EXHIBIT 10.3

 

SECURITIES PURCHASE AGREEMENT

 

This Securities Purchase Agreement (this “Agreement”) is dated as of October 2,
2017, between R Squared Technologies Inc., a Delaware corporation (the
“Company”), and the investor(s) signatory or who become signatory hereto (each,
a “Purchaser” and collectively, the “Purchasers”). If there is only one
Purchaser, all references herein to “Purchasers” or a “Purchaser” shall be
deemed to refer to such Purchaser.

 

WHEREAS, subject to the terms and conditions set forth in this Agreement and
pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the
“Securities Act”), and Rule 506 promulgated thereunder, the Company desires to
issue and sell to the Purchasers, and the Purchasers desire to purchase from the
Company, securities of the Company as more fully described in this Agreement
(the “Offering”).

 

NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this
Agreement, and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the Company and each Purchaser agree
as follows:

 

ARTICLE I.

DEFINITIONS

 

1.1 Definitions. In addition to the terms defined elsewhere in this Agreement:
(a) capitalized terms that are not otherwise defined herein have the meanings
given to such terms in the Note (as defined herein), and (b) the following terms
have the meanings set forth in this Section 1.1:

 

“Acquiring Person” shall have the meaning ascribed to such term in Section 4.7.

 

“Action” shall have the meaning ascribed to such term in Section 3.1(j).

 

“Affiliate” means any Person that, directly or indirectly through one or more
intermediaries, controls or is controlled by or is under common control with a
Person, as such terms are used in and construed under Rule 405 under the
Securities Act.

 

“Board of Directors” means the board of directors of the Company.

 

“Business Day” means any day except any Saturday, any Sunday, any day which is a
federal legal holiday in the United States or any day on which banking
institutions in the State of New York are required by law or other governmental
action to close.

 

“Closing” means each purchase and sale of Notes pursuant to this Agreement.

 

“Closing Date” means, with respect to each Closing, the Business Day on which
all of the Transaction Documents with respect to such Closing have been executed
and delivered by the applicable parties thereto, and all conditions precedent to
(i) the Purchaser’s obligations to pay the Subscription Amount at such Closing,
and (ii) the Company’s obligations to deliver the Securities to be issued and
sold at such Closing, in each case, have been satisfied or waived, but, in the
case of the initial Closing, in no event later than the tenth Business Day
following the date hereof.

  

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“Commission” means the United States Securities and Exchange Commission.

 

“Common Stock” means the common stock of the Company, par value $0.0001 per
share, and any other class of securities into which such securities may
hereafter be reclassified or changed.

 

“Common Stock Equivalents” means any securities of the Company or the
Subsidiaries which would entitle the holder thereof to acquire at any time
Common Stock, including, without limitation, any debt, preferred stock, right,
option, warrant or other instrument that is at any time convertible into or
exercisable or exchangeable for, or otherwise entitles the holder thereof to
receive, Common Stock.

 

“Company Counsel” means Jeffrey G. Klein, Esq., fax: (561) 994-6693, e-mail:
jklein@jkleinlegal.com.

 

“Conversion Price” shall have the meaning ascribed to such term in the Notes.

 

“Disclosure Schedules” means the Disclosure Schedules of the Company delivered
concurrently herewith, as the same may be updated by supplemental disclosure
schedules delivered by the Company to the Purchasers in connection with and on
or prior to each Closing, if any, after the initial Closing, solely for the
purpose of disclosing any events or changes occurring since the initial Closing
that would be required to be disclosed in order to make the representations and
warranties of the Company contained in this Agreement true and correct as of the
date of such Closing. If the contents of any such supplemental disclosure
schedules, in the sole and absolute discretion of a Purchaser, reflect an event
or circumstance which, individually or in the aggregate, is, or could become,
materially negative to the Company, its financial condition or results of
operations, its business or prospects or to the value of such Purchaser’s
investment in the Company, then, for clarity and notwithstanding anything to the
contrary contained herein, such Purchaser shall not be required to consummate
such Closing.

 

“Equity Line of Credit” shall have the meaning ascribed to such term in Section
4.13.

 

“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated thereunder.

 

“Exempt Issuance” means the issuance of (a) shares of Common Stock and Common
Stock Equivalents to officers, directors, consultants or employees of the
Company, from and after the date hereof, pursuant to plans in existence and as
constituted on the date of this Agreement or plans that have been approved by a
majority of the stockholders and a majority of the independent members of the
board of directors of the Company, in an aggregate amount, on an as-converted to
Common Stock basis, not to exceed 10% of the number of shares of Common Stock
outstanding on the initial Closing Date, (b) securities upon the exchange of or
conversion of any Securities issued hereunder (subject to adjustment for forward
and reverse stock splits and the like that occur after the date hereof) and
other securities exercisable or exchangeable for or convertible into shares of
Common Stock issued and outstanding on the date of this Agreement, provided that
such securities and any term thereof have not been amended since the date of
this Agreement to increase the number of such securities or to decrease the
issue price, exchange price or conversion price of such securities, (c)
securities issued pursuant to acquisitions or strategic transactions approved by
a majority of the disinterested directors of the Company, provided that any such
issuance shall only be to a Person (or to the equity holders of a Person) which
is, itself or through its subsidiaries, an operating company or an owner of an
asset in a business synergistic with the business of the Company and shall be
intended to provide to the Company substantial additional benefits in addition
to the incidental investment of funds, but shall not include a transaction in
which the Company is issuing securities primarily for the purpose of raising
capital or to an entity whose primary business is investing in securities, and
(d) securities issued or issuable to the Purchasers and their assigns pursuant
to this Agreement, the Notes and other Transaction Documents including without
limitation, Section 4.17 herein, or upon conversion of any such securities.

 

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“FCPA” means the Foreign Corrupt Practices Act of 1977, as amended.

 

“FDA” shall have the meaning ascribed to such term in Section 3.1(mm).

 

“Form 8-K” shall have the meaning ascribed to such term in Section 4.6.

 

“GAAP” shall have the meaning ascribed to such term in Section 3.1(h).

 

“Guaranty” means the Subsidiary Guaranty to be employed in connection with the
sale of the Securities, a form of which is attached as an exhibit to the
Security Agreement.

 

“Indebtedness” shall have the meaning ascribed to such term in Section 3.1(ll).

 

“Intellectual Property Rights” shall have the meaning ascribed to such term in
Section 3.1(o).

 

“Legend Removal Date” shall have the meaning ascribed to such term in Section
4.1(c).

 

“Liens” means a lien, charge, pledge, security interest, encumbrance, rights of
first refusal, preemptive right or other restriction.

 

“Listing Default” shall have the meaning ascribed to such term in Section
4.11(c).

 

“Majority in Interest” shall have the meaning ascribed to such term in Section
5.5.

 

“Material Adverse Effect” shall have the meaning assigned to such term in
Section 3.1(b).

 

“Material Permits” shall have the meaning ascribed to such term in Section
3.1(m).

 

“Maximum Rate” shall have the meaning ascribed to such term in Section 5.17.

 

“Money Laundering Laws” shall have the meaning ascribed to such term in Section
3.1(gg).

 

“Notes” means, collectively, the senior secured convertible notes issuable
pursuant to this Agreement, in the form of Exhibit A hereto.

.

“OFAC” shall have the meaning ascribed to such term in Section 3.1(ii).

 

“Participation Maximum” shall have the meaning ascribed to such term in Section
4.17(a).

 

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“Person” means an individual or corporation, partnership, trust, incorporated or
unincorporated association, joint venture, limited liability company, joint
stock company, government (or an agency or subdivision thereof) or other entity
of any kind.

 

“Pre-Notice” shall have the meaning ascribed to such term in Section 4.17(b).

 

“Proceeding” means an action, claim, suit, investigation or proceeding
(including, without limitation, an informal investigation or partial proceeding,
such as a deposition), whether commenced or threatened.

 

“Pro-Rata Portion” shall have the meaning ascribed to such term in Section
4.17(c).

 

“Public Information Failure” shall have the meaning ascribed to such term in
Section 4.3.

 

“Public Information Failure Payments” shall have the meaning ascribed to such
term in Section 4.3.

 

“Purchaser Party” shall have the meaning ascribed to such term in Section 4.10.

 

“Registration Rights Agreement” means the Registration Rights Agreement
contemplated by and to be entered into pursuant to Section 4.22.

 

“Reporting Requirements” shall have the meaning ascribed to such term in Section
3.1(h).

 

“Required Minimum” means, as of any date, the maximum aggregate number of shares
of Common Stock then issued or potentially issuable in the future pursuant to
the Transaction Documents, including any Underlying Shares issuable upon
conversion in full of the Notes, ignoring any conversion limits set forth
therein, and assuming that any previously unconverted portion of a Note will be
held until the scheduled maturity date thereof.

 

“Reverse Merger” means a business combination in which the Company becomes a
directly or indirectly wholly-owned subsidiary of Andalay Solar, Inc., a
Delaware corporation, or other publicly held reporting company satisfactory to
Purchasers and which shall be consummated on terms satisfactory to the
Purchasers in their sole discretion.

 

“Rule 144” means Rule 144 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended or interpreted from time to time, or
any similar rule or regulation hereafter adopted by the Commission having
substantially the same purpose and effect as such Rule.

 

“Securities” means the Notes and the Underlying Shares.

 

“Securities Act” means the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder.

 

“Security Agreement” means the Security Agreement to be entered into in
connection with and as a condition to the initial Closing hereunder, a form of
which is annexed hereto as Exhibit B.

 

“Short Sales” means all “short sales” as defined in Rule 200 of Regulation SHO
under the Exchange Act (but shall not be deemed to include the location and/or
reservation of borrowable shares of Common Stock). 

 

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“Subscription Amount” means, for each Closing, the aggregate amount to be paid
for the Notes purchased at such Closing, as specified below Purchaser’s name on
the signature page of this Agreement and next to the heading “Subscription
Amount,” in United States dollars and in immediately available funds.

 

“Subsequent Financing” shall have the meaning ascribed to such term in Section
4.17(a).

 

“Subsequent Financing Notice” shall have the meaning ascribed to such term in
Section 4.17(b).

 

“Subsidiary” means with respect to any entity at any date, any corporation,
limited or general partnership, limited liability company, trust, estate,
association, joint venture or other business entity (A) of which more than 30%
of (i) the outstanding capital stock having (in the absence of contingencies)
ordinary voting power to elect a majority of the board of directors or other
managing body of such entity, (ii) in the case of a partnership or limited
liability company, the interest in the capital or profits of such partnership or
limited liability company or (iii) in the case of a trust, estate, association,
joint venture or other entity, the beneficial interest in such trust, estate,
association or other entity business is, at the time of determination, owned or
controlled directly or indirectly through one or more intermediaries, by such
entity, or (B) which is under the actual direct or indirect control of such
entity.

 

“Termination Date” shall have the meaning ascribed to such term in Section 2.1.

 

“Trading Day” means a day on which the principal Trading Market is open for
trading or, if there is no Trading Market, a Business Day.

 

“Trading Market” means any of the following markets or exchanges on which the
Common Stock is listed or quoted for trading on the date in question: the NYSE
MKT, the NASDAQ Capital Market, the NASDAQ Global Market, the NASDAQ Global
Select Market, the New York Stock Exchange, the OTC Bulletin Board, or the
OTCQB, OTCQX or OTC Pink Marketplace maintained by the OTC Markets Group Inc.
(or any successors to any of the foregoing).

 

“Transaction Documents” means this Agreement, the Security Agreement, the
Registration Rights Agreement, the Notes, all exhibits and schedules thereto and
hereto and any other documents or agreements executed in connection with the
transactions contemplated hereunder.

 

“Transfer Agent” means the registrar and transfer agent for the Company’s Common
Stock, and the Company shall notify the Purchasers of the name and contact
information of any such Transfer Agent promptly upon request or engagement
thereof.

 

“Underlying Shares” means the shares of Common Stock issued and issuable upon
conversion of the Notes and issued and issuable in lieu of the cash payment of
interest on the Notes in accordance with the terms of the Notes and any other
shares of Common Stock issued or issuable to a Purchaser in connection with or
pursuant to the Securities or Transaction Documents (including any shares of
Common Stock issuable in lieu of cash payment of liquidated damage amounts).

 

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“Unlegended Shares” shall have the meaning ascribed to such term in Section
4.1(c).

 

“Variable Priced Equity Linked Instruments” shall have the meaning ascribed to
such term in Section 4.13.

 

“Variable Rate Transaction” shall have the meaning ascribed to such term in
Section 4.13.

 

“VWAP” means, for any date, the price determined by the first of the following
clauses that applies: (a) if the Common Stock is then listed or quoted on a
Trading Market, the daily volume weighted average price of the Common Stock for
such date (or the nearest preceding date) on the Trading Market on which the
Common Stock is then listed or quoted as reported by Bloomberg L.P. (based on a
Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City
time)), (b) if any of the NASDAQ markets or exchanges is not a Trading Market,
the volume weighted average price of the Common Stock for such date (or the
nearest preceding date) on the OTC Bulletin Board, (c) if the Common Stock is
not then listed or quoted for trading on the OTC Bulletin Board and if prices
for the Common Stock are then reported on the OTCQX, OTCQB or OTC Pink
Marketplace maintained by the OTC Markets Group, Inc. (or a similar organization
or agency succeeding to its functions of reporting prices), the most recent bid
price per share of the Common Stock so reported as of the close of trading on
such date, or (d) in all other cases, the fair market value of a share of Common
Stock as determined by an independent appraiser selected in good faith by the
Purchasers of a majority in interest of the Securities then outstanding and
reasonably acceptable to the Company, the fees and expenses of which shall be
paid by the Company.

 

ARTICLE II.

PURCHASE AND SALE

 

2.1 Closings. The Offering is intended to be consummated in multiple Closings
for aggregate Subscription Amounts of up to $400,000. Upon the terms and subject
to the conditions set forth herein, the Company agrees to sell, and the
Purchasers agree to purchase Notes as determined pursuant to Section 2.2(a), in
the amounts and for the Subscription Amount set forth on their respective
signature pages hereto. The initial Closing is anticipated to be in the amount
of $200,000, $100,000 of which shall be held in escrow and released as provided
in a letter agreement to be entered into in connection with the initial Closing.
After the initial Closing, the Company and the Purchasers agree to consummate
additional Closings up to the aggregate $400,000 Subscription Amount less the
Subscription Amount funded in the initial Closing, but only in such amounts and
at such times as the Purchasers shall deem necessary and appropriate to fund
purchase orders actually received by the Company for products the specifications
of which have previously been approved by Purchasers; provided that Purchasers
shall have no obligation to fund any Closing (i) after the date of the Reverse
Merger, (ii) more than three months after the date hereof or (iii) if the
Company shall have breached or defaulted on any term of any Transaction
Document. At each Closing, the Company shall deliver to each participating
Purchaser its respective Notes, as determined pursuant to Section 2.2(a),
against payment of the Subscription Amount therefor, and the Company and the
participating Purchasers shall deliver the other items set forth in Section 2.2
deliverable at the Closing. Upon and subject to satisfaction of the covenants
and conditions set forth in Sections 2.2 and 2.3, Closings shall occur at such
location as the parties shall mutually agree.

 

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2.2 Deliveries.

