-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RTCO51LM9ndd5ZK43yq3Wj69Qmeyf3QdO8fTzDKJtzYF1cS+GmGUAyMjG4aLM/1d a9gYEQYiRYw0PMchitok0Q== 0001144204-10-037647.txt : 20100713 0001144204-10-037647.hdr.sgml : 20100713 20100713131320 ACCESSION NUMBER: 0001144204-10-037647 CONFORMED SUBMISSION TYPE: SC 13D PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 20100713 DATE AS OF CHANGE: 20100713 GROUP MEMBERS: KENNETH A. MERLAU GROUP MEMBERS: PHILIP C. ADAMS SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: STEELCLOUD INC CENTRAL INDEX KEY: 0001058027 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPUTERS [3571] IRS NUMBER: 541890464 STATE OF INCORPORATION: VA FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: SC 13D SEC ACT: 1934 Act SEC FILE NUMBER: 005-55829 FILM NUMBER: 10949877 BUSINESS ADDRESS: STREET 1: 14040 PARK CENTER ROAD CITY: HERNDON STATE: VA ZIP: 20171 BUSINESS PHONE: 7036745500 MAIL ADDRESS: STREET 1: 14040 PARK CENTER ROAD CITY: HERNDON STATE: VA ZIP: 20171 FORMER COMPANY: FORMER CONFORMED NAME: STEELCLOUD INC DATE OF NAME CHANGE: 20010815 FORMER COMPANY: FORMER CONFORMED NAME: DUNN COMPUTER CORP /VA/ DATE OF NAME CHANGE: 19980318 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: Clipper Investors LLC CENTRAL INDEX KEY: 0001496456 IRS NUMBER: 272950999 FILING VALUES: FORM TYPE: SC 13D BUSINESS ADDRESS: STREET 1: 1095 FISHER LANE CITY: WINNETKA STATE: IL ZIP: 60093 BUSINESS PHONE: 312-977-4400 MAIL ADDRESS: STREET 1: 1095 FISHER LANE CITY: WINNETKA STATE: IL ZIP: 60093 SC 13D 1 v190359_sc13d.htm

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Schedule 13D

Under the Securities Exchange Act of 1934

Steelcloud, Inc.

(Name of Issuer)

Common Stock, $.001 par value per share

(Title of Class of Securities)

85815M107

(CUSIP Number)

Mr. Kenneth A. Merlau

c/o Clipper Investors LLC

1095 Fisher Lane

Winnetka, Illinois 60093

(312) 977-4400

(Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications)

July 2, 2010

(Date of Event Which Requires Filing of This Statement)

If the filing person has previously filed a statement on Schedule 13G to report the acquisition that is the subject of this Schedule 13D, and is filing this schedule because of §§ 240.13d-1(e), 240.13d-1(f) or 240.13d-1(g), check the following box ¨.

Note: Schedules filed in paper format shall include a signed original and five copies of the schedule, including all exhibits. See §240.13d-7 for other parties to whom copies are to be sent.

* The remainder of this cover page shall be filled out for a reporting person’s initial filing on this form with respect to the subject class of securities, and for any subsequent amendment containing information which would alter disclosures provided in a prior cover page.

The information required on the remainder of this cover page shall not be deemed to be “filed” for the purpose of Section 18 of the Securities Exchange Act of 1934 (“Act”) or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes).

1. Name of Reporting Person Clipper Investors LLC
2. Check the Appropriate Box if a Member of a Group (See Instructions)		(a) o (b) x
3. SEC Use Only
4. Source of Funds (See Instructions) WC
5. Check if Disclosure of Legal Proceedings is Required Pursuant to Item 2(d) or 2(e) ¨
6. Citizenship or Place of Organization Illinois
	7. Sole Voting Power 0
Number of Shares Beneficially Owned by	8. Shared Voting Power 40,000,000
Each Reporting Person With	9. Sole Dispositive Power 0
	10. Shared Dispositive Power 40,000,000
11. Aggregate Amount Beneficially Owned by Each Reporting Person: 40,000,000
12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares ¨ (See Instructions)
13. Percent of Class Represented by Amount in Row (11) 58.8%
14. Type of Reporting Person (See Instructions) OO

1. Name of Reporting Person Kenneth A. Merlau
2. Check the Appropriate Box if a Member of a Group (See Instructions)		(a) o (b) x
3. SEC Use Only
4. Source of Funds (See Instructions) OO
5. Check if Disclosure of Legal Proceedings is Required Pursuant to Item 2(d) or 2(e) ¨
6. Citizenship or Place of Organization USA
	7. Sole Voting Power 0
Number of Shares Beneficially Owned by	8. Shared Voting Power 40,000,000
Each Reporting Person With	9. Sole Dispositive Power 0
	10. Shared Dispositive Power 40,000,000
11. Aggregate Amount Beneficially Owned by Each Reporting Person: 40,000,000
12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares ¨ (See Instructions)
13. Percent of Class Represented by Amount in Row (11) 58.8%
14. Type of Reporting Person (See Instructions) IN

1. Names of Reporting Person Philip C. Adams
2. Check the Appropriate Box if a Member of a Group (See Instructions)		(a) o (b) x
3. SEC Use Only
4. Source of Funds (See Instructions) OO
5. Check if Disclosure of Legal Proceedings is Required Pursuant to Item 2(d) or 2(e) ¨
6. Citizenship or Place of Organization USA
	7. Sole Voting Power 0
Number of Shares Beneficially Owned by	8. Shared Voting Power 40,000,000
Each Reporting Person With	9. Sole Dispositive Power 0
	10. Shared Dispositive Power 40,000,000
11. Aggregate Amount Beneficially Owned by Each Reporting Person: 40,000,000
12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares ¨ (See Instructions)
13. Percent of Class Represented by Amount in Row (11) 58.8%
14. Type of Reporting Person (See Instructions) IN

Item 1. Security and Issuer.

This statement relates to the common stock, $.001 par value per share (the “Common Stock”), of the Issuer, whose principal executive offices are at 20110 Ashbrook Place, Suite 130, Ashburn, VA 20147.

On July 2, 2010, Clipper Investors LLC, an Illinois limited liability company (“Clipper”) acquired the following securities in a private transaction with the Issuer: (a) 450,000 shares (the “Clipper Preferred Stock”) of the Issuer’s Series A Preferred Stock (“Series A Preferred Stock”) convertible into an aggregate of 9,000,000 shares of Common Stock, (b) warrants exercisable for 20,000,000 shares of Common Stock (the “Clipper Warrants”) and (c) a convertible note convertible into 11,000,000 shares of Common Stock (the “Clipper Note,” and, together with the Clipper Preferred Stock and the Clipper Warrants, collectively, the “Clipper Securities”). Collectively, the foregoing transactions are referred to herein as the “Clipper Transaction”). As a result of the Clipper Transaction, Clipper and its managers, Kenneth A. Merlau and Philip C. Adams, may be deemed to be the beneficial owners of 40,000,000 shares of Common Stock.

The definitive instruments and agreements governing the Clipper Transaction are attached hereto as exhibits, namely: (1) Certificate of Incorporation of the Issuer, dated February 25, 1998, and effective as of February 26, 1998, (2) Articles of Amendment to the Certificate of Incorporation of the Issuer dated July 2, 2010, (3) Preferred Stock and Warrant Purchase Agreement, dated July 2, 2010, by and between the Issuer and Clipper, (4) Warrant, dated July 2, 2010, issued to Clipper by the Issuer, (5) Note Purchase Agreement, dated July 2, 2010, by and between the Issuer and Clipper, (6) Promissory Note, dated July 2, 2010, by the Issuer and payable to Clipper and (7) Registration Rights Agreement, dated July 2, 2010, by and between the Issuer, Clipper and Caledonia Capital Corporation (“Caledonia”). The Clipper Transaction is described in additional detail in the Issuer’s current report on SEC Form 8-K, dated July 9, 2010.

Item 2. Identity and Background.

This Schedule 13D is being filed jointly by Clipper, Kenneth A. Merlau and Philip C. Adams (together, the “Reporting Persons.”)

A.	Clipper Investors LLC

	(i)	Name of Person Filing:	Clipper Investors LLC (“Clipper”)

	(ii)	Organization:	Illinois limited liability company

	(iii)	Principal Business:	Investment management

	(iv)	Address of Principal Office:	1095 Fisher Lane Winnetka, Illinois 60093

	(v)	Prior Criminal Convictions:	None

	(vi)	Prior Civil Proceedings with Respect to Federal or State Securities Laws:	None

B.	Kenneth A. Merlau

	(i)	Name of Person Filing:	Kenneth A. Merlau (“Mr. Merlau”)

	(ii)	Business Address:	1095 Fisher Lane Winnetka, Illinois 60093

	(iii)	Present Occupation:	Investment management

	(iv)	Prior Criminal Convictions:	None

	(v)	Prior Civil Proceedings with Respect to Federal or State Securities Laws:	None

	(vi)	Citizenship	United States of America

C.	Philip C. Adams

	(i)	Name of Person Filing:	Philip C. Adams (“Mr. Adams”)

	(ii)	Business Address:	1095 Fisher Lane Winnetka, Illinois 60093

	(iii)	Present Occupation:	Investment management

	(iv)	Prior Criminal Convictions:	None

	(v)	Prior Civil Proceedings with Respect to Federal or State Securities Laws:	None

	(vi)	Citizenship	United States of America

Item 3. Source and Amount of Funds or Other Consideration.

The aggregate purchase price of the Clipper Securities purchased by Clipper in the Clipper Transaction described above in Item 1 was $2,000,000. The shares of Common Stock reported in this Schedule 13D may be acquired by Clipper upon the conversion of the Clipper Securities in accordance with the terms of the definitive transaction documents, copies of which are attached hereto as exhibits. In summary, (a) the Clipper Preferred Shares are convertible into Common Stock at the option of Clipper, without payment of additional consideration, (b) the Clipper Warrants are exercisable for Common Stock at $0.14 per share (subject to customary adjustments for stock splits and other items) and (c) the Clipper Note is convertible into Common Stock at $0.10 per share (subject to customary adjustments for stock splits and other items) by reducing the principal balance owed by the Issuer thereunder. Clipper’s funds used to acquire the Clipper Securities were drawn from its working capital contributed by its members, who include Mr. Merlau and Mr. Adams, among others.

Item 4. Purpose of Transaction.

The purpose of the Clipper Transaction was to invest in, and to acquire economic and voting control of, the Issuer.

The Clipper Preferred Stock consists of 450,000 shares of the Series A Preferred Stock of the Issuer and votes with the Common Stock as a single class, with each share of the Series A Preferred Stock entitled to 200 votes for each share of Preferred Stock. Accordingly, based upon the number of shares of Common Stock and Preferred Stock outstanding as of July 2, 2010 (as calculated by the Reporting Persons as described in Item 5(a) below), Clipper has the right to vote approximately 71.7% of the outstanding voting securities of the Issuer and generally has the power to elect directors to the Issuer’s board of directors (the “Board of Directors”).

In addition, pursuant to the Issuer’s Certificate of Incorporation, as amended pursuant to the Clipper Transaction, Clipper has the right to designate three directors to the Board of Directors. As reported in the Issuer’s Current Report on Form 8-K dated July 9, 2010, Clipper designated Mr. Merlau, Mark J. Lister, and James M. Feigley to serve on the Board of Directors, effective July 2, 2010.

The Reporting Persons anticipate seeking to influence the nomination and election of directors in the future. As of the date hereof, the Reporting Persons have no immediate plans or proposals which would result in any change in the present board of directors or management of the Issuer other than as set forth above.

The Reporting Persons may, at any time and from time to time, depending upon various factors, including without limitation the financial performance of the Issuer, the availability and price of shares of the Common Stock and other general and market conditions, (1) convert some or all of the Clipper Securities into Common Stock, (2) acquire or dispose of shares of Common Stock through open market transactions, (3) acquire or dispose of the Clipper Securities or other securities of the Issuer (together with the Common Stock and the Clipper Securities, “Issuer Securities”) through private transactions, (4) enter into and dispose of derivative transactions with one or more counterparties that are based on the value of Issuer Securities and engage in hedging transactions with respect to Issuer Securities, (5) make an offer to purchase up to all of the Issuer’s outstanding shares of Common Stock, through a negotiated transaction, a series of negotiated transactions or otherwise, (6) cause the Common Stock to be deregistered through a squeeze-out merger transaction or otherwise, (7) pursue a “going-private” transaction or (8) present proposals for consideration at annual or special meetings of the Issuer’s shareholders. The Reporting Persons may change their intentions with respect to any and all of the matters referred to in this Item 4.

Except as stated above, none of the Reporting Persons has any plans or proposals of the types referred to in clauses (a) through (j) of Item 4 of Schedule 13D, as promulgated by the Securities and Exchange Commission.

Item 5. Interest in Securities of the Issuer.

(a)

As a result of the Clipper Transaction, Clipper is the beneficial owner of the Clipper Securities, which, as described in Item 1 above, result in the right to acquire an aggregate 40,000,000 shares of Common Stock. Based solely upon information provided by the Issuer as of the closing of the Clipper Transaction, the Issuer had 20,075,001 Common Shares issued and outstanding. Following the conversion of the 2,500,000 shares of Common Stock held by Caledonia (as described in the Issuer’s Current Report on Form 8-K dated July 9, 2010), on July 2, 2010, concurrently with the closing of the Clipper Transaction, based solely on information provided by the Issuer, the Issuer had 17,575,001 shares of Common Stock issued and outstanding and Caledonia held Series A Preferred Stock and warrants exercisable for 10,500,000 shares of Common Stock, resulting in Clipper holding a 58.8% stake in the Issuer on a fully-diluted as-converted-to-Common Stock basis.

(b)

Clipper is the legal, record owner of, and has shared voting and dispositive power with respect to, (a) 450,000 shares of Series A Preferred Stock convertible into 9,000,000 shares of Common Stock, (b) Warrants exercisable for 20,000,000 shares of Common Stock and (c) the Clipper Note, convertible into 11,000,000 shares of Common Stock, resulting in the right to acquire an aggregate, fully-diluted ownership of 40,000,000 shares of Common Stock and accordingly is deemed to be the beneficial owner of 40,000,000 shares of Common Stock for purposes of Section 13(d) of the Securities Exchange Act of 1934 (as amended, the “1934 Act”).

