group report v6.pdf

Entrepreneurial Finance

Grace Bioremediation Technologies

MGSM 985A Karl Rodrigues

Tristan Sander

Mihir Medhekar

Eliel Barcelona

Nasir Ali

! Entrepreneurial Finance MGSM 985A – Grace Bioremediation Technologies

Contents Executive Summary ............................................................................................................................... 2

Introduction ........................................................................................................................................... 2

Pre-‐Negotiation Expectations ................................................................................................................ 2

Term Sheet ......................................................................................................................................... 3

Board of directors .......................................................................................................................... 3

Share Repurchase .......................................................................................................................... 3

Initial Public Offering ..................................................................................................................... 3

Terms ..................................................................................................................................................... 3

Terms of No Flexibility ....................................................................................................................... 3

Terms of Negotiation ......................................................................................................................... 4

Process of Negotiation .................................................................................................................... 4

Post-‐Negotiation Summary .................................................................................................................... 5

Bibliography ........................................................................................................................................... 7

Appendix ................................................................................................................................................ 7

Appendix A ......................................................................................................................................... 7

Appendix B ......................................................................................................................................... 7

Appendix C ......................................................................................................................................... 7

Appendix D ......................................................................................................................................... 8

Appendix E ......................................................................................................................................... 9

Appendix F ....................................................................................................................................... 11


Executive Summary Grace Bioremediation Technologies (GBT) management sought US$4 million in financing to purchase GBT from its parent company W.R. Grace & Company (Grace). Venture Capitalist firm Covington has shown interest in this deal and negotiations were undertaken to seek a possible agreement.

Agreement was made on Monday 12th November 2012 between GBT management and Covington as to the details of the financing. Covington would provide GBT management with the US$4 million required which consisted of Covington’s US$3M Preferred Participating Shares and Skylon’s US$1M Ordinary Shares. This resulted in an ownership of GBT Management – 8.05%, Covington Capital – 68.97%, Skylon – 17.24% and Options for GBT management – 5.75%.

Exit Strategy was based around a 5 year term with a minimum exit value of $8.45 million for GBT management to access their options.

Full detail of the term sheet signed by both GBT management and Covington has been provided.

Introduction It is April 2002 and GBT a Canadian based company, is currently a subsidiary of the NYSE-‐listed organisation Grace. Grace has filed for bankruptcy protection and is currently seeking to divest non-‐core assets, one of which being GBT. GBT’s management are looking to raise US$4 million in financing, along with their own contribution of US$350,000, to purchase GBT for US$4.35 million.

GBT has entered negotiations with a venture capital (VC) firm Covington, based in Toronto, Ontario to raise funds for the US$4 million. The available financing instruments for Covington are straight equity, convertible preferred with dividend and debt accompanied by free warrants.

GBT has projected growth expectations for their two products (DARAMEND & AQUAMEND) until 2006. These projections are based on only 10 per cent of expected sales for DARAMEND and fifty per cent of expected sales for AQUAMEND. These projections were considered reasonable by management and were also acceptable to Covington.

This report discusses and outlines the expectations that the management team of GBT had pre and post negotiations. It also describes the negotiation process with Covington and what terms of negotiation were deemed to be acceptable or unacceptable to GBT’s management. All dollar figures from this point forward are assumed to be in US currency.

Pre-‐Negotiation Expectations An important issue to GBT management was to increase the voting control of the company. Whilst GBT management would prefer majority of voting control, based on the modest amount of capital able to be raised by GBT management it would be highly unlikely. However, there were other options available GBT management to increase control.