 

(a) On or prior to the applicable Closing Date, the Company shall deliver or
cause to be delivered to each Purchaser, as applicable, the following:

 

(i) this Agreement duly executed by the Company (unless delivered at a prior
Closing);

 

(ii) a Note with a principal amount equal to one dollar of principal amount for
each $0.90 of such Purchaser’s Subscription Amount registered in the name of
such Purchaser;

 

(iii) the Security Agreement duly executed by the Company and each Subsidiary
(unless delivered at a prior Closing);

 

(iv) the Guaranty (if required under the Security Agreement) duly executed by
the guarantor party thereto (unless delivered at a prior Closing);

 

(v) a legal opinion of Company Counsel, in form and substance satisfactory to
counsel to Purchasers;

 

(vi) a certificate of the Principal Executive Officer and Chief Executive
Officer (each as defined in the Exchange Act) of the Company, dated as of the
Closing Date, in which such officer shall certify that the conditions set forth
in Section 2.3(b) have been fulfilled; and

 

(vii) Secretary’s certificate containing (i) copies of the text of the
resolutions by which the corporate action on the part of the Company necessary
to approve this Agreement and the other Transaction Documents and the
transactions and actions contemplated hereby and thereby, which shall be
accompanied by a certificate of the corporate secretary or assistant corporate
secretary of Company dated as of the Closing Date certifying to the Purchasers
that such resolutions were duly adopted and have not been amended or rescinded,
(ii) an incumbency certificate dated as of the Closing Date executed on behalf
of Company by its corporate secretary or one of its assistant corporate
secretaries certifying the office of each officer of Company executing this
Agreement, or any other agreement, certificate or other instrument executed
pursuant hereto, and (iii) copies of (A) the Company’s Certificate of
Incorporation and bylaws in effect on the Closing Date, and (B) the certificate
evidencing the good standing of Company as of a day within five (5) Business
Days prior to the Closing Date.

 

(b) On or prior to the applicable Closing Date, each Purchaser shall deliver or
cause to be delivered to the Company the following:

 

(i) this Agreement duly executed by such Purchaser;

 

(ii) the Purchaser’s Subscription Amount by wire transfer to the Company; and

 

(iii) the Security Agreement duly executed by the Purchaser and the Collateral
Agent (unless delivered at a prior Closing).

 

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2.3 Closing Conditions.

 

(a) The obligations of the Company hereunder to effect each Closing are subject
to the following conditions being met:

 

(i) the accuracy in all material respects on the applicable Closing Date of the
representations and warranties of the Purchasers contained herein (unless as of
a specific date therein in which case they shall be accurate as of such date);

 

(ii)all obligations, covenants and agreements of the Purchasers required to be
performed at or prior to the applicable Closing Date shall have been performed;
and

 

(iii) the delivery by the Purchasers of the items set forth in Section 2.2(b) of
this Agreement.

 

(b) The respective obligations of a Purchaser hereunder to effect any Closing,
unless waived by such Purchaser, are subject to the following conditions being
met:

 

(iv) the accuracy in all material respects (determined without regard to any
materiality, Material Adverse Effect or other similar qualifiers therein) on the
applicable Closing Date of the representations and warranties of the Company
contained herein (unless as of a specific date therein in which case they shall
be accurate as of such date);

 

(v)all obligations, covenants and agreements of the Company required to be
performed at or prior to the applicable Closing Date shall have been performed.

 

(vi) the delivery by the Company of the items set forth in Section 2.2(a) of
this Agreement;

 

(vii) there shall have been no Material Adverse Effect with respect to the
Company since the date hereof; and

 

(viii) from the date hereof to the applicable Closing Date, trading in the
Common Stock shall not have been suspended by the Commission or the Company’s
principal Trading Market, and, at any time prior to the Closing Date, trading in
securities generally as reported by Bloomberg L.P. shall not have been suspended
or limited, or minimum prices shall not have been established on securities
whose trades are reported by such service, or on any Trading Market, nor shall a
banking moratorium have been declared either by the United States or New York
State authorities nor shall there have occurred any material outbreak or
escalation of hostilities or other national or international calamity of such
magnitude in its effect on, or any material adverse change in, any financial
market which, in each case, in the reasonable judgment of the Purchaser, makes
it impracticable or inadvisable to purchase the Securities at such Closing.

 

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ARTICLE III.

REPRESENTATIONS AND WARRANTIES

 

3.1 Representations and Warranties of the Company. Except as set forth in the
Disclosure Schedules, which Disclosure Schedules shall be deemed a part hereof
and shall qualify any representation made herein only to the extent of the
disclosure contained in the corresponding section of the Disclosure Schedules,
the Company hereby makes the following representations and warranties to the
Purchaser as of each Closing Date:

 

(a) Subsidiaries. Except as set forth on Schedule 3.1(a), the Company has no
Subsidiaries. The Company owns, directly or indirectly, all of the capital stock
or other equity interests of each Subsidiary, and all of the issued and
outstanding shares of capital stock of each Subsidiary are validly issued and
are fully paid, non-assessable.

 

(b) Organization and Qualification. The Company and each of the Subsidiaries is
an entity duly incorporated or otherwise organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation or
organization, with the requisite power and authority to own and use its
properties and assets and to carry on its business as currently conducted.
Neither the Company nor any Subsidiary is in violation nor default of any of the
provisions of its respective certificate or articles of incorporation, bylaws or
other organizational or charter documents. Each of the Company and the
Subsidiaries is duly qualified to conduct business and is in good standing as a
foreign corporation or other entity in each jurisdiction in which the nature of
the business conducted or property owned by it makes such qualification
necessary, except where the failure to be so qualified or in good standing, as
the case may be, could not have or reasonably be expected to result in: (i) a
material adverse effect on the legality, validity or enforceability of any
Transaction Document, (ii) a material adverse effect on the results of
operations, assets, business, or condition (financial or otherwise) of the
Company and the Subsidiaries, taken as a whole, or (iii) a material adverse
effect on the Company’s ability to perform in any material respect on a timely
basis its obligations under any Transaction Document (any of (i), (ii) or (iii),
a “Material Adverse Effect”) and, no Proceeding has been instituted in any such
jurisdiction revoking, limiting or curtailing or seeking to revoke, limit or
curtail such power and authority or qualification.

 

(c) Authorization; Enforcement. The Company has the requisite corporate power
and authority to enter into and to consummate the transactions contemplated by
this Agreement and each of the other Transaction Documents and otherwise to
carry out its obligations hereunder and thereunder. The execution and delivery
of this Agreement and each of the other Transaction Documents by the Company and
the consummation by it of the transactions contemplated hereby and thereby have
been duly authorized by all necessary action on the part of the Company and no
further action is required by the Company or the Board of Directors in
connection herewith or therewith. This Agreement and each other Transaction
Document to which it is a party has been (or upon delivery will have been) duly
executed by the Company and, when delivered in accordance with the terms hereof
and thereof, will constitute the valid and binding obligation of the Company
enforceable against the Company in accordance with its terms, except: (i) as
limited by general equitable principles and applicable bankruptcy, insolvency,
reorganization, moratorium and other laws of general application affecting
enforcement of creditors’ rights generally, (ii) as limited by laws relating to
the availability of specific performance, injunctive relief or other equitable
remedies and (iii) insofar as indemnification and contribution provisions may be
limited by applicable law.

 

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(d) No Conflicts. The execution, delivery and performance by the Company of this
Agreement and the other Transaction Documents, the issuance and sale of the
Securities and the consummation by it of the transactions contemplated hereby
and thereby to which it is a party do not and will not: (i) conflict with or
violate any provision of the Company’s or any Subsidiary’s certificate or
articles of incorporation, bylaws or other organizational or charter documents,
(ii) conflict with, or constitute a default (or an event that with notice or
lapse of time or both would become a default) under, result in the creation of
any Lien upon any of the properties or assets of the Company or any Subsidiary,
or give to others any rights of termination, amendment, acceleration, reset,
repricing, or cancellation (with or without notice, lapse of time or both) of,
any agreement, credit facility, debt or other instrument (evidencing a Company
or Subsidiary debt or otherwise) or other understanding to which the Company or
any Subsidiary is a party or by which any property or asset of the Company or
any Subsidiary is bound or affected, or (iii) conflict with or result in a
violation of any law, rule, regulation, order, judgment, injunction, decree or
other restriction of any court or governmental authority to which the Company or
a Subsidiary is subject (including federal and state securities laws and
regulations), or by which any property or asset of the Company or a Subsidiary
is bound or affected; other than with respect to each of clauses (ii) and (iii),
such as could not have or reasonably be expected to result in a Material Adverse
Effect.

 

(e) Filings, Consents and Approvals. The Company is not required to obtain any
consent, waiver, authorization or order of, give any notice to, or make any
filing or registration with, any court or other federal, state, local or other
governmental authority or other Person in connection with the execution,
delivery and performance by the Company of the Transaction Documents and the
transactions contemplated thereby, other than: (i) filings with the Commission
pursuant to the Registration Rights Agreement, (ii) filings required pursuant to
Section 4.6 of this Agreement, (iii) the filing of Form D with the Commission
and such filings as are required to be made under applicable state securities
laws.

 

(f) Issuance of the Securities. The Securities are duly authorized and, when
issued and paid for in accordance with the applicable Transaction Documents,
will be duly and validly issued, fully paid and non-assessable, free and clear
of all Liens imposed by the Company. The Company has reserved from its duly
authorized capital stock a number of shares of Common Stock for issuance of the
Underlying Shares in an amount at least equal to the Required Minimum on the
date hereof.

 

(g) Capitalization. The capitalization of the Company is as set forth on
Schedule 3.1(g). No Person has any right of first refusal, preemptive right,
right of participation, or any similar right to participate in the transactions
contemplated by the Transaction Documents. Except as disclosed on Schedule
3.1(g), there are no outstanding options, employee or incentive stock option
plans, warrants, scrip rights to subscribe to, calls or commitments of any
character whatsoever relating to, or securities, rights or obligations
convertible into or exercisable or exchangeable for, or giving any Person any
right to subscribe for or acquire any shares of Common Stock, or contracts,
commitments, understandings or arrangements by which the Company or any
Subsidiary is or may become bound to issue additional shares of Common Stock or
Common Stock Equivalents. Except as set forth on Schedule 3.1(g), the issuance
and sale of the Securities will not obligate the Company to issue shares of
Common Stock or other securities to any Person (other than the Purchasers) and
will not result in a right of any holder of Company securities to adjust the
exercise, conversion, exchange or reset price under any of such securities. All
of the outstanding shares of capital stock of the Company are duly authorized,
validly issued, fully paid and non-assessable, have been issued in material
compliance with all federal and state securities laws, and none of such
outstanding shares was issued in violation of any preemptive rights or similar
rights to subscribe for or purchase securities. No further approval or
authorization of the Board of Directors is required for the issuance and sale of
the Securities. There are no stockholders agreements, voting agreements or other
similar agreements with respect to the Company’s capital stock to which the
Company is a party or, to the knowledge of the Company, between or among any of
the Company’s stockholders.

 

(h) [intentionally omitted]

 

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(i) Material Changes; Undisclosed Events, Liabilities or Developments. Since
inception of the Company: (i) there has been no event, occurrence or development
that has had or that could reasonably be expected to result in a Material
Adverse Effect, (ii) the Company has not incurred any material liabilities
(contingent or otherwise) other than (A) trade payables and accrued expenses
incurred in the ordinary course of business consistent with past practice and
(B) liabilities not required to be reflected in the Company’s financial
statements pursuant to GAAP, (iii) the Company has not altered its method of
accounting, (iv) the Company has not declared or made any dividend or
distribution of cash or other property to its stockholders or purchased,
redeemed or made any agreements to purchase or redeem any shares of its capital
stock and (v) the Company has not issued any equity securities to any officer,
director or Affiliate. Except for the issuance of the Securities contemplated by
this Agreement, no event, liability, fact, circumstance, occurrence or
development has occurred or exists or is reasonably expected to occur or exist
with respect to the Company or its Subsidiaries or their respective businesses,
properties, operations, assets or financial condition, that would be required to
be disclosed by the Company under applicable securities laws or SEC reporting
requirements.

 

(j) Litigation. There is no action, suit, inquiry, notice of violation,
proceeding or investigation pending or, to the knowledge of the Company,
threatened against or affecting the Company, any Subsidiary or any of their
respective properties before or by any court, arbitrator, governmental or
administrative agency or regulatory authority (federal, state, county, local or
foreign) (collectively, an “Action”) which (i) adversely affects or challenges
the legality, validity or enforceability of any of the Transaction Documents or
the Securities or (ii) could, if there were an unfavorable decision, have or
reasonably be expected to result in a Material Adverse Effect. Neither the
Company nor any Subsidiary, nor any director or officer thereof, is or has been
the subject of any Action involving a claim of violation of or liability under
federal or state securities laws or a claim of breach of fiduciary duty. There
has not been, and to the knowledge of the Company, there is not pending or
contemplated, any investigation by the Commission involving the Company or any
current or former director or officer of the Company. The Commission has not
issued any stop order or other order suspending the effectiveness of any
registration statement filed by the Company or any Subsidiary under the Exchange
Act or the Securities Act.

 

(k) Labor Relations. No labor dispute exists or, to the knowledge of the
Company, is imminent with respect to any of the employees of the Company, which
could reasonably be expected to result in a Material Adverse Effect. None of the
Company’s or its Subsidiaries’ employees is a member of a union that relates to
such employee’s relationship with the Company or such Subsidiary, and neither
the Company nor any of its Subsidiaries is a party to a collective bargaining
agreement, and the Company and its Subsidiaries believe that their relationships
with their employees are good. To the knowledge of the Company, no executive
officer of the Company or any Subsidiary, is, or is now expected to be, in
violation of any material term of any employment contract, confidentiality,
disclosure or proprietary information agreement or non-competition agreement, or
any other contract or agreement or any restrictive covenant in favor of any
third party, and the continued employment of each such executive officer does
not subject the Company or any of its Subsidiaries to any liability with respect
to any of the foregoing matters. The Company and its Subsidiaries are in
compliance with all U.S. federal, state, local and foreign laws and regulations
relating to employment and employment practices, terms and conditions of
employment and wages and hours, except where the failure to be in compliance
could not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect.

 

(l) Compliance. Neither the Company nor any Subsidiary: (i) is in default under
or in violation of (and no event has occurred that has not been waived that,
with notice or lapse of time or both, would result in a default by the Company
or any Subsidiary under), nor has the Company or any Subsidiary received notice
of a claim that it is in default under or that it is in violation of, any
indenture, loan or credit agreement or any other agreement or instrument to
which it is a party or by which it or any of its properties is bound (whether or
not such default or violation has been waived), (ii) is in violation of any
judgment, decree or order of any court, arbitrator or other governmental
authority or (iii) is or has been in violation of any statute, rule, ordinance
or regulation of any governmental authority, including without limitation all
foreign, federal, state and local laws relating to taxes, environmental
protection, occupational health and safety, product quality and safety and
employment and labor matters, except in each case as could not have or
reasonably be expected to result in a Material Adverse Effect.

 

  11

   

 

(m) Regulatory Permits. The Company and the Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate federal,
state, local or foreign regulatory authorities necessary to conduct their
respective businesses, except where the failure to possess such permits could
not reasonably be expected to result in a Material Adverse Effect (“Material
Permits”), and neither the Company nor any Subsidiary has received any notice of
proceedings relating to the revocation or modification of any Material Permit.