Mr. Merlau is a manager of Clipper. In that capacity, Mr. Merlau has shared voting and dispositive power over the Issuer securities convertible into Common Stock held by Clipper, and accordingly is deemed to be the beneficial owners of such Common Stock for purposes of Section 13(d) of the 1934 Act. Except for such deemed beneficial ownership, Mr. Merlau does not own any Common Stock or other equity securities of the Issuer. Mr. Merlau disclaims beneficial ownership of the shares of Common Stock reported hereunder, except to the extent of his beneficial interest in Clipper.

Mr. Adams is a manager of Clipper. In that capacity, Mr. Adams has shared voting and dispositive power over the Issuer securities convertible into Common Stock held by Clipper, and accordingly is deemed to be the beneficial owners of such Common Stock for purposes of Section 13(d) of the 1934 Act. Except for such deemed beneficial ownership, Mr. Adams does not own any Common Stock or other equity securities of the Issuer. Mr. Adams disclaims beneficial ownership of the shares of Common Stock reported hereunder, except to the extent of his beneficial interest in Clipper.

(c)	None of the Reporting Persons has effected any transaction in or with respect to the Issuer’s Common Stock within the last 60 days other than the acquisition of the Clipper Securities as described in Item 1, which disclosure is incorporated into this Item 5(c) by reference.

(d)	Not Applicable


(e)	Not Applicable

Item 6. Contracts, Arrangements, Understandings or Relationships with Respect to Securities of the Issuer.

Except as described herein with respect to (a) Mr. Merlau’s and Mr. Adams participation in the management of Clipper, and (b) Clipper’s right to convert the Clipper Securities into an aggregate of 40,000,000 share of Common Stock as described in Item 1 above, none of the Reporting Persons is a party to any contract, arrangement, understanding or relationship (legal or otherwise) with respect to any securities of the Issuer.

Item 7. Material to be Filed as Exhibits.

Exhibit Number		Description
3.1		Articles of Incorporation of Steelcloud, Inc., dated February 25, 1998, and effective as of February 26, 1998. (Filed as Exhibit 3.1 to the Issuer's Registration Statement on Form S-1, Amendment No. 1, dated April 23, 1998 (File No. 333-47631) and hereby incorporated by reference).
3.2		Articles of Amendment to the Certificate of Incorporation of Steelcloud, Inc. dated July 2, 2010
10.1		Preferred Stock and Warrant Purchase Agreement, dated July 2, 2010, by and between Steelcloud, Inc. and Clipper Investors LLC
10.2		Warrant, dated July 2, 2010, issued to Clipper Investors LLC by Steelcloud, Inc.
10.3		Note Purchase Agreement, dated July 2, 2010, by and between Steelcloud, Inc. and Clipper Investors LLC
10.4		Promissory Note, dated July 2, 2010, by Steelcloud, Inc. payable to Clipper Investors LLC
10.5		Registration Rights Agreement, dated July 2, 2010, by and between Steelcloud, Inc., Clipper Investors LLC and Caledonia Capital Corporation

[SIGNATURE PAGE FOLLOWS]

After reasonable inquiry and to the best of its or his knowledge and belief, each of the undersigned certifies that the information set forth in this statement is true, complete and correct.

Date: July 12, 2010

CLIPPER INVESTORS LLC

By:	/s/ Kenneth A. Merlau
Name:	Kenneth A. Merlau
Title:	Manager

By:	/s/ Philip C. Adams
Name:	Philip C. Adams
Title:	Manager

/s/ Kenneth A. Merlau
KENNETH A. MERLAU, individually

/s/ Philip C. Adams
PHILIP C. ADAMS, individually

EX-3.2 2 v190281_ex3-2.htm

ARTICLES OF AMENDMENT

TO THE CERTIFICATE OF INCORPORATION

STEELCLOUD, INC.

STEELCLOUD, INC., A VIRGINIA CORPORATION, DOES HEREBY CERTIFY:

THE NAME OF THE CORPORATION IS STEELCLOUD, INC.

PURSUANT TO VA CODE § 13.1-639A, ARTICLE 3 OF THE ARTICLES OF INCORPORATION OF THE CORPORATION, IS AMENDED BY ADDING THE FOLLOWING:

Pursuant to Article 3 of the Articles of Incorporation of the Corporation, seven hundred fifty thousand (750,000) of the two million (2,000,000) shares of Preferred Stock authorized therein, all of which are unissued, be and hereby are classified as a series of Preferred Stock designated as the Series A Convertible Preferred Stock (the “Series A Preferred Stock”). The 750,000 shares of Series A Preferred Stock shall have a par value of $0.001 per share and the designations, preferences and relative, participating, optional or other special rights, qualifications, limitations and restrictions as hereinafter set forth:

1. Dividends. The holders of Series A Preferred Stock shall be entitled to receive cash dividends, payable at such times and in such amounts as is set forth below:

(a) quarterly, on the last day of each fiscal quarter of the Corporation, out of funds legally available therefor, the Regular Quarterly Dividend, until the aggregate Contingent Dividends paid pursuant to paragraph 1(b) below equals the Contingent Dividend Cap; and

(b) quarterly, on or before the Contingent Dividend Payment Date, out of funds legally available therefor, in the amount of the Contingent Dividend determined as of the end of the most recent fiscal quarter of the Corporation (beginning with the fiscal quarter ending October 31, 2010), paid ratably to each holder of Series A Preferred Stock in proportion to the number of shares of Series A Preferred Stock held by each, until the aggregate Contingent Dividends paid pursuant to this paragraph 1(b) equals the Contingent Dividend Cap.

No dividends shall be paid with respect to any shares of Common Stock or any Junior Stock unless the holders of Series A Preferred Stock are first paid (i) all due and unpaid dividends and (ii) a dividend per share of Series A Preferred Stock equal to the dividend which would be payable on the number of shares of Common Stock into which each share of Series A Preferred Stock is then convertible.

2. Liquidation. In the event of a voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the holders of Series A Preferred Stock shall be entitled to receive an amount per share equal to the Liquidation Preference, plus accrued and unpaid dividends, before any distribution or payment is made to the holders of Common Stock or any Junior Stock. If, upon any such sale, liquidation, dissolution or winding up of the Corporation, the assets distributable among the holders of all Series A Preferred Stock shall be insufficient to permit the payment in full to such holders of the amount hereinabove provided, then the entire assets of the Corporation shall be applied ratably to the payment of such amount to the holders of Series A Preferred Stock then outstanding. Thereafter, any remaining assets shall be distributed ratably to the holders of Common Stock and holders of Series A Preferred Stock (as if all outstanding shares of Series A Preferred Stock were converted into Common Stock). The merger or consolidation of the Corporation, the sale, lease, transfer or other conveyance of more than 50% of the Corporation’s assets or the sale, lease, transfer or other conveyance of assets which generated more than 50% of the Corporation’s revenues for its then current fiscal year or for the fiscal year immediately prior thereto, shall each be deemed to be a liquidation, dissolution or winding up of the Corporation within the meaning of this paragraph 2 if the holders of a majority of the shares of Series A Preferred Stock outstanding so determine by notice to the Corporation no later than ten days after the occurrence thereof. The holders of Series A Preferred Stock shall be given notice of any proposed transaction set forth in this paragraph 2 at least 20 days prior to the approval thereof.

3. Conversion.

3.1 The holder of any share or shares of Series A Preferred Stock shall have the right, at its option, to convert all or any portion of such shares into fully paid and non-assessable shares of Common Stock of the Corporation, at any time and from time to time after the date of issuance, at a conversion price of $0.10 per share (such price, giving effect to the latest prior adjustment pursuant to subparagraph 3.6 hereof, if any, is hereinafter called the “Conversion Price”). The number of shares of Common Stock issuable upon conversion of each share of Series A Preferred Stock (the “Conversion Rate”) shall be equal to the Original Purchase Price divided by the Conversion Price. To the extent permitted by law, when shares of Series A Preferred Stock are converted, all dividends accrued and unpaid on the stock so converted to the date of conversion (whether or not currently payable) shall be immediately due and payable in cash.

3.2 The Series A Preferred Stock shall be convertible at the principal office of the Corporation into fully paid and non-assessable shares of Common Stock at the Conversion Price.

3.3 In order to convert shares of Series A Preferred Stock into shares of Common Stock pursuant to the right of conversion set forth in subparagraph (a) above, the holder thereof shall surrender the certificate or certificates representing such shares of Series A Preferred Stock, duly endorsed to the Corporation or in blank, at the principal office of the Corporation and shall give written notice to the Corporation that such holder elects to convert the same, stating in such notice the name or names in which such holder wishes the certificate or certificates representing shares of Common Stock to be issued. The Corporation shall, within five business days, deliver at said office or other place to such holder of Series A Preferred Stock, or to such holder’s nominee or nominees, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid, together with any cash to which such holder shall be entitled in lieu of fractional shares in an amount equal to the same fraction of the Conversion Price of a whole share of Common Stock on the business day preceding the day of conversion. Shares of Series A Preferred Stock shall be deemed to have been converted as of the date of the surrender of such shares for conversion as provided above, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. Upon conversion of only a portion of the number of shares covered by a certificate representing shares of Series A Preferred Stock surrendered for conversion, the Corporation shall issue and deliver to, or upon the written order of, the holder of the certificate so surrendered for conversion, at the expense of the Corporation, a new certificate covering the number of shares of Series A Preferred Stock representing the unconverted portion of the certificate so surrendered, which new certificate shall entitle the holder thereof to the rights of the shares of Series A Preferred Stock represented thereby to the same extent as if the certificate theretofore covering such unconverted shares had not been surrendered for conversion.

3.4 Notwithstanding the provisions of subparagraph (a) hereof, the issued and outstanding shares of Series A Preferred Stock shall be automatically converted into fully paid and non-assessable shares of Common Stock at the Conversion Price upon the consent of Clipper as long as it holds a majority of the Series A Preferred Stock.

3.5 The issuance of certificates for shares of Common Stock upon the conversion of shares of Series A Preferred Stock shall be made without charge to the converting stockholder for any original issue or transfer tax in respect of the issuance of such certificates and any such tax shall be paid by the Corporation.

3.6 The Conversion Price shall be subject to the following adjustments:

3.6.1 If the Corporation shall declare and pay to the holders of Common Stock a dividend or other distribution payable in shares of Common Stock, the Conversion Price in effect immediately prior thereto shall be adjusted so that the holders of Series A Preferred Stock thereafter surrendered for conversion shall be entitled to receive the number of shares of Common Stock which such holder would have owned or been entitled to receive after the declaration and payment of such dividend or other distribution if such shares of Series A Preferred Stock had been converted immediately prior to the record date for the determination of stockholders entitled to receive such dividend or other distribution.

3.6.2 If the Corporation shall subdivide the outstanding shares of Common Stock into a greater number of shares of Common Stock, or combine the outstanding shares of Common Stock into a lesser number of shares, or issue by reclassification of its shares of Common Stock any shares of the Corporation, the Conversion Price in effect immediately prior thereto shall be adjusted so that the holders of Series A Preferred Stock thereafter surrendered for conversion shall be entitled to receive the number of shares of Common Stock which such holder would have owned or been entitled to receive after the happening of any of the events described above if such shares of Series A Preferred Stock had been converted immediately prior to the happening of such event on the day upon which such subdivision, combination or reclassification, as the case may be, becomes effective.

3.6.3 If, after the date of issuance of the Series A Preferred Stock, the Corporation shall issue or sell any Additional Shares of Common Stock for a consideration per share less than the Conversion Price in effect immediately prior to such issuance, then, and thereafter successively upon any such issuance or sale, the Conversion Price shall be reduced, concurrently with such issue, to a price (calculated to the nearest cent) determined by multiplying the Conversion Price by a fraction the numerator of which shall be the number of shares of Common Stock issuable upon the conversion of the outstanding Series A Preferred Stock (based on the Conversion Price in effect on the date of and immediately prior to this adjustment) plus the number of shares of Common Stock that the aggregate consideration received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at the Conversion Price in effect prior to such issue; and the denominator of which shall be the number of shares of Common Stock issuable upon the conversion of the outstanding Series A Preferred Stock (based on the Conversion Price in effect on the date of and immediately prior to this adjustment) plus the number of such Additional Shares of Common Stock so issued. For the purposes of this subparagraph 3.6.3, the date as of which the Conversion Price shall be computed shall be the earlier of (x) the date on which the Corporation shall enter into a firm contract for the issuance or sale of such Additional Shares of Common Stock or (y) the date of the actual issuance or sale of such shares.

3.6.4 If the Corporation shall issue or sell any warrants or options or other rights entitling the holders thereof to subscribe for or purchase either any Additional Shares of Common Stock or evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable, with or without payment of additional consideration in cash or property, for Additional Shares of Common Stock (such convertible or exchangeable evidences of indebtedness, shares of stock or other securities hereinafter being called “Convertible Securities”), and the consideration per share for which Additional Shares of Common Stock may at any time thereafter be issuable pursuant to such warrants, options or other rights or pursuant to the terms of such Convertible Securities (when added to the consideration per share of Common Stock, if any, received for such warrants, options or other rights), shall be less than the Conversion Price, then the Conversion Price shall be adjusted as provided in subparagraph 3.6.3 on the basis of the consideration received and receivable by the Corporation for the issuance of such Additional Shares of Common Stock pursuant to such warrants, options or other rights or pursuant to the terms of such Convertible Securities.

3.6.5 If the Corporation shall issue or sell Convertible Securities and the consideration per share for which Additional Shares of Common Stock may at any time thereafter be issuable pursuant to the terms of such Convertible Securities shall be less than the Conversion Price, then the Conversion Price shall be adjusted as provided in subparagraph 3.6.3 on the basis that the aggregate consideration for such maximum number of Additional Shares of Common Stock shall be deemed to be the consideration received and receivable by the Corporation for the issuance of such Additional Shares of Common Stock pursuant to the terms of such Convertible Securities. No adjustment of the Conversion Price shall be made under this subparagraph (v) upon the issuance of any Convertible Securities which are issued pursuant to the exercise of any warrants, options or other rights, if such adjustment shall previously have been made upon the issuance of such warrants, options or other rights pursuant to subparagraph 3.6.4.

3.6.6 For the purposes of subparagraphs 3.6.4 and 3.6.5, the date as of which the Conversion Price shall be computed shall be the earliest of (x) the date on which the Corporation shall take a record of the holders of its Common Stock for the purpose of entitling them to receive any warrants, options or other rights referred to in subsection 3.6.4 or to receive any Convertible Securities, (y) the date on which the Corporation shall enter into a firm contract for the issuance of such warrants, options or other rights or Convertible Securities or (z) the date of the actual issuance of such warrants, options or other rights or Convertible Securities.

