 Insurance. Any indemnification payments hereunder shall take into account any insurance proceeds or other third-party reimbursement actually received.
Section 8.06 Time Limit. The obligations of Creditor and the Company under Section 8.01 and Section 8.02 respectively shall expire two (2) years from the Closing Date, except with respect to (i) an indemnification claim asserted in accordance with the provisions of this Article VIII which remains unresolved, for which the obligation to indemnify shall continue until such claim is resolved; and (ii) resolved claims for which payment has not yet been paid to the Indemnified Party.
Section 8.07 Effect of Investigation. The representations, warranties and covenants of the Indemnifying Party, and any Indemnified Party’s right to indemnification with respect thereto, shall not be affected or deemed waived by reason of any investigation made by or on behalf of the any Indemnified Party or by reason of the fact that such Indemnified Party knew or should have known that any such representation or warranty is, was or might be inaccurate.
Section 8.08 Exclusive Remedy. In the event that the Closing occurs, the indemnification provisions contained in this Article VIII shall be the sole and exclusive remedy of the Parties with respect to the Transactions for any and all breaches or alleged breaches of any representations, warranties, covenants or agreements of the Parties hereto or any other provision of this Agreement or arising out of the Transactions, except (i) with respect to any equitable remedy to which such Party may be entitled to with respect to any claims or causes of action arising from the breach of any covenants or agreement of a Party that is to be performed subsequent to the Closing Date, or (ii) with respect to a Party, an actual and intentional fraud with respect to this Agreement and the Transactions. In furtherance of the foregoing, each Party hereto, for itself and on behalf of its Affiliates, hereby waives, from and after the Closing, to the fullest extent permitted under applicable law and except as otherwise specified in this Article VIII, any and all rights, claims and causes of action it may have against any other Party hereto relating to the subject matter of this Agreement or any other agreement, certificate or other document or instrument delivered pursuant to this Agreement, arising under or based upon any applicable law.
Article IX. Miscellaneous
Section 9.01 Notices.
| (a) | Any notice or other communications required or permitted hereunder shall be in writing and shall be sufficiently given if personally delivered to it or sent by email, overnight courier or registered mail or certified mail, postage prepaid, addressed as follows: |
If to the Company, to:
Harmony Energy Technologies Corp
Attention: Demin (Fleming) Huang
165 Broadway, Floor 23
New York, NY 10006
Email: fleming.huang@hetcusa.com
If to Creditor, to the address as set forth on the signature page hereof.
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| (b) | Any Party may change its address for notices hereunder upon notice to each other Party in the manner for giving notices hereunder. |
| (c) | Any notice hereunder shall be deemed to have been given (i) upon receipt, if personally delivered, (ii) on the day after dispatch, if sent by overnight courier, (iii) upon dispatch, if transmitted by email with return receipt requested and received and (iv) three (3) days after mailing, if sent by registered or certified mail. |
Section 9.02 Governing Law; Jurisdiction. This Agreement, and any and all claims, proceedings or causes of action relating to this Agreement or arising from this Agreement or the transactions contemplated herein, including, without limitation, tort claims, statutory claims and contract claims, shall be interpreted, construed, governed and enforced under and solely in accordance with the substantive and procedural laws of the State of Delaware, in each case as in effect from time to time and as the same may be amended from time to time, and as applied to agreements performed wholly within the State of Delaware. Subject to the provisions of Section 9.04, each of the Parties (a) irrevocably consents and agrees that any legal or equitable action or proceedings arising under or in connection with this Agreement shall be brought exclusively in the state or federal courts of the United States with jurisdiction in New York City, New York. By execution and delivery of this Agreement, each Party hereto irrevocably submits to and accepts, with respect to any such action or proceeding, generally and unconditionally, the jurisdiction of the aforesaid courts, and irrevocably waives any and all rights such Party may now or hereafter have to object to such jurisdiction.
Section 9.03 Waiver of Jury Trial.
| (a) | EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREIN (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS Section 9.03(a). |
| (b) | Each of the Parties acknowledge that each has been represented in connection with the signing of this waiver by independent legal counsel selected by the respective Party and that such Party has discussed the legal consequences and import of this waiver with legal counsel. Each of the Parties further acknowledge that each has read and understands the meaning of this waiver and grants this waiver knowingly, voluntarily, without duress and only after consideration of the consequences of this waiver with legal counsel. |
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Section 9.04 Arbitration.
| (a) | The Parties shall promptly submit any dispute, claim, or controversy arising out of or relating to this Agreement (including with respect to the meaning, effect, validity, termination, interpretation, performance, or enforcement of this Agreement) or any alleged breach thereof (including any action in tort, contract, equity, or otherwise), to binding arbitration before one arbitrator (the “Arbitrator”). Binding arbitration shall be the sole means of resolving any dispute, claim, or controversy arising out of or relating to this Agreement (including with respect to the meaning, effect, validity, termination, interpretation, performance or enforcement of this Agreement) or any alleged breach thereof (including any claim in tort, contract, equity, or otherwise). |
| (b) | If the Parties cannot agree upon the Arbitrator within ten (10) Business Days of the commencement of the efforts to so agree on an Arbitrator, each of the Company and Creditor shall select one arbitrator and the two arbitrators so selected shall select the sole Arbitrator who shall hear and resolve the dispute. |
| (c) | The laws of the State of Delaware shall apply to any arbitration hereunder. In any arbitration hereunder, this Agreement and any agreement contemplated hereby shall be governed by the laws of the State of Delaware applicable to a contract negotiated, signed, and wholly to be performed in the State of Delaware, which laws the Arbitrator shall apply in rendering his decision. The Arbitrator shall issue a written decision, setting forth findings of fact and conclusions of law, within sixty (60) days after he shall have been selected. The Arbitrator shall have no authority to award punitive or other exemplary damages. |
| (d) | The arbitration shall be held in New York City, New York in accordance with and under then-current provisions of the rules of the American Arbitration Association, except as otherwise provided herein. |
| (e) | On application to the Arbitrator, any Party shall have rights to discovery to the same extent as would be provided under the Federal Rules of Civil Procedure, and the Federal Rules of Evidence shall apply to any arbitration under this Agreement; provided, however, that the Arbitrator shall limit any discovery or evidence such that his decision shall be rendered within the period referred to in Section 9.04(b). |
| (f) | The Arbitrator may, at his discretion and at the expense of the Party who will bear the cost of the arbitration, employ experts to assist him in his determinations. |
| (g) | The costs of the arbitration proceeding and any proceeding in court to confirm any arbitration award or to obtain relief, as applicable (including actual attorneys’ fees and costs), shall be borne by the unsuccessful Party and shall be awarded as part of the Arbitrator’s decision, unless the Arbitrator shall otherwise allocate such costs in such decision. The determination of the Arbitrator shall be final and binding upon the Parties and not subject to appeal. |
| (h) | Any judgment upon any award rendered by the Arbitrator may be entered in and enforced by any court of competent jurisdiction. The Parties expressly consent to the non-exclusive jurisdiction of the courts (Federal and state) located in New York City, New York to enforce any award of the Arbitrator or to render any provisional, temporary, or injunctive relief in connection with or in aid of the Arbitration. The Parties expressly consent to the personal and subject matter jurisdiction of the Arbitrator to arbitrate any and all matters to be submitted to arbitration hereunder. None of the Parties hereto shall challenge any arbitration hereunder on the grounds that any party necessary to such arbitration (including the Parties) shall have been absent from such arbitration for any reason, including that such Party shall have been the subject of any bankruptcy, reorganization, or insolvency proceeding. |
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Section 9.05 Limitation on Damages. In no event will any Party be liable to any other Party under or in connection with this Agreement or in connection with the Transactions for special, general, indirect or consequential damages, including damages for lost profits or lost opportunity, even if the Party sought to be held liable has been advised of the possibility of such damage.
Section 9.06 Attorneys’ Fees. In the event that any Party institutes any action or suit to enforce this Agreement or to secure relief from any default hereunder or breach hereof, the prevailing Party shall be reimbursed by the losing Party for all costs, including reasonable attorneys’ fees, incurred in connection therewith and in enforcing or collecting any judgment rendered therein.
Section 9.07 Third Party Beneficiaries. This Agreement is strictly between the Parties, and except as specifically provided herein, no other Person and no director, officer, shareholder, member, employee, agent, independent contractor or any other Person shall be deemed to be a third-party beneficiary of this Agreement.
Section 9.08 Expenses. Subject to Article VIII and Section 9.06, whether or not the Transactions are consummated and other than as specifically set forth herein, each of the Parties will bear their own respective expenses, including legal, accounting and professional fees, incurred in connection with the Transactions.
Section 9.09 Entire Agreement. This Agreement and the other agreements and documents references herein represent the entire agreement between the Parties relating to the subject matter thereof and supersede all prior agreements, understandings and negotiations, written or oral, with respect to such subject matter, provided that the Parties acknowledge and agree that the Company and Creditor have entered into that certain Mutual Non-Disclosure Agreement, dated June 9, 2022, which shall remain in full force and effect in accordance with its terms.
Section 9.10 Survival. The representations and warranties of the respective Parties herein shall survive the Closing Date and the consummation of the Transactions for a period of two years. The covenants and other agreements of the respective Parties herein shall survive the Closing until fully performed, or for the maximum period permitted by applicable Laws, whichever is less.
Section 9.11 Amendment; Waiver; Remedies.
| (a) | This Agreement may be amended, modified, superseded, terminated or cancelled, and any of the terms, covenants, representations, warranties or conditions hereof may be waived, only by a written instrument executed by both of the Parties. |
| (b) | Every right and remedy provided herein shall be cumulative with every other right and remedy, whether conferred herein, at law, or in equity, and may be enforced concurrently herewith, and no waiver by any Party of the performance of any obligation by the other shall be construed as a waiver of the same or any other default then, theretofore, or thereafter occurring or existing. |
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| (c) | Neither any failure or delay in exercising any right or remedy hereunder or in requiring satisfaction of any condition herein, nor any course of dealing shall constitute a waiver of or prevent any Party from enforcing any right or remedy or from requiring satisfaction of any condition. No notice to or demand on a Party waives or otherwise affects any obligation of that Party or impairs any right of the Party giving such notice or making such demand, including any right to take any action without notice or demand not otherwise required by this Agreement. No exercise of any right or remedy with respect to a breach of this Agreement shall preclude exercise of any other right or remedy, as appropriate to make the aggrieved Party whole with respect to such breach, or subsequent exercise of any right or remedy with respect to any other breach. |
Section 9.12 Arm’s Length Bargaining; No Presumption Against Drafter. This Agreement has been negotiated at arm’s-length by parties of equal bargaining strength, each represented by counsel or having had but declined the opportunity to be represented by counsel and having participated in the drafting of this Agreement. This Agreement creates no fiduciary or other special relationship between the Parties, and no such relationship otherwise exists. No presumption in favor of or against any Party in the construction or interpretation of this Agreement or any provision hereof shall be made based upon which Person might have drafted this Agreement or such provision.
Section 9.13 Headings. The headings contained in this Agreement are intended solely for convenience and shall not affect the rights of the Parties.
Section 9.14 No Assignment or Delegation. This Agreement shall be binding upon and shall inure to the benefit of the Parties and their respective successors and permitted assigns. No Party shall have any power or any right to assign or transfer, in whole or in part, this Agreement, or any of its rights or any of its obligations hereunder, including, without limitation, any right to pursue any claim for damages pursuant to this Agreement or the transactions contemplated herein, or to pursue any claim for any breach or default of this Agreement, or any right arising from the purported assignor’s due performance of its obligations hereunder, without the prior written consent of the other Parties and any such purported assignment in contravention of the provisions herein shall be null and void and of no force or effect.
Section 9.15 Commercially Reasonable Efforts. Subject to the terms and conditions herein provided, each Party shall use their respective commercially reasonable efforts to perform or fulfill all conditions and obligations to be performed or fulfilled by it under this Agreement so that the Transactions shall be consummated as soon as practicable, and to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable under applicable Laws and regulations to consummate and make effective this Agreement and the Transactions.
