Exhibit 10.1

 

SECURITIES PURCHASE AGREEMENT

 

LAURUS MASTER FUND, LTD.

 

and

 

BIODELIVERY SCIENCES INTERNATIONAL, INC.

 

Dated: February 22, 2005

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TABLE OF CONTENTS

 

              Page

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1.

  Agreement to Sell and Purchase    1

2.

  Fees and Warrant    1

3.

  Closing, Delivery and Payment    2    

3.1

   Closing    2    

3.2

   Delivery    2

4.

  Representations and Warranties of the Company    2    

4.1

   Organization, Good Standing and Qualification    2    

4.2

   Subsidiaries    3    

4.3

   Capitalization; Voting Rights    3    

4.4

   Authorization; Binding Obligations    4    

4.5

   Liabilities    5    

4.6

   Agreements; Action    5    

4.7

   Obligations to Related Parties    6    

4.8

   Changes    7    

4.9

   Title to Properties and Assets; Liens, Etc    8    

4.10

   Intellectual Property    9    

4.11

   Compliance with Other Instruments    9    

4.12

   Litigation    9    

4.13

   Tax Returns and Payments    10    

4.14

   Employees    10    

4.15

   Registration Rights and Voting Rights    11    

4.16

   Compliance with Laws; Permits    11    

4.17

   Environmental and Safety Laws    11    

4.18

   Valid Offering    12    

4.19

   Full Disclosure    12    

4.20

   Insurance    12    

4.21

   SEC Reports    12    

4.22

   Listing    13    

4.23

   No Integrated Offering    13    

4.24

   Stop Transfer    13    

4.25

   Dilution    13    

4.26

   Patriot Act    13    

4.27

   ERISA    14

5.

  Representations and Warranties of the Purchaser    14    

5.1

   No Shorting    14    

5.2

   Requisite Power and Authority    14    

5.3

   Investment Representations    15    

5.4

   The Purchaser Bears Economic Risk    15    

5.5

   Acquisition for Own Account    15    

5.6

   The Purchaser Can Protect Its Interest    15    

5.7

   Accredited Investor    15    

5.8

   Legends    16

 

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         Page(s)

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6.

  Covenants of the Company    17    

6.1

      Stop-Orders    17    

6.2

      Listing    17    

6.3

      Market Regulations    17    

6.4

      Reporting Requirements    17    

6.5

      Use of Funds    17    

6.6

      Access to Facilities    17    

6.7

      Taxes    18    

6.8

      Insurance    18    

6.9

      Intellectual Property    19    

6.10

      Properties    19    

6.11

      Confidentiality    19    

6.12

      Required Approvals    20    

6.13

      Reissuance of Securities    21    

6.14

      Opinion    21    

6.15

      Margin Stock    21    

6.16

      Financing Right of First Refusal    21

7.

  Covenants of the Purchaser    22    

7.1

      Confidentiality    22    

7.2

      Non-Public Information    22    

7.3

      Limitation on Acquisition of Common Stock of the Company    22

8.

  Covenants of the Company and the Purchaser Regarding Indemnification    23    

8.1

      Company Indemnification    23    

8.2

      Purchaser’s Indemnification    23

9.

  Conversion of Convertible Note    23    

9.1

      Mechanics of Conversion    23

10.

  Registration Rights    25    

10.1

      Registration Rights Granted    25    

10.2

      Offering Restrictions    25

11.

  Miscellaneous    25    

11.1

      Governing Law    25    

11.2

      Survival    26    

11.3

      Successors    26    

11.4

      Entire Agreement; Maximum Interest    27    

11.5

      Severability    27    

11.6

      Amendment and Waiver    27    

11.7

      Delays or Omissions    27    

11.8

      Notices    27    

11.9

      Attorneys’ Fees    28    

11.10

      Titles and Subtitles    29    

11.11

      Facsimile Signatures; Counterparts    29    

11.12

      Broker’s Fees    29    

11.13

      Construction    29

 

 

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LIST OF EXHIBITS

 

Form of Convertible Term Note

   Exhibit A

Form of Warrant

   Exhibit B

Form of Opinion

   Exhibit C

Form of Escrow Agreement

   Exhibit D

 

LIST OF SCHEDULES

 

Subsidiaries

   4.2  

Capitalization of Subsidiaries

   4.3  

Liabilities

   4.5  

Agreements

   4.6  

Obligations to Related Parties

   4.7  

Changes

   4.8  

Properties and Assets

   4.9  

Compliance

   4.11  

Litigation

   4.12  

Tax Returns

   4.13  

Employees

   4.14  

Registration Rights

   4.15  

Environmental

   4.17  

SEC Reports

   4.21  

Debt

   6.12 (e)

Exclusion from Right of First Refusal

   6.16 (a)

Brokers

   11.13  

 

 

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SECURITIES PURCHASE AGREEMENT

 

THIS SECURITIES PURCHASE AGREEMENT (this “Agreement”) is made and entered into
as of February 22, 2005, by and between BIODELIVERY SCIENCES INTERNATIONAL,
INC., a Delaware corporation (the “Company”), and LAURUS MASTER FUND, LTD., a
Cayman Islands company (the “Purchaser”).

 

RECITALS

 

WHEREAS, the Company has authorized the sale to the Purchaser of a Secured
Convertible Term Note in the aggregate principal amount of Two Million Five
Hundred Thousand Dollars ($2,500,000) in the form of Exhibit A hereto (as
amended, modified or supplemented from time to time, the “Note”), which Note is
convertible into shares of the Company’s common stock, $0.001 par value per
share (the “Common Stock”) at an initial fixed conversion price of $3.10 per
share of Common Stock (“Fixed Conversion Price”);

 

WHEREAS, the Company wishes to issue to the Purchaser a warrant in the form of
Exhibit B hereto (as amended, modified or supplemented from time to time, the
“Warrant”) to purchase up to 350,000 shares of the Company’s Common Stock
(subject to adjustment as set forth therein) in connection with the Purchaser’s
purchase of the Note;

 

WHEREAS, the Purchaser desires to purchase the Note and the Warrant on the terms
and conditions set forth herein; and

 

WHEREAS, the Company desires to issue and sell the Note and the Warrant to the
Purchaser on the terms and conditions set forth herein.

 

AGREEMENT

 

NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
promises, representations, warranties and covenants hereinafter set forth and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:

 

1. Agreement to Sell and Purchase. Pursuant to the terms and conditions set
forth in this Agreement, on the Closing Date (as defined in Section 3), the
Company shall sell to the Purchaser, and the Purchaser shall purchase from the
Company, the Note and the Warrant. The sale of the Note and the Warrant on the
Closing Date shall be known as the “Offering.” The Note will mature on the
Maturity Date (as defined in the Note). Collectively, the Note and Warrant and
Common Stock issuable upon conversion of the Note and upon exercise of the
Warrant are referred to as the “Securities.”

 

2. Fees and Warrant. On the Closing Date:

 

(a) The Company will issue and deliver to the Purchaser the Warrant to purchase
up to 350,000 shares of Common Stock (subject to adjustment as set forth
therein) in connection with the Offering, pursuant to Section 1 hereof. All the

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representations, covenants, warranties, undertakings, and indemnification, and
other rights made or granted to or for the benefit of the Purchaser by the
Company, to the extent applicable, are hereby also made and granted in respect
of the Warrant and shares of the Company’s Common Stock issuable upon exercise
of the Warrant (the “Warrant Shares”).

 

(b) Subject to the terms of Section 2(d) below, the Company shall pay to Laurus
Capital Management, LLC, the manager of the Purchaser, a closing payment in an
amount equal to three and three quarters percent (3.75%) of the aggregate
principal amount of the Note. The foregoing fee is referred to herein as the
“Closing Payment.”

 

(c) The Company shall reimburse the Purchaser for its reasonable expenses
(including legal fees and expenses) incurred in connection with the preparation
and negotiation of this Agreement and the Related Agreements (as hereinafter
defined), and expenses incurred in connection with the Purchaser’s due diligence
review of the Company and its Subsidiaries (as defined in Section 4.2) and all
related matters. Amounts required to be paid under this Section 2(c) will be
paid on the Closing Date and shall be $39,500 (net of deposits previously paid
by the Company) for such expenses referred to in this Section 2(c).

 

(d) The Closing Payment and the expenses referred to in the preceding clause (c)
(net of deposits previously paid by the Company) shall be paid at closing out of
funds held pursuant to the Escrow Agreement (as defined below) and a
disbursement letter (the “Disbursement Letter”).

 

3. Closing, Delivery and Payment.

 

3.1 Closing. Subject to the terms and conditions herein, the closing of the
transactions contemplated hereby (the “Closing”), shall take place on the date
hereof, at such time or place as the Company and the Purchaser may mutually
agree (such date is hereinafter referred to as the “Closing Date”).

 

3.2 Delivery. Pursuant to the Escrow Agreement, at the Closing on the Closing
Date, the Company will deliver to the Purchaser, among other things, the Note
and the Warrant and the Purchaser will deliver to the Company, among other
things, the amounts set forth in the Disbursement Letter by certified funds or
wire transfer.

 

4. Representations and Warranties of the Company. The Company hereby represents
and warrants to the Purchaser as follows (which representations and warranties
are subject to and expressly qualified by the information contained in the
Company’s filings under the Securities Exchange Act of 1934, as amended
(“Exchange Act”) made prior to the date of this Agreement (collectively,
together with all exhibits to such filings, the “Exchange Act Filings”), copies
of which have been reviewed by the Purchaser with the information contained
therein being hereby acknowledged by the Purchaser):

 

4.1 Organization, Good Standing and Qualification. Each of the Company and each
of its Subsidiaries is a corporation or limited liability company, as the case
may be, duly organized, validly existing and in good standing under the laws of
its jurisdiction of

 

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organization. Each of the Company and each of its Subsidiaries has the corporate
or limited liability company, as the case may be, power and authority to own and
operate its properties and assets and, insofar as it is or shall be a party
thereto, to (1) execute and deliver (i) this Agreement, (ii) the Note and the
Warrant to be issued in connection with this Agreement, (iii) the Master
Security Agreement dated as of the date hereof between the Company, certain
Subsidiaries of the Company and the Purchaser (as amended, modified or
supplemented from time to time, the “Master Security Agreement”), (iv) the
Registration Rights Agreement relating to the Securities dated as of the date
hereof between the Company and the Purchaser (as amended, modified or
supplemented from time to time, the “Registration Rights Agreement”), (v) the
Subsidiary Guaranty dated as of the date hereof made by certain Subsidiaries of
the Company (as amended, modified or supplemented from time to time, the
“Subsidiary Guaranty”), (vi) the Stock Pledge Agreement dated as of the date
hereof among the Company, certain Subsidiaries of the Company and the Purchaser
(as amended, modified or supplemented from time to time, the “Stock Pledge
Agreement”), (vii) the Funds Escrow Agreement dated as of the date hereof among
the Company, the Purchaser and the escrow agent referred to therein,
substantially in the form of Exhibit D hereto (as amended, modified or
supplemented from time to time, the “Escrow Agreement”) and (viii) all other
documents, instruments and agreements entered into in connection with the
transactions contemplated hereby and thereby (the preceding clauses (ii) through
(viii), collectively, the “Related Agreements”); (2) issue and sell the Note and
the shares of Common Stock issuable upon conversion of the Note (the “Note
Shares”); (3) issue and sell the Warrant and the Warrant Shares; and (4) carry
out the provisions of this Agreement and the Related Agreements and to carry on
its business as presently conducted. Each of the Company and each of its
Subsidiaries is duly qualified and is authorized to do business and is in good
standing as a foreign corporation or limited liability company, as the case may
be, in all jurisdictions in which the nature or location of its activities and
of its properties (both owned and leased) makes such qualification necessary,
except for those jurisdictions in which failure to do so has not, or could not
reasonably be expected to have, individually or in the aggregate, a material
adverse effect on the business, assets, liabilities, condition (financial or
otherwise), properties, operations or prospects of the Company and its
Subsidiaries, taken individually and as a whole (a “Material Adverse Effect”).

 

4.2 Subsidiaries. Each direct and indirect Subsidiary of the Company, the direct
owner of such Subsidiary and its percentage ownership thereof, is set forth on
Schedule 4.2. For the purpose of this Agreement, a “Subsidiary” of any person or
entity means (i) a corporation or other entity whose shares of stock or other
ownership interests having ordinary voting power (other than stock or other
ownership interests having such power only by reason of the happening of a
contingency) to elect a majority of the directors of such corporation, or other
persons or entities performing similar functions for such person or entity, are
owned, directly or indirectly, by such person or entity or (ii) a corporation or
other entity in which such person or entity owns, directly or indirectly, more
than 50% of the equity interests at such time.

 

4.3 Capitalization; Voting Rights.

 

(a) The authorized capital stock of the Company, as of the date hereof, consists
of: (i) 45,000,000 shares of Common Stock, of which there are 7,245,863 shares
issued and 7,145,863 shares are issued and outstanding, and (ii) 5,000,000
shares of preferred stock, par value $.001, of which: (A) 1,647,059 are
designated as Series A

 

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Convertible Preferred Stock, all of which are issued and outstanding and (B)
941,177 are designated as Series B Convertible Preferred Stock, of which 341,176
are issued and outstanding. The authorized and outstanding capital stock of each
Subsidiary of the Company is set forth on Schedule 4.3.

 

(b) Except as disclosed on Schedule 4.3, other than: (i) the shares reserved for
issuance under the Company’s stock option plans; (ii) publicly-traded warrants
to purchase 2,085,000 shares of Common Stock at an exercise price of $6.30 per
share as of the date hereof; (iii) shares of Common Stock issuable upon
conversion the Company’s currently outstanding shares of Series A Convertible
Preferred Stock and Series B Convertible Preferred Stock and (iv) shares which
may be issued pursuant to this Agreement and the Related Agreements, there are
no outstanding options, warrants, rights (including conversion or preemptive
rights and rights of first refusal), proxy or stockholder agreements, or
arrangements or agreements of any kind for the purchase or acquisition from the
Company of any of its securities. Except as disclosed on Schedule 4.3, neither
the offer, issuance or sale of any of the Note or the Warrant, or the issuance
of any of the Note Shares or Warrant Shares, nor the consummation of any
transaction contemplated hereby will result in a change in the price or number
of any securities of the Company outstanding, under anti-dilution or other
similar provisions contained in or affecting any such securities.

 

(c) All issued and outstanding shares of the Company’s Common Stock issued on or
after June 24, 2002: (i) have been duly authorized and validly issued and are
fully paid and nonassessable; and (ii) were issued in compliance with all
applicable state and federal laws concerning the issuance of securities.

 

(d) The rights, preferences, privileges and restrictions of the shares of the
Common Stock are as stated in the Company’s Certificate of Incorporation (the
“Charter”). The Note Shares and Warrant Shares have been duly and validly
reserved for issuance. When issued in compliance with the provisions of this
Agreement, the Note, the Warrant and the Company’s Charter, the Securities will
be validly issued, fully paid and nonassessable, and will be free of any liens
or encumbrances; provided, however, that the Securities may be subject to
restrictions on transfer under state and/or federal securities laws as set forth
herein or as otherwise required by such laws at the time a transfer is proposed.

 

4.4 Authorization; Binding Obligations. All corporate or limited liability
company, as the case may be, action on the part of the Company and each of its
Subsidiaries (including their respective officers and directors) necessary for
the authorization of this Agreement and the Related Agreements, the performance
of all obligations of the Company and its Subsidiaries hereunder and under the
other Related Agreements at the Closing and, the authorization, sale, issuance
and delivery of the Note and Warrant has been taken or will be taken prior to
the Closing. This Agreement and the Related Agreements, when executed and
delivered and to the extent it is a party thereto, will be valid and binding
obligations of each of the Company and each of its Subsidiaries, enforceable
against each such entity in accordance with their terms, except:

 

(a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium
or other laws of general application affecting enforcement of creditors’ rights;
and

 

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(b) general principles of equity that restrict the availability of equitable or
legal remedies.

 

The sale of the Note and the subsequent conversion of the Note into Note Shares
are not and will not be subject to any preemptive rights or rights of first
refusal that have not been properly waived or complied with. The issuance of the
Warrant and the subsequent exercise of the Warrant for Warrant Shares are not
and will not be subject to any preemptive rights or rights of first refusal that
have not been properly waived or complied with.

 

4.5 Liabilities. Except as set forth on Schedule 4.5, neither the Company nor
any of its Subsidiaries has any liabilities, except current liabilities incurred
in the ordinary course of business and any liabilities disclosed in any Exchange
Act Filings.

 

4.6 Agreements; Action. Except, in each case, as set forth on Schedule 4.6 or as
disclosed in any Exchange Act Filings:

 

(a) there are no agreements, understandings, instruments, contracts, proposed
transactions, judgments, orders, writs or decrees to which the Company or any of
its Subsidiaries is a party or by which it is bound which may involve: (i)
obligations (contingent or otherwise) of, or payments to, the Company or any
such Subsidiary in excess of $50,000 (other than obligations of, or payments to,
the Company or any such Subsidiary arising from purchase or sale agreements
entered into in the ordinary course of business); or (ii) the transfer or
license of any patent, copyright, trade secret or other proprietary right to or
from the Company or any such Subsidiary (other than licenses arising from the
purchase of “off the shelf” or other standard products); or (iii) provisions
restricting the development, manufacture or distribution of the Company’s or any
such Subsidiary’s products or services; or (iv) indemnification by the Company
or any such Subsidiary with respect to infringements of proprietary rights.

 

(b) Since December 31, 2003 (the “Balance Sheet Date”), neither the Company nor
any of its Subsidiaries has: (i) declared or paid any dividends, or authorized
or made any distribution upon or with respect to any class or series of its
capital stock; (ii) incurred any indebtedness for money borrowed or any other
liabilities (other than ordinary course obligations) individually in excess of
$50,000 or, in the case of indebtedness and/or liabilities individually less
than $50,000, in excess of $100,000 in the aggregate; (iii) made any loans or
advances to any person or entity not in excess, individually or in the
aggregate, of $100,000, other than ordinary course advances for travel expenses;
or (iv) sold, exchanged or otherwise disposed of any of its assets or rights,
other than the sale of its inventory in the ordinary course of business.

 

(c) For the purposes of subsections (a) and (b) above, all indebtedness,
liabilities, agreements, understandings, instruments, contracts and proposed
transactions involving the same person or entity (including persons or entities
the Company or any

 

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applicable Subsidiary of the Company has reason to believe are affiliated
therewith) shall be aggregated for the purpose of meeting the individual minimum
dollar amounts of such subsections.

 

(d) The Company maintains disclosure controls and procedures (“Disclosure
Controls”) designed to ensure that information required to be disclosed by the
Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized, and reported, within the time periods specified
in the rules and forms of the Securities and Exchange Commission (“SEC”).

 

(e) The Company makes and keep books, records, and accounts, that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
Company’s assets. The Company maintains internal control over financial
reporting (“Financial Reporting Controls”) designed by, or under the supervision
of, the Company’s principal executive and principal financial officers, and
effected by the Company’s board of directors, management, and other personnel,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles (“GAAP”), including that:

 

(i) transactions are executed in accordance with management’s general or
specific authorization;

 

(ii) unauthorized acquisition, use, or disposition of the Company’s assets that
could have a material effect on the financial statements are prevented or timely
detected;

 

(iii) transactions are recorded as necessary to permit preparation of financial
statements in accordance with GAAP, and that the Company’s receipts and
expenditures are being made only in accordance with authorizations of the
Company’s management and board of directors;

 

(iv) transactions are recorded as necessary to maintain accountability for
assets; and

 

(v) the recorded accountability for assets is compared with the existing assets
at reasonable intervals, and appropriate action is taken with respect to any
differences.

 

(f) There is no weakness in any of the Company’s Disclosure Controls or
Financial Reporting Controls that would be required to be disclosed in any of
the Exchange Act Filings, except as so disclosed.

 

4.7 Obligations to Related Parties. Except as set forth on Schedule 4.7, there
are no obligations of the Company or any of its Subsidiaries to officers,
directors, 5% or greater stockholders or employees of the Company or any of its
Subsidiaries other than:

 

(a) for payment of salary for services rendered and for bonus payments;

 

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(b) customary fees earned for serving on the board of directors and committees
of the board of directors;

 

(c) reimbursement for reasonable expenses incurred on behalf of the Company and
its Subsidiaries;

 

(d) for other standard employee benefits made generally available to all
employees (including stock option agreements outstanding under any stock option
plan approved by the Board of Directors of the Company and each such Subsidiary
of the Company, as applicable); and

 

(e) obligations listed in the Company’s and each of its Subsidiary’s financial
statements or disclosed in any of the Company’s Exchange Act Filings.

 

Except as described above or set forth on Schedule 4.7, none of the officers,
directors or, to the best of the Company’s knowledge, key employees or 5% or
greater stockholders of the Company or any of its Subsidiaries or any members of
their immediate families, are indebted to the Company or any of its
Subsidiaries, individually or in the aggregate, in excess of $50,000 or have any
direct or indirect ownership interest in any firm or corporation with which the
Company or any of its Subsidiaries is affiliated or with which the Company or
any of its Subsidiaries has a business relationship, or any firm or corporation
which competes with the Company or any of its Subsidiaries, other than passive
investments in publicly traded companies (representing less than one percent
(1%) of such company) which may compete with the Company or any of its
Subsidiaries. Except as described above, no officer, director or 5% or greater
stockholder of the Company or any of its Subsidiaries, or any member of their
immediate families, is, directly or indirectly, interested in any material
contract with the Company or any of its Subsidiaries and no agreements,
understandings or proposed transactions are contemplated between the Company or
any of its Subsidiaries and any such person. Except as set forth on Schedule
4.7, neither the Company nor any of its Subsidiaries is a guarantor or
indemnitor of any indebtedness of any other person, firm or entity.

 

4.8 Changes. Since the Balance Sheet Date, except as disclosed in any Exchange
Act Filing or in any Schedule to this Agreement or to any of the Related
Agreements, there has not been:

 

(a) any change in the business, assets, liabilities, condition (financial or
otherwise), properties, operations or prospects of the Company or any of its
Subsidiaries, which individually or in the aggregate has had, or could
reasonably be expected to have, individually or in the aggregate, a Material
Adverse Effect;

 

(b) any resignation or termination of any officer, key employee or group of
employees of the Company or any of its Subsidiaries;

 

(c) any material change, except in the ordinary course of business, in the
contingent obligations of the Company or any of its Subsidiaries by way of
guaranty, endorsement, indemnity, warranty or otherwise;

 

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(d) any damage, destruction or loss, whether or not covered by insurance, which
has had, or could reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect;

 

(e) any waiver by the Company or any of its Subsidiaries of a valuable right or
of a material debt owed to it;

 

(f) any direct or indirect loans made by the Company or any of its Subsidiaries
to any 5% or greater stockholder, employee, officer or director of the Company
or any of its Subsidiaries, other than advances made in the ordinary course of
business;

 

(g) any material change in any compensation arrangement or agreement with any
employee, officer, director or 5% or greater stockholder of the Company or any
of its Subsidiaries;

 

(h) any declaration or payment of any dividend or other distribution of the
assets of the Company or any of its Subsidiaries;

 

(i) any labor organization activity related to the Company or any of its
Subsidiaries;

 

(j) any debt, obligation or liability incurred, assumed or guaranteed by the
Company or any of its Subsidiaries, except those for immaterial amounts and for
current liabilities incurred in the ordinary course of business;

 

(k) any sale, assignment or transfer of any patents, trademarks, copyrights,
trade secrets or other intangible assets owned by the Company or any of its
Subsidiaries;

 

(l) any change in any material agreement to which the Company or any of its
Subsidiaries is a party or by which either the Company or any of its
Subsidiaries is bound which either individually or in the aggregate has had, or
could reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect;

 

(m) any other event or condition of any character that, either individually or
in the aggregate, has had, or could reasonably be expected to have, individually
or in the aggregate, a Material Adverse Effect; or

 

(n) any arrangement or commitment by the Company or any of its Subsidiaries to
do any of the acts described in subsection (a) through (m) above.

 

4.9 Title to Properties and Assets; Liens, Etc. Except as set forth on Schedule
4.9 or in any Exchange Act Filing, each of the Company and each of its
Subsidiaries has good and marketable title to its properties and assets, and
good title to its leasehold interests, in each case subject to no mortgage,
pledge, lien, lease, encumbrance or charge, other than:

 

(a) those resulting from taxes which have not yet become delinquent;

 

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(b) minor liens and encumbrances which do not materially detract from the value
of the property subject thereto or materially impair the operations of the
Company or any of its Subsidiaries, so long as in each such case, such liens and
encumbrances have no effect on the lien priority of the Purchaser in such
property; and

 

(c) those that have otherwise arisen in the ordinary course of business, so long
as they have no effect on the lien priority of the Purchaser therein.

 

All facilities, machinery, equipment, fixtures, vehicles and other properties
owned, leased or used by the Company and its Subsidiaries are in good operating
condition and repair and are reasonably fit and usable for the purposes for
which they are being used, subject to normal wear and tear. Except as set forth
on Schedule 4.9 or in any Exchange Act Filing, each of the Company and its
Subsidiaries are in compliance with all material terms of each lease to which it
is a party or is otherwise bound.

 

4.10 Intellectual Property.

 

(a) Each of the Company and each of its Subsidiaries owns or possesses
sufficient legal rights to all patents, trademarks, service marks, trade names,
copyrights, trade secrets, licenses, information and other proprietary rights
and processes necessary for its business as now conducted and, to the Company’s
knowledge, as presently proposed to be conducted (the “Intellectual Property”),
without any known infringement of the rights of others. Other than as disclosed
in the Exchange Act Filings, there are no outstanding options, licenses or
agreements of any kind relating to the foregoing proprietary rights, nor is the
Company or any of its Subsidiaries bound by or a party to any options, licenses
or agreements of any kind with respect to the patents, trademarks, service
marks, trade names, copyrights, trade secrets, licenses, information and other
proprietary rights and processes of any other person or entity other than such
licenses or agreements arising from the purchase of “off the shelf” or standard
products.

 

(b) Neither the Company nor any of its Subsidiaries has received any
communications alleging that the Company or any of its Subsidiaries has violated
any of the patents, trademarks, service marks, trade names, copyrights or trade
secrets or other proprietary rights of any other person or entity, nor is the
Company or any of its Subsidiaries aware of any basis therefor.

 

(c) The Company does not believe it is or will be necessary to utilize any
inventions, trade secrets or proprietary information of any of its employees
made prior to their employment by the Company or any of its Subsidiaries, except
for inventions, trade secrets or proprietary information that have been
rightfully assigned to the Company or any of its Subsidiaries.

 

4.11 Compliance with Other Instruments. Neither the Company nor any of its
Subsidiaries is in violation or default of (x) any term of its Charter or
Bylaws, or (y) any provision of any indebtedness, mortgage, indenture, contract,
agreement or instrument to which it is party or by which it is bound or of any
judgment, decree, order or writ, which violation or default, in the case of this
clause (y), has had, or could reasonably be expected to have, either

 

9

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individually or in the aggregate, a Material Adverse Effect. Except as set forth
on Schedule 4.11, the execution, delivery and performance of and compliance with
this Agreement and the Related Agreements to which it is a party, and the
issuance and sale of the Note by the Company and the other Securities by the
Company each pursuant hereto and thereto, will not, with or without the passage
of time or giving of notice, result in any such material violation, or be in
conflict with or constitute a default under any such term or provision, or
result in the creation of any mortgage, pledge, lien, encumbrance or charge upon
any of the properties or assets of the Company or any of its Subsidiaries or the
suspension, revocation, impairment, forfeiture or nonrenewal of any permit,
license, authorization or approval applicable to the Company, its business or
operations or any of its assets or properties.

 

4.12 Litigation. Except as set forth on Schedule 4.12 hereto, there is no
action, suit, proceeding or investigation pending or, to the Company’s
knowledge, currently threatened against the Company or any of its Subsidiaries
that prevents the Company or any of its Subsidiaries from entering into this
Agreement or the Related Agreements, or from consummating the transactions
contemplated hereby or thereby, or which has had, or could reasonably be
expected to have, either individually or in the aggregate, a Material Adverse
Effect or any change in the current equity ownership of the Company or any of
its Subsidiaries, nor is the Company aware that there is any basis to assert any
of the foregoing. Neither the Company nor any of its Subsidiaries is a party to
or subject to the provisions of any order, writ, injunction, judgment or decree
of any court or government agency or instrumentality. There is no action, suit,
proceeding or investigation by the Company or any of its Subsidiaries currently
pending or which the Company or any of its Subsidiaries intends to initiate.

 

4.13 Tax Returns and Payments. Each of the Company and each of its Subsidiaries
has timely filed all tax returns (federal, state and local) required to be filed
by it. All taxes shown to be due and payable on such returns, any assessments
imposed, and all other taxes due and payable by the Company or any of its
Subsidiaries on or before the Closing, have been paid or will be paid prior to
the time they become delinquent. Except as set forth on Schedule 4.13, neither
the Company nor any of its Subsidiaries has been advised:

 

(a) that any of its returns, federal, state or other, have been or are being
audited as of the date hereof; or

 

(b) of any adjustment, deficiency, assessment or court decision in respect of
its federal, state or other taxes.

 

The Company has no knowledge of any liability for any tax to be imposed upon its
properties or assets as of the date of this Agreement that is not adequately
provided for.

 

4.14 Employees. Except as set forth on Schedule 4.14, neither the Company nor
any of its Subsidiaries has any collective bargaining agreements with any of its
employees. There is no labor union organizing activity pending or, to the
Company’s knowledge, threatened with respect to the Company or any of its
Subsidiaries. Except as disclosed in the Exchange Act Filings or on Schedule
4.14, neither the Company nor any of its Subsidiaries is a party to or bound by
any currently effective employment contract, deferred compensation arrangement,
bonus plan, incentive plan, profit sharing plan, retirement agreement or other
employee

 

10

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compensation plan or agreement. To the Company’s knowledge, no employee of the
Company or any of its Subsidiaries, nor any consultant with whom the Company or
any of its Subsidiaries has contracted, is in violation of any term of any
employment contract, proprietary information agreement or any other agreement
relating to the right of any such individual to be employed by, or to contract
with, the Company or any of its Subsidiaries because of the nature of the
business to be conducted by the Company or any of its Subsidiaries; and to the
Company’s knowledge the continued employment by the Company and its Subsidiaries
of their present employees, and the performance of the Company’s and its
Subsidiaries’ contracts with its independent contractors, will not result in any
such violation. Neither the Company nor any of its Subsidiaries is aware that
any of its employees is obligated under any contract (including licenses,
covenants or commitments of any nature) or other agreement, or subject to any
judgment, decree or order of any court or administrative agency that would
interfere with their duties to the Company or any of its Subsidiaries. Neither
the Company nor any of its Subsidiaries has received any notice alleging that
any such violation has occurred. Except for employees who have a current
effective employment agreement with the Company or any of its Subsidiaries, no
employee of the Company or any of its Subsidiaries has been granted the right to
continued employment by the Company or any of its Subsidiaries or to any
material compensation following termination of employment with the Company or
any of its Subsidiaries. Except as set forth on Schedule 4.14, the Company is
not aware that any officer, key employee or group of employees intends to
terminate his, her or their employment with the Company or any of its
Subsidiaries, nor does the Company or any of its Subsidiaries have a present
intention to terminate the employment of any officer, key employee or group of
employees.

 

4.15 Registration Rights and Voting Rights. Except as set forth on Schedule 4.15
and except as disclosed in Exchange Act Filings, neither the Company nor any of
its Subsidiaries is presently under any obligation, and neither the Company nor
any of its Subsidiaries has granted any rights, to register any of the Company’s
or its Subsidiaries’ presently outstanding securities or any of its securities
that may hereafter be issued. Except as set forth on Schedule 4.15 and except as
disclosed in Exchange Act Filings, to the Company’s knowledge, no 5% or greater
stockholder of the Company or any of its Subsidiaries has entered into any
agreement with respect to the voting of equity securities of the Company or any
of its Subsidiaries.

 

4.16 Compliance with Laws; Permits. Neither the Company nor any of its
Subsidiaries is in violation of any provision of the Sarbanes-Oxley Act of 2002
SEC rule or rule of the Principal Market (as hereafter defined) promulgated
thereunder or any applicable statute, rule, regulation, order or restriction of
any domestic or foreign government or any instrumentality or agency thereof in
respect of the conduct of its business or the ownership of its properties which
has had, or could reasonably be expected to have, either individually or in the
aggregate, a Material Adverse Effect. No governmental orders, permissions,
consents, approvals or authorizations are required to be obtained and no
registrations or declarations are required to be filed in connection with the
execution and delivery of this Agreement or any other Related Agreement and the
issuance of any of the Securities, except such as have been duly and validly
obtained or filed, or with respect to any filings that must be made after the
Closing, as will be filed in a timely manner. Each of the Company and its
Subsidiaries has all material franchises, permits, licenses and any similar
authority necessary for the conduct of its business as now being conducted by
it, the lack of which could, either individually or in the aggregate, reasonably
be expected to have a Material Adverse Effect.

 

11

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4.17 Environmental and Safety Laws. Neither the Company nor any of its
Subsidiaries is in violation of any applicable statute, law or regulation
relating to the environment or occupational health and safety, and to the
Company’s knowledge, no material expenditures are or will be required in order
to comply with any such existing statute, law or regulation. Except as set forth
on Schedule 4.17, to the knowledge of the Company, no Hazardous Materials (as
defined below) are used or have been used, stored, or disposed of by the Company
or any of its Subsidiaries or, to the Company’s knowledge, by any other person
or entity on any property owned, leased or used by the Company or any of its
Subsidiaries. For the purposes of the preceding sentence, “Hazardous Materials”
shall mean:

 

(a) materials which are listed or otherwise defined as “hazardous” or “toxic”
under any applicable local, state, federal and/or foreign laws and regulations
that govern the existence and/or remedy of contamination on property, the
protection of the environment from contamination, the control of hazardous
wastes, or other activities involving hazardous substances, including building
materials; or

 

(b) any petroleum products or nuclear materials.

 

4.18 Valid Offering. Assuming the accuracy of the representations and warranties
of the Purchaser contained in this Agreement, the offer, sale and issuance of
the Securities will be exempt from the registration requirements of the
Securities Act of 1933, as amended (the “Securities Act”), and will have been
registered or qualified (or are exempt from registration and qualification)
under the registration, permit or qualification requirements of all applicable
state securities laws.

 

4.19 Full Disclosure. Each of the Company and each of its Subsidiaries has
provided the Purchaser with all information requested by the Purchaser in
connection with its decision to purchase the Note and Warrant, including all
information the Company and its Subsidiaries believe is reasonably necessary to
make such investment decision. Neither this Agreement, the Related Agreements,
the exhibits and schedules hereto and thereto nor any other document delivered
by the Company or any of its Subsidiaries to Purchaser or its attorneys or
agents in connection herewith or therewith or with the transactions contemplated
hereby or thereby, contain any untrue statement of a material fact nor omit to
state a material fact necessary in order to make the statements contained herein
or therein, in light of the circumstances in which they are made, not
misleading. Any financial projections and other estimates provided to the
Purchaser by the Company or any of its Subsidiaries were based on the Company’s
and its Subsidiaries’ experience in the industry and on assumptions of fact and
opinion as to future events which the Company or any of its Subsidiaries, at the
date of the issuance of such projections or estimates, believed to be
reasonable.

 

4.20 Insurance. Each of the Company and each of its Subsidiaries has general
commercial, product liability, fire and casualty insurance policies with
coverages which the Company believes are customary for companies similarly
situated to the Company and its Subsidiaries in the same or similar business.

 

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4.21 SEC Reports. Except as set forth on Schedule 4.21, the Company has filed
all proxy statements, reports and other documents required to be filed by it
under the Exchange Act. The Company has furnished the Purchaser copies of: (i)
its Annual Reports on Form 10-KSB for its fiscal year ended December 31, 2003;
and (ii) its Quarterly Reports on Form 10-QSB for its fiscal quarters ended
March 31, 2004, June 30, 2004 and September 30, 2004, and the Form 8-K filings
which it has made during the fiscal years 2004 and 2005 to date (collectively,
the “SEC Reports”). Except as set forth on Schedule 4.21, each SEC Report was,
at the time of its filing, in substantial compliance with the requirements of
its respective form and none of the SEC Reports, nor the financial statements
(and the notes thereto) included in the SEC Reports, as of their respective
filing dates, contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.

 

4.22 Listing. The Company’s Common Stock is listed for trading on a Principal
Market (as hereafter defined) and satisfies and at all times hereafter will
satisfy all requirements for the continuation of such listing. The Company has
not received any notice that its Common Stock will be delisted from the
Principal Market or that its Common Stock does not meet all requirements for
listing. For purposes hereof, the term “Principal Market” means the NASD OTC
Bulletin Board, NASDAQ SmallCap Market, NASDAQ National Marketing System,
American Stock Exchange or New York Stock Exchange (whichever of the foregoing
is at the time the principal trading exchange or market for the Common Stock).

 

4.23 No Integrated Offering. Neither the Company, nor any of its Subsidiaries or
affiliates, nor to the Company’s knowledge, 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 pursuant to this Agreement or any of the Related
Agreements to be integrated with prior offerings by the Company for purposes of
the Securities Act which would prevent the Company from selling the Securities
pursuant to Rule 506 under the Securities Act, or any applicable
exchange-related stockholder approval provisions, nor will the Company or any of
its affiliates or Subsidiaries take any action or steps that would cause the
offering of the Securities to be integrated with other offerings.

 

4.24 Stop Transfer. The Securities are restricted securities as of the date of
this Agreement. Neither the Company nor any of its Subsidiaries will issue any
stop transfer order or other order impeding the sale and delivery of any of the
Securities at such time as the Securities are registered for public sale or an
exemption from registration is available, except as required by state and
federal securities laws.

 

4.25 Dilution. The Company specifically acknowledges that its obligation to
issue the shares of Common Stock upon conversion of the Note and exercise of the
Warrant is binding upon the Company and enforceable regardless of the dilution
such issuance may have on the ownership interests of other shareholders of the
Company.

 

4.26 Patriot Act. The Company certifies that, to the best of Company’s
knowledge, neither the Company nor any of its Subsidiaries has been designated,
nor is or shall be owned or controlled, by a “suspected terrorist” as defined in
Executive Order 13224. The

 

13

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Company hereby acknowledges that the Purchaser seeks to comply with all
applicable laws concerning money laundering and related activities. In
furtherance of those efforts, the Company hereby represents, warrants and
covenants that: (i) none of the cash or property that the Company or any of its
Subsidiaries will pay or will contribute to the Purchaser has been or shall be
derived from, or related to, any activity that is deemed criminal under United
States law; and (ii) no contribution or payment by the Company or any of its
Subsidiaries to the Purchaser, to the extent that they are within the Company’s
and/or its Subsidiaries’ control shall cause the Purchaser to be in violation of
the United States Bank Secrecy Act, the United States International Money
Laundering Control Act of 1986 or the United States International Money
Laundering Abatement and Anti-Terrorist Financing Act of 2001. The Company shall
promptly notify the Purchaser if any of these representations, warranties or
covenants ceases to be true and accurate regarding the Company or any of its
Subsidiaries. The Company shall provide the Purchaser any and all additional
information regarding the Company or any of its Subsidiaries that the Purchaser
deems necessary or convenient to ensure compliance with all applicable laws
concerning money laundering and similar activities. The Company understands and
agrees that if at any time it is discovered that any of the foregoing
representations, warranties or covenants are incorrect, or if otherwise required
by applicable law or regulation related to money laundering or similar
activities, the Purchaser may undertake appropriate actions to ensure compliance
with applicable law or regulation, including but not limited to segregation
and/or redemption of the Purchaser’s investment in the Company. The Company
further understands that the Purchaser may release confidential information
about the Company and its Subsidiaries and, if applicable, any underlying
beneficial owners, to proper authorities if the Purchaser, in its sole
discretion, determines that it is in the best interests of the Purchaser in
light of relevant rules and regulations under the laws set forth in subsection
(ii) above.

 

4.27 ERISA. Based upon the Employee Retirement Income Security Act of 1974
(“ERISA”), and the regulations and published interpretations thereunder: (i)
neither the Company nor any of its Subsidiaries has engaged in any Prohibited
Transactions (as defined in Section 406 of ERISA and Section 4975 of the
Internal Revenue Code of 1986, as amended (the “Code”)); (ii) each of the
Company and each of its Subsidiaries has met all applicable minimum funding
requirements under Section 302 of ERISA in respect of its plans; (iii) neither
the Company nor any of its Subsidiaries has any knowledge of any event or
occurrence which would cause the Pension Benefit Guaranty Corporation to
institute proceedings under Title IV of ERISA to terminate any employee benefit
plan(s); (iv) neither the Company nor any of its Subsidiaries has any fiduciary
responsibility for investments with respect to any plan existing for the benefit
of persons other than the Company’s or such Subsidiary’s employees; and (v)
neither the Company nor any of its Subsidiaries has withdrawn, completely or
partially, from any multi-employer pension plan so as to incur liability under
the Multiemployer Pension Plan Amendments Act of 1980.

 

5. Representations and Warranties of the Purchaser. The Purchaser hereby
represents and warrants to the Company as follows (such representations and
warranties do not lessen or obviate the representations and warranties of the
Company set forth in this Agreement):

 

5.1 No Shorting. The Purchaser or any of its affiliates and investment partners
has not prior to the date hereof, and will not and will not cause any person or
entity, subsequent to the date hereof, in the case of any of the foregoing, to
engage in “short sales” of the Company’s Common Stock as long as the Note shall
be outstanding.

 

14

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5.2 Requisite Power and Authority; No Violation.

 

(a) The Purchaser has all necessary power and authority under all applicable
provisions of law to execute and deliver this Agreement and the Related
Agreements and to carry out their provisions. All corporate action on the
Purchaser’s part required for the lawful execution and delivery of this
Agreement and the Related Agreements have been or will be effectively taken
prior to the Closing. Upon their execution and delivery, this Agreement and the
Related Agreements will be valid and binding obligations of the Purchaser,
enforceable in accordance with their terms, except: (i) as limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws of general
application affecting enforcement of creditors’ rights; and (ii) as limited by
general principles of equity that restrict the availability of equitable and
legal remedies.

 

(b) Neither the execution or delivery of this Agreement, the Related Agreements
nor the consummation of the transactions contemplated thereby, will conflict
with or result in the breach of any material term or provision of, require any
material consent or violate or constitute a material default under, or relieve
any third party of, any material obligation to the Purchaser or give any third
party the right to terminate or accelerate any material obligation under, any
materialcharter provision, bylaw, contract, or agreement to which the Purchaser
is a party or by which any of its assets are in any way bound or obligated.

 

5.3 Investment Representations. The Purchaser understands that the Securities
are being offered and sold pursuant to an exemption from registration contained
in the Securities Act based in part upon the Purchaser’s representations
contained in this Agreement, including, without limitation, that the Purchaser
is an “accredited investor” within the meaning of Regulation D under the
Securities Act of 1933, as amended (the “Securities Act”). The Purchaser
confirms that it has received or has had full access to all the information it
considers necessary or appropriate to make an informed investment decision with
respect to the Company, the Note and the Warrant to be purchased by it under
this Agreement and the Note Shares and the Warrant Shares acquired by it upon
the conversion of the Note and the exercise of the Warrant, respectively. The
Purchaser further confirms that it has had an opportunity to ask questions and
receive answers from the Company regarding the Company’s and its Subsidiaries’
business, management and financial affairs and the terms and conditions of the
Offering, the Note, the Warrant and the Securities and to obtain additional
information (to the extent the Company possessed such information or could
acquire it without unreasonable effort or expense) necessary to verify any
information furnished to the Purchaser or to which the Purchaser had access.

 

5.4 The Purchaser Bears Economic Risk. The Purchaser has substantial experience
in evaluating and investing in private placement transactions of securities in
companies similar to the Company so that it is capable of evaluating the merits
and risks of its investment in the Company and has the capacity to protect its
own interests. The Purchaser must bear the economic risk of this investment
until the Securities are sold pursuant to: (i) an effective

 

15

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registration statement under the Securities Act; or (ii) an exemption from
registration is available with respect to such sale. The Purchaser acknowledges
that the Securities are speculative and involve a high degree of risk and that
the Purchaser can bear the economic risk of the purchase of the Securities,
including a total loss of its investment therein.

 

5.5 Acquisition for Own Account. The Purchaser is acquiring the Note and Warrant
and the Note Shares and the Warrant Shares for the Purchaser’s own account for
investment only, and not as a nominee or agent and not with a view towards or
for resale in connection with their distribution.

 

5.6 The Purchaser Can Protect Its Interest. The Purchaser represents that by
reason of its, or of its management’s, business and financial experience, the
Purchaser has the capacity to evaluate the merits and risks of its investment in
the Note, the Warrant and the Securities and to protect its own interests in
connection with the transactions contemplated in this Agreement and the Related
Agreements. Further, the Purchaser is aware of no publication of any
advertisement in connection with the transactions contemplated in the Agreement
or the Related Agreements.

 

5.7 Accredited Investor. The Purchaser represents that it is an accredited
investor within the meaning of Regulation D under the Securities Act.

 

5.8 Legends.

 

(a) The Note shall bear substantially the following legend:

 

“THIS NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE
STATE SECURITIES LAWS. THIS NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION
OF THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE OR SUCH SHARES
UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO BIODELIVERY SCIENCES INTERNATIONAL, INC. THAT SUCH
REGISTRATION IS NOT REQUIRED.”

 

(b) The Note Shares and the Warrant Shares, if not issued by DWAC system (as
hereinafter defined), shall bear a legend which shall be in substantially the
following form until such shares are covered by an effective registration
statement filed with the SEC:

 

“THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS.
THESE SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT AND
APPLICABLE STATE LAWS OR AN

 

16

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OPINION OF COUNSEL REASONABLY SATISFACTORY TO BIODELIVERY SCIENCES
INTERNATIONAL, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.”

 

(c) The Warrant shall bear substantially the following legend:

 

“THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY
APPLICABLE STATE SECURITIES LAWS. THIS WARRANT AND THE COMMON SHARES ISSUABLE
UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS
WARRANT OR THE UNDERLYING SHARES OF COMMON STOCK UNDER SAID ACT AND APPLICABLE
STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO
BIODELIVERY SCIENCES INTERNATIONAL, INC. THAT SUCH REGISTRATION IS NOT
REQUIRED.”

 

6. Covenants of the Company. The Company covenants and agrees with the Purchaser
as follows:

 

6.1 Stop-Orders. The Company will advise the Purchaser, promptly after it
receives notice of issuance by the SEC, any state securities commission or any
other regulatory authority of any stop order or of any order preventing or
suspending any offering of any securities of the Company, or of the suspension
of the qualification of the Common Stock of the Company for offering or sale in
any jurisdiction, or the initiation of any proceeding for any such purpose.

 

6.2 Listing. The Company shall promptly secure the listing of the shares of
Common Stock issuable upon conversion of the Note and upon the exercise of the
Warrant on the Principal Market upon which shares of Common Stock are listed
(subject to official notice of issuance) and shall maintain such listing so long
as any other shares of Common Stock shall be so listed. The Company will
maintain the listing of its Common Stock on the Principal Market, and will
comply in all material respects with the Company’s reporting, filing and other
obligations under the bylaws or rules of the National Association of Securities
Dealers (“NASD”) and such exchanges, as applicable.

 

6.3 Market Regulations. The Company shall notify the SEC, NASD and applicable
state authorities, in accordance with their requirements, of the transactions
contemplated by this Agreement, and shall take all other necessary action and
proceedings as may be required and permitted by applicable law, rule and
regulation, for the legal and valid issuance of the Securities to the Purchaser
and promptly provide copies thereof to the Purchaser.

 

6.4 Reporting Requirements. The Company shall timely file with the SEC all
reports required to be filed pursuant to the Exchange Act and refrain from
terminating its status as an issuer required by the Exchange Act to file reports
thereunder even if the Exchange Act or the rules or regulations thereunder would
permit such termination.

 

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6.5 Use of Funds. The Company shall use the proceeds of the sale of the Note and
the Warrant for the retirement of indebtedness owed to Gold Bank in an amount
not to exceed $300,000 and for general working capital purposes only.

 

6.6 Access to Facilities. For as long as the Note is outstanding, each of the
Company and each of its Subsidiaries will permit any representatives designated
by the Purchaser (or any successor of the Purchaser), who are bound by a
confidentiality agreement with the Company and agreed: (i) not to purchase or
sell any of the Company’s securities, while in possession of material non-public
information and (ii) to comply with Regulation FD under the securities laws,
upon reasonable notice and during normal business hours, at such person’s
expense and accompanied by a representative of the Company or any Subsidiary
(provided that no such prior notice shall be required to be given and no such
representative of the Company or any Subsidiary shall be required to accompany
the Purchaser in the event the Purchaser believes such access is necessary to
preserve or protect the Collateral (as defined in the Master Security Agreement)
or following the occurrence and during the continuance of an Event of Default
(as defined in the Note)), to:

 

(a) visit and inspect any of the properties of the Company or any of its
Subsidiaries;

 

(b) examine the corporate and financial records of the Company or any of its
Subsidiaries (unless such examination is not permitted by federal, state or
local law or by contract) and make copies thereof or extracts therefrom; and

 

(c) discuss the affairs, finances and accounts of the Company or any of its
Subsidiaries with the directors, officers and independent accountants of the
Company or any of its Subsidiaries.

 

6.7 Taxes. Each of the Company and each of its Subsidiaries will promptly pay
and discharge, or cause to be paid and discharged, when due and payable, all
taxes, assessments and governmental charges or levies imposed upon the income,
profits, property or business of the Company and its Subsidiaries; provided,
however, that any such tax, assessment, charge or levy need not be paid
currently if the validity thereof shall currently and diligently be contested in
good faith by appropriate proceedings, such tax, assessment, charge or levy
shall have no effect on the lien priority of the Purchaser in any property of
the Company or any of its Subsidiaries and if the Company and/or such Subsidiary
shall have set aside on its books adequate reserves with respect thereto in
accordance with GAAP, and provided, further, that the Company and its
Subsidiaries will pay all such taxes, assessments, charges or levies forthwith
upon the commencement of proceedings to foreclose any lien which may have
attached as security therefor.

 

6.8 Insurance. Subsequent to the Closing, each of the Company and its
Subsidiaries will keep its assets which are of an insurable character insured by
financially sound and reputable insurers against loss or damage by fire,
explosion and other risks customarily

 

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insured against by companies in similar business similarly situated as the
Company and its Subsidiaries; and the Company and its Subsidiaries will
maintain, with financially sound and reputable insurers, insurance against other
hazards and risks and liability to persons and property to the extent and in the
manner which the Company reasonably believes is customary for companies in
similar business similarly situated as the Company and its Subsidiaries and to
the extent available on commercially reasonable terms. The Company, and each of
its Subsidiaries, will jointly and severally bear the full risk of loss from any
loss of any nature whatsoever with respect to the assets pledged to the
Purchaser as security for their respective obligations hereunder and under the
Related Agreements. At the Company’s and each of its Subsidiaries’ joint and
several cost and expense in amounts and with carriers reasonably acceptable to
the Purchaser, each of the Company and each of its Subsidiaries shall (i) keep
all its insurable properties and properties in which it has an interest insured
against the hazards of fire, flood, sprinkler leakage, those hazards covered by
extended coverage insurance and such other hazards, and for such amounts, as is
customary in the case of companies engaged in businesses similar to the
Company’s or the respective Subsidiary’s including business interruption
insurance; (ii) maintain a bond in such amounts as is customary in the case of
companies engaged in businesses similar to the Company’s or the respective
Subsidiary’s insuring against larceny, embezzlement or other criminal
misappropriation of insured’s officers and employees who may either singly or
jointly with others at any time have access to the assets or funds of the
Company or any of its Subsidiaries either directly or through governmental
authority to draw upon such funds or to direct generally the disposition of such
assets; (iii) maintain public and product liability insurance against claims for
personal injury, death or property damage suffered by others; (iv) maintain all
such worker’s compensation or similar insurance as may be required under the
laws of any state or jurisdiction in which the Company or the respective
Subsidiary is engaged in business; and (v) furnish the Purchaser with (x) copies
of all policies and evidence of the maintenance of such policies at least thirty
(30) days before any expiration date, (y) excepting the Company’s workers’
compensation policy, endorsements to such policies naming the Purchaser as
“co-insured” or “additional insured” and appropriate loss payable endorsements
in form and substance satisfactory to the Purchaser, naming the Purchaser as
loss payee, and (z) evidence that as to the Purchaser the insurance coverage
shall not be impaired or invalidated by any act or neglect of the Company or any
Subsidiary and the insurer will provide the Purchaser with at least thirty (30)
days notice prior to cancellation. The Company and each Subsidiary shall
instruct the insurance carriers that in the event of any loss thereunder, the
carriers shall make payment for such loss to the Company and/or the Subsidiary
and the Purchaser jointly. In the event that as of the date of receipt of each
loss recovery upon any such insurance, the Purchaser has not declared an event
of default with respect to this Agreement or any of the Related Agreements, then
the Company and/or such Subsidiary shall be permitted to direct the application
of such loss recovery proceeds toward investment in property, plant and
equipment that would comprise “Collateral” secured by the Purchaser’s security
interest pursuant to the Master Security Agreement or such other security
agreement as shall be required by the Purchaser, with any surplus funds to be
applied toward payment of the obligations of the Company to the Purchaser. In
the event that the Purchaser has properly declared an event of default with
respect to this Agreement or any of the Related Agreements, then all loss
recoveries received by the Purchaser upon any such insurance thereafter may be
applied to the obligations of the Company hereunder and under the Related
Agreements, in such order as the Purchaser may determine. Any surplus (following
satisfaction of all Company obligations to the

 

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Purchaser) shall be paid by the Purchaser to the Company or applied as may be
otherwise required by law. Any deficiency thereon shall be paid by the Company
or the Subsidiary, as applicable, to the Purchaser, on demand.

 

6.9 Intellectual Property. Each of the Company and each of its Subsidiaries
shall maintain in full force and effect its existence, rights and franchises and
all licenses and other rights to use Intellectual Property owned or possessed by
it and reasonably deemed to be necessary to the conduct of its business.

 

6.10 Properties. Each of the Company and each of its Subsidiaries will keep its
properties in good repair, working order and condition, reasonable wear and tear
excepted, and from time to time make all needful and proper repairs, renewals,
replacements, additions and improvements thereto; and each of the Company and
each of its Subsidiaries will at all times comply with each provision of all
leases to which it is a party or under which it occupies property if the breach
of such provision could, either individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect.

 

6.11 Confidentiality. The Company will not, and will not permit any of its
Subsidiaries to, disclose, and will not include in any public announcement, the
name of the Purchaser, unless expressly agreed to by the Purchaser or unless and
until such disclosure is required by law or applicable regulation, and then only
to the extent of such requirement. Notwithstanding the foregoing, the Company
may disclose the Purchaser’s identity and the terms of this Agreement to its
current and prospective debt and equity financing sources. The Company (and its
subsidiaries and affiliates) shall continue to be bound by the confidentiality
provision of this Agreement and of any signed Confidentiality Agreement
regardless of whether or not any disclosures have been made pursuant to this
Section 6.11, or otherwise.

 

6.12 Required Approvals. For so long as twenty-five percent (25%) of the
principal amount of the Note is outstanding, the Company, without the prior
written consent of the Purchaser, shall not, and shall not permit any of its
Subsidiaries to:

 

(a) (i) directly or indirectly declare or pay any dividends, other than
dividends paid to the Company or any wholly owned Subsidiary of the Company,
(ii) issue any preferred stock that is manditorily redeemable prior to the one
year anniversary of Maturity Date (as defined in the Note) or (iii) redeem any
of its preferred stock or other equity interests;

 

(b) liquidate, dissolve or effect a material reorganization (it being understood
that in no event shall the Company or any of its Subsidiaries dissolve,
liquidate or merge with any other person or entity (unless, in the case of a
merger, the Company or such Subsidiary, as applicable, is the surviving entity);

 

(c) become subject to (including, without limitation, by way of amendment to or
modification of) any agreement or instrument which by its terms would (under any
circumstances) restrict the Company’s or any of its Subsidiaries right to
perform the provisions of this Agreement, any Related Agreement or any of the
agreements contemplated hereby or thereby;

 

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(d) materially alter or change the scope of the business of the Company and its
Subsidiaries taken as a whole;

 

(e) (i) create, incur, assume or suffer to exist any indebtedness (exclusive of
trade debt and debt incurred to finance the purchase of equipment (not in excess
of five percent (5%) of the fair market value of the Company’s and its
Subsidiaries’ assets)) whether secured or unsecured other than (x) the Company’s
indebtedness to the Purchaser, (y) indebtedness set forth on Schedule 6.12(e)
attached hereto and made a part hereof and any refinancings or replacements
thereof on terms no less favorable to the Purchaser than the indebtedness being
refinanced or replaced, and (z) any debt incurred in connection with the
purchase of assets in the ordinary course of business, or any refinancings or
replacements thereof on terms no less favorable to the Purchaser than the
indebtedness being refinanced or replaced, so long as any lien relating thereto
shall only encumber the fixed assets so purchased and no other assets of the
Company or any of its Subsidiaries; (ii) cancel any debt owing to it in excess
of $50,000 in the aggregate during any 12 month period; (iii) assume, guarantee,
endorse or otherwise become directly or contingently liable in connection with
any obligations of any other person or entity, except the endorsement of
negotiable instruments by the Company for deposit or collection or similar
transactions in the ordinary course of business or guarantees of indebtedness
otherwise permitted to be outstanding pursuant to this clause (e); and

 

(f) create or acquire any Subsidiary after the date hereof unless (i) such
Subsidiary is a wholly-owned Subsidiary of the Company and (ii) such Subsidiary
becomes a party to the Master Security Agreement, the Stock Pledge Agreement and
the Subsidiary Guaranty (either by executing a counterpart thereof or an
assumption or joinder agreement in respect thereof) and, to the extent required
by the Purchaser, satisfies each condition of this Agreement and the Related
Agreements as if such Subsidiary were a Subsidiary on the Closing Date.

 

6.13 Reissuance of Securities. The Company agrees to reissue certificates
representing the Securities without the legends set forth in Section 5.8 above
at such time as:

 

(a) the holder thereof is permitted to dispose of such Securities pursuant to
Rule 144(k) under the Securities Act; or

 

(b) upon resale subject to an effective registration statement after such
Securities are registered under the Securities Act.

 

The Company agrees to cooperate with the Purchaser in connection with all
resales pursuant to Rule 144(d) and Rule 144(k) and provide legal opinions
necessary to allow such resales; provided, that: (i) the Company and its counsel
receive reasonably requested representations from the Purchaser and broker, if
any, and (ii) that the Purchaser undertakes to (x) comply with the prospectus
delivery requirements of the Securities Act, or (y) accept re-legended
securities if there is no effective registration statement in place at such
time.

 

6.14 Opinion. On the Closing Date, the Company will deliver to the Purchaser an
opinion acceptable to the Purchaser from the Company’s external legal counsel.
The

 

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Company will provide, at the Company’s expense, such other legal opinions in the
future as are deemed reasonably necessary by the Purchaser (and acceptable to
the Purchaser) in connection with the conversion of the Note and exercise of the
Warrant.

 

6.15 Margin Stock. The Company will not permit any of the proceeds of the Note
or the Warrant to be used directly or indirectly to “purchase” or “carry”
“margin stock” or to repay indebtedness incurred to “purchase” or “carry”
“margin stock” within the respective meanings of each of the quoted terms under
Regulation U of the Board of Governors of the Federal Reserve System as now and
from time to time hereafter in effect.

 

6.16 Financing Right of First Refusal.

 

(a) From and after the date hereof and prior to the full repayment or conversion
of the Note (together with all accrued and unpaid interest and fees related
thereto), the Company hereby grants to the Purchaser a right of first refusal to
provide any Additional Financing (as defined below) to be issued by the Company
and/or any of its Subsidiaries, subject to the following terms and conditions.
From and after the date hereof and prior to the full repayment or conversion of
the Note (together with all accrued and unpaid interest and fees related
thereto), prior to the incurrence of any additional indebtedness and/or the sale
or issuance of any equity interests of the Company or any of its Subsidiaries,
other than a financing of the type referred to on Schedule 6.16(a) (an
“Additional Financing”), the Company and/or any Subsidiary of the Company, as
the case may be, shall notify the Purchaser of its intention to enter into such
Additional Financing. In connection therewith, the Company and/or the applicable
Subsidiary thereof shall submit a fully executed term sheet (a “Proposed Term
Sheet”) to the Purchaser setting forth the terms, conditions and pricing of any
such Additional Financing (such financing to be negotiated on “arm’s length”
terms and the terms thereof to be negotiated in good faith) proposed to be
entered into by the Company and/or such Subsidiary. The Purchaser shall have the
right, but not the obligation, to deliver its own proposed term sheet (the
“Purchaser Term Sheet”) setting forth the terms and conditions upon which the
Purchaser would be willing to provide such Additional Financing to the Company
and/or such Subsidiary. The Purchaser Term Sheet shall contain terms no less
favorable to the Company and/or such Subsidiary than those outlined in Proposed
Term Sheet. The Purchaser shall deliver such Purchaser Term Sheet within ten
business days of receipt of each such Proposed Term Sheet. If the provisions of
the Purchaser Term Sheet are at least as favorable to the Company and/or such
Subsidiary, as the case may be, as the provisions of the Proposed Term Sheet,
the Company and/or such Subsidiary shall enter into and consummate the
Additional Financing transaction outlined in the Purchaser Term Sheet.

 

(b) The Company will not, and will not permit its Subsidiaries to, agree,
directly or indirectly, to any restriction with any person or entity which
limits the ability of the Purchaser to consummate an Additional Financing with
the Company or any of its Subsidiaries.

 

6.17 Additional Investment. The Company acknowledges that the Purchaser shall
have the right (at its sole option), on or prior to the date which is 120 days
following the Closing Date, to issue an additional convertible term note (such
note, the “Additional Note”) to the Company in an aggregate principal amount of
no less than $1,000,000 and up to $2,500,000

 

22

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pursuant to substantially similar documentation as, this Agreement and the
Related Agreements; provided that (i) the Additional Note shall, unless
otherwise agreed to in writing by the Company and the Purchaser, have a fixed
conversion price equal to the greater of (x) 85% of the average closing price of
the Common Stock for the ten (10) trading days immediately prior to the date of
the issuance of the Additional Note and (y) $4.25, and (ii) no warrants shall be
issued by the Company to the Purchaser in connection with the issuance of such
Additional Note.

 

7. Covenants of the Purchaser. The Purchaser covenants and agrees with the
Company as follows:

 

7.1 Confidentiality. The Purchaser will not disclose, and will not include in
any public announcement, the name of the Company, unless expressly agreed to by
the Company or unless and until such disclosure is required by law or applicable
regulation, and then only to the extent of such requirement. The confidentiality
provisions of this Agreement and of any signed Confidentiality Agreement between
the Company (or its representatives or agents) and the Purchaser will remain
binding on the Purchaser regardless of whether or not any disclosures have been
made pursuant to this Section 7.1, or otherwise.

 

7.2 Non-Public Information. The Purchaser will not effect any sales in the
shares of the Company’s Common Stock or other Company securities while in
possession of material, non-public information regarding the Company if such
sales would violate applicable securities law.

 

7.3 Limitation on Acquisition of Common Stock of the Company. Notwithstanding
anything to the contrary contained herein, in any Related Agreement or any
document, instrument or agreement entered into in connection with any other
transactions between the Purchaser and the Company, the Purchaser may not
acquire stock in the Company (including, without limitation, pursuant to a
contract to purchase, by exercising an option or warrant, by converting any
other security or instrument, by acquiring or exercising any other right to
acquire, shares of stock or other security convertible into shares of stock in
the Company, or otherwise, and such contracts, options, warrants, conversion or
other rights shall not be enforceable or exercisable) to the extent such stock
acquisition would cause any interest (including any original issue discount)
payable by the Company to Laurus not to qualify as “portfolio interest” within
the meaning of Section 881(c)(2) of the Code, by reason of Section 881(c)(3) of
the Code, taking into account the constructive ownership rules under Section
871(h)(3)(C) of the Code (the “Stock Acquisition Limitation”). The Stock
Acquisition Limitation shall automatically become null and void without any
notice to the Company upon the earlier to occur of either (a) the Company’s
delivery to Laurus of a Notice of Redemption (as defined in the Note) or (b) the
existence of an Event of Default (as defined in the Note) at a time when the
average closing price of the Company’s common stock as reported by Bloomberg,
L.P. on the Principal Market for the immediately preceding five trading days is
greater than or equal to 150% of the Fixed Conversion Price (as defined in the
Note).

 

8. Covenants of the Company and the Purchaser Regarding Indemnification.

 

8.1 Company Indemnification. The Company agrees to indemnify, hold harmless,
reimburse and defend the Purchaser, each of the Purchaser’s officers, directors,
agents,

 

23

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affiliates, control persons, and principal shareholders, against any and all
claims, costs, expenses, liabilities, obligations, losses or damages (including
reasonable legal fees) of any nature, incurred by or imposed upon the Purchaser
which result, arise out of or are based upon: (i) any misrepresentation by the
Company or any of its Subsidiaries or breach of any warranty by the Company or
any of its Subsidiaries in this Agreement, any other Related Agreement or in any
exhibits or schedules attached hereto or thereto; or (ii) any breach or default
in performance by Company or any of its Subsidiaries of any covenant or
undertaking to be performed by Company or any of its Subsidiaries hereunder,
under any other Related Agreement or any other agreement entered into by the
Company and/or any of its Subsidiaries and the Purchaser relating hereto or
thereto.

 

8.2 Purchaser’s Indemnification. the Purchaser agrees to indemnify, hold
harmless, reimburse and defend the Company and each of the Company’s officers,
directors, agents, affiliates, control persons and principal shareholders, at
all times against any claims, costs, expenses, liabilities, obligations, losses
or damages (including reasonable legal fees) of any nature, incurred by or
imposed upon the Company which result, arise out of or are based upon: (i) any
misrepresentation by the Purchaser or breach of any warranty by the Purchaser in
this Agreement or in any exhibits or schedules attached hereto or any Related
Agreement; or (ii) any breach or default in performance by the Purchaser of any
covenant or undertaking to be performed by the Purchaser hereunder, or any other
agreement entered into by the Company and the Purchaser relating hereto.

 

9. Conversion of Convertible Note.

 

9.1 Mechanics of Conversion.

 

(a) Provided the Purchaser has notified the Company of the Purchaser’s intention
to sell the Note Shares and the Note Shares are included in an effective
registration statement or are otherwise exempt from registration when sold: (i)
upon the conversion of the Note or part thereof, the Company shall, at its own
cost and expense, take all necessary action (including the issuance of an
opinion of counsel reasonably acceptable to the Purchaser following a request by
the Purchaser) to assure that the Company’s transfer agent shall issue shares of
the Company’s Common Stock in the name of the Purchaser (or its nominee) or such
other persons as designated by the Purchaser in accordance with Section 9.1(b)
hereof and in such denominations to be specified representing the number of Note
Shares issuable upon such conversion; and (ii) the Company warrants that no
instructions other than these instructions have been or will be given to the
transfer agent of the Company’s Common Stock and that after the Effectiveness
Date (as defined in the Registration Rights Agreement) the Note Shares issued
will be freely transferable subject to the prospectus delivery requirements of
the Securities Act and the provisions of this Agreement, and will not contain a
legend restricting the resale or transferability of the Note Shares.

 

(b) The Purchaser will give notice of its decision to exercise its right to
convert the Note or part thereof by telecopying or otherwise delivering an
executed and completed notice of the number of shares to be converted to the
Company (the “Notice of Conversion”). The Purchaser will not be required to
surrender the Note until the

 

24

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Purchaser receives a credit to the account of the Purchaser’s prime broker
through the DWAC system (as defined below), representing the Note Shares or
until the Note has been fully satisfied. Each date on which a Notice of
Conversion is telecopied or delivered to the Company in accordance with the
provisions hereof shall be deemed a “Conversion Date.” Pursuant to the terms of
the Notice of Conversion, the Company will issue instructions to the transfer
agent accompanied by an opinion of counsel within three (3) business days of the
date of the delivery to the Company of the Notice of Conversion and shall cause
the transfer agent to transmit the certificates representing the Conversion
Shares to the Holder by crediting the account of the Purchaser’s prime broker
with the Depository Trust Company (“DTC”) through its Deposit Withdrawal Agent
Commission (“DWAC”) system within three (3) business days after receipt by the
Company of the Notice of Conversion (the “Delivery Date”).

 

(c) The Company understands that a delay in the delivery of the Note Shares in
the form required pursuant to Section 9 hereof beyond the Delivery Date could
result in economic loss to the Purchaser. In the event that the Company fails to
direct its transfer agent to deliver the Note Shares to the Purchaser via the
DWAC system within the time frame set forth in Section 9.1(b) above and the Note
Shares are not delivered to the Purchaser by the Delivery Date, as compensation
to the Purchaser for such loss, the Company agrees to pay late payments to the
Purchaser for late issuance of the Note Shares in the form required pursuant to
Section 9 hereof upon conversion of the Note in the amount equal to $500 per
business day after the Delivery Date; or (ii) the Purchaser’s actual damages
from such delayed delivery. Notwithstanding the foregoing, the Company will not
owe the Purchaser any late payments if the delay in the delivery of the Note
Shares beyond the Delivery Date is solely out of the control of the Company and
the Company is actively trying to cure the cause of the delay. The Company shall
pay any payments incurred under this Section in immediately available funds upon
demand and, in the case of actual damages, accompanied by reasonable
documentation of the amount of such damages. Such documentation shall show the
number of shares of Common Stock the Purchaser is forced to purchase (in an open
market transaction) which the Purchaser anticipated receiving upon such
conversion, and shall be calculated as the amount by which (A) the Purchaser’s
total purchase price (including customary brokerage commissions, if any) for the
shares of Common Stock so purchased exceeds (B) the aggregate principal and/or
interest amount of the Note, for which such Conversion Notice was not timely
honored.