Initial discussions between GBT management revolved around the cost of debt versus the cost of equity. Debt was the obvious cheaper option, with the current prime rate being six per cent. Equity however would be much more expensive with the twenty to thirty per cent expected return on


equity sought by Covington. A straight debt forecast was derived to see how liquid GBT would become satisfying a $4 million debt. Appendix A depicts a forecast of straight debt issue; GBT management saw this as an unacceptable solution due to the lack of liquidity in the company. Appendix B depicts a forecast for a blend of $2 million in debt and $2 million in equity; GBT management saw this second option as a much more preferable solution due to the increase in liquidity and also the future potential to repurchase the equity with cash or a second round of debt. The second option also increases GBT management’s control of the company, with their $350,000 contribution, bringing them closer to obtaining voting control. Covington would be expected to buy in at $1.40 per share, giving them 33% control over GBT for their $2 million equity injection.

Two exit strategies were envisioned by GBT management, one being the repurchase of Covington’s equity using cash on hand in 2009 (depicted in Appendix C), or perhaps earlier if funds allowed, or to raise an Initial Public Offering (IPO) for a predicted $19 million, at which point Covington would obtain an estimated $6.27 million or a 20 per cent return on equity.

Term Sheet Appendix D is a table containing the initial expectations of GBT management in the form of contract terms. Some important points for discussion were:

Board of directors The board of directors will contain three directors with equal voting rights given to GBT and Covington. A third independent director will be brought in to make the deciding vote, should GBT and Covington disagree. This will ensure that both companies have an equal say regarding issues they feel that are important.

Share Repurchase In 2008, GBT’s cash flows are predicted to be able to, or close to, repurchasing Covington’s equity portion. In the event that cash on hand alone cannot complete the repurchase, a new round of debt financing should be investigated to complete the transaction, if cash flow and liquidity expectations allow it. Covington should not have the right to force this transaction if GBT cannot cope with the new round of debt.

Initial Public Offering In the event that the share purchase is unachievable, an IPO is envisioned to give Covington their exit strategy. An IPO of $19 million is predicted in order to give Covington their expected returns. After 2008 it will be Covington’s decision to raise, or refuse, an IPO for anything less that $19 million.

Terms

Terms of No Flexibility GBT management identified certain key terms that were considered to be non-‐negotiable with Covington. The following section describes these terms in detail.


GBT valuation: The asking price of $4.35million by Grace was considered non-‐negotiable by GBT management; furthermore as management could only provide $350,000, the $4million of extra funding was necessary to fulfil the asking price by Grace.

Board control: In order to steer the company in the best direction possible, using their extensive knowledge and experience, GBT management saw control over the company as a major issue driving forward. A seat on the board for GBT was considered essential, along with a board seating that did not favour Covington to make an independent decision without the agreement of a third party board member.

Terms of Negotiation GBT management identified certain key terms that were considered to be negotiable with Covington. The following section describes these terms in detail.

Capital structure: GBT management saw high liquidity within the company, forecast to be able to satisfy a $2million debt. This, in turn, increased ownership and control for the GBT management with their contribution. This debt/equity structure was considered negotiable with Covington in order to provide them with satisfactory risk mitigation and return.

Required rate of return/risk: GBT management were aware that Covington’s required rate of return was between 20 and 30 per cent; however due to the already established size of the company, operating cash flows and knowledgeable management, GBT management saw GBT to be a low risk investment.

Ownership/control: GBT management were aware that their contribution of $350,000 would likely result in the minority control of GBT; however GBT management were aiming to increase their ownership by increasing debt and decreasing the shares outstanding.

Share price: Analysis lead to an initial asking price of $1.40 per share; however GBT management saw this to be directly correlated to the business evaluation which would also be negotiated with Covington in the near future.

Process of Negotiation Covington Capital and GBT team approached the case using the eight-‐stage negotiation process.

1. Preparation – Both teams studied the GBT Financial Case independently. GBT management focused on the value of GBT based on the projected cash flow operations. It had considered the existing business model of GBT and how it would change if Covington Capital would acquire the company. The GBT management discussed different financing options such as debt capital raising and ordinary shares capital injection. GBT management considered preferred shares however it was disregarded as it was not a favourable outcome for the management team. GBT management firmly believed that there should be at least one board seat allocated to GBT management in order to maintain some level of control.