 

(n) Title to Assets. The Company and the Subsidiaries have good and marketable
title in fee simple to all real property (if any) owned by them and good and
marketable title in all personal property owned by them that is material to the
business of the Company and the Subsidiaries, in each case free and clear of all
Liens, except for (i) Liens that do not materially affect the value of such
property and do not materially interfere with the use made and proposed to be
made of such property by the Company and the Subsidiaries and (ii) Liens for the
payment of federal, state or other taxes, for which appropriate reserves have
been made in accordance with GAAP and, the payment of which is neither
delinquent nor subject to penalties. Any real property and facilities held under
lease by the Company and the Subsidiaries are held by them under valid,
subsisting and enforceable leases with which the Company and the Subsidiaries
are in compliance.

 

(o) Intellectual Property.

 

(i) The term “Intellectual Property Rights” includes:

 

 

1. the name of the Company and each Subsidiary, all fictional business names,
trading names, registered and unregistered trademarks, service marks, and
applications of the Company and each Subsidiary (collectively, “Marks'');

 

 

 

 

2. all patents and patent applications of the Company and each Subsidiary
including without limitation those listed on Schedule 3.1(o) hereto
(collectively, “Patents'');

 

 

 

 

3. all copyrights in both published works and published works of the Company and
each Subsidiary (collectively, “Copyrights”);

 

 

 

 

4. all rights in mask works of the Company and each Subsidiary (collectively,
“Rights in Mask Works''); and

 

 

 

 

5. all know-how, trade secrets, confidential information, customer lists,
software, source code, technical information, data, process technology, plans,
drawings, and blue prints (collectively, “Trade Secrets''); owned, used, or
licensed by the Company and each Subsidiary as licensee or licensor.

 

  12

   

 

(ii) Agreements. There are no pending or threatened disputes or disagreements
with respect to any agreements relating to any Intellectual Property Rights to
which the Company is a party or by which the Company is bound. Other than with
respect to commercially available software products under standard end-user
object code license agreements, there is no outstanding option, license,
agreement, claim, encumbrance or shared ownership interest of any kind relating
to the Intellectual Property Rights, nor is the Company bound by or a party to
any options, licenses or agreements of any kind with respect to the intellectual
property of any other person.

 

(iii) Know-How Necessary for the Business. The Intellectual Property Rights are
all those necessary for the operation of the Company’s businesses as it is
currently conducted or as proposed or represented to the Purchaser to be
conducted including without limitation for the manufacture and sale of the R2
Sentinel Router, and no person other than the Company has any claim to any
intellectual property or know-how necessary for the operation of the Company’s
business as currently conducted or proposed to be conducted. The Company is the
owner of all right, title, and interest in and to each of the Intellectual
Property Rights, free and clear of all Liens, security interests, charges,
encumbrances, equities, and other adverse claims, and has the right to use all
of the Intellectual Property Rights.

 

(iv) Patents. The Company is the owner of all right, title and interest in and
to each of the Patents, free and clear of all Liens. All of the issued Patents
are currently in compliance with formal legal requirements (including payment of
filing, examination, and maintenance fees and proofs of working or use), are
valid and enforceable, and are not subject to any maintenance fees or taxes or
actions falling due within ninety days after the Closing Date. No Patent has
been or is now involved in any interference, reissue, reexamination, or
opposition proceeding. To the Company’s knowledge: (1) there is no potentially
interfering patent or patent application of any third party, and (2) no Patent
is infringed or has been challenged or threatened in any way. To the Company’s
knowledge, none of the products manufactured and sold, nor any process or
know-how used, by the Company infringes or is alleged to infringe any patent or
other proprietary right of any other Person.

 

(v) Trademarks. The Company is the owner of all right, title, and interest in
and to each of the Marks, free and clear of all Liens and other adverse claims.
All Marks that have been registered with the United States Patent and Trademark
Office are currently in compliance with all formal legal requirements (including
the timely post-registration filing of affidavits of use and incontestability
and renewal applications), are valid and enforceable, and are not subject to any
maintenance fees or taxes or actions falling due within ninety days after the
Closing Date. No Mark has been or is now involved in any opposition,
invalidation, or cancellation and, to the Company’s knowledge, no such action is
threatened with respect to any of the Marks. To the Company’s knowledge: (1)
there is no potentially interfering trademark or trademark application of any
third party, and (2) no Mark is infringed or has been challenged or threatened
in any way. To the Company’s knowledge, none of the Marks used by the Company
infringes or is alleged to infringe any trade name, trademark, or service mark
of any third party.

 

  13

   

 

(vi) Copyrights. The Company is the owner of all right, title, and interest in
and to each of the Copyrights, free and clear of all Liens and other adverse
claims. All the Copyrights have been registered and are currently in compliance
with formal requirements, are valid and enforceable, and are not subject to any
maintenance fees or taxes or actions falling due within ninety days after the
date of the Closing. No Copyright is infringed or, to the Company’s knowledge,
has been challenged or threatened in any way. To the Company’s knowledge, none
of the subject matter of any of the Copyrights infringes or is alleged to
infringe any copyright of any third party or is a derivative work based on the
work of a third party. All works encompassed by the Copyrights have been marked
with the proper copyright notice.

 

(vii) Trade Secrets. With respect to each Trade Secret, the documentation
relating to such Trade Secret is current, accurate, and sufficient in detail and
content to identify and explain it and to allow its full and proper use without
reliance on the knowledge or memory of any individual. The Company has taken all
reasonable precautions to protect the secrecy, confidentiality, and value of its
Trade Secrets. The Company has good title and an absolute (but not necessarily
exclusive) right to use the Trade Secrets. The Trade Secrets are not part of the
public knowledge or literature, and, to the Company’s knowledge, have not been
used, divulged, or appropriated either for the benefit of any Person (other the
Company) or to the detriment of the Company. No Trade Secret is subject to any
adverse claim or has been challenged or threatened in any way.

 

(viii) Employee and Consultants. Each current and former employee, consultant
and officer of the Company has executed an agreement with the Company regarding
confidentiality and proprietary information pursuant to which such Person has
assigned to the Company all intellectual property rights he or she owns or
creates that are related to the Company’s business as now conducted and as
presently proposed to be conducted. No current or former employee or consultant
has excluded any work or invention from such person’s assignment of inventions
and, to the Company’s knowledge, no such person is in violation of such
agreement. To the Company’s knowledge, none of its employees is obligated under
any judgment, decree, contract, covenant or agreement that would interfere with
such employee’s ability to promote the interests of the Company or that would
conflict with the Company’s business. To the Company’s knowledge, no employee of
the Company has entered into any contract that restricts or limits in any way
the scope or type of work in which the employee may be engaged or requires the
employee to transfer, assign, or disclose information concerning his work to
anyone other than of the Company. Within 30 days of the date of this Agreement,
the Company shall have entered into non-compete and non-solicitation agreements
with each of its employees on terms satisfactory to the Purchasers.

 

(p) Insurance. The Company and the Subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as are prudent and customary in the businesses in which the Company and
the Subsidiaries are engaged, and the Company agrees to maintain such insurance
so long as the Notes remain outstanding. Neither the Company nor any Subsidiary
has any reason to believe that it will not be able to renew its existing
insurance coverage as and when such coverage expires or to obtain similar
coverage from similar insurers as may be necessary to continue its business
without a significant increase in cost.

 

  14

   

 

(q) Transactions With Affiliates and Employees. None of the officers or
directors of the Company or any Subsidiary and, to the knowledge of the Company,
none of the employees of the Company or any Subsidiary is presently a party to
any transaction with the Company or any Subsidiary (other than for services as
employees, officers and directors), including any contract, agreement or other
arrangement providing for the furnishing of services to or by, providing for
rental of real or personal property to or from, providing for the borrowing of
money from or lending of money to or otherwise requiring payments to or from any
officer, director or such employee or, to the knowledge of the Company, any
entity in which any officer, director, or any such employee has a substantial
interest or is an officer, director, trustee, stockholder, control person,
member or partner, in each case in excess of $50,000 other than for: (i) payment
of salary for services rendered, (ii) reimbursement for expenses incurred on
behalf of the Company or any Subsidiary, and (iii) other employee benefits,
including stock option agreements under any stock option plan of the Company.

 

(r) No Disqualification Events. With respect to the Securities to be offered and
sold hereunder in reliance on Rule 506 under the Securities Act, none of the
Company, any of its predecessors, any affiliated issuer, any director, executive
officer, other officer of the Company participating in the offering hereunder,
any beneficial owner of 20% or more of the Company’s outstanding voting equity
securities, calculated on the basis of voting power, nor any promoter (as that
term is defined in Rule 405 under the Securities Act) connected with the Company
in any capacity at the time of sale (each, an “Issuer Covered Person” and,
together, “Issuer Covered Persons”) is subject to any of the “Bad Actor”
disqualifications described in Rule 506(d)(1)(i) to (viii) under the Securities
Act (a “Disqualification Event”), except for a Disqualification Event covered by
Rule 506(d)(2) or (d)(3). The Company has exercised reasonable care to determine
whether any Issuer Covered Person is subject to a Disqualification Event. The
Company has complied, to the extent applicable, with its disclosure obligations
under Rule 506(e), and has furnished to the Purchasers a copy of any disclosures
provided thereunder.

 

(s) Certain Fees. No brokerage, finder’s fees, commissions or due diligence fees
are or will be payable by the Purchasers to any broker, financial advisor or
consultant, finder, placement agent, investment banker, bank or other Person
with respect to the transactions contemplated by the Transaction Documents. The
Purchasers shall have no obligation with respect to any such fees or with
respect to any claims made by or on behalf of other Persons for fees of a type
contemplated in this Section 3.1(s) that may be due in connection with the
transactions contemplated by the Transaction Documents.

 

(t) Investment Company. The Company is not, and is not an Affiliate of, and
immediately after receipt of payment for the Securities, will not be or be an
Affiliate of, an “investment company” within the meaning of the Investment
Company Act of 1940, as amended. The Company shall conduct its business in a
manner so that it will not become an “investment company” subject to
registration under the Investment Company Act of 1940, as amended.

 

(u) Registration Rights. No Person has any right to cause the Company or any
Subsidiary to effect the registration under the Securities Act of any securities
of the Company or any Subsidiary.

 

(v) [intentionally omitted]

 

(w) Application of Takeover Protections. The Company and the Board of Directors
will have taken as of the Closing Date all necessary action, if any, in order to
render inapplicable any control share acquisition, business combination, poison
pill (including any distribution under a rights agreement) or other similar
anti-takeover provision under the Company’s certificate of incorporation (or
similar charter documents) or the laws of its state of incorporation that is or
could become applicable to the Purchaser as a result of the Purchaser and the
Company fulfilling their obligations or exercising their rights under the
Transaction Documents, including without limitation as a result of the Company’s
issuance of the Securities and the Purchaser’s ownership of the Securities.

 

  15

   

 

(x) Disclosure. Except with respect to the material terms and conditions of the
transactions contemplated by the Transaction Documents, the Company confirms
that neither it nor any other Person acting on its behalf has provided the
Purchaser or its agents or counsel with any information that it believes
constitutes or might constitute material, non-public information. The Company
understands and confirms that the Purchaser will rely on the foregoing
representation in effecting transactions in securities of the Company. All of
the disclosure furnished by or on behalf of the Company to the Purchaser
regarding the Company and its Subsidiaries, their respective businesses and the
transactions contemplated hereby, including the Disclosure Schedules to this
Agreement, when taken together as a whole, is true and correct and does 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 light of the
circumstances under which they were made, not misleading. The press releases
disseminated by the Company during the twelve months preceding the date of this
Agreement taken as a whole do not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made and when made, not misleading. The Company acknowledges and
agrees that the Purchaser does not make nor has made any representations or
warranties with respect to the transactions contemplated hereby other than those
specifically set forth in Section 3.2 hereof.

 

(y) No Integrated Offering. Assuming the accuracy of the Purchaser’s
representations and warranties set forth in Section 3.2, neither the Company,
nor any of its Affiliates, nor any Person acting on its or their behalf has,
directly or indirectly, made any offers or sales of any security or solicited
any offers to buy any security, under circumstances that would cause the
Offering of the Securities to be integrated with prior offerings by the Company
for purposes of: (i) the Securities Act which would require the registration of
any such securities under the Securities Act, or (ii) any applicable shareholder
approval provisions of any Trading Market on which any of the securities of the
Company are listed or designated.

 

(z) Solvency. Based on the consolidated financial condition of the Company as of
the Closing Date, and the Company’s good faith estimate of the fair market value
of its assets, after giving effect to the receipt by the Company of the proceeds
from the sale of the Securities hereunder: (i) the fair saleable value of the
Company’s assets exceeds the amount that will be required to be paid on or in
respect of the Company’s existing debts and other liabilities (including known
contingent liabilities) as they mature, (ii) the Company’s assets do not
constitute unreasonably small capital to carry on its business as now conducted
and as proposed to be conducted including its capital needs taking into account
the particular capital requirements of the business conducted by the Company,
consolidated and projected capital requirements and capital availability
thereof, and (iii) the current cash flow of the Company, together with the
proceeds the Company would receive, were it to liquidate all of its assets,
after taking into account all anticipated uses of the cash, would be sufficient
to pay all amounts on or in respect of its liabilities when such amounts are
required to be paid. The Company does not intend to incur debts beyond its
ability to pay such debts as they mature (taking into account the timing and
amounts of cash to be payable on or in respect of its debt). The Company has no
knowledge of any facts or circumstances which lead it to believe that it will
file for reorganization or liquidation under the bankruptcy or reorganization
laws of any jurisdiction within one year from the Closing Date.

 

  16

   

 

(aa) Tax Status. Except for matters that would not, individually or in the
aggregate, have or reasonably be expected to result in a Material Adverse
Effect, the Company and its Subsidiaries each (i) has made or filed all United
States federal, state and local income and all foreign income and franchise tax
returns, reports and declarations required by any jurisdiction to which it is
subject, (ii) has paid all taxes and other governmental assessments and charges
that are material in amount, shown or determined to be due on such returns,
reports and declarations and (iii) has set aside on its books provision
reasonably adequate for the payment of all material taxes for periods subsequent
to the periods to which such returns, reports or declarations apply. There are
no unpaid taxes in any material amount claimed to be due by the taxing authority
of any jurisdiction, and the officers of the Company or of any Subsidiary know
of no basis for any such claim.

 

(bb) Foreign Corrupt Practices. Neither the Company nor any Subsidiary, nor to
the knowledge of the Company or any Subsidiary, any agent or other person acting
on behalf of the Company or any Subsidiary, has: (i) directly or indirectly,
used any funds for unlawful contributions, gifts, entertainment or other
unlawful expenses related to foreign or domestic political activity, (ii) made
any unlawful payment to foreign or domestic government officials or employees or
to any foreign or domestic political parties or campaigns from corporate funds,
(iii) failed to disclose fully any contribution made by the Company or any
Subsidiary (or made by any person acting on its behalf of which the Company is
aware) which is in violation of law or (iv) violated in any material respect any
provision of FCPA.