3.6.7 No adjustment of the Conversion Price shall be made under subparagraph 3.6.3 upon the issuance of any Additional Shares of Common Stock which are issued pursuant to the exercise of any warrants, options or other rights or pursuant to the exercise of any conversion or exchange rights in any Convertible Securities, if such adjustment shall previously have been made upon the issuance of such warrants, options or other rights or upon the issuance of such Convertible Securities (or upon the issuance of any warrants, options or other rights therefor), pursuant to subparagraphs 3.6.4 or 3.6.5.

3.6.8 If any warrants, options or other rights (or any portions thereof) which shall have given rise to an adjustment pursuant to subparagraph 3.6.4 or conversion rights pursuant to Convertible Securities which shall have given rise to an adjustment pursuant to subparagraph 3.6.5 shall have expired or terminated without the exercise thereof and/or if by reason of the terms of such warrants, options or other rights or Convertible Securities there shall have been an increase or increases, with the passage of time or otherwise, in the price payable upon the exercise or conversion thereof, then the Conversion Price shall be readjusted (but to no greater extent than originally adjusted) on the basis of (x) eliminating from the computation any Additional Shares of Common Stock corresponding to such warrants, options or other rights or conversion rights as shall have expired or terminated, (y) treating the Additional Shares of Common Stock, if any, actually issued or issuable pursuant to the previous exercise of such warrants, options or other rights or of conversion rights pursuant to any Convertible Securities as having been issued for the consideration actually received and receivable thereof, and (z) treating any of such warrants, options or other rights or of conversion rights pursuant to any Convertible Securities which remain outstanding as being subject to exercise or conversion on the basis of such exercise or conversion price as shall be in effect at the time; provided, however, that any consideration which was actually received by the Corporation in connection with the issuance or sale of such warrants, options or other rights shall form part of the readjustment computation even though such warrants, options or other rights shall have expired without the exercise thereof. The Conversion Price shall be adjusted as provided in subparagraph 3.6.3 as a result of any increase in the number of Additional Shares of Common Stock issuable, or any decrease in the consideration payable upon any issuance of Additional Shares of Common Stock, pursuant to any anti-dilution provisions contained in any warrants, options or other rights or in any Convertible Securities.

3.6.9 (A) In case any Additional Shares of Common Stock, Convertible Securities or warrants, options or other rights to purchase any such Additional Shares of Common Stock or Convertible Securities shall be issued or sold for cash, the consideration received thereof or shall be deemed to be the amount received by the Corporation therefor.

(B) In case any Additional Shares of Common Stock, Convertible Securities or warrants, options or other rights to purchase any such Additional Shares of Common Stock or Convertible Securities shall be offered by the Corporation for subscription, the consideration received therefor shall be deemed to be the subscription price.

(C) In any such case covered by subparagraphs (A) or (B) herein, in determining the amount of consideration received by the Corporation, if the consideration is in whole or in part consideration other than cash, the amount of the consideration shall be deemed to be the fair value of such consideration as determined in good faith by the Board of Directors of the Corporation. If Additional Shares of Common Stock shall be issued as part of a unit with warrants, options, or other rights, then the amount of consideration for the warrants, option or other right shall be deemed to be the amount determined at the time of issuance by the Board of Directors of the Corporation. If the Board of Directors of the Corporation shall not make any such determination, the consideration for the warrant, option or other right shall be deemed to be zero.

(D) In any such case covered by subparagraphs (A), (B) or (C) (D) herein, in determining the amount of consideration received by the Corporation (I) any amounts paid or receivable for accrued interest or accrued dividends shall be excluded, and (II) any compensation, discounts, or expenses paid or incurred in connection therewith shall not be deducted.

(E) In any case covered by subparagraphs (A) or (B) herein, there shall be added to the consideration received by the Corporation at the time of issuance or sale, the minimum aggregate amount of additional consideration payable to the Corporation upon the exercise of such warrants, options or other rights which relate to Convertible Securities, and the minimum aggregate amount of consideration, if any, payable upon the conversion or exchange thereof.

(F) In case any Additional Shares of Common Stock, Convertible Securities or any options, warrants or other rights to purchase such Additional Shares of Common Stock or Convertible Securities shall be issued in connection with any merger or consolidation in which the Corporation is the surviving corporation, the amount of consideration therefor shall be deemed to be the fair value, as determined by the Board of Directors of the Corporation, of such portion of the assets and business of the non-surviving corporation or corporations as such Board shall determine to be attributable to such Additional Shares of Common Stock, Convertible Securities or warrants, options or other rights to purchase such Additional Shares of Common Stock or Convertible Securities.

3.6.10 In case the Corporation shall effect a reorganization, shall merge with or consolidate into another corporation, or shall sell, transfer or otherwise dispose of all or substantially all of its property, assets or business (unless any of the foregoing constitutes a liquidation pursuant to paragraph 2 hereof) and, pursuant to the terms of such reorganization, merger, consolidation or disposition of assets, shares of stock or other securities, property or assets of the Corporation, successor or transferee or an affiliate thereof or cash are to be received by or distributed to the holders of Common Stock, then each holder of Series A Preferred Stock shall be given a written notice from the Corporation informing each holder of the terms of such reorganization, merger, consolidation, or disposition of assets and of the record date thereof for any distribution pursuant thereto, at least ten days in advance of such record date, and each holder of Series A Preferred Stock shall have the right thereafter to receive, upon conversion of such Series A Preferred Stock, the number of shares of stock or other securities, property or assets of the Corporation, successor or transferee or affiliate thereof or cash receivable upon or as a result of such reorganization, merger, consolidation or disposition of assets by a holder of the number of shares of Common Stock equal to the then-applicable Conversion Rate, multiplied by the number of shares of Series A Preferred Stock as may be converted. The provisions of this subparagraph (x) shall similarly apply to successive reorganizations, mergers, consolidations or dispositions of assets.

3.6.11 If a purchase, tender or exchange offer is made to and accepted by the holders of more than 50% of the outstanding shares of Common Stock, the Corporation shall not effect any consolidation, merger or sale with the person having made such offer or with any affiliate of such person, unless prior to the consummation thereof each holder of shares of Series A Preferred Stock shall have been given a reasonable opportunity to elect to receive, upon conversion of the shares of Series A Preferred Stock then held by such holder, either the stock, securities, cash or assets then issuable with respect to the Common Stock or the stock, securities, cash or assets issued to previous holders of the Common Stock in accordance with such offer, or the equivalent thereof.

3.6.12 The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Corporation, and the disposition of such shares shall be considered an issue or sale of Common Stock, for the purposes of this paragraph 3.6.

3.6.13 The Corporation will not pay or declare a dividend (other than in Common Stock) upon the Common Stock payable otherwise than out of earnings or earned surplus (determined in accordance with generally accepted accounting principles).

3.6.14 If a state of facts shall occur which, without being specifically controlled by the provisions of this paragraph 3.6, would not fairly protect the conversion rights of the Series A Preferred Stock in accordance with the essential intent and principles of such provisions, then the Board of Directors of the Corporation shall make an adjustment in the application of such provisions, in accordance with such essential intent and principles, so as to protect such conversion rights.

3.6.15 All calculations under this paragraph 3.6 shall be made to the nearest one-thousandth of a share.

3.6.16 Whenever the Conversion Price shall be adjusted pursuant to this paragraph 3.6, the Corporation shall forthwith obtain, and cause to be delivered to each holder of Series A Preferred Stock, a certificate signed by the principal financial or accounting officer of the Corporation, setting forth in reasonable detail the event requiring the adjustment and the method by which such adjustment was calculated (including a description of the basis on which the Board of Directors of the Corporation determined the fair value of any consideration other than cash pursuant to subparagraph 3.6.9) and specifying the new Conversion Price. In the case referred to in subparagraph 3.6.10, such a certificate shall be issued describing the amount and kind of stock, securities, property or assets or cash which shall be receivable upon conversion of the Series A Preferred Stock after giving effect to the provisions of such subparagraph 3.6.10.

3.7 The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of Series A Preferred Stock, the full number of shares of Common Stock then deliverable upon the conversion or exchange of all shares of Series A Preferred Stock at the time outstanding. The Corporation shall at all times take such corporate action as shall be necessary in order that the Corporation may validly and legally issue fully paid and non-assessable shares of Common Stock upon the conversion of Series A Preferred Stock in accordance with the provisions hereof.

3.8 No fractional shares of Common Stock or scrip representing fractional shares of Common Stock shall be issued upon any conversion of Series A Preferred Stock, but, in lieu thereof, there shall be paid an amount in cash equal to the same fraction of the Conversion Price of a whole share of Common Stock on the business day preceding the day of conversion.

4. Voting Rights.

4.1 The holders of Series A Preferred Stock, voting separately as a class, shall be entitled to elect three (3) directors of the Corporation. Except as otherwise required by the Virginia Stock Corporation Act, the holders of shares of Series A Preferred Stock shall have the right to vote, together with the holders of all the outstanding shares of Common Stock and not by classes, on all matters on which holders of Common Stock shall have the right to vote. The holders of shares of Series A Preferred Stock shall have the right to cast two hundred (200) votes for each share of Series A Preferred Stock held by them.

4.2 Without the prior approval of the holders of a majority of the shares of Series A Preferred Stock outstanding, the Corporation will not (i) authorize, create or issue any series or shares of capital stock which have any rights (such as voting, liquidation, redemption or otherwise) which are senior or pari passu to, or could adversely affect any of the rights of, the Series A Preferred Stock, or adopt or otherwise issue any stock or options to, employees, consultants or directors of the Corporation, (iii) increase or decrease the authorized number of shares of Series A Preferred Stock, or (iv) take any action which would alter or adversely affect the rights of the holders of the Series A Preferred Stock.

5. Definitions.

(a) “Additional Shares of Common Stock” shall mean all shares of Common Stock of the Corporation issued by the Corporation after July 2, 2010, except Common Stock which may be issued pursuant to (i) conversion of the Series A Preferred Stock; (ii) conversion of any outstanding evidences of indebtedness of the Corporation, pursuant to the terms thereof; (iii) the issuance of shares of Common Stock or rights, options or warrants to subscribe for, purchase or otherwise acquire Common Stock pursuant to any equity incentive plan or benefit plan approved by the Board of Directors of the Corporation, and any shares of Common Stock issued on exercise of such rights, options or warrants; (iv) subject to approval of the Board of Directors, the issuance of stock, warrants or other securities to financial institutions or issued in connection with credit arrangements and equipment leases or other similar transactions; and (v) subject to approval of the Board of Directors, the issuance of stock, warrants or other securities in connection with corporate partnerships or similar strategic arrangements, including strategic licensing transactions.

(b) “Clipper” shall mean Clipper Investors LLC, an Illinois limited liability company.

(d) “Contingent Dividend” shall mean an amount equal to 40% of the Excess Net Income measured as of the end of the applicable fiscal quarter of the Corporation, minus (i) the aggregate amount of Contingent Dividends earned previously during the applicable Measurement Period, and (ii) the aggregate amount of Regular Quarterly Dividends earned during the applicable Measurement Period.

(e) “Contingent Dividend Cap” shall mean $3,000,000.

(f) “Contingent Dividend Payment Date” shall mean the date that is twenty (20) days after the end of each fiscal quarter of the Corporation.

(g) “Excess Net Income” shall mean, as of the end of the applicable fiscal quarter of the Corporation, an amount equal to the Corporation’s Net Income for the then-trailing four (4) fiscal quarters, minus $1,500,000, provided, however, that Excess Net Income measured as of September 30, 2010, December 31, 2010, and March 31, 2011 shall mean an amount equal to the Corporation’s Net Income earned during the applicable quarter then-ended, minus $375,000.

(h) “Junior Stock” shall mean the Common Stock and any class or series of capital stock of the Corporation which may be issued which, at the time of issuance, is not declared to be on a parity with or senior to the Series A Preferred Stock as to all of the following: dividends, rights upon liquidation or redemption or voting rights.

(i) “Liquidation Preference” shall mean $3,000,000 divided by the aggregate number of shares of Series A Preferred Stock to be issued on or about July 2, 2010.

(j) “Measurement Period” shall mean the fiscal quarter or the trailing four (4) fiscal quarters, as applicable, during which Net Income is measured for purposes of calculating Excess Net Income.

(k) “Net Income” shall mean, for any period, the net income of the Corporation for such period, determined in accordance with generally accepted accounting principles, consistently applied, and as reported by the Corporation in its filings with the Securities Exchange Commission, if such filings are then being made by the Corporation.

(l) “Original Purchase Price” shall mean $2.00 per share of Series A Preferred Stock (subject to equitable adjustments in the event of stock splits or other similar events).

(m) “Regular Quarterly Dividend” shall mean an amount equal to 10% per share per annum of the Original Purchase Price.

THE FOREGOING AMENDMENT WAS ADOPTED ON JULY 1, 2010.

THE AMENDMENT WAS DULY ADOPTED BY THE BOARD OF DIRECTORS OF THE CORPORATION.

The undersigned declares that the facts herein stated are true as of the 1st of July 2010.

STEELCLOUD, INC.

By:	/s/ Brian H. Hajost
Brian H. Hajost
President and CEO

EX-10.1 3 v190281_ex10-1.htm

PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT

AND

BETWEEN

STEELCLOUD, INC.

AND

CLIPPER INVESTORS LLC

JULY 2, 2010

PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT

This Preferred Stock and Warrant Purchase Agreement (this “Agreement”), dated the 2nd day of July, 2010, by and between STEELCLOUD, INC., a Virginia corporation (the “Company”) and CLIPPER INVESTORS LLC, an Illinois limited liability company (the “Investor”).

WITNESSETH:

WHEREAS, the Company desires to issue and sell to the Investor shares of Series A Convertible Preferred Stock (the “Preferred Shares”) of the Company and warrants to purchase shares of the Company’s common stock (which, with the Preferred Shares, are collectively referred to as the “Securities”); and

WHEREAS, the Investor desires to purchase the Securities from the Company;

NOW, THEREFORE, in consideration of the foregoing premises and the mutual agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows:

1. Definitions; Purchase and Sale of Preferred Shares.

1.1. Definitions. Certain terms as used in this Agreement are defined in Section 11 hereof and reference is hereby made to such Section.