2. Open – GBT management made a presentation and disclosed its positions to Covington Capital about the value of the company, sources of funding, terms of payment and structure ownership.

3. Covington Rebuttal – During the meeting between GBT management and Covington Capital team, there were significant and conflicting positions that were discussed. This has been summarised in Appendix E. Refer to Points Discussed.

4. Explore – Both teams had an open mind-‐set to explore and resolve any conflicting perspectives.

5. Signal – Both teams offered alternative suggestions to conflicting disputes for resolution. 6. Package -‐ Both teams were willing to compromise in order to find possible solutions to

proceed the deal. 7. Close – Covington Capital team and GBT both agreed on the revised term sheet. Refer to

result/Agreement column in Appendix E. 8. Sustain – Covington Capital team updated the Term Sheet and a revised Term Sheet was

sent through via email, ready for signature by both parties.

Post-‐Negotiation Summary The end result of lengthy discussions between GBT management and Covington Capital was an agreement between the two parties on the various terms of the financing. A full term sheet has been provided in the Appendix along with signed agreement between GBT management and Covington Capital team.

As discussed above GBT management had a certain number of Non-‐Negotiable terms of which the following were agreed to by Covington Capital:

• Final valuation of GBT will be US$4.35M and $4M in funding would be required • GBT must have board representation and there must be an independent on the board

Similarly Covington Capital had Non-‐Negotiable terms that were agreed to by GBT management:

• Required Rate of Return = 24.35% • US$3M Preferred Participating Shares and US$1M Ordinary Shares (Skylon) • Preferred shares have conversion ratio of 1:1 to ordinary shares • Ownership

o GBT Management – 8.05% o Covington Capital – 68.97% o Skylon – 17.24% o Options – 5.75%

The following negotiable terms were negotiated and agreed to by both GBT management and Covington Capital:

• Funding was to be provided through capital only (US$3M Preferred Participating Shares and US$1M Ordinary Shares) rather than US$2M Ordinary Shares and US$2M Debt. Covington drove straight equity financing in an attempt to lower the risk of increased debt and to increase their control and total returns that was only obtainable with equity.


• An options pool was negotiated for GBT management to increase their ownership on a performance and successful exit basis. This helped to offset the lack of ownership previously lost with the negotiated 100% equity financing.

• Life Insurance for Key Officers was reduced to US$6M from $US10M. This was negotiated down by GMT management to discourage using loss of management as a successful exit strategy.

• Successful exit strategy evaluation was set at an achievable target value ($8.45M) rather than 200% of Covington Capital’s preferred shares plus its accrued dividend. This helped to set a realistic goal of the future and helped GBT management to meet their performance targets.

• Minimum IPO value was reduced to US$15M from US$20M. This was driven by GBT management to provide a more realistic exit strategy that still returned Covington their required returns. It also helped to show lower risk in the organisation.

• Preference Dividend was agreed to 11%. This was negotiated down by GBT management in order to increase liquidity and ownership of the organisation.

• In the case of liquidation, a Series A investor would receive pro rata of share liquidation not the greater of 150% purchase price or pro rata. This was negotiated by GBT management to decrease their liability should the company enter liquidation, only company assets would be available to Covington during liquidation.

GBT management were reasonably pleased with the outcome as their primary objective, which was to receive immediate funding for the entire US$4M, was met. Furthermore, they ensured that they still had an input into the direction/operations of the company through a vital board seat and the appointment of an independent worked to GBT management’s favour.

Due to their expertise in bioremediation the return on equity required was lower than Covington Capital’s high risk investment of 30% and 24.35% was seen as a fair risk level for the investors. GBT management would have preferred greater control in the firm through a mix of capital and debt investment, however in order to gain the necessary funding US$3M Preferred Participating Shares and US$1M Ordinary Shares had to be agreed to resulting in lower ownership by GBT management of 8.05%.