 

(cc) Listing and Maintenance Requirements. The Company has not, in the last six
(6) months preceding the date hereof, received notice from any Trading Market on
which the Common Stock is or has been listed or quoted to the effect that the
Company is not in compliance with the listing or maintenance requirements of
such Trading Market.

 

(dd) Acknowledgment Regarding Purchasers’ Purchase of Securities. The Company
acknowledges and agrees that the Purchaser is acting solely in the capacity of
an arm’s length purchaser with respect to the Transaction Documents and the
transactions contemplated thereby. The Company further acknowledges that the
Purchaser is not acting as a financial advisor or fiduciary of the Company (or
in any similar capacity) with respect to the Transaction Documents and the
transactions contemplated thereby and any advice given by the Purchaser or any
of its representatives or agents in connection with the Transaction Documents
and the transactions contemplated thereby is merely incidental to the
Purchasers’ purchase of the Securities. The Company further represents to the
Purchaser that the Company’s decision to enter into this Agreement and the other
Transaction Documents has been based solely on the independent evaluation of the
transactions contemplated hereby by the Company and its representatives.

 

(ee) Acknowledgment Regarding Purchaser’s Trading Activity. Anything in this
Agreement or elsewhere herein to the contrary notwithstanding, it is understood
and acknowledged by the Company that: (i) the Purchaser has not been asked by
the Company to agree, nor has the Purchaser agreed, to desist from purchasing or
selling, long and/or short, securities of the Company, or “derivative”
securities based on securities issued by the Company or to hold the Securities
for any specified term, (ii) past or future open market or other transactions by
the Purchaser, specifically including, without limitation, Short Sales or
“derivative” transactions, before or after the closing of this or future private
placement transactions, may negatively impact the market price of the Company’s
publicly-traded securities, (iii) the Purchaser, and counter-parties in
“derivative” transactions to which the Purchaser is a party, directly or
indirectly, may presently have a “short” position in the Common Stock and (iv)
the Purchaser shall not be deemed to have any affiliation with or control over
any arm’s length counter-party in any “derivative” transaction. The Company
further understands and acknowledges that (y) the Purchaser may engage in
hedging activities at various times during the period that the Securities are
outstanding, including, without limitation, during the periods that the value of
the Underlying Shares deliverable with respect to Securities are being
determined, and (z) such hedging activities (if any) could reduce the value of
the existing stockholders' equity interests in the Company at and after the time
that the hedging activities are being conducted. The Company acknowledges that
such aforementioned hedging activities do not constitute a breach of any of the
Transaction Documents.

 

  17

   

 

(ff) Regulation M Compliance. The Company has not, and to its knowledge no one
acting on its behalf has, (i) taken, directly or indirectly, any action designed
to cause or to result in the stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of any of the
Securities, (ii) sold, bid for, purchased, or paid any compensation for
soliciting purchases of, any of the Securities, or (iii) paid or agreed to pay
to any Person any compensation for soliciting another to purchase any other
securities of the Company.

 

(gg) Money Laundering. The operations of the Company and its Subsidiaries are
and have been conducted at all times in compliance with applicable financial
record-keeping and reporting requirements of the Currency and Foreign
Transactions Reporting Act of 1970, as amended, applicable money laundering
statutes and applicable rules and regulations thereunder (collectively, the
“Money Laundering Laws”), and no action, suit or proceeding by or before any
court or governmental agency, authority or body or any arbitrator involving the
Company or any Subsidiary with respect to the Money Laundering Laws is pending
or, to the knowledge of the Company or any Subsidiary, threatened.

 

(hh) Stock Option Plans. Each stock option and similar security granted by the
Company was granted (i) pursuant to and in accordance with the terms of a stock
option plan approved by the shareholders of the Company and (ii) with an
exercise price at least equal to the fair market value of the Common Stock on
the date such stock option would be considered granted under GAAP and applicable
law. No stock option granted under any stock option plan has been backdated. The
Company has not knowingly granted, and there is no and has been no Company
policy or practice to knowingly grant, stock options prior to, or otherwise
knowingly coordinate the grant of stock options with, the release or other
public announcement of material information regarding the Company or its
Subsidiaries or their financial results or prospects.

 

(ii) Office of Foreign Assets Control. Neither the Company nor any Subsidiary
nor, to the Company's knowledge, any director, officer, agent, employee or
affiliate of the Company is currently subject to any U.S. sanctions administered
by the Office of Foreign Assets Control of the U.S. Treasury Department
(“OFAC”).

 

(jj) Private Placement. Assuming the accuracy of the Purchaser’s representations
and warranties set forth in Section 3.2, no registration under the Securities
Act is required for the offer and sale of the Securities by the Company to the
Purchaser as contemplated hereby. The issuance and sale of the Securities
hereunder does not contravene the rules and regulations of the Trading Market.

 

(kk) No General Solicitation. Neither the Company nor any person acting on
behalf of the Company has offered or sold any of the Securities by any form of
general solicitation or general advertising. The Company has offered the
Securities for sale only to the Purchaser and certain other “accredited
investors” within the meaning of Rule 501 under the Securities Act.

 

  18

   

 

(ll) Indebtedness and Seniority. Schedule 3.1(ll) sets forth as of the date
hereof all outstanding secured and unsecured Indebtedness of the Company or any
Subsidiary, or for which the Company or any Subsidiary has commitments. No
Indebtedness is senior to the Notes in right of payment or secured by an
interest in any of the assets of the Company or of any Subsidiary. Except as set
forth on Schedule 3.1(ll), neither the Company nor any Subsidiary is in default
with respect to any Indebtedness. For purposes of this Agreement, “Indebtedness”
means (x) any liabilities for borrowed money or amounts owed (including trade
accounts payable), (y) all guaranties, endorsements and other contingent
obligations in respect of indebtedness of others, whether or not the same are or
should be reflected in the Company’s consolidated balance sheet (or the notes
thereto), except guaranties by endorsement of negotiable instruments for deposit
or collection or similar transactions in the ordinary course of business; and
(z) the present value of any lease payments due under leases required to be
capitalized in accordance with GAAP.

 

(mm) Accountants. The Company’s accounting firm is set forth on Schedule 3.1(mm)
of the Disclosure Schedules. To the knowledge and belief of the Company, such
accounting firm: (i) is a registered public accounting firm as required by the
Exchange Act and (ii) shall express its opinion with respect to the financial
statements for the present and most recently completed fiscal years. There are
no disagreements of any kind presently existing, or reasonably anticipated by
the Company to arise, between the Company and such accountants.

 

(nn) Other Covered Persons. Except as set forth on Schedule 3.1(nn) or to
attorneys for legal services, the Company is not aware of any person that has
been or will be paid (directly or indirectly) remuneration in connection with
the sale of any Securities in reliance upon Regulation D pursuant to this
Agreement.

 

(oo) No Outstanding Variable Priced Equity Linked Instruments. As of the Closing
Date and for so long as Notes are outstanding, the Company will not have
outstanding nor issuable any Variable Priced Equity Linked Instruments, nor any
debt or equity with anti-dilution, ratchet or reset rights, except as set forth
and described on Schedule 3.1(oo).

 

3.2 Representations and Warranties of the Purchaser. Each Purchaser, hereby
represents and warrants (as to itself and not as to other Purchasers) as of the
date hereof and as of the Closing Date to the Company as follows (unless as of a
specific date therein):

 

(a) Organization; Authority. The Purchaser is either an individual or an entity
duly incorporated or formed, validly existing and in good standing under the
laws of the jurisdiction of its incorporation or formation with full right,
corporate, partnership, limited liability company or similar power and authority
to enter into and to consummate the transactions contemplated by the Transaction
Documents and otherwise to carry out its obligations hereunder and thereunder.
The execution and delivery of the Transaction Documents and performance by the
Purchaser of the transactions contemplated by the Transaction Documents have
been duly authorized by all necessary corporate, partnership, limited liability
company or similar action, as applicable, on the part of the Purchaser. Each
Transaction Document to which it is a party has been duly executed by the
Purchaser, and when delivered by the Purchaser in accordance with the terms
hereof, will constitute the valid and legally binding obligation of the
Purchaser, enforceable against it in accordance with its terms, except: (i) as
limited by general equitable principles and applicable bankruptcy, insolvency,
reorganization, moratorium and other laws of general application affecting
enforcement of creditors’ rights generally, (ii) as limited by laws relating to
the availability of specific performance, injunctive relief or other equitable
remedies and (iii) insofar as indemnification and contribution provisions may be
limited by applicable law.

 

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(b) Understandings or Arrangements. The Purchaser understands that the
Securities are “restricted securities” and have not been registered under the
Securities Act or any applicable state securities law and is acquiring the
Securities as principal for its own account and not with a view to or for
distributing or reselling such Securities or any part thereof in violation of
the Securities Act or any applicable state securities law, has no present
intention of distributing any of such Securities in violation of the Securities
Act or any applicable state securities law and has no direct or indirect
arrangement or understandings with any other persons to distribute or regarding
the distribution of such Securities in violation of the Securities Act or any
applicable state securities law (this representation and warranty not limiting
the Purchaser’s right to sell the Securities pursuant to a registration
statement or otherwise in compliance with applicable federal and state
securities laws). The Purchaser is acquiring the Securities hereunder in the
ordinary course of its business.

 

(c) Purchaser Status. At the time the Purchaser was offered the Securities, it
was, and as of the date hereof it is, and on each date on which it converts any
Notes it will be either: (i) an “accredited investor” as defined in Rule 501(a)
under the Securities Act or (ii) a “qualified institutional buyer” as defined in
Rule 144A(a) under the Securities Act. The Purchaser is not required to be
registered as a broker-dealer under Section 15 of the Exchange Act. The
Purchaser has the authority and is duly and legally qualified to purchase and
own the Securities. The Purchaser is able to bear the risk of such investment
for an indefinite period and to afford a complete loss thereof. The information
set forth on the signature pages hereto regarding the Purchaser is true and
complete in all respects. The Purchaser has had no position, office or other
material relationship within the past three years with the Company or Persons
(as defined below) known to the Purchaser to be affiliates of the Company, and
is not a member of the Financial Industry Regulatory Authority or an “associated
person” (as such term is defined under the FINRA Membership and Registration
Rules Section 1011).

 

(d) Experience of Such Purchaser. The Purchaser, either alone or together with
its representatives, has such knowledge, sophistication and experience in
business and financial matters so as to be capable of evaluating the merits and
risks of the prospective investment in the Securities, and has so evaluated the
merits and risks of such investment. The Purchaser is able to bear the economic
risk of an investment in the Securities and, at the present time, is able to
afford a complete loss of such investment.

 

(e) Information on Company. The Purchaser may have received in writing from the
Company such other information concerning its operations, financial condition
and other matters as the Purchaser has requested, identified thereon as OTHER
WRITTEN INFORMATION (such other information is collectively, the “Other Written
Information”), and considered all factors the Purchaser deems material in
deciding on the advisability of investing in the Securities. The Purchaser was
afforded (i) the opportunity to ask such questions as the Purchaser deemed
necessary of, and to receive answers from, representatives of the Company
concerning the merits and risks of acquiring the Securities; (ii) the right of
access to information about the Company and its financial condition, results of
operations, business, properties, management and prospects sufficient to enable
the Purchaser to evaluate the Securities; and (iii) the opportunity to obtain
such additional information that the Company possesses or can acquire without
unreasonable effort or expense that is necessary to make an informed investment
decision with respect to acquiring the Securities.

 

  20

   

 

(f) Compliance with Securities Act; Reliance on Exemptions. The Purchaser
understands and agrees that the Securities have not been registered under the
1933 Act or any applicable state securities laws, by reason of their issuance in
a transaction that does not require registration under the 1933 Act, and that
such Securities must be held indefinitely unless a subsequent disposition is
registered under the 1933 Act or any applicable state securities laws or is
exempt from such registration. The Purchaser understands and agrees that the
Securities are being offered and sold to the Purchaser in reliance on specific
exemptions from the registration requirements of United States federal and state
securities laws and regulations and that the Company is relying in part upon the
truth and accuracy of, and the Purchaser’s compliance with, the representations,
warranties, agreements, acknowledgments and understandings of the Purchaser set
forth herein in order to determine the availability of such exemptions and the
eligibility of the Purchaser to acquire the Securities.

 

(g) Communication of Offer. The Purchaser is not purchasing the Securities as a
result of any “general solicitation” or “general advertising,” as such terms are
defined in Regulation D, which includes, but is not limited to, any
advertisement, article, notice or other communication regarding the Securities
published in any newspaper, magazine or similar media or on the internet or
broadcast over television, radio or the internet or presented at any seminar or
any other general solicitation or general advertisement.

 

(h) No Governmental Review. The Purchaser understands that no United States
federal or state agency or any other governmental or state agency has passed on
or made recommendations or endorsement of the Securities or the suitability of
the investment in the Securities nor have such authorities passed upon or
endorsed the merits of the Offering.

 

(i) No Conflicts. The execution, delivery and performance of this Agreement and
performance under the other Transaction Documents and the consummation by the
Purchaser of the transactions contemplated hereby and thereby or relating hereto
or thereto do not and will not (i) result in a violation of the Purchaser’s
charter documents, bylaws or other organizational documents, if applicable, (ii)
conflict with nor constitute a default (or an event which with notice or lapse
of time or both would become a default) under any agreement to which the
Purchaser is a party, nor (iii) result in a violation of any law, rule, or
regulation, or any order, judgment or decree of any court or governmental agency
applicable to the Purchaser or its properties (except for such conflicts,
defaults and violations as would not, individually or in the aggregate, have a
material adverse effect on the Purchaser). The Purchaser is not required to
obtain any consent, authorization or order of, or make any filing or
registration with, any court or governmental agency in order for it to execute,
deliver or perform any of its obligations under this Agreement or perform under
the other Transaction Documents nor to purchase the Securities in accordance
with the terms hereof, provided that for purposes of the representation made in
this sentence, the Purchaser is assuming and relying upon the accuracy of the
relevant representations and agreements of the Company herein.

 

(j) Survival. The foregoing representations and warranties shall survive the
Closing.

 

The Company acknowledges and agrees that the representations contained in
Section 3.2 shall not modify, amend or affect the Purchaser’s right to rely on
the Company’s representations and warranties contained in this Agreement or any
representations and warranties contained in any other Transaction Document or
any other document or instrument executed and/or delivered in connection with
this Agreement or the consummation of the transaction contemplated hereby.

 

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ARTICLE IV.

OTHER AGREEMENTS OF THE PARTIES

 

4.1 Transfer Restrictions.

 

(a) The Securities may only be disposed of in compliance with state and federal
securities laws. In connection with any transfer of Securities other than
pursuant to an effective registration statement or Rule 144, to the Company or
to an Affiliate of a Purchaser or in connection with a pledge as contemplated in
Section 4.1(b), the Company may require the transferor thereof to provide to the
Company, at the Company’s expense, an opinion of counsel selected by the
transferor to the effect that such transfer does not require registration of
such transferred Securities under the Securities Act. As a condition of
transfer, any such transferee shall agree in writing to be bound by the terms of
this Agreement and shall have the rights and obligations of the Purchaser under
this Agreement.