1.2. Sale of Preferred Shares. Subject to the terms and conditions hereof, the Company hereby agrees to issue and sell on the Closing Date to the Investor, and the Investor agrees to purchase from the Company on the Closing Date, an aggregate of 450,000 Preferred Shares.

1.3. Purchase Price for Preferred Shares. The purchase price to be paid by the Investor for the Preferred Shares is $2.00 per share, or $900,000 in the aggregate (the “Purchase Price”).

1.4. Warrants. Subject to the terms and conditions hereof, the Company agrees to deliver a Warrant Agreement to the Investor on the Closing Date, pursuant to which the Investor shall have the right to purchase 20,000,000 Common Shares at $0.14 per share (the “Warrants”) for the five (5) years immediately following the Closing Date.

2. Closing; Closing Deliveries.

2.1. Closing Date. The closing of the transactions contemplated by this Agreement (the “Closing”) shall take place at 10:00 A.M. local time on the date that if five (5) business days after the date that all conditions set forth in Sections 5 and 6 hereof shall have been satisfied or waived, or on such other date or time as shall be mutually agreed to by the Company and the Investor (the “Closing Date”). In the event the Closing shall not have occurred on or before July 16, 2010, either party shall have the right to terminate this Agreement by delivery of written notice thereof to the other party.

2.2. Closing Deliveries by the Company. At the Closing, the Company shall deliver to the Investor the following:

(a) a stock certificate registered in the name of the Investor representing 450,000 Preferred Shares;

(b) the Warrant Agreement, evidencing the Warrants registered in the name of the Investor and duly executed by the Company;

(d) the Security Agreement, duly executed by the Company;

(e) copies of the resolutions adopted by the Company’s Board of Directors authorizing the execution, delivery and performance of this Agreement and the transactions contemplated hereby, certified by the Secretary of the Company as being in full force and effect on the Closing Date;

(f) a certificate executed by the President of the Company stating that the conditions specified in Sections 6.1 and 6.2 have been fulfilled and stating that there shall have been no material adverse change in the business, affairs, prospects, operations, properties, assets or condition of the Company since the date of the Financial Statements;

(g) a certified copy of the Certificate of Designations, as filed with the Secretary of State of Virginia;

(h) a certificate, dated as of a recent date, of the Secretary of State of Virginia attesting as to the good standing of and the payment of taxes by the Company in such State;

(i) a copy of the Company’s Bylaws, as amended, certified by the Secretary of the Company as being in full force and effect on the Closing Date;

(j) the legal opinions of Gersten & Savage, and Fettman, Tolchin & Majors PC, counsel to the Company, in form and substance satisfactory to the Investor and to the Investor’s counsel; and

(k) such other certificates or documents as the Investor or its counsel may reasonably request relating to the transactions contemplated hereby.

2.3 Closing Deliveries by the Investor. At the Closing, the Investor shall deliver to the Company the following:

(a) the Purchase Price by wire transfer to an account designated by the Company not less than two (2) business days prior to the Closing; and

(b) such other certificates or documents as the Company or its counsel may reasonably request relating to the transactions contemplated hereby.

3. Representations and Warranties of the Company. The Company hereby represents and warrants to the Investor as follows:

3.1. Organization; Good Standing. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Virginia. The Company has all requisite corporate power and authority and holds all licenses, permits and other required authorizations from governmental authorities necessary to conduct its business as it is now being conducted or as proposed to be conducted and to own or lease the properties and assets it now owns or holds under lease. The Company is duly qualified or licensed and in good standing as a foreign corporation in each jurisdiction wherein the character of its properties or the nature of the activities conducted by it makes such qualification or licensing necessary.

3.2. Authorization. The Company has the full corporate power and authority to enter into this Agreement and the Ancillary Agreements and to perform all of its obligations hereunder and thereunder. The execution, delivery and performance of this Agreement and the Ancillary Agreements by the Company have been or will be, on or before the Closing Date, duly authorized by all necessary corporate action. This Agreement constitutes a legal, valid and binding obligation of the Company enforceable in accordance with its terms. The Company, in light of its business or proposed business, does not require any consent, approval, authorization or order of, or declaration, filing or registration with, any court or governmental or regulatory agency or board in connection with the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby.

3.3. Charter Documents. The Company has heretofore delivered to counsel for the Investor true, correct and complete copies of the Company’s Certificate of Incorporation and Bylaws, each as in full force and effect on the date hereof. There will be no changes made to such Certificate of Incorporation or Bylaws between the date hereof and the Closing Date, except as contemplated by the Certificate of Designations or such amendments to the Bylaws as may be required by the Investor to reflect the agreement between the Investor and the Company regarding the size and constitution of the board of directors.

3.4. Capitalization. As of the Closing, the Company’s authorized capitalization will consist of (i) 80,000,000 shares of Common Stock, par value $0.001 (the “Common Stock”), of which 20,075,001 are issued and outstanding, (ii) 750,000 shares of Series A Convertible Preferred Stock, par value $0.001 per share, of which none are issued and outstanding, and (iii)1,250,000 shares of blank check preferred stock. All outstanding shares of Common Stock of the Company are validly issued, fully paid and non-assessable. The issuance of the Preferred Shares and Warrants hereunder and the shares of Common Stock issuable upon conversion of the Preferred Shares and the shares of Common Stock issuable upon the exercise of the Warrants (the “Conversion Shares”) pursuant to the provisions of this Agreement have been duly and validly authorized. No further approval or authorization of the shareholders or the directors of the Company or of any governmental authority or agency will be required for the issuance and sale of the Preferred Shares or Conversion Shares as contemplated by this Agreement. No shareholder of the Company or any other person is entitled to any preemptive rights with respect to the purchase or sale of any securities by the Company. When issued and sold to the Investor, the Preferred Shares will be duly and validly issued, fully paid and non-assessable, will be free and clear of any liens, pledges or encumbrances and will have the designations, preferences and relative, participating, optional and other special rights as set forth in the Certificate of Designations. The Conversion Shares, when issued and delivered upon conversion of the Preferred Shares and/or upon exercise of the Warrants, will be duly and validly issued, fully paid and non-assessable. Except as set forth on Schedule 3.4 attached hereto, there are no outstanding options, warrants or other rights, commitments or arrangements, written or oral, to which the Company is a party or by which it is bound, to purchase or otherwise acquire any authorized but unissued shares of capital stock of the Company or any security directly or indirectly convertible into or exchangeable or exercisable for any capital stock of the Company. No stock plan, stock purchase, stock option or other agreement or understanding between the Company and any holder of any securities or rights exercisable or convertible for securities provides for acceleration or other changes in the vesting provisions or other terms of such agreement or understanding as the result of the occurrence of any event.

3.5. Financial Statements. The Company has furnished to the Investor its unaudited balance sheet as of April 30, 2010 (the “Balance Sheet Date”), its unaudited statement of operations for the six month period ended April 30, 2010, and its unaudited statement of cash flows for the six month period ended April 30, 2010 (collectively the “Financial Statements”). The Financial Statements have been prepared in conformity with generally accepted accounting principles consistently applied, are true and correct in all material respects and fairly present the financial position and results of operations of the Company as at, or for the period ended on, such date. Since the date of such Financial Statements, the Company has conducted its business in a consistent manner without any change in accounting or credit principles, policies or procedures. At the date of such Financial Statements, there were no debts, liabilities or obligations of the Company of any kind and description, whether absolute or contingent, monetary or non-monetary, direct or indirect, known or unknown or matured or unmatured, or of any other nature, other than those disclosed in such Financial Statements.

3.6. Absence of Changes. Except as set forth on Schedule 3.6, since the Balance Sheet Date, there has not been:

(a) any change in the business, assets, liabilities, financial condition or results of operations of the Company from that reflected in the Financial Statements, except changes in the ordinary course of business that have not had a Materially Adverse Effect;

(b) any change in the contingent obligations of the Company, by way of contract, guaranty, endorsement, indemnity, warranty or otherwise, except changes in the ordinary course of business that have not had a Material Adverse Effect;

(d) any waiver by the Company of a material right or of a material debt owed to it;

(e) any satisfaction or discharge of any Lien or payment of any obligation by the Company, except in the ordinary course of business and not having a Material Adverse Effect;

(f) any material change or amendment to a material agreement or material arrangement by which the Company or any of its assets or properties is bound or subject;

(g) any material change in any compensation arrangement or agreement with any employee, officer or director of the Company;

(h) any sale, assignment or transfer of any patents, trademarks, copyrights, trade secrets or other intangible assets, other than the license of software and products in the ordinary course of business;

(i) any resignation or termination of employment of any officer or key employee of the Company, and the Company does not know of the impending resignation or termination of employment of any such officer or key employee;

(j) receipt of notice of a loss of, or material order cancellation by, any major customer of the Company;

(k) any Lien created by the Company, with respect to any of its material properties or assets, except Liens for taxes not yet due or payable;

(l) any loans or guarantees made by the Company to or for the benefit of its respective employees, officers or directors, or any members of their immediate families, other than travel advances and other advances made in the ordinary course of business;

(m) any declaration, setting aside, payment or other distribution in respect of any of the capital stock of the Company, or any direct or indirect redemption, purchase or other acquisition of any of such stock by the Company;

(n) to the knowledge of the Company, any other event or condition of any character that could reasonably be expected to result in a Material Adverse Effect;

(o) any issuance or alteration of the rights, preferences, privileges or terms of any capital stock of the Company; or

(p) any agreement or commitment by the Company to do any of the things described in this Section 3.6.

3.7. Compliance with Other Instruments. Except as set forth on Schedule 3.7, the Company is not in default in the performance of any obligation, agreement, instrument or undertaking to which it is a party or by which it is bound and there is no such obligation, agreement, instrument or undertaking which adversely affects or in the future may adversely affect its business, properties, prospects, operations or condition (financial or otherwise). The Company is not in violation of its Certificate of Incorporation or Bylaws. Neither the sale of the Preferred Shares and the Warrants (or the issuance and delivery of the Conversion Shares), the execution and delivery of this Agreement, nor the fulfillment of the terms set forth in this Agreement and the consummation of the transactions contemplated by this Agreement, will: (i) conflict with or constitute a breach of, or constitute a default under or an event which, with or without notice or lapse of time or each, would be a breach of or default under or violation of the Certificate of Incorporation or Bylaws of the Company or would be a breach of or default under or violation of any agreement, document, indenture, mortgage or other instrument or undertaking by which the Company is bound or to which any of its properties are subject, or would be a violation of any law, administrative regulation, judgment, order or decree applicable to the Company; (ii) result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company; (iii) result in the loss of any license, certificate, legal privilege or legal right enjoyed or possessed by the Company; (iv) give any party to any agreement to which the Company is a party a right of termination; or (v) require the consent of any other person or entity under any agreement, indenture, mortgage, document or other instrument or undertaking by which the Company is bound or to which any of its properties are subject.

3.8. Taxes. To the Company’s knowledge, the Company has filed all necessary or appropriate federal, state, local and foreign tax returns and reports and all taxes, fees, assessments and governmental charges of any nature shown by such returns to be due and payable have been paid, except for those amounts being contested in good faith and for which appropriate amounts have been reserved in accordance with generally accepted accounting principles. There is no tax deficiency which has been, or to the knowledge of the Company might be, asserted against the Company which would adversely affect the business or operations, or proposed business or operations, of the Company. The Company has not been, and is not now being, audited by any federal, state, local or foreign tax authorities. To the Company’s knowledge, the Company has made all required deposits for taxes applicable to the current tax year. All tax returns and reports of the Company were prepared in accordance with the relevant rules and regulations of each taxing authority having jurisdiction over the Company.

3.9. Litigation. Except as set forth on Schedule 3.9, there is not now pending, and to the best knowledge of the Company there is not threatened nor is there any basis for, any litigation, action, suit or proceeding: (a) to which the Company is or will be a party in or before or by any court or governmental or regulatory agency or body; or (b) to which any of the officers or employees of the Company is or will be a party in or before or by any court or governmental or regulatory agency or body, concerning termination by such person of his employment with any of such person’s former employers. In addition to the foregoing, there is no judgment, decree, injunction, rule or order of any court, governmental department, commission, agency, instrumentality or arbitrator outstanding against the Company having, or which, insofar as can be foreseen in the future, may have, any adverse effect on the business or proposed business or operations, properties, assets or condition, financial or otherwise, of the Company.

3.10. Compliance with Law. The Company is in compliance in all material respects with all applicable statutes and regulations of the United States and of all states, municipalities and agencies in respect of the conduct of its business. No failure by the Company to comply with such statutes and regulations will have a material adverse effect on the Company.

3.11. SEC Filings and the Sarbanes-Oxley Act.

(a) Company SEC Documents.

(i) As of its filing date, each Company SEC Document complied, and each such Company SEC Document filed subsequent to the date hereof will comply, as to form in all material respects with the applicable requirements of the Securities Act and the Exchange Act, as the case may be.

(ii) As of its filing date, each Company SEC Document filed pursuant to the Exchange Act did not, and each such Company SEC Document filed subsequent to the date hereof will not, contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading.

(iii) Each Company SEC Document that is a registration statement, as amended or supplemented, if applicable, filed pursuant to the Securities Act, as of the date such statement or amendment became effective, did not contain (or, in the case of any registration statement, as amended or supplemented, if applicable, filed by the Company prior to the Closing Date, as of the date such registration statement or amendment becomes effective, will not contain) any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading.

(b) Prohibited Actions. The Company has not, since the enactment of the Sarbanes-Oxley Act, taken any action prohibited by Section 402 of the Sarbanes-Oxley Act.

3.12. Subsidiaries. Except as set forth on Schedule 3.12, the Company does not have any investment or other ownership interest in any other corporation, joint venture, general partnership, limited partnership or other business entity.

3.13. Registration Rights. Except as set forth on Schedule 3.13 and except as to the rights granted in the Registration Rights Agreement, there are no rights outstanding which permit or allow the holder thereof to cause the Company to file a registration statement or which permit or allow the holder thereof to include securities of the Company in a registration statement filed by the Company.

3.14. Outstanding Indebtedness. Except as set forth on Schedule 3.14 attached hereto and for trade payables incurred in the ordinary cause of business, the Company does not have (a) any liability or obligation of any nature, whether accrued, absolute, contingent or otherwise, and whether direct, indirect, due or to become due; (b) any power of attorney outstanding, nor any other agreement of agency, whether as principal or agent, nor has it any obligation or liability, either actual, accrued, accruing or contingent, as guarantor, surety, cosigner, endorser, comaker, indemnitor or otherwise in respect of the obligation of any person; or (iii) any liability to any officer, director, shareholder or employee of the Company for money borrowed by the Company or otherwise.