The exit strategy with an achievable target of US$8.45M including the vesting of options as this level was seen as a fair target and given GBT management’s expertise in bioremediation and the superior products the target value should be achieved.


Bibliography Grace Bioremediation Technologies, Richard Ivey School of Business, 2004

Appendix

Appendix A Appendix A shows a forecast of the available cash within GBT to satisfy a debt of US$4 million within a five year period. It can be noticed the lack of liquidity within GBT which may be considered highly risky.

Appendix B Appendix B shows a forecast of the available case within GBT to satisfy a debt of US$2 million and equity injection of US$2million. It can be noticed that GBT would be much more liquid to operate than that of a straight debt injection.

Appendix C Appendix C shows a forecast into year 2009, and the ability for GBT to repurchase Covington’s portion of equity using cash. This forecast assumes a 6% rate of debt and 20% rate of equity. It can be noticed that around the first quarter of 2009, GBT is forecast to be able to repurchase Covington’s equity, giving them an exit strategy.

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Appendix D Appendix D is a table representing the initial deal structure expected by GBT management.

Term Condition Amount of financing Grace’s $3.5 million in goodwill is non-‐negotiable

$4.35 million total investment required, $4 million required by Covington Preferred Covington financing

$2 million debt $2 million equity

Use of funds GBT will use the funds to divest ownership from W.R. Grace & Co. Subscription price $1.40 per share Closing Date 30th June 2012 Costs & Expenses GBT will pay legal all legal fees surrounding the investment deal Due-‐Diligence Expenses:

Covington will incur their own due diligence expenses

Exclusivity period 30 days from the signing of the term sheet Break fee Incurred by the party that break contract after signing, total costs incurred

include legal & due diligence expenses. Board of directors The board of directors will consist of three directors and two observers.

• 1 seat to GBT management • 1 seat to Covington investors • 1 third part seat • 1 observer to GBT management • 1 observer to Covington

Further financing There is no foreseen need for further financing, should the need arise for overseas expansion, further financing will not proceed without the approval of Covington. In the event of further financing, Covington will have the right to first financing.

Spending GBT management will not spend greater than 10% of retained earnings without board approval.

Share Vesting GBT managers will not be able to divest their shares within the first 5 years without board approval.

Preference Shares Covington will have to right to convert all preference shares, to common stock, at a conversion rate of 1:1.

Debt repayments Any debt portion borrowed by GBT, from Covington, in 2002 will be repaid in entirety by EOFY 2007.

Share repurchase Covington shares to be repurchased by GBT in 2008 if assets and cash flow allow it. Covington will have to right to refuse the repurchase and stay

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invested. Covington will not have to right to force GBT to repurchase the equity if cash flows cannot cover any additional debt required for the repurchase.

IPO In the event that GBT cannot repurchase Covington’s equity, an IPO can be raised for no less than $19 million. This will ensure that Covington get the minimum of $6.27 million or 20% return on equity. Covington will have to right to force the raise of an IPO after 2008 for less than $19m if desired.

Appendix E Covington Capital and GBT Management have discussed key elements of the term sheet that are vital in closing the deal. Below is the list of key items:

Points Discussed Covington Capital (CC) Position

GBT Management Team Position

Result/Agreement

GBT Valuation

CC was willing to pay the company worth $4. million

GBT was asking for $4 to pursue the deal

$4 Million was agreed.

Source of Funding

CC offered $3M worth of 12% Preferred Participating, and $1M worth of ordinary shares

GBT offered $4M debt financing with 20% interest. Payment is fully paid after 6 years.

GBT gave up its positions and accepted CC $3M Preferred Participating and $1M of ordinary shares.

Conversion Rights Preferred shares have conversion ratio of 1:1 to ordinary shares

No initial position on this matter

GBT agreed to 1:1 Conversion

Board Representation

CC would like to have 3 seats in the board, 1 seat for Skylon and 1 seat for GBT Team

GBT believed that it would fair that CC would give its 1 board seat to an independent director.