Section 9.16 Further Assurances. From and after the Effective Date, each Party shall execute and deliver such documents and take such action, as may reasonably be considered within the scope of such Party’s obligations hereunder, necessary to effectuate the Transactions.
Section 9.17 Specific Performance. The Parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed by them in accordance with the terms hereof or were otherwise breached and that each Party hereto shall be entitled to an injunction or injunctions, specific performance and other equitable relief to prevent breaches of the provisions hereof and to enforce specifically the terms and provisions hereof, without the proof of actual damages, in addition to any other remedy to which they are entitled at law or in equity. Each Party agrees to waive any requirement for the security or posting of any bond in connection with any such equitable remedy, and agrees that it will not oppose the granting of an injunction, specific performance or other equitable relief on the basis that (a) the other Party has an adequate remedy at law, or (b) an award of specific performance is not an appropriate remedy for any reason at law or equity.
Section 9.18 Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original and all of which taken together shall be but a single instrument. Counterparts may be delivered via facsimile, electronic mail (including pdf or any electronic signature complying with the U.S. federal ESIGN Act of 2000, e.g., www.docusign.com) or other transmission method and any counterpart so delivered shall be deemed to have been duly and validly delivered and be valid and effective for all purposes.
[Signatures Appear on Following Pages]
| 17 |
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the Effective Date.
| Harmony Energy Technologies Corp | ||
| By: | ||
| Name: | Demin (Fleming) Huang | |
| Title: | Chief Financial Officer | |
| Creditor: | ||
| By: | ||
| Name: | ||
| Title: | ||
| (if applicable) | ||
| Address for notices: | ||
| Email: | ||
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Exhibit A
Debt; Instruments; Payment Amount; Wire Instructions
| Debt: | $__________________________ |
| Instruments: | _______________________________________________________ |
| _______________________________________________________ | |
| _______________________________________________________ |
| Settlement Payment: | $____________________________ |
Creditor Wire Instructions:
| [___________________] | |
| [___________________] | |
| [___________________] | |
| [___________________] | |
| [___________________] | |
| [___________________] |
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Exhibit 10.3
Escrow Agreement
This Escrow Agreement (this “Agreement”) dated as of April 14, 2023 (the Effective Date”), is entered into by and among (i) Christian Guilbaud, Kenneth Charles Grainger, Demin Huang and Rui Zhu (each a “Guarantor” and collectively, the “Guarantors”); (ii) Harmony Energy Technologies Corp., a Delaware corporation (“Harmony”); (iii) Zircon Corporation, a California corporation (“Zircon”); and (iv) Anthony L.G., PLLC (the “Escrow Agent”). Each Guarantor, Harmony and Zircon may be collectively referred to herein as the “Transaction Parties” and each individually as a “Transaction Party”. The Escrow Agent and the Transaction Parties may be collectively referred to herein as the “Parties” and each individually as a “Party”.
WHEREAS, the Transaction Parties and ZRCN Inc., a California corporation and a wholly owned subsidiary of Harmony (the “Merger Sub”) are parties to that certain Agreement and Plan of Merger, dated as of April 13, 2023 (the “Merger Agreement”);
WHEREAS, pursuant to the terms of the Merger Agreement, Merger Sub has merged with and into Zircon in accordance with the terms of the Merger Agreement, the General Corporation Law of the State of Delaware (the “DGCL”) and the California Corporations Code (the “CCC”), as a result of which Zircon has become a wholly owned subsidiary of Harmony;
WHEREAS, pursuant to the Merger Agreement, Guarantors have agreed to place into escrow with the Escrow Agent certain shares of Harmony Common Stock (as defined in the Merger Agreement”) for the purposes of supporting the indemnification obligations of Harmony pursuant to the Merger Agreement and Escrow Agent is willing to accept said instruments in accordance with the terms hereinafter set forth;
WHEREAS, the Transaction Parties represent and warrant to the Escrow Agent that they will comply with all of their respective obligations under applicable state and federal securities laws and regulations with respect to the Merger Agreement and the transactions as set forth therein; and
WHEREAS, the Transaction Parties represent and warrant to the Escrow Agent that they have not stated to any individual or entity that the Escrow Agent’s duties will include anything other than those duties stated in this Agreement;
NOW, THEREFORE, IT IS AGREED as follows:
| 1. | Delivery of Escrow Shares. |
| (a) | The Parties acknowledge that on the Effective Date, the Transaction Parties shall deliver to the Escrow Agent certificates for an aggregate of 3,877,440 Harmony Shares collectively owned by the Guarantors (the “Escrow Shares”), which shall be held by Escrow Agent and released in accordance with the provisions of this Agreement and the Merger Agreement. The Parties acknowledge and agree that the portion of the Escrow Shares contributed by each of the Guarantors, and the pro-rata share of each of the Guarantors, is as follows: |
| (i) | Kenneth Charles Grainger: 42,840 Escrow Shares; pro-rata share of 1.10%. |
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| (ii) | Demin Huang: 991,200 Escrow Shares; pro-rata share of 25.56%. | |
| (iii) | Christian Guibaud: 1,113,000 Escrow Shares; pro-rata share of 28.70%. | |
| (iv) | Rui Zhu: 1,730,400 Escrow Shares; pro-rata share of 44.63% |
| (b) | The Escrow Agent shall hold no cash or other escrowed funds on behalf of the Transaction Parties. | |
| (c) | The Escrow Agent shall provide to each Transaction Party confirmation of the receipt of the Escrowed Shares, and any releases thereof. |
| 2. | Release of Escrow Shares. The Escrow Shares shall be paid by the Escrow Agent in accordance with the following: |
| (a) | The Escrow Agent shall, upon receipt of written instructions, in the form of Exhibit A, attached hereto and made a part hereof, in a form and substance reasonably satisfactory to the Escrow Agent, received from each of the Transaction Parties, release the Escrow Shares in accordance with such written instructions, subject to such instructions not resulting in the violation of any applicable laws. In the event that fewer than all of the Escrow Shares are to be released, the Transaction Parties shall deliver to the Escrow Agent a replacement certificate for the Escrow Shares which are to remain being held by the Escrow Agent, and at such time the Escrow Agent shall release the then-applicable certificate to the parties as so directed, to the addresses of the Transaction Parties as set forth herein for notices to the Transaction Parties. Each of the Transaction Parties covenants and agrees that it shall execute and deliver to the Escrow Agent such instruments as requested by the Escrow Agent as required to transfer the Escrow Shares or any portion thereof to the intended recipient. | |
| (b) | Any disbursements of the Escrow Shares shall be made within one (1) Business Day of receipt of such written instructions, which must be received by the Escrow Agent no later than 3:00 PM Eastern Time on a Business Day for the Escrow Agent to process such instructions that Business Day. Any disbursements of the Escrow Shares shall be conditioned on the Transaction Parties paying to the Escrow Agent any out of pocket costs incurred or to be incurred by the Escrow Agent in connection with such disbursement. | |
| (c) | If any date that is a deadline under this Agreement for giving the Escrow Agent notice or instructions or for the Escrow Agent to take action is not a Business Day, then such date shall be the Business Day that immediately precedes that date. A “Business Day” is any day other than a Saturday, Sunday or a Bank holiday. |
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| 3. | Acceptance by Escrow Agent. The Escrow Agent hereby accepts and agrees to perform its obligations hereunder, provided that: |
| (a) | The Escrow Agent may act in reliance upon any signature believed by it to be genuine, and may assume that any person who has been designated by any Transaction Party to give any written instructions, notice or receipt, or make any statements in connection with the provisions hereof has been duly authorized to do so. The Escrow Agent shall have no duty to make inquiry as to the genuineness, accuracy or validity of any statements or instructions or any signatures on statements or instructions. The names and true signatures of each individual authorized to act singly on behalf of each Transaction Party are set forth on the signature pages of such Transaction Parties. Each Transaction Party may each remove or add one or more of its authorized signers stated on such signature pages by notifying the Escrow Agent of such change in accordance with this Agreement, which notice shall include the true signature for any new authorized signatories. | |
| (b) | The Escrow Agent may act relative hereto in reliance upon advice of counsel in reference to any matter connected herewith. The Escrow Agent shall not be liable for any mistake of fact or error of judgment or law, or for any acts or omissions of any kind, unless caused by its willful misconduct or gross negligence. | |
| (c) | The Transaction Parties agree to indemnify and hold the Escrow Agent harmless from and against any and all claims, losses, costs, liabilities, damages, suits, demands, judgments or expenses (including but not limited to reasonable attorney’s fees) claimed against or incurred by Escrow Agent arising out of or related, directly or indirectly, to this Escrow Agreement unless caused by the Escrow Agent’s gross negligence or willful misconduct. | |
| (d) | In the event that the Escrow Agent shall be uncertain as to its duties or rights hereunder, the Escrow Agent shall be entitled to (i) refrain from taking any action other than to keep safely the Escrow Shares until it shall be directed otherwise by a court of competent jurisdiction, or (ii) deliver the Escrow Shares to a court of competent jurisdiction. | |
| (e) | The Escrow Agent shall have no duty, responsibility or obligation to interpret or enforce the terms of any agreement other than Escrow Agent’s obligations hereunder, and the Escrow Agent shall not be required to make a request that any monies or other instruments be delivered to the Escrow Agent, it being agreed that the sole duties and responsibilities of the Escrow Agent shall be to the extent not prohibited by applicable law to accept the Escrow Shares and to disburse or refrain from disbursing the Escrow Shares as stated above. |
| 4. | Resignation and Termination of the Escrow Agent. The Escrow Agent may resign at any time by giving thirty (30) days’ prior written notice of such resignation to each Transaction Party. Upon providing such notice, the Escrow Agent shall have no further obligation hereunder except to hold as depository the Escrow Shares that it receives until the end of such thirty (30)-day period. In such event, the Escrow Agent shall not take any action until the Transaction Parties have jointly designated a banking corporation, trust company, attorney or other person as successor. Upon receipt of such written designation signed by each of the Transaction Parties, the Escrow Agent shall promptly deliver the Escrow Shares to such successor and shall thereafter have no further obligations hereunder. If such instructions are not received within thirty (30) days following the effective date of such resignation, then the Escrow Agent may deposit the Escrow Shares held by it pursuant to this Agreement with a clerk of a court of competent jurisdiction pending the appointment of a successor. In either case provided for in this section, the Escrow Agent shall be relieved of all further obligations and released from all liability thereafter arising with respect to the Escrow Shares. |
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| 5. | Termination. The Transaction Parties may, together, terminate the appointment of the Escrow Agent hereunder upon written notice specifying the date upon which such termination shall take effect, which date shall be at least thirty (30) days from the date of such notice. In the event of such termination, the Transaction Parties shall, within thirty (30) days of such notice, jointly appoint a successor escrow agent and the Escrow Agent shall, upon receipt of written instructions signed by each of the Transaction Parties, turn over to such successor escrow agent all of the Escrow Shares; provided, however, that if Transaction Parties fail to appoint a successor escrow agent within such thirty (30) day period, such termination notice shall be null and void and the Escrow Agent shall continue to be bound by all of the provisions hereof. Upon receipt of the Escrow Shares, the successor escrow agent shall become the escrow agent hereunder and shall be bound by all of the provisions hereof and Escrow Agent shall be relieved of all further obligations and released from all liability thereafter arising with respect to the Escrow Shares and under this Agreement. | |
| 6. | Compensation. The Escrow Agent shall be entitled, for the duties to be performed by it hereunder, to a fee of $2,500.00, which fee shall be paid upon execution of this Agreement by the Transaction Parties. In addition, Harmony shall be obligated to reimburse Escrow Agent for all fees, costs and expenses incurred or that become due in connection with this Agreement, including reasonable attorneys’ fees. Neither the modification, cancellation, termination or rescission of this Agreement nor the resignation or termination of the Escrow Agent shall affect the right of the Escrow Agent to retain the amount of any fee which has been paid, or to be reimbursed or paid any amount which has been incurred or becomes due, prior to the effective date of any such modification, cancellation, termination, resignation or rescission. To the extent the Escrow Agent has incurred any such expenses, or any such fee becomes due, prior to any disbursements hereunder, the Escrow Agent shall advise the Transaction Parties that the Escrow Agent shall retain the funds from such disbursement and shall thereafter have the right to retain such funds. | |
| 7. | Notices. All notices, requests, demands and other communications required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given if sent by hand-delivery, by facsimile (followed by first-class mail), by nationally recognized overnight courier service or by prepaid registered or certified mail, return receipt requested, or by email with return receipt requested, and if to Harmony or Zircon, then to the addresses for the Harmony or Zircon as set forth in the Merger Agreement; and if to any of the Guarantors, to: |
Demin Huang
226-165 Cherokee Blvd
Toronto, Ontario, Canada, M2J 4T7
Email: fleming.huang@yahoo.ca
With copies to the other Guarantors via email, to graingerkc@yahoo.com, cguilbaud@videotron.ca, and kkk9982001@163.com.