3.15. Conflicting Agreements. No officer or other employee of the Company is a party to or bound by any agreement, contract or commitment, or subject to any restrictions (including confidentiality or non-compete restrictions) in connection with any previous or current employment of any such person, which adversely affects, or in the future may reasonably be expected to adversely affect, the business, or the proposed business, of the Company.

3.16. Compliance with the Securities Act. All securities of the Company heretofore sold and issued by it were sold and issued in material compliance with all applicable Federal and state securities laws. Based upon the representations of the Investor set forth herein, and assuming the truth of such representations, the offer, sale and issuance of the Preferred Shares and the Warrants (and the issuance and delivery of the Conversion Shares) are exempt from the registration requirements of the Securities Act.

3.17. Minute Books. The minute books of the Company made available to the Investor contain a complete summary of all meetings of directors and stockholders since the time of incorporation, to the extent such minute books are held by or are reasonably available to the Company, and reflect all transactions referred to in such minutes accurately in all material respects.

3.18. Disclosure. Neither this Agreement nor any of the schedules, exhibits, written statements, documents, certificates or other items prepared or supplied by the Company with respect to the transactions contemplated hereby contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained herein or therein not misleading. There exists no fact or circumstance which, to the knowledge of the Company, adversely affects or will adversely affect the business, properties or assets, or condition, financial or otherwise, of the Company, both at the present and as proposed.

4. Representations, Warranties and Covenants of the Investor. The Investor hereby severally represents and warrants to, and agrees with, the Company as follows:

4.1. Investment Intent. The Investor is acquiring the Preferred Shares and the Warrants (and any Conversion Shares) for its own account and not with a present view to, or for sale in connection with, any distribution thereof in violation of the Securities Act. The Investor consents to the placement of the following legend on each Warrant and certificate representing the Preferred Shares and Conversion Shares:

“[THE SHARES EVIDENCED BY THIS CERTIFICATE] [THIS WARRANT AND THE SECURITIES ISSUABLE UPON ITS EXERCISE] HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES STATUES OR REGULATIONS, AND MAY NOT BE TRANSFERRED OR SOLD UNLESS (i) A REGISTRATION STATEMENT UNDER SUCH ACT IS THEN IN EFFECT WITH RESPECT THERETO, (ii) A WRITTEN OPINION FROM COUNSEL FOR THE ISSUER OR OTHER COUNSEL FOR THE HOLDER REASONABLY ACCEPTABLE TO THE ISSUER HAS BEEN OBTAINED TO THE EFFECT THAT NO SUCH REGISTRATION IS REQUIRED OR (iii) A ‘NO ACTION’ LETTER OR ITS THEN EQUIVALENT HAS BEEN ISSUED BY THE STAFF OF THE SECURITIES AND EXCHANGE COMMISSION WITH RESPECT TO SUCH TRANSFER OR SALE.”

4.2. Restricted Securities. The Investor understands that the Preferred Shares and the Warrants (and any Conversion Shares) will not be registered at the Closing under the Securities Act for the reason that the sale provided for in this Agreement is exempt pursuant to Section 4 of the Securities Act and that the reliance of the Company on such exemption is predicated in part on the Investor’s representations set forth herein. The Investor further represents that it has had access during the course of the transaction and prior to its purchase of the Preferred Shares and the Warrants to such information relating to the Company as it has desired and that it has had the opportunity to ask questions of and receive answers from the Company concerning the terms and conditions of the offering and to obtain additional information (to the extent the Company possessed such information or could acquire it without unreasonable effort or expense) necessary to verify the accuracy of any information furnished to it or to which it had access. The foregoing, however, does not limit or modify the representations and warranties of the Company in Section 3 of this Agreement or the right of the Investor to rely thereon. The Investor understands that the Preferred Shares and the Warrants (and any Conversion Shares) may not be sold, transferred or otherwise disposed of without registration under the Securities Act or an exemption therefrom and that in the absence of an effective registration statement covering the Preferred Shares or the Warrants (or the Conversion Shares) or an available exemption from registration under the Securities Act, the Preferred Shares and the Warrants (and any Conversion Shares) must be held indefinitely.

4.3. Accredited Investor. The Investor is an “accredited investor” as defined in Rule 501(a) of Regulation D promulgated under the Securities Act. The Investor has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the purchase of the Preferred Stock and the Conversion Shares into which it may be converted. The Investor is not registered as a broker or dealer under Section 15(a) of the Securities Exchange Act, affiliated with any broker or dealer registered under Section 15(a) of the Securities Exchange Act, or a member of the Financial Industry Regulatory Authority.

4.4. No General Solicitation. Neither the Investor nor any of its officers, directors, employees, agents, stockholders or partners has either directly or indirectly, including through a broker or finder, engaged in any general solicitation or published any advertisement in connection with the offer and sale of the Shares.

4.5. No Conflicts. The execution, delivery and performance of this Agreement and the Ancillary Documents by the Investor and the consummation by the Investor of the transactions contemplated hereby and thereby will not (i) result in a violation of the certificate of incorporation, by-laws or other documents of organization of the Investor, (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Investor is bound, or (iii) result in a violation of any law, rule, regulation or decree applicable to the Investor.

4.6. Disclosure of Information. The Investor and its advisors, if any, have had an opportunity to discuss the Company’s business, management, financial affairs and the terms and conditions of the offering of the Preferred Stock with the Company’s management and have had an opportunity to review the Company’s facilities and financials and to ask questions of the Company. In determining whether to enter into this Agreement and purchase the Preferred Shares, the Investor has relied solely on (i) the written information supplied by Company employees in response to the written due diligence information request provided by the Investor to the Company, and (ii) the PowerPoint presentations delivered by the Company’s management to the Investor, titled “Investor Presentation April 9, 2010”, “Clipper Development Corp. May 28, 2010”, and “SteelCloud Confidential SWOT Feb. 2010”, and the Investor has not received nor relied upon any oral representation or warranty relating to the Company, this Agreement, the Ancillary Documents, the Preferred Shares, or any of the transactions or relationships contemplated thereby. The Investor understands that its purchase of the Preferred Shares involves a high degree of risk. The Investor has sought such accounting, legal and tax advice as it has considered necessary to make an informed investment decision with respect to its acquisition of the Preferred Shares. The foregoing, however, does not limit or modify the representations and warranties of the Company in Section 3 of this Agreement or the right of the Investor to rely thereon.

5. Conditions to Obligations of the Company. The obligations of the Company under this Agreement are subject to the satisfaction of the following conditions on or prior to the Closing Date, any of which may be waived in whole or in part by the Company:

5.1. Representations and Warranties. All of the representations and warranties of the Investor contained in this Agreement shall be true and correct in all material respects on the Closing Date with the same force and effect as if made on the Closing Date.

5.2. Consideration. The purchase price set forth in Section 1.4 hereof to be paid to the Company on the Closing Date shall have been paid by the Investor.

5.3. Closing Deliveries. All agreements and other documents to be delivered to the Investor by the Company pursuant to Section 2.2 hereof shall be in form and substance satisfactory to the Company in its sole and absolute discretion.

6. Conditions to Obligations of the Investor. The obligations of the Investor under this Agreement are subject to the satisfaction of the following conditions on or prior to the Closing Date, any of which may be waived in whole or in part by the Investor:

6.1. Representations and Warranties. All of the representations and warranties of the Company contained in this Agreement shall be true and correct in all material respects on the Closing Date with the same effect as if made on the Closing Date.

6.2. Performance of Covenants. All of the covenants and agreements of the Company contained in this Agreement and required to be performed on or before the Closing Date shall have been performed in all material respects to the satisfaction of the Investor.

6.3. Legal Action. There shall not have been instituted or threatened any legal proceeding seeking to prohibit or threaten the consummation of the transactions contemplated by this Agreement. None of the parties hereto shall be prohibited by any order, writ, injunction or decree of any governmental body of competent jurisdiction from consummating the transactions contemplated by this Agreement.

6.4. Due Diligence. The Investor shall have completed its due diligence investigation of the Company and shall be satisfied with results of such investigation.

6.5. Adverse Change. There shall have been no material adverse change in the business, property or condition, financial or otherwise, of the Company from that disclosed in the Company’s April 30, 2010 quarterly financials.

6.6. Disclosure Schedules. All disclosure schedules delivered to the Investor shall be in form and substance satisfactory to the Investor in its sole and absolute discretion.

6.7. Closing Deliveries. All agreements and other documents to be delivered to the Investor pursuant to Section 2.2 hereof shall be in form and substance satisfactory to the Investor in its sole and absolute discretion.

6.8. Note Purchase Agreement. The parties hereto shall have entered into a Note Purchase Agreement pursuant to which the Investor shall purchase $1,100,000 of notes issued by the Company, upon such terms and conditions as shall be acceptable to the Investor in its sole and absolute discretion, and the transactions contemplated by such Note Purchase Agreement shall be consummated concurrently with the transactions contemplated hereunder.

7. Expenses. The Company agrees to pay, and hold the Investor harmless against liability for the payment of, (a) the Investor's fees and expenses, including the reasonable fees and expenses of counsel, accounting advisors and other advisors to the Investor, arising in connection with the negotiation, execution and consummation of this Agreement and the transactions contemplated hereby, up to a maximum of $40,000.00, which fees and expenses will be paid promptly after submission of bills, (b) fees and expenses (including, without limitation, reasonable attorneys’ fees) incurred with respect to any amendments or waivers requested by the Company (whether or not the same become effective) under or in respect of this Agreement and the transactions contemplated hereby, (c) stamp and other transfer taxes which may be payable in respect of the execution and delivery of this Agreement or the issuance of the Preferred Shares or Conversion Shares and (d) fees and expenses (including, without limitation, reasonable attorneys’ fees) incurred in respect of the enforcement by the Investor of the rights granted to the Investor under this Agreement and the transactions contemplated hereby.

8. Conduct Prior to the Closing Date. The Investor, its counsel, accountants, employees or other representatives may, prior to the Closing Date, make such investigations of the properties and operations of the Company and such audit of the financial condition of the Company for such purposes as they deem necessary or advisable in connection with the transactions contemplated hereby; such investigation shall not, however, affect the representations and warranties of the Company hereunder. The Company agrees to permit the Investor and its counsel, accountants, employees or other representatives to have, after the date hereof, full access during normal business hours, upon reasonable notice, to the premises and to all books and records of the Company and the Investor shall have the right to make copies thereof and excerpts therefrom, and the Company will furnish the Investor with such financial and operating data and other information with respect to the business and properties of the Company as the Investor may, from time to time, reasonably request. The Company agrees to permit the Investor and its counsel, accountants, employees or other representatives to communicate with and visit suppliers, customers and others having business relations with the Company. The Company acknowledges that the rights set forth in this Section 8 are essential to the Investor as a means of evaluating the assets and business of the Company and agrees that in no event will it make any claim of any kind as a result of the exercise by the Investor of such rights and hereby waive any and all rights it may have to make such claims.

9. No Brokers. Each of the Company, on the one hand, and the Investor, on the other hand, represents and warrants to the other that there was no broker or finder connected with this Agreement or the transactions contemplated hereby.

10. Survival of Representations. All representations, warranties, covenants and agreements contained in this Agreement or in any document, exhibit, schedule or certificate delivered in connection herewith shall survive the execution and delivery of this Agreement and the Closing Date and any investigation at any time made by the Investor or on its behalf.

11. Definitions.

For purposes of this Agreement, the following terms have the respective meanings set forth below:

11.1. “Affiliate” has the meaning such term is given in Rule 405 promulgated under the Securities Act.

11.2. “Ancillary Agreements” means the Warrant Agreement, the Registration Rights Agreement, the Security Agreement, and all other agreements to be delivered by the Company to the Investor pursuant to the terms of this Agreement.

11.3. “Certificate of Designations” means a certificate of designations setting forth the designations, preferences, and relative, participating, optional, and other special rights of the Preferred Shares.

11.4. “Company SEC Documents” means the Company’s (i) annual reports on Form 10-K for its fiscal years ended October 31, 2009, 2008 and 2007; (ii) quarterly report on Form 10-Q for its fiscal quarter ended April 30, 2010; (iii) proxy or information statements relating to meetings of the shareholders of the Company held (or actions taken without a meeting by such stockholders) since October 31, 2009, and (iv) all of its other reports, statements, schedules and registration statements filed with the SEC since October 31, 2009.

11.5. “Indebtedness” means all obligations, contingent or otherwise, which in accordance with generally accepted accounting principles should be classified on the obligor’s balance sheet as liabilities, but in any event including liabilities secured by any mortgage, pledge, lien or other security interest existing on property owned or acquired by the obligor, whether or not the liability secured thereby shall have been assumed, all guarantees of such Indebtedness and other contingent obligations in respect of the Indebtedness of others.

11.6. “Lien” means, with respect to any property or asset (whether tangible or intangible), any mortgage, lien, pledge, charge, security interest, encumbrance, or other adverse claim of any kind in respect of such property or asset.

11.7. “Material Adverse Effect” means any material adverse change in, or material adverse effect on the business, assets, prospects, results of operations, value, financial or other condition of the Company, or any event or circumstance that could reasonably be expected to have any such effect or that could reasonably be expected to prevent, hinder or delay the consummation of any of the transactions contemplated by this Agreement, the Ancillary Agreements, or any of the other documents, instruments or agreements contemplated hereby and thereby.

11.8. “Registration Rights Agreement” means the Registration Rights Agreement to be delivered by the Company to the Investor pursuant to Section 2.2 hereof, which shall be in form and substance satisfactory to the Investor in its sole and absolute discretion.

11.9. “Sarbanes-Oxley Act” means the Sarbanes-Oxley Act of 2002.

11.10. “SEC” means the Securities and Exchange Commission.

11.11. “Securities Act” means the Securities Act of 1933, as amended, or any similar Federal law then in force.

11.12. “Securities Exchange Act” means the Securities Exchange Act of 1934, as amended, or any similar Federal law then in force.

11.13. “Security Agreement” means the Security Agreement to be delivered by the Company to the Investor pursuant to Section 2.2 hereof, which shall be in form and substance satisfactory to the Investor in its sole and absolute discretion.

11.14. “Warrant Agreement” means the agreement evidencing the grant of the Warrants referenced in Section 1.4 hereof, which shall be in form and substance satisfactory to the Investor in its sole and absolute discretion.