CC agreed with GBT request.

Life insurance

CC informed that GBT key officers would be insured by at least $10M, individually

GBT requested that it should be reduced to $5M.

GBT and CC compromised to $6M.

Break Fees

In case any party would not continue the venture, the party that caused the breach would pay $100K break fees

GBT agreed with the term. Agreed

Exit Strategy CC will exit after 5 years and the GBT Management team needs to pay 200% of its preferred shares plus its accrued dividend

GBT pointed out to CC that based on the projected cash flow, there is no way that the company could pay CC based on that term. GBT suggested that CC should revise its position.

CC revised its term and set a minimum exit value of $8.45M, in the event of IPO, merger or sale. GBT agreed the revised term.

Fees The Company will pay all the expenses incidental to this transaction

GBT agreed that all fees related to this should be shouldered by the Company

Agreed

!" Entrepreneurial Finance MGSM 985A – Grace Bioremediation Technologies

Qualified IPO CC defined initial public offering to be at least US$20M and Gross Proceeds to be in excess of US$12M

GBT believed US$20M is too optimistic a figure to be the minimum and initial IPO should be for US$10M and Gross Proceeds to be US$5M

CC and GBT compromised and agreed to a minimum IPO of US$15M and Gross Proceeds to be in excess of US$6.5M

Liquidation Preference

CC required the Series A investor to receive the greater of 150% of Purchase Price or pro rata of share liquidation

GBT requested to remove the greater of 150% of Purchase Price and that Series A investors would only receive pro rata share of liquidation

CC agreed and 150% was removed

Preference Dividend

CC Preferred Participating share would receive 12% Dividend

GBT offered a share dividend of 10%

CC and GBT agreed the final Preferred Participating Share Dividend would be 11%

For other matters please see the agreed Term Sheet.

!! Entrepreneurial Finance MGSM 985A – Grace Bioremediation Technologies

Appendix F TERM SHEET FOR PRIVATE PLACEMENT OF SERIES "A" PARTICIPATING CONVERTIBLE PREFERENCE SHARES BY GRACE BIOREMEDIATION TECHNOLOGIES. 14th November 2012

The following is a summary of the principal terms with respect to the proposed Series "A" Participating Convertible Preference Share issue by Grace Bioremediation Technologies (the “Company”). Except for the section entitled “Binding Terms,” this summary of terms does not constitute a legally binding obligation on the parties. Any other legally binding obligation will only be made pursuant to definitive agreements to be negotiated and executed by the parties.

Offering Terms

Securities to Issue: 3,000,000 Series A Participating Convertible Preference Shares (“Series A Preferred Shares”), convertible into an equal number of Ordinary Shares.

A preferred dividend of 11% per annum on the Series A Preferred Shares will be payable quarterly from available cash flow, as determined by the Board. To the extent the dividend is not paid, it will accrue, but not compound. No dividends may be paid on the Ordinary Shares or any series of preferred stock, except for dividends on the Series A Preferred Shares as described herein.

Aggregate Issue Price:

US$3,000,000 in aggregate.

Investors: Covington Capital (the “Investors”).

Key Executive Shareholders:

Key Executive Shareholders (the “Key Executive Shareholders), include Alan Seech, Kerry Bolanos-Shaw, David Raymond and Theresa Phillips. The Key Executive Shareholder’s Shares vest twenty percent on closing with the remainder vesting linearly over a forty-eight month period.

Price Per Share: $1 (the “Original Issue Price”), based on a pre-money valuation of $4,350,000, and as outlined in the table below.