 

10. Registration Rights.

 

10.1 Registration Rights Granted. The Company hereby grants registration rights
to the Purchaser pursuant to the Registration Rights Agreement.

 

10.2 Offering Restrictions. Except as previously disclosed in the SEC Reports or
in the Exchange Act Filings, or stock or stock options granted to employees or
directors of the Company (these exceptions hereinafter referred to as the
“Excepted Issuances”), neither the Company nor any of its Subsidiaries will,
prior to the full repayment or conversion of the Note (together with all accrued
and unpaid interest and fees related thereto), (x) enter into any equity line of
credit agreement or similar agreement or (y) issue, or enter into any agreement
to issue,

 

25

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any securities with a variable/floating conversion and/or pricing feature which
are or could be (by conversion or registration) free-trading securities (i.e.
common stock subject to a registration statement).

 

11. Miscellaneous.

 

11.1 Governing Law, Jurisdiction and Waiver of Jury Trial.

 

(a) THIS AGREEMENT AND THE OTHER RELATED AGREEMENTS SHALL BE GOVERNED BY AND
CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK
APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE, WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAWS (OTHER THAN THE PRINCIPLES SET FORTH IN SECTION
5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK).

 

(b) THE COMPANY HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS
LOCATED IN THE COUNTY OF NEW YORK, STATE OF NEW YORK SHALL HAVE EXCLUSIVE
JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN THE COMPANY,
ON THE ONE HAND, AND THE PURCHASER, ON THE OTHER HAND, PERTAINING TO THIS
AGREEMENT OR ANY OF THE RELATED AGREEMENTS OR TO ANY MATTER ARISING OUT OF OR
RELATED TO THIS AGREEMENT OR ANY OF THE OTHER RELATED AGREEMENTS; PROVIDED, THAT
THE PURCHASER AND THE COMPANY ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY
HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF THE COUNTY OF NEW YORK, STATE OF
NEW YORK; AND FURTHER PROVIDED, THAT NOTHING IN THIS AGREEMENT SHALL BE DEEMED
OR OPERATE TO PRECLUDE THE PURCHASER FROM BRINGING SUIT OR TAKING OTHER LEGAL
ACTION IN ANY OTHER JURISDICTION TO COLLECT THE OBLIGATIONS, TO REALIZE ON THE
COLLATERAL (AS DEFINED IN THE MASTER SECURITY AGREEMENT) OR ANY OTHER SECURITY
FOR THE OBLIGATIONS (AS DEFINED IN THE MASTER SECURITY AGREEMENT), OR TO ENFORCE
A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF THE PURCHASER. THE COMPANY EXPRESSLY
SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT
COMMENCED IN ANY SUCH COURT, AND THE COMPANY HEREBY WAIVES ANY OBJECTION WHICH
IT MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM
NON CONVENIENS. THE COMPANY HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS,
COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT
SERVICE OF SUCH SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE BY REGISTERED
OR CERTIFIED MAIL ADDRESSED TO THE COMPANY AT THE ADDRESS SET FORTH IN SECTION
11.9 AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF THE
COMPANY’S ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S.
MAILS, PROPER POSTAGE PREPAID.

 

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(c) THE PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH
APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF
THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHTS TO
TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE,
WHETHER ARISING IN CONTRACT, TORT, OR OTHERWISE BETWEEN THE PURCHASER AND/OR THE
COMPANY ARISING OUT OF, CONNECTED WITH, RELATED OR INCIDENTAL TO THE
RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT, ANY
OTHER RELATED AGREEMENT OR THE TRANSACTIONS RELATED HERETO OR THERETO.

 

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

 

11.3 Survival. The representations, warranties, covenants and agreements made
herein shall survive any investigation made by either party and the closing of
the transactions contemplated hereby to the extent provided therein. All
statements as to factual matters contained in any certificate or other
instrument delivered by or on behalf of the Company pursuant hereto in
connection with the transactions contemplated hereby shall be deemed to be
representations and warranties by the Company hereunder solely as of the date of
such certificate or instrument.

 

11.4 Successors. Except as otherwise expressly provided herein, the provisions
hereof shall inure to the benefit of, and be binding upon, the successors,
heirs, executors and administrators of the parties hereto and shall inure to the
benefit of and be enforceable by each entity which shall be a holder of the
Securities from time to time, other than the holders of Common Stock which has
been sold by the Purchaser pursuant to Rule 144 or an effective registration
statement. The Purchaser may not assign its rights hereunder to a competitor of
the Company.

 

11.5 Entire Agreement; Maximum Interest. This Agreement, the Related Agreements,
the exhibits and schedules hereto and thereto and the other documents delivered
pursuant hereto constitute the full and entire understanding and agreement
between the parties with regard to the subjects hereof and no party shall be
liable or bound to any other in any manner by any representations, warranties,
covenants and agreements except as specifically set forth herein and therein.
Nothing contained herein or in any document referred to herein or delivered in
connection herewith shall be deemed to establish or require the payment of a
rate of interest or other charges in excess of the maximum permitted by
applicable law. In the event that the rate of interest or dividends required to
be paid or other charges hereunder exceed the

 

27

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maximum amount permitted by such law, any payments in excess of such maximum
shall be credited against amounts owed by the Company to the Purchaser and thus
refunded to the Company.

 

11.6 Severability. In case any provision of the Agreement shall be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.

 

11.7 Amendment and Waiver.

 

(a) This Agreement may be amended or modified only upon the written consent of
the Company and the Purchaser.

 

(b) The obligations of the Company and the rights of the Purchaser under this
Agreement may be waived only with the written consent of the Purchaser.

 

(c) The obligations of the Purchaser and the rights of the Company under this
Agreement may be waived only with the written consent of the Company.

 

11.8 Delays or Omissions. It is agreed that no delay or omission to exercise any
right, power or remedy accruing to any party, upon any breach, default or
noncompliance by another party under this Agreement or the Related Agreements,
shall impair any such right, power or remedy, nor shall it be construed to be a
waiver of any such breach, default or noncompliance, or any acquiescence
therein, or of or in any similar breach, default or noncompliance thereafter
occurring. All remedies, either under this Agreement or the Related Agreements,
by law or otherwise afforded to any party, shall be cumulative and not
alternative.

 

11.9 Notices. All notices required or permitted hereunder shall be in writing
and shall be deemed effectively given:

 

(a) upon personal delivery to the party to be notified;

 

(b) when sent by confirmed facsimile if sent during normal business hours of the
recipient, if not, then on the next business day;

 

(c) three (3) business days after having been sent by registered or certified
mail, return receipt requested, postage prepaid; or

 

(d) one (1) day after deposit with a nationally recognized overnight courier,
specifying next day delivery, with written verification of receipt.

 

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All communications shall be sent as follows:

 

If to the Company, to:

  

BioDelivery Sciences International, Inc.

185 South Orange Avenue, Administrative Building 4

Newark, New Jersey 07103

Attention:         James A. McNulty

Facsimile:         (813) 288-8757

     with a copy to:     

Ellenoff Grossman & Schole LLP

370 Lexington Ave.

New York, New York 10017

Attention:         Barry I. Grossman

Facsimile:         (212) 370-7889

If to the Purchaser, to:

  

Laurus Master Fund, Ltd.

c/o M&C Corporate Services Limited

P.O. Box 309 GT

Ugland House

George Town

South Church Street

Grand Cayman, Cayman Islands

Facsimile:         345-949-8080

     with a copy to:     

John E. Tucker, Esq.

825 Third Avenue 14th Floor

New York, NY 10022

Facsimile:         212-541-4434

 

or at such other address as the Company or the Purchaser may designate by
written notice to the other parties hereto given in accordance herewith.

 

11.10 Attorneys’ Fees. In the event that any suit or action is instituted to
enforce any provision in this Agreement or any Related Agreement, the prevailing
party in such dispute shall be entitled to recover from the losing party all
fees, costs and expenses of enforcing any right of such prevailing party under
or with respect to this Agreement and/or such Related Agreement, including,
without limitation, such reasonable fees and expenses of attorneys and
accountants, which shall include, without limitation, all fees, costs and
expenses of appeals.

 

11.11 Titles and Subtitles. The titles of the sections and subsections of this
Agreement are for convenience of reference only and are not to be considered in
construing this Agreement.

 

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11.12 Facsimile Signatures; Counterparts. This Agreement may be executed by
facsimile signatures and in any number of counterparts, each of which shall be
an original, but all of which together shall constitute one agreement.

 

11.13 Broker’s Fees. Except as set forth on Schedule 11.13 hereof, each party
hereto represents and warrants that no agent, broker, investment banker, person
or firm acting on behalf of or under the authority of such party hereto is or
will be entitled to any broker’s or finder’s fee or any other commission
directly or indirectly in connection with the transactions contemplated herein.
Each party hereto further agrees to indemnify each other party for any claims,
losses or expenses incurred by such other party as a result of the
representation in this Section 11.13 being untrue.

 

11.14 Construction. Each party acknowledges that its legal counsel participated
in the preparation of this Agreement and the Related Agreements and, therefore,
stipulates that the rule of construction that ambiguities are to be resolved
against the drafting party shall not be applied in the interpretation of this
Agreement or any Related Agreement to favor any party against the other.

 

[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]

 

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IN WITNESS WHEREOF, the parties hereto have executed the SECURITIES PURCHASE
AGREEMENT as of the date set forth in the first paragraph hereof.

 

COMPANY:   PURCHASER: BIODELIVERY SCIENCES INTERNATIONAL, INC.   LAURUS MASTER
FUND, LTD. By:  

/S/ James A. McNulty

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  By:  

/S/ David Grin

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Name:   James A. McNulty   Name:   David Grin Title:   Chief Financial Officer  
Title:   Director

 

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