 

(b) The Purchaser agrees to the imprinting, so long as is required by this
Section 4.1, of a legend on any of the Securities in the following form:

 

[NEITHER] THIS SECURITY [NOR THE SECURITIES INTO WHICH THIS SECURITY IS
CONVERTIBLE HAS [NOT] BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE
COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
“SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO
AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO
THE TRANSFEROR TO SUCH EFFECT. THIS SECURITY [AND THE SECURITIES ISSUABLE UPON
CONVERSION OF THIS SECURITY] MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE
MARGIN ACCOUNT WITH A REGISTERED BROKER-DEALER OR OTHER LOAN WITH A FINANCIAL
INSTITUTION THAT IS AN “ACCREDITED INVESTOR” AS DEFINED IN RULE 501(a) UNDER THE
SECURITIES ACT OR OTHER LOAN SECURED BY SUCH SECURITIES.

 

The Company acknowledges and agrees that the Purchaser may from time to time
pledge pursuant to a bona fide margin agreement with a registered broker-dealer
or grant a security interest in some or all of the Securities to a financial
institution that is an “accredited investor” as defined in Rule 501(a) under the
Securities Act and who agrees to be bound by the provisions of this Agreement
and, if required under the terms of such arrangement, the Purchaser may transfer
pledge or secure Securities to the pledgees or secured parties. Such a pledge or
transfer would not be subject to approval of the Company and no legal opinion of
legal counsel of the pledgee, secured party or pledgor shall be required in
connection therewith. Further, no notice shall be required of such pledge. At
the Purchaser’s expense, the Company will execute and deliver such reasonable
documentation as a pledgee or secured party of Securities may reasonably request
in connection with a pledge or transfer of the Securities, including, if the
Securities are subject to registration pursuant to a registration statement, the
preparation and filing of any required prospectus supplement under Rule
424(b)(3) under the Securities Act or other applicable provision of the
Securities Act to appropriately amend the list of selling stockholders
thereunder.

 

  22

   

 

(c) Certificates evidencing the Underlying Shares shall not contain any legend
(“Unlegended Shares”) (including the legend set forth in Section 4.1(b) hereof)
upon the occurrence of any of the following (the date of occurrence of any such
events, the “Effective Date”): (i) while a registration statement covering the
resale of such securities is effective under the Securities Act, (ii) following
any sale of such Underlying Shares pursuant to Rule 144, (iii) if such
Underlying Shares are eligible for sale under Rule 144, without the requirement
for the Company to be in compliance with the current public information required
under Rule 144 as to such Underlying Shares and without volume or manner-of-sale
restrictions or (iv) if such legend is not required under applicable
requirements of the Securities Act (including judicial interpretations and
pronouncements issued by the staff of the Commission). The Company shall cause
its counsel to issue a legal opinion to the Transfer Agent promptly after the
Effective Date if required by the Transfer Agent to effect the removal of the
legend hereunder. If all or any Notes are converted at a time when there is an
effective registration statement to cover the resale of the Underlying Shares,
or if such Underlying Shares may be sold under Rule 144 or if such legend is not
otherwise required under applicable requirements of the Securities Act
(including judicial interpretations and pronouncements issued by the staff of
the Commission) then such Underlying Shares shall be issued free of all legends.
In the event the Purchaser submits a request in writing to the Company that it
wishes to sell the Underlying Shares, and if at such time a legend is no longer
required under this Section 4.1(c), the Company will, no later than five Trading
Days following the delivery by the Purchaser to the Company or the Transfer
Agent of a certificate representing Underlying Shares, as applicable, issued
with a restrictive legend (such fifth Trading Day, the “Legend Removal Date”),
deliver or cause to be delivered to the Purchaser a certificate representing
such shares that is free from all restrictive and other legends (however, the
Company shall use reasonable best efforts to deliver such shares within three
(3) Trading Days). If required by the Transfer Agent, the Company shall promptly
cause its counsel to provide a legal opinion in connection with any legend
removal or issuance of shares free from legend hereunder. Without limiting the
Company’s obligation to provide any such legal opinion or its liability for
failing to timely do so, and without imposing any obligation on the Purchaser,
if the Company fails to promptly provide any such required legal opinion, the
Company authorizes and shall authorize the Transfer Agent to accept such legal
opinion from Eilenberg & Krause LLP or such other counsel as shall be selected
by the Purchaser in its sole and absolute discretion, the cost of which legal
opinion shall be borne by the Company. The Company may not make any notation on
its records or give instructions to the Transfer Agent that enlarge the
restrictions on transfer set forth in this Section 4. Certificates for
Underlying Shares subject to legend removal hereunder shall be transmitted by
the Transfer Agent to the Purchaser by crediting the account of the Purchaser’s
prime broker with the Depository Trust Company System as directed by the
Purchaser if the Company is a participant in such system.

 

(d) In addition to the Purchaser’s other available remedies, the Company shall
pay to the Purchaser, in cash, as partial liquidated damages and not as a
penalty, for each $1,000 of Underlying Shares (based on the higher of the actual
purchase price or VWAP of the Common Stock on the date such Securities are
submitted to the Transfer Agent) delivered for removal of the restrictive legend
and subject to Section 4.1(c), $25 per Trading Day for each of the first five
Trading Days after the Legend Removal Date and $100 per Trading Day thereafter
until such certificate is delivered without a legend. Nothing herein shall limit
the Purchaser’s right to pursue actual damages for the Company’s failure to
deliver certificates representing any Securities as required by the Transaction
Documents, and the Purchaser shall have the right to pursue all remedies
available to it at law or in equity including, without limitation, a decree of
specific performance and/or injunctive relief. The Purchaser may, in its
discretion and in lieu of receiving any such liquidated damages in cash, require
the amount of any such liquidated damages to be added to the principal amount of
the Note.

 

  23

   

 

(e) DWAC. In lieu of delivering physical certificates representing the
Unlegended Shares, upon request of a Purchaser, so long as the certificates
therefor do not bear a legend and the Purchaser is not obligated to return such
certificate for the placement of a legend thereon, the Company shall cause its
transfer agent to electronically transmit the Unlegended Shares by crediting the
account of Purchaser’s prime broker with the Depository Trust Company through
its Deposit Withdrawal At Custodian system, provided that the Company’s Common
Stock is DTC eligible and the Company’s transfer agent participates in the
Deposit Withdrawal at Custodian system. Such delivery must be made on or before
the Legend Removal Date.

 

(f) Injunction. In the event a Purchaser shall request delivery of Unlegended
Shares as described in this Section 4.1 and the Company is required to deliver
such Unlegended Shares, the Company may not refuse to deliver Unlegended Shares
based on any claim that such Purchaser or anyone associated or affiliated with
such Purchaser has not complied with such Purchaser’s obligations under the
Transaction Documents, or for any other reason, unless, an injunction or
temporary restraining order from a court, on notice, restraining and or
enjoining delivery of such Unlegended Shares shall have been sought and obtained
by the Company, and the Company has posted a surety bond for the benefit of such
Purchaser in the amount of the greater of (i) 120% of the amount of the
aggregate purchase price of the Underlying Shares to be subject to the
injunction or temporary restraining order, or (ii) the VWAP of the Common Stock
on the trading day before the issue date of the injunction multiplied by the
number of Unlegended Shares to be subject to the injunction, which bond shall
remain in effect until the completion of arbitration/litigation of the dispute
and the proceeds of which shall be payable to such Purchaser to the extent
Purchaser obtains judgment in Purchaser’s favor.

 

(g) Buy-In. In addition to any other rights available to Purchasers, if the
Company fails to deliver to a Purchaser Unlegended Shares as required pursuant
to this Agreement and after the Legend Removal Date the Purchaser, or a broker
on the Purchaser’s behalf, purchases (in an open market transaction or
otherwise) shares of Common Stock to deliver in satisfaction of a sale by such
Purchaser of the shares of Common Stock which the Purchaser was entitled to
receive in unlegended form from the Company (a “Buy-In”), then the Company shall
promptly pay in cash to the Purchaser (in addition to any remedies available to
or elected by the Purchaser) the amount, if any, by which (A) the Purchaser’s
total purchase price (including brokerage commissions, if any) for the shares of
Common Stock so purchased exceeds (B) the aggregate purchase price of the shares
of Common Stock delivered to the Company for reissuance as Unlegended Shares
together with interest thereon at a rate of 15% per annum accruing until such
amount and any accrued interest thereon is paid in full (which amount shall be
paid as liquidated damages and not as a penalty). For example, if a Purchaser
purchases shares of Common Stock having a total purchase price of $11,000 to
cover a Buy-In with respect to $10,000 of purchase price of Shares delivered to
the Company for reissuance as Unlegended Shares, the Company shall be required
to pay the Purchaser $1,000, plus interest, if any. The Purchaser shall provide
the Company written notice indicating the amounts payable to the Purchaser in
respect of the Buy-In.

 

(h) Resale Undertakings. Each Purchaser agrees with the Company that such
Purchaser will not sell any Securities other than pursuant to either the
registration requirements of the Securities Act, including any applicable
prospectus delivery requirements, or in a transaction exempt therefrom or not
subject thereto, and that if Securities are sold pursuant to a registration
statement, they will be sold in compliance with the plan of distribution set
forth therein, and acknowledges that the removal of the restrictive legend from
certificates representing Securities as set forth in this Section 4.1 is
predicated upon the Company’s reliance upon this understanding.

 

  24

   

 

4.2 Acknowledgment of Dilution. The Company acknowledges that the issuance of
the Securities may result in dilution of the outstanding shares of Common Stock,
which dilution may be substantial under certain market conditions. The Company
further acknowledges that its obligations under the Transaction Documents,
including, without limitation, its obligation to issue the Underlying Shares
pursuant to the Transaction Documents, are unconditional and absolute and not
subject to any right of set off, counterclaim, delay or reduction, regardless of
the effect of any such dilution or any claim the Company may have against the
Purchaser and regardless of the dilutive effect that such issuance may have on
the ownership of the other stockholders of the Company.

 

4.3 Furnishing of Information; Public Information. Until such time as the
Purchasers own no Securities, the Company covenants to timely file (or obtain
extensions in respect thereof and file within the applicable grace period) all
reports that would be required to be filed by the Company after the date hereof
which constitutes “adequate current public information” and “is available”
within the meaning of Rule 144(c)(1) under the Securities Act. At any time
commencing on the initial Closing Date and ending at such time that all of the
Securities may be sold without the requirement for the Company to be in
compliance with Rule 144(c)(1) and otherwise without restriction or limitation
pursuant to Rule 144, if the Company shall fail for any reason to satisfy the
current public information requirement under Rule 144(c) (a “Public Information
Failure”) then, in addition to such Purchaser’s other available remedies, the
Company shall pay to each Purchaser, in cash, as partial liquidated damages and
not as a penalty, by reason of any such delay in or reduction of its ability to
sell the Securities, an amount in cash equal to two percent (2.0%) of the
aggregate principal amount of Notes (and accrued interest thereon) held by such
Purchaser on the day of a Public Information Failure and on every thirtieth
(30th) day (pro-rated for periods totaling less than thirty days) thereafter
until the earlier of (a) the date such Public Information Failure is cured and
(b) such time that such public information is no longer required for the
Purchasers to transfer the Underlying Shares pursuant to Rule 144. The payments
to which a Purchaser shall be entitled pursuant to this Section 4.3 are referred
to herein as “Public Information Failure Payments.” Public Information Failure
Payments shall be paid on the earlier of (i) the last day of the calendar month
during which such Public Information Failure Payments are incurred and (ii) the
third (3rd) Business Day after the event or failure giving rise to the Public
Information Failure Payments is cured. In the event the Company fails to make
Public Information Failure Payments in a timely manner, such Public Information
Failure Payments shall bear interest at the rate of 1.5% per month (prorated for
partial months) until paid in full. Nothing herein shall limit such Purchaser’s
right to pursue actual damages for the Public Information Failure, and such
Purchaser shall have the right to pursue all remedies available to it at law or
in equity including, without limitation, a decree of specific performance and/or
injunctive relief.

 

4.4 Integration. The Company shall not sell, offer for sale or solicit offers to
buy or otherwise negotiate in respect of any security (as defined in Section 2
of the Securities Act) that would be integrated with the offer or sale of the
Securities in a manner that would require the registration under the Securities
Act of the sale of the Securities or that would be integrated with the offer or
sale of the Securities for purposes of the rules and regulations of any Trading
Market such that it would require shareholder approval prior to the closing of
such other transaction unless shareholder approval is obtained before the
closing of such subsequent transaction.

 

4.5 Conversion Procedures. The form of Notice of Conversion included in the
Notes set forth the totality of the procedures required of the Purchasers in
order to convert the Notes. No additional legal opinion, other information or
instructions shall be required of the Purchasers to convert their Notes. The
Company shall honor conversions of the Notes and shall deliver Underlying Shares
in accordance with the terms, conditions and time periods set forth in the
Transaction Documents.

 

  25

   

 

4.6 [intentionally omitted]

 

4.7 Shareholder Rights Plan. No claim will be made or enforced by the Company
or, with the consent of the Company, any other Person, that any Purchaser is an
“Acquiring Person” under any control share acquisition, business combination,
poison pill (including any distribution under a rights agreement) or similar
anti-takeover plan or arrangement in effect or hereafter adopted by the Company,
or that the Purchaser could be deemed to trigger the provisions of any such plan
or arrangement, by virtue of receiving Securities under the Transaction
Documents or under any other agreement between the Company and the Purchasers.

 

4.8 Non-Public Information. Except with respect to the material terms and
conditions of the transactions contemplated by the Transaction Documents, the
Company covenants and agrees that neither it, nor the Person acting on its
behalf, will provide the Purchaser or its agents or counsel with any information
that the Company believes constitutes material non-public information, unless
prior thereto the Purchaser shall have entered into a written agreement with the
Company regarding the confidentiality and use of such information. The Company
understands and confirms that the Purchaser shall be relying on the foregoing
covenant in effecting transactions in securities of the Company.

 

4.9 Use of Proceeds. The Company shall use the net proceeds from the sale of the
Offering hereunder for the purposes set forth on Schedule 4.9 hereto, and shall
provide to Purchasers a written accounting thereof within two weeks following
the end of each calendar month or sooner upon request, and shall not use such
proceeds: (a) for the satisfaction of any portion of the Company’s debt except
as disclosed on Schedule 4.9 (other than payment of trade payables in the
ordinary course of the Company’s business and consistent with prior practices),
(b) for the redemption of any Common Stock or Common Stock Equivalents, (c) for
the settlement of any outstanding litigation or (d) in violation of FCPA or OFAC
regulations.

 

4.10 Indemnification of Purchaser. Subject to the provisions of this Section
4.10(a), the Company will indemnify and hold the Purchaser and its directors,
officers, shareholders, members, partners, employees and agents (and any other
Persons with a functionally equivalent role of a Person holding such titles
notwithstanding a lack of such title or any other title), each Person who
controls the Purchaser (within the meaning of Section 15 of the Securities Act
and Section 20 of the Exchange Act), and the directors, officers, shareholders,
agents, members, partners or employees (and any other Persons with a
functionally equivalent role of a Person holding such titles notwithstanding a
lack of such title or any other title) of such controlling persons (each, a
“Purchaser Party”) harmless from any and all losses, liabilities, obligations,
claims, contingencies, damages, costs and expenses, including all judgments,
amounts paid in settlements, court costs and reasonable attorneys’ fees and
costs of investigation that any such Purchaser Party may suffer or incur as a
result of or relating to (i) any breach of any of the representations,
warranties, covenants or agreements made by the Company in this Agreement or in
the other Transaction Documents or (ii) any action instituted against Purchaser
Parties in any capacity, or any of them or their respective Affiliates, by any
stockholder of the Company who is not an Affiliate of such Purchaser Party, with
respect to any of the transactions contemplated by the Transaction Documents
(unless such action is based upon a breach of such Purchaser Party’s
representations, warranties or covenants under the Transaction Documents or any
agreements or understandings such Purchaser Party may have with any such
stockholder or any violations by such Purchaser Party of state or federal
securities laws or any conduct by such Purchaser Party which constitutes fraud,
gross negligence, willful misconduct or malfeasance). If any action shall be
brought against any Purchaser Party in respect of which indemnity may be sought
pursuant to this Agreement, such Purchaser Party shall promptly notify the
Company in writing, and the Company shall have the right to assume the defense
thereof with counsel of its own choosing reasonably acceptable to the Purchaser
Party. Any Purchaser Party shall have the right to employ separate counsel in
any such action and participate in the defense thereof, and the fees and
expenses of one such counsel shall be borne by the Company. The Company will not
be liable to any Purchaser Party under this Agreement (y) for any settlement by
a Purchaser Party effected without the Company’s prior written consent, which
shall not be unreasonably withheld or delayed; or (z) to the extent, but only to
the extent that a loss, claim, damage or liability is attributable to any
Purchaser Party’s breach of its representations, warranties or covenants under
the Transaction Documents. The indemnification required by this Section 4.10(a)
shall be made by periodic payments of the amount thereof during the course of
the investigation or defense, as and when bills are received or are incurred.
The indemnity agreements contained herein shall be in addition to any cause of
action or similar right of any Purchaser Party against the Company or others and
any liabilities the Company may be subject to pursuant to law.

 

  26

   

 

4.11 Reservation and Listing of Securities. [Section 4.11(c)-(d) are not
applicable unless and until the the Company’s securities become publicly held.]

 

(a) The Company shall maintain a reserve from its duly authorized shares of
Common Stock for issuance pursuant to the Securities and Transaction Documents
in such amount as may then be required to fulfill its obligations in full
thereunder, but not less than the Required Minimum.

 

(b) If, on any date, the number of authorized but unissued (and otherwise
unreserved) shares of Common Stock is less than the Required Minimum on such
date, then the Company shall amend the Company’s certificate or articles of
incorporation to increase the number of authorized but unissued shares of Common
Stock to at least the Required Minimum at such time, as soon as possible and in
any event not later than the 60th day after such date.

 

(c) The Company shall, if applicable: (i) in the time and manner required by the
principal Trading Market, prepare and file with such Trading Market an
additional shares listing application covering a number of shares of Common
Stock at least equal to the Required Minimum on the date of such application,
(ii) take all steps necessary to cause such shares of Common Stock to be
approved for listing or quotation on such Trading Market as soon as possible
thereafter, (iii) provide to the Purchasers evidence of such listing or
quotation and (iv) maintain the listing or quotation of such Common Stock on any
date at least equal to the Required Minimum on such date on such Trading Market
or another Trading Market. The Company will take all action necessary to
continue the listing or quotation and trading of its Common Stock on a Trading
Market until the later of (i) at least five years after the Closing Date, and
(ii) for so long as the Notes are outstanding, and will comply in all respects
with the Company’s reporting, filing and other obligations under the bylaws or
rules of the Trading Market. In the event the afore-described listing is not
continuously maintained for five years after the Closing Date and for so long as
Notes are outstanding (a “Listing Default”), then in addition to any other
rights the Purchasers may have hereunder or under applicable law, on the first
day of a Listing Default and on each monthly anniversary of each such Listing
Default date (if the applicable Listing Default shall not have been cured by
such date) until the applicable Listing Default is cured, the Company shall pay
to each Purchaser an amount in cash, as partial liquidated damages and not as a
penalty, equal to 2% of the aggregate Subscription Amount of Notes and
conversion price paid for Conversion Shares held by such Purchaser on the day of
a Listing Default and on every thirtieth day (pro-rated for periods less than
thirty days) thereafter until the date such Listing Default is cured. If the
Company fails to pay any liquidated damages pursuant to this Section in a timely
manner, the Company will pay interest thereon at a rate of 1.5% per month
(pro-rated for partial months) to the Purchaser.

 

(d) The Company will then take all action necessary to continue the listing or
quotation and trading of its Common Stock on a Trading Market for so long as the
Notes are outstanding, and will comply in all respects with the Company’s
reporting, filing and other obligations under the bylaws or rules of the Trading
Market at least for so long as the Notes are outstanding. In the event the
afore-described listing is not continuously maintained for such time period (a
“Listing Default”), then in addition to any other rights the Purchasers may have
hereunder or under applicable law, on the first day of a Listing Default and on
each monthly anniversary of each such Listing Default date (if the applicable
Listing Default shall not have been cured by such date) until the applicable
Listing Default is cured, the Company shall pay to each Purchaser an amount in
cash, as partial liquidated damages and not as a penalty, equal to ten percent
(10%) of the aggregate Subscription Amount held by such Purchaser on the day of
a Listing Default and on every thirtieth day (pro-rated for periods less than
thirty days) thereafter until the date such Listing Default is cured. If the
Company fails to pay any liquidated damages pursuant to this Section in a timely
manner, the Company will pay interest thereon at a rate of 1.5% per month
(pro-rated for partial months) to the Purchaser.

 

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4.12 Form D; Blue Sky Filings. The Company agrees to timely file a Form D with
respect to the Securities as required under Regulation D and to provide a copy
thereof, promptly upon request of any Purchaser. The Company shall take such
action as the Company shall reasonably determine is necessary in order to obtain
an exemption for, or to qualify the Securities for, sale to the Purchasers at
the Closing under applicable securities or “Blue Sky” laws of the states of the
United States, and shall provide evidence of such actions promptly upon request
of any Purchaser.

 

4.13 Subsequent Equity Sales. From the date hereof until such time as the Notes
are no longer outstanding, the Company will not, without the consent of a
Majority in Interest, enter into any Equity Line of Credit or similar agreement,
issue or agree to issue floating or Variable Priced Equity Linked Instruments
nor issue or agree to issue any of the foregoing or equity with price reset
rights (subject to adjustment for stock splits, distributions, dividends,
recapitalizations and the like) (collectively, a “Variable Rate Transaction”).
For purposes hereof, “Equity Line of Credit” shall include any transaction
involving a written agreement between the Company and an investor or underwriter
whereby the Company has the right to “put” its securities to the investor or
underwriter over an agreed period of time and at an agreed price or price
formula, and “Variable Priced Equity Linked Instruments” shall include: (A) any
debt or equity securities which are convertible into, exercisable or
exchangeable for, or carry the right to receive additional shares of Common
Stock or Common Stock Equivalents or any of the foregoing at a price that can be
reduced either (1) at any conversion, exercise or exchange rate or other price
that is based upon and/or varies with the trading prices of or quotations for
Common Stock at any time after the initial issuance of such debt or equity
security, or (2) with a fixed conversion, exercise or exchange price that is
subject to being reset at some future date at any time after the initial
issuance of such debt or equity security due to a change in the market price of
the Company’s Common Stock since date of initial issuance, or upon the issuance
of any debt, equity or Common Stock Equivalent, and (B) any amortizing
convertible security which amortizes prior to its maturity date, where the
Company is required or has the option to (or any investor in such transaction
has the option to require the Company to) make such amortization payments in
shares of Common Stock which are valued at a price that is based upon and/or
varies with the trading prices of or quotations for Common Stock at any time
after the initial issuance of such debt or equity security (whether or not such
payments in stock are subject to certain equity conditions). For purposes of
determining the total consideration for a convertible instrument (including a
right to purchase equity of the Company) issued, subject to an original issue or
similar discount or which principal amount is directly or indirectly increased
after issuance, the consideration will be deemed to be the actual net cash
amount received by the Company in consideration of the original issuance of such
convertible instrument. For so long as the Notes are outstanding, the Company
will not, without the consent of a Majority in Interest, issue any Common Stock
or Common Stock Equivalents to officers, directors, and employees of the Company
unless such issuance is an Exempt Issuance. For so long as any Notes are
outstanding, the Company will not amend the terms of any securities or Common
Stock Equivalents or of any agreement outstanding or in effect as of the date of
this Agreement pursuant to which same were or may be acquired without the
consent of a Majority in Interest, if the result of such amendment would be at
an effective price per share of Common Stock less than the higher of the
Conversion Price in effect at the time of such amendment. For so long as any
Notes are outstanding, the Company will not issue any Common Stock or Common
Stock Equivalents, without the consent of a Majority in Interest, if such
issuance would be at an effective price per share of Common Stock less than the
higher of the Conversion Price in effect at the time of such issuance. The
restrictions and limitations in this Section 4.13 are in addition to and shall
apply whether or not a Purchaser exercises its rights pursuant to Section 4.17
and Section 4.24.

 

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4.14 D&O Insurance. Prior to the Reverse Merger, the Company shall obtain
directors and officers insurance coverage in an amount at least equal to
$1,000,000 and shall maintain the same in such amount so long as the Notes are
outstanding.

 

4.15 Capital Changes. So long as the Notes are outstanding, the Company shall
not undertake a reverse or forward stock split or reclassification of the Common
Stock without 10 days’ prior written notice to the Purchasers.

 

4.16 Reimbursement. If a Purchaser becomes involved in any capacity in any
Proceeding by or against any Person who is a stockholder of the Company (except
as a result of sales, pledges, margin sales and similar transactions by such
Purchaser to or with any current stockholder), solely as a result of such
Purchaser’s acquisition of the Securities under this Agreement, the Company will
reimburse the Purchaser for its reasonable legal and other expenses (including
the cost of any investigation preparation and travel in connection therewith)
incurred in connection therewith, as such expenses are incurred. The
reimbursement obligations of the Company under this paragraph shall be in
addition to any liability which the Company may otherwise have, shall extend
upon the same terms and conditions to any Affiliates of the Purchasers who are
actually named in such action, proceeding or investigation, and partners,
directors, agents, employees and controlling persons (if any), as the case may
be, of the Purchaser and any such Affiliate, and shall be binding upon and inure
to the benefit of any successors, assigns, heirs and personal representatives of
the Company, the Purchaser and any such Affiliate and any such Person. The
Company also agrees that neither the Purchasers nor any such Affiliates,
partners, directors, agents, employees or controlling persons shall have any
liability to the Company or any Person asserting claims on behalf of or in right
of the Company solely as a result of acquiring the Securities under this
Agreement.

 

4.17 Participation in Future Financing.

 

(a) Until one year after the Underlying Shares become freely tradable without
restriction, upon any proposed issuance by the Company or any of its
Subsidiaries of Common Stock, Common Stock Equivalents for cash consideration,
Indebtedness or a combination thereof, other than (i) a rights offering to all
holders of Common Stock (which may include extending such rights offering to
holders of Notes) or (ii) an Exempt Issuance, (a “Subsequent Financing”), the
Purchasers shall have the right to participate in up to an amount of the
Subsequent Financing equal to 100% of the Subsequent Financing (the
“Participation Maximum”), pro rata to each other in proportion to their
Subscription Amounts, on the same terms, conditions and price provided for in
the Subsequent Financing, unless the Subsequent Financing is an underwritten
public offering, in which case the Company shall offer the Purchasers the right
to participate in such public offering when it is lawful for the Company to do
so, but Purchasers shall be entitled to purchase any particular amount of such
public offering.

 

(b) At least ten (10) Trading Days prior to the closing of the Subsequent
Financing, the Company shall deliver to the Purchasers a written notice of its
intention to effect a Subsequent Financing (“Pre-Notice”), which Pre-Notice
shall ask each Purchaser if it wants to review the details of such financing
(such additional notice, a “Subsequent Financing Notice”). Upon the request of a
Purchaser for a Subsequent Financing Notice, the Company shall promptly, but no
later than one (1) Trading Day after such request, deliver a Subsequent
Financing Notice to the Purchaser. The requesting Purchaser shall be deemed to
have acknowledged that the Subsequent Financing Notice may contain material
non-public information. The Subsequent Financing Notice shall describe in
reasonable detail the proposed terms of such Subsequent Financing, the amount of
proceeds intended to be raised thereunder and the Person or Persons through or
with whom such Subsequent Financing is proposed to be effected and shall include
a term sheet or similar document relating thereto as an attachment.

 

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(c) Any Purchaser desiring to participate in such Subsequent Financing must
provide written notice to the Company by not later than 5:30 p.m. (New York City
time) on the tenth (10th) Trading Day after all of the Purchasers shall have
received the Pre-Notice that the Purchaser is willing to participate in the
Subsequent Financing, the amount of such Purchaser’s participation, and
representing and warranting that such Purchaser has such funds ready, willing,
and available for investment on the terms set forth in the Subsequent Financing
Notice. If the Company receives no such notice from a Purchaser as of such tenth
(10th) Trading Day, such Purchaser shall be deemed to have notified the Company
that it does not elect to participate.

 

(d) If by 5:30 p.m. (New York City time) on the tenth (10th) Trading Day after
all of the Purchasers shall have received the Pre-Notice, notification by the
Purchasers of their willingness to participate in the Subsequent Financing (or
to cause their designees to participate) is, in the aggregate, equal to or less
than the total amount of the Subsequent Financing, then the Purchasers who have
notified willingness to participate shall have the right to participate in the
Subsequent Financing as to the full amount notified and the Company may affect
the remaining portion of such Subsequent Financing, if any, on the terms and
with the Persons set forth in the Subsequent Financing Notice.

 

(e) If by 5:30 p.m. (New York City time) on the tenth (10th) Trading Day after
all of the Purchasers have received the Pre-Notice, the Company receives
responses to a Subsequent Financing Notice from Purchasers seeking to purchase
more than the aggregate amount of the Participation Maximum, each such Purchaser
shall have the right to purchase its Pro Rata Portion (as defined below) of the
Participation Maximum. “Pro Rata Portion” means the ratio of (x) the principal
amount of Notes purchased hereunder by a Purchaser participating under this
Section 4.17 and (y) the sum of the aggregate principal amounts of Notes
purchased hereunder by all Purchasers participating under this Section 4.17.

 

(f) The Company must provide the Purchasers with a second Subsequent Financing
Notice, and the Purchasers will again have the right of participation set forth
above in this Section 4.17, if the Subsequent Financing subject to the initial
Subsequent Financing Notice is not consummated for any reason on the terms set
forth in such Subsequent Financing Notice within thirty (30) Trading Days after
the date of the initial Subsequent Financing Notice.

 

(g) The Company agrees that if Purchasers elect to participate in the Subsequent
Financing, the transaction documents related to the Subsequent Financing shall
not include any term or provision whereby the Purchasers shall be required to
agree to any restrictions on trading as to any of the Securities purchased
hereunder (for avoidance of doubt, the securities purchased in the Subsequent
Financing shall not be considered securities purchased hereunder) or be required
to consent to any amendment to or termination of, or grant any waiver, release
or the like under or in connection with, this Agreement, without the prior
written consent of the Purchaser.