Capitalization Table:

Investor Instrument Investment No. Shares Ownership

Key Executive Shareholders

Common Shares

$350,000 350,000 [1] 8.05%

Covington Capital

Participating Convertible Preference

Shares

$3,000,000 3,000,000 68.97%

Skylon Advisors Inc

Common Shares

$1,000,000 750,000 17.24%

Options Options 250,000 5.75%

Totals $4,350,000 4,350,000 100%


Minimum Exit Value:

As an incentive to the Key Executive Shareholders, a minimum exit value (the “Minimum Exit Value”) will be set at US$8.45m. In the event that a sale or IPO of the Company results in a valuation that is less than the Minimum Exit Value, the Key Executive Shareholders will transfer 250,000 of their Ordinary Shares to the Investors.

Use of Funds: The Company will use the proceeds from the Series A Preferred Shares to purchase all the assets of Grace Bioremediation Technologies (the Company) from W.R. Grace & Company (Grace).

Conditions Precedent:

i. Minimum committed financing of US$4.35 million from a syndicate comprised of the Company management team and Investors acceptable to each other and o the Company.

ii. Completion of satisfactory due diligence, included audited historical financial statements.

iii. Creation of the Company as a separate legal entity.

iv. All intellectual property including trademarks, patents, and copyright belonging to Grace or the Management team are to be registered or transferred into the Company’s name.

v. Investor to appoint key executive staff including Chief Financial Officer, Vice President of Sales and Vice President of Marketing.

vi. Approval process of the Investors

Legal Fees & Expenses

The Company will pay its own legal fees and the legal fees and expenses of the Investors.

Due Diligence Expenses

The Company will pay third party due diligence expenses and out-of-pocket expenses incurred by Investors. Expenses to be paid from the proceeds of investment at closing.

Break fee: In the event that the Company declines the investment, then the Company will pay the Investors the greater of US$100,000 or third party expenses. Similarly, in the event that the Investors decline the investment, then the Investors will pay the Company the greater of US$100,000 or third party expenses.

Board of Directors: The Company’s Constitution would provide for a Board of five Directors, including, two seats for the Investors, one seat for the Company, one seat for Skylon Advisors Inc and one independent Director, who shall be elected by the Series A and Ordinary Shares voting together as a single class on an as-if-converted basis.


Information Rights: So long as any Series A Preferred Shares were outstanding, the Company would deliver to the Investor (i) audited annual financial statements within [90] days after the end of each fiscal year; (ii) unaudited quarterly financial statements, including forecasts for the next [6] months within [45] days of the end of each fiscal quarter; (iii) unaudited monthly financial statements, including forecasts for the next [3] months within [30] days of the end of each month; (iv) monthly business unit performance reports within [30] days of the end of each month and (v) an annual budget within 60 days prior to the end of each fiscal year. For so long as any Series A Preferred Shares were outstanding, the Investor would have standard inspection rights.

Voting Rights: Each holder of Series A Preferred Shares has the same right to attend and speak at any general meeting of the Company and to vote on a show of hands as any Ordinary Shareholder and to vote on a poll casting the same number of votes per Series A Preferred Share as is cast per Ordinary Share.

Covenants: Business Plan: The Company will prepare an annual business plan, with financial projections, for Board Approval, no later than thirty [30] days prior to the beginning of each fiscal year.

Key Man Insurance: The Company will have obtained “Key Man” Life Insurance on the lives of Alan Seech, Kerry Bolanos-Shaw, David Raymond and Theresa Phillips in an amount of not less than US$6,000,000 each with the Company as the beneficiary.

Financial Audits: So long as any Series A Preferred Shares were outstanding, the Investor may appoint an independent auditor to audit any annual, quarterly or monthly financial statements provided to the Investor by the Company. The cost of such appointment will be borne by the Company.

IP Protection: The Company will maintain appropriate protection, including the payment of annual maintenance fees, for all existing intellectual property, including trademarks, patents, and copyright. All new intellectual property will be appropriately protected at the time of creation or acquisition.


Protective Provisions:

Consent of the holders of at least 50% of the outstanding Series A Preferred Shares, voting as a single class, would be required for: (i) any amendment or change of the rights, preferences, privileges or powers of, or the restrictions provided for the benefit of, the Series A Preferred Shares; (ii) any action that authorized, created or issued shares of any class of shares having preferences superior to or on a parity with the Series A Preferred Shares; (iii) any action that reclassified any outstanding shares into shares having preferences or priority as to dividends or assets senior to or on a parity with the preference of the Series A Preferred Shares; (iv) any amendment of the Company's

Constitution that adversely affected the rights of the Series A Preferred Shares; (v) any merger or consolidation of the Company with one or more other corporations in which the shareholders of the Company immediately after such merger or consolidation held stock representing less than a majority of the voting power of the outstanding stock of the surviving corporation; (vi) a Change in Control of the Company; (vii) the sale of all or substantially all the Company's assets; (viii) the liquidation or dissolution of the Company; (ix) the declaration or payment of a dividend on the Ordinary Shares; (x) borrowings or financial accommodation (in whatever form) of an amount in excess of US$100,000 by or to the Company; (xi) material changes in the Company's business plan; (xii) any expenditure by the Company or agreement by the Company to expend amounts or agreement by the Company to incur any liability, contingent or otherwise, including (without limitation) capital expenditure on any one item or series of related or interconnected or operationally interdependent items in aggregate greater than US$100,000, or under any comfort letter aggregating in excess of US$100,000 in any one financial year and not provided for in the Business Plan for that year; (xiii) appointment or removal of any Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Vice President of Sales or Vice President of Marketing; or (xiv) the resignation or removal of any Key Executive Shareholders.

Non-compete Agreement:

In the event of the resignation or removal of any Company executives, or Key Executive Shareholders, such persons shall be restricted from working for any other company that competes directly or indirectly with the Company for a period of no less than three years.

Representations and Warranties:

The Company and the Key Executive Shareholders will provide normal commercial representations and warranties with agreed caps and time limits acceptable to the Investor relating to the disclosure of all relevant information regarding the business. In the event of a material breach of warranties, non-defaulting shareholders reserve the right to purchase the vested and unvested shares or options of the defaulting shareholder at a valuation established by an independent auditor, conducted at the expense of the defaulting shareholder.


Conversion Rights: The Investors would have the right to convert the Series A Preferred Shares into Ordinary Shares at any time. The conversion rate for the Preferred Shares would be 1-for-1. The Preferred Shares would automatically be converted into Ordinary Shares, at the then applicable conversion rate, upon the closing of an underwritten public offering of Ordinary Shares of the Company (a "Qualified IPO").

Right of First Financing:

In case of subsequent equity financings the Investor and other ordinary or common share holders, but not option holders, shall be entitled to purchase such portion of that financing to maintain the percentage of the outstanding stock held by that shareholder calculated on an as-converted, as exercised basis other than:

i. shares issued in a Qualifying IPO; or

ii. ordinary shares in the Company pursuant to strategic or one-off alliances.

Options: The company will establish an Employee Share Option Plan (the “ESOP”) as an incentive for Key Executive Shareholders. The number of options issued under this plan will be 250,000 (the “Exit Bonus Pool”). Options in the Exit Bonus Pool will vest under the following conditions:

i. After the fifth year; and

ii. On the sale or IPO of the Company that meets or exceeds the Minimum Exit Value.

Options will vest in the following proportions:

Exit Value Range Proportion: Number of Shares

< US $8.45m 0% 0

US $8.45m - $11.9m 40% 100,000

US $12m - $14.9m 60% 150,000

US $15m - $17.9m 80% 200,000

> US$18m 100% 250,000


Anti Dilution: The conversion price of the Series A Preferred will be subject to a full ratchet adjustment to reduce dilution in the event that the Company issues additional equity securities (other than shares (i) reserved as employee shares described under the Company’s option pool; (ii) shares issued for consideration other than cash pursuant to a merger, consolidation, acquisition, or similar business combination approved by the Board; (iii) shares issued pursuant to any equipment loan or leasing arrangement, real property leasing arrangement or debt financing from a bank or similar financial institution approved by the Board; and (iv) shares with respect to which the holders of a majority of the outstanding Series A Preferred waive their anti-dilution rights) at a purchase price less than the applicable conversion price. In the event of an issuance of stock involving tranches or other multiple closings, the anti dilution adjustment shall be calculated as if all stock was issued at the first closing. The conversion price will also be subject to proportional adjustment for stock splits, stock dividends, combinations, recapitalizations and the like.

Pre-Emptive Rights:

The Company will give each holder of the Series A Preferred Shares the right of first refusal with respect to any future equity offerings. Furthermore, each holder of the Series A Preferred will have pre-emptive rights on all offerings of equity securities or securities convertible or exchangeable into equity securities in order to maintain its original fully-diluted, post investment equity ownership position. A Series A Preferred holder will have 30 days in which to exercise these pre-emptive rights. Notwithstanding the provisions set forth above, no pre-emptive rights will apply to (i) equity compensation grants to employees, consultants or directors pursuant to plans or other arrangements approved by the Board of Directors or (ii) the issuance of securities in connection with a bona fide business acquisition of or by the Company, whether by merger, consolidation, sale of assets, sale or exchange of stock or otherwise. These rights will terminate at the Company's Official Public Offering.

Tag-along Agreement:

If any shareholder with 10% or more of the Company sells any proportion of its shares in the Company (other than to another existing shareholder), the Series A Investor shall have the right to a sale of that same proportion of the Series A Investor’s Preference Shares and/or ordinary shares in the Company.

Drag-along Agreement:

If the holders of 75% of the Series A Preferred Shares and Ordinary Shares, (calculated on an as-if-converted basis) execute a final, binding, definitive agreement with a prospective purchaser to sell all of their respective shares to such purchaser for consideration consisting entirely of cash or publicly traded securities, then the remaining shareholders shall be entitled and obliged to sell their shares to the same purchaser upon the same terms.


Liquidation Preference:

In the event of any insolvent liquidation, dissolution or winding up of the Company, following distributions to other legally senior parties and subject to the legal availability thereafter of distributable assets, the Series A Investor would be entitled to receive, prior to any distribution to the holders of the Ordinary Shares or any other class of preferred shares, pro rata share of such liquidation.

Registration Rights: If, at the end of four years from the Closing Date, more than 50% of all the shares of Series A Preferred, or Common Stock issued upon conversion of the Series A Preferred, voting as a single class may force the Company to register their shares for an IPO, or appoint an investment banker to place their shares or sell the Company.

Qualified IPO: A "Qualified IPO" is defined as an initial public offering at an implied valuation of at least US$15,000,000 million and gross proceeds to the Company in excess of US$6.5 million.

Redemption Rights:

If, by five years from the closing date the Company has not listed or merged for liquid securities, or the Series A Investor has not otherwise sold its holding in the Company, then the Company, if requested by a simple majority of Series A Preference Shareholders will enter into a share Buy-back Scheme (the “Buy-back Scheme”) that allows the Company to purchase the Series A shares, as converted to Ordinary Shares. The Buy-back Scheme will take into account the need of the Investors to sell their shares by the end of seven years from the closing date with the available cash flows and borrowing capacity of the Company and will require approval by the Board of Directors.

Binding Terms: For a period of ninety days, the Company agrees not to solicit offers from other parties for any financing. Without the consent of Investors, the Company will not disclose these terms to anyone other than officers, directors, key service providers, and other potential Investors in this financing.


GRACE BIO REMEDIATION INVESTORS

DATE: DATE:

group report v6.pdf

Documents

appendix e

appendix b

appendix c

appendix d

appendix f

terms of negotiation

negotiation summary

negotiation expectations