12. Miscellaneous Provisions.

12.1. Construction and Enforcement. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF ILLINOIS WITHOUT GIVING ANY EFFECT TO PRINCIPLES OF CONFLICTS OF LAWS. The Company agrees that it will not assert against any partner of the Investor (or against any partner, officer, director, employee or agent of the Investor or any of its affiliates) any claim it may have under this Agreement by reason of any failure or alleged failure by the Investor to meet its obligations hereunder.

12.2. Notices. All notices hereunder shall be in writing and shall be deemed to have been given at the time when hand delivered, when received if sent by telecopier or by same day or overnight recognized commercial courier service, or three days after being mailed by certified mail, addressed to the address below stated of the party to which notice is given, or to such changed address as such party may have fixed by notice:

To the Company:

20110 Ashbrook Place, Suite 130

Ashburn, Virginia 20147

Attn: Brian H. Hajost

with a copy to:

Fettmann, Tolchin & Majors, PC

10509 Judicial Drive

Suite 300

Fairfax, VA 22030

Attn: Edward J. Tolchin, Esq.

To the Investor:

At the addresses set forth on Schedule A

with a copy to:

Ungaretti & Harris LLP

70 West Madison, Suite 3500

Chicago, Illinois 60602

Attn: Michael W. Black

provided, however, that any notice of change of address shall be effective only upon receipt.

12.3. Assignment. This Agreement shall be binding upon and inure to the benefit of the Company, the Investor and the respective successors and permitted assigns of the Investor. The Company may not assign any of its rights or obligations under this Agreement without the prior written consent of the Investor. The Investor may assign all or any part of its rights and obligations hereunder. A person to whom all or a part of the Investor’s rights are assigned shall become a party to this Agreement, entitled to all the rights and benefits hereunder. The rights and powers of the Investor hereunder are granted to the Investor as owner of the Preferred Shares and Conversion Shares. Any subsequent owner of any Preferred Shares or Conversion Shares, whether becoming such by transfer, assignment, operation of law or otherwise, shall be deemed to be an Investor hereunder, shall have the same rights and powers which an Investor owning such securities has hereunder, and shall be entitled to exercise them in full and no transfer or assignment shall divest such Investor or any subsequent owner of such rights and powers until such Investor or subsequent owner no longer owns any Preferred Shares or Conversion Shares. Whenever reference is made to the Investor in this Agreement, such reference shall include the Investor’s Affiliates and any assignees of the Investor’s rights hereunder.

12.4. Entire Agreement; Amendments and Waivers. This Agreement and all exhibits and schedules hereto set forth the entire understanding of the parties with respect to the transactions contemplated hereby. This Agreement may be amended, the Company may take any action herein prohibited or omit to take action herein required to be performed by it, and any breach of or compliance with any covenant, agreement, warranty or representation may be waived, only if the Company has obtained the written consent or waiver of the holders of at least 70% of the Preferred Shares (or Conversion Shares).

12.5. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument.

12.6. Severability. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction.

12.7. Headings. The headings in this Agreement are for reference purposes only and shall not constitute a part hereof.

[signature page follows]

IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the day and year first above written.

COMPANY:

STEELCLOUD, INC.

By:	/s/ Brian H. Hajost
	Brian H. Hajost, Chief Executive Officer

INVESTOR:

CLIPPER INVESTORS LLC

By	/s/ Kenneth A. Merlau
	Kenneth A. Merlau, Manager

Signature Page to Preferred Stock and Warrant Purchase Agreement

SCHEDULE A

Name and Address of Investor	Number of Preferred Shares	Warrant Shares

Clipper Investors LLC	450,000	20,000,000
1095 Fisher Lane
Winnetka, IL 60093

PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT

DISCLOSURE SCHEDULES

Schedule 3.6: Absence of Changes

As disclosed in the Company’s SEC Documents, the Company has entered into a material transaction with Caledonia Capital Corporation.

Schedule 3.7: Compliance with Other Instruments

The Company defaulted on the 13962 Park Center Lease, as well as with respect to the Forbearance Agreement (defined in Schedule 3.9).

Schedule 3.9: Litigation

On May 22, 2009, the Company entered into a Stipulation/Consent Order with CRP (the “Stipulation”), pursuant to an Affidavit and Statement of Account (the“Affidavit”) stating, as declared by a general manager of Jones Lang LaSalle, a property management company and agent for CRP Holdings A-1, LLC, referred to as “CRP,” the landlord of 14040 Park Center Road, Suite 210, Herndon, Virginia 20171 (the “Premises”), that CRP, as landlord, was seeking a judgment against the Company for: (i) possession of the Premises, and (ii) monetary damages for nonpayment of rent due under a sublease (the “Sublease”), dated September 28, 2004, by and between the Company and NEC America, Inc. (“NEC”), and a subsequent assignment of the Sublease to CRP from NEC, dated December 15, 2008. In the Stipulation the Company acknowledged that the balance due for rent and additional rent for the Premises was $168,637.96, together with attorney’s fees and court expenses of $7,041.00 through May 22, 2009, referred to as the “Judgment Amount.” Pursuant to the Stipulation, the Company paid $30,000 on May 22, 2009 toward the Judgment Amount. Further the Company agreed to, and has, vacated the Premises. CRP agreed to stay enforcement of the Judgment Amount until the earlier of (a) the Company’s receipt of capital in the amount of at least $500,000, or (b) May 31, 2010 (the “Forbearance Agreement”). The matter was returned to the court’s files pending compliance with the terms of the Stipulation.

Mr. Robert Frick, a former employee, claimed in a letter sent on May 13, 2009, that the Company owes him $67,500 under a severance agreement. Discussions are on-going concerning this matter. No lawsuit has been filed.

Attorney Recovery Systems, Inc., an assignee of NEC Corporation, a former sublessor to the Company, has asserted a claim in a letter dated April 2, 2009, that the Company owes $52,827.08 under the former sublease. Discussions have been held, but no resolution reached. No lawsuit has been filed.

On October 27, 2009, an attorney representing a company known as AITC forwarded a letter asserting that the Company is holding $55,440 paid to it from the DC government, which may be required to be refunded, directly or indirectly, to the DC government, in whole or in substantial part. On November 13, 2009, the District of Columbia made the same assertion. The claim relates to an investigation by DC authorities into improper contracting activities by a former DC employee and several others, including AITC employees. The Company was not implicated in the matter other than that it was the recipient of funds which AITC is now claiming the Company should pay over to AITC to refund to DC or should refund directly to DC. The Company responded to AITC’s lawyer with a copy to the District of Columbia’s representative on November 18, 2009, denying the claim, and asserting an offset against it which exceeds the $55,440. The Company has not heard anything additional from AITC or the DC Government since our last correspondence.

Schedule 3.12: Subsidiaries

Subsidiaries

The Company has inactive subsidiaries, which include: International Data Products, Puerto Rico Industrial Manufacturing Operations Acquisition Corporation, and STMS Corporation.

Joint Venture

Company has inactive JV with SteelCloud MEA, LLC.

Schedule 3.13: Registration Rights

Caledonia Capital Corporation, Inc. has registration rights.

Schedule 3.14: Outstanding Indebtedness

Mr. Brian Hajost and Mr. Steven Snyder did not receive a paycheck for the pay period ending May 15, 2010. This action is reflected in the Company’s accrued liabilities.

EX-10.2 4 v190281_ex10-2.htm

THIS WARRANT AND THE SECURITIES ISSUABLE UPON ITS EXERCISE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY STATE SECURITIES STATUTES OR REGULATIONS, AND MAY NOT BE TRANSFERRED OR SOLD UNLESS (i) A REGISTRATION STATEMENT UNDER SUCH ACT IS THEN IN EFFECT WITH RESPECT THERETO, (ii) A WRITTEN OPINION FROM COUNSEL FOR THE ISSUER OR OTHER COUNSEL FOR THE HOLDER REASONABLY ACCEPTABLE TO THE ISSUER HAS BEEN OBTAIN TO THE EFFECT THAT NO SUCH REGISTRATION IS REQUIRED OR (III) A ‘NO ACTION’ LETTER OR ITS THEN EQUIVALENT HAS BEEN ISSUED BY THE STAFF OF THE SECURITIES AND EXCHANGE COMMISSION WITH RESPECT TO SUCH TRANSFER OR SALE.

WARRANT

July 2, 2010

To Purchase 20,000,000 Shares of Common Stock of

STEELCLOUD, INC.

This Warrant (the “Warrant”) certifies that, for value received, CLIPPER INVESTORS LLC, an Illinois limited liability company (the “Holder”), is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after the date hereof (the “Initial Exercise Date”) and on or prior to the fifth-year anniversary of the Initial Exercise Date (the “Termination Date”), but not thereafter, to subscribe for and purchase from STEELCLOUD, INC., a Virginia corporation (the “Company”), up to 20,000,000 shares, as such number may be adjusted from time to time as hereinafter set forth (the “Warrant Shares”), of common stock of the Company, $0.001 par value per share (the “Common Stock”). The purchase price of each share of Common Stock (the “Exercise Price”) under this Warrant shall be $0.14, subject to adjustment hereunder.

1. Title to Warrant. Prior to the Termination Date and subject to compliance with applicable laws and Section 7 of this Warrant, this Warrant and all rights hereunder are transferable, in whole or in part, at the office or agency of the Company by the Holder or its agent or attorney upon surrender of this Warrant together with the Assignment Form attached hereto as Exhibit A (the “Assignment Form”), properly endorsed.

2. Authorization of Shares. The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue).

3. Exercise of Warrant.

(a) Exercise of the purchase rights represented by this Warrant may be made at any time or times on or after the Initial Exercise Date and on or before the Termination Date by delivery to the Company (or such other office or agency of the Company as it may designate by notice in writing to the registered holder at the address of such holder appearing on the books of the Company) of a duly executed facsimile copy of the Notice of Exercise in the form attached hereto as Exhibit B (the “Notice of Exercise”); provided, however, within five (5) Business Days (as defined below) of the date said Notice of Exercise is delivered to the Company, the Holder shall have surrendered this Warrant to the Company, and, if the Holder has not elected to make a cashless exercise as provided below, the Company shall have received payment of the aggregate Exercise Price of the shares thereby purchased by wire transfer or cashier’s check drawn on a United States bank. Certificates for Warrant Shares purchased hereunder shall be delivered to the Holder no later than three (3) Business Days after the delivery to the Company of the Notice of Exercise, surrender of this Warrant and, if the Holder has not elected to make a cashless exercise as provided below, payment of the aggregate Exercise Price as set forth above (“Warrant Share Delivery Date”). Prior to the issuance of such Warrant Shares, if the Company fails to deliver to the Holder a certificate or certificates representing the Warrant Shares pursuant to this Section 3(a) by the Warrant Share Delivery Date, then the Holder will have the right to rescind such exercise. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity, including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely deliver certificates representing Warrant Shares as required pursuant to the terms hereof. “Business Day” means any day on which financial institutions are open for business in Chicago, Illinois.

(b) If this Warrant shall have been exercised in part, then the Company shall, at the time of delivery of the certificate or certificates representing the Warrant Shares, deliver to the Holder a new Warrant evidencing the rights of the Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.

(c) In the event that the Holder elects to make a cashless exercise as provided above, the Company shall issue to the Holder the number of shares of Common Stock equal to the result obtained by (i) subtracting B from A, (ii) multiplying the difference by C, and (iii) dividing the product by A, as set forth in the following equation:

(A - B) x C where:

the number of shares of Common Stock issuable upon a cashless exercise of the Warrant pursuant to the provisions of this Section 3.

the Fair Market Value (as defined below) of one share of Common Stock on the date of exercise.

the Exercise Price for one share of Common Stock under this Warrant.

the number of shares of Common Stock as to which this Warrant is exercisable.

If the foregoing calculation results in a negative number, then no shares of Common Stock shall be issued upon a cashless exercise.

For the purpose of such calculations, the “Fair Market Value” per share of the shares of Common Stock shall be, (i) if the cashless exercise of the Warrant is in connection with a public offering of the Company’s Common Stock, the public offering price (before deducting commission, discounts or expenses) at which the Common Stock is sold in such offering, (ii) if a public market for the Company’s Common Stock exists at the time of such exercise, the average of the closing bid and asked prices of the Common Stock quoted in the Over-The-Counter Market Summary or the last reported sale price of the Common Stock or closing price quoted on the Nasdaq National Market or on any exchange on which the Common Stock is listed, whichever is applicable, as published in The Wall Street Journal for the five (5) trading days prior to the date of determination of Fair Market Value; or (iii) if there is no public market for the Company’s Common Stock, determined by the Company’s Board of Directors in good faith.

4. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. As to any fraction of a share which the Holder would otherwise be entitled to purchase upon such exercise, the Company shall round such fraction of a share up to the nearest whole share.

5. Charges, Taxes and Expenses. Issuance of certificates for Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Holder or in such name or names as may be directed by the Holder. In the event certificates for Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form duly executed by the Holder.

6. Closing of Books. The Company will not close its shareholder books or records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof.

7. Transfer, Division and Combination.

(a) Subject to compliance with any applicable securities laws and with the provisions of Sections 1, 5 and 7(e) hereof, this Warrant and all rights hereunder are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company, together with an Assignment Form completed and duly executed by the Holder or its agent or attorney. Upon such surrender, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees and in the denomination or denominations specified in the Assignment Form, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. A Warrant, if properly assigned, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued.

(b) This Warrant may be divided or combined with other Warrants upon presentation hereof at the office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 7(a), as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice.

(c) The Company shall prepare, issue and deliver at its own expense the new Warrant or Warrants contemplated by this Section 7.

(d) The Company agrees to maintain, at its office, books for the registration and the registration of transfer of the Warrants.

(e) If, at the time of the surrender of this Warrant in connection with any transfer of this Warrant, the transfer of this Warrant shall not be registered pursuant to an effective registration statement under the Securities Act and under applicable state securities or blue sky laws, the Company may require, as a condition of allowing such transfer: (i) that the Holder or assignee of this Warrant, as the case may be, furnish to the Company a written opinion of counsel (which opinion shall be in form, substance and scope customary for opinions of counsel in comparable transactions) to the effect that such transfer may be made without registration under the Securities Act and under applicable state securities or blue sky laws; (ii) that the Holder or assignee execute and deliver to the Company an investment representation letter in form and substance reasonably satisfactory to the Company; and (iii) that the assignee be an “accredited investor” as defined in Rule 501(a) promulgated under the Securities Act.