 

(h) Notwithstanding anything to the contrary in this Section 4.17 and unless
otherwise agreed to by the Purchasers, the Company shall either confirm in
writing to the Purchaser that the transaction with respect to the Subsequent
Financing has been abandoned or shall publicly disclose its intention to issue
the securities in the Subsequent Financing, in either case in such a manner such
that the Purchasers will not be in possession of any material, non-public
information, by the tenth (10th) Business Day following delivery of the
Subsequent Financing Notice. If by such tenth (10th) Business Day, no public
disclosure regarding a transaction with respect to the Subsequent Financing has
been made, and no notice regarding the abandonment of such transaction has been
received by the Purchasers, such transaction shall be deemed to have been
abandoned and the Purchasers shall not be deemed to be in possession of any
material, non-public information with respect to the Company or any of its
Subsidiaries.

 

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4.18 Purchasers’ Exercise Limitations. The Company shall not effect any exercise
of the rights granted in Section 4.17 of this Agreement, and a Purchaser shall
not have the right to exercise any portion of such rights granted in Section
4.17 to the extent that after giving effect to such exercise, the Purchaser
(together with the Purchaser’s Affiliates, and any other Persons acting as a
group together with the Purchaser or any of the Purchaser’s Affiliates), would
beneficially own in excess of the Beneficial Ownership Limitation (as defined in
Section 4.25), applied in the manner set forth in the Note.

 

4.19 Maintenance of Property. The Company shall keep all of its property, which
is necessary or useful to the conduct of its business, in good working order and
condition, ordinary wear and tear excepted.

 

4.20 Preservation of Corporate Existence. The Company shall preserve and
maintain its corporate existence, rights, privileges and franchises in the
jurisdiction of its incorporation, and qualify and remain qualified, as a
foreign corporation in each jurisdiction in which such qualification is
necessary in view of its business or operations and where the failure to qualify
or remain qualified might reasonably have a Material Adverse Effect upon the
financial condition, business or operations of the Company taken as a whole.

 

4.21 DTC Program. At all times that Notes are outstanding, the Company shall
employ as the transfer agent for its Common Stock and Underlying Shares a
participant in the Depository Trust Company Automated Securities Transfer
Program and cause the Common Stock and Underlying Shares to be transferable
pursuant to such program.

 

4.22 Registration Rights. If and when requested by Purchasers, the Company shall
enter into a registration rights agreement with and for the benefit of the
Purchasers covering registration and resale of the Underlying Shares, such
agreement to be on terms and conditions satisfactory to the Purchasers and
accompanied by a legal opinion regarding enforceability in form and substance
satisfactory to counsel to the Purchasers.

 

4.23 [intentionally omitted]

 

4.24 Most Favored Nation Provision. From the date hereof and for so long as any
Securities are outstanding and held by a Purchaser, in the event that the
Company issues or sells any Common Stock or Common Stock Equivalent, if a
Purchaser then holding outstanding Securities reasonably believes that any of
the terms and conditions appurtenant to such securities or issuance or sale are
more favorable to the Purchaser than are the terms and conditions granted to the
Purchasers hereunder, each such Purchaser shall have the right, upon notice to
the Company within twenty (20) days’ after disclosure to Purchaser of the terms
and conditions of such other transaction and securities, elect to incorporate
any or all of the terms or conditions of such other transaction and securities
into the terms and conditions of the transactions contemplated by this Agreement
and the Securities (or to replace any or all of these terms and conditions and
Securities with any of such other terms and conditions and securities). Upon
receipt by the Company of any such notice, the changes will be automatically
effective, and the Company shall promptly take such action as is necessary or
appropriate to effect any amendments or exchanges required thereby. The purpose
of this provision is to enable Purchasers to realize only the benefit of more
favorable terms offered to others. By way of example, if the new transaction
includes a note with a more favorable conversion rate but a longer maturity date
than that provided for in the Notes, holders of Notes will have the right to
substitute the conversion rate offered in the transaction for the conversion
rate of the Notes but will have no obligation to elect the longer maturity date.
The Company shall provide each Purchaser with notice of any such issuance or
sale in the manner for disclosure of Subsequent Financings set forth in Section
4.17.

 

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4.25 Purchaser’s Exercise Limitations. The Company shall not effect any exercise
of the option granted to Purchasers in Sections 4.17 and 4.24 of this Agreement,
and a Purchaser shall not have the right to exercise any portion of such option,
pursuant to Sections 4.17 and 4.24 or otherwise, to the extent that after giving
effect to such issuance after exercise as set forth on the applicable notice of
exercise, the Purchaser (together with the Purchaser’s Affiliates, and any other
Persons acting as a group together with the Purchaser or any of the Purchaser’s
Affiliates), would beneficially own in excess of the Beneficial Ownership
Limitation (as defined below). For purposes of the foregoing sentence, the
number of shares of Common Stock beneficially owned by the Purchaser and its
Affiliates shall include the number of shares of Common Stock issuable upon
exercise of the option with respect to which such determination is being made,
but shall exclude the number of shares of Common Stock which would be issuable
upon (i) exercise of the remaining, nonexercised portion of the option
beneficially owned by the Purchaser or any of its Affiliates and (ii) exercise
or conversion of the unexercised or nonconverted portion of any other securities
of the Company (including, without limitation, any other Common Stock
Equivalents) subject to a limitation on conversion or exercise analogous to the
limitation contained herein beneficially owned by the Purchaser or any of its
Affiliates. Except as set forth in the preceding sentence, for purposes of this
Section 4.25, beneficial ownership shall be calculated in accordance with
Section 13(d) of the Exchange Act and the rules and regulations promulgated
thereunder, it being acknowledged by the Purchaser that the Company is not
representing to the Purchaser that such calculation is in compliance with
Section 13(d) of the Exchange Act and the Purchaser is solely responsible for
any schedules required to be filed in accordance therewith. To the extent that
the limitation contained in this Section 4.25 applies, the determination of
whether the option is exercisable (in relation to other securities owned by the
Purchaser together with any Affiliates) and of which portion of the option is
exercisable shall be in the sole discretion of the Purchaser, and the submission
of an exercise notice shall be deemed to be the Purchaser’s determination of
whether the option is exercisable (in relation to other securities owned by the
Purchaser together with any Affiliates) and of which portion of the option is
exercisable, in each case subject to the Beneficial Ownership Limitation. To
ensure compliance with this restriction, a Purchaser will be deemed to represent
to the Company when it delivers an exercise notice that such exercise notice has
not violated the restrictions set forth in this paragraph, and the Company shall
have no obligation to verify or confirm the accuracy of such determination. In
addition, a determination as to any group status as contemplated above shall be
determined in accordance with Section 13(d) of the Exchange Act and the rules
and regulations promulgated thereunder. For purposes of this Section 4.25, in
determining the number of outstanding shares of Common Stock, a Purchaser may
rely on the number of outstanding shares of Common Stock as reflected in (A) the
Company’s most recent periodic or annual report filed with the Commission, as
the case may be, (B) a more recent public announcement by the Company or (C) a
more recent written notice by the Company or the Transfer Agent setting forth
the number of shares of Common Stock outstanding. Upon the written or oral
request of a Purchaser, the Company shall within two Trading Days confirm orally
and in writing to the Purchaser the number of shares of Common Stock then
outstanding. In any case, the number of outstanding shares of Common Stock shall
be determined after giving effect to the conversion or exercise of securities of
the Company by the Purchaser or its Affiliates since the date as of which such
number of outstanding shares of Common Stock was reported. The “Beneficial
Ownership Limitation” shall be 9.99%, unless a Purchaser elects on its signature
page hereto a different amount for its own Beneficial Ownership Limitation of
the number of shares of the Common Stock outstanding immediately after giving
effect to the issuance of shares of Common Stock issuable upon exercise of the
option. The Purchaser may decrease the Beneficial Ownership Limitation at any
time and the Purchaser, upon not less than 61 days’ prior notice to the Company,
may increase the Beneficial Ownership Limitation provisions of this Section
4.25, provided that the provisions of this Section 4.25 shall continue to apply.
Any such increase will not be effective until the 61st day after such notice is
delivered to the Company. The provisions of this paragraph shall be construed
and implemented in a manner otherwise than in strict conformity with the terms
of this Section 4.25 to correct this paragraph (or any portion hereof) which may
be defective or inconsistent with the intended Beneficial Ownership Limitation
herein contained or to make changes or supplements necessary or desirable to
properly give effect to such limitation. In the event the limitations in this
Section 4.25 would prevent the exercise of a Purchaser’s rights under Sections
4.17 and 4.24, then such Purchaser may exercise all such rights and comply with
all obligations applicable thereto except that the delivery of Common Stock will
be deferred until such time as such Purchaser provides notice to the Company
that such Purchaser may receive or beneficially own such Common Stock which
exceeds the Beneficial Ownership Limitation without exceeding the then
applicable Beneficial Ownership Limitation. The Beneficial Ownership Limitation
shall apply only when the Company has a class of equity securities registered
pursuant to Sections 12(b) or 12(g) of the Securities Act.

 

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4.26 Indebtedness. For so long as any portion of the original principal amount
of the Notes is outstanding, the Company will not incur any Indebtedness other
than Permitted Indebtedness, without the consent of the Majority in Interest.

 

4.27 Notice of Disqualification Events. The Company will notify the Purchasers
in writing, prior to each Closing Date of (i) any Disqualification Event
relating to any Issuer Covered Person and (ii) any event that would, with the
passage of time, become a Disqualification Event relating to any Issuer Covered
Person not otherwise disclosed herein.

 

4.28 Duration of Undertakings. Unless otherwise stated in this Article IV, all
of the Company’s undertakings, obligations and responsibilities set forth in
Article IV of this Agreement shall remain in effect for so long as any
Securities remain outstanding and held by a Purchaser.

 

ARTICLE V.

MISCELLANEOUS

 

5.1 Termination. This Agreement may be terminated by any Purchaser, as to such
Purchaser’s obligations hereunder only and without any effect whatsoever on the
obligations between the Company and the other Purchasers, by written notice to
the other parties, if the initial Closing has not been consummated on or before
October 10, 2017; provided, however, that such termination will not affect the
right of any party to sue for any breach by any other party (or parties).

 

5.2 Fees and Expenses. At each Closing, the Company has agreed to pay counsel
for the Purchasers for its legal fees and out-of-pocket expenses in connection
with the Transaction Documents and the transactions contemplated thereby, which
amount may, at Purchasers’ election, be offset against the Purchasers’ required
Subscription Amount payment. Except as expressly set forth in the Transaction
Documents, each party shall pay the fees and expenses of its advisers, counsel,
accountants and other experts, if any, and all other expenses incurred by such
party incident to the negotiation, preparation, execution, delivery and
performance of this Agreement. The Company shall pay all Transfer Agent fees
(including, without limitation, any fees required for same-day processing of any
instruction letter delivered by the Company and any conversion notice delivered
by a Purchaser), stamp taxes and other taxes and duties levied in connection
with the delivery of any Securities to the Purchasers.

 

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5.3 Entire Agreement. The Transaction Documents, together with the exhibits and
schedules thereto, contain the entire understanding of the parties with respect
to the subject matter hereof and thereof and supersede all prior agreements and
understandings, oral or written, with respect to such matters, which the parties
acknowledge have been merged into such documents, exhibits and schedules.

 

5.4 Notices. All notices, demands, requests, consents, approvals, and other
communications required or permitted hereunder shall be in writing and, unless
otherwise specified herein, shall be (i) personally served, (ii) deposited in
the mail, registered or certified, return receipt requested, postage prepaid,
(iii) delivered by reputable air courier service with charges prepaid, or (iv)
transmitted by hand delivery, telegram, or facsimile, addressed as set forth
below or to such other address as such party shall have specified most recently
by written notice. Any notice or other communication required or permitted to be
given hereunder shall be deemed effective (a) upon hand delivery or delivery by
facsimile, with accurate confirmation generated by the transmitting facsimile
machine, at the address or number designated below (if delivered on a business
day during normal business hours where such notice is to be received), or the
first business day following such delivery (if delivered other than on a
business day during normal business hours where such notice is to be received)
or (b) on the second business day following the date of mailing by express
courier service, fully prepaid, addressed to such address, or upon actual
receipt of such mailing, whichever shall first occur. The addresses for such
communications shall be: (i) if to the Company, to: R Squared Technologies Inc,
1040 Old Spanish Trail, Suite 60, Slidell, LA 70458, Attn: Rob Damare, CEO, fax:
(413) 845-0739, with a copy by fax only to: Jeffrey G. Klein, Esq., fax (561)
994-6693, and (ii) if to the Purchasers, to: the addresses and fax numbers
indicated on the signature pages hereto, with an additional copy by fax only to
(which shall not constitute notice): Gracin & Marlow, Company counsel, (212)
208-4657. For so long as any notice may or be required to be given to the
Company pursuant to the transaction documents, the Company will maintain an
address for notice purposes in New York, New York.

 

5.5 Amendments; Waivers. No provision of this Agreement may be waived, modified,
supplemented or amended except in a written instrument signed, in the case of an
amendment, by the Company and the Purchasers holding at least a majority in
interest of the Securities then outstanding (the “Majority in Interest”), or, in
the case of a waiver, by the party against whom enforcement of any such waived
provision is sought. Whenever the term “consent of the Purchasers” or a similar
term is employed herein, it shall mean the consent of a Majority in Interest. No
waiver of any default with respect to any provision, condition or requirement of
this Agreement shall be deemed to be a continuing waiver in the future or a
waiver of any subsequent default or a waiver of any other provision, condition
or requirement hereof, nor shall any delay or omission of any party to exercise
any right hereunder in any manner impair the exercise of any such right.

 

5.6 Headings. The headings herein are for convenience only, do not constitute a
part of this Agreement and shall not be deemed to limit or affect any of the
provisions hereof.

 

5.7 Successors and Assigns. This Agreement shall be binding upon and inure to
the benefit of the parties and their successors and permitted assigns. The
Company may not assign this Agreement or any rights or obligations hereunder
without the prior written consent of each Purchaser (other than by merger).
Following the Closing, each Purchaser may assign any or all of its rights under
this Agreement to any Person to whom such Purchaser assigns or transfers any
Securities, provided that such transferee agrees in writing to be bound, with
respect to the transferred Securities, by the provisions of the Transaction
Documents that apply to a “Purchaser” and so long as such transfer is not
contrary to Purchaser’s representations and warranties set forth herein.

 

5.8 No Third-Party Beneficiaries. This Agreement is intended for the benefit of
the parties hereto and their respective successors and permitted assigns and is
not for the benefit of, nor may any provision hereof be enforced by, any other
Person, except as otherwise set forth in Section 4.10.

 

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5.9 Governing Law; Consent to Jurisdiction; Legal Fees and Other Costs. All
questions concerning the construction, validity, enforcement and interpretation
of the Transaction Documents shall be governed by and construed and enforced in
accordance with the internal laws of the State of New York, without regard to
the principles of conflicts of law thereof. Each party agrees that all legal
proceedings concerning the interpretations, enforcement and defense of the
transactions contemplated by this Agreement and any other Transaction Documents
(whether brought against a party hereto or its respective affiliates, directors,
officers, shareholders, partners, members, employees or agents) shall be
commenced exclusively in the state and federal courts sitting in the City of New
York. Each party hereby irrevocably submits to the exclusive jurisdiction of the
state and federal courts sitting in the City of New York, Borough of Manhattan
for the adjudication of any dispute hereunder or in connection herewith or with
any transaction contemplated hereby or discussed herein (including with respect
to the enforcement of any of the Transaction Documents), and hereby irrevocably
waives, and agrees not to assert in any action, suit or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is improper or is an inconvenient venue for such
proceeding. Each party hereby irrevocably waives personal service of process and
consents to process being served in any such suit, action or proceeding by
mailing a copy thereof via registered or certified mail or overnight delivery
(with evidence of delivery) to such party at the address in effect for notices
to it under this Agreement and agrees that such service shall constitute good
and sufficient service of process and notice thereof. Nothing contained herein
shall be deemed to limit in any way any right to serve process in any other
manner permitted by law. If either party shall commence an action or proceeding
to enforce any provisions of the Transaction Documents, then, in addition to the
obligations of the Company under Section 4.10, the prevailing party in such
action, suit or proceeding shall be reimbursed by the other party for its
reasonable attorneys’ fees and other costs and expenses incurred with the
investigation, preparation and prosecution of such action or proceeding.

 

5.10 Survival. The representations and warranties contained herein shall survive
the Closing and the delivery of the Securities.

 

5.11 Execution. This Agreement may be executed in two or more counterparts, all
of which when taken together shall be considered one and the same agreement and
shall become effective when counterparts have been signed by each party and
delivered to each other party, it being understood that the parties need not
sign the same counterpart. In the event that any signature is delivered by
facsimile transmission or by e-mail delivery of a “.pdf” format data file, such
signature shall create a valid and binding obligation of the party executing (or
on whose behalf such signature is executed) with the same force and effect as if
such facsimile or “.pdf” signature page were an original thereof.

 

5.12 Severability. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, illegal,
void or unenforceable, the remainder of the terms, provisions, covenants and
restrictions set forth herein shall remain in full force and effect and shall in
no way be affected, impaired or invalidated, and the parties hereto shall use
their commercially reasonable efforts to find and employ an alternative means to
achieve the same or substantially the same result as that contemplated by such
term, provision, covenant or restriction. It is hereby stipulated and declared
to be the intention of the parties that they would have executed the remaining
terms, provisions, covenants and restrictions without including any of such that
may be hereafter declared invalid, illegal, void or unenforceable.

 

5.13 Rescission and Withdrawal Right. Notwithstanding anything to the contrary
contained in (and without limiting any similar provisions of) any of the other
Transaction Documents, whenever a Purchaser exercises a right, election, demand
or option under a Transaction Document and the Company does not timely perform
its related obligations within the periods therein provided, then the Purchaser
may, at any time prior to the Company’s performance of such obligations, rescind
or withdraw, in its sole discretion from time to time upon written notice to the
Company, any relevant notice, demand or election in whole or in part without
prejudice to its future actions and rights; provided, however, that in the case
of a rescission of a conversion of a Note, the Purchaser shall be required to
return any shares of Common Stock subject to any such rescinded conversion
notice.

 

  35

   

 

5.14 Replacement of Securities. If any certificate or instrument evidencing any
Securities is mutilated, lost, stolen or destroyed, the Company shall issue or
cause to be issued in exchange and substitution for and upon cancellation
thereof (in the case of mutilation), or in lieu of and substitution therefor, a
new certificate or instrument, but only upon receipt of a lost certificate
affidavit or like document. The applicant for a new certificate or instrument
under such circumstances shall also pay any reasonable third-party costs
(including customary indemnity) associated with the issuance of such replacement
Securities.

 

5.15 Remedies. In addition to being entitled to exercise all rights provided
herein or granted by law, including recovery of damages, each of the Purchaser
and the Company will be entitled to specific performance under the Transaction
Documents. The parties agree that monetary damages may not be adequate
compensation for any loss incurred by reason of any breach of obligations
contained in the Transaction Documents and hereby agree to waive and not to
assert in any action for specific performance of any such obligation the defense
that a remedy at law would be adequate.

 

5.16 Payment Set Aside. To the extent that the Company makes a payment or
payments to any Purchaser pursuant to any Transaction Document or a Purchaser
enforces or exercises its rights thereunder, and such payment or payments or the
proceeds of such enforcement or exercise or any part thereof are subsequently
invalidated, declared to be fraudulent or preferential, set aside, recovered
from, disgorged by or are required to be refunded, repaid or otherwise restored
to the Company, a trustee, receiver or any other Person under any law
(including, without limitation, any bankruptcy law, state or federal law, common
law or equitable cause of action), then to the extent of any such restoration
the obligation or part thereof originally intended to be satisfied shall be
revived and continued in full force and effect as if such payment had not been
made or such enforcement or setoff had not occurred.

 

5.17 Usury. The Company represents and warrants that the Company has discussed,
considered and verified with its legal counsel that the amount of interest due
or payable under the Notes and other Transaction Documents is not usurious and
does not exceed the maximum rate of interest, if any, allowed by applicable law.
The Company acknowledges that (i) the Purchasers are relying on this
representation and warranty and (ii) this representation and warranty is
integral to the transactions contemplated hereby, without which the Purchasers
would not enter into this Agreement or consummate the transactions contemplated
hereby. To the extent it may lawfully do so, the Company hereby agrees not to
insist upon or plead or in any manner whatsoever claim, and will resist any and
all efforts to be compelled to take the benefit or advantage of, usury laws
wherever enacted, now or at any time hereafter in force, in connection with any
claim, action or proceeding that may be brought by any Purchaser in order to
enforce any right or remedy under any Transaction Document. Notwithstanding any
provision to the contrary contained in any Transaction Document, it is expressly
agreed and provided that the total liability of the Company under the
Transaction Documents for payments in the nature of interest shall not exceed
the maximum lawful rate authorized under applicable law (the “Maximum Rate”),
and, without limiting the foregoing, in no event shall any rate of interest or
default interest, or both of them, when aggregated with any other sums in the
nature of interest that the Company may be obligated to pay under the
Transaction Documents exceed such Maximum Rate. It is agreed that if the maximum
contract rate of interest allowed by law and applicable to the Transaction
Documents is increased or decreased by statute or any official governmental
action subsequent to the date hereof, the new maximum contract rate of interest
allowed by law will be the Maximum Rate applicable to the Transaction Documents
from the Closing Date thereof forward, unless such application is precluded by
applicable law. If under any circumstances whatsoever, interest in excess of the
Maximum Rate is paid by the Company to any Purchaser with respect to
indebtedness evidenced by the Transaction Documents, such excess shall be
applied by such Purchaser to the unpaid principal balance of any such
indebtedness or be refunded to the Company, the manner of handling such excess
to be at such Purchaser’s election.

 

  36

   

 

5.18 Independent Nature of Purchasers’ Obligations and Rights. The obligations
of each Purchaser under any Transaction Document are several and not joint with
the obligations of any other Purchaser, and no Purchaser shall be responsible in
any way for the performance or non-performance of the obligations of any other
Purchaser under any Transaction Document. Nothing contained herein or in any
other Transaction Document, and no action taken by any Purchaser pursuant hereto
or thereto, shall be deemed to constitute the Purchasers as a partnership, an
association, a joint venture or any other kind of entity, or create a
presumption that the Purchasers are in any way acting in concert or as a group
with respect to such obligations or the transactions contemplated by the
Transaction Documents. Each Purchaser shall be entitled to independently protect
and enforce its rights, including, without limitation, the rights arising out of
this Agreement or out of the other Transaction Documents, and it shall not be
necessary for any other Purchaser to be joined as an additional party in any
proceeding for such purpose. Each Purchaser has had an opportunity to be
represented by its own separate legal counsel in its review and negotiation of
the Transaction Documents. The Company has elected to provide all Purchasers
with the same terms and Transaction Documents for the convenience of the Company
and not because it was required or requested to do so by any of the Purchasers.
It is expressly understood and agreed that each provision contained in this
Agreement and in each other Transaction Document is between the Company and a
Purchaser, solely, and not between the Company and the Purchasers collectively
and not between and among the Purchasers.

 

5.19 Liquidated Damages. The Company’s obligations to pay any partial liquidated
damages or other amounts owing under the Transaction Documents is a continuing
obligation of the Company and shall not terminate until all unpaid partial
liquidated damages and other amounts have been paid notwithstanding the fact
that the instrument or security pursuant to which such partial liquidated
damages or other amounts are due and payable shall have been canceled.

 

5.20 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.

 

5.21 Construction. The parties agree that each of them and/or their respective
counsel have reviewed and had an opportunity to revise the Transaction Documents
and, therefore, the normal rule of construction to the effect that any
ambiguities are to be resolved against the drafting party shall not be employed
in the interpretation of the Transaction Documents or any amendments thereto. In
addition, each and every reference to share prices and shares of Common Stock in
any Transaction Document shall be subject to adjustment for reverse and forward
stock splits, stock dividends, stock combinations and other similar transactions
of the Common Stock that occur after the date of this Agreement.

 

5.22 WAIVER OF JURY TRIAL. IN ANY ACTION, SUIT, OR PROCEEDING IN ANY
JURISDICTION BROUGHT BY ANY PARTY AGAINST ANY OTHER PARTY, THE PARTIES EACH
KNOWINGLY AND INTENTIONALLY, TO THE GREATEST EXTENT PERMITTED BY APPLICABLE LAW,
HEREBY ABSOLUTELY, UNCONDITIONALLY, IRREVOCABLY AND EXPRESSLY WAIVES FOREVER
TRIAL BY JURY.

 

  37

   

 

5.23 Equitable Adjustment. Trading volume amounts, price per share/volume
amounts and similar figures in the Transaction Documents shall be equitably
adjusted (but without duplication) to offset the effect of stock splits, similar
events and as otherwise described in this Agreement. Notwithstanding the
foregoing, no adjustment shall be made to the $1.00 Note conversion price to
reflect a reverse split of the Common Stock contemplated to occur in connection
with or following the Reverse Merger at a rate approved by the Purchasers to
reflect, and such conversion price assumes, no more than 12,000,000 shares of
Common Stock outstanding on a fully diluted basis after the Reverse Merger
(after giving effect to shares issued or issuable in connection with the Reverse
Merger and excluding shares underlying the Notes). In the event such split does
not occur within sixty days following the Reverse Merger (or such later date as
shall be approved holders of a majority of the principal amount of then
outstanding Notes), such prices shall be proportionately readjusted and the
Notes shall be revised accordingly.

 

(Signature Pages Follow)

 

  38

   

 

IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase
Agreement to be duly executed by their respective authorized signatories as of
October 2, 2017.

 

 

R2 SQUARED TECHNOLOGIES INC.

 

 

 

 

 

 

By:

 

 

 

Name:

Robert Damaré

 

Title:

Chief Executive Officer

 

 

 

 

 

 

By:

[west_ex103img2.jpg]

 

 

Name:

William Robinson

 

 

Title:

Chief Financial Officer

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK

SIGNATURE PAGE FOR PURCHASER FOLLOWS]

 

  39

   

 

[PURCHASER SIGNATURE PAGE TO R2 SQUARED TECHNOLOGIES INC.

SECURITIES PURCHASE AGREEMENT]

 

IN WITNESS WHEREOF, the undersigned have caused this Securities Purchase
Agreement to be duly executed by their respective authorized signatories as of
October 2, 2017.

 

Name of Purchaser:
______________________________________________________________

 

Signature of Authorized Signatory of Purchaser:
_______________________________________

 

Name of Authorized Signatory:
_____________________________________________________

 

Title of Authorized Signatory:
______________________________________________________

 

Email Address of Authorized Signatory:
______________________________________________

 

Facsimile Number of Authorized Signatory:
____________________________________________

 

State of Residence of Purchaser:
____________________________________________________

 

Address for Notice to
Purchaser:____________________________________________________

    

   

Address for Delivery of Securities to Purchaser (if not same as address for
notice): ______________

  

   

  

Subscription Amount: US$____________________

 

Note Principal Amount: US$___________________

 

Warrants: ________________________________

  

   

EIN Number, if applicable, will be provided under separate
cover:_______________________

 

Date: ___________________________

 

  40

   

 

EXHIBITS AND SCHEDULES

Exhibits

 

 

 

Exhibit A

 

Form of Note

Exhibit B

 

Form of Security Agreement

 

 

 

Schedules

 

 

 

Schedule 3.1(a)

 

 

Schedule 3.1(g)

 

 

Schedule 3.1(h)

 

 

Schedule 3.1(i)

 

 

Schedule 3.1(o)

 

 

Schedule 3.1 (ii)

 

 

Schedule 3.1(mm)

 

 

Schedule 3.1 (nn)

 

 

Schedule 3.1(oo)

 

 

Schedule 4.9

 

 

  41

   

 

SCHEDULE 3.1(a)

 

Subsidiaries

 

None

 

 

 

 

  

 

  42

   

 

SCHEDULE 3.1(g)

 

Capitalization

 

The Company has 13,939,770 shares of common stock outstanding including common
stock issued pursuant to the Common Stock Purchase Agreements referenced below
but excluding 400,000 shares issuable on as-converted to common stock basis
underlying the promissory note referenced below.

 

The Company has 3,600,000 warrants outstanding, exercisable at $1.00 per share.

 

The Company has agreed to issue preferred stock to Robert Damare and Patriot
Government Services, Inc. that is convertible into an aggregate of 400,000
shares of common stock at the holder’s option. The preferred stock will not have
any dividend, voting, redemption or other preferential rights except for a
preference upon liquidation of $400,000 which will be senior to the common stock
and junior to any and all other classes of preferred stock that may from time to
time come into existence.

 

Alpha Capital Anstalt and Robert Herskowitz (and affiliated entities) have
dilution protection on their investments in the Company.

 

  43

   

 

SCHEDULE 3.1(h)

 

SEC Filings

 

Not applicable

 

 

 

 

 

  44

   

 

SCHEDULE 3.1(i)

 

Material Changes not reported in SEC filings

 

Not applicable

 

 

 

 

 

  45

   

 

SCHEDULE 3.1(o)

 

Patents

 

To be filed after development and direction from Patent attorney. Anticipate
method and application patent and software.

 

A copy of the brochure describing the R2 Sentinel Router has been provided under
separate cover.

 

  46

   

 

SCHEDULE 3.1(ii)

 

Indebtedness and Security

 

The Company has no Indebtedness other than trade accounts payable not exceeding
$30,000 in the aggregate.

 

There are no Security Interests.

 

  47

   

 

SCHEDULE 3.1(mm)

 

Accounting and Auditing Firm

 

The Company has not yet determined or retained an accountant or auditor.

 

  48

   

 

SCHEDULE 3.1(nn)

 

Payments to others except for legal services from sales proceeds

 

None.

 

  49

   

 

SCHEDULE 3.1(00)

 

Variable priced equity securities

 

None

 

  50

   

 

SCHEDULE 4.9

 

USE OF PROCEEDS

  

1. Initial $200,000:

 

 

Proceeds of the initial Closing in the anticipated amount of $200,000 shall be
used as described in a letter agreement to be entered into in connection with
the initial Closing.

 

 

2. Amounts above $200,000:

 

 

To fund production of actual purchase orders for the R2 Sentinel Router and the
normal day to day business operations.

 

 

51