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If to the Escrow Agent, to:
Anthony L.G., PLLC
Attn: Laura Anthony
625 N. Flagler Drive, Suite 600
West Palm Beach, FL 33401
Fax: (561) 514-0832
Email: lanthony@anthonypllc.com
| 8. | General. |
| (a) | This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Florida applicable to agreements made and to be entirely performed within such State, without regard to choice of law principles, and any action brought hereunder shall be brought in the courts of the State of Florida, located in Palm Beach County, Florida. Each Party irrevocably waives any objection on the grounds of venue, forum non conveniens or any similar grounds and irrevocably consents to service of process by mail or in any manner permitted by applicable law and consents to the jurisdiction of said courts. EACH OF THE PARTIES HEREBY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. | |
| (b) | This Agreement sets forth the entire agreement and understanding of the Parties with respect to the matters contained herein and supersedes all prior agreements, arrangements and understandings relating thereto. | |
| (c) | All of the terms and conditions of this Agreement shall be binding upon, and inure to the benefit of and be enforceable by, the Parties, as well as their respective successors and assigns. | |
| (d) | This Agreement may be amended, modified, superseded or canceled, and any of the terms or conditions hereof may be waived, only by a written instrument executed by each Party or, in the case of a waiver, by the Party waiving compliance. The failure of any Party at any time or times to require performance of any provision hereof shall in no manner affect its right at a later time to enforce the same. No waiver of any Party of any condition, or of the breach of any term contained in this Agreement, whether by conduct or otherwise, in any one or more instances shall be deemed to be or construed as a further or continuing waiver of any such condition or breach or a waiver of any other condition or of the breach of any other term of this Agreement. No Party may assign any rights, duties or obligations hereunder unless all other Parties have given their prior written consent. | |
| (e) | If any provision included in this Agreement proves to be invalid or unenforceable, it shall not affect the validity of the remaining provisions. | |
| (f) | This Agreement and any modification or amendment of this Agreement may be executed in several counterparts or by separate instruments and all of such counterparts and instruments shall constitute one agreement, binding on all of the Parties. |
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| 9. | No Third-Party Beneficiaries. This Agreement shall be binding upon and shall inure to the benefit of the Parties and their respective successors and permitted assigns. No Party shall have any power or any right to assign or transfer, in whole or in part, this Agreement, or any of its rights or any of its obligations hereunder, including, without limitation, any right to pursue any claim for damages pursuant to this Agreement or the transactions contemplated herein, or to pursue any claim for any breach or default of this Agreement, or any right arising from the purported assignor’s due performance of its obligations hereunder, without the prior written consent of the other Party and any such purported assignment in contravention of the provisions herein shall be null and void and of no force or effect. Other than as specifically set forth herein, nothing in this Agreement, expressed or implied, shall confer on any person or entity other than the Parties, and their respective successors and assigns, any rights, remedies, obligations, or liabilities under or by reason of this Agreement. | |
| 10. | Counsel. The Transaction Parties acknowledge and agree that Escrow Agent has acted as legal counsel to Harmony with respect to the Merger Agreement and the transactions contemplated therein, and that Escrow Agent has prepared this Agreement at the request of the Transaction Parties, and is acting as escrow agent at the request of the Transaction Parties, and each of the Transaction Parties acknowledges and agrees that they are aware of, and have consented to, the Escrow Agent acting as legal counsel to Harmony and as Escrow Agent hereunder, and that Escrow Agent has advised each of the Transaction Parties to retain separate counsel to review the terms and conditions of this Agreement and the other documents to be delivered in connection herewith, and each Transaction Party has either waived such right freely or has otherwise sought such additional counsel as it has deemed necessary. Each of the Transaction Parties acknowledges and agrees that Escrow Agent does not owe any duties to any of the Transaction Parties in connection with this Agreement and the transactions contemplated herein. Each of the Transaction Parties hereby waives any conflict of interest which may apply with respect to Escrow Agent’s actions as set forth herein, and the Transaction Parties confirm that the Transaction Parties have previously negotiated the material terms of the agreements as set forth herein. | |
| 11. | Form of Signature. The Agreement may be executed in multiple counterparts, each of which shall be deemed an original and all of which taken together shall be but a single instrument. Counterparts may be delivered via facsimile, electronic mail (including pdf or any electronic signature complying with the U.S. federal ESIGN Act of 2000, e.g., www.docusign.com) or other transmission method and any counterpart so delivered shall be deemed to have been duly and validly delivered and be valid and effective for all purposes. |
[Signatures appear on following page]
| 6 |
IN WITNESS WHEREOF, the Parties have duly executed this Agreement as of the Effective Date.
| Anthony L.G., PLLC | ||
| By: | ||
| Name: | Laura Anthony | |
| Title: | Managing Partner | |
[Signatures continue on following pages]
| 7 |
| HARMONY ENERGY TECHNOLOGIES CORP. | ||
| By: | ||
| Name: | Demin (Fleming) Huang | |
| Title: | Chief Financial Officer | |
The Escrow Agent is authorized to accept instructions signed or believed by the Escrow Agent to be signed by any one of the following on behalf of Harmony Energy Technologies Corp.:
| Name | True Signature |
| John Stauss | |
| Ron Bourque |
| 8 |
| ZIRCON CORPORATION | ||
| By: | ||
| Name: | John Stauss | |
| Title: | Chief Executive Officer | |
The Escrow Agent is authorized to accept instructions signed or believed by the Escrow Agent to be signed by the following on behalf of Zircon Corporation:
| Name | True Signature |
| John Stauss | |
| Ron Bourque |
| 9 |
| Guarantors: | ||
| By: | ||
| Name: | Christian Guilbaud | |
| By: | ||
| Name: | Kenneth Charles Grainger | |
| By: | ||
| Name: | Demin Huang | |
| By: | ||
| Name: | Rui Zhu | |
| 10 |
Exhibit A
FORM OF ESCROW RELEASE NOTICE
Date: ________________
Anthony L.G., PLLC
Attn: Laura Anthony
625 N. Flagler Drive, Suite 600
West Palm Beach, FL 33401
Email: lanthony@anthonypllc.com
Fax: (561) 514-0832
Dear Ms. Anthony:
In accordance with the terms of Section 2 of the Escrow Agreement dated as of April [___], 2023 (the “Escrow Agreement”), by and between among (i) Christian Guilbaud, Kenneth Charles Grainger, Demin Huang and Rui Zhu (each a “Guarantor” and collectively the “Guarantors”); (ii) Harmony Energy Technologies Corp., a Delaware corporation (“Harmony”); (iii) Zircon Corporation, a California corporation (“Zircon”); and (iv) Anthony L.G., PLLC (the “Escrow Agent”) the Transaction Parties, as required by the Escrow Agreement, hereby notify and direct the Escrow Agent to disburse the Escrow Shares or portions thereof as follows, effective as of _________________, 202__.
Defined terms used herein without definition shall have the meanings given in the Escrow Agreement.
PLEASE HOLD OR DISTRIBUTE ESCROW SHARES AS FOLLOWS:
Recipient |
Escrow Shares to Be Received | |
This instruction may be executed in several counterparts or by separate instruments and all of such counterparts and instruments shall constitute one document, binding on all of the Parties.
[Signatures appear on following pages]
| 11 |
| Very truly yours, | ||
| HARMONY ENERGY TECHNOLOGIES CORP. | ||
| By: | ||
| Name: | Demin (Fleming) Huang | |
| Title: | Chief Financial Officer | |
| ZIRCON CORPORATION | ||
| By: | ||
| Name: | John Stauss | |
| Title: | Chief Executive Officer | |
| Guarantors: | ||
| By: | ||
| Name: | Christian Guilbaud | |
| By: | ||
| Name: | Kenneth Charles Grainger | |
| By: | ||
| Name: | Demin Huang | |
| By: | ||
| Name: | Rui Zhu | |
| 12 |
Exhibit 99.1
ZIRCON CORPORATION
FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2022 AND 2021
INDEPENDENT AUDITOR’S REPORT
To the Board of Directors Zircon Corporation Campbell, California
We have audited the financial statements of Zircon Corporation, which comprise the balance sheets as of March 31, 2022 and 2021, and the related statements of income, shareholders’ equity, and cash flows for the years then ended, and the related notes to the financial statements.
In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of Zircon Corporation as of March 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
Basis for Opinion
We conducted our audits in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of Zircon Corporation and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audits. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Responsibilities of Management for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about Zircon Corporation’s ability to continue as a going concern for one year after the date that the financial statements are available to be issued.
Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.
In performing an audit in accordance with GAAS, we:
| ● | Exercise professional judgment and maintain professional skepticism throughout the audit. | |
| ● | Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. | |
| ● | Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Zircon Corporation’s internal control. Accordingly, no such opinion is expressed. | |
| ● | Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the financial statements. | |
| ● | Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about Zircon Corporation’s ability to continue as a going concern for a reasonable period of time. |
We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control–related matters that we identified during the audit.
June 24, 2022
ZIRCON CORPORATION
BALANCE SHEETS
Assets
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Current assets: | ||||||||
| Cash | $ | 85,001 | $ | 118,602 | ||||
| Accounts receivable, less allowance for doubtful accounts of $115,000 and $120,000 respectively | 7,588,818 | 10,895,341 | ||||||
| Receivable from affiliate | 200,449 | 175,751 | ||||||
| Note receivable from shareholder | 50,000 | - | ||||||
| Inventory | 14,298,858 | 11,914,630 | ||||||
| Prepaid expenses and other assets | 822,526 | 192,153 | ||||||
| Total current assets | 23,045,652 | 23,296,477 | ||||||
| Property and equipment, net of accumulated depreciation and amortization | 2,003,666 | 2,730,820 | ||||||
| Federal tax deposit | 70,461 | 103,914 | ||||||
| Intangible assets, net of amortization | 825,805 | 838,234 | ||||||
| Deposits | 19,195 | 19,195 | ||||||
| $ | 25,964,779 | $ | 26,988,640 | |||||
| Liabilities and Shareholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Line of credit | $ | 7,043,665 | $ | 3,500,000 | ||||
| Notes payable, current portion | 410,000 | 410,000 | ||||||
| Accounts payable | 5,262,025 | 6,348,420 | ||||||
| Accrued expenses | 1,665,610 | 2,785,174 | ||||||
| Due to affiliate | 85,073 | 346,082 | ||||||
| Total current liabilities | 14,466,373 | 13,389,676 | ||||||
| Notes payable, net of current portion | 270,834 | 680,834 | ||||||
| Notes payable to Stauss Family Administrative Trust | 907,420 | 1,155,175 | ||||||
| Note payable to affiliate | 800,000 | 400,000 | ||||||
| Shareholders’ equity: | ||||||||
| Common stock; no par value, 20,000,000 shares authorized,10,000,000 shares issued and outstanding | 1,000 | 1,000 | ||||||
| Retained earnings | 9,519,152 | 11,361,955 | ||||||
| Total shareholders’ equity | 9,520,152 | 11,362,955 | ||||||
| $ | 25,964,779 | $ | 26,988,640 | |||||
See accompanying independent auditor’s report and notes to financial statements.
| 4 |
ZIRCON CORPORATION
STATEMENTS OF INCOME
| Year Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Net sales | $ | 35,561,413 | $ | 40,876,885 | ||||
| Cost of sales | 22,981,670 | 25,599,631 | ||||||
| Gross profit | 12,579,743 | 15,277,254 | ||||||
| Operating expenses: | ||||||||
| General and administrative | 5,420,624 | 5,188,802 | ||||||
| Marketing and selling | 4,569,678 | 4,142,715 | ||||||
| Research and development | 2,034,254 | 2,031,997 | ||||||
| Total operating expenses | 12,024,556 | 11,363,514 | ||||||
| Income before other operating items | 555,187 | 3,913,740 | ||||||
| Other operating items: | ||||||||
| Loan forgiveness from Paycheck Protection Program | - | 1,364,213 | ||||||
| Interest expense | (304,544 | ) | (332,660 | ) | ||||
| Other (loss) income | (33,135 | ) | 18,333 | |||||
| Patent and technology impairment expense | (5,995 | ) | (286,047 | ) | ||||
| Net other operating items | (343,674 | ) | 763,839 | |||||
| Income before taxes | 211,513 | 4,677,579 | ||||||
| State franchise tax expense | 1,484 | 24,173 | ||||||
| Net income | $ | 210,029 | $ | 4,653,406 | ||||
See accompanying independent auditor’s report and notes to financial statements.
| 5 |
ZIRCON CORPORATION
STATEMENTS OF SHAREHOLDERS’ EQUITY
Years Ended March 31, 2022 and 2021
| Common Stock | Retained | |||||||||||||||
| Shares | Amount | Earnings | Total | |||||||||||||
| Balances, April 1, 2020 | 10,000,000 | $ | 1,000 | $ | 6,708,549 | $ | 6,709,549 | |||||||||
| Net income | - | - | 4,653,406 | 4,653,406 | ||||||||||||
| Balances, March 31, 2021 | 10,000,000 | 1,000 | 11,361,955 | 11,362,955 | ||||||||||||
| Net income | - | - | 210,029 | 210,029 | ||||||||||||
| Shareholder distributions | - | - | (2,052,832 | ) | (2,052,832 | ) | ||||||||||
| Balances, March 31, 2022 | 10,000,000 | $ | 1,000 | $ | 9,519,152 | $ | 9,520,152 | |||||||||
See accompanying independent auditor’s report and notes to financial statements.
| 6 |
ZIRCON CORPORATION
STATEMENTS OF CASH FLOWS
| Year Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 210,029 | $ | 4,653,406 | ||||
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: | ||||||||
| Depreciation and amortization | 1,307,631 | 1,370,161 | ||||||
| Allowance for doubtful accounts | (5,000 | ) | 98,000 | |||||
| Patent and technology impairment expense | 5,995 | 286,047 | ||||||
| Forgiveness of Paycheck Protection Program loan | - | (1,364,213 | ) | |||||
| Forgiveness of Economic Injury Disaster Loan advance | - | (10,000 | ) | |||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | 3,311,523 | (4,003,166 | ) | |||||
| Receivable from affiliate | (24,698 | ) | (65,457 | ) | ||||
| Inventory | (2,384,228 | ) | (1,367,043 | ) | ||||
| Prepaid expenses and other assets | (630,373 | ) | (1,628 | ) | ||||
| Federal tax deposit | 33,453 | (103,914 | ) | |||||
| Accounts payable | (1,086,395 | ) | 1,896,559 | |||||
| Accrued expenses | (1,119,564 | ) | 1,383,343 | |||||
| Due to affiliate | (261,009 | ) | 89,631 | |||||
| Net cash (used in) provided by operating activities | (642,636 | ) | 2,861,726 | |||||
| Cash flows from investing activities: | ||||||||
| Capital expenditures | (507,134 | ) | (521,716 | ) | ||||
| Intangible assets investments | (66,909 | ) | (41,229 | ) | ||||
| Issuance of note receivable to shareholder | (50,000 | ) | - | |||||
| Net cash used in investing activities | (624,043 | ) | (562,945 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Net borrowing (repayment) on line of credit | 3,543,665 | (3,356,466 | ) | |||||
| Payments on notes payable | (410,000 | ) | (538,333 | ) | ||||
| Increase in note payable to affiliate | 400,000 | - | ||||||
| Repayment of note payable to Stauss Family Administrative Trust | (247,755 | ) | - | |||||
| Distributions to shareholders | (2,052,832 | ) | - | |||||
| Proceeds from Paycheck Protection Program loan | - | 1,367,000 | ||||||
| Proceeds from Economic Injury Disaster Loan advance | - | 10,000 | ||||||
| Repayment of Paycheck Protection Program loan | - | (2,787 | ) | |||||
| Net cash provided by (used in) financing activities | 1,233,078 | (2,520,586 | ) | |||||
| Net decrease in cash | (33,601 | ) | (221,805 | ) | ||||
| Cash, beginning of year | 118,602 | 340,407 | ||||||
| Cash, end of year | $ | 85,001 | $ | 118,602 | ||||
See accompanying independent auditor’s report and notes to financial statements.
| 7 |
ZIRCON CORPORATION
Notes to the Financial Statements
March 31, 2022 and 2021
Note 1 - Nature of operations
Zircon Corporation (the “Company”) was incorporated in California in 1977. The Company is principally engaged in the design and manufacture of electronic-based consumer hardware and sells its products primarily to retail outlets located throughout the United States, Canada, Japan and Europe. The Company operates from its headquarters located in Campbell, California and an affiliate facility located in Ensenada, Mexico. The Company’s operations are supported by an affiliated entity located in the United Kingdom.
Note 2 - Summary of significant accounting policies Basis of presentation
The accompanying financial statements are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (GAAP). On this basis, revenue and the related assets are recognized when services are performed and products are sold, and expenses and related liabilities are recorded when the obligation is incurred.
Revenues from contracts with customers
The Company recognizes revenue in accordance with Accounting Standard Codification Topic 606, Revenue from Contracts with Customers (ASC 606).
Performance obligations
The Company’s revenue is derived from sales of products to customers. The Company satisfies its performance obligation and recognizes revenue at the time the customer obtains the rights to the product, which is generally when goods are shipped. As a result, the majority of the Company’s revenue is recognized at a point in time.
The Company’s contracts with customers include promises to transfer goods that have one or multiple performance obligations. Generally, the multiple performance obligations are separately identifiable from other promises in the contract and provide benefits to the customers on their own. Therefore, such performance obligations are considered to be distinct and are accounted for as a separate unit of account. These performance obligations are substantially the same and are transferred to the customer in the same pattern. The Company considers these performance obligations to be a series of distinct goods and accounts for them as one single performance obligation. Revenue is recognized when the performance obligation is satisfied by transferring control over a good to the customer.
Variable consideration
The structure of the Company’s contracts allows for variable consideration including volume discounts and rights of return. The liability for sales returns, including the impact of the related cost, is immaterial to the transaction price. The Company offers volume discounts to a limited number of qualifying customers which allow for discounts that are applied to all purchases under the agreement on a retrospective basis. Management has estimated the impact of the volume discounts from annual contracts approximates $266,000 for each of the years ended March 31, 2022 and 2021. These amounts were determined to be insignificant to total sales.
| 8 |
ZIRCON CORPORATION
Notes to the Financial Statements
March 31, 2022 and 2021
Note 2 - Summary of significant accounting policies (continued) Revenues from contracts with customers (continued)
Significant financing component
Contracts with customers do not contain significant financing components based on the typical period of time between performance of services and collection of consideration.
Warranty
The Company provides an assurance warranty that its products and the functionalities work as intended and comply with defined specifications. The Company does not provide an extended service warranty to its customers. The cost associated with the assurance warranty is insignificant.
Disaggregation of revenue
Revenue generated per major product line:
| Year Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Stud sensor edge | $ | 21,006,531 | $ | 24,162,619 | ||||
| Multifunctional scanners | 5,593,262 | 8,334,758 | ||||||
| Stud sensor center | 5,133,000 | 6,716,126 | ||||||
| Other | 3,828,620 | 1,663,382 | ||||||
| $ | 35,561,413 | $ | 40,876,885 | |||||
Revenue per geographic region:
| Year Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| United States | $ | 30,819,773 | $ | 35,949,677 | ||||
| Canada | 2,425,566 | 2,596,954 | ||||||
| Japan | 1,383,254 | 1,495,182 | ||||||
| Europe | 482,409 | 561,838 | ||||||
| Other | 450,411 | 273,234 | ||||||
| $ | 35,561,413 | $ | 40,876,885 | |||||
| 9 |
ZIRCON CORPORATION
Notes to the Financial Statements
March 31, 2022 and 2021
Note 2 - Summary of significant accounting policies (continued) Accounts receivable
The Company provides credit without requiring collateral, in the normal course of business, to credit- worthy customers as determined by management’s review of references and credit reports. Bad debts are charged against the allowance for doubtful accounts. The allowance is adjusted to provide a specific and general reserve for estimated uncollectible accounts, which is based on management’s judgment.
Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. Based on management’s assessment of the credit history with customers having outstanding balances and current relationships with them, management believes that losses on balances outstanding will not exceed the allowance.
The following represents the Company’s opening and ending balances of accounts receivable from contracts with customers:
| April 1, | March 31, | March 31, | ||||||||||
| 2020 | 2021 | 2022 | ||||||||||
| Accounts receivable, net of discounts | $ | 6,990,175 | $ | 10,895,341 | $ | 7,588,818 | ||||||
Inventory
Inventory is stated at the lower of cost or net realizable value. Cost is determined by the first-in, first-out (FIFO) method. Labor and overhead associated with inventory purchases are estimated and capitalized in inventory.
Property, equipment, depreciation and amortization
Property and equipment are stated at cost. Leasehold improvements are amortized over the shorter of the lease terms or estimated useful lives of the respective assets. Depreciation is computed using either the units of production method or declining-balance method over the following estimated useful lives of the respective assets:
| Patents | 14 - 20 years |
| Leasehold improvements | 7 - 10 years |
| Computer equipment | 5 years |
| Manufacturing equipment | 3 - 5 years |
| Furniture and office equipment | 7 years |
| Vehicles | 5 years |
Intangible assets
Included in intangible assets are the cost of internally developed and purchased patents as well as the cost of the exclusivity rights and licenses secured by the Company for certain technology. The cost of issued patents is comprised of legal and filing fees. The intangible assets are recorded at cost on the balance sheet and adjusted for amortization, abandonments, and impairments (see Note 6). Amortization is computed using the straight-line method over their estimated useful lives of 5 to 20 years. Amortization for filed patents not yet issued will begin upon the date of issuance.
| 10 |
ZIRCON CORPORATION
Notes to the Financial Statements
March 31, 2022 and 2021
Note 2 - Summary of significant accounting policies (continued)
Development cost
The Company incurs cost associated with development of software technologies and applications. The applications are considered internal-use software as the Company does not plan to license their use for a fee. The company capitalizes the eligible internal and external cost incurred in the development stage and amortizes the cost over 40 months. As of March 31, 2022, included in the fixed assets is approximately $429,000 of unamortized development cost, which is expected to be amortized over the remaining 15 months. Amortization expense for the year ended March 31, 2022 and 2021 approximated
$332,000.
Taxes on income
The Company has elected to be an S Corporation under the Internal Revenue Code. The shareholders are taxed individually for federal and California income tax purposes on their proportionate share of the Company’s taxable income. The Company is taxed by the State of California as an S Corporation at a rate of 1.5% based on its taxable income or $800, whichever is greater.
In 2021, California established the Small Business Relief Act, which allows qualified pass-through entities that file a California tax return to elect to pay and deduct a pass-through entity tax of 9.3% on qualified net income. Although the Company may deduct this payment to calculate its corporate tax expense, this tax payment is made on behalf of the shareholders and for financial reporting purposes is treated as an equity transaction. Included in distributions is approximately $55,000 that will be deducted as an expense for federal income tax purposes in 2021.
The Company adopted the accounting standard related to uncertainties in income taxes. The Company’s income tax filings are subject to audit by various tax authorities and are open to examination by a major tax jurisdiction back to 2018. Management believes estimates related to income tax uncertainties are appropriate based on current facts and circumstances. Any interest and penalties related to income tax matters are classified as a component of income tax expense.
Advertising and promotion
The Company participates in co-operative advertising programs for some of its customers and expenses related to these programs are accrued based on management’s estimates. Advertising and promotion expenses were $716,951 and $391,872 for the years ended March 31, 2022 and 2021, respectively.
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Significant estimates used in preparing these financial statements include the allowance for doubtful accounts, inventory obsolescence reserve, allocation of overhead to inventory, estimated future benefit and fair value of intangible assets, accrued rebates and advertising allowances, useful lives and depreciation methods of property and equipment, uncertain tax positions and technological feasibility of internally developed computer software. It is at least reasonably possible that the significant estimates used will change within the next year.
| 11 |
ZIRCON CORPORATION
Notes to the Financial Statements
March 31, 2022 and 2021
Note 2 - Summary of significant accounting policies (continued)
Fair value
The Company has adopted fair value accounting guidance for all applicable assets and liabilities to define fair value, establish a framework for measuring fair value, and enhance fair value measurement disclosure. When measuring fair value, an entity must maximize the use of observable inputs and minimize the use of unobservable inputs. Management measures intangible assets at fair value on a non-recurring basis using internally developed assumptions about the market as there is no market activity available. All carrying amounts of other applicable assets and liabilities on the Company’s balance sheet approximate fair value.
New accounting pronouncements not yet adopted
In 2016 and through subsequent amendments, the FASB issued new accounting guidance for reporting leases, which requires an entity that is a lessee to classify leases as either finance or operating and to recognize a lease liability and a right-of-use asset for all leases that have a term of greater than 12 months. Leases of 12 months or less will be accounted for similar to existing guidance for operating leases. The new standard will be effective for annual reporting periods beginning with April 1, 2022, and must be applied using a modified retrospective approach. The Company is currently evaluating the impact of adopting this standard on its financial statements.
In 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses. The standard requires a financial asset (including trade receivables) measured at amortized cost basis to be presented at the net amount expected to be collected. Thus, the income statement will reflect the measurement of credit losses for newly recognized financial assets as well as the expected increases or decreases of expected credit losses that have taken place during the period. This standard will be effective for the calendar year beginning April 1, 2023. The Company is currently in the process of evaluating the impact of adoption of this ASU on its financial statements.
Other accounting pronouncements that have been enacted but not yet implemented are not expected to have a material impact on the Company’s financial statements.
Accounting for commonly controlled entities
The Company adopted a private company accounting alternative to applying the guidance within the Variable Interest Entities subsections of the FASB Codification Subtopic 810-10, Consolidation-Overall to entities under common control. The private company accounting alternative applies only to legal entities that are not public business entities and when the reporting entity does not have a controlling financial (voting) interest. As such, the financial results of the commonly controlled companies Zircon de Mexico S.A. de C.V. and Zircon Corporation Limited, variable interest entities, have not been consolidated with the Company in these financial statements. See Note 10 for additional information regarding these affiliated companies.
Subsequent events
In preparing its financial statements, the Company has evaluated subsequent events through June 24, 2022, which is the date the financial statements were available to be issued.
| 12 |
ZIRCON CORPORATION
Notes to the Financial Statements
March 31, 2022 and 2021
Note 3 - Note receivable from shareholder
In April 2021, the Company advanced $50,000 to a shareholder and recorded a note receivable. The note receivable principal and the interest were repaid subsequent to March 31, 2022. The note is classified as a current asset on the balance sheet due to the short-term repayment period.
Note 4 - Inventory
Inventory consisted of the following:
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Finished goods | $ | 7,310,959 | $ | 6,413,782 | ||||
| Raw materials and parts | 5,013,556 | 3,783,684 | ||||||
| Work in process | 1,974,343 | 1,717,164 | ||||||
| $ | 14,298,858 | $ | 11,914,630 | |||||
Note 5 - Property and equipment
Property and equipment consisted of the following:
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Manufacturing equipment | $ | 8,353,480 | $ | 8,685,796 | ||||
| Computer equipment | 2,600,515 | 2,466,403 | ||||||
| Leasehold improvements | 851,099 | 913,850 | ||||||
| Furniture and office equipment | 647,184 | 639,876 | ||||||
| Vehicles | 258,086 | 258,086 | ||||||
| 12,710,364 | 12,964,011 | |||||||
| Construction in progress | 133,078 | 116,695 | ||||||
| 12,843,442 | 13,080,706 | |||||||
| Less accumulated depreciation and amortization | (10,839,776 | ) | (10,349,886 | ) | ||||
| $ | 2,003,666 | $ | 2,730,820 | |||||
Depreciation and amortization expense was $1,234,288 and $1,300,960 for the years ended March 31, 2022, and 2021, respectively.
Construction in progress consists of assets and technologies under internal development. The Company starts depreciation once the assets are completed and placed in service. During the year ended March 2021, management evaluated the technology in construction in progress for impairment and recorded impairment expense of $213,043. No impairment expenses were recognized during the year ended March 31, 2022.
| 13 |
ZIRCON CORPORATION
Notes to the Financial Statements
March 31, 2022 and 2021
Note 6 - Intangible assets
Intangible assets consisted of the following:
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Patents issued and pending | $ | 1,259,483 | $ | 1,198,569 | ||||
| Exclusivity rights and licenses | 167,542 | 167,542 | ||||||
| 1,427,025 | 1,366,111 | |||||||
| Less accumulated amortization | (601,220 | ) | (527,877 | ) | ||||
| $ | 825,805 | $ | 838,234 | |||||
The amortization expense of intangible assets amounted to $73,343 and $69,201 for the years ended March 31, 2022 and 2021, respectively. Included in the cost of patents is $121,228 and $130,752 for patents that were not subject to amortization as of March 31, 2022 and 2021, respectively.
The Company evaluates intangible assets for impairment and writes off assets that are not used in any products. During the year ended March 31, 2022 and 2021, the Company recorded $5,995 and $73,004, respectively, of impairment expense for pending patents that were estimated by management to have less technological benefit than previously expected. The expected amortization expense for intangible assets for future years is as follows:
For the Years Ending March 31, |
Amount | |||
| 2023 | $ | 72,530 | ||
| 2024 | 71,863 | |||
| 2025 | 66,846 | |||
| 2026 | 66,087 | |||
| 2027 | 65,972 | |||
| Thereafter | 361,279 | |||
| $ | 704,577 | |||
Note 7 - Line of credit
The Company has a revolving line of credit with a bank, which allows borrowings up to $10,000,000 that expires in November 2022. As further defined in the agreement, borrowings bear interest at either a fixed rate for a fixed term (2.36% per annum in excess of Daily Simple SOFR) or variable rate (Reference Rate) selected by management which was 2.41% for $6,500,000 and 3.5% for $543,665 of outstanding borrowings on the line of credit balance at March 31, 2022. The line of credit is secured by substantially all of the Company’s assets.
| 14 |
ZIRCON CORPORATION
Notes to the Financial Statements
March 31, 2022 and 2021
Note 8 - Notes payable
In July 2015, the Company entered into a term loan with a bank for $2,000,000 to finance the growth of the business and inventory. Under the agreement, the Company paid approximately $33,000 in monthly principal payments plus interest. The note was repaid in July 2020 and was secured by the Company’s assets. Interest paid on the loan during the year end March 31, 2021 was immaterial.
In July 2018, the Company entered into a term loan with a bank for $1,750,000 to finance the growth of the business and inventory. Under the agreement, the Company pays approximately $29,000 in monthly principal payments plus interest. During the year ended March 31, 2022, interest paid on the loan approximated $46,000. The note matures in August 2023 and is secured by the Company’s assets.
Borrowings bear interest at either a fixed rate (3.5% per annum in excess of LIBOR rate) or variable rate (0.25% in excess of Reference Rate) as selected by management. The Company executed an interest- rate swap agreement to convert the variable interest rate to 6.56% fixed interest rate for the full term of the note. The fair value of the interest-rate swap is not material to the financial statements for the year ended March 31, 2022 and has not been recorded.
In September 2019, the Company entered into a term loan with a bank for $300,000 to finance the growth of the business and inventory. Under the agreement, the Company paid interest only from November 2019 through April 2020, and starting in May 2020, the Company made monthly payments of $5,000 plus interest. During the year ended March 31, 2022, interest paid on the loan approximated $7,500. The note matures in April 2025 and is secured by the Company’s assets. Borrowings bear interest at either a fixed rate (3.5% per annum in excess of LIBOR rate) or variable rate (0.25% in excess of Reference Rate) as selected by management.
Future scheduled maturities of notes payable are as follows:
For the Years Ending March 31, | Amount | |||
| 2023 | $ | 410,000 | ||
| 2024 | 205,834 | |||
| 2025 | 60,000 | |||
| 2026 | 5,000 | |||
| $ | 680,834 | |||
| 15 |
ZIRCON CORPORATION
Notes to the Financial Statements
March 31, 2022 and 2021
Note 8 - Notes payable (continued)
In May 2020, the Company received loan proceeds in the amount of $1,367,000 under the Paycheck Protection Program (“PPP”) issued by the Small Business Administration (“SBA”). The PPP, established as part of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), provided for loans to qualifying businesses in amounts up to 2.5 times the average monthly payroll expenses of the qualifying business for the defined qualifying time-period. The loan and accrued interest are forgivable after the applicable time period in the CARES Act as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. In December 2020, the Company was informed that the PPP loan in the amount of $1,364,213 and the related accrued interest was forgiven by the SBA. The remaining balance of $2,787 that was not forgiven by SBA was repaid by the Company during the year ended March 31, 2021. Forgiveness of the loan is recognized as other income during the year ended March 31, 2021.
During the year ended March 31, 2021, the Company obtained a $10,000 grant under Economic Injury Disaster Loan (“EIDL”) program. The loan proceeds from this grant were interest free and did not require repayment. The Company included the grant proceeds in other income on the income statement during the year ended March 31, 2021.
Note 9 - Accrued expenses
Accrued expenses consisted of the following:
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Rebates | $ | 365,671 | $ | 724,950 | ||||
| Vacation | 363,155 | 379,445 | ||||||
| Payroll and related | 340,604 | 437,817 | ||||||
| Sales expenses | 260,047 | 243,696 | ||||||
| Advertising allowance | 256,059 | 374,041 | ||||||
| Interest | 41,957 | 37,659 | ||||||
| Professional services | 30,135 | 587,566 | ||||||
| Accrued taxes | 7,982 | - | ||||||
| $ | 1,665,610 | $ | 2,785,174 | |||||
Note 10 - Related party transactions
The Company is a member of a controlled group of companies and has revenue and cost-sharing activities with other members of the controlled group. Results of operations and financial condition may not represent amounts that would have been reported if the Company operated as an unaffiliated entity.
The Company has an exclusive manufacturing and technical assistance agreement with Zircon de Mexico S.A. de C.V. (the “Contractor”), an entity which is owned by certain shareholders of the Company.
| 16 |
ZIRCON CORPORATION
Notes to the Financial Statements
March 31, 2022 and 2021
Note 10 - Related party transactions (continued)
Under the terms of the agreement, the Company provides materials, technical assistance, and expertise to the Contractor, and the Contractor assembles certain of the Company’s products. The Company paid the Contractor for costs incurred in manufacturing the Company’s products, as defined in the contract, plus a profit percentage of approximately 5% of actual cost during the years ended March 31, 2022 and 2021. Total payments including the profit percentage amounted to $2,805,864 and $2,933,484 for the years ended March 31, 2022 and 2021, respectively. As of March 31, 2022 and 2021, the Company had a payable to the Contractor of approximately $85,000 and $346,000, respectively.
The Company has a note payable to the Contractor. The note was established for the purpose of reducing the payable balance and to satisfy the Company’s lender’s requirements. During the year ended March 31, 2022, the Company increased the borrowings by $400,000 to reduce the payable balance and to control the timing of the expected cash payments. The outstanding loan balance at March 31, 2022 was at $800,000. The note bears interest at the current Federal funds rate not to exceed 5% and is limited to an increase of no more than 2% annually. The entire principal balance is due and payable in December 2024 and is subordinated to the line of credit agreement the Company has with the bank.
In September 2017, an affiliated company, Zircon Corporation Limited, was established in the United Kingdom to facilitate the sale of the Company’s products to European customers and operations began during the year ended March 31, 2019. The ownership structure of the affiliate is similar to the ownership of the Company. The Company pays certain administrative and selling expenses of the affiliate. During the years ended March 31, 2022 and 2021, the Company recorded sales to the affiliate of approximately $25,000 and $55,000, respectively. As of March 31, 2022 and 2021, the Company had a receivable from the affiliate of approximately $200,000 and $175,000, respectively.
Note 11 - Notes payable to Stauss Family Administrative Trust
The Company has notes payable to the Stauss Family Administrative Trust to repay loans made to the Company. During the year ended March 31, 2022, the Company management made a one time unscheduled payment of $247,755. The remaining principal balance of $907,420 is due and payable in December 2024. Interest accrued at 5.5% per annum is paid quarterly and included in accrued expenses. The note is subordinated to the line of credit payable to the bank and no payment is to be made on the note without prior approval from the bank.
Note 12 - Income taxes and federal tax deposit
The state franchise tax expense in the statements of income consists of the current state franchise taxes. Franchise tax expense differs from the amount calculated using statutory rates due to the application of research and development credits to the year’s tax liability. For the years ended March 31, 2022 and 2021, the Company had research and development tax credit carryovers of approximately $7,400 and $55,000, respectively. The research and development tax credit is carried forward indefinitely to apply to future state franchise taxes.
Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. For the years ended March 31, 2022 and 2021, deferred income taxes are insignificant.
| 17 |
ZIRCON CORPORATION
Notes to the Financial Statements
March 31, 2022 and 2021
Note 12 - Income taxes and federal tax deposit (continued)
The Company has elected to use a fiscal year-end different than the year-end for the shareholders, which triggers a federal tax deposit requirement with the Internal Revenue Service. This deposit will be refunded in the event of liquidation or change of fiscal year-end to December 31. Management believes the Company has no obligation to increase the federal deposit amount at March 31, 2022.
Note 13 - Profit sharing and 401(k) plan
The Company has a defined contribution profit sharing plan for all eligible employees. Contributions to the profit sharing plan are determined annually by the Board of Directors. There were no profit sharing contributions made for the years ended March 31, 2022 and 2021.
All eligible employees are also allowed to participate in the Company’s 401(k) plan. The Company’s contributions to the plan are based on a specified percentage of each participant’s eligible contribution, decided annually by the Board of Directors, as defined in the plan document. Company contributions of $51,890 and $51,889 were made to the plan for the years ended March 31, 2022 and 2021, respectively.
Note 14 - Lease commitments
The Company’s corporate headquarters in Campbell, California are leased from the trust of one of its former shareholders for approximately $19,000 per month under a lease expiring in December 2022. The lease requires the Company to pay utilities, maintenance and real estate taxes. Rent expense was $230,340 for each of the years ended March 31, 2022 and 2021.
The Company leases office equipment through a lease that expires in June 2026 and requires monthly lease payments of $987 for a period of five years. The total lease expense for the year ended March 31, 2022 amounted to $8,883.
The Company leases a vehicle through a lease that expires in July 2024 and requires monthly lease payments of $448 for a period of three years. The total lease expense for the year ended March 31, 2022 amounted to $4,082.
The Company had a lease for a vehicle that expired in August 2021. The payments for the lease were $250 per month. The total lease expense for the year ending March 31, 2022 was $999. Future minimum lease commitments are as follows:
| For
the Years Ending March 31, | Amount | |||
| 2023 | $ | 189,969 | ||
| 2024 | 17,214 | |||
| 2025 | 13,187 | |||
| 2026 | 11,844 | |||
| 2027 | 2,961 | |||
| $ | 235,175 | |||
| 18 |
ZIRCON CORPORATION
Notes to the Financial Statements
March 31, 2022 and 2021
Note 15 - Supplemental cash flow information
Cash was paid for the following:
| Year Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Interest | $ | 300,246 | $ | 347,216 | ||||
| California franchise taxes | $ | 25,228 | $ | 800 | ||||
Forgiveness of the Paycheck Protection Program loan of $1,364,213 and Economic Injury Disaster loan of $10,000 were non-cash financing activities for the year ended March 31, 2022.
Note 16 - Concentrations, commitments and contingencies
During the years ended March 31, 2022 and 2021, the Company maintained deposits in a single bank that exceeded the federal insured deposit limit of the Federal Deposit Insurance Corporation (FDIC).
During each the years ended March 31, 2022 and 2021, the Company generated approximately 69% of its total revenue from two customers, respectively. Accounts receivable from these customers amounted to approximately 69% and 71% of total accounts receivable at March 31, 2022 and 2021, respectively.
The majority of the Company’s inventory is manufactured by third party manufacturers located in foreign countries. During each of the years ended March 31, 2022 and 2021, approximately 25% and 35%, respectively, of the Company’s total purchases were from one contract manufacturer. It is possible that unforeseen changes in the business of these manufacturers could disrupt the Company’s inventory supply, and the Company has purchased business interruption insurance to mitigate this risk.
The Company is engaged in legal proceedings incidental to its normal business activities. While the outcome of claims, lawsuits or other proceedings cannot be predicted with certainty, management expects that any such liabilities, to the extent not covered by insurance or otherwise, will not have a material adverse effect on the Company’s financial position or results of operations.
Note 17 - Economic risks and uncertainties
Various uncertainties exist in the current global, economic, and political environment including continued uncertainty related to the impact of the COVID-19 pandemic, disrupted supply chain, staff shortages, and current geopolitical conflicts. The extent of the impact of these uncertainties on the Company’s operational and financial performance will depend on certain developments, including the duration and spread of the pandemic outbreak, the impact on the Company’s customers, employees, and general operations, all of which are uncertain and cannot be predicted.
| 19 |
Exhibit 99.2
PART 1 – FINANCIAL INFORMATION
Item 1. Financial Statements
Zircon Corporation
Income Statement
(in thousands)
| Three Months Ended | ||||||||
| December 31, 2022 | December 31, 2021 | |||||||
| Net Sales | $ | 7,858.6 | $ | 9,450.1 | ||||
| Cost of Sales | (5,222.5 | ) | (5,940.4 | ) | ||||
| Gross Profit | 2,636.1 | 3,509.7 | ||||||
| Gross Margin | 34 | % | 37 | % | ||||
| Selling, Administrative and Other Costs | (2,467.6 | ) | (2,482.6 | ) | ||||
| Operating Profit | 168.6 | 1,027.1 | ||||||
| Other Income / (Expense) | ||||||||
| Interest Income / (Expense) | (149.8 | ) | (69.1 | ) | ||||
| IP Enforcement (Expense) | (17.2 | ) | (162.3 | ) | ||||
| Total Other Income / (Expense) | (167.0 | ) | (231.4 | ) | ||||
| Income before provision for income taxes | 1.6 | 795.7 | ||||||
| Provisions for taxes | ||||||||
| NET INCOME | $ | 1.6 | $ | 795.7 | ||||
See accompanying Notes to the Financial Statements.
Zircon Corporation
Balance Sheets
(in thousands)
| December 31, 2022 | March 31, 2022 | |||||||
| ASSETS: | ||||||||
| Current Assets: | ||||||||
| Cash | $ | 1,069.8 | $ | 85.0 | ||||
| Accounts Receivable net of allowances | 7,342.9 | 7,588.8 | ||||||
| Other Receivables | 188.6 | 200.4 | ||||||
| Note Receivable from shareholder | 50.0 | |||||||
| Inventory net of reserves | 13,377.2 | 14,298.9 | ||||||
| Prepaid Taxes and Deposits | 810.4 | 822.5 | ||||||
| Total Current Assets | 22,788.9 | 23,045.7 | ||||||
| Non-current assets: | ||||||||
| Net Property & Equipment | 1,257.7 | 2,003.7 | ||||||
| Patents (Net) | 833.4 | 825.8 | ||||||
| Long Term Deposits | 329.7 | 89.7 | ||||||
| Total non-current assets | 2,420.8 | 2,919.1 | ||||||
| Total Assets | $ | 25,209.6 | $ | 25,964.8 | ||||
| LIABILITIES: | ||||||||
| Current Liabilities: | ||||||||
| Accounts Payable | $ | 5,210.8 | $ | 5,262.0 | ||||
| Line of Credit | 7,500.0 | 7,043.7 | ||||||
| Accrued Compensation | 572.4 | 1,665.6 | ||||||
| Other Current Liabilities | 677.8 | 495.1 | ||||||
| Total Current Liabilities | 13,961.0 | 14,466.4 | ||||||
| Non-current Liabilities: | ||||||||
| Bank Note Payable | 109.2 | 270.8 | ||||||
| Shareholder Note Payable | 1,707.4 | 1,707.4 | ||||||
| Total non-current liabilities | 1,816.6 | 1,978.3 | ||||||
| Total Liabilities | 15,777.6 | 16,444.6 | ||||||
| EQUITY: | ||||||||
| Common Stock | 1.0 | 1.0 | ||||||
| Cumulative Distributions | (223.0 | ) | (6,960.3 | ) | ||||
| Retained Earnings - Prior | 9,519.1 | 16,269.5 | ||||||
| Retained Earnings - YTD | 135.0 | 210.0 | ||||||
| Total Equity | 9,432.1 | 9,520.2 | ||||||
| Total Liability and Shareholder Equity | $ | 25,209.6 | 25,964.8 | |||||
See accompanying Notes to the Financial Statements.
Zircon Corporation
Statement of Cash Flows
(in thousands)
| Nine Months Ended | ||||||||
| December 31, 2022 | December 31, 2021 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net Income / (loss) | $ | 135.0 | $ | (375.3 | ) | |||
| Depreciation & Amortization | 821.9 | 975.4 | ||||||
| Changes in Assets & Liabilities: | ||||||||
| Accounts Receivable | 242.3 | 2,675.8 | ||||||
| Inventory | 921.6 | (584.9 | ) | |||||
| Prepaid Expenses | 41.7 | (41.9 | ) | |||||
| Other A/R | 65.4 | 3.6 | ||||||
| Federal Tax Deposit | 41.0 | (72.2 | ) | |||||
| Deposits | ||||||||
| Accounts Payable | 17.5 | (204.5 | ) | |||||
| Accrued Expenses | (1,176.6 | ) | (2,368.7 | ) | ||||
| Due Affiliate | 4.3 | (313.0 | ) | |||||
| Net Cash generated by / (used in) Operating Activities | 1,114.1 | (305.8 | ) | |||||
| Cash Flows from Investing Activities: | ||||||||
| Capital Expenditures | (320.1 | ) | (366.5 | ) | ||||
| Capitalized IP Acquisition Costs | (73.9 | ) | (59.6 | ) | ||||
| Net Cash provided by / (used in) Investing Activities | (394.0 | ) | (426.2 | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Changes in Sweep Account | (227.7 | ) | 154.6 | |||||
| Changes in Credit Line | 456.3 | 2,987.2 | ||||||
| Increase in Long Term Debt | (161.7 | ) | (307.5 | ) | ||||
| Changes in Shareholder Notes | 152.2 | |||||||
| Shareholder Distributions | (223.0 | ) | (1,589.8 | ) | ||||
| Paid in Surplus | ||||||||
| Net Cash provided by / (used in) financing activities | (156.0 | ) | 1,396.7 | |||||
| Net Increase / (Decrease) in Cash | 564.1 | 664.8 | ||||||
| Cash at Beginning of Period | 505.7 | 228.9 | ||||||
| Cash at End of Period | $ | 1,069.8 | $ | 893.7 | ||||
See accompanying Notes to the Financial Statements.
Note 1 - Nature of operations.
ZIRCON CORPORATION Notes to the Financial Statements December, 2022 and 2021
Zircon Corporation (the “Company”) was incorporated in California in 1977. The Company is principally engaged in the design and manufacture of electronic-based consumer hardware and sells its products primarily to retail outlets located throughout the United States, Canada, Japan and Europe. The Company operates from its headquarters located in Campbell, California and an affiliate facility located in Ensenada, Mexico. The Company’s operations are supported by an affiliated entity located in the United Kingdom.
Note 2 - Summary of significant accounting policies Basis of presentation
The accompanying financial statements are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (GAAP). On this basis, revenue and the related assets are recognized when services are performed and products are sold, and expenses and related liabilities are recorded when the obligation is incurred.
The acquisition of a private operating company by a non-operating public corporation typically results in the owners and management of the private company having actual or effective voting and operating control of the combined company. The Company considers a public reverse acquisition to be a capital transaction in substance, rather than a business combination. That is, the transaction is a reverse recapitalization, equivalent to the issuance of stock by the private company for the net monetary assets of the non-operating corporation accompanied by a recapitalization. The accounting will be similar to that resulting from a reverse acquisition, except that no goodwill or other intangible assets will be recorded.
Revenues from contracts with customers
The Company recognizes revenue in accordance with Accounting Standard Codification Topic 606, Revenue from Contracts with Customers (ASC 606).
Performance obligations
The Company’s revenue is derived from sales of products to customers. The Company satisfies its performance obligation and recognizes revenue at the time the customer obtains the rights to the product, which is generally when goods are shipped. As a result, the majority of the Company’s revenue is recognized at a point in time.
The Company’s contracts with customers include promises to transfer goods that have one or multiple performance obligations. Generally, the multiple performance obligations are separately identifiable from other promises in the contract and provide benefits to the customers on their own. Therefore, such performance obligations are considered to be distinct and are accounted for as a separate unit of account. These performance obligations are substantially the same and are transferred to the customer in the same pattern. The Company considers these performance obligations to be a series of distinct goods and accounts for them as one single performance obligation. Revenue is recognized when the performance obligation is satisfied by transferring control over a good to the customer.
Variable consideration
The structure of the Company’s contracts allows for variable consideration including volume discounts and rights of return. The liability for sales returns, including the impact of the related cost, is immaterial to the transaction price. The Company offers volume discounts to a limited number of qualifying customers which allow for discounts that are applied to all purchases under the agreement on a retrospective basis. Management has estimated the impact of the volume discounts from annual contracts approximates $175,000 for each of the 9-month periods ended December 31, 2022 and 2021. These amounts were determined to be insignificant to total sales.
Note 2 - Summary of significant accounting policies (continued)
Revenues from contracts with customers (continued)
Significant financing component
Contracts with customers do not contain significant financing components based on the typical period of time between the performance of services the and collection of consideration.
Warranty
The Company provides an assurance warranty that its products and the functionalities work as intended and comply with defined specifications. The Company does not provide an extended service warranty to its customers. The cost associated with the assurance warranty is insignificant.
Disaggregation of revenue
Revenue generated per major product line:
| Nine Months Ending | ||||||||
| December 31, 2022 | December 31, 2021 | |||||||
| Stud sensor edge | $ | 13,389,558 | $ | 16,546,426 | ||||
| Multifunctional scanners | 3,565,144 | 5,707,596 | ||||||
| Stud sensor center | 3,271,773 | 4,599,165 | ||||||
| Other | 2,440,362 | 1,139,075 | ||||||
| Total Net Sales | $ | 22,666,837 | $ | 27,992,262 | ||||
Revenue per geographic region:
| Nine Months Ending | ||||||||
| December 31, 2022 | December 31, 2021 | |||||||
| United States | $ | 20,088,054 | $ | 24,457,360 | ||||
| Canada | 1,403,669 | 1,711,835 | ||||||
| Japan | 529,674 | 1,384,485 | ||||||
| Europe | 299,233 | 372,263 | ||||||
| Other | 346,207 | 66,319 | ||||||
| Total Revenue | $ | 22,666,837 | $ | 27,992,262 | ||||
Note 2 - Summary of significant accounting policies (continued)
Accounts receivable
The Company provides credit without requiring collateral, in the normal course of business, to credit- worthy customers as determined by management’s review of references and credit reports. Bad debts are charged against the allowance for doubtful accounts. The allowance is adjusted to provide a specific and general reserve for estimated uncollectible accounts, which is based on management’s judgment. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. Based on management’s assessment of the credit history with customers having outstanding balances and current relationships with them, management believes that losses on balances outstanding will not exceed the allowance.
The following represents the Company’s opening and ending balances of accounts receivable from contracts with customers:
| April 1, | December 31, | December 31, | ||||||||||
| 2021 | 2021 | 2022 | ||||||||||
| Accounts receivable, net of discounts | $ | 10,795,341 | $ | 8,119,579 | $ | 7,342,873 | ||||||
Inventory
Inventory is stated at the lower of cost or net realizable value. Cost is determined by the first-in, first-out (FIFO) method. Labor and overhead associated with inventory purchases are estimated and capitalized in inventory.
| Nine Months Ending | ||||||||
| December 31, 2022 | December 31, 2021 | |||||||
| Finished goods | $ | 9,214,298 | $ | 7,601,815 | ||||
| Raw materials and Parts | 2,925,574 | 3,712,729 | ||||||
| Work in process | 1,237,369 | 1,184,989 | ||||||
| Total Inventory | $ | 13,377,241 | $ | 12,499,533 | ||||
Property, equipment, depreciation and amortization
Property and equipment are stated at cost. Leasehold improvements are amortized over the shorter of the lease terms or estimated useful lives of the respective assets. Depreciation is computed using either the units of production method or declining-balance method over the following estimated useful lives of the respective assets:
| Patents | 14 - 20 years | |||
| Leasehold improvements | 7 – 10 years | |||
| Computer equipment | 5 years | |||
| Manufacturing equipment | 3 – 5 years | |||
| Furniture and office equipment | 7 years | |||
| Vehicles | 5 years |
Intangible assets
Included in intangible assets are the cost of internally developed and purchased patents as well as the cost of the exclusivity rights and licenses secured by the Company for certain technology. The cost of issued patents is comprised of legal and filing fees. The intangible assets are recorded at cost on the balance sheet and adjusted for amortization, abandonments, and impairments (see Note 6). Amortization is computed using the straight-line method over their estimated useful lives of 5 to 20 years. Amortization for filed patents not yet issued will begin upon the date of issuance.
Note 2 - Summary of significant accounting policies (continued)
Development cost
The Company incurs costs associated with the development of software technologies and applications. The applications are considered internal-use software as the Company does not plan to license their use for a fee. The company capitalizes the eligible internal and external costs incurred in the development stage and amortizes the cost over 40 months. As of December, 2022, included in the fixed assets is approximately $147,622 of unamortized development cost, which is expected to be amortized over the remaining 15 months. Amortization expenses for the 9 month periods ended December 31, 2022 and 2021 are approximately $281,190.
Taxes on income
The Company has elected to be an S Corporation under the Internal Revenue Code. The shareholders are taxed individually for federal and California income tax purposes on their proportionate share of the Company’s taxable income. The Company is taxed by the State of California as an S Corporation at a rate of 1.5% based on its taxable income or $800, whichever is greater.
In 2021, California established the Small Business Relief Act, which allows qualified pass-through entities that file a California tax return to elect to pay and deduct a pass-through entity tax of 9.3% on qualified net income. Although the Company may deduct this payment to calculate its corporate tax expense, this tax payment is made on behalf of the shareholders and for financial reporting purposes is treated as an equity transaction. Included in distributions is approximately $25,000 that will be deducted as an expense for federal income tax purposes in 2022.
In April 2022, the Company made a further deposit to the Franchise Tax Board of $7,100 that was treated as an equity distribution. In January 2023, the Franchise Tax Board issues a payment refund of $89,125 against excess prior estimated tax payments. The result of the payment will be reflected as income of $10,000.
The Company adopted the accounting standard related to uncertainties in income taxes. The Company’s income tax filings are subject to audit by various tax authorities and are open to examination by a major tax jurisdiction back to 2018. Management believes estimates related to income tax uncertainties are appropriate based on current facts and circumstances. Any interest and penalties related to income tax matters are classified as a component of income tax expense.
Advertising and promotion
The Company participates in co-operative advertising programs for some of its customers and expenses related to these programs are accrued based on management’s estimates. Co-op advertising and promotion expenses were $958,374 and $1,106,977 for the 9 month periods ended December 31, 2022 and 2021, respectively.
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Significant estimates used in preparing these financial statements include the allowance for doubtful accounts, inventory obsolescence reserve, allocation of overhead to inventory, estimated future benefit and fair value of intangible assets, accrued rebates and advertising allowances, useful lives and depreciation methods of property and equipment, uncertain tax positions and technological feasibility of internally developed computer software. It is likely that the significant estimates used will change within the next year.
Note 2 - Summary of significant accounting policies (continued)
Fair value
The Company has adopted fair value accounting guidance for all applicable assets and liabilities to define fair value, establish a framework for measuring fair value, and enhance fair value measurement disclosure. When measuring fair value, an entity must maximize the use of observable inputs and minimize the use of unobservable inputs. Management measures intangible assets at fair value on a non-recurring basis using internally developed assumptions about the market as there is no market activity available. All carrying amounts of other applicable assets and liabilities on the Company’s balance sheet approximate fair value.
New accounting pronouncements not yet adopted
In 2016 and through subsequent amendments, the FASB issued new accounting guidance for reporting leases, which requires an entity that is a lessee to classify leases as either finance or operating and to recognize a lease liability and a right-of-use asset for all leases that have a term of greater than 12 months. Leases of 12 months or less will be accounted for similar to existing guidance for operating leases. The new standard will be effective for annual reporting periods beginning with April 1, 2022, and must be applied using a modified retrospective approach. The Company is currently evaluating the impact of adopting this standard on its financial statements.
In 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses. The standard requires a financial asset (including trade receivables) measured at amortized cost basis to be presented at the net amount expected to be collected. Thus, the income statement will reflect the measurement of credit losses for newly recognized financial assets as well as the expected increases or decreases of expected credit losses that have taken place during the period. This standard will be effective for the calendar year beginning April 1, 2023. The Company is currently in the process of evaluating the impact of adoption of this ASU on its financial statements.
Other accounting pronouncements that have been enacted but not yet implemented are not expected to have a material impact on the Company’s financial statements.
Accounting for commonly controlled entities
The Company adopted a private company accounting alternative to applying the guidance within the Variable Interest Entities subsections of the FASB Codification Subtopic 810-10, Consolidation-Overall to entities under common control. The private company accounting alternative applies only to legal entities that are not public business entities and when the reporting entity does not have a controlling financial (voting) interest. As such, the financial results of the commonly controlled companies Zircon de Mexico S.A. de C.V. and Zircon Corporation Limited, variable interest entities, have not been consolidated with the Company in these financial statements. See Note 10 for additional information regarding these affiliated companies.
Subsequent events
In preparing its financial statements, the Company has evaluated subsequent events through January 20, 2023, which is the date the financial statements were available to be issued.
Note 3 - Note receivable from shareholder
In April 2021, the Company advanced $50,000 to a shareholder and recorded a note receivable. The note receivable principal and the interest were repaid subsequent to March 31, 2022. The note is classified as a current asset on the balance sheet due to the short-term repayment period.
Note 4 - Inventory
Inventory consisted of the following:
| Nine Months Ending | ||||||||
| December 31, 2022 | December 31, 2021 | |||||||
| Finished goods | $ | 9,214,298 | $ | 7,601,815 | ||||
| Raw materials and Parts | 2,925,574 | 3,712,729 | ||||||
| Work in process | 1,237,369 | 1,184,989 | ||||||
| Total Inventory | $ | 13,377,241 | $ | 12,499,533 | ||||
Note 5 - Property and equipment
Property and equipment consisted of the following:
| Nine Months Ending | ||||||||
| December 31, 2022 | December 31, 2021 | |||||||
| Manufacturing equipment | $ | 8,437,272 | $ | 8,328,589 | ||||
| Computer equipment | 2,632,619 | 2,540,326 | ||||||
| Leasehold improvements | 877,102 | 845,324 | ||||||
| Furniture and office equipment | 647,983 | 647,184 | ||||||
| Vehicles | 258,086 | 258,086 | ||||||
| $ | 12,853,062 | $ | 12,619,509 | |||||
| Construction in progress | 310,455 | 163,487 | ||||||
| 13,163,517 | 12,782,996 | |||||||
| Less accumulated depreciation and amortization | (11,595,344 | ) | (10,526,082 | ) | ||||
| Total | $ | 1,568,173 | $ | 2,256,914 | ||||
Depreciation and amortization expense was $755,568 and $920,594 for the 9 months ended December 31, 2022, and 2021, respectively.
Construction in progress consists of assets and technologies under internal development. The Company starts depreciation once the assets are completed and placed in service. During the 9 month period ended December 31, 2021, management evaluated the technology in construction in progress for impairment and recorded no impairment expense. No impairment expenses were recognized during the 9 month period ended December 31, 2022.
Note 6 - Intangible assets
Intangible assets consisted of the following:
| Nine Months Ending | ||||||||
| December 31, 2022 | December 31, 2021 | |||||||
| Patents issued and pending | $ | 1,333,425 | $ | 1,258,211 | ||||
| Exclusivity rights and licenses | 167,542 | 167,542 | ||||||
| 1,500,967 | 1,425,753 | |||||||
| Less Accumulated Amortization | (667,563 | ) | (582,664 | ) | ||||
| $ | 833,404 | $ | 843,089 | |||||
The amortization expense of intangible assets amounted to $66,343 and $54,788 for the 9 month periods ended December 31, 2022 and 2021, respectively. Included in the cost of patents is $158,008 and $119,958 for patents that were not subject to amortization as of December 31, 2022 and 2021, respectively.
The Company evaluates intangible assets for impairment and writes off assets that are not used in any products. During the 9 month periods ended December 31, 2022 and 2021, the Company no impairment expense for pending patents that were estimated by management to have less technological benefit than previously expected. The expected amortization expense for intangible assets for future years is as follows:
| For the Years Ending March 31, | Amount | |||
| 2023 | $ | 72,530 | ||
| 2024 | 71,863 | |||
| 2025 | 66,846 | |||
| 2026 | 66,087 | |||
| 2027 | 65,972 | |||
| Thereafter | 361,279 | |||
| Total | $ | 704,577 | ||
Note 7 - Line of credit
The Company has a revolving line of credit with a bank, which allows borrowings up to $12,000,000 that expired in November 2022 and was extended to August 31, 2023. As further defined in the agreement, borrowings bear interest at either a fixed rate for a fixed term (2.36% per annum in excess of Daily Simple SOFR) or variable rate (Reference Rate) selected by management which was 6.16% for $7,500,000 of outstanding borrowings on the line of credit balance at December 31, 2022. The line of credit is secured by substantially all of the Company’s assets.
Note 8 - Notes payable
In July 2018, the Company entered into a term loan with a bank for $1,750,000 to finance the growth of the business and inventory. Under the agreement, the Company pays approximately $29,000 in monthly principal payments plus interest. During the 9 month period ended December 31, 2022, interest paid on the loan approximated $14,000. The note matures in August 2023 and is secured by the Company’s assets. Borrowings bear interest at either a fixed rate (3.5% per annum in excess of LIBOR rate) or variable rate (0.25% in excess of Reference Rate) as selected by management. The Company executed an interest- rate swap agreement to convert the variable interest rate to 6.56% fixed interest rate for the full term of the note. The fair value of the interest-rate swap is not material to the financial statements for the 9 month period ended December 31, 2022 and has not been recorded.
In September 2019, the Company entered into a term loan with a bank for $300,000 to finance the growth of the business and inventory. Under the agreement, the Company paid interest only from November 2019 through April 2020, and starting in May 2020, the Company made monthly payments of $5,000 plus interest. During the year 9 month period ended December 31, 2022, interest paid on the loan approximated $6,800. The note matures in April 2025 and is secured by the Company’s assets. Borrowings bear interest at either a fixed rate (3.5% per annum in excess of LIBOR rate) or variable rate (0.25% in excess of Reference Rate) as selected by management.
Future scheduled maturities of notes payable are as follows:
| For the Years Ending March 31, | Amount | |||
| 2023 | $ | 410,000 | ||
| 2024 | 205,834 | |||
| 2025 | 60,000 | |||
| 2026 | 5,000 | |||
| Total | $ | 680,834 | ||
Note 9 - Accrued expenses
Accrued expenses consisted of the following:
| Nine Months Ending | ||||||||
| December 31, 2022 | December 31, 2021 | |||||||
| Rebates | $ | 556,977 | $ | 121,595 | ||||
| Vacation | 342,580 | 347,968 | ||||||
| Payroll and related | 257,968 | 243,701 | ||||||
| Sales expenses | 349,203 | 286,959 | ||||||
| Advertising allowance | 120,844 | 260,023 | ||||||
| Interest | 29,609 | 40,326 | ||||||
| Professional services | 187,492 | 145,290 | ||||||
| Accrued taxes | 14,277 | - | ||||||
| Total | $ | 1,858,950 | $ | 1,445,862 | ||||
Note 10 - Related party transactions
The Company is a member of a controlled group of companies and has revenue and cost-sharing activities with other members of the controlled group. Results of operations and financial condition may not represent amounts that would have been reported if the Company operated as an unaffiliated entity.
The Company has an exclusive manufacturing and technical assistance agreement with Zircon de Mexico S.A. de C.V. (the “Contractor”), an entity which is owned by certain shareholders of the Company.
Under the terms of the agreement, the Company provides materials, technical assistance, and expertise to the Contractor, and the Contractor assembles certain of the Company’s products. The Company paid the Contractor for costs incurred in manufacturing the Company’s products, as defined in the contract, plus a profit percentage of approximately 5% of actual cost during the 9 month periods ended December 31, 2022 and 2021. Total payments including the profit percentage amounted to $1,862,179 and $1,987,013 for the 9 month periods ended December 31, 2022 and 2021, respectively. As of December 31, 2022 and 2021, the Company had a payable to the Contractor of approximately $89,331 and $33,046, respectively.
The Company has a note payable to the Contractor. The note was established for the purpose of reducing the payable balance and to satisfy the Company’s lender’s requirements. During the period December 31, 2021, the Company increased the borrowings by $400,000 to reduce the payable balance and to control the timing of the expected cash payments. The outstanding loan balance at December 31, 2022 was at $800,000. The note bears interest at the current Federal funds rate not to exceed 5% and is limited to an increase of no more than 2% annually. The entire principal balance is due and payable in December 2024 and is subordinated to the line of credit agreement the Company has with the bank.
In September 2017, an affiliated company, Zircon Corporation Limited, was established in the United Kingdom to facilitate the sale of the Company’s products to European customers and operations began during the year ended March 31, 2019. The ownership structure of the affiliate is similar to the ownership of the Company. The Company pays certain administrative and selling expenses of the affiliate. During the 9 month periods ended December 31, 2022 and 2021, the Company recorded sales to the affiliate of approximately $5,611 and $38,457, respectively. As of December 31, 2022 and 2021, the Company had a receivable from the affiliate of approximately $95,400 and $175,751, respectively.
Note 11 - Notes payable to Stauss Family Administrative Trust
The Company has notes payable to the Stauss Family Administrative Trust to repay loans made to the Company. During the year ended March 31, 2022, the Company management made a one time unscheduled payment of $247,755. The remaining principal balance of $907,420 is due and payable in December 2024. Interest accrued at 5.5% per annum is paid quarterly and included in accrued expenses. The note is subordinated to the line of credit payable to the bank and no payment is to be made on the note without prior approval from the bank.
Note 12 - Income taxes and federal tax deposit
The state franchise tax expense in the statements of income consists of the current state franchise taxes. Franchise tax expense differs from the amount calculated using statutory rates due to the application of research and development credits to the year’s tax liability. For the years ended March 31, 2022 and 2021, the Company had research and development tax credit carryovers of approximately $7,400 and $55,000, respectively. The research and development tax credit is carried forward indefinitely to apply to future state franchise taxes.
Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. For the 9 month periods ended December 31, 2022 and 2021, deferred income taxes are insignificant.
The Company has elected to use a fiscal year-end different than the year-end for the shareholders, which triggers a federal tax deposit requirement with the Internal Revenue Service. This deposit will be refunded in the event of liquidation or change of fiscal year-end to December 31. Management believes the Company has no obligation to increase the federal deposit amount at December 31, 2022.
Note 13 - Profit sharing and 401(k) plan
The Company has a defined contribution profit sharing plan for all eligible employees. Contributions to the profit sharing plan are determined annually by the Board of Directors. There were no profit sharing contributions made for the periods ended December 31, 2022 and 2021.
All eligible employees are also allowed to participate in the Company’s 401(k) plan. The Company’s contributions to the plan are based on a specified percentage of each participant’s eligible contribution, decided annually by the Board of Directors, as defined in the plan document. Company contributions of $51,890 and $51,889 were made to the plan for the years ended March 31, 2022 and 2021, respectively.
The Company accrues a monthly estimate of the anticipated contributions to the plan. The accrued expenses for the Profit Sharing Plan were $39,143 and $38,918 for the 9 month periods ended December 31, 2022 and 2021, respectively.
Note 14 - Lease commitments
The Company’s corporate headquarters in Campbell, California are leased from the trust of one of its former shareholders for approximately $19,000 per month under a lease expiring in December 2022. The lease requires the Company to pay utilities, maintenance and real estate taxes. Rent expense was $172,755 for each of the 9 month periods ended December 31, 2022 and 2021.
The Company leases office equipment through a lease that expires in June 2026 and requires monthly lease payments of $987 for a period of five years. The total lease expense for the 9 month periods ended December 31, 2022 and 2021, amounted to $6,662.
The Company had The Company leases a vehicle through a lease that expires in July 2024 and requires monthly lease payments of $448 for a period of three years. The total lease expense for the 9 month periods ended December 31, 2022 and 2021, amounted to $3,061.
Future minimum lease commitments are as follows:
| For the Years Ending March 31, | Amount | |||
| 2023 | $ | 189,969 | ||
| 2024 | 17,214 | |||
| 2025 | 13,187 | |||
| 2026 | 11,844 | |||
| 2027 | 2,961 | |||
| Total | $ | 235,175 | ||
Note 15 - Supplemental cash flow information
Cash was paid for the following:
| Nine Months Ending | ||||||||
| December 31, 2022 | December 31, 2021 | |||||||
| Interest | $ | 312,658 | $ | 211,714 | ||||
| California franchise taxes | 0 | 0 | ||||||
Note 16 - Concentrations, commitments and contingencies
During the 9 month periods ended December 31, 2022 and 2021, the Company maintained deposits in a single bank that exceeded the federal insured deposit limit of the Federal Deposit Insurance Corporation (FDIC).
During each the 9 month periods ended December 31, 2022 and 2021, the Company generated approximately 63% and 66%, respectively of its total revenue from two customers. Accounts receivable from these customers amounted to approximately 59% and 65% of total accounts receivable at December 31, 2022 and 2021, respectively.
The majority of the Company’s inventory is manufactured by third party manufacturers located in foreign countries. During each of the 9 month periods ended December 31, 2022 and 2021, approximately 23% of the Company’s total purchases were from one contract manufacturer. It is possible that unforeseen changes in the business of these manufacturers could disrupt the Company’s inventory supply, and the Company has purchased business interruption insurance to mitigate this risk.
The Company is engaged in legal proceedings incidental to its normal business activities. While the outcome of claims, lawsuits or other proceedings cannot be predicted with certainty, management expects that any such liabilities, to the extent not covered by insurance or otherwise, will not have a material adverse effect on the Company’s financial position or results of operations.
Note 17 - Economic risks and uncertainties
Various uncertainties exist in the current global, economic, and political environment including continued uncertainty related to the impact of the COVID-19 pandemic, disrupted supply chain, staff shortages, and current geopolitical conflicts. The extent of the impact of these uncertainties on the Company’s operational and financial performance will depend on certain developments, including the duration and spread of the pandemic outbreak, the impact on the Company’s customers, employees, and general operations, all of which are uncertain and cannot be predicted.