8. No Rights as Shareholder until Exercise. This Warrant does not entitle the Holder to any voting rights or other rights as a shareholder of the Company prior to the exercise hereof. Upon the surrender of this Warrant, the delivery of the Notice of Exercise, and the payment of the aggregate Exercise Price, the Warrant Shares so purchased shall be and be deemed to be issued to such Holder as the record owner of such shares as of the close of business on the later of the date of such surrender, delivery or payment.

9. Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate.

10. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall not be a Business Day, then such action may be taken or such right may be exercised on the next succeeding Business Day.

11. Adjustments to Exercise Price and Number of Warrant Shares. The number and kind of securities purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time if the Company shall: (i) pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock to holders of its outstanding Common Stock; (ii) subdivide its outstanding shares of Common Stock into a greater number of shares; (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock; or (iv) issue any shares of its capital stock in a reclassification of the Common Stock. Upon the happening of any of the events set forth in subsections (i)-(iv) of this Section 11, the number of Warrant Shares purchasable upon exercise of this Warrant immediately prior thereto shall be adjusted so that the Holder shall be entitled to receive the kind and number of Warrant Shares or other securities of the Company which it would have owned or have been entitled to receive had such Warrant been exercised in advance thereof. Upon each such adjustment of the kind and number of Warrant Shares or other securities of the Company which are purchasable hereunder, the Holder shall thereafter be entitled to purchase the number of Warrant Shares or other securities resulting from such adjustment at an Exercise Price per Warrant Share or other security obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares purchasable pursuant hereto immediately prior to such adjustment and dividing by the number of Warrant Shares or other securities of the Company that are purchasable pursuant hereto immediately after such adjustment. An adjustment made pursuant to this paragraph shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event.

12. Reorganization, Reclassification, Merger, Consolidation or Disposition of Assets. In case the Company shall reorganize its capital, reclassify its capital stock, consolidate or merge with or into another corporation (where the Company is not the surviving corporation or where there is a change in or distribution with respect to the Common Stock of the Company), or sell, transfer or otherwise dispose of its property, assets or business to another corporation and, pursuant to the terms of such reorganization, reclassification, merger, consolidation or disposition of assets, shares of common stock of the successor or acquiring corporation, or any cash, shares of stock or other securities or property of any nature whatsoever (excluding cash but including warrants or other subscription or purchase rights) in addition to or in lieu of common stock of the successor or acquiring corporation (“Other Property”), are to be received by or distributed to the holders of Common Stock of the Company, then the Holder shall have the right thereafter to receive the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and Other Property receivable upon or as a result of such reorganization, reclassification, merger, consolidation or disposition of assets by a Holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such event. In case of any such reorganization, reclassification, merger, consolidation or disposition of assets, the successor or acquiring corporation (if other than the Company) shall expressly assume the due and punctual observance and performance of each and every covenant and condition of this Warrant to be performed and observed by the Company and all the obligations and liabilities hereunder, subject to such modifications as may be deemed appropriate (as determined in good faith by resolution of the Board of Directors of the Company) in order to provide for adjustments of Warrant Shares for which this Warrant is exercisable which shall be as nearly equivalent as practicable to the adjustments provided for in this Section 12. For purposes of this Section 12, “common stock of the successor or acquiring corporation” shall include stock of such corporation of any class which is not preferred as to dividends or assets over any other class of stock of such corporation and which is not subject to redemption and shall also include any evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable for any such stock, either immediately or upon the arrival of a specified date or the happening of a specified event and any warrants or other rights to subscribe for or purchase any such stock. The foregoing provisions of this Section 12 shall similarly apply to successive reorganizations, reclassifications, mergers, consolidations or disposition of assets.

13. Notice of Adjustment. Whenever the number of Warrant Shares or number or kind of securities or other property purchasable upon the exercise of this Warrant or the Exercise Price is adjusted, as herein provided, the Company shall give notice thereof to the Holder, which notice shall state the number of Warrant Shares (and other securities or property) purchasable upon the exercise of this Warrant and the Exercise Price of such Warrant Shares (and other securities or property) after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth the computation by which such adjustment was made.

14. Notice of Corporate Action. If at any time:

(a) the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or other distribution, or any right to subscribe for or purchase any evidences of its indebtedness, any shares of stock of any class or any other securities or property, or to receive any other right; or

(b) there shall be any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any consolidation or merger of the Company with, or any sale, transfer or other disposition of all or substantially all the property, assets or business of the Company to, another corporation; or

then, in any one or more of such cases, the Company shall give to Holder: (i) at least thirty (30) days’ prior written notice of the date on which a record date shall be selected for such dividend, distribution or right or for determining rights to vote in respect of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, liquidation or winding up, and (ii) in the case of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up, at least thirty (30) days’ prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause also shall specify: (A) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, the date on which the holders of Common Stock shall be entitled to any such dividend, distribution or right, and the amount and character thereof, and (B) the date on which any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up is to take place and the time, if any such time is to be fixed, as of which the holders of Common Stock shall be entitled to exchange their Warrant Shares for securities or other property deliverable upon such disposition, dissolution, liquidation or winding up. Each such written notice shall be sufficiently given if addressed to the Holder at the last address of the Holder appearing on the books of the Company and delivered in accordance with Section 16(d).

15. Authorized Shares. The Company covenants that during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. All such shares shall be duly authorized and, when issued upon such exercise, validly issued, fully paid and non-assessable and free of all preemptive rights. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for the Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation.

Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending the Company’s Certificate of Incorporation or any Certificate of Designations relating to any of the Company’s equity securities, or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of the Holder as set forth in this Warrant against impairment. Without limiting the generality of the foregoing, the Company will: (i) not increase the par value of any Warrant Shares above the amount payable therefor upon such exercise immediately prior to such increase in par value, (ii) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant, and (iii) use its best efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable the Company to perform its obligations under this Warrant.

Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof.

16. Miscellaneous.

(a) Governing Law. This Warrant shall be governed by and construed in accordance with the laws of the State of Virginia without regard to principles of conflict of laws.

(b) Restrictions. The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered, will have restrictions upon resale imposed by state and federal securities laws.

(c) Nonwaiver and Expenses. No course of dealing or any delay or failure to exercise any right hereunder on the part of the Holder shall operate as a waiver of such right or otherwise prejudice the Holder’s rights, powers or remedies, notwithstanding all rights hereunder terminate on the Termination Date. If the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to the Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys’ fees, including those of appellate proceedings, incurred by the Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder.

(d) Notices. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been made when delivered or mailed by first class mail, postage prepaid, as follows: (a) if to the Holder, at the address of the Holder as shown on the registry books maintained by the Company or the Transfer Agent; and (b) if to the Company, at 20110 Ashbrook Place, Suite 130, Ashburn, Virginia 20147, Attention: Brian H. Hajost.

(e) Limitation of Liability. No provision hereof, in the absence of any affirmative action by the Holder to exercise this Warrant or purchase Warrant Shares, and no enumeration herein of the rights or privileges of the Holder, shall give rise to any liability of the Holder for the purchase price of any Common Stock or as a shareholder of the Company, whether such liability is asserted by the Company or by creditors of the Company.

(f) Remedies. The Holder, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate.

(g) Successors and Assigns. Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company and the successors and permitted assigns of the Holder. The Company may not assign any of its rights or obligations under this Warrant without the consent of the Holder. The provisions of this Warrant are intended to be for the benefit of all Holders from time to time of this Warrant and shall be enforceable by any such Holder or holder of Warrant Shares.

(h) Amendment. This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company and the Holder.

(i) Severability. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant.

(j) Headings. The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.

(k) Registration Rights. The Holder of this Warrant shall be entitled to the rights and benefits as a holder of Investor Registrable Securities pursuant to that certain Registration Rights Agreement dated July 2, 2010, by and among the Company, the Holder and Caledonia Capital Corporation, a Delaware corporation.

[signature page follows]

IN WITNESS WHEREOF, the Company has caused this Warrant to be signed on its behalf, in its corporate name, by its duly authorized officer, all as of the day and year first above written.

	STEELCLOUD, INC., a Virginia corporation

	By	: /s/ Brian H. Hajost
	Name: Brian H. Hajost
	Title: President & CEO

Signature Page to Warrant

EXHIBIT A

ASSIGNMENT FORM

(To assign the foregoing Warrant, execute

this form and supply required information.

Do not use this form to exercise the Warrant.)

FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby assigned to

_______________________________________________ whose address is

_______________________________________________________________.

_______________________________________________________________

Dated: ______________, _______

	Holder’s Name:

	Signature of Holder
	or Authorized Signatory:

	Title (if applicable):

	Holder’s Address:

Signature Guaranteed: ________________________________________________

NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank or trust company. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.

EXHIBIT B

NOTICE OF EXERCISE

To: STEELCLOUD, INC.

The undersigned, the Holder of the attached Warrant, hereby irrevocably elects to exercise the purchase right represented by the Warrant for, and to purchase thereunder, _______ shares of Common Stock (as such terms are defined in the Warrant, dated July 2, 2010, issued by STEELCOUD, INC. to CLIPPER INVESTORS LLC.

(Cash Exercise) The undersigned has included with this Notice of Exercise the purchase price of such shares in full.

(Cashless Exercise) The undersigned elects to purchase such shares pursuant to the net exercise provisions of such Warrant.

The undersigned hereby requests that the Certificate(s) for such securities be issued in the name(s) and delivered to the address(es) as follows:

Name:
Address:
Social Security Number:
Deliver to:
Address:

If the foregoing evidences an exercise of the Warrant to purchase fewer than all of the Warrant Shares (or other securities or property) to which the undersigned is entitled under such Warrant, please issue a new Warrant, of like tenor, for the remaining portion of the Warrant (or other securities or property) in the name(s), and deliver the same to the address(es) as follows:

Name:
Address:

DATED: ____________, 2010.


(Name of Holder)


(Signature of Holder or Authorized Signatory)			(SS or TIN of Holder)

Signature Guaranteed:

EX-10.3 5 v190281_ex10-3.htm

NOTE PURCHASE AGREEMENT

This Note Purchase Agreement (this “Agreement”) is entered into as of July 2, 2010 (the “Effective Date”) by and between STEELCLOUD, INC., a Virginia corporation (the “Company”), and CLIPPER INVESTORS LLC, an Illinois limited liability company (the “Investor”). The Company and the Investor are referred to collectively herein as the “parties.”

RECITALS

A. The Investor is willing, pursuant to the terms and conditions of this Agreement, to purchase from the Company that certain Note (as defined herein) which Note shall be convertible into securities of the Company on the terms and subject to the conditions set forth herein.

B. The Company wishes to sell the Note on the terms and conditions and in the form referenced herein.

C. The purpose of this Agreement is to set forth the understanding of the parties relative to the matters above. By this reference these Recitals are incorporated into the Agreement which follows below.

AGREEMENT

NOW, THEREFORE, in consideration of these premises, and the terms, conditions, representations and covenants set forth herein, the parties hereby agree as follows:

1. DEFINITIONS.

1.1 Certain Defined Terms. As used in this Agreement, the following terms shall have the following respective meanings:

“Agreement” has the meaning ascribed to such term in the preamble.

“Affiliate” has the meaning such term is given in Rule 405 promulgated under the Securities Act.

“Balance Sheet Date” has the meaning ascribed to such term in Section 6.5.

“Closing” has the meaning ascribed to such term in Section 3.1.

“Closing Date” has the meaning ascribed to such term in Section 3.1.

“Collateral” has the meaning ascribed to such term in the Security Agreement.

“Common Stock” means the Company’s $0.001 par value common stock.

“Company” has the meaning ascribed to such term in the preamble.

“Company SEC Documents” means the Company’s (i) annual reports on Form 10-K for its fiscal years ended October 31, 2009, 2008 and 2007; (ii) quarterly report on Form 10-Q for its fiscal quarter ended April 30, 2010; (iii) proxy or information statements relating to meetings of the shareholders of the Company held (or actions taken without a meeting by such stockholders) since October 31, 2009, and (iv) all of its other reports, statements, schedules and registration statements filed with the SEC since October 31, 2009.

“Conversion Notice” has the meaning ascribed to such term in Section 5.1.

“Conversion Shares” means the shares of Common Stock issuable upon the conversion of the Note.

“Debt” means (i) Indebtedness for borrowed money, (ii) obligations evidenced by bonds, debentures, notes or other similar instruments, (iii) obligations to pay the deferred purchase price of property or services, (iv) obligations as lessee under leases which shall have been or should be, in accordance with generally accepted accounting principles, recorded as capital leases, and (v) obligations under direct or indirect guaranties in respect of, and obligations (contingent or otherwise) to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, Indebtedness or obligations of others of the kinds referred to in clause (i) through (iv) above.

“Default Rate” has the meaning ascribed to such term in Section 4.3.

“Effective Date” has the meaning ascribed to such term in the preamble.

“Event of Default” has the meaning ascribed to such term in Section 10.

“Financial Statements” has the meaning ascribed to such term in Section 6.5.

“Indebtedness” means all Debt and other obligations, contingent or otherwise, which in accordance with generally accepted accounting principles should be classified on the obligor’s balance sheet as liabilities, but in any event including liabilities secured by any mortgage, pledge, lien or other security interest existing on property owned or acquired by the obligor, whether or not the liability secured thereby shall have been assumed, all guarantees of such Indebtedness and other contingent obligations in respect of the Indebtedness of others.

“Investor” has the meaning ascribed to such term in the preamble.

“Lien” means, with respect to any property or asset (whether tangible or intangible), any mortgage, lien, pledge, charge, security interest, encumbrance, or other adverse claim of any kind in respect of such property or asset.

“Loan Documents” means collectively this Agreement, the Note, the Security Agreement, and the Registration Rights Agreement.

“Material Adverse Effect” means any material adverse change in, or material adverse effect on the business, assets, prospects, results of operations, value, financial or other condition of the Company, or any event or circumstance that could reasonably be expected to have any such effect or that could reasonably be expected to prevent, hinder or delay the consummation of any of the transactions contemplated by this Agreement, the other Loan Documents, or any of the other documents, instruments or agreements contemplated hereby and thereby.

“Maturity Date” has the meaning ascribed to such term in Section 4.2.

“Note” has the meaning ascribed to such term in Section 2.1.

“Outstanding Balance” means the unpaid principal balance of the Note.

“Person” means an individual, corporation, partnership, association, trust, government or political subdivision or agent or instrumentality thereof, or other entity or organization.

“Preferred Stock and Warrant Purchase Agreement” means that certain Preferred Stock and Warrant Purchase Agreement of even date herewith by and between the Company and the Investor pursuant to which the Investor shall purchase 450,000 shares of the Company’s Series A Preferred Stock and warrants to purchase 20,000,000 shares of Common Stock.

“Purchase Price” has the meaning ascribed to such term in Section 2.2.

“Registration Rights Agreement” means the Registration Rights Agreement to be delivered by the Company to the Investor pursuant to Section 3.2 hereof, substantially in the form attached hereto as Exhibit B.

“Sarbanes-Oxley Act” means the Sarbanes-Oxley Act of 2002.

“SEC” means the Securities and Exchange Commission.

“Securities Act” means the Securities Act of 1933, as amended, or any similar Federal law then in force.

“Securities Exchange Act” means the Securities Exchange Act of 1934, as amended, or any similar Federal law then in force.

“Security Agreement” means that certain Security Agreement, dated of even date herewith, by and between the Company and the Investor, substantially in the form attached hereto as Exhibit C.

1.2 Other Defined Terms.

(a) Certain other words and phrases are defined or described elsewhere in this Agreement and/or the Schedules and Exhibits hereto.

(b) Wherever used in this Agreement (i) the words “include” or “including” shall be construed as incorporating, also, “but not limited to” or “without limitation”, (ii) the word “day” means a calendar day unless otherwise specified, (iii) the word “party” means each and every person or entity who is a party to this Agreement, (iv) the word “law” (or “laws”) means any statute, ordinance, resolution, regulation, code, rule, order, decree, judgment, writ, injunction, mandate or other legally binding requirements of a government entity, (v) the word “notice” shall mean notice in writing (whether or not specifically stated) and shall include notices, consents, approvals and any other written communication contemplated under this Agreement, (vi) the word “or” shall mean either or both and (vii) the words “Business Day” shall mean any day other than Saturday, Sunday or a day on which commercial banks located in Chicago, Illinois are required or authorized by law to close.

(c) Unless the context otherwise requires, words in the singular number include the plural and vice versa. All Schedules and Exhibits hereto are hereby incorporated herein and made a part hereof.

2. PURCHASE OF NOTES.

2.1 Authorization. The Company has authorized the issuance and sale to the Investor of a convertible note in the aggregate principal amount of One Million One Hundred Thousand Dollars ($1,100,000), in the form attached hereto as Exhibit A (the “Note”).

2.2 Sale and Purchase of Note. Upon the terms and conditions contained herein, the Company agrees to sell to the Investor, and the Investor agrees to purchase from the Company, at the Closing (as hereinafter defined) and for the aggregate purchase price of One Million One Hundred Thousand Dollars ($1,100,000) (the “Purchase Price”), the Note.

3. CLOSING; CLOSING DELIVERIES.

3.1 Closing. The sale to and purchase by the Investor of the Note shall take place in a closing (the “Closing”) with the Closing to occur at the offices of Ungaretti & Harris LLP, 70 West Madison, Suite 3500, Chicago, Illinois 60602 at 10:00 a.m. local time, on the date hereof, or at such other time, date or place as the Company and the Investor shall mutually agree (the “Closing Date”).

3.2 Deliveries by the Company at the Closing. The Investor shall have received on or before the Closing Date, in form and substance satisfactory to the Investor in its sole discretion:

(a) the Note issued in the name of the Investor;

(b) the Security Agreement, duly executed by the Company;

(d) a certificate executed by the President of the Company stating that the conditions specified in Sections 3.6(a) and 3.6(b) have been fulfilled and stating that there shall have been no material adverse change in the business, affairs, prospects, operations, properties, assets or condition of the Company since the date of the Financial Statements;

(e) certified copies of (A) the resolutions of the Board of Directors of the Company approving the Loan Documents and of all documents evidencing other necessary corporate action and governmental approvals, if any, with respect to such Loan Documents, and (B) the Certificate of Incorporation and the Bylaws of the Company as in effect on the Closing Date;

(f) the legal opinions of Gersten & Savage LLP, and Fettman, Tolchin & Majors PC, counsel to the Company, in form and substance satisfactory to the Investor and to the Investor’s counsel; and

(g) such other certificates or documents the Investor or its counsel may reasonably require.

3.3 Deliveries by the Investor at Closing. The Company shall have received on or before the Closing Date, in form and substance satisfactory to the Company in its sole discretion:

(a) the Purchase Price, by wire transfer of immediately available funds; and

(b) such other certificates or documents as the Investor or its counsel may reasonably require.

3.4 Conditions of the Company’s Obligations at Closing. The obligations of the Company to the Investor under this Agreement are subject to the fulfillment on or before the purchase or Closing of each of the following conditions by the Investor:

(a) Representations and Warranties. The representations and warranties of the Investor contained in Section 6 shall be true on and as of the purchase or Closing with the same effect as though such representations and warranties had been made on and as of the purchase or Closing.

(b) Payment of Purchase Price. Investor shall have delivered the Purchase Price.

3.6 Conditions of the Investor’s Obligations at Closing. The obligations of the Investor under this Agreement are subject to the satisfaction of the following conditions on or prior to the Closing Date, any of which may be waived in whole or in part by the Investor:

(a) Representations and Warranties. All of the representations and warranties of the Company contained in this Agreement shall be true and correct in all material respects on the Closing Date with the same effect as if made on the Closing Date.

(b) Performance of Covenants. All of the covenants and agreements of the Company contained in this Agreement and required to be performed on or before the Closing Date shall have been performed in all material respects to the satisfaction of the Investor.

(c) Authorizations and Approvals. All authorizations and approvals required in connection with the issuance of the Note and the stock issuable upon conversion of the Note shall have been obtained.

(d) Legal Action. There shall not have been instituted or threatened any legal proceeding seeking to prohibit or threaten the consummation of the transactions contemplated by this Agreement. None of the parties hereto shall be prohibited by any order, writ, injunction or decree of any governmental body of competent jurisdiction from consummating the transactions contemplated by this Agreement.

(e) Due Diligence. The Investor shall have completed its due diligence investigation of the Company and shall be satisfied with results of such investigation.

(f) Adverse Change. There shall have been no material adverse change in the business, property or condition, financial or otherwise, of the Company from that disclosed in the Company’s April 30, 2010 quarterly financials.

(g) Disclosure Schedules. All disclosure schedules delivered to the Investor shall be in form and substance satisfactory to the Investor in its sole and absolute discretion.

(h) Closing Deliveries. All agreements and other documents to be delivered to the Investor pursuant to Section 3.2 hereof shall be in form and substance satisfactory to the Investor in its sole and absolute discretion.

(i) Preferred Stock and Warrant Purchase Agreement. The parties hereto shall have entered into the Preferred Stock and Warrant Purchase Agreement, and the transactions contemplated by such Preferred Stock and Warrant Purchase Agreement shall be consummated concurrently with the transactions contemplated hereunder.

4. PAYMENT OF NOTE.

4.1 Interest. The Outstanding Balance in respect of the Note shall accrue interest, beginning as of the date of the Note, at a rate of 12% per annum. Interest shall be payable on July 31, 2010 and on the last day of each month thereafter, and on the first to occur of the conversion of the outstanding balance of the Note as contemplated by Section 5.1, the Maturity Date, and the acceleration of the Note. Interest payable on the Note shall be calculated on the basis of a year of 360 days consisting of twelve 30-day months. If the date for any payment of principal is extended (whether by operation of this Agreement, any provision of law or otherwise), interest shall be payable for such extended time at the rates provided herein. Whenever any payment hereunder shall be stated to be due on a day other than a Business Day, such payment shall be due on the next succeeding Business Day.

4.2 Principal. The Outstanding Balance shall be due and payable in cash by 1:00 p.m. Chicago time on July 2, 2013 (the “Maturity Date”).

4.3 Default Rate of Interest. If the Company shall fail to pay on the due date therefor, whether on the Maturity Date, by acceleration or otherwise, any principal owing under the Notes, then interest shall accrue on such unpaid principal from the due date to the date on which such principal is paid in full at a rate per annum equal to eighteen percent (18%) (the “Default Rate”). Interest calculated at the Default Rate shall be due and payable upon demand by the Investor.

4.4 Other Payment Terms. All other terms and conditions governing the payment of the Note shall be as set forth in the Note.

5. INVESTOR’S CONVERSION OPTION.

5.1 Conversion of Note. The Investor shall have the right at any time and from time to time to convert all, or any part, of the outstanding balance due under the Note into shares of Common Stock of the Company at the conversion rate of $0.10 per share of Common Stock (subject to adjustment in the event of stock splits or combinations). To exercise such conversion right, the Investor must give written notice to the Company (“Conversion Notice”) of such intent at least five (5) days prior to such conversion and specify the portion of the outstanding principal balance of the Notes to be so converted. No fractional shares of the Company's Common Stock shall be issued upon conversion of the Note. In lieu of the Company issuing any fractional shares to the Investor upon the conversion of the Note, the Company shall pay to the Investor the amount of outstanding principal that is not so converted in cash. Within five (5) days after receipt of the Conversion Notice, (a) the Company at its expense will issue and deliver to the Investor a certificate or certificates for the number of full shares of Common Stock issuable upon such conversion and pay any outstanding interest accrued under the Note, (b) the principal balance of the Note shall be reduced by the amount so converted, and (c) upon conversion of all of the outstanding principal balance due under the Note, the Investor shall concurrently surrender the Note, marked paid, at the principal office of the Company. Upon conversion of all of the outstanding principal balance due under the Note, and payment of any accrued and outstanding interest thereon, the Company shall be forever released from all its obligations and liabilities under the Note. Anything contained in the Note to the contrary notwithstanding, the Note may not be prepaid without the Company providing the Investor not less than thirty (30) days prior written notice of such prepayment and the Investor shall not be required to accept any prepayment of the Note if following receipt of such written notice the Investor has delivered a Conversion Notice to the Company.

5.2 Reservation of Shares. From and after the date hereof, the Company shall reserve and keep available for issuance (i) such number of its authorized but unissued shares of its Common Stock as will be sufficient to permit the conversion in full of the Note into Common Stock, and in each case in accordance with this Agreement and the terms of the Note. All shares of Common Stock that are so issuable shall, when issued upon conversion or exercise, be duly and validly issued and fully paid and non-assessable. If at any time the number of authorized but unissued shares of Common Stock shall be insufficient to effect the conversion or exercise of all the outstanding Note, the Company shall take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose.

5.3 Registration Rights. The Investor shall be entitled to the rights and benefits as a holder of Investor Registrable Securities under the Registration Rights Agreement.

6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

The Company hereby represents and warrants to the Investor as follows:

6.1 Organization; Good Standing. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Virginia. The Company has all requisite corporate power and authority and holds all licenses, permits and other required authorizations from governmental authorities necessary to conduct its business as it is now being conducted or as proposed to be conducted and to own or lease the properties and assets it now owns or holds under lease. The Company is duly qualified or licensed and in good standing as a foreign corporation in each jurisdiction wherein the character of its properties or the nature of the activities conducted by it makes such qualification or licensing necessary.

6.2 Authorization. The Company has the full corporate power and authority to enter into the Loan Documents and to perform all of its obligations hereunder and thereunder. The execution, delivery and performance of the Loan Documents by the Company have been or will be, on or before the Closing Date, duly authorized by all necessary corporate action. This Agreement constitutes a legal, valid and binding obligation of the Company enforceable in accordance with its terms. The Company, in light of its business or proposed business, does not require any consent, approval, authorization or order of, or declaration, filing or registration with, any court or governmental or regulatory agency or board in connection with the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby.

6.3 Charter Documents. The Company has heretofore delivered to counsel for the Investor true, correct and complete copies of the Company’s Certificate of Incorporation and Bylaws, each as in full force and effect on the date hereof. There will be no changes made to such Certificate of Incorporation or Bylaws between the date hereof and the Closing Date, except as contemplated by the Preferred Stock and Warrant Purchase Agreement.

6.4 Capitalization. As of the Closing, the Company’s authorized capitalization will consist of (i) 80,000,000 shares of Common Stock, of which 20,075,001 are issued and outstanding, (ii) 750,000 shares of Series A Convertible Preferred Stock, par value $0.001 per share, of which none are issued and outstanding, and (iii)1,250,000 shares of blank check preferred stock. All outstanding shares of Common Stock of the Company are validly issued, fully paid and non-assessable. The issuance of the Note hereunder and the Conversion Shares pursuant to the provisions of this Agreement have been duly and validly authorized. No further approval or authorization of the shareholders or the directors of the Company or of any governmental authority or agency will be required for the issuance and sale of the Note or Conversion Shares as contemplated by this Agreement. No shareholder of the Company or any other person is entitled to any preemptive rights with respect to the purchase or sale of any securities by the Company. The Conversion Shares, when issued and delivered upon conversion of the Note, will be duly and validly issued, fully paid and non-assessable. Except as set forth on Schedule 6.4 attached hereto, there are no outstanding options, warrants or other rights, commitments or arrangements, written or oral, to which the Company is a party or by which it is bound, to purchase or otherwise acquire any authorized but unissued shares of capital stock of the Company or any security directly or indirectly convertible into or exchangeable or exercisable for any capital stock of the Company. No stock plan, stock purchase, stock option or other agreement or understanding between the Company and any holder of any securities or rights exercisable or convertible for securities provides for acceleration or other changes in the vesting provisions or other terms of such agreement or understanding as the result of the occurrence of any event.

6.5 Financial Statements. The Company has furnished to the Investor its unaudited balance sheet as of April 30, 2010 (the “Balance Sheet Date”), its unaudited statement of operations for the six month period ended April 30, 2010, and its unaudited statement of cash flows for the six month period ended April 30, 2010 (collectively the “Financial Statements”). Except as set forth on Schedule 6.5, the Financial Statements have been prepared in conformity with generally accepted accounting principles consistently applied, are true and correct in all material respects and fairly present the financial position and results of operations of the Company as at, or for the period ended on, such date. Since the date of such Financial Statements, the Company has conducted its business in a consistent manner without any change in accounting or credit principles, policies or procedures. At the date of such Financial Statements, there were no debts, liabilities or obligations of the Company of any kind and description, whether absolute or contingent, monetary or non-monetary, direct or indirect, known or unknown or matured or unmatured, or of any other nature, other than those disclosed in such Financial Statements.

6.6 Absence of Changes. Except as set forth on Schedule 6.6, since the Balance Sheet Date, there has not been: