SECURITIES PURCHASE AGREEMENT

 

This SECURITIES PURCHASE AGREEMENT (the “Agreement”), dated as of June [__],
2016, by and between QUANTUMSPHERE, INC., a Nevada corporation, with
headquarters located at 2905 Tech Center Drive, Santa Ana, CA 92705 (the
“Company”), and _____________________________, with its address at
___________________________ (the “Buyer”).

 

WHEREAS:

 

A. The Company and the Buyer are executing and delivering this Agreement in
reliance upon the exemption from securities registration afforded by Section
4(a)(2) of the Securities Act of 1933, as amended (the “1933 Act”) and Rule
506(b) promulgated by the United States Securities and Exchange Commission (the
“SEC”) under the 1933 Act;

 

B. Buyer desires to purchase from the Company, and the Company desires to issue
and sell to the Buyer, upon the terms and conditions set forth in this
Agreement, a Secured Promissory Note of the Company, in the aggregate principal
amount of $________________.00 (together with any note(s) issued in replacement
thereof or as a dividend thereon or otherwise with respect thereto in accordance
with the terms thereof, in the form attached hereto as Exhibit A, the “Note”),
convertible into shares of common stock, $0.001 par value per share, of the
Company only upon an event of default by the Company as described in Section 3
of the Note (the “Common Stock”), and subject to the terms, limitations and
conditions set forth in such Note;

 

C. The Buyer wishes to purchase, upon the terms and conditions stated in this
Agreement, such principal amount of the Note as is set forth immediately below
its name on the signature pages hereto;

 

D. The Buyer further wishes to purchase, upon the terms and conditions stated in
this Agreement, a warrant, in the form attached hereto as Exhibit B (the
“Warrant”), to purchase _______ shares of Common Stock (the “Warrant Shares”)
with an exercise price equal to the price per share of the Company’s next equity
round of financing per share and exercisable for a period of five (5) years; and

 

E. The Note will be collateralized by (1) pledges on all shares of Common Stock,
stock options and warrants held by Gregory Hrncir and Kevin Maloney as set forth
in that certain Pledge Agreement, in the form attached hereto as Exhibit C (the
“Pledge Agreement”), to be entered into on the Closing Date (as defined below)
by and among the Buyer, Gregory Hrncir and Kevin Maloney and (2) security
interests in all of the assets of the Company and its subsidiaries subject to
the security interest of Novus Capital Group, LLC and the holders of the Series
O-2 Notes (as defined) as set forth in that certain Security Agreement, in the
form attached hereto as Exhibit D (which for all purposes hereof and the other
documents entered into in connection herewith shall include the IP Security
Agreement by and between such parties, in the form attached hereto as Exhibit E,
the “Security Agreement”).

 

NOW THEREFORE, in consideration of the foregoing and of the agreements and
covenants herein contained, and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the Company and the
Buyer hereby agree as follows:

 

1. Purchase and Sale of Note and Warrant.

 

a. Purchase of Note and Warrant. On the Closing Date (as defined below), the
Company shall issue and sell to the Buyer, and the Buyer agrees to purchase from
the Company, the Note in the principal amount as is set forth immediately below
the Buyer’s name on the signature pages hereto, and the Warrant in the number
set forth immediately below the Buyer’s name on the signature page hereto.

 

b. Form of Payment. On the Closing Date: (i) the Buyer shall pay the purchase
price for the Note and Warrant to be issued and sold to it at the Closing (as
defined below) (the “Purchase Price”) by wire transfer of immediately available
funds to the Company, in accordance with the Company’s written wiring
instructions, against delivery of the Note in an amount equal to the Actual
Amount of Purchase Price of Note (i.e., 115% of the purchase price of the Note)
as is set forth below the Buyer’s name on the signature pages hereto, and (ii)
the Company shall deliver such duly executed Note and Warrant on behalf of the
Company, to the Buyer, against delivery of such Purchase Price.

 

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c. Closing Date. Subject to the satisfaction (or written waiver) of the
conditions thereto set forth in Section 6 and Section 7 below, the date and time
of the issuance and sale of the Note pursuant to this Agreement (the “Closing
Date”) shall be 4:00 PM, Eastern Time on the date first written above, or such
other mutually agreed upon time.

 

d. Closing. The closing of the transactions contemplated by this Agreement (the
“Closing”) shall occur on the Closing Date at such location as may be agreed to
by the parties (including via exchange of electronic signatures). Concurrently
with the Closing, the Company shall be permitted to sell promissory notes
identical to the Note to certain other investors up to an aggregate principal
amount (not including original issuance discount) of $587,500, inclusive of thjs
Note.

 

2. Buyer’s Representations and Warranties. The Buyer represents and warrants to
the Company as of the Closing Date that:

 

a. Investment Purpose. As of the Closing Date, the Buyer is purchasing the Note,
the Warrant, the Warrant Shares and the shares of Common Stock issuable upon
conversion (only in the event of a default by the Company as described in
Section 3 of the Note) of or otherwise pursuant to the Note and such additional
shares of Common Stock, if any, as are issuable on account of interest on the
Note pursuant to this Agreement, such shares of Common Stock being collectively
referred to herein as the “Conversion Shares” and, collectively with the Note,
the Warrant and the Warrant Shares, the “Securities”) for its own account and
not with a present view towards the public sale or distribution thereof, except
pursuant to sales registered or exempted from registration under the 1933 Act;
provided, however, that by making the representations herein, the Buyer does not
agree to hold any of the Securities for any minimum or other specific term and
reserves the right to dispose of the Securities at any time in accordance with
or pursuant to a registration statement or an exemption from securities
registration under the 1933 Act.

 

b. Accredited Investor Status. The Buyer is an “accredited investor” as that
term is defined in Rule 501(a) of Regulation D (an “Accredited Investor”).

 

c. Reliance on Exemptions. The Buyer understands that the Securities are being
offered and sold to it in reliance upon specific exemptions from the
registration requirements of United States federal and state securities laws and
that the Company is relying upon the truth and accuracy of, and the Buyer’s
compliance with, the representations, warranties, agreements, acknowledgments
and understandings of the Buyer set forth herein in order to determine the
availability of such exemptions and the eligibility of the Buyer to acquire the
Securities.

 

d. Information. The Buyer and its advisors, if any, have been, and for so long
as the Note remains outstanding will continue to be, furnished with all
materials relating to the business, finances and operations of the Company and
materials relating to the offer and sale of the Securities which have been
requested by the Buyer or its advisors. The Buyer and its advisors, if any, have
been, and for so long as the Note remains outstanding will continue to be,
afforded the opportunity to ask questions of the Company regarding its business
and affairs. Notwithstanding the foregoing, the Company has not disclosed to the
Buyer any material nonpublic information regarding the Company or otherwise and
will not disclose such information unless such information is disclosed to the
public prior to or promptly following such disclosure to the Buyer. Neither such
inquiries nor any other due diligence investigation conducted by Buyer or any of
its advisors or representatives shall modify, amend or affect Buyer’s right to
rely on the Company’s representations and warranties contained in Section 3
below.

 

e. Governmental Review. The Buyer understands that no United States federal or
state agency or any other government or governmental agency has passed upon or
made any recommendation or endorsement of the Securities.

 

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f. Transfer or Re-sale. The Buyer understands that (i) the sale or resale of the
Securities has not been and is not being registered under the 1933 Act or any
applicable state securities laws, and the Securities may not be transferred
unless (a) the Securities are sold pursuant to an effective registration
statement under the 1933 Act, (b) the Buyer shall have delivered to the Company,
at the cost of the Company, an opinion of counsel (which may be the Legal
Counsel Opinion (as defined below)) that shall be in form, substance and scope
customary for opinions of counsel in comparable transactions to the effect that
the Securities to be sold or transferred may be sold or transferred pursuant to
an exemption from such registration, which opinion shall be accepted by the
Company, (c) the Securities are sold or transferred to an “affiliate” (as
defined in Rule 144 promulgated under the 1933 Act (or a successor rule) (“Rule
144”)) of the Buyer who agrees to sell or otherwise transfer the Securities only
in accordance with this Section 2(f) and who is an Accredited Investor, (d) the
Securities are sold pursuant to Rule 144, or (e) the Securities are sold
pursuant to Regulation S under the 1933 Act (or a successor rule) (“Regulation
S”), and the Buyer shall have delivered to the Company, at the cost of the
Company, an opinion of counsel that shall be in form, substance and scope
customary for opinions of counsel in corporate transactions, which opinion shall
be accepted by the Company; (ii) any sale of such Securities made in reliance on
Rule 144 may be made only in accordance with the terms of said Rule and further,
if said Rule is not applicable, any re-sale of such Securities under
circumstances in which the seller (or the person through whom the sale is made)
may be deemed to be an underwriter (as that term is defined in the 1933 Act) may
require compliance with some other exemption under the 1933 Act or the rules and
regulations of the SEC thereunder; and (iii) neither the Company nor any other
person is under any obligation to register such Securities under the 1933 Act or
any state securities laws or to comply with the terms and conditions of any
exemption thereunder (in each case). Notwithstanding the foregoing or anything
else contained herein to the contrary, the Securities may be pledged in
connection with a bona fide margin account or other lending arrangement secured
by the Securities, and such pledge of Securities shall not be deemed to be a
transfer, sale or assignment of the Securities hereunder, and the Buyer in
effecting such pledge of Securities shall be not required to provide the Company
with any notice thereof or otherwise make any delivery to the Company pursuant
to this Agreement or otherwise.

 

g. Legends. The Buyer understands that until such time as the Note and the
Warrant, and, upon conversion (only in the event of a default by the Company as
described in Section 3 of the Note) of the Note or exercise of the Warrant in
accordance with their respective terms, the Conversion Shares and the Warrant
Shares, have been registered under the 1933 Act or may be sold pursuant to Rule
144, Rule 144A under the 1933 Act or Regulation S without any restriction as to
the number of securities as of a particular date that can then be immediately
sold, the Securities may bear a restrictive legend in substantially the
following form (and a stop-transfer order may be placed against transfer of the
certificates for such Securities):

 

“NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE (IN THE EVENT OF
A DEFAULT BY THE COMPANY) AND/OR EXERCISABLE HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE
SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE
ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL (WHICH COUNSEL
SHALL BE SELECTED BY THE HOLDER), IN A GENERALLY ACCEPTABLE FORM, THAT
REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE
144, RULE 144A OR REGULATION S UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING,
THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR
OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.”

 

The legend set forth above shall be removed and the Company shall issue a
certificate for the applicable shares of Common Stock without such legend to the
holder of any Security upon which it is stamped or (as requested by such holder)
issue the applicable shares of Common Stock to such holder by electronic
delivery by crediting the account of such holder’s broker with The Depository
Trust Company (“DTC”), if, unless otherwise required by applicable state
securities laws, (a) such Security is registered for sale under an effective
registration statement filed under the 1933 Act or otherwise may be sold
pursuant to Rule 144, Rule 144A or Regulation S without any restriction as to
the number of securities as of a particular date that can then be immediately
sold, or (b) the Company or the Holder provides the Legal Counsel Opinion (as
contemplated by and in accordance with Section 4(m) hereof) to the effect that a
public sale or transfer of such Security may be made without registration under
the 1933 Act, which opinion shall be accepted by the Company so that the sale or
transfer is effected. The Company shall be responsible for the fees of its
transfer agent and all DTC fees associated with any such issuance. The Buyer
agrees to sell all Securities, including those represented by a certificate(s)
from which the legend has been removed, in compliance with applicable prospectus
delivery requirements, if any. In the event that the Company does not accept the
opinion of counsel provided by the Buyer with respect to the transfer of
Securities pursuant to an exemption from registration, such as Rule 144, Rule
144A or Regulation S, at the Deadline (as defined in the Note), it will be
considered an Event of Default pursuant to Section 3.2 of the Note.

 

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h. Authorization; Enforcement. This Agreement has been duly and validly
authorized by the Buyer and has been duly executed and delivered on behalf of
the Buyer, and this Agreement constitutes a valid and binding agreement of the
Buyer enforceable in accordance with its terms, except as enforcement may be
limited by bankruptcy, insolvency, reorganization, moratorium or other similar
laws affecting creditors’ rights generally and except as may be limited by the
exercise of judicial discretion in applying principles of equity.

 

i. Residency. The Buyer is a resident of the jurisdiction set forth immediately
below the Buyer’s name on the signature pages hereto.

 

3. Representations and Warranties of the Company. The Company represents and
warrants to the Buyer as of the Closing Date that:

 

a. Organization and Qualification. The Company and each of its Subsidiaries (as
defined below), if any, is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction in which it is incorporated,
with full power and authority (corporate and other) to own, lease, use and
operate its properties and to carry on its business as and where now owned,
leased, used, operated and conducted. Schedule 3(a), if attached hereto, sets
forth a list of all of the Subsidiaries of the Company and the jurisdiction in
which each is incorporated. The Company and each of its Subsidiaries is duly
qualified as a foreign corporation to do business and is in good standing in
every jurisdiction in which its ownership or use of property or the nature of
the business conducted by it makes such qualification necessary except where the
failure to be so qualified or in good standing would not have a Material Adverse
Effect. “Material Adverse Effect” means any material adverse effect on the
business, operations, assets, financial condition or prospects of the Company or
its Subsidiaries, if any, taken as a whole, or on the transactions contemplated
hereby or by the agreements or instruments to be entered into in connection
herewith. “Subsidiaries” means any corporation or other organization, whether
incorporated or unincorporated, in which the Company owns, directly or
indirectly, any equity or other ownership interest.

 

b. Authorization; Enforcement. (i) The Company has all requisite corporate power
and authority to enter into and perform this Agreement, the Note, the Security
Agreement, the Intercreditor Agreement, the Irrevocable Transfer Agent
Instructions, and the Warrant and to consummate the transactions contemplated
hereby and thereby and to issue the Securities, in accordance with the terms
hereof and thereof, (ii) the execution and delivery of this Agreement, the Note,
the Security Agreement, the Intercreditor Agreement, the Irrevocable Transfer
Agent Instructions, the Warrant and (if applicable) the Conversion Shares (in
the event of a default by the Company as described in Section 3 of the Note) and
the Warrant Shares by the Company and the consummation by it of the transactions
contemplated hereby and thereby (including without limitation, the issuance of
the Note and the Warrant and the issuance and reservation for issuance of the
Conversion Shares (in the event of a default by the Company as described in
Section 3 of the Note) and the Warrant Shares issuable upon conversion or
exercise of the Note and the Warrant) have been duly authorized by the Company’s
Board of Directors and no further consent or authorization of the Company, its
Board of Directors, or its shareholders is required, (iii) this Agreement, the
Note, the Security Agreement, the Intercreditor Agreement, the Irrevocable
Transfer Agent Instructions, and the Warrant (together with any other
instruments executed in connection herewith or therewith) have been duly
executed and delivered by the Company by its authorized representative, and such
authorized representative is the true and official representative with authority
to sign this Agreement, the Note, the Security Agreement, the Intercreditor
Agreement, the Irrevocable Transfer Agent Instructions, and the Warrant and the
other instruments documents executed in connection herewith or therewith and
bind the Company accordingly, and (iv) this Agreement constitutes, and upon
execution and delivery by the Company of the Note, the Security Agreement, the
Intercreditor Agreement, the Irrevocable Transfer Agent Instructions, and the
Warrant, each such instrument will constitute, a legal, valid and binding
obligation of the Company enforceable against the Company in accordance with its
terms.

 

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c. Capitalization; Governing Documents. As of March 31, 2016, the authorized
capital stock of the Company consists of: 500,000,000 authorized shares of
Common Stock, of which 22,670,217 shares were issued and outstanding and
10,000,000 authorized shares of preferred stock, par value $0.001 per share,
none of which were issued and outstanding. All of such outstanding shares of
capital stock are, or upon issuance will be, duly authorized, validly issued,
fully paid and non-assessable. No shares of capital stock of the Company are
subject to preemptive rights or any other similar rights of the shareholders of
the Company or any liens or encumbrances imposed through the actions or failure
to act of the Company. As of March 31, 2016, and exclusive of options
outstanding to purchase 5,416,034 shares of common stock of the Company pursuant
to the Company’s 2014 Equity Incentive Plan, and warrants outstanding to
purchase 11,841,231 shares of common stock of the Company, other than as
publicly announced prior to such date and reflected in the SEC filings of the
Company (i) there are no outstanding options, warrants, scrip, rights to
subscribe for, puts, calls, rights of first refusal, agreements, understandings,
claims or other commitments or rights of any character whatsoever relating to,
or securities or rights convertible into or exchangeable for any shares of
capital stock of the Company or any of its Subsidiaries, or arrangements by
which the Company or any of its Subsidiaries is or may become bound to issue
additional shares of capital stock of the Company or any of its Subsidiaries,
(ii) there are no agreements or arrangements under which the Company or any of
its Subsidiaries is obligated to register the sale of any of its or their
securities under the 1933 Act, other than piggy-back registration rights issued
to third parties in conjunction with prior financings, and (iii) there are no
anti-dilution or price adjustment provisions contained in any security issued by
the Company (or in any agreement providing rights to security holders) that will
be triggered by the issuance of any of the Securities provided that an event of
default does not occur as described in Section 3 of the Note. The Company has
furnished to the Buyer true and correct copies of the Company’s Certificate of
Incorporation as in effect on the date hereof (“Certificate of Incorporation”),
the Company’s By-laws, as in effect on the date hereof (the “By-laws”), and the
terms of all securities convertible into or exercisable for Common Stock of the
Company and the material rights of the holders thereof in respect thereto. In
addition, there is no agreement or arrangement that has the effect of obligating
the Company or any of its Subsidiaries, as a result of the transactions
contemplated by this Agreement, the Note, the Warrant, the Intercreditor
Agreement or the Transfer Agent Instructions to establish rights or otherwise
benefit any person in a manner equal to, or more favorable than, the terms
hereof or thereof.

 

d. Issuance of Conversion Shares and Warrant Shares. The Conversion Shares
(issuable, and applicable, only upon an event of default as described in Section
3 of the Note) are duly authorized and reserved for issuance and, upon
conversion of the Note (only upon an event of default as described in Section
3,2 of the Note) in accordance with its terms, will be validly issued, fully
paid and non-assessable, and free from all taxes, liens, claims and encumbrances
with respect to the issue thereof and shall not be subject to preemptive rights
or other similar rights of shareholders of the Company and will not impose
personal liability upon the holder thereof. The Warrant Shares are duly
authorized and reserved for issuance and, upon exercise of the Warrant in
accordance with its terms, will be validly issued, fully paid and
non-assessable, and free from all taxes, liens, claims and encumbrances with
respect to the issue thereof and shall not be subject to preemptive rights or
other similar rights of shareholders of the Company and will not impose personal
liability upon the holder thereof.

 

e. [Intentionally Omitted].

 

f. Acknowledgment of Dilution. The Company understands and acknowledges the
potentially dilutive effect to the Common Stock upon the issuance of Conversion
Shares upon conversion of the Note (only upon an event of default as described
in Section 3 of the Note) and Warrant Shares upon exercise of the Warrant. The
Company further acknowledges that its obligation to issue, upon conversion of
the Note (only upon an event of default as described in Section 3 of the Note)
or exercise of the Warrant, the Conversion Shares and the Warrant Shares,
respectively, in accordance with this Agreement, the Note and the Warrant is
absolute and unconditional regardless of the dilutive effect that such issuance
may have on the ownership interests of other shareholders of the Company.

 

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g. Security; No Conflicts. The obligations of the Company under the Note are
secured by (i) all shares of Common Stock, stock options and warrants held by
certain members of management of the Company pursuant to the Pledge Agreement
and (2) all assets of the Company and its Subsidiaries pursuant to the Security
Agreement. The execution, delivery and performance of this Agreement, the Note,
the Security Agreement, the Intercreditor Agreement, the Irrevocable Transfer
Agent Instructions, and the Warrant by the Company and the consummation by the
Company of the transactions contemplated hereby and thereby (including, without
limitation, the issuance and reservation for issuance of the Conversion Shares
(which shall only occur upon an event of default as described in Section 3 of
the Note) and the Warrant Shares) will not (i) conflict with or result in a
violation of any provision of the Certificate of Incorporation or By-laws, or
(ii) violate or conflict with, or result in a breach of any provision of, or
constitute a default (or an event which with notice or lapse of time or both
could become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, note, evidence of
indebtedness, indenture, patent, patent license or instrument to which the
Company or any of its Subsidiaries is a party, or (iii) result in a violation of
any law, rule, regulation, order, judgment or decree (including federal and
state securities laws and regulations and regulations of any self-regulatory
organizations to which the Company or its securities are subject) applicable to
the Company or any of its Subsidiaries or by which any property or asset of the
Company or any of its Subsidiaries is bound or affected (except for such
conflicts, defaults, terminations, amendments, accelerations, cancellations and
violations as would not, individually or in the aggregate, have a Material
Adverse Effect). Neither the Company nor any of its Subsidiaries is in violation
of its Certificate of Incorporation, By-laws or other organizational documents
and neither the Company nor any of its Subsidiaries is in default (and as of the
time of issuance of the Note. no event exists which with notice or lapse of time
or both could put the Company or any of its Subsidiaries in default) under, and
neither the Company nor any of its Subsidiaries has taken any action or failed
to take any action that would give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture or
instrument to which the Company or any of its Subsidiaries is a party or by
which any property or assets of the Company or any of its Subsidiaries is bound
or affected, except for possible defaults as would not, individually or in the
aggregate, have a Material Adverse Effect. The businesses of the Company and its
Subsidiaries, if any, are not being conducted, and shall not be conducted so
long as the Buyer owns any of the Securities, in violation of any law, ordinance
or regulation of any governmental entity. Except as specifically contemplated by
this Agreement and as required under the 1933 Act and any applicable state
securities laws, the Company is not required to obtain any consent,
authorization or order of, or make any filing or registration with, any court,
governmental agency, regulatory agency, self-regulatory organization or stock
market or any third party in order for it to execute, deliver or perform any of
its obligations under this Agreement, the Note, the Security Agreement, the
Intercreditor Agreement, the Irrevocable Transfer Agent Instructions, and the
Warrant in accordance with the terms hereof or thereof or to issue and sell the
Note and the Warrant in accordance with the terms hereof and to issue, upon
conversion of the Note (only upon an event of default as described in Section 3
of the Note), Conversion Shares and upon exercise of the Warrant, the Warrant
Shares, other than a notice filing on Form D and applicable state securities
(“Blue Sky”) filings in reliance upon the exemptions from securities
registration. All consents, authorizations, orders, filings and registrations
which the Company is required to obtain pursuant to the preceding sentence have
been obtained or effected on or prior to the date hereof, excluding notice
filing on Form D with the SEC, and applicable Blue Sky filings which will be
made immediately following the issuance of the Note. If the Company is listed on
the Over-the-Counter Bulletin Board, the OTCQB Market operated by OTC Markets
Group, Inc. or any successor to such markets (collectively, the “OTCBB”), the
Company is not in violation of the listing requirements of the OTCBB and does
not reasonably anticipate that the Common Stock will be delisted by the OTCBB in
the foreseeable future. The Company and its Subsidiaries are unaware of any
facts or circumstances which might give rise to any of the foregoing.

 

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h. SEC Documents; Financial Statements. The Company has timely filed all
reports, schedules, forms, statements and other documents required to be filed
by it with the SEC pursuant to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the “1934 Act”) (all of the foregoing filed
prior to the date hereof and all exhibits included therein and financial
statements and schedules thereto and documents (other than exhibits to such
documents) incorporated by reference therein, being hereinafter referred to
herein as the “SEC Documents”). As of their respective dates, the SEC Documents
complied in all material respects with the requirements of the 1934 Act and the
rules and regulations of the SEC promulgated thereunder applicable to the SEC
Documents, and none of the SEC Documents, at the time they were filed with the
SEC, contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. None of the statements made in any such SEC Documents is, or has
been, required to be amended or updated under applicable law (except for such
statements as have been amended or updated in subsequent filings prior the date
hereof). As of their respective dates, the financial statements of the Company
included in the SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto. Such financial statements have been prepared in
accordance with United States generally accepted accounting principles,
consistently applied, during the periods involved and fairly present in all
material respects the consolidated financial position of the Company and its
consolidated Subsidiaries as of the dates thereof and the consolidated results
of their operations and cash flows for the periods then ended (subject, in the
case of unaudited statements, to normal year-end audit adjustments). Except as
set forth in the financial statements of the Company included in the SEC
Documents, the Company has no liabilities, contingent or otherwise, other than
(i) liabilities incurred in the ordinary course of business subsequent to its
most recent quarterly report on Form 10-Q filed on May 19, 2016, and (ii)
obligations under contracts and commitments incurred in the ordinary course of
business and not required under generally accepted accounting principles to be
reflected in such financial statements, which, individually or in the aggregate,
are not material to the financial condition or operating results of the Company.
The Company is subject to the reporting requirements of the 1934 Act.

 

i. Absence of Certain Changes. Since the date of its most recent quarterly
report on Form 10-Q, filed on May 19, 2016, there has been no material adverse
change and no material adverse development in the assets, liabilities, business,
properties, operations, financial condition, results of operations, prospects or
1934 Act reporting status of the Company or any of its Subsidiaries.

 

j. Absence of Litigation. There is no action, suit, claim, proceeding, inquiry
or investigation before or by any court, public board, government agency,
self-regulatory organization or body pending or, to the knowledge of the Company
or any of its Subsidiaries, threatened against or affecting the Company or any
of its Subsidiaries, or their officers or directors in their capacity as such,
that could have a Material Adverse Effect. The SEC Documents contain a complete
list and summary description of any pending or, to the knowledge of the Company,
threatened proceeding against or affecting the Company or any of its
Subsidiaries, without regard to whether it would have a Material Adverse Effect.
The Company and its Subsidiaries are unaware of any facts or circumstances which
might give rise to any of the foregoing.

 

k. Intellectual Property. The Company and each of its Subsidiaries owns or
possesses the requisite licenses or rights to use all patents, patent
applications, patent rights, inventions, know-how, trade secrets, trademarks,
trademark applications, service marks, service names, trade names and copyrights
(“Intellectual Property”) necessary to enable it to conduct its business as now
operated (and, as presently contemplated to be operated in the future); there is
no claim or action by any person pertaining to, or proceeding pending, or to the
Company’s knowledge threatened, which challenges the right of the Company or of
a Subsidiary with respect to any Intellectual Property necessary to enable it to
conduct its business as now operated (and, as presently contemplated to be
operated in the future); to the best of the Company’s knowledge, the Company’s
or its Subsidiaries’ current and intended products, services and processes do
not infringe on any Intellectual Property or other rights held by any person;
and the Company is unaware of any facts or circumstances which might give rise
to any of the foregoing. The Company and each of its Subsidiaries have taken
reasonable security measures to protect the secrecy, confidentiality and value
of their Intellectual Property.

 

l. No Materially Adverse Contracts, Etc. Neither the Company nor any of its
Subsidiaries is subject to any charter, corporate or other legal restriction, or
any judgment, decree, order, rule or regulation which in the judgment of the
Company’s officers has or is expected in the future to have a Material Adverse
Effect. Neither the Company nor any of its Subsidiaries is a party to any
contract or agreement which in the judgment of the Company’s officers has or is
expected to have a Material Adverse Effect.

 

m. Tax Status. The Company and each of its Subsidiaries has made or filed all
federal, state and foreign income and all other tax returns, reports and
declarations required by any jurisdiction to which it is subject (unless and
only to the extent that the Company and each of its Subsidiaries has set aside
on its books provisions reasonably adequate for the payment of all unpaid and
unreported taxes) and has paid all taxes and other governmental assessments and
charges that are material in amount, shown or determined to be due on such
returns, reports and declarations, except those being contested in good faith
and has set aside on its books provisions reasonably adequate for the payment of
all taxes for periods subsequent to the periods to which such returns, reports
or declarations apply. There are no unpaid taxes in any material amount claimed
to be due by the taxing authority of any jurisdiction, and the officers of the
Company know of no basis for any such claim. The Company has not executed a
waiver with respect to the statute of limitations relating to the assessment or
collection of any foreign, federal, state or local tax. None of the Company’s
tax returns is presently being audited by any taxing authority.

 

 7 

 

 

n. Transactions with Affiliates. Except for loans made to the Company officers
and directors and arm’s length transactions pursuant to which the Company or any
of its Subsidiaries makes payments in the ordinary course of business upon terms
no less favorable than the Company or any of its Subsidiaries could obtain from
third parties and other than the grant of stock options described in the SEC
Documents, none of the officers, directors, or employees of the Company is
presently a party to any transaction with the Company or any of its Subsidiaries
(other than for services as employees, officers and directors), including any
contract, agreement or other arrangement providing for the furnishing of
services to or by, providing for rental of real or personal property to or from,
or otherwise requiring payments to or from any officer, director or such
employee or, to the knowledge of the Company, any corporation, partnership,
trust or other entity in which any officer, director, or any such employee has a
substantial interest or is an officer, director, trustee or partner.

 

o. Disclosure. All information relating to or concerning the Company or any of
its Subsidiaries set forth in this Agreement and provided to the Buyer pursuant
to Section 2(d) hereof and otherwise in connection with the transactions
contemplated hereby is true and correct in all material respects and the Company
has not omitted to state any material fact necessary in order to make the
statements made herein or therein, in light of the circumstances under which
they were made, not misleading. No event or circumstance has occurred or exists
with respect to the Company or any of its Subsidiaries or its or their business,
properties, prospects, operations or financial conditions, which, under
applicable law, rule or regulation, requires public disclosure or announcement
by the Company but which has not been so publicly announced or disclosed
(assuming for this purpose that the Company’s reports filed under the 1934 Act
are being incorporated into an effective registration statement filed by the
Company under the 1933 Act).

 

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

 

q. No Integrated Offering. Neither the Company, nor any of its affiliates, nor
any person acting on its or their behalf, has directly or indirectly made any
offers or sales in any security or solicited any offers to buy any security
under circumstances that would require registration under the 1933 Act of the
issuance of the Securities to the Buyer. The issuance of the Securities to the
Buyer will not be integrated with any other issuance of the Company’s securities
(past, current or future) for purposes of any shareholder approval provisions
applicable to the Company or its securities.

 

r. No Brokers. The Company has taken no action which would give rise to any
claim by any person for brokerage commissions, transaction fees or similar
payments relating to this Agreement or the transactions contemplated hereby.

 

s. Permits; Compliance. The Company and each of its Subsidiaries is in
possession of all franchises, grants, authorizations, licenses, permits,
easements, variances, exemptions, consents, certificates, approvals and orders
necessary to own, lease and operate its properties and to carry on its business
as it is now being conducted (collectively, the “Company Permits”), and there is
no action pending or, to the knowledge of the Company, threatened regarding
suspension or cancellation of any of the Company Permits. Neither the Company
nor any of its Subsidiaries is in conflict with, or in default or violation of,
any of the Company Permits, except for any such conflicts, defaults or
violations which, individually or in the aggregate, would not reasonably be
expected to have a Material Adverse Effect. Since March 31, 2016, neither the
Company nor any of its Subsidiaries has received any notification with respect
to possible conflicts, defaults or violations of applicable laws, except for
notices relating to possible conflicts, defaults or violations, which conflicts,
defaults or violations would not have a Material Adverse Effect.

 

 8 

 

 

t. Environmental Matters.

 

(i) There are, to the Company’s knowledge, with respect to the Company or any of
its Subsidiaries or any predecessor of the Company, no past or present
violations of Environmental Laws (as defined below), releases of any material
into the environment, actions, activities, circumstances, conditions, events,
incidents, or contractual obligations which may give rise to any common law
environmental liability or any liability under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 or similar federal, state,
local or foreign laws and neither the Company nor any of its Subsidiaries has
received any notice with respect to any of the foregoing, nor is any action
pending or, to the Company’s knowledge, threatened in connection with any of the
foregoing. The term “Environmental Laws” means all federal, state, local or
foreign laws relating to pollution or protection of human health or the
environment (including, without limitation, ambient air, surface water,
groundwater, land surface or subsurface strata), including, without limitation,
laws relating to emissions, discharges, releases or threatened releases of
chemicals, pollutants contaminants, or toxic or hazardous substances or wastes
(collectively, “Hazardous Materials”) into the environment, or otherwise
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Hazardous Materials, as well as all
authorizations, codes, decrees, demands or demand letters, injunctions,
judgments, licenses, notices or notice letters, orders, permits, plans or
regulations issued, entered, promulgated or approved thereunder.

 

(ii) Other than those that are or were stored, used or disposed of in compliance
with applicable law, no Hazardous Materials are contained on or about any real
property currently owned, leased or used by the Company or any of its
Subsidiaries, and no Hazardous Materials were released on or about any real
property previously owned, leased or used by the Company or any of its
Subsidiaries during the period the property was owned, leased or used by the
Company or any of its Subsidiaries, except in the normal course of the Company’s
or any of its Subsidiaries’ business.

 

(iii) There are no underground storage tanks on or under any real property
owned, leased or used by the Company or any of its Subsidiaries that are not in
compliance with applicable law.

 

u. Title to Property. The Company and its Subsidiaries have good and marketable
title in fee simple to all real property and good and marketable title to all
personal property owned by them which is material to the business of the Company
and its Subsidiaries, in each case free and clear of all liens, encumbrances and
defects except for outstanding security interests as have been disclosed to
Buyer, or such as would not have a Material Adverse Effect. Any real property
and facilities held under lease by the Company and its Subsidiaries are held by
them under valid, subsisting and enforceable leases with such exceptions as
would not have a Material Adverse Effect.

 

v. Insurance. The Company and each of its Subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks and in such
amounts as management of the Company believes to be prudent and customary in the
businesses in which the Company and its Subsidiaries are engaged. Neither the
Company nor any such Subsidiary has any reason to believe that it will not be
able to renew its existing insurance coverage as and when such coverage expires
or to obtain similar coverage from similar insurers as may be necessary to
continue its business at a cost that would not have a Material Adverse Effect.
Upon written request the Company will provide to the Buyer true and correct
copies of all policies relating to directors’ and officers’ liability coverage,
errors and omissions coverage, and commercial general liability coverage.

 

w. Internal Accounting Controls. The Company and each of its Subsidiaries
maintain a system of internal accounting controls sufficient, in the judgment of
the Company’s board of directors, to provide reasonable assurance that (i)
transactions are executed in accordance with management’s general or specific
authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability, (iii) access to
assets is permitted only in accordance with management’s general or specific
authorization and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.

 

 9 

 

 

x. Foreign Corrupt Practices. Neither the Company, nor any of its Subsidiaries,
nor any director, officer, agent, employee or other person acting on behalf of
the Company or any Subsidiary has, in the course of his actions for, or on
behalf of, the Company, used any corporate funds for any unlawful contribution,
gift, entertainment or other unlawful expenses relating to political activity;
made any direct or indirect unlawful payment to any foreign or domestic
government official or employee from corporate funds; violated or is in
violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977, as
amended, or made any bribe, rebate, payoff, influence payment, kickback or other
unlawful payment to any foreign or domestic government official or employee.

 

y. Solvency. The Company (after giving effect to the transactions contemplated
by this Agreement) is solvent (i.e., its assets have a fair market value in
excess of the amount required to pay its probable liabilities on its existing
debts as they become absolute and matured) and currently the Company has no
information that would lead it to reasonably conclude that the Company would
not, after giving effect to the transaction contemplated by this Agreement, have
the ability to, nor does it intend to take any action that would impair its
ability to, pay its debts from time to time incurred in connection therewith as
such debts mature. The Company’s financial statements for its most recent fiscal
year end and interim financial statements have been prepared assuming the
Company will continue as a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business.

 

z. No Investment Company. The Company is not, and upon the issuance and sale of
the Securities as contemplated by this Agreement will not be an “investment
company” required to be registered under the Investment Company Act of 1940 (an
“Investment Company”). The Company is not controlled by an Investment Company.

 

aa. No Off Balance Sheet Arrangements. There is no transaction, arrangement, or
other relationship between the Company or any of its Subsidiaries and an
unconsolidated or other off balance sheet entity that is required to be
disclosed by the Company in its 1934 Act filings and is not so disclosed or that
otherwise could be reasonably likely to have a Material Adverse Effect.

 

bb. No Disqualification Events. None of the Company, any of its predecessors,
any affiliated issuer, any director, executive officer, other officer of the
Company participating in the offering hereunder, any beneficial owner of 20% or
more of the Company’s outstanding voting equity securities, calculated on the
basis of voting power, nor any promoter (as that term is defined in Rule 405
under the 1933 Act) connected with the Company in any capacity at the time of
sale (each, an “Issuer Covered Person”) is subject to any of the “Bad Actor”
disqualifications described in Rule 506(d)(1)(i) to (viii) under the 1933 Act (a
“Disqualification Event”), except for a Disqualification Event covered by Rule
506(d)(2) or (d)(3). The Company has exercised reasonable care to determine
whether any Issuer Covered Person is subject to a Disqualification Event.

 

cc. Manipulation of Price. The Company has not, and to its knowledge no one
acting on its behalf has: (i) taken, directly or indirectly, any action designed
to cause or to result, or that could reasonably be expected to cause or result,
in the stabilization or manipulation of the price of any security of the Company
to facilitate the sale or resale of any of the Securities, (ii) sold, bid for,
purchased, or paid any compensation for soliciting purchases of, any of the
Securities, or (iii) paid or agreed to pay to any person any compensation for
soliciting another to purchase any other securities of the Company.

 

dd. Breach of Representations and Warranties by the Company. The Company agrees
that if the Company breaches any of the representations or warranties set forth
in this Section 3 and in addition to any other remedies available to the Buyer
pursuant to this Agreement, it will be considered an Event of Default under
Section 3.4 of the Note.

 

 10 

 

 

4. ADDITIONAL COVENANTS, AGREEMENTS AND ACKNOWLEDGEMENTS.

 

a. Best Efforts. The parties shall use their best efforts to satisfy timely each
of the conditions described in Section 6 and 7 of this Agreement.

 

b. Form D; Blue Sky Laws. The Company agrees to file a Form D with respect to
the Securities as required under Regulation D and to provide a copy thereof to
the Buyer promptly after such filing. The Company shall, on or before the
Closing Date, or as soon as commercially practicable thereafter, take such
action as the Company shall reasonably determine is necessary to exempt the
Securities from the registration requirements of the 1933 Act for sale to the
Buyer pursuant to this Agreement under applicable securities or “blue sky” laws
of the states of the United States.

 

c. Use of Proceeds. The Company shall use the proceeds for general working
capital purposes and other purposes expressly set forth in the use of proceeds
statement previously delivered to Buyer and not for the repayment of any
indebtedness owed to officers, directors or employees of the Company or their
affiliates or in violation or contravention of any applicable law, rule or
regulation.

 

d. Right of Participation in Subsequent Offerings.

 

i. From the date first written above until the first anniversary of the Closing
Date, the Company will not: (i) directly or indirectly, offer, sell, grant any
option to purchase (other than pursuant to its 2014 Equity Incentive Plan), or
otherwise dispose of (or announce any offer, sale, grant or any option to
purchase or other disposition of) any of its or its Subsidiaries’ debt, equity
or equity equivalent securities, including without limitation any debt,
preferred shares or other instrument or security that is, at any time during its
life and under any circumstances, convertible into or exchangeable or
exercisable for Common Stock (any such offer, sale, grant, disposition or
announcement being referred to as a “Subsequent Placement”) or (ii) enter into
any definitive agreement with regard to the foregoing, in each case unless the
Company shall have first complied with this Section 4(d).

 

ii. The Company shall deliver to the Buyer an irrevocable written notice (the
“Offer Notice”) of any proposed or intended issuance or sale or exchange (the
“Offer”) of the securities being offered (the “Offered Securities”) in a
Subsequent Placement, which Offer Notice shall (w) identify and describe the
Offered Securities, (x) describe the price (if it has been definitively
determined) and other terms upon which they are to be issued, sold or exchanged,
and the number or amount of the Offered Securities to be issued (if it has been
definitively determined), sold or exchanged, (y) identify the persons (if known)
or entities (if known) to which or with which the Offered Securities are to be
offered, issued, sold or exchanged and (z) offer to issue and sell to or
exchange with the Buyer all of the Offered Securities (the subscription amount
for such aggregate number of Offered Securities, the “Subscription Amount”). For
the avoidance of doubt, and notwithstanding any provision set forth in this
Section 4.d, an Offer Notice is hereby provided to Buyer of the Company’s
intention to initiate a private placement, in the amount of not less than four
million and 00/100 dollars ($4,000,000), with the structure of the private
placement anticipated to consist of common stock and attached warrants,
immediately following the issuance of this Note. Buyer shall provide notice in
writing to the Company of its irrevocable election to partictipate, or not, in
the private placement within the Offer Period specified in Section 4.d.iii
immediately below, with the Offer Period to commence on the date of issuance of
the Note.

 

iii. The Buyer may accept an Offering with respect to all, or any portion, of
the Subscription Amount. To accept an Offer, in whole or in part, the Buyer must
deliver a written notice to the Company prior to the end of the third (3rd)
Business Day after the Buyer’s receipt of the Offer Notice (the “Offer Period”),
setting forth the portion of the Subscription Amount that the Buyer definitively
elects to purchase (the “Notice of Acceptance”).

 

 11 

 

 

e. Usury. To the extent it may lawfully do so, the Company hereby agrees not to
insist upon or plead or in any manner whatsoever claim, and will resist any and
all efforts to be compelled to take the benefit or advantage of, usury laws
wherever enacted, now or at any time hereafter in force, in connection with any
action or proceeding that may be brought by the Buyer in order to enforce any
right or remedy under this Agreement, the Note, the Pledge Agreement, the
Security Agreement, the Intercreditor Agreement, the Irrevocable Transfer Agent
Instructions, and any document, agreement or instrument contemplated thereby.
Notwithstanding any provision to the contrary contained in this Agreement, the
Note, the Security Agreement, the Intercreditor Agreement, the Irrevocable
Transfer Agent Instructions, and any document, agreement or instrument
contemplated thereby, it is expressly agreed and provided that the total
liability of the Company under this Agreement, the Note, the Security Agreement,
the Intercreditor Agreement, the Irrevocable Transfer Agent Instructions, or any
document, agreement or instrument contemplated thereby for payments which under
New York law are in the nature of interest shall not exceed the maximum lawful
rate authorized under applicable law (the “Maximum Rate”), and, without limiting
the foregoing, in no event shall any rate of interest or default interest, or
both of them, when aggregated with any other sums which under New York law in
the nature of interest that the Company may be obligated to pay under this
Agreement, the Note, the Security Agreement, the Intercreditor Agreement, the
Irrevocable Transfer Agent Instructions, and any document, agreement or
instrument contemplated thereby exceed such Maximum Rate. It is agreed that if
the maximum contract rate of interest allowed by New York law and applicable to
this Agreement, the Note, the Security Agreement, the Intercreditor Agreement,
the Irrevocable Transfer Agent Instructions, and any document, agreement or
instrument contemplated thereby is increased or decreased by statute or any
official governmental action subsequent to the date hereof, the new maximum
contract rate of interest allowed by law will be the Maximum Rate applicable to
this Agreement, the Note, the Security Agreement, the Intercreditor Agreement,
the Irrevocable Transfer Agent Instructions, and any document, agreement or
instrument contemplated thereby from the effective date thereof forward, unless
such application is precluded by applicable law. If under any circumstances
whatsoever, interest in excess of the Maximum Rate is paid by the Company to the
Buyer with respect to indebtedness evidenced by this Agreement, the Note, the
Pledge Agreement , the Security Agreement, the Intercreditor Agreement, the
Irrevocable Transfer Agent Instructions, and any document, agreement or
instrument contemplated thereby, such excess shall be applied by the Buyer to
the unpaid principal balance of any such indebtedness or be refunded to the
Company, the manner of handling such excess to be at the Buyer’s election.

 

f. Restriction on Activities. Commencing as of the date first above written, and
until the the Note is no longer outstanding, the Company shall not, directly or
indirectly, without the Buyer’s prior written consent, which consent shall not
be unreasonably withheld: (a) change the nature of its business; (b) sell,
divest, acquire, change the structure of any material assets other than in the
ordinary course of business, expressly excluding the sale or license of the
Company’s metal-air battery business, which is not core to the Company’s
business; or (c) accept any offers for a variable rate debt transactions (i.e.,
transactions where the conversion or exercise price of the security issued by
the Company varies based on the market price of the Common Stock).

 

g. Listing. So long as the Securities are outstanding , the Company will
maintain the listing and trading of its Common Stock on the OTCBB or any
equivalent replacement exchange or electronic quotation system (including but
not limited to the Pink Sheets electronic quotation system) and will comply in
all respects with the Company’s reporting, filing and other obligations under
the bylaws or rules of the Financial Industry Regulatory Authority (“FINRA”) and
such exchanges, as applicable. The Company shall promptly provide to the Buyer
copies of any notices it receives from the OTCBB and any other exchanges or
electronic quotation systems on which the Common Stock is then traded regarding
the continued eligibility of the Common Stock for listing on such exchanges and
quotation systems.

 

h. Corporate Existence. The Company will, so long as the Buyer beneficially owns
any of the Securities, maintain its corporate existence and shall not sell all
or substantially all of the Company’s assets, except in the event of a merger or
consolidation or sale of all or substantially all of the Company’s assets, where
the surviving or successor entity in such transaction (i) assumes the Company’s
obligations hereunder and under the agreements and instruments entered into in
connection herewith and (ii) is a publicly traded corporation whose Common Stock
is listed for trading or quotation on the OTCBB, any tier of the NASDAQ Stock
Market, the New York Stock Exchange or the NYSE MKT.

 

i. No Integration. The Company shall not make any offers or sales of any
security (other than the Securities) under circumstances that would require
registration of the Securities being offered or sold hereunder under the 1933
Act or cause the offering of the Securities to be integrated with any other
offering of securities by the Company for the purpose of any stockholder
approval provision applicable to the Company or its securities.

 

 12 

 

 

j. Breach of Covenants. The Company acknowledges and agrees that if the Company
breaches any of the covenants set forth in this Section 4, in addition to any
other remedies available to the Buyer pursuant to this Agreement, it will be
considered an Event of Default under Section 3.4 of the Note.

 

k. Compliance with 1934 Act; Public Information Failures. For so long as any of
the Securities are outstandinghe Company shall comply with the reporting
requirements of the 1934 Act at all times. During the period that the Buyer
beneficially owns the Note or the Warrant or any of the Conversion Shares, if
the Company shall (i) fail for any reason to satisfy the requirements of Rule
144(c)(1), including, without limitation, the failure to satisfy the current
public information requirements under Rule 144(c) or (ii) if the Company becomes
an issuer described in Rule 144(i)(1)(i), and the Company shall fail to satisfy
any condition set forth in Rule 144(i)(2) (each, a “Public Information Failure”)
then, as partial relief for the damages to the Buyer by reason of any such delay
in or reduction of its ability to sell the Securities (which remedy shall not be
exclusive of any other remedies available pursuant to this Agreement, the Note
or the Warrant, or at law or in equity), the Company shall pay to the Buyer an
amount in cash equal to two percent (2%) of the Purchase Price on each of
trading day of a Public Information Failure until the date such Public
Information Failure is cured. The payments to which a holder shall be entitled
pursuant to this Section 4(k) are referred to herein as “Public Information
Failure Payments.” Public Information Failure Payments shall be paid on the
earlier of (i) the last day of the calendar month during which such Public
Information Failure Payments are incurred and (iii) the third business day after
the event or failure giving rise to the Public Information Failure Payments is
cured. In the event the Company fails to make Public Information Failure
Payments in a timely manner, such Public Information Failure Payments shall bear
interest at the rate of 2% per month (prorated for partial months) until paid in
full.

 

l. Intentionally left blank.

 

m. Disclosure of Transactions and Other Material Information. By 9:00 a.m., New
York time, on or before the fourth calendar day following the date this
Agreement has been fully executed (and if such day falls on a weekend, then no
later than the immediately following trading day), the Company shall file a
Current Report on Form 8-K describing the terms of the transactions contemplated
by this Agreement in the form required by the 1934 Act and attaching this
Agreement, the form of Note, the form of Pledge Agreement, the form of Security
Agreement and the form of Warrant (the “8-K Filing”). From and after the filing
of the 8-K Filing with the SEC, the Buyer shall ensure that it is not in
possession of any material, nonpublic information received from the Company, any
of its Subsidiaries or any of their respective officers, directors, employees or
agents that is not disclosed in the 8-K Filing. In addition, effective upon the
filing of the 8-K Filing, the Company acknowledges and agrees that any and all
confidentiality or similar obligations under any agreement, whether written or
oral, between the Company, any of its Subsidiaries or any of their respective
officers, directors, affiliates, employees or agents, on the one hand, and the
Buyer or any of its affiliates, on the other hand, shall terminate.

 

n. Legal Counsel Opinions. Upon the request of the Buyer from to time to time,
the Company shall be responsible (at its cost) for promptly supplying to the
Company’s transfer agent and the Buyer a customary legal opinion letter of its
counsel (the “Legal Counsel Opinion”) to the effect that the resale of the
Conversion Shares and the Warrant Shares by the Buyer or its affiliates,
successors and assigns is exempt from the registration requirements of the 1933
Act pursuant to Rule 144 (provided the requirements of Rule 144 are satisfied
and provided the Conversion Shares and the Warrant Shares are not then
registered under the 1933 Act for resale pursuant to an effective registration
statement). Should the Company’s legal counsel fail for any reason to issue the
Legal Counsel Opinion, the Buyer may (at the Company’s cost) secure another
legal counsel to issue the Legal Counsel Opinion, and the Company will instruct
its transfer agent to accept such opinion.

 

o. Piggyback Registration Rights. The Company hereby grants to the Buyer the
registration rights set forth on Exhibit F hereto.

 

 13 

 

 

p. Most Favored Nation. While the Note or any principal amount, interest or fees
or expenses due thereunder remain outstanding and unpaid, the Company shall not
enter into any public or private offering of its securities (including
securities convertible into shares of Common Stock) with any individual or
entity (an “Other Investor”) that has the effect of establishing rights or
otherwise benefiting such Other Investor in a manner more favorable in any
material respect to such Other Investor than the rights and benefits established
in favor of the Buyer by this Agreement, the Note, the Pledge Agreement, the
Security Agreement, the Intercreditor Agreement, the Irrevocable Transfer Agent
Instructions, or the Warrant unless, in any such case, the Buyer has been
provided with such rights and benefits pursuant to a definitive written
agreement or agreements between the Company and the Buyer.

 

q. Subsequent Variable Rate Transactions. From the date hereof until such time
as the Buyer no longer holds the Note or any of the Conversion Shares, the
Company shall be prohibited from effecting or entering into an agreement
involving a Variable Rate Transaction. “Variable Rate Transaction” means a
transaction in which the Company (i) issues or sells any debt or equity
securities that are convertible into, exchangeable or exercisable for, or
include the right to receive, additional shares of Common Stock either (A) at a
conversion price, exercise price or exchange rate or other price that is based
upon, and/or varies with, the trading prices of or quotations for the shares of
Common Stock at any time after the initial issuance of such debt or equity
securities or (B) with a conversion, exercise or exchange price that is subject
to being reset at some future date after the initial issuance of such debt or
equity security or upon the occurrence of specified or contingent events
directly or indirectly related to the business of the Company or the market for
the Common Stock or (ii) enters into any agreement, including, but not limited
to, an equity line of credit, whereby the Company may issue securities at a
future determined price. Any Purchaser shall be entitled to obtain injunctive
relief against the Company to preclude any such issuance, which remedy shall be
in addition to any right to collect damages. Notwithstanding the foregoing, and
for the avoidance of doubt, the Company may enter into a Variable Rate
Transaction, at its election, provided the closing proceeds of a Variable Rate
Transaction are utilized to repay the Note in full,

 

5. Transfer Agent Instructions. The Company shall issue irrevocable instructions
to its transfer agent to issue certificates, registered in the name of the Buyer
or its nominee, for, upon conversion of the Note, the Conversion Shares (upon
the occurrence of an Event of Default pursuant to Section 3 of the Note) and
upon exercise of the Warrant, the Warrant Shares, in such amounts as specified
from time to time by the Buyer to the Company in accordance with the terms
thereof (the “Irrevocable Transfer Agent Instructions”). In the event that the
Company proposes to replace its transfer agent, the Company shall provide, prior
to the effective date of such replacement, a fully executed Irrevocable Transfer
Agent Instructions in a form as initially delivered pursuant to this Agreement
(including but not limited to the provision to irrevocably reserved shares of
Common Stock in the Reserved Amount (as defined in the Note)) signed by the
successor transfer agent to the Company and the Company. Prior to registration
of the Conversion Shares or the Warrant Shares under the 1933 Act or the date on
which the Conversion Shares may be sold pursuant to Rule 144 without any
restriction as to the number of Securities as of a particular date that can then
be immediately sold, all such certificates shall bear the restrictive legend
specified in Section 2(g) of this Agreement. The Company warrants that: (i) no
instruction other than the Irrevocable Transfer Agent Instructions referred to
in this Section 5 will be given by the Company to its transfer agent and that
the Securities shall otherwise be freely transferable on the books and records
of the Company as and to the extent provided in this Agreement and the Note;
(ii) it will not direct its transfer agent not to transfer or delay, impair,
and/or hinder its transfer agent in transferring (or issuing)(electronically or
in certificated form) any certificate for Securities to be issued to the Buyer
upon conversion of or otherwise pursuant to the Note or upon exercise of or
otherwise pursuant to the Warrant as and when required by the Note, the Warrant
and this Agreement; (iii) it will not fail to remove (or directs its transfer
agent not to remove or impairs, delays, and/or hinders its transfer agent from
removing) any restrictive legend (or to withdraw any stop transfer instructions
in respect thereof) on any certificate for any Securities issued to the Buyer
upon conversion of or otherwise pursuant to the Note or upon exercise of or
otherwise pursuant to the Warrant as and when required by the Note, the Warrant
and this Agreement and (iv) it will provide any required corporate resolutions
and issuance approvals to its transfer agent within one (1) business day of each
conversion of the Note or exercise of the Warrant. Nothing in this Section shall
affect in any way the Buyer’s obligations and agreement set forth in Section
2(g) hereof to comply with all applicable prospectus delivery requirements, if
any, upon re-sale of the Securities. If the Buyer provides the Company, at the
cost of the Company, with (i) an opinion of counsel in form, substance and scope
customary for opinions in comparable transactions, to the effect that a public
sale or transfer of such Securities may be made without registration under the
1933 Act and such sale or transfer is effected or (ii) the Buyer provides
reasonable assurances that the Securities can be sold pursuant to Rule 144, the
Company shall permit the transfer, and, in the case of the Securities, promptly
instruct its transfer agent to issue one or more certificates, free from
restrictive legend, in such name and in such denominations as specified by the
Buyer. The Company acknowledges that a breach by it of its obligations hereunder
will cause irreparable harm to the Buyer, by vitiating the intent and purpose of
the transactions contemplated hereby. Accordingly, the Company acknowledges that
the remedy at law for a breach of its obligations under this Section 5 may be
inadequate and agrees, in the event of a breach or threatened breach by the
Company of the provisions of this Section, that the Buyer shall be entitled, in
addition to all other available remedies, to an injunction restraining any
breach and requiring immediate transfer, without the necessity of showing
economic loss and without any bond or other security being required.

 

 14 

 

 

6. Conditions to the Company’s Obligation to Sell. The obligation of the Company
hereunder to issue and sell the Note to the Buyer at the Closing is subject to
the satisfaction, at or before the Closing Date, of each of the following
conditions thereto, provided that these conditions are for the Company’s sole
benefit and may be waived by the Company at any time in its sole discretion:

 

a. The Buyer shall have executed this Agreement and delivered the same to the
Company.

 

b. The Buyer shall have delivered the Purchase Price in accordance with Section
1(b) above.

 

c. The representations and warranties of the Buyer shall be true and correct in
all material respects as of the date when made and as of the Closing Date, as
though made at that time (except for representations and warranties that speak
as of a specific date), and the Buyer shall have performed, satisfied and
complied in all material respects with the covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by the
Buyer at or prior to the Closing Date.

 

d. No litigation, statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by or in
any court or governmental authority of competent jurisdiction or any
self-regulatory organization having authority over the matters contemplated
hereby which prohibits the consummation of any of the transactions contemplated
by this Agreement.

 

e. Each of Gregory Hrncir and Kevin Maloney shall have executed the Pledge
Agreement and delivered the same to the Company.

 

f. The Company, the Buyer and each of the Lenders (as defined below) shall have
executed an intercreditor agreement in form satisfactory to the Buyer setting
out the relative rights of the Buyer and the Lenders (the “Intercreditor
Agreement”).

 

7. Conditions to The Buyer’s Obligation to Purchase. The obligation of the Buyer
hereunder to purchase the Note, on the Closing Date, is subject to the
satisfaction, at or before the Closing Date, of each of the following
conditions, provided that these conditions are for the Buyer’s sole benefit and
may be waived by the Buyer at any time in its sole discretion:

 

a. The Company shall have executed this Agreement and delivered the same to the
Buyer.

 

b. The Company shall have delivered to the Buyer the duly executed Note in such
denominations as the Buyer shall request and in accordance with Section 1(b)
above.

 

c. The Irrevocable Transfer Agent Instructions, in form and substance
satisfactory to the Buyer, shall have been delivered to and acknowledged in
writing by the Company’s Transfer Agent.

 

d. The representations and warranties of the Company shall be true and correct
in all material respects as of the date when made and as of Closing Date, as
though made at such time (except for representations and warranties that speak
as of a specific date) and the Company shall have performed, satisfied and
complied in all material respects with the covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by the
Company at or prior to the Closing Date.

 

e. No litigation, statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by or in
any court or governmental authority of competent jurisdiction or any
self-regulatory organization having authority over the matters contemplated
hereby which prohibits the consummation of any of the transactions contemplated
by this Agreement.

 

 15 

 

 

f. No event shall have occurred which could reasonably be expected to have a
Material Adverse Effect on the Company including but not limited to a change in
the 1934 Act reporting status of the Company or the failure of the Company to be
timely in its 1934 Act reporting obligations.

 

g. Trading in the Common Stock on the OTCBB shall not have been suspended by the
SEC, FINRA or the OTCBB.

 

h. The Company shall have delivered to the Buyer a certificate evidencing the
formation and good standing of the Company and each of its Subsidiaries in such
entity’s jurisdiction of formation issued by the Secretary of State (or
comparable office) of such jurisdiction, as of a date within ten (10) days of
the Closing Date.

 

i. The Company shall have obtained and delivered to the Buyer written waivers
and/or consents in favor of Buyer (in a form acceptable to the Buyer) from all
existing lenders of the Company, including, without limitation, Novus Capital
Group, LLC, James Baez-Silva, Kevin Maloney, and Stephen Hall, (collectively,
the “Lenders”), (i) approving the Company’s entry into this Agreement, the Note,
and the transactions contemplated hereby and thereby, including the incurrence
of the indebtedness evidenced by the Note and (ii) waiving any rights that they
may have to declare a default and to pursue any remedies or impose any penalties
thereon until no earlier than December __, 2016.

 

j. Each of Gregory Hrncir and Kevin Maloney shall have executed the Pledge
Agreement and delivered the same to the Buyer.

 

k. The Company, the Buyer and each of the Lenders shall have executed
Intercreditor Agreement.

 

l. The Company, the Buyer and the other investors shall have entered into the
Security Agreement.

 

m. The Buyers shall have received an opinion satisfactory in form and substance
to them from Gregory Hrncir.

 

n. The Company, the Buyer and each of the Lenders shall have executed the IP
Security Agreement of even date herewith.

 

8. Governing Law; Miscellaneous.

 

a. Governing Law; Venue. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York without regard to principles
of conflicts of laws. Any action brought by either party against the other
concerning the transactions contemplated by this Agreement, the Note, the Pledge
Agreement, the Security Agreement, the Intercreditor Agreement, the Irrevocable
Transfer Agent Instructions, the Warrant or any other agreement, certificate,
instrument or document contemplated hereby shall be brought only in the state
courts of New York or in the federal courts located in the state and county of
New York. The parties to this Agreement hereby irrevocably waive any objection
to jurisdiction and venue of any action instituted hereunder and shall not
assert any defense based on lack of jurisdiction or venue or based upon forum
non conveniens. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND
AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE
HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF THIS AGREEMENT OR ANY
TRANSACTIONS CONTEMPLATED HEREBY. The prevailing party shall be entitled to
recover from the other party its reasonable attorney’s fees and costs. Each
party hereby irrevocably waives personal service of process and consents to
process being served in any suit, action or proceeding in connection with this
Agreement, the Note, the Pledge Agreement, the Security Agreement, the
Intercreditor Agreement, the Irrevocable Transfer Agent Instructions, the
Warrant or any other agreement, certificate, instrument or document contemplated
hereby or thereby by mailing a copy thereof via registered or certified mail or
overnight delivery (with evidence of delivery) to such party at the address in
effect for notices to it under this Agreement and agrees that such service shall
constitute good and sufficient service of process and notice thereof. Nothing
contained herein shall be deemed to limit in any way any right to serve process
in any other manner permitted by law.

 

 16 

 

 

b. Counterparts. This Agreement may be executed in one or more counterparts,
each of which shall be deemed an original but all of which shall constitute one
and the same agreement and shall become effective when counterparts have been
signed by each party and delivered to the other party. A facsimile or .pdf
signature shall be considered due execution and shall be binding upon the
signatory thereto with the same force and effect as if the signature were an
original, not a facsimile or .pdf signature. Delivery of a counterpart signature
hereto by facsimile or email/.pdf transmission shall be deemed validly delivery
thereof.

 

c. Construction; Headings. This Agreement shall be deemed to be jointly drafted
by the Company and the Buyer and shall not be construed against any person as
the drafter hereof. The headings of this Agreement are for convenience of
reference only and shall not form part of, or affect the interpretation of, this
Agreement.

 

d. Severability. In the event that any provision of this Agreement, the Note,
the Pledge Agreement, the Security Agreement, the Intercreditor Agreement, the
Irrevocable Transfer Agent Instructions, the Warrant or any other agreement or
instrument delivered in connection herewith is invalid or unenforceable under
any applicable statute or rule of law, then such provision shall be deemed
inoperative to the extent that it may conflict therewith and shall be deemed
modified to conform with such statute or rule of law. Any such provision which
may prove invalid or unenforceable under any law shall not affect the validity
or enforceability of any other provision of this Agreement, the Note, the Pledge
Agreement,, the Security Agreement, the Intercreditor Agreement, the Irrevocable
Transfer Agent Instructions, the Warrant or any other agreement, certificate,
instrument or document contemplated hereby or thereby.

 

e. Entire Agreement; Amendments. This Agreement, the Note, the Pledge Agreement,
the Security Agreement, the Intercreditor Agreement, the Irrevocable Transfer
Agent Instructions, the Warrant and the instruments referenced herein contain
the entire understanding of the parties with respect to the matters covered
herein and therein and, except as specifically set forth herein or therein,
neither the Company nor the Buyer makes any representation, warranty, covenant
or undertaking with respect to such matters. No provision of this Agreement, the
Note, the Pledge Agreement, the Security Agreement, the Intercreditor Agreement,
the Irrevocable Transfer Agent Instructions, the Warrant or any agreement or
instrument contemplated hereby may be waived or amended other than by an
instrument in writing signed by the Buyer.

 

f. Notices. All notices, demands, requests, consents, approvals, and other
communications required or permitted hereunder shall be in writing and, unless
otherwise specified herein, shall be (i) personally served, (ii) deposited in
the mail, registered or certified, return receipt requested, postage prepaid,
(iii) delivered by reputable air courier service with charges prepaid, or (iv)
transmitted by hand delivery, telegram, e-mail or facsimile, addressed as set
forth below or to such other address as such party shall have specified most
recently by written notice. Any notice or other communication required or
permitted to be given hereunder shall be deemed effective (a) upon hand delivery
or delivery by e-mail or facsimile, with accurate confirmation generated by the
transmitting facsimile machine, at the address or number designated below (if
delivered on a business day during normal business hours where such notice is to
be received), or the first business day following such delivery (if delivered
other than on a business day during normal business hours where such notice is
to be received) or (b) on the second business day following the date of mailing
by express courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses for
such communications shall be:

 

If to the Company, to:

 

QUANTUMSPHERE, INC.

2905 Tech Center Drive

Santa Ana, CA 92705

Attention: Kevin Maloney

e-mail: kmaloney@qsinano.com

 

 17 

 

 

If to the Buyer:

 

FIRSTFIRE GLOBAL OPPORTUNITIES FUND, LLC

1040 First Avenue, Suite 190

New York, NY 10022

Attn: Eli Fireman

e-mail: eli@firstfirecapital.com

 

With a copy by e-mail only to (which copy shall not constitute notice):

 

ELLENOFF GROSSMAN & SCHOLE LLP

1345 Avenue of the Americas

New York, NY 10105

Attn: Lawrence A. Rosenbloom, Esq.

e-mail: lrosenbloom@egsllp.com

 

g. Successors and Assigns. This Agreement shall be binding upon and inure to the
benefit of the parties and their successors and assigns. The Company r shall not
assign this Agreement or any rights or obligations hereunder without the prior
written consent of the Buyer. Notwithstanding the foregoing, subject to Section
2(f), the Buyer may assign its rights hereunder to any person that purchases
Securities in a private transaction from the Buyer or to any of its
“affiliates,” as that term is defined under the 1934 Act, without the consent of
the Company.

 

h. Third Party Beneficiaries. This Agreement is intended for the benefit of the
parties hereto and their respective permitted successors and assigns, and is not
for the benefit of, nor may any provision hereof be enforced by, any other
person.

 

i. Survival. The representations and warranties of the Company and the
agreements and covenants set forth in this Agreement shall survive the closing
hereunder notwithstanding any due diligence investigation conducted by or on
behalf of the Buyer. The Company agrees to indemnify and hold harmless the Buyer
and all their officers, directors, employees and agents for loss or damage
arising as a result of or related to any breach or alleged breach by the Company
of any of its representations, warranties and covenants set forth in this
Agreement or any of its covenants and obligations under this Agreement,
including advancement of expenses as they are incurred.

 

j. Publicity. The Company, and the Buyer shall have the right to review a
reasonable period of time before issuance of any press releases, SEC, OTCBB or
FINRA filings, or any other public statements with respect to the transactions
contemplated hereby; provided, however, that the Company shall be entitled,
without the prior approval of the Buyer, to make any press release or SEC, OTCBB
(or other applicable trading market) or FINRA filings with respect to such
transactions as is required by applicable law and regulations (although the
Buyer shall be consulted by the Company in connection with any such press
release prior to its release and shall be provided with a copy thereof and be
given an opportunity to comment thereon).

 

k. Expense Reimbursement; Further Assurances. At the Closing to occur as of the
Closing Date, the Company shall pay on behalf of the Buyer or reimburse the
Buyer for its legal fees and expenses incurred (which may be added to Buyer’s
Note, if so desired by Buyer) in connection with this Agreement in the amount of
$12,500. Each party shall do and perform, or cause to be done and performed, all
such further acts and things, and shall execute and deliver all such other
agreements, certificates, instruments and documents, as the other party may
reasonably request in order to carry out the intent and accomplish the purposes
of this Agreement and the consummation of the transactions contemplated hereby.

 

l. No Strict Construction. The language used in this Agreement will be deemed to
be the language chosen by the parties to express their mutual intent, and no
rules of strict construction will be applied against any party.

 

 18 

 

 

m. Indemnification. In consideration of the Buyer’s execution and delivery of
this Agreement and acquiring the Securities hereunder, and in addition to all of
the Company’s other obligations under this Agreement, the Note, the Security
Agreement, the Intercreditor Agreement, the Irrevocable Transfer Agent
Instructions, or the Warrant, the Company shall defend, protect, indemnify and
hold harmless the Buyer and its stockholders, partners, members, officers,
directors, employees and direct or indirect investors and any of the foregoing
persons’ agents or other representatives (including, without limitation, those
retained in connection with the transactions contemplated by this Agreement)
(collectively, the “Indemnitees”) from and against any and all actions, causes
of action, suits, claims, losses, costs, penalties, fees, liabilities and
damages, and expenses in connection therewith (irrespective of whether any such
Indemnitee is a party to the action for which indemnification hereunder is
sought), and including reasonable attorneys’ fees and disbursements (the
“Indemnified Liabilities”), incurred by any Indemnitee as a result of, or
arising out of, or relating to (a) any misrepresentation or breach of any
representation or warranty made by the Company in this Agreement, the Note, the
Security Agreement, the Intercreditor Agreement, the Irrevocable Transfer Agent
Instructions, or the Warrant or any other agreement, certificate, instrument or
document contemplated hereby or thereby, (b) any breach of any covenant,
agreement or obligation of the Company contained in this Agreement, the Note or
the Warrant or any other agreement, certificate, instrument or document
contemplated hereby or thereby or (c) any cause of action, suit or claim brought
or made against such Indemnitee by a third party (including for these purposes a
derivative action brought on behalf of the Company) and arising out of or
resulting from (i) the execution, delivery, performance or enforcement of this
Agreement, the Note, the Security Agreement, the Intercreditor Agreement, the
Irrevocable Transfer Agent Instructions, or the Warrant or any other agreement,
certificate, instrument or document contemplated hereby or thereby, (ii) any
transaction financed or to be financed in whole or in part, directly or
indirectly, with the proceeds of the issuance of the Securities, or (iii) the
status of the Buyer or holder of the Securities as an investor in the Company
pursuant to the transactions contemplated by this Agreement. To the extent that
the foregoing undertaking by the Company may be unenforceable for any reason,
the Company shall make the maximum contribution to the payment and satisfaction
of each of the Indemnified Liabilities that is permissible under applicable law.

 

n. Remedies. The Company acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to the Buyer by vitiating the intent and
purpose of the transaction contemplated hereby. Accordingly, the Company
acknowledges that the remedy at law for a breach of its obligations under this
Agreement, the Note, the Security Agreement, the Intercreditor Agreement, the
Irrevocable Transfer Agent Instructions, or the Warrant will be inadequate and
agrees, in the event of a breach or threatened breach by the Company of the
provisions of this Agreement, the Note, the Security Agreement, the
Intercreditor Agreement, the Irrevocable Transfer Agent Instructions, or the
Warrant, that the Buyer shall be entitled, in addition to all other available
remedies at law or in equity, and in addition to the penalties assessable
herein, to an injunction or injunctions restraining, preventing or curing any
breach of this Agreement, the Note, the Security Agreement, the Intercreditor
Agreement, the Irrevocable Transfer Agent Instructions, or the Warrant and to
enforce specifically the terms and provisions hereof or thereof, without the
necessity of showing economic loss and without any bond or other security being
required.

 

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

 

p. Failure or Indulgence Not Waiver. No failure or delay on the part of the
Buyer in the exercise of any power, right or privilege hereunder shall operate
as a waiver thereof, nor shall any single or partial exercise of any such power,
right or privilege preclude other or further exercise thereof or of any other
right, power or privileges. All rights and remedies of the Buyer existing
hereunder are cumulative to, and not exclusive of, any rights or remedies
otherwise available.

 

[Signature Page Follows]

 

 19 

 

 

IN WITNESS WHEREOF, the undersigned Buyer and the Company have caused this
Agreement to be duly executed as of the date first above written.

 

QUANTUMSPHERE, INC.

 

By:     Name: KEVIN MALONEY   Title: CHIEF EXECUTIVE OFFICER  

 

BUYER:                     By:    

 

By:    

 

SUBSCRIPTION AMOUNT:

 

Principal Amount of Note: $_____________

Actual Amount of Purchase Price of Note: $________________

 

 20 

 

 

EXHIBIT A

 

FORM OF NOTE

 

THIS INSTRUMENT CONTAINS AN AFFIDAVIT OF CONFESSION OF JUDGMENT PROVISION WHICH
CONSTITUTES A WAIVER OF IMPORTANT RIGHTS BORROWER MAY HAVE AND ALLOWS THE HOLDER
TO OBTAIN A JUDGMENT AGAINST BORROWER WITHOUT ANY FURTHER NOTICE.

 

NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED
OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION
OF COUNSEL (WHICH MAY BE THE LEGAL COUNSEL OPINION (AS DEFINED IN THE PURCHASE
AGREEMENT)), IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED
UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144, RULE 144A OR REGULATION
S UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED
IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY THE SECURITIES.

 

Principal Amount: $___________ Issue Date: June [__], 2016 Actual Amount of
Purchase Price: $__________  

 

SECURED PROMISSORY NOTE

 

FOR VALUE RECEIVED, QUANTUMSPHERE, INC., a Nevada corporation (hereinafter
called the “Borrower” or the “Company”), hereby promises to pay to the order of
_______________________, or registered assigns (the “Holder”) in the form of
lawful money of the United States of America by October [__], 2016 (the
“Maturity Date”), the principal sum of $______________, which amount is the
$___________ actual amount of the purchase price hereof plus a 15% original
issue discount (the “Principal Amount”) and to pay interest on the unpaid
Principal Amount hereof at the rate of five percent (5%) (the “Interest Rate”)
per annum from the date hereof (the “Issue Date”) until the same becomes due and
payable, whether at maturity or upon acceleration or by prepayment or otherwise.

 

This Note may not be prepaid or repaid in whole or in part except as otherwise
explicitly set forth herein.

 

The obligations of the Company under this Note are secured by (i) an aggregate
of 318,138 shares of Common Stock, (ii) stock options to purchase an aggregate
of 2,290,700 shares of Common Stock under the Company’s 2014 Equity Incentive
Plan (2,057,362 shares of which are vested, and 233,338 shares of which are
subject to satisfaction of vesting conditions), and (iii) warrants to purchase
an aggregate of 1,000,000 shares of Common Stock (fully vested), pursuant to
that certain Pledge Agreement, dated as of the date hereof, by and among the
Gregory Hrncir, Kevin Maloney and the Holder (the “Pledge Agreement” and (ii)
all of the assets of the Company and its Subsidiaries, pursuant to the terms of
the Security Agreement, dated as of the date hereof, by and among the Borrower,
its Subsidiaries and the Secured Parties (as defined therein) .

 

Interest shall commence accruing on the date that the Note is fully funded and
shall be computed on the basis of a 365-day year and the actual number of days
elapsed. Any Principal Amount or interest on this Note which is not paid when
due shall bear interest at the rate of fifteen percent (15%) per annum from the
due date thereof until the same is paid (“Default Interest”).

 

All payments due hereunder (to the extent not converted, which shall only occur
upon an event of default under Section 3 herein, into shares of common stock,
$0.001 par value per share, of the Borrower (the “Common Stock”) in accordance
with the terms hereof) shall be made in lawful money of the United States of
America. All payments shall be made at such address as the Holder shall
hereafter give to the Borrower by written notice made in accordance with the
provisions of this Note. Whenever any amount expressed to be due by the terms of
this Note is due on any day which is not a business day, the same shall instead
be due on the next succeeding day which is a business day and, in the case of
any interest payment date which is not the date on which this Note is paid in
full, the extension of the due date thereof shall not be taken into account for
purposes of determining the amount of interest due on such date.

 

21

 

 

Each capitalized term used herein, and not otherwise defined, shall have the
meaning ascribed thereto in that certain Securities Purchase Agreement, dated as
of the Issue Date, pursuant to which this Note was originally issued (the
“Purchase Agreement”). As used in this Note, the term “business day” shall mean
any day other than a Saturday, Sunday or a day on which commercial banks in the
city of New York, New York are authorized or required by law or executive order
to remain closed. As used herein, the term “Trading Day” means any day that
shares of Common Stock are listed for trading or quotation on the OTCBB (as
defined in the Purchase Agreement), any tier of the NASDAQ Stock Market, the New
York Stock Exchange or the NYSE MKT.

 

This Note is free from all taxes, liens, claims and encumbrances with respect to
the issue thereof and shall not be subject to preemptive rights or other similar
rights of shareholders of the Borrower and will not impose personal liability
upon the holder thereof.

 

The following terms shall apply to this Note:

 

ARTICLE I. CONVERSION RIGHTS

 

1.1 Conversion Right Upon Event of Default. The Holder shall have the right, at
any time beginning from and after the occurrence of any Event of Default
hereunder and ending on the date of the payment in full of all outstanding
Principal Amount and interest under this Note, to convert all or any portion of
the then outstanding and unpaid Principal Amount plus accrued interest
(including any Default Interest) under this Note into fully paid and
non-assessable shares of Common Stock, as such Common Stock exists on the Issue
Date, or any shares of capital stock or other securities of the Borrower into
which such Common Stock shall hereafter be changed or reclassified, at the
Conversion Price (as defined below) determined as provided herein (a
“Conversion”); provided, however, that in no event shall the Holder be entitled
to convert any portion of this Note in excess of that portion of this Note upon
conversion of which the sum of (1) the number of shares of Common Stock
beneficially owned by the Holder and its affiliates (other than shares of Common
Stock which may be deemed beneficially owned through the ownership of the
unconverted portion of this Note or the unexercised or unconverted portion of
any other security of the Borrower subject to a limitation on conversion or
exercise analogous to the limitations contained herein) and (2) the number of
Conversion Shares issuable upon the conversion of the portion of this Note with
respect to which the determination of this proviso is being made, would result
in beneficial ownership by the Holder and its affiliates of more than 4.99% of
the then outstanding shares of Common Stock. For purposes of the proviso set
forth in the immediately preceding sentence, beneficial ownership shall be
determined in accordance with Section 13(d) of the Securities Exchange Act of
1934, as amended (the “1934 Act”), and Regulations 13D-G thereunder, except as
otherwise provided in clause (1) of such proviso, provided, however, that the
limitations on conversion may be waived by the Holder upon, at the election of
the Holder, not less than 61 days’ prior notice to the Borrower, and the
provisions of the conversion limitation shall continue to apply until such 61st
day (or such later date, as determined by the Holder, as may be specified in
such notice of waiver). The number of Conversion Shares to be issued upon each
conversion of this Note shall be determined by dividing the Conversion Amount
(as defined below) by the applicable Conversion Price then in effect on the date
specified in the notice of conversion, in the form attached hereto as Exhibit A
(the “Notice of Conversion”), delivered to the Borrower by the Holder in
accordance with Section 1.4 below; provided that the Notice of Conversion is
submitted by facsimile or e-mail (or by other means resulting in, or reasonably
expected to result in, notice) to the Borrower before 4:00 p.m., New York, New
York time on such conversion date (the “Conversion Date”). The term “Conversion
Amount” means, with respect to any conversion of this Note, the sum of (1) the
Principal Amount of this Note to be converted in such conversion plus (2) at the
Holder’s option, accrued and unpaid interest, if any, on such Principal Amount
at the Interest Rate to the Conversion Date, plus (3) at the Holder’s option,
Default Interest, if any, on the amounts referred to in the immediately
preceding clauses (1) and/or (2).

 

22

 

 

1.2 Conversion Price Upon Event of Default.

 

(a) Calculation of Conversion Price. The per share conversion price into which
any Principal Amount and interest (including any Default Interest) under this
Note shall be convertible into shares of Common Stock hereunder (the “Conversion
Price”) shall be equal to 60% multiplied by the volume-weighted average price of
the Common Stock on the OTCQB (or if not reported, as calculated by the Holder
in good faith) during the thirty (30) consecutive Trading Day period immediately
preceding the Trading Day that the Company receives a Notice of Conversion; and
provided, further, however, and notwithstanding the above calculation of the
Conversion Price or any other calculation of Conversion Price pursuant to this
Section 1.2, if the closing bid price of the Common Stock is less than the
Conversion Price on the date following the Conversion Date (the “Free Trading
Share Receipt Date”) on which the Holder actually receives from the Company or
its transfer agent Conversion Shares issuable pursuant to this Section 1 which
are immediately upon receipt unrestricted and freely tradable by the Holder
either by way of (A) registration under the 1933 Act or (B) pursuant to Rule 144
under the 1933 Act (or a successor rule) (“Rule 144”), Rule 144A under the 1933
Act (or a successor rule) (“Rule 144A”) or Regulation S under the 1933 Act (or a
successor rule) (“Regulation S”), then the Conversion Price shall be deemed to
have been retroactively adjusted, as of the Conversion Date, to a price equal to
75% multiplied by the closing bid price of the Common Stock on the Free Trading
Shares Receipt Date (the “Free Trading Shares Receipt Date Conversion Price”),
and the Company shall, on the Trading Day following the Free Trading Share
Receipt Date, issue to the Holder additional shares of unrestricted, freely
tradable Common Stock equal to the difference between (Y) the number of
Conversion Shares receivable upon conversion of the applicable Conversion Amount
at the Conversion Price and (Z) the number of Conversion Shares receivable upon
conversion of the applicable Conversion Amount at the Free Trading Shares
Receipt Date Conversion Price; and provided, further, however, and
notwithstanding the above calculation of the Conversion Price, if, prior to the
repayment or conversion of this Note, in the event the Borrower consummates a
registered or unregistered primary offering of its securities for capital
raising purposes (a “Primary Offering”), the Holder shall have the right, in its
discretion, to (x) demand repayment in full of an amount equal to any
outstanding Principal Amount and interest (including Default Interest) under
this Note as of the closing date of the Primary Offering.

 

(b) Conversion Price During Major Announcements. Notwithstanding anything
contained in Section 1.2(a) to the contrary, in the event the Borrower (i) makes
a public announcement that it intends to be acquired by, consolidate or merge
with any other corporation or entity (other than a merger in which the Borrower
is the surviving or continuing corporation and its capital stock is unchanged)
or sell or transfer all or substantially all of the assets of the Borrower or
(ii) any person, group or entity (including the Borrower) publicly announces a
tender offer to purchase 50% or more of the Common Stock (or any other takeover
scheme) (any such transaction referred to in clause (i) or (ii) being referred
to herein as a “Change in Control” and the date of the announcement referred to
in clause (i) or (ii) is being referred to herein as the “Announcement Date”),
then the Conversion Price shall, effective upon the Announcement Date and
continuing through the Adjusted Conversion Price Termination Date (as defined
below), be equal to the lower of (x) the Conversion Price and (y) a 25% discount
to the Acquisition Price (as defined below). From and after the Adjusted
Conversion Price Termination Date, the Conversion Price shall be determined as
set forth in Section 1.2(a). For purposes hereof, “Adjusted Conversion Price
Termination Date” shall mean, with respect to any proposed Change in Control for
which a public announcement as contemplated by this Section 1.2(b) has been
made, the date upon which the Borrower (in the case of clause (i) above) or the
person, group or entity (in the case of clause (ii) above) consummates or
publicly announces the termination or abandonment of the proposed Change in
Control which caused this Section 1.2(b) to become operative. For purposes
hereof, “Acquisition Price” shall mean a price per share of Common Stock derived
by dividing (x) the total consideration (in cash, equity, earn-out or similar
payments or otherwise) paid or to be paid to the Borrower or its shareholders in
the Change in Control transaction by (y) the number of authorized shares of
Common Stock outstanding as of the business day prior to the Announcement Date.

 

23

 

 

1.3 Authorized and Reserved Shares. The Borrower covenants that during the
period the conversion right exists, the Borrower will reserve from its
authorized and unissued Common Stock a sufficient number of shares, free from
preemptive rights, to provide for the issuance of a number of Conversion Shares
equal to the greater of: (a) 5,000,000 shares of Common Stock or (b) the sum of
(i) the number of Conversion Shares issuable upon the full conversion of this
Note (assuming no payment of Principal Amount or interest) as of any issue date
(taking into consideration any adjustments to the Conversion Price pursuant to
Section 2 hereof or otherwise) multiplied by (ii) five (5) (the “Reserved
Amount”). The Reserved Amount shall be recalculated each month and the Company
shall notify its transfer agent and the Holder in writing by the first day of
the following month of the new Reserved Amount. In the event that the Borrower
shall be unable to reserve the entirety of the Reserved Amount (the “Reserve
Amount Failure”), the Borrower shall promptly take all actions necessary to
increase its authorized share capital to accommodate the Reserved Amount (the
“Authorized Share Increase”), including without limitation, all board of
directors actions and approvals and promptly (but no less than 60 days following
the calling and holding a special meeting of its shareholders no more than 60
days following the Reserve Amount Failure to seek approval of the Authorized
Share Increase via the solicitation of proxies. Notwithstanding the foregoing,
in no event shall the Reserved Amount be lower than the initial Reserved Amount,
regardless of any prior conversions. The Borrower represents that upon issuance,
the Conversion Shares will be duly and validly issued, fully paid and
non-assessable. In addition, if the Borrower shall issue any securities or make
any change to its capital structure which would change the number of Conversion
Shares into which this Note shall be convertible at the then current Conversion
Price, the Borrower shall at the same time make proper provision so that
thereafter there shall be a sufficient number of shares of Common Stock
authorized and reserved, free from preemptive rights, for conversion of this
Note. The Borrower (i) acknowledges that it has irrevocably instructed its
transfer agent to issue certificates for the Conversion Shares or instructions
to have the Conversion Shares issued as contemplated by Section 1.4(f) hereof,
and (ii) agrees that its issuance of this Note shall constitute full authority
to its officers and agents who are charged with the duty of executing stock
certificates or cause the Company to electronically issue shares of Common Stock
to execute and issue the necessary certificates for the Conversion Shares or
cause the Conversion Shares to be issued as contemplated by Section 1.4(f)
hereof in accordance with the terms and conditions of this Note.

 

If, at any time the Borrower does not maintain the Reserved Amount it will be
considered an Event of Default under this Note.

 

1.4 Method of Conversion Upon Event of Default.

 

(a) Mechanics of Conversion. This Note may be converted by the Holder in whole
or in part, on any Trading Day from and after the occurrence of any Event of
Default hereunder and ending on the date of the payment in full of all
outstanding Principal Amount and interest under this Note, by submitting to the
Borrower a Notice of Conversion (by facsimile, e-mail or other reasonable means
of communication dispatched on the Conversion Date prior to 4:00 p.m., New York,
New York time). Any Notice of Conversion submitted after 4:00 p.m., New York,
New York time, shall be deemed to have been delivered and received on the next
Trading Day.

 

(b) Surrender of Note Upon Conversion. Notwithstanding anything to the contrary
set forth herein, upon conversion of this Note in accordance with the terms
hereof, the Holder shall not be required to physically surrender this Note to
the Borrower unless the entire unpaid Principal Amount is so converted. The
Holder and the Borrower shall maintain records showing the Principal Amount so
converted and the dates of such conversions or shall use such other method,
reasonably satisfactory to the Holder and the Borrower, so as not to require
physical surrender of this Note upon each such conversion. In the event of any
dispute or discrepancy, such records of the Borrower shall, prima facie, be
controlling and determinative in the absence of any error. Notwithstanding the
foregoing, if any portion of this Note is converted as aforesaid, the Holder may
not transfer this Note unless the Holder first physically surrenders this Note
to the Borrower, whereupon the Borrower will forthwith issue and deliver upon
the order of the Holder a new Note of like tenor, registered as the Holder (upon
payment by the Holder of any applicable transfer taxes) may request,
representing in the aggregate the remaining unpaid Principal Amount of this
Note. The Holder and any assignee, by acceptance of this Note, acknowledge and
agree that, by reason of the provisions of this paragraph, following conversion
of a portion of this Note, the unpaid and unconverted Principal Amount of this
Note represented by this Note may be less than the amount stated on the face
hereof.

 

(c) Payment of Taxes. The Borrower shall not be required to pay any tax which
may be payable in respect of any transfer involved in the issue and delivery of
shares of Common Stock or other securities or property on conversion of this
Note in a name other than that of the Holder (or in street name), and the
Borrower shall not be required to issue or deliver any such shares or other
securities or property unless and until the person or persons (other than the
Holder or the custodian in whose street name such shares are to be held for the
Holder’s account) requesting the issuance thereof shall have paid to the
Borrower the amount of any such tax or shall have established to the
satisfaction of the Borrower that such tax has been paid.

 

24

 

 

(d) Delivery of Common Stock Upon Conversion. Upon receipt by the Borrower from
the Holder of a facsimile transmission or e-mail or overnight FedEx of a Notice
of Conversion meeting the requirements for conversion as provided in this
Section 1.4, the Borrower shall issue and deliver or cause to be issued and
delivered to or upon the order of the Holder certificates for the Conversion
Shares (or cause the electronic delivery of the Conversion Shares as
contemplated by Section 1.4(f) hereof) within two (2) Trading Days after such
receipt (the “Deadline”) (and, solely in the case of conversion of the entire
unpaid Principal Amount and interest (including any Default Interest) under this
Note, surrender of this Note). If the Company shall fail for any reason or for
no reason to issue to the Holder on or prior to the Deadline a certificate for
the number of Conversion Shares or to which the Holder is entitled hereunder and
register such Conversion Shares on the Company’s share register or to credit the
Holder’s balance account with DTC (as defined below) for such number of
Conversion Shares to which the Holder is entitled upon the Holder’s conversion
of this Note (a “Conversion Failure”), then, in addition to all other remedies
available to the Holder, (i) the Company shall pay in cash to the Holder on each
day after the Deadline and during such Conversion Failure an amount equal to
2.0% of the product of (A) the sum of the number of Conversion Shares not issued
to the Holder on or prior to the Deadline and to which the Holder is entitled
and (B) the closing sale price of the Common Stock on the Trading Day
immediately preceding the last possible date which the Company could have issued
such Conversion Shares to the Holder without violating this Section 1.4(d); and
(ii) the Holder, upon written notice to the Company, may void its Notice of
Conversion with respect to, and retain or have returned, as the case may be, any
portion of this Note that has not been converted pursuant to such Notice of
Conversion; provided that the voiding of an Notice of Conversion shall not
affect the Company’s obligations to make any payments which have accrued prior
to the date of such notice. In addition to the foregoing, if on or prior to the
Deadline the Company shall fail to issue and deliver a certificate to the Holder
and register such Conversion Shares on the Company’s share register or credit
the Holder’s balance account with DTC for the number of Conversion Shares to
which the Holder is entitled upon the Holder’s exercise hereunder or pursuant to
the Company’s obligation pursuant to clause (ii) below, and if on or after such
Trading Day the Holder purchases (in an open market transaction or otherwise)
shares of Common Stock to deliver in satisfaction of a sale by the Holder of
shares of Common Stock issuable upon such exercise that the Holder anticipated
receiving from the Company, then the Company shall, within three (3) Trading
Days after the Holder’s request and in the Holder’s discretion, either (i) pay
cash to the Holder in an amount equal to the Holder’s total purchase price
(including brokerage commissions and other reasonable and customary
out-of-pocket expenses, if any) for the shares of Common Stock so purchased (the
“Buy-In Price”), at which point the Company’s obligation to deliver such
certificate (and to issue such Conversion Shares) or credit such Holder’s
balance account with DTC for such Conversion Shares shall terminate, or (ii)
promptly honor its obligation to deliver to the Holder a certificate or
certificates representing such Conversion Shares or credit such Holder’s balance
account with DTC and pay cash to the Holder in an amount equal to the excess (if
any) of the Buy-In Price over the product of (A) such number of shares of Common
Stock, times (B) the closing sales price of the Common Stock on the date of
exercise. Nothing shall limit the Holder’s right to pursue any other remedies
available to it hereunder, at law or in equity, including, without limitation, a
decree of specific performance and/or injunctive relief with respect to the
Company’s failure to timely deliver certificates representing the Conversion
Shares (or to electronically deliver such Conversion Shares) upon the conversion
of this Note as required pursuant to the terms hereof.

 

(e) Obligation of Borrower to Deliver Common Stock. Upon receipt by the Borrower
of a Notice of Conversion, the Holder shall be deemed to be the holder of record
of the Conversion Shares issuable upon such conversion, the outstanding
Principal Amount and the amount of accrued and unpaid interest (including any
Default Interest) under this Note shall be reduced to reflect such conversion,
and, unless the Borrower defaults on its obligations under this Article I, all
rights with respect to the portion of this Note being so converted shall
forthwith terminate except the right to receive the Common Stock or other
securities, cash or other assets, as herein provided, on such conversion. If the
Holder shall have given a Notice of Conversion as provided herein, the
Borrower’s obligation to issue and deliver the certificates for the Conversion
Shares (or cause the electronic delivery of the Conversion Shares as
contemplated by Section 1.4(f) hereof) shall be absolute and unconditional,
irrespective of the absence of any action by the Holder to enforce the same, any
waiver or consent with respect to any provision thereof, the recovery of any
judgment against any person or any action to enforce the same, any failure or
delay in the enforcement of any other obligation of the Borrower to the holder
of record, or any setoff, counterclaim, recoupment, limitation or termination,
or any breach or alleged breach by the Holder of any obligation to the Borrower,
and irrespective of any other circumstance which might otherwise limit such
obligation of the Borrower to the Holder in connection with such conversion. The
Conversion Date specified in the Notice of Conversion shall be the Conversion
Date so long as the Notice of Conversion is received by the Borrower before 6:00
p.m., New York, New York time, on such date.

 

25

 

 

(f) Delivery of Conversion Shares by Electronic Transfer. In lieu of delivering
physical certificates representing the Conversion Shares issuable upon
conversion hereof, provided the Borrower is participating in the Depository
Trust Company (“DTC”) Fast Automated Securities Transfer or Deposit/Withdrawal
at Custodian programs, upon request of the Holder and its compliance with the
provisions contained in Section 1.1 and in this Section 1.4, the Borrower shall
use its best efforts to cause its transfer agent to electronically transmit the
Conversion Shares issuable upon conversion hereof to the Holder by crediting the
account of Holder’s Prime Broker with DTC through its Deposit Withdrawal Agent
Commission system.

 

1.5 Concerning the Shares. The Conversion Shares issuable upon conversion of
this Note may not be sold or transferred unless (i) such shares are sold
pursuant to an effective registration statement under the 1933 Act or (ii) the
Borrower or its transfer agent shall have been furnished with an opinion of
counsel (which opinion shall be the Legal Counsel Opinion (as defined in the
Purchase Agreement)) to the effect that the shares to be sold or transferred may
be sold or transferred pursuant to an exemption from such registration or (iii)
such shares are sold or transferred pursuant to Rule 144, Rule 144A or
Regulation S or (iv) such shares are transferred to an “affiliate” (as defined
in Rule 144) of the Borrower who agrees to sell or otherwise transfer the shares
only in accordance with this Section 1.5 and who is an Accredited Investor (as
defined in the Purchase Agreement). Except as otherwise provided in the Purchase
Agreement (and subject to the removal provisions set forth below), until such
time as the Conversion Shares have been registered under the 1933 Act or
otherwise may be sold pursuant to Rule 144, Rule 144A or Regulation S without
any restriction as to the number of securities as of a particular date that can
then be immediately sold, each certificate for the Conversion Shares that has
not been so included in an effective registration statement or that has not been
sold pursuant to an effective registration statement or an exemption that
permits removal of the legend, shall bear a legend substantially in the
following form, as appropriate:

 

“NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED
OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION
OF COUNSEL (WHICH MAY BE THE LEGAL COUNSEL OPINION (AS DEFINED IN THE PURCHASE
AGREEMENT)), IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED
UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144, RULE 144A OR REGULATION
S UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED
IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY THE SECURITIES.”

 

The legend set forth above shall be removed and the Company shall issue to the
Holder a certificate for the applicable Conversion Shares without such legend
upon which it is stamped or (as requested by the Holder) issue the applicable
Conversion Shares by electronic delivery by crediting the account of such
holder’s broker with DTC, if, unless otherwise required by applicable state
securities laws: (a) such Conversion Shares are registered for sale under an
effective registration statement filed under the 1933 Act or otherwise may be
sold pursuant to Rule 144, Rule 144A or Regulation S without any restriction as
to the number of securities as of a particular date that can then be immediately
sold, or (b) the Company or the Holder provides the Legal Counsel Opinion (as
contemplated by and in accordance with Section 4(m) of the Purchase Agreement)
to the effect that a public sale or transfer of such Conversion Shares may be
made without registration under the 1933 Act, which opinion shall be accepted by
the Company so that the sale or transfer is effected. The Company shall be
responsible for the fees of its transfer agent and all DTC fees associated with
any such issuance. The Holder agrees to sell all Conversion Shares, including
those represented by a certificate(s) from which the legend has been removed, in
compliance with applicable prospectus delivery requirements, if any. In the
event that the Company does not accept the opinion of counsel provided by the
Holder with respect to the transfer of Conversion Shares pursuant to an
exemption from registration, such as Rule 144, Rule 144A or Regulation S, at the
Deadline, notwithstanding that the conditions of Rule 144, Rule 144A or
Regulation S, as applicable, have been met, it will be considered an Event of
Default under this Note.

 

26

 

 

1.6 Effect of Certain Events.

 

(a) Effect of Merger, Consolidation, Etc. At the option of the Holder, the sale,
conveyance or disposition of all or substantially all of the assets of the
Borrower, or the consolidation, merger or other business combination of the
Borrower with or into any other Person (as defined below) or Persons when the
Borrower is not the survivor shall either: (i) be deemed to be an Event of
Default (as defined in Article III) pursuant to which the Borrower shall be
required to pay to the Holder upon the consummation of and as a condition to
such transaction an amount equal to the Default Amount (defined in Section 3.21)
or (ii) be treated pursuant to Section 1.6(b) hereof. “Person” shall mean any
individual, corporation, limited liability company, partnership, association,
trust or other entity or organization.

 

(b) Adjustment Due to Merger, Consolidation, Etc. If, at any time when this Note
is issued and outstanding and prior to conversion of all of this Note, there
shall be any merger, consolidation, exchange of shares, recapitalization,
reorganization, or other similar event, as a result of which shares of Common
Stock of the Borrower shall be changed into the same or a different number of
shares of another class or classes of stock or securities of the Borrower or
another entity, or in case of any sale or conveyance of all or substantially all
of the assets of the Borrower other than in connection with a plan of complete
liquidation of the Borrower, then the Holder of this Note shall thereafter have
the right to receive upon conversion of this Note, upon the basis and upon the
terms and conditions specified herein and in lieu of the shares of Common Stock
immediately theretofore issuable upon conversion, such stock, securities or
assets which the Holder would have been entitled to receive in such transaction
had this Note been converted in full immediately prior to such transaction
(without regard to any limitations on conversion set forth herein), and in any
such case appropriate provisions shall be made with respect to the rights and
interests of the Holder of this Note to the end that the provisions hereof
(including, without limitation, provisions for adjustment of the Conversion
Price and of the number of shares issuable upon conversion of the Note) shall
thereafter be applicable, as nearly as may be practicable in relation to any
securities or assets thereafter deliverable upon the conversion hereof. The
Borrower shall not effectuate any transaction described in this Section 1.6(b)
unless (a) it first gives, to the extent practicable, at least thirty (30) days
prior written notice (but in any event at least fifteen (15) days prior written
notice) of the record date of the special meeting of shareholders to approve, or
if there is no such record date, the consummation of, such merger,
consolidation, exchange of shares, recapitalization, reorganization or other
similar event or sale of assets (during which time the Holder shall be entitled
to convert this Note) and (b) the resulting successor or acquiring entity (if
not the Borrower) assumes by written instrument the obligations of this Section
1.6(b). The above provisions shall similarly apply to successive consolidations,
mergers, sales, transfers or share exchanges.

 

(c) Adjustment Due to Distribution. If the Borrower shall declare or make any
distribution of its assets (or rights to acquire its assets) to holders of
Common Stock as a dividend, stock repurchase, by way of return of capital or
otherwise (including any dividend or distribution to the Borrower’s shareholders
in cash or shares (or rights to acquire shares) of capital stock of a subsidiary
(i.e., a spin-off)) (a “Distribution”), then the Holder of this Note shall be
entitled, upon any conversion of this Note after the date of record for
determining shareholders entitled to such Distribution, to receive the amount of
such assets which would have been payable to the Holder with respect to the
shares of Common Stock issuable upon such conversion had such Holder been the
holder of such shares of Common Stock on the record date for the determination
of shareholders entitled to such Distribution.

 

(d) Purchase Rights. If, at any time when all or any portion of this Note is
issued and outstanding, the Borrower issues any convertible securities or rights
to purchase stock, warrants, securities or other property (the “Purchase
Rights”) pro rata to the record holders of any class of Common Stock, then the
Holder of this Note will be entitled to acquire, in cash and upon the terms
applicable to such Purchase Rights, the aggregate Purchase Rights which such
Holder could have acquired if such Holder had held the number of shares of
Common Stock acquirable upon complete conversion of this Note (without regard to
any limitations on conversion contained herein) immediately before the date on
which a record is taken for the grant, issuance or sale of such Purchase Rights
or, if no such record is taken, the date as of which the record holders of
Common Stock are to be determined for the grant, issue or sale of such Purchase
Rights. For the avoidance of doubt, notice is hereby provided that the Borrower
will be undertaking a private placement of securities (the “Private Placement”)
following the issuance of this Note. Holders may exercise its Purchase Rights
with respect to the Private Placement by notifying the Borrower in writing of
its firm intention to participate with a cash investment in the Private
Placement, including the amount of its participation, pro rata to the record
holders of Common Stock of Borrower.

 

27

 

 

(e) Dilutive Issuance. If the Borrower, at any time while this Note or any
amounts due hereunder are outstanding, issues, sells or grants (or has issued,
sold or granted as of the Issue Date, as the case may be) any option to
purchase, or sells or grants any right to reprice, or otherwise disposes of, or
issues (or has sold or issued, as the case may be, or announces any sale, grant
or any option to purchase or other disposition), any Common Stock or other
securities convertible into, exercisable for, or otherwise entitle any person or
entity the right to acquire, shares of Common Stock (including, without
limitation, upon conversion of any convertible notes or warrants outstanding as
of or following the Issue Date, but expressly excluding any outstanding options
to purchase shares of common stock pursuant to the Company’s 2014 Equity
Incentive Plan in existence as of the date of issuance of this Note), in each or
any case at an effective price per share that is lower than (a) the then
Conversion Price or (b) in the event that any such issuance, sale or grant
occurs prior to the occurrence of an Event of Default, the initial Conversion
Price following the occurrence of an Event of Default (such lower price in
either case, the “Base Conversion Price” and such issuances in either case,
collectively, a “Dilutive Issuance”) (it being agreed that if the holder of the
Common Stock or other securities so issued shall at any time, whether by
operation of purchase price adjustments, reset provisions, floating conversion,
exercise or exchange prices or otherwise, or due to warrants, options or rights
per share which are issued in connection with such issuance, be entitled to
receive shares of Common Stock at an effective price per share that is lower
than the Conversion Price, such issuance shall be deemed to have occurred for
less than the Conversion Price on such date of the Dilutive Issuance), then the
Conversion Price shall be reduced to a price equal to the Base Conversion Price.
If the Company enters into a Variable Rate Transaction, despite the prohibition
set forth in the Purchase Agreement, the Company shall be deemed to have issued
Common Stock or Common Stock Equivalents at the lowest possible price per share
at which such securities could be issued in connection with such Variable Rate
Transaction. Such adjustment shall be made whenever such Common Stock or other
securities are issued. Notwithstanding the foregoing, no adjustment will be made
under this Section 1.6(e) in respect of an Exempt Issuance. In the event of an
issuance of securities involving multiple tranches or closings, any adjustment
pursuant to this Section 1.6(e) shall be calculated as if all such securities
were issued at the initial closing.

 

An “Exempt Issuance” shall mean the issuance of (a) shares of Common Stock or
other securities to employees, officers or directors of the Company pursuant to
the Company’s 2014 Equity Incentive Plan; (b) securities issued pursuant to a
merger, consolidation, acquisition or similar business combination approved by a
majority of the disinterested directors of the Company, provided that any such
issuance shall only be to a Person (or to the equityholders of a Person) which
is, itself or through its subsidiaries, an operating company or an owner of an
asset in a business synergistic with the business of the Company and shall
provide to the Company additional benefits in addition to the investment of
funds, but shall not include a transaction in which the Company is issuing
securities primarily for the purpose of raising capital or to an entity whose
primary business is investing in securities; (c) securities issued pursuant to
any equipment loan or leasing arrangement, real property leasing arrangement or
debt financing from a bank or similar financial institution approved by a
majority of the disinterested directors of the Company; or (d) issued in the
Private Placement in an amount sufficient to repay in full all of the Notes.

 

(f) Notice of Adjustments. Upon the occurrence of each adjustment or
readjustment of the Conversion Price as a result of the events described in this
Section 1.6, the Borrower, at its expense, shall promptly compute such
adjustment or readjustment and prepare and furnish to the Holder a certificate
setting forth such adjustment or readjustment and showing in detail the facts
upon which such adjustment or readjustment is based. The Borrower shall, upon
the written request at any time of the Holder, furnish to such Holder a like
certificate setting forth (i) such adjustment or readjustment, (ii) the
Conversion Price at the time in effect and (iii) the number of shares of Common
Stock and the amount, if any, of other securities or property which at the time
would be received upon conversion of the Note.

 

1.7 Trading Market Limitations. Unless permitted by the applicable rules and
regulations of the principal securities market on which the Common Stock is then
listed or traded, in no event shall the Borrower issue upon conversion of or
otherwise pursuant to this Note more than the maximum number of shares of Common
Stock that the Borrower can issue pursuant to any rule of the principal United
States securities market on which the Common Stock is then traded (the “Maximum
Share Amount”), which shall be 4.99% of the total shares outstanding on the
Initial Closing Date (as defined in the Purchase Agreement), subject to
equitable adjustment from time to time for stock splits, stock dividends,
combinations, capital reorganizations and similar events relating to the Common
Stock occurring after the Issue Date. Once the Maximum Share Amount has been
issued, if the Borrower fails to satisfy any prohibitions under applicable law
or the rules or regulations of any stock exchange, interdealer quotation system
or other self-regulatory organization with jurisdiction over the Borrower or any
of its securities on the Borrower’s ability to issue shares of Common Stock in
excess of the Maximum Share Amount, in lieu of any further right to convert this
Note, this will be considered an Event of Default under Section 3.3 of the Note.

 

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1.8 Status as Shareholder. Upon submission of a Notice of Conversion by a
Holder, (i) the Conversion Shares covered thereby (other than the Conversion
Shares, if any, which cannot be issued because their issuance would exceed such
Holder’s allocated portion of the Reserved Amount or Maximum Share Amount) shall
be deemed converted into shares of Common Stock and (ii) the Holder’s rights as
a Holder of such converted portion of this Note shall cease and terminate,
excepting only the right to receive certificates for such shares of Common Stock
and to any remedies provided herein or otherwise available at law or in equity
to such Holder because of a failure by the Borrower to comply with the terms of
this Note. Notwithstanding the foregoing, if a Holder has not received
certificates for all shares of Common Stock prior to the tenth (10th) business
day after the expiration of the Deadline with respect to a conversion of any
portion of this Note for any reason, then (unless the Holder otherwise elects to
retain its status as a holder of Common Stock by so notifying the Borrower) the
Holder shall regain the rights of a Holder of this Note with respect to such
unconverted portions of this Note and the Borrower shall, as soon as
practicable, return such unconverted Note to the Holder or, if the Note has not
been surrendered, adjust its records to reflect that such portion of this Note
has not been converted. In all cases, the Holder shall retain all of its rights
and remedies for the Borrower’s failure to convert this Note.

 

1.9 Prepayment. Notwithstanding anything to the contrary contained in this Note,
at any time prior to or as of (but not following) the Maturity Date, the
Borrower shall have the right, exercisable on not less than one (1) Trading Day
prior written notice to the Holder of the Note, to prepay the outstanding
Principal Amount of this note together with accrued interest (including any
Default Interest) then due under this Note, in whole or in part, in accordance
with this Section 1.9. Any notice of prepayment hereunder (an “Optional
Prepayment Notice”) shall be delivered to the Holder of the Note at its
registered addresses or via facsimile or email and shall state: (1) that the
Borrower is exercising its right to prepay the Note, and (2) the date of
prepayment which shall be not more than three (3) Trading Days from the date of
the Optional Prepayment Notice. On the date fixed for prepayment (the “Optional
Prepayment Date”), the Borrower shall make payment of the Optional Prepayment
Amount (as defined below) to or upon the order of the Holder as specified by the
Holder in writing to the Borrower at least one (1) business day prior to the
Optional Prepayment Date. If the Borrower exercises its right to prepay the
Note, the Borrower shall make payment to the Holder of an amount in cash (the
“Optional Prepayment Amount”) equal to the sum of: (w) 115% multiplied by the
Principal Amount plus (x) accrued and unpaid interest on the Principal Amount to
the Optional Prepayment Date plus (y) Default Interest, if any, on the amounts
referred to in clauses (w) and (x).

 

1.10 Repayment from Financing Proceeds. While any portion of the outstanding
Principal Amount and interest (including Default Interest) under this Note are
due and owning, if the Company receives cash proceeds from any source or series
of related or unrelated sources, including but not limited to, from the issuance
of equity or debt (including but not limited to the Private Placement), the
conversion of outstanding warrants of the Borrower, the issuance of securities
pursuant to an equity line of credit of the Borrower or the sale or divestiture
of the Company’s metal-air battery business or any other assets, the Borrower
shall, within three (3) business days of Borrower’s receipt of such proceeds,
inform the Holder of such receipt, following which the Holder shall have the
right in its sole discretion to require the Borrower to immediately apply all or
any portion of such proceeds to repay all or any portion of the outstanding
Principal Amount of this note together with accrued interest (including any
Default Interest) then due under this Note. Failure of the Borrower to comply
with this provision shall constitute an Event of Default. In the event that such
proceeds are received by the Holder on or prior to the Maturity Date, the
required prepayment shall be subject to the terms of Section 1.9 herein.

 

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ARTICLE II. RANKING AND CERTAIN COVENANTS

 

2.1 Security. The obligations of the Company under this Note are secured by (i)
an aggregate of 318,138 shares of Common Stock, (ii) stock options to purchase
an aggregate of 2,290,700 shares of Common Stock under the Company’s 2014 Equity
Incentive Plan (2,057,362 shares of which are vested, and 233,338 shares of
which are subject to satisfaction of vesting conditions), and (iii) warrants to
purchase an aggregate of 1,000,000 shares of Common Stock (fully vested) held by
Gregory Hrncir and Kevin Maloney, pursuant to the Pledge Agreement and (ii) all
of the assets of the Borrower and its Subsidiaries, pursuant to the Security
Agreement.

 

2.2 Other Indebtedness. Subject to the terms of the Intercreditor Agreement and
except for indebtedness outstanding immediately prior to the date hereof, so
long as the Borrower shall have any obligation under this Note, the Borrower
shall not (directly or indirectly through any Subsidiary or affiliate) incur or
suffer to exist or guarantee any Indebtedness that is senior to or pari passu
with (in priority of payment and performance) the Borrower’s obligations
hereunder. As used in this Section 2.2, the term “Borrower” means the Borrower
and any Subsidiary of the Borrower. As used herein, the term “ Indebtedness”
means, for the period following issuance of the Note and while Borrower shall
have any obligation under this Note (a) all indebtedness of the Borrower for
borrowed money or for the deferred purchase price of property or services,
including any type of letters of credit, but not including deferred purchase
price obligations in place as of the Issue Date and as disclosed in the SEC
Documents or obligations to trade creditors incurred in the ordinary course of
business, (b) all obligations of the Borrower evidenced by notes, bonds,
debentures or other similar instruments, (c) purchase money indebtedness
hereafter incurred by the Borrower to finance the purchase of fixed or capital
assets, including all capital lease obligations of the Borrower which do not
exceed the purchase price of the assets funded, (d) all guarantee obligations of
the Borrower in respect of obligations of the kind referred to in clauses (a)
through (c) above that the Borrower would not be permitted to incur or enter
into, and (e) all obligations of the kind referred to in clauses (a) through (d)
above that the Borrower is not permitted to incur or enter into that are secured
and/or unsecured by (or for which the holder of such obligation has an existing
right, contingent or otherwise, to be secured and/or unsecured by) any lien or
encumbrance on property (including accounts and contract rights) owned by the
Borrower, whether or not the Borrower has assumed or become liable for the
payment of such obligation.

 

2.3 Distributions on Capital Stock. So long as the Borrower shall have any
obligation under this Note, the Borrower shall not without the Holder’s written
consent (a) pay, declare or set apart for such payment, any dividend or other
distribution (whether in cash, property or other securities) on shares of
capital stock other than dividends on shares of Common Stock solely in the form
of additional shares of Common Stock or (b) directly or indirectly or through
any subsidiary make any other payment or distribution in respect of its capital
stock except for distributions pursuant to any shareholders’ rights plan which
is approved by a majority of the Borrower’s disinterested directors.

 

2.4 Restriction on Stock Repurchases and Debt Repayments. So long as the
Borrower shall have any obligation under this Note, the Borrower shall not
without the Holder’s written consent redeem, repurchase or otherwise acquire
(whether for cash or in exchange for property or other securities or otherwise)
in any one transaction or series of related transactions any shares of capital
stock of the Borrower or any warrants, rights or options to purchase or acquire
any such shares, or repay any pari passu or subordinated indebtedness of
Borrower or the outstanding Series O-2 Notes.

 

2.5 Sale of Assets. So long as the Borrower shall have any obligation under this
Note, the Borrower shall not, without the Holder’s written consent, sell, lease
or otherwise dispose of any significant portion of its assets outside the
ordinary course of business. Any consent to the disposition of any assets may be
conditioned on a specified use of the proceeds of disposition; provided,
however, the Borrower may sell or divest its metal-air battery business so long
as it does so in accordance with Section 1.10 hereof.

 

2.6 Advances and Loans; Affiliate Transactions. So long as the Borrower shall
have any obligation under this Note, the Borrower shall not, without the
Holder’s written consent, lend money, give credit, make advances to or enter
into any transaction with any person, firm, joint venture or corporation,
including, without limitation, officers, directors, employees, subsidiaries and
affiliates of the Borrower, except loans, credits or advances (a) in existence
or committed on the Issue Date and which the Borrower has informed Holder in
writing prior to the Issue Date, (b) in regard to transactions with unaffiliated
third parties, made in the ordinary course of business or (c) in regard to
transactions with unaffiliated third parties, not in excess of $50,000. So long
as the Borrower shall have any obligation under this Note, the Borrower shall
not, without the Holder’s written consent, repay any affiliate (as defined in
Rule 144) of the Borrower in connection with any indebtedness or accrued amounts
owed to any such party.

 

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2.7 Preservation of Business and Existence, etc. So long as the Borrower shall
have any obligation under this Note, the Borrower shall not, without the
Holder’s written consent, change the nature of its business. In addition, so
long as the Borrower shall have any obligation under this Note, the Borrower
shall maintain and preserve, and cause each of its Subsidiaries to maintain and
preserve, its existence, rights and privileges, and become or remain, and cause
each of its Subsidiaries (other than dormant Subsidiaries that have no or
minimum assets) to become or remain, duly qualified and in good standing in each
jurisdiction in which the character of the properties owned or leased by it or
in which the transaction of its business makes such qualification necessary.
Furthermore, so long as the Borrower shall have any obligation under this Note,
the Borrower shall not, without the Holder’s written consent, (i) sell, divest,
acquire or change the structure of any material assets other than in the
ordinary course of business or (ii) solicit any offers for, respond to any
unsolicited offers for, or conduct any negotiations with, any other person or
entity with respect to any Variable Rate Transaction or investment; provided,
however, that the Borrower may sell or divest its metal-air battery business so
long as it does so in accordance with Section 1.10 hereof.

 

2.8 Noncircumvention. The Company hereby covenants and agrees that the Company
will not, by amendment of its Certificate or Articles of Incorporation or
Bylaws, or through any reorganization, transfer of assets, consolidation,
merger, scheme of arrangement, dissolution, issue or sale of securities, or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms of this Note, and will at all times in good faith carry out all
the provisions of this Note and take all action as may be required to protect
the rights of the Holder.

 

2.9 Lost, Stolen or Mutilated Note. Upon receipt by the Company of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of this Note, and, in the case of loss, theft or destruction, of any
indemnification undertaking by the Holder to the Company in customary form and,
in the case of mutilation, upon surrender and cancellation of this Note, the
Company shall execute and deliver to the Holder a new Note.

 

ARTICLE III. EVENTS OF DEFAULT

 

It shall be considered an event of default if any of the following events listed
in this Article III (each, an “Event of Default”) shall occur; provided,
however, that, except in the case of the Events of Default listed in Sections
3.1, 3.2, 3.4, 3.5, 3.6, 3.7, 3.9, 3.10, 3.11, 3.14, 3.16, 3.17, 3.18, 3.19 or
3.20 below, the Borrower shall have five (5) business days to cure such Event of
Default unless a lesser number of days is required pursuant to the provisions of
this Article III:

 

3.1 Failure to Pay Principal or Interest. The Borrower fails to pay the
Principal Amount hereof or interest thereon when due on this Note, whether at
maturity, upon acceleration or otherwise.

 

3.2 Conversion and the Shares. The Borrower (i) fails to issue Conversion Shares
to the Holder (or announces or threatens in writing that it will not honor its
obligation to do so) upon exercise by the Holder of the conversion rights of the
Holder in accordance with the terms of this Note, (ii) fails to transfer or
cause its transfer agent to transfer (issue) (electronically or in certificated
form) any certificate for the Conversion Shares issuable to the Holder upon
conversion of or otherwise pursuant to this Note as and when required by this
Note, or (iii) the Borrower directs its transfer agent not to transfer or
delays, impairs, and/or hinders its transfer agent in transferring (or issuing)
(electronically or in certificated form) any certificate for the Conversion
Shares issuable to the Holder upon conversion of or otherwise pursuant to this
Note as and when required by this Note, or fails to remove (or directs its
transfer agent not to remove or impairs, delays, and/or hinders its transfer
agent from removing) any restrictive legend (or to withdraw any stop transfer
instructions in respect thereof) on any certificate for any Conversion Shares
issued to the Holder upon conversion of or otherwise pursuant to this Note as
and when required by this Note (or makes any written announcement, statement or
threat that it does not intend to honor the obligations described in this
paragraph) and any such failure shall continue uncured (or any written
announcement, statement or threat not to honor its obligations shall not be
rescinded in writing) for three (3) business days after the Holder shall have
delivered a Notice of Conversion. It is an obligation of the Borrower to remain
current in its obligations to its transfer agent. It shall be an Event of
Default of this Note, if a conversion of this Note is delayed, hindered or
frustrated due to a balance owed by the Borrower to its transfer agent. If at
the option of the Holder, the Holder advances any funds to the Borrower’s
transfer agent in order to process a conversion, such advanced funds shall be
paid by the Borrower to the Holder within forty eight (48) hours of a demand
from the Holder.

 

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3.3 Breach of Agreements and Covenants. The Borrower breaches any material
agreement, covenant or other material term or condition contained in the
Purchase Agreement, this Note, the Warrant described in the Purchase Agreement,
the Pledge Agreement, the Security Agreement, the Intercreditor Agreement, the
Irrevocable Transfer Agent Instructions, or in any agreement, statement or
certificate given in writing pursuant hereto or in connection herewith or
therewith.

 

3.4 Breach of Representations and Warranties. Any representation or warranty of
the Borrower made in the Purchase Agreement, this Note, the Warrant described in
the Purchase Agreement, the Pledge Agreement, the Security Agreement, the
Intercreditor Agreement, the Irrevocable Transfer Agent Instructions, or in any
agreement, statement or certificate given in writing pursuant hereto or in
connection herewith or therewith shall be false or misleading in any material
respect when made and the breach of which has (or with the passage of time will
have) a material adverse effect on the rights of the Holder with respect to this
Note or the Purchase Agreement.

 

3.5 Receiver or Trustee. The Borrower or any subsidiary of the Borrower shall
make an assignment for the benefit of creditors, or apply for or consent to the
appointment of a receiver or trustee for it or for a substantial part of its
property or business, or such a receiver or trustee shall otherwise be
appointed.

 

3.6 Judgments. Any money judgment, writ or similar process shall be entered or
filed against the Borrower or any subsidiary of the Borrower or any of its
property or other assets for more than $50,000, and shall remain unvacated,
unbonded or unstayed for a period of twenty (20) days unless otherwise consented
to by the Holder, which consent will not be unreasonably withheld.

 

3.7 Bankruptcy. Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings, voluntary or involuntary, for relief under any
bankruptcy law or any law for the relief of debtors shall be instituted by or
against the Borrower or any subsidiary of the Borrower.

 

3.8 Delisting of Common Stock. The Borrower shall fail to maintain the listing
of the Common Stock on at least one of the Over the Counter Bulletin Board, the
OTCQB Market or any level of the Nasdaq Stock Market or the New York Stock
Exchange (including the NYSE MKT).

 

3.9 Failure to Comply with the 1934 Act. The Borrower shall fail to comply with
the reporting requirements of the 1934 Act and/or the Borrower shall cease to be
subject to the reporting requirements of the 1934 Act. It shall be an Event of
Default under this Section 3.9 if the Borrower shall file any Notification of
Late Filing on Form 12b-25 with the SEC and Borrower fails to make the required
filing under the 1934 Act during the prescribed period.

 

3.10 Liquidation. Any dissolution, liquidation, or winding up of Borrower or any
substantial portion of its business.

 

3.11Cessation of Operations. Any cessation of operations by Borrower or Borrower
admits it is otherwise generally unable to pay its debts as such debts become
due, provided, however, that any disclosure of the Borrower’s ability to
continue as a “going concern” shall not be an admission that the Borrower cannot
pay its debts as they become due.

 

3.12 Maintenance of Assets. The failure by Borrower to maintain any material
intellectual property rights, personal, real property or other assets which are
necessary to conduct its business (whether now or in the future).

 

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3.13 Financial Statement Restatement. The restatement of any financial
statements filed by the Borrower with the SEC for any date or period from two
years prior to the Issue Date of this Note and until this Note is no longer
outstanding, if the result of such restatement would, by comparison to the
unrestated financial statement, have constituted a material adverse effect on
the rights of the Holder with respect to this Note or the Purchase Agreement.

 

3.14 Reverse Splits. The Borrower effectuates a reverse split of its Common
Stock without twenty (20) days prior written notice to the Holder.

 

3.15 Replacement of Transfer Agent. In the event that the Borrower proposes to
replace its transfer agent, the Borrower fails to provide, prior to the
effective date of such replacement, a fully executed Irrevocable Transfer Agent
Instructions in a form as initially delivered pursuant to the Purchase Agreement
(including but not limited to the provision to irrevocably reserve shares of
Common Stock in the Reserved Amount) signed by the successor transfer agent to
Borrower and the Borrower.

 

3.16 DTC “Chill”. The DTC places a “chill” (i.e. a restriction placed by DTC on
one or more of DTC’s services, such as limiting a DTC participant’s ability to
make a deposit or withdrawal of the security at DTC) on any of the Borrower’s
securities.

 

3.17 Illegality. Any court of competent jurisdiction issues an order declaring
this Note, the Purchase Agreement or any provision hereunder or thereunder to be
illegal.

 

3.18. DWAC Eligibility. In addition to the Event of Default in Section 3.16, the
Common Stock is otherwise not eligible for trading through the DTC’s Fast
Automated Securities Transfer or Deposit/Withdrawal at Custodian programs.

 

3.19 Cross-Default. The declaration of an event of default by any lender or
other extender of credit to the Company under any notes, loans, agreements or
other instruments of the Company evidencing any Indebtedness of the Company
(including those filed as exhibits to or described in the Company’s filings with
the SEC), after the passage of all applicable notice and cure or grace periods.

 

3.20 Variable Rate Transactions. The Borrower (i) issues shares of Common Stock
(or convertible securities or Purchase Rights) pursuant to an equity line of
credit of the Company or otherwise in connection with a Variable Rate
Transaction (whether now existing or entered into in the future) or (ii) adjusts
downward the “floor price” at which shares of Common Stock (or convertible
securities or Purchase Rights) may be issued under an equity line of credit or
otherwise in connection with a Variable Rate Transaction (whether now existing
or entered into in the future).

 

3.21 Rights and Remedies Upon an Event of Default. Subject to applicable cure
periods specifically provided for herein, upon the occurrence and during the
continuation of any Event of Default specified in this Article III, exercisable
through the delivery of written notice to the Borrower by the Holder (the
“Default Notice”) (provided, however, that no Default Notice need be provided by
the Holder and no notice and no cure period shall apply in the case of the
Events of Default specified in Sections 3.1, 3.2, 3.4, 3.5, 3.6, 3.7, 3.9, 3.10,
3.11, 3.14 3.16, 3.17, 3.18, 3.19 or 3.20 above), this Note shall become
immediately due and payable and the Borrower shall pay to the Holder, in full
satisfaction of its obligations hereunder, an amount (the “Default Amount”)
equal to 125% of the Principal Amount then outstanding plus accrued interest
(including any Default Interest) through the date of full repayment. Holder may,
in its sole discretion, determine to accept payment part in Common Stock and
part in cash. For purposes of payments in Common Stock, the conversion formula
set forth in Section 1.2 shall apply. Upon an uncured Event of Default, all
amounts payable hereunder shall immediately become due and payable, all without
demand, presentment or notice, all of which hereby are expressly waived by the
Borrower, together with all costs, including, without limitation, legal fees and
expenses, of collection, and the Holder shall be entitled to exercise all other
rights and remedies available at law or in equity, including, without
limitation, those set forth in Section 3.22 below.

 

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3.22 Holder’s Right to Confession of Judgment. Upon the occurrence and during
the continuation of any Event of Default, and in addition to any other right or
remedy of the Holder hereunder, under the Purchase Agreement or otherwise at law
or in equity, the Borrower hereby irrevocably authorizes and empowers Holder or
its legal counsel, each as the Borrower’s attorney-in-fact, to appear ex parte
and without notice to the Borrower to confess judgment against the Borrower for
the unpaid amount of this Note as evidenced by the Affidavit of Confession of
Judgment signed by the Borrower as of the Issue Date and to be completed by the
Holder or its counsel pursuant to the foregoing power of attorney (which power
is coupled with an interest), a copy of which is attached as Exhibit B hereto
(the “Affidavit”). The Affidavit shall set forth the amount then due hereunder,
plus reasonable attorney’s fees and cost of suit, and to release all errors, and
waive all rights of appeal. The Borrower waives the right to contest Holder’s
rights under this Section 3.22, including without limitation the right to any
stay of execution and the benefit of all exemption laws now or hereafter in
effect. No single exercise of the foregoing right and power to confess judgment
will be deemed to exhaust such power, whether or not any such exercise shall be
held by any court to be invalid, voidable, or void, and such power shall
continue undiminished and may be exercised from time to time as the Holder may
elect until all amounts owing on this Note have been paid in full.

 

ARTICLE IV. MISCELLANEOUS

 

4.1 Failure or Indulgence Not Waiver. No failure or delay on the part of the
Holder in the exercise of any power, right or privilege hereunder shall operate
as a waiver thereof, nor shall any single or partial exercise of any such power,
right or privilege preclude other or further exercise thereof or of any other
right, power or privileges. All rights and remedies of the Holder existing
hereunder are cumulative to, and not exclusive of, any rights or remedies
otherwise available.

 

4.2 Notices. All notices, demands, requests, consents, approvals, and other
communications required or permitted hereunder shall be in writing and, unless
otherwise specified herein, shall be (i) personally served, (ii) deposited in
the mail, registered or certified, return receipt requested, postage prepaid,
(iii) delivered by reputable air courier service with charges prepaid, or (iv)
transmitted by hand delivery, telegram, e-mail or facsimile, addressed as set
forth below or to such other address as such party shall have specified most
recently by written notice. Any notice or other communication required or
permitted to be given hereunder shall be deemed effective (a) upon hand delivery
or delivery by e-mail or facsimile, with accurate confirmation generated by the
transmitting facsimile machine, at the address or number designated below (if
delivered on a business day during normal business hours where such notice is to
be received), or the first business day following such delivery (if delivered
other than on a business day during normal business hours where such notice is
to be received) or (b) on the second business day following the date of mailing
by express courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses for
such communications shall be:

 

If to the Borrower, to:

 

QUANTUMSPHERE, INC.

2905 Tech Center Drive

Santa Ana, CA 92705

Attention: Kevin Maloney

e-mail: kmaloney@qsinano.com

 

If to the Holder:

 

____________________________________

____________________________________

____________________________________

 

With a copy by e-mail only to (which copy shall not constitute notice):

 

ELLENOFF GROSSMAN & SCHOLE LLP

1345 Avenue of the Americas

New York, NY 10105

Attn: Lawrence A. Rosenbloom, Esq.

e-mail: lrosenbloom@egsllp.com

 

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4.3 Amendments. This Note and any provision hereof may only be amended by an
instrument in writing signed by the Borrower and the Holder. The term “Note” and
all reference thereto, as used throughout this instrument, shall mean this
instrument as originally executed, or if later amended or supplemented, then as
so amended or supplemented.

 

4.4 Assignability. This Note shall be binding upon the Borrower and its
successors and assigns, and shall inure to be the benefit of the Holder and its
successors and assigns. Each transferee of this Note must be an “Accredited
Investor” (as defined in the Purchase Agreement). Notwithstanding anything in
this Note to the contrary, this Note may be pledged as collateral by Holder in
connection with a bona fide margin account or other lending arrangement.

 

4.5 Cost of Collection. If default is made in the payment of this Note, the
Borrower shall pay the Holder hereof costs of collection, including reasonable
attorneys’ fees.

 

4.6 Governing Law; Venue; Attorney’s Fees. This Note shall be governed by and
construed in accordance with the laws of the State of New York without regard to
principles of conflicts of laws. Any action brought by either party against the
other concerning the transactions contemplated by this Note or any other
agreement, certificate, instrument or document contemplated hereby shall be
brought only in the state courts of New York or in the federal courts located in
the state and county of New York. The Borrower hereby irrevocably waives any
objection to jurisdiction and venue of any action instituted hereunder and shall
not assert any defense based on lack of jurisdiction or venue or based upon
forum non conveniens. THE BORROWER HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY
HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY
DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF THIS NOTE OR ANY
TRANSACTIONS CONTEMPLATED HEREBY. Each party hereby irrevocably waives personal
service of process and consents to process being served in any suit, action or
proceeding in connection with this Note or any other agreement, certificate,
instrument or document contemplated hereby or thereby by mailing a copy thereof
via registered or certified mail or overnight delivery (with evidence of
delivery) to such party at the address in effect for notices to it under this
Note and agrees that such service shall constitute good and sufficient service
of process and notice thereof. Nothing contained herein shall be deemed to limit
in any way any right to serve process in any other manner permitted by law. The
prevailing party in any action or dispute brought in connection with this the
Note or any other agreement, certificate, instrument or document contemplated
hereby or thereby shall be entitled to recover from the other party its
reasonable attorney’s fees and costs.

 

4.7 Certain Amounts. Whenever pursuant to this Note the Borrower is required to
pay an amount in excess of the outstanding Principal Amount (or the portion
thereof required to be paid at that time) plus accrued and unpaid interest plus
Default Interest on such interest, the Borrower and the Holder agree that the
actual damages to the Holder from the receipt of cash payment on this Note may
be difficult to determine and the amount to be so paid by the Borrower
represents stipulated damages and not a penalty and is intended to compensate
the Holder in part for loss of the opportunity to convert this Note and to earn
a return from the sale of shares of Common Stock acquired upon conversion of
this Note at a price in excess of the price paid for such shares pursuant to
this Note. The Borrower and the Holder hereby agree that such amount of
stipulated damages is not plainly disproportionate to the possible loss to the
Holder from the receipt of a cash payment without the opportunity to convert
this Note into shares of Common Stock.

 

4.8 Purchase Agreement. The Company and the Holder shall be bound by the
applicable terms of the Purchase Agreement and the documents entered into in
connection herewith and therewith.

 

4.9 Notice of Corporate Events. Except as otherwise provided below, the Holder
of this Note shall have no rights as a Holder of Common Stock unless and only to
the extent that it converts this Note into Common Stock. The Borrower shall
provide the Holder with prior notification of any meeting of the Borrower’s
shareholders (and copies of proxy materials and other information sent to
shareholders). In the event of any taking by the Borrower of a record of its
shareholders for the purpose of determining shareholders who are entitled to
receive payment of any dividend or other distribution, any right to subscribe
for, purchase or otherwise acquire (including by way of merger, consolidation,
reclassification or recapitalization) any share of any class or any other
securities or property, or to receive any other right, or for the purpose of
determining shareholders who are entitled to vote in connection with any Change
in Control or any proposed liquidation, dissolution or winding up of the
Borrower, the Borrower shall mail a notice to the Holder, at least twenty (20)
days prior to the record date specified therein (or thirty (30) days prior to
the consummation of the transaction or event, whichever is earlier), of the date
on which any such record is to be taken for the purpose of such dividend,
distribution, right or other event, and a brief statement regarding the amount
and character of such dividend, distribution, right or other event to the extent
known at such time. The Borrower shall make a public announcement of any event
requiring notification to the Holder hereunder substantially simultaneously with
the notification to the Holder in accordance with the terms of this Section 4.9.

 

35

 

 

4.10 Remedies. The Borrower acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to the Holder, by vitiating the intent and
purpose of the transaction contemplated hereby. Accordingly, the Borrower
acknowledges that the remedy at law for a breach of its obligations under this
Note will be inadequate and agrees, in the event of a breach by the Borrower of
the provisions of this Note, that the Holder shall be entitled, in addition to
all other available remedies at law or in equity, and in addition to the
penalties assessable herein, to an injunction or injunctions restraining,
preventing or curing any breach of this Note and to enforce specifically the
terms and provisions thereof, without the necessity of showing economic loss and
without any bond or other security being required.

 

4.11 Construction; Headings. This Note shall be deemed to be jointly drafted by
the Company and the Holder and shall not be construed against any person as the
drafter hereof. The headings of this Note are for convenience of reference and
shall not form part of, or affect the interpretation of, this Note.

 

4.12 Usury. To the extent it may lawfully do so, the Company hereby agrees not
to insist upon or plead or in any manner whatsoever claim, and will resist any
and all efforts to be compelled to take the benefit or advantage of, usury laws
wherever enacted, now or at any time hereafter in force, in connection with any
action or proceeding that may be brought by the Holder in order to enforce any
right or remedy under this Note. Notwithstanding any provision to the contrary
contained in this Note, it is expressly agreed and provided that the total
liability of the Company under this Note for payments which under New York law
are in the nature of interest shall not exceed the maximum lawful rate
authorized under applicable law (the “Maximum Rate”), and, without limiting the
foregoing, in no event shall any rate of interest or default interest, or both
of them, when aggregated with any other sums which under New York law in the
nature of interest that the Company may be obligated to pay under this Note
exceed such Maximum Rate. It is agreed that if the maximum contract rate of
interest allowed by New York law and applicable to this Note is increased or
decreased by statute or any official governmental action subsequent to the Issue
Date, the new maximum contract rate of interest allowed by law will be the
Maximum Rate applicable to this Note from the effective date thereof forward,
unless such application is precluded by applicable law. If under any
circumstances whatsoever, interest in excess of the Maximum Rate is paid by the
Company to the Holder with respect to indebtedness evidenced by this the Note,
such excess shall be applied by the Holder to the unpaid principal balance of
any such indebtedness or be refunded to the Company, the manner of handling such
excess to be at the Holder’s election.

 

4.13 Severability. In the event that any provision of this Note is invalid or
unenforceable under any applicable statute or rule of law (including any
judicial ruling), then such provision shall be deemed inoperative to the extent
that it may conflict therewith and shall be deemed modified to conform with such
statute or rule of law. Any such provision which may prove invalid or
unenforceable under any law shall not affect the validity or enforceability of
any other provision of this Note.

 

[signature page follows]

 

36

 

 

IN WITNESS WHEREOF, Borrower has caused this Note to be signed in its name by
its duly authorized officer this _____ day of June, 2016.

 

QUANTUMSPHERE, INC.

 

By:     Name: Kevin Maloney   Title: Chief Executive Officer & President  

 

37

 

 

EXHIBIT A — NOTICE OF CONVERSION

 

The undersigned hereby elects to convert $______________ principal amount of the
Note (defined below) into that number of shares of Common Stock to be issued
pursuant to the conversion of the Note (“Common Stock”) as set forth below, of
QUANTUMSPHERE, INC., a Nevada corporation (the “Borrower”), according to the
conditions of the Secured Promissory Note of the Borrower dated as of June
______, 2016 (the “Note”), as of the date written below. No fee will be charged
to the Holder for any conversion, except for transfer taxes, if any.

 

Box Checked as to applicable instructions:

 

[  ]   The Borrower shall electronically transmit the Common Stock issuable
pursuant to this Notice of Conversion to the account of the undersigned or its
nominee with DTC through its Deposit Withdrawal Agent Commission system (“DWAC
Transfer”).           Name of DTC Prime Broker:     Account Number:       [  ]  
The undersigned hereby requests that the Borrower issue a certificate or
certificates for the number of shares of Common Stock set forth below (which
numbers are based on the Holder’s calculation attached hereto) in the name(s)
specified immediately below or, if additional space is necessary, on an
attachment hereto:          

_____________________

_____________________

_____________________

          Date of Conversion:     ________________     Applicable Conversion
Price: $     Number of Shares of Common Stock to be Issued Pursuant to
Conversion of the Note:     ________________     Amount of Principal Balance Due
remaining Under the Note after this conversion:     ________________

 

  By:       Name:       Title:       Date:    

 

 

 

 

EXHIBIT B

 

Affidavit of Confession of Judgment

 

SUPREME COURT OF THE STATE OF NEW YORK

COUNTY OF NEW YORK

_______________________________________________ X

_______________________________________________,

 

    Index No.   Plaintiff,       AFFIDAVIT OF
CONFESSION OF - against -   JUDGMENT       QUANTUMSPHERE, INC.,       Defendant.
 

 

_______________________________________________ X

 

STATE OF NEW YORK )   )         ss.: COUNTY OF NEW YORK )

 

Kevin Maloney, being duly sworn, hereby deposes and says:

 

1. I am the Chief Executive Officer and President of defendant QUANTUMSPHERE,
INC. (“QSIM”). As such, I am fully familiar with all the facts and circumstances
recited herein on personal knowledge. QSIM has its principal place of business
at 2905 Tech Center Drive, Santa Ana, CA 92705. On behalf of QSIM, I hereby
confess judgment in favor of ____________________ (“___________”), residing at
_________________________, in the amount of ________________________
($________), less any payments made on or after the date of this affidavit of
confession of judgment, plus a default interest rate of fifteen percent (15%)
percent per annum on said amount. In no event shall interest payable hereunder
exceed the maximum permissible under applicable law.

 

2. I hereby authorize the Supreme Court of the State of New York to enter
judgment against QSIM in the amount of in the amount
________________________________ ($__________), plus a default interest rate of
fifteen percent (15%) per annum on said amount from the date of any default,
plus the costs and reasonable attorneys’ fees that are set forth below, less any
payments made on or after the date of this affidavit of confession of judgment,
upon QSIM’s failure for any reason to timely make any payment to __________
called for by the Secured Promissory Note between of the parties, dated June __,
2016 (the “Note”), due to QSIM’s breach of Section 3.1 of the Note (failure to
Pay Principal or Interest) or due to QSIM’s breach of its obligations that it
owes to _______________ pursuant to Sections 3.2-3.20 of the Note.

 

 

 

 

3. In order to secure these obligations, QSIM agreed to simultaneously deliver
with the execution of the Note this Affidavit of Confession of Judgment.

 

4. The sums confessed pursuant to this affidavit of confession of judgment are
justly due and owing to ____________ under the following circumstances: QSIM
entered into the Note pursuant to which QSIM promised to pay to the order of
__________ the principal sum of _______________________________ ($____________)
plus interest as provided for therein. The amounts confessed by this affidavit
represent an investment in the Note by _____________ in QSIM and arise out of
QSIM’s breach of its obligations under the Note.

 

5. QSIM agrees to pay any and all costs and expenses incurred by _____________
in enforcing the terms of this affidavit of confession of judgment, including
reasonable attorneys’ fees and expenses at the rate of $475.00 per hour that
_____________ incurs or is billed for in connection with enforcing the terms of
the affidavit of confession of judgment, entering any Judgment, collecting upon
said Judgment, and defending or prosecuting any appeals.

 

  QUANTUMSPHERE, INC.         By:     Name: Kevin Maloney   Title: Chief
Executive Officer & President

 

 

 

 

STATE OF CALIFORNIA )   ss.: COUNTY OF ORANGE )

 

ACKNOWLEDGMENT

 

On June _____, 2016 before me personally came Kevin Maloney, to me known, who,
by me duly sworn, did depose and say that deponent is the Chief Executive
Officer and President of QUANTUMSPHERE, INC. the corporation described in, and
which executed the foregoing affidavit of confession of judgment, that deponent
knows the seal of the corporation, that the seal affixed to the affidavit of
confession of judgment is the corporation’s seal, that it was affixed by order
of the board of directors of the corporation and that deponent signed deponent’s
name by like order.

 

    Notary Public  

 

SEAL:

 

[Signature Page to Affidavit of Confession of Judgment]

 

 

 

 

EXHIBIT B

 

FORM OF WARRANT

 

NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED
OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION
OF COUNSEL (WHICH COUNSEL SHALL BE SELECTED BY THE HOLDER), IN A GENERALLY
ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS
SOLD PURSUANT TO RULE 144, RULE 144A OR REGULATION S UNDER SAID ACT.
NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH
A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE
SECURITIES.

 

Issuance Date: June [__], 2016

 

QUANTUMSPHERE, INC.

Common Stock Purchase Warrant

 

THIS CERTIFIES THAT, for value received, __________________________ (the
“Holder”), is entitled to subscribe for and purchase, at the Exercise Price (as
defined below), from QUANTUMSPHERE, INC., a Nevada corporation (the “Company”),
shares of the Company’s common stock, par value $0.001 (the “Common Stock”), at
any time prior to the 5:00 p.m., Eastern time, on June [__], 2021 (the “Warrant
Exercise Term”).

 

This Warrant is issued in connection and subject to, the terms and conditions
described in the Securities Purchase Agreement, dated June [__], 2016, between
the Holder and the Company (the “Agreement”). Capitalized terms used herein and
not otherwise defined shall have the definitions ascribed to such terms in the
Agreement. As used herein, the term “Trading Day” means any day that shares of
Common Stock are listed for trading or quotation on the OTCBB (as defined in the
Agreement), any tier of the NASDAQ Stock Market, the New York Stock Exchange or
the NYSE MKT (the “Trading Market”).

 

This Warrant is subject to the following terms and conditions:

 

1. Shares. The Holder has, subject to the terms set forth herein, the right to
purchase up to an aggregate of _______________________ (________________) shares
(the “Shares”) of Common Stock at a per share exercise price equal to the price
per share of the Company’s next equity round of financing (the “Private
Placement”)(as subject to adjustment as provided for herein, the “Exercise
Price”).

 

2. Exercise of Warrant.

 

(a) Exercise. This Warrant may be exercised by the Holder at any time following
the initial closing of the Private Placement, and prior to the expiration of the
Warrant Exercise Term, in whole or in part, by delivering the notice of exercise
attached as Exhibit A hereto (the “Notice of Exercise”), duly executed by the
Holder to the Company at its principal office, or at such other office as the
Company may designate, accompanied by payment, in cash by wire transfer of
immediately available funds to the order of the Company and to an account
designated by the Company, of the amount obtained by multiplying the number of
Shares designated in the Notice of Exercise by the Exercise Price (the “Purchase
Price”). For purposes hereof, “Exercise Date” shall mean the date on which all
deliveries required to be made to the Company upon exercise of this Warrant
pursuant to this Section 2(a) shall have been made.

 

 

 

 

(b) Issuance of Shares. Upon receipt by the Company from the Holder of a
facsimile transmission or e-mail or overnight FedEx of a Notice of Exercise, the
Company shall issue and deliver or cause to be issued and delivered to or upon
the order of the Holder certificates for the Shares (or cause the electronic
delivery of the Shares as contemplated by Section 2(d) hereof) within three (3)
Trading Days after such receipt (the “Deadline”). If the Company shall fail for
any reason or for no reason to issue to the Holder on or prior to the Deadline a
certificate for the number of Shares or to which the Holder is entitled
hereunder and register such Shares on the Company’s share register or to credit
the Holder’s balance account with DTC (as defined below) for such number of
Shares to which the Holder is entitled upon the Holder’s exercise of this
Warrant (an “Exercise Failure”), then, in addition to all other remedies
available to the Holder, (i) the Company shall pay in cash to the Holder on each
day after the Deadline and during such Exercise Failure an amount equal to 2.0%
of the product of (A) the sum of the number of Exercise Shares not issued to the
Holder on or prior to the Deadline and to which the Holder is entitled and (B)
the closing sale price of the Common Stock on the Trading Day immediately
preceding the last possible date which the Company could have issued such Shares
to the Holder without violating this Section 2(b) and (ii) the Holder, upon
written notice to the Company, may void its Notice of Exercise with respect to,
and retain or have returned, as the case may be, any portion of this Warrant
that has not been exercised pursuant to such Notice of Exercise; provided that
the voiding of an Notice of Exercise shall not affect the Company’s obligations
to make any payments which have accrued prior to the date of such notice. In
addition to the foregoing, if on or prior to the Deadline the Company shall fail
to issue and deliver a certificate to the Holder and register such Shares on the
Company’s share register or credit the Holder’s balance account with DTC for the
number of Shares to which the Holder is entitled upon the Holder’s exercise
hereunder or pursuant to the Company’s obligation pursuant to clause (ii) below,
and if on or after such Trading Day the Holder purchases (in an open market
transaction or otherwise) shares of Common Stock to deliver in satisfaction of a
sale by the Holder of shares of Common Stock issuable upon such exercise that
the Holder anticipated receiving from the Company, then the Company shall,
within three (3) Trading Days after the Holder’s request and in the Holder’s
discretion, either (i) pay cash to the Holder in an amount equal to the Holder’s
total purchase price (including brokerage commissions and other reasonable and
customary out-of-pocket expenses, if any) for the shares of Common Stock so
purchased (the “Buy-In Price”), at which point the Company’s obligation to
deliver such certificate (and to issue such Shares) or credit such Holder’s
balance account with DTC for such Shares shall terminate, or (ii) promptly honor
its obligation to deliver to the Holder a certificate or certificates
representing such Shares or credit such Holder’s balance account with DTC and
pay cash to the Holder in an amount equal to the excess (if any) of the Buy-In
Price over the product of (A) such number of shares of Common Stock, times (B)
the closing sales price of the Common Stock on the date of exercise. Nothing
shall limit the Holder’s right to pursue any other remedies available to it
hereunder, at law or in equity, including, without limitation, a decree of
specific performance and/or injunctive relief with respect to the Company’s
failure to timely deliver certificates representing the Shares (or to
electronically deliver such Shares) upon the exercise of this Warrant as
required pursuant to the terms hereof.

 

(c) Obligation of Company to Deliver Common Stock. Upon receipt by the Company
of a Notice of Exercise, the Holder shall be deemed to be the holder of record
of the Shares issuable upon such exercise and all rights with respect to the
portion of this Warrant being so exercised shall forthwith terminate except the
right to receive the Common Stock or other securities, cash or other assets, as
herein provided, on such exercise. If the Holder shall have given a Notice of
Exercise as provided herein, the Company’s obligation to issue and deliver the
Shares (or cause the electronic delivery of the Shares as contemplated by
Section 2(d) hereof) shall be absolute and unconditional, irrespective of the
absence of any action by the Holder to enforce the same, any waiver or consent
with respect to any provision thereof, the recovery of any judgment against any
person or any action to enforce the same, any failure or delay in the
enforcement of any other obligation of the Company to the holder of record, or
any setoff, counterclaim, recoupment, limitation or termination, or any breach
or alleged breach by the Holder of any obligation to the Company, and
irrespective of any other circumstance which might otherwise limit such
obligation of the Company to the Holder in connection with such exercise.

 

(d) Delivery of Shares by Electronic Transfer. In lieu of delivering physical
certificates representing the Shares issuable upon exercise hereof, provided the
Company is participating in the Depository Trust Company (“DTC”) Fast Automated
Securities Transfer program, upon request of the Holder, the Company shall use
its best efforts to cause its transfer agent to electronically transmit the
Share issuable upon exercise hereof to the Holder by crediting the account of
Holder’s Prime Broker with DTC through its Deposit Withdrawal Agent Commission
system.

 

(e) Taxes. The issuance of the Shares upon the exercise of this Warrant, and the
delivery of certificates or other instruments representing such Shares, shall be
made without charge to the Holder for any tax or other charge of whatever nature
in respect of such issuance and the Company shall bear any such taxes in respect
of such issuance.

 

 

 

 

(f) Limitation on Beneficial Ownership. Notwithstanding anything to the contrary
contained herein, that in no event shall the Holder be entitled to exercise any
portion of this Warrant in excess of that portion of this Warrant upon
conversion of which the sum of (1) the number of shares of Common Stock
beneficially owned by the Holder and its affiliates (other than shares of Common
Stock which may be deemed beneficially owned through the ownership of the
unexercised portion of this Warrant or the unexercised or unconverted portion of
any other security of the Company subject to a limitation on conversion or
exercise analogous to the limitations contained herein) and (2) the number of
Shares issuable upon the exercise of the portion of this Warrant with respect to
which the determination of this proviso is being made, would result in
beneficial ownership by the Holder and its affiliates of more than 4.99% of the
then outstanding shares of Common Stock. The “beneficial ownership” of the
Holder shall be determined in accordance with Section 13(d) of the 1934 Act, and
Regulations 13D-G thereunder, except as otherwise provided in clause (1) of
above, provided, however, that the limitations on exercise may be waived by the
Holder upon, at the election of the Holder, not less than 61 days’ prior notice
to the Company, and the provisions of the conversion limitation shall continue
to apply until such 61st day (or such later date, as determined by the Holder,
as may be specified in such notice of waiver).

 

(g) Cashless Exercise. Notwithstanding anything contained herein to the
contrary, if and only if a registration statement pursuant to the 1933 Act
covering the resale of all or any portion of the Warrant Shares is not available
for the resale of such Warrant Shares (such unregistered portion of the Warrant
Shares, the “Unavailable Warrant Shares”), the Holder may, in its sole
discretion, exercise this Warrant solely with respect to the Unavailable Warrant
Shares and, in lieu of making the cash payment otherwise contemplated to be made
to the Company upon such exercise in payment of the aggregate Exercise Price for
such Unavailable Warrant Shares, elect instead to receive upon such exercise the
“Net Number” of shares of Common Stock determined according to the following
formula (a “Cashless Exercise”):

 

  X = Y (A - B)            A

 

       with:

 

X = the number of Warrant Shares to be issued to the Holder

 

Y = the number of Unavailable Warrant Shares with respect to which the Warrant
is being exercised

 

A = the fair value per share of Common Stock on the date of exercise of this
Warrant

 

B = the then-current Exercise Price of the Warrant

 

Solely for the purposes of this paragraph, “fair value” per share of Common
Stock shall mean (A) the average of the closing sales prices on the Trading
Market for the twenty (20) Trading Days immediately preceding the date on which
the Notice of Exercise is deemed to have been sent to the Company, or (B) if the
Common Stock is not publicly traded as set forth above, as reasonably and in
good faith determined by the Board of Directors of the Company as of the date
which the Notice of Exercise is deemed to have been sent to the Company.

 

For purposes of Rule 144 promulgated under the 1933 Act, it is intended,
understood and acknowledged that the Warrant Shares issued in a Cashless
Exercise transaction shall be deemed to have been acquired by the Holder, and
the holding period for such shares shall be deemed to have commenced, on the
date this Warrant was originally issued.

 

 

 

 

3. Adjustment of Exercise Price and Other Events.

 

(a) Adjustment for Reclassification, Consolidation or Merger. If while this
Warrant, or any portion hereof, remains outstanding and unexpired there shall be
(i) a reorganization or recapitalization (other than a combination,
reclassification, exchange or subdivision of shares otherwise provided for
herein), (ii) a merger or consolidation of the Company with or into another
corporation or other entity in which the Company shall not be the surviving
entity, or a reverse merger in which the Company shall be the surviving entity
but the shares of the Company’s capital stock outstanding immediately prior to
the merger are converted by virtue of the merger into other property, whether in
the form of securities, cash or otherwise, or (iii) a sale or transfer of the
Company’s properties and assets as, or substantially as, an entirety to any
other corporation or other entity in one transaction or a series of related
transactions, then, as a part of such reorganization, recapitalization, merger,
consolidation, sale or transfer, unless otherwise directed by the Holder, all
necessary or appropriate lawful provisions shall be made so that the Holder
shall thereafter be entitled to receive upon exercise of this Warrant, during
the period specified herein and upon payment of the Exercise Price then in
effect, the number of shares of capital stock or other securities or property
that a holder of the Shares deliverable upon exercise of this Warrant would have
been entitled to receive in such reorganization, recapitalization, merger,
consolidation, sale or transfer if this Warrant had been exercised immediately
prior to such reorganization, recapitalization, merger, consolidation, sale or
transfer, all subject to further adjustment as provided in this Section 3. If
the per share consideration payable to the Holder for Shares in connection with
any such transaction is in a form other than cash or marketable securities, then
the value of such consideration shall be determined in good faith by the
Company’s Board of Directors. The foregoing provisions of this paragraph shall
similarly apply to successive reorganizations, recapitalizations, mergers,
consolidations, sales and transfers and to the capital stock or securities of
any other corporation that are at the time receivable upon the exercise of this
Warrant. In all events, appropriate adjustment shall be made in the application
of the provisions of this Warrant with respect to the rights and interests of
the Holder after the transaction, to the end that the provisions of this Warrant
shall be applicable after that event, as near as reasonably may be, in relation
to any shares or other property deliverable or issuable after such
reorganization, recapitalization, merger, consolidation, sale or transfer upon
exercise of this Warrant.

 

(b) Adjustments for Split, Subdivision or Combination of Shares. If while this
Warrant, or any portion hereof, remains outstanding and unexpired the Company
shall subdivide (by any stock split, stock dividend, recapitalization,
reorganization, reclassification or otherwise) the shares of Common Stock
subject to acquisition hereunder, then, after the date of record for effecting
such subdivision, the Exercise Price in effect immediately prior to such
subdivision will be proportionately reduced and the number of shares of Common
Stock subject to acquisition upon exercise of the Warrant will be
proportionately increased. If the Company at any time combines (by reverse stock
split, recapitalization, reorganization, reclassification or otherwise) the
shares of Common Stock subject to acquisition hereunder, then, after the record
date for effecting such combination, the Exercise Price in effect immediately
prior to such combination will be proportionately increased and the number of
shares of Common Stock subject to acquisition upon exercise of the Warrant will
be proportionately decreased.

 

(c) Adjustments for Dividends in Stock or Other Securities or Property. If while
this Warrant, or any portion hereof, remains outstanding and unexpired, the
holders of any class of securities as to which purchase rights under this
Warrant exist at the time shall have received or, on or after the record date
fixed for the determination of eligible stockholders, shall have become entitled
to receive, without payment therefor, other or additional stock or other
securities or property (other than cash) of the Company by way of dividend, then
and in each case, this Warrant shall represent the right to acquire, in addition
to the number of shares of such class of security receivable upon exercise of
this Warrant, and without payment of any additional consideration therefor, the
amount of such other or additional stock or other securities or property (other
than cash) of the Company that such holder would hold on the date of such
exercise had it been the holder of record of the class of security receivable
upon exercise of this Warrant on the date hereof and had thereafter, during the
period from the date hereof to and including the date of such exercise, retained
such shares and/or all other additional stock available to it as aforesaid
during said period, giving effect to all adjustments called for during such
period by the provisions of this Section 3.

 

(d) Adjustments for Dilutive Issuances . If, at any time while this Warrant is
outstanding, the Company sells or grants any option to purchase or sells or
grants any right to reprice, or otherwise disposes of or issues (or announces
any sale, grant or any option to purchase or other disposition), any Common
Stock or other securities entitling any person to acquire shares of Common Stock
at an effective price per share that is lower than the then Exercise Price (such
lower price, the “Base Exercise Price” and such issuances, collectively, a
“Dilutive Issuance”) (if the holder of the Common Stock or other securities so
issued shall at any time, whether by operation of purchase price adjustments,
reset provisions, floating conversion, exercise or exchange prices or otherwise,
or due to warrants, options or rights per share which are issued in connection
with such issuance, be entitled to receive shares of Common Stock at an
effective price per share that is lower than the Exercise Price, such issuance
shall be deemed to have occurred for less than the Exercise Price on such date
of the Dilutive Issuance), then the Exercise Price shall be reduced to equal the
Base Exercise Price. Such adjustment shall be made whenever such Common Stock or
other securities are issued. Notwithstanding the foregoing, no adjustment will
be made under this Section 3(d) in respect of an Exempt Issuance. In the event
of an issuance of securities involving multiple tranches or closings, any
adjustment pursuant to this Section 3(d) shall be calculated as if all such
securities were issued at the initial closing.

 

 

 

 

An “Exempt Issuance” shall mean the issuance of (i) shares of Common Stock or
other securities to employees, officers or directors of the Company pursuant to
any stock or option or similar equity incentive plan duly adopted for such
purpose, by a majority of the non-employee members of the Board of Directors or
a majority of the members of a committee of non-employee directors established
for such purpose in a manner which is consistent with the Company’s prior
business practices; (ii) securities issued pursuant to a merger, consolidation,
acquisition or similar business combination approved by a majority of the
disinterested directors of the Company, provided that any such issuance shall
only be to a person (or to the equityholders of a person) which is, itself or
through its subsidiaries, an operating company or an owner of an asset in a
business synergistic with the business of the Company and shall provide to the
Company additional benefits in addition to the investment of funds, but shall
not include a transaction in which the Company is issuing securities primarily
for the purpose of raising capital or to an entity whose primary business is
investing in securities; or (iii) securities issued pursuant to any equipment
loan or leasing arrangement, real property leasing arrangement or debt financing
from a bank or similar financial institution approved by a majority of the
disinterested directors of the Company.

 

(e) Fundamental Transactions. The Company shall not enter into or be party to a
Fundamental Transaction unless the entity succeeding to the Company (the
“Successor Entity”) assumes in writing all of the obligations of the Company
under this Warrant and the Agreement. Upon occurrence or consummation of the
Fundamental Transaction, the Company and the Successor Entity shall deliver to
the Holder confirmation that there shall be issued upon exercise of this Warrant
at any time after the occurrence or consummation of the Fundamental Transaction,
as elected by the Holder solely at its option, shares of Common Stock, shares of
capital stock of the Successor Entity (“Successor Capital Stock”) or, in lieu of
the shares of Common Stock or Successor Capital Stock (or other securities,
cash, assets or other property purchasable upon the exercise of this Warrant
prior to such Fundamental Transaction), such shares of stock, securities, cash,
assets or any other property whatsoever (including warrants or other purchase or
subscription rights), which for purposes of clarification may continue to be
shares of Common Stock, if any, that the Holder would have been entitled to
receive upon the happening of such Fundamental Transaction or the record,
eligibility or other determination date for the event resulting in such
Fundamental Transaction, had this Warrant been exercised immediately prior to
such Fundamental Transaction or the record, eligibility or other determination
date for the event resulting in such Fundamental Transaction, as adjusted in
accordance with the provisions of this Warrant. In addition to and not in
substitution for any other rights hereunder, prior to the occurrence or
consummation of any Fundamental Transaction pursuant to which holders of shares
of Common Stock are entitled to receive securities, cash, assets or other
property with respect to or in exchange for shares of Common Stock (a “Corporate
Event”), the Company shall make appropriate provision to insure that, and any
applicable Successor Entity shall ensure that, and it shall be a required
condition to the occurrence or consummation of such Corporate Event that, the
Holder will thereafter have the right to receive upon exercise of this Warrant
at any time after the occurrence or consummation of the Corporate Event, shares
of Common Stock or Successor Capital Stock or, if so elected by the Holder, in
lieu of the shares of Common Stock (or other securities, cash, assets or other
property) purchasable upon the exercise of this Warrant prior to such Corporate
Event. The provisions of this Section 2(e) shall apply similarly and equally to
successive Fundamental Transactions and Corporate Events.

 

 

 

 

(g) As used herein, the term “Fundamental Transaction” means (A) that the
Company shall, directly or indirectly, including through subsidiaries,
Affiliates or otherwise, in one or more related transactions, (i) consolidate or
merge with or into (whether or not the Company is the surviving corporation)
another entity, or (ii) sell, assign, transfer, convey or otherwise dispose of
all or substantially all of the properties or assets of the Company to one or
more entities, or (iii) make, or allow one or more entities to make, or allow
the Company to be subject to or have its Common Stock be subject to or party to
one or more entities making, a purchase, tender or exchange offer that is
accepted by the holders of at least either (x) 50% of the outstanding shares of
Common Stock, (y) 50% of the outstanding shares of Common Stock calculated as if
any shares of Common Stock held by all entities making or party to, or
affiliated with any entities making or party to, such purchase, tender or
exchange offer were not outstanding; or (z) such number of shares of Common
Stock such that all entities making or party to, or Affiliated with any entity
making or party to, such purchase, tender or exchange offer, become collectively
the beneficial owners (as defined in Rule 13d-3 under the 1934 Act) of at least
50% of the outstanding shares of Common Stock, or (iv) consummate a stock
purchase agreement or other business combination (including, without limitation,
a reorganization, recapitalization, spin-off or scheme of arrangement) with one
or more entities whereby all such entities, individually or in the aggregate,
acquire, either (x) at least 50% of the outstanding shares of Common Stock, (y)
at least 50% of the outstanding shares of Common Stock calculated as if any
shares of Common Stock held by all the entities making or party to, or
affiliated with any entity making or party to, such stock purchase agreement or
other business combination were not outstanding; or (z) such number of shares of
Common Stock such that the entities become collectively the beneficial owners
(as defined in Rule 13d-3 under the 1934 Act) of at least 50% of the outstanding
shares of Common Stock, or (v) reorganize, recapitalize or reclassify its Common
Stock such that such modified Common Stock no longer has the residual right to
dividends or distributions form the Company or the residual right to vote on
matters given to the common stock holders under Nevada law, (B) that the Company
shall, directly or indirectly, including through subsidiaries, affiliates or
otherwise, in one or more related transactions, allow any entity individually or
entities in the aggregate to be or become the “beneficial owner” (as defined in
Rule 13d-3 under the 1934 Act), directly or indirectly, whether through
acquisition, purchase, assignment, conveyance, tender, tender offer, exchange,
reduction in outstanding shares of Common Stock, merger, consolidation, business
combination, reorganization, recapitalization, spin-off, scheme of arrangement,
reorganization, recapitalization or reclassification or otherwise in any manner
whatsoever, of either (x) at least 50% of the aggregate ordinary voting power
represented by issued and outstanding Common Stock, (y) at least 50% of the
aggregate ordinary voting power represented by issued and outstanding Common
Stock not held by all such entities as of the date of this Warrant calculated as
if any shares of Common Stock held by all such entities were not outstanding, or
(z) a percentage of the aggregate ordinary voting power represented by issued
and outstanding shares of Common Stock or other equity securities of the Company
sufficient to allow such entities to effect a statutory short form merger or
other transaction requiring other stockholders of the Company to surrender their
shares of Common Stock without approval of the stockholders of the Company or
(C) directly or indirectly, including through subsidiaries, affiliates or
otherwise, in one or more related transactions, the issuance of or the entering
into any other instrument or transaction structured in a manner to circumvent,
or that circumvents, the intent of this definition in which case this definition
shall be construed and implemented in a manner otherwise than in strict
conformity with the terms of this definition to the extent necessary to correct
this definition or any portion of this definition which may be defective or
inconsistent with the intended treatment of such instrument or transaction.

 

(i) Notice of Fundamental Transactions and Adjustments. The Company shall
provide the Holder with no less than five (5) business days written notice of
the public announcement of any Fundamental Transaction. In addition, upon any
adjustment of the Exercise Price and any increase or decrease in the number of
Shares purchasable upon the exercise of this Warrant, then, and in each such
case, the Company, within 30 days thereafter, shall give written notice thereof
to the Holder at the address of such Holder as shown on the books of the
Company, which notice shall state the Exercise Price as adjusted and, if
applicable, the increased or decreased number of Shares purchasable upon the
exercise of this Warrant, setting forth in reasonable detail the method of
calculation of each.

 

4. Notices. Any notice or other communication required or permitted to be given
hereunder shall be in writing and shall be undertaken in accordance with the
provisions of this Agreement.

 

5. Removal of Legend. The Holder shall have the right to cause restrictive
legends removed from the Shares as provided for in the Agreement.

 

6. Fractional Shares. No fractional Shares will be issued in connection with any
exercise hereunder. Instead, the Company shall round up, as nearly as
practicable to the nearest whole Share, the number of Shares to be issued.

 

 

 

 

7. Rights of Stockholder. Except as expressly provided in Section 3 hereof, the
Holder, as such, shall not be entitled to vote or receive dividends or be deemed
the holder of the Shares or any other securities of the Company that may at any
time be issuable on the exercise hereof for any purpose, nor shall anything
contained herein be construed to confer upon the Holder, as such, any of the
rights of a stockholder of the Company or any right to vote for the election of
directors or upon any matter submitted to stockholders at any meeting thereof,
or to give or withhold consent to any corporate action (whether upon any
recapitalization, issuance of stock, reclassification of stock, change of par
value, consolidation, merger, conveyance, or otherwise) or to receive notice of
meetings, or otherwise until this Warrant shall have been exercised and the
Shares purchasable upon the exercise hereof shall have been issued, as provided
herein.

 

8. Transfer; Multiple Warrants; Lost Warrant; New Warrants. This Warrant and the
Shares may be offered for sale, sold, transferred, pledged or assigned without
the consent of the Company, provided that any such offer, sale, transfer, pledge
or assignment must be undertaken in accordance with applicable law, rule and
regulation (including the 1933 Act). This Warrant is exchangeable, upon the
surrender hereof by the Holder at the principal office of the Company, for a new
Warrant or Warrants representing in the aggregate the right to purchase the
number of Shares then underlying this Warrant, and each such new Warrant will
represent the right to purchase such portion of such Shares as is designated by
the Holder at the time of such surrender. Upon receipt by the Company of
evidence reasonably satisfactory to the Company of the loss, theft, destruction
or mutilation of this Warrant, and, in the case of loss, theft or destruction,
of any indemnification undertaking by the Holder to the Company in customary
form and, in the case of mutilation, upon surrender and cancellation of this
Warrant, the Company shall execute and deliver to the Holder a new Warrant
representing the right to purchase the Warrant Shares then underlying this
Warrant. Whenever the Company is required to issue a new Warrant pursuant to the
terms of this Warrant, such new Warrant (i) shall be of like tenor with this
Warrant, (ii) shall represent, as indicated on the face of such new Warrant, the
right to purchase the Shares then underlying this Warrant (or in the case of a
new Warrant being issued pursuant to this Section 8, the Shares designated by
the Holder which, when added to the number of shares of Common Stock underlying
the other new Warrants issued in connection with such issuance, does not exceed
the number of Shares then underlying this Warrant), (iii) shall have an issuance
date, as indicated on the face of such new Warrant which is the same as the
Issuance Date, and (iv) shall have the same rights and conditions as this
Warrant.

 

9. Miscellaneous.

 

(a) This Warrant and disputes arising hereunder shall be governed by and
construed and enforced in accordance with the laws of the State of New York
applicable to agreements made and to be performed wholly within such State,
without regard to its conflict of law rules. Venue for resolution of disputes
shall be as provided for in the Agreement.

 

(b) The headings in this Warrant are for purposes of reference only, and shall
not limit or otherwise affect any of the terms hereof.

 

(c) The covenants of the respective parties contained herein shall survive the
execution and delivery of this Warrant.

 

(d) The terms of this Warrant shall be binding upon and shall inure to the
benefit of any successors or permitted assigns of the Company and of the Holder
and of the Shares issued or issuable upon the exercise hereof.

 

(e) This Warrant and the other documents delivered pursuant hereto constitute
the full and entire understanding and agreement between the parties with regard
to the subject hereof.

 

(f) The Company shall not, by amendment of its Certificate or Articles of
Incorporation or Bylaws, or through any other means, directly or indirectly,
avoid or seek to avoid the observance or performance of any of the terms of this
Warrant and shall at all times in good faith assist in the carrying out of all
such terms and in the taking of all such action as may be necessary or
appropriate in order to protect the rights of the Holder contained herein
against impairment.

 

(g) Upon receipt of evidence reasonably satisfactory to the Company of the loss,
theft, destruction or mutilation of this Warrant and, in the case of any such
loss, theft or destruction, upon delivery of an indemnity agreement reasonably
satisfactory in form and amount to the Company, or, in the case of any such
mutilation, upon surrender and cancellation of such Warrant, the Company, at its
expense, will execute and deliver to the Holder, in lieu thereof, a new Warrant
of like date and tenor.

 

(h) This Warrant and any provision hereof may be amended, waived or terminated
only by an instrument in writing signed by the Company and the Holder.

 

 

 

 

IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly
authorized officer.

 

  QUANTUMSPHERE, INC.         By:   Name: Kevin Maloney   Title: Chief Executive
Officer & President

 

 

 

 

Exhibit A

 

EXERCISE NOTICE

TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS

WARRANT TO PURCHASE COMMON STOCK

 

QUANTUMSPHERE, INC.

 

The undersigned holder hereby exercises the right to purchase _________________
of the shares of Common Stock (“Warrant Shares”) of QUANTUMSPHERE, INC., a
Nevada corporation (the “Company”), evidenced by the attached Common Stock
Purchase Warrant (the “Warrant”). Capitalized terms used herein and not
otherwise defined shall have the respective meanings set forth in the Warrant.

 

The holder shall tender payment for such shares of Common Stock (i) in the sum
of $___________________ to the Company in accordance with the terms of the
Warrant or (ii) via cashless exercise, in each case in accordance with the terms
hereof.

 

The Company shall deliver to the holder __________ Warrant Shares:

 

______ in certificated form

 

_____ through the facilities of the DTC via the following instructions:

 

           

 

Date: _______________ __, ______

 

   

Name of Registered Holder

 

By:     Name:     Title:    

 

 

 

 

Exhibit B

 

FORM OF ASSIGNMENT

 

FOR VALUE RECEIVED, ___________________________________ hereby sells, assigns
and transfers to each assignee set forth below all of the rights of the
undersigned under the Warrant (as defined in and evidenced by the attached
Warrant) to acquire the number of Shares set opposite the name of such assignee
below and in and to the foregoing Warrant with respect to said acquisition
rights and the shares issuable upon exercise of the Warrant:

 

Name of Assignee   Address   Number of Shares                              

 

If the total of the Shares are not all of the Shares evidenced by the foregoing
Warrant, the undersigned requests that a new Warrant evidencing the right to
acquire the Shares not so assigned be issued in the name of and delivered to the
undersigned.

 

  Name of Holder (print):  

 

  (Signature):  

 

  (By:)     (Title:)     Dated:  

 

 

 

 

EXHIBIT C

 

FORM OF PLEDGE AGREEMENT

 

PLEDGE AGREEMENT

 

This PLEDGE AGREEMENT (this “Agreement”), dated as of June 8, 2016, made by
Kevin Maloney and Gregory Hrncir, each an individual with an address c/o
Quantumsphere, Inc., 2905 Tech Center Drive, Santa Ana, CA 92705 (the “Pledgors”
and each a “Pledgor”), in favor of the pledgees set forth on Schedule A annexed
hereto (each a “Pledgee” and collectively the “Pledgees”).

 

WHEREAS:

 

A. Pledgees have agreed to loan to QuantumSphere, Inc. (the “Company”) an
aggregate amount of $587,500.00 pursuant to those certain Secured Promissory
Notes (the “Note”) and related agreements and instruments to be delivered upon
execution hereof; and

 

B. Pledgors are substantial shareholders and members of management of the
Company and will materially benefit by the transactions contemplated by the
Note; and

 

C. It is a condition precedent to the loan that each Pledgor shall have executed
and delivered to Pledgees a pledge agreement providing for the pledge to the
Pledgees of, and the grant to the Pledgees of a security interest in, all common
stock and common stock equivalents of the Company owned by such Pledgor,
including but not limited to shares of Common Stock, stock options and warrants
to purchase shares of Common Stock, as set forth on Schedule B annexed hereto
(collectively, the “Pledged Shares”).

 

NOW, THEREFORE, in consideration of the premises and the agreements herein
contained and in order to induce the Pledgees to make the loan described above,
each Pledgor hereby agrees with the Pledgees, as follows:

 

SECTION 1. Definitions. All terms used in this Agreement which are defined in
the Note, Article 8 or Article 9 of the Uniform Commercial Code (the “UCC”)
currently in effect in the State of New York and which are not otherwise defined
herein shall have the same meanings herein as set forth therein; provided, that
terms used herein which are defined in the UCC as in effect in the State of New
York on the date hereof shall continue to have the same meaning notwithstanding
any replacement or amendment of such statute.

 

SECTION 2. Pledge and Grant of Security Interest. As collateral security for all
of the Obligations (as defined in Section 3 hereof), each Pledgor severally
hereby pledges and assigns to Pledgees, and grants to Pledgees a continuing
security interest in, such Pledgor’s right, title and interest in and to the
Pledged Shares, the certificates representing such Pledged Shares, all options
and other rights, contractual or otherwise, in respect thereof and all
dividends, distributions, cash, instruments, investment property and other
property (including but not limited to, any stock dividend and any distribution
in connection with a stock split) from time to time received, receivable or
otherwise distributed in respect of or in exchange for any or all of the Pledged
Shares (collectively, the “Pledged Collateral”).

 

 

 

 

SECTION 3. Security for Obligations. The security interest created hereby in the
Pledged Collateral constitutes continuing collateral security for all of the
following obligations, whether now existing or hereafter incurred (the
“Obligations”): the prompt payment to Pledgees, as and when due and payable (by
scheduled maturity, required prepayment, acceleration, demand or otherwise), of
all amounts from time to time owing by it in respect of any interest, principal
and other penalties, damages, costs, fees, expenses or charges of, or arising
under, the Notes (including, without limitation, all interest that accrues after
the commencement of any case, proceeding or other action relating to bankruptcy,
insolvency or reorganization of any Pledgor whether or not the payment of such
interest is unenforceable or is not allowable due to the existence of such case,
proceeding or other action), all fees, commissions, expense reimbursements,
indemnifications and all other amounts due or to become due to Pledgees under
the Notes.

 

SECTION 4. Delivery of the Pledged Collateral.

 

(a) FirstFire Global Opportunities Fund LLC (the “Collateral Agent”) shall hold
the Pledged Shares for the benefit of the Pledgees and each Pledgor further
agrees to execute such other documents and to take such other actions as the
Collateral Agent deems reasonably necessary or desirable to create and perfect
the security interests intended to be created hereunder, including, without
limitation, duly executed undated stock powers endorsed in blank, with medallion
guarantee(s), to effect the foregoing and to permit Pledgees to exercise any of
their rights and remedies hereunder.

 

(b) If any Pledgor shall receive, by virtue of its being or having been an owner
of any Pledged Collateral, any (i) stock certificate (including, without
limitation, any certificate representing a stock dividend or distribution in
connection with any increase or reduction of capital, reclassification, merger,
consolidation, sale of assets, combination of shares, stock split, spin-off or
split-off), promissory note or other instrument, (ii) option or right, whether
as an addition to, substitution for, or in exchange for, any Pledged Collateral,
or otherwise, (iii) dividends or interest payable in cash or in securities or
other property, (iv) dividends, interest and other distributions paid or payable
other than in cash in respect of, and instruments and other property received,
receivable or otherwise distributed in respect of or in exchange for, any
Pledged Collateral, (v) dividends or other distributions in connection with a
partial or total liquidation or dissolution or in connection with a reduction of
capital, capital surplus or paid-in surplus, or (vi) cash paid, payable or
otherwise distributed in redemption of, or in exchange for, any Pledged
Collateral, such stock certificate, promissory note, instrument, option, right,
property, payment or distribution constituting Pledged Collateral shall be, and
shall forthwith be delivered to Collateral Agent to hold as, Pledged Collateral
and shall be received in trust for the benefit of the Pledgees, shall be
segregated from Pledgor’s other property and shall be delivered forthwith to
Collateral Agent in the exact form received, with any necessary endorsement
and/or appropriate stock powers duly executed in blank, to be held by the
Collateral Agent as Pledged Collateral and as further collateral security for
the Obligations.

 

 

 

 

SECTION 5. Representations and Warranties. Each Pledgor represents and warrants,
severally and jointly, as follows:

 

(a) The execution, delivery and performance by the Pledgors of this Agreement
and the exercise by any Pledgee of any of its rights and remedies in accordance
with the terms of this Agreement and applicable securities law will not
contravene any law or any contractual restriction binding on or affecting the
Pledgors or any of its properties and do not and will not result in or require
the creation of any lien upon or with respect to any of its properties other
than pursuant to this Agreement.

 

(b) The Pledgors are and will be at all times the beneficial owner of the
Pledged Collateral free and clear of any lien or option except for the security
interest created by this Agreement.

 

(c) No authorization or approval or other action by, and no notice to or filing
with, any governmental authority or other regulatory body is required for the
grant by the Pledgors, or the perfection, of the security interest purported to
be created hereby in the Pledged Collateral or the exercise by any Pledgee of
any of its rights and remedies hereunder, except as may be required in
connection with any sale of any Pledged Collateral by laws affecting the
offering and sale of securities generally, including the foreclosure procedures
sanctioned under the interpretations of the securities laws.

 

(d) This Agreement creates a valid security interest in favor of the Pledgees in
the Pledged Collateral, as security for the Obligations. Such security interest
is, or in the case of Pledged Collateral in which the Pledgors obtain rights
after the date hereof, will be, a perfected, first priority security interest.
All action necessary to perfect and protect such security interest has been duly
taken, except for Pledgees’ having possession of security certificates
constituting Pledged Collateral after the date hereof and obtaining control of
uncertificated securities and security entitlements constituting Pledged
Collateral after the date hereof.

 

SECTION 6. Covenants as to the Pledged Collateral. So long as any of the
Obligations shall remain outstanding, each Pledgor will, unless Collateral Agent
(who shall act at the direction of holders of a majority of the Notes then
outstanding) shall otherwise consent in writing:

 

(a) keep adequate records concerning the Pledged Collateral and permit
Collateral Agent or any agents or representatives of Collateral Agent at any
reasonable time and from time to time to examine and make copies of and
abstracts from such records;

 

(b) at its expense, promptly deliver to Collateral Agent a copy of each notice
or other communication received by it in respect of the Pledged Collateral;

 

(c) at its expense, defend Pledgees’ right, title and security interest in and
to the Pledged Collateral against the claims of any person or entity;

 

(d) at its expense, at any time and from time to time, promptly execute and
deliver all further instruments and documents and take all further action that
may be necessary or desirable or that Collateral Agent may reasonably request in
order to (i) perfect and protect the security interest purported to be created
hereby, or (ii) enable Collateral Agent to exercise and enforce the Pledgees’
rights and remedies hereunder in respect of the Pledged Collateral;

 

 

 

 

(e) not sell, assign (by operation of law or otherwise), transfer, exchange or
otherwise dispose of any Pledged Collateral or any interest therein;

 

(f) not create or suffer to exist any lien upon or with respect to any Pledged
Collateral except for the security interest created hereby;

 

(g) not make or consent to any amendment or other modification or waiver with
respect to any Pledged Collateral or enter into any agreement or permit to exist
any restriction with respect to any Pledged Collateral other than pursuant
hereto; and

 

(h) not take or fail to take any action which would in any manner impair the
value or enforceability of Pledgees’ security interest in any Pledged
Collateral.

 

SECTION 7. Voting Rights, Etc. in Respect of the Pledged Collateral.

 

(a) So long as no Event of Default or event which, with the giving of notice or
lapse of time or both, would constitute an Event of Default, shall have occurred
and be continuing:

 

(i) each Pledgor may exercise any and all voting and other consensual rights
pertaining to any Pledged Collateral for any purpose not inconsistent with the
terms of the Note; and

 

(ii) each Pledgee will execute and deliver (or cause to be executed and
delivered) to each Pledgor all such proxies and other instruments as such
Pledgor may reasonably request for the purpose of enabling such Pledgor to
exercise the voting and other rights which it is entitled to exercise pursuant
to paragraph Section 7(a)(i) hereof.

 

(b) Upon the occurrence and during the continuance of an Event of Default or an
event which, with the giving of notice or the lapse of time or both, would
constitute an Event of Default:

 

(i) all rights of any Pledgor to exercise the voting and other consensual rights
which it would otherwise be entitled to exercise pursuant to Section 7(a)(i)
hereof shall cease, and all such rights shall thereupon become vested in the
Pledgees which shall thereupon have the sole right to exercise such voting and
other consensual rights; and

 

(ii) without limiting the generality of the foregoing, each Pledgee may at its
option exercise any and all rights of conversion, exchange, subscription or any
other rights, privileges or options pertaining to any Pledged Collateral as if
it were the absolute owner thereof, including, without limitation, the right to
exchange, in its discretion, any and all of such Pledged Collateral upon the
merger, consolidation, reorganization, recapitalization or other adjustment of
the Company, or upon the exercise of any right, privilege or option pertaining
to any Pledged Collateral, and, in connection therewith, to deposit and deliver
any and all of the Pledged Collateral with any committee, depository, transfer
agent, registrar or other designated agent upon such terms and conditions as it
may determine.

 

 

 

 

SECTION 8. Additional Provisions Concerning the Pledged Collateral.

 

(a) Each Pledgor hereby authorizes Collateral Agent to file, without the
signature of such Pledgor where permitted by law, one or more financing or
continuation statements, and amendments thereto, relating to the Pledged
Collateral.

 

(b) Each Pledgor hereby irrevocably appoints Collateral Agent (who shall act at
the direction of holders of 50% of the Notes then outstanding) as such Pledgor’s
attorney-in-fact and proxy, with full authority, exercisable only during the
existence of an Event of Default, in the place and stead of such Pledgor and in
the name of such Pledgor or otherwise, from time to time in Collateral Agent’s
discretion, to take any action and to execute any instrument which Collateral
Agent may deem necessary or advisable to accomplish the purposes of this
Agreement (subject to the rights of such Pledgor under Section 7(a) hereof),
including, without limitation, to receive, endorse and collect all instruments
made payable to such Pledgor representing any dividend or other distribution in
respect of any of the Pledged Collateral and to give full discharge for the
same. This power is coupled with an interest and is irrevocable until all of the
Obligations are satisfied in full.

 

(c) If any Pledgor fails to perform any agreement or obligation contained
herein, Collateral Agent itself may perform, or cause performance of, such
agreement or obligation with respect to Pledged Collateral, and the expenses of
Collateral Agent incurred in connection therewith shall be payable by such
Pledgor pursuant to Section 10 hereof and shall be secured by the Pledged
Collateral.

 

SECTION 10. Indemnity and Expenses.

 

(a) Each Pledgor agrees to indemnify and hold harmless each Pledgee and all of
its stockholders, partners, members, officers, directors, employees and direct
or indirect investors and any of the foregoing persons’ agents or other
representatives (including, without limitation, those retained in connection
with the transactions contemplated by this Agreement) from and against any and
all third-party claims, damages, losses, liabilities, obligations, penalties,
costs and expenses (including, without limitation, reasonable attorney’s fees
and disbursements) to the extent that they arise out of or otherwise result from
this Agreement (including, without limitation, enforcement of this Agreement),
except, as to any such indemnified person or entity, claims, losses or
liabilities resulting solely and directly from such person or entity’s gross
negligence or willful misconduct as determined by a final judgment of a court of
competent jurisdiction and except to the extent that such claims, losses or
liabilities result from failure of such indemnified person or entities to comply
with the securities laws.

 

 

 

 

SECTION 11. Notices. Whenever notice is required to be given under this
Agreement, unless otherwise provided herein, such notice shall be given in
accordance with the terms of the Note.

 

SECTION 12. Security Interest Absolute. To the extent permitted by law, all
rights of each Pledgee and each Pledgor hereunder shall be absolute and
unconditional irrespective of: (i) any lack of validity or enforceability of any
ancillary agreement or any other agreement or instrument relating thereto, (ii)
any change in the time, manner or place of payment of, or in any other term in
respect of, all or any of the Obligations, or any other amendment or waiver of
or consent to any departure from any guaranty, for all or any of the
Obligations, or (iii) any other circumstance which might otherwise constitute a
defense available to, or a discharge of, each Pledgor in respect of the
Obligations. All authorizations and agencies contained herein with respect to
any of the Pledged Collateral are irrevocable and powers coupled with an
interest.

 

SECTION 13. Miscellaneous.

 

(a) No amendment of any provision of this Agreement shall be effective unless it
is in writing and signed by each Pledgor and Collateral Agent, and no waiver of
any provision of this Agreement, and no consent to any departure by any Pledgor
therefrom, shall be effective unless it is in writing and signed by Collateral
Agent, and then such waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given.

 

(b) No failure on the part of Collateral Agent to exercise, and no delay in
exercising, any right hereunder or under any ancillary agreement shall operate
as a waiver thereof; nor shall any single or partial exercise of any such right
preclude any other or further exercise thereof or the exercise of any other
right. The rights and remedies of the Pledgees provided herein and in the
ancillary agreements are cumulative and are in addition to, and not exclusive
of, any rights or remedies provided by law. The rights of the Pledgees under any
ancillary agreement against any party thereto are not conditional or contingent
on any attempt by any Pledgee to exercise any of its rights under any other
document against such party or against any other person or entity.

 

(c) Any provision of this Agreement which is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining portions
hereof or thereof or affecting the validity or enforceability of such provision
in any other jurisdiction.

 

(d) This Agreement shall create a continuing security interest in the Pledged
Collateral and shall (i) remain in full force and effect until the satisfaction
in full or release of the Obligations and (ii) be binding on each Pledgor and
its successors and assigns and shall inure, together with all rights and
remedies of each Pledgee hereunder, to the benefit of each Pledgee and its
successors, transferees and assigns; provided that no such transfer or
assignment shall be valid if it is in violation of applicable securities laws.
Without limiting the generality of clause (ii) of the immediately preceding
sentence, subject to compliance with the applicable securities laws and
applicable provisions of the ancillary agreements, each Pledgee may assign or
otherwise transfer all or any portion of the Note, and its rights under the
ancillary agreements, to any other person or entity, and such other person or
entity shall thereupon become vested with all of the benefits in respect thereof
granted to such Pledgee herein or otherwise unless such benefit is unavailable
due to the status of such transferee or otherwise under applicable law. Upon any
such permitted assignment or transfer, all references in this Agreement to
Pledgee shall mean the assignee of any Pledgee. None of the rights or
obligations of any Pledgor hereunder may be assigned or otherwise transferred
without the prior written consent of Collateral Agent.

 

 

 

 

(e) Upon the satisfaction in full of the Obligations, (i) this Agreement and the
security interest created hereby shall terminate and all rights to the Pledged
Collateral, if any shall be remaining, shall revert to the Pledgors,
respectively, and (ii) the Collateral Agent will, upon any Pledgor’s request and
at such Pledgor’s expense, (A) return to such Pledgor such of the Pledged
Collateral as shall not have been sold or otherwise disposed of, dealt with or
applied pursuant to the terms hereof and of the ancillary agreements and (B)
execute and deliver to such Pledgor, without recourse, representation or
warranty, such documents as such Pledgor shall reasonably request to evidence
such termination.

 

(f) All questions concerning the construction, validity, enforcement and
interpretation of this Agreement shall be governed by and construed and enforced
in accordance with the internal laws of the State of New York, without regard to
the principles of conflicts of law thereof. Each party hereby irrevocably
submits to the exclusive jurisdiction of the state and federal courts sitting in
the City of New York, borough of Manhattan, for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby
or discussed herein, and hereby irrevocably waives, and agrees not to assert in
any suit, action or proceeding, any claim that it is not personally subject to
the jurisdiction of any such court, that such suit, action or proceeding is
improper. Each party hereby irrevocably waives personal service of process and
consents to process being served in any such suit, action or proceeding by
mailing a copy thereof to such party at the address in effect for notices to it
under this Agreement and agrees that such service shall constitute good and
sufficient service of process and notice thereof. Nothing contained herein shall
be deemed to limit in any way any right to serve process in any manner permitted
by law. Each party hereto hereby irrevocably waives, to the fullest extent
permitted by applicable law, any and all right to trial by jury in any legal
proceeding arising out of or relating to this Agreement or the transactions
contemplated hereby. If either party shall commence a Proceeding to enforce any
provisions of this Agreement, then the prevailing party in such Proceeding shall
be reimbursed by the other party for its attorneys’ fees and other costs and
expenses incurred with the investigation, preparation and prosecution of such
proceeding.

 

[signature page follows]

 

 

 

 

IN WITNESS WHEREOF, each Pledgor has caused this Pledge Agreement to be executed
and delivered by its officer thereunto duly authorized, as of the date first
above written.

 

      Kevin Maloney           Gregory Hrncir

 

FIRSTFIRE GLOBAL OPPORTUNITIES FUND LLC

 

By:     Name:     Title:    

 

 

 

 

SCHEDULE A

LIST OF PLEDGEES

 

Name   Address Kevin Maloney   c/o 2905 Tech Center Dr.     Santa Ana, CA 92705
Gregory Hrncir   c/o 2905 Tech Center Dr.     Santa Ana, CA 92705

 

 

 

 

SCHEDULE B

PLEDGED SHARES

 

1. Kevin Maloney

 

GRANT
DATE   EXPIRATION
DATE   SHARES     OPTIONS
VESTED     OPTIONS
NOT
VESTED     WARRANTS
VESTED     EXERCISE
PRICE                                                 266,628                  
                7/1/2007   7/1/2017             200,000                     $
1.50   12/15/2007   12/15/2017             11,198                     $ 1.50  
1/1/2010   1/1/2020             400,000                     $ 1.50   6/3/2013  
6/3/2023             291,666       8,334             $ 1.30   6/3/2013  
6/3/2023             146,778                     $ 1.30   11/15/2013  
11/15/2023             91,665       108,335             $ 1.80   9/7/2011  
9/7/2018                             500,000     $ 1.50                        
                        TOTAL         266,628       1,141,307       116,669    
  500,000          

 

2. Gregory Hrncir

 

GRANT
DATE   MATURITY
DATE   SHARES     OPTIONS
VESTED     OPTIONS
NOT
VESTED     WARRANTS
VESTED     EXERCISE
PRICE                                                 51,510                    
              7/1/2007   7/1/2017             200,000                     $ 1.50
  12/15/2007   12/15/2017             3,843                     $ 1.50  
1/1/2010   1/1/2020             200,000                     $ 1.50   6/3/2013  
6/3/2023             291,666       8,334             $ 1.30   6/3/2013  
6/3/2023             128,881                     $ 1.30   11/15/2013  
11/15/2023             91,665       108,335             $ 1.80   9/7/2011  
9/7/2018                             500,000     $ 1.50                        
                        TOTAL         51,510       916,055       116,669      
500,000          

 

 

 

 

EXHIBIT D

 

FORM OF SECURITY AGREEMENT

 

SECURITY AGREEMENT

 

THIS SECURITY AGREEMENT (this “Agreement”), is entered into as of June 8, 2016
by and between QuantumSphere, Inc., a Nevada corporation (the “Borrower”),
FirstFire Global Opportunities Fund LLC (the “Collateral Agent”), and each of
the secured parties whose name appears on the signature pages to this Agreement
(individually, a “Secured Party” and, collectively, the “Secured Parties”). All
capitalized terms not otherwise defined herein shall the meanings ascribed to
them in those certain Note Purchase Agreements and the Notes (as defined below)
by and between Borrower and each Secured Party (the “Note Purchase Agreements”).

 

RECITALS

 

WHEREAS, the Secured Parties have loaned monies to Borrower, as more
particularly described in the Note Purchase Agreements and as evidenced by 5%
Secured Convertible Promissory Notes issued by Borrower to the Secured Parties
(the “Notes”);

 

WHEREAS, the term “Secured Party” as used in this Agreement shall mean,
collectively, all holders of Notes, including those persons who become holders
of Notes subsequent to the date hereof; and

 

WHEREAS, this Agreement is being executed and delivered by Borrower to secure
the Notes.

 

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, each of the parties hereto hereby agrees as
follows:

 

1. Obligations Secured. This Agreement secures, in part, the prompt payment and
performance of all obligations of Borrower under the Notes, and all renewals,
extensions, modifications, amendments, and/or supplements thereto (collectively,
the “Secured Obligations”).

 

2. Grant of Security.

 

a. Collateral. Borrower hereby grants, pledges, and assigns for the benefit of
the Secured Parties, and there is hereby created in favor of each of the Secured
Parties, a security interest in and to all of Borrower’s right, title, and
interest in, to, and under all of the collateral set forth on Exhibit A hereto
(collectively, “Collateral”) subject to Section 2(c) below.

 

b. Effective Date. This grant of security shall be effective as of the date
hereof.

 

c. Subordination. The Notes and the Secured Obligations shall be subordinated,
or junior in interest, to the obligations of Borrower in favor of (i) its senior
lender, Novus Capital, LLC, with outstanding principal and accrued interest in
the collective amount of $386,701 as of May 31, 2016 (the “Novus Capital
Financing”), and (ii) that certain financing secured by Borrower from a total of
fourteen (14) investors, with outstanding principal and accrued interest in the
collective amount of $1,480,796 as of May 31, 2016 (the “Series O-2 Notes
Financing”).

 

 -1- 

 

 

d. Filings to Perfect Security. The Company will (and is hereby authorized to)
file with any filing office such financing statements, amendments, addenda,
continuations, terminations, assignments and other records (whether or not
executed by Borrower) to perfect and to maintain perfected security interests in
the Collateral by the Secured Parties, whereby (a) promptly upon the execution
of this Agreement, a Financing Statement on Form UCC-1 (the “Financing
Statement”) shall be filed with the California Secretary of State on behalf of
the Secured Parties with respect to the Collateral; The Financing Statement
shall designate each of the Secured Parties as a Secured Party and Borrower as
the debtor, shall identify the security interest in the Collateral, and contain
any other items required by law. The Financing Statement shall contain a
description of collateral consistent with the description set forth herein and
shall not describe the collateral as “all assets” or “all personal property.”

 

3. Transfers and Other Liens. Except as set forth in Section 2(c) herein or in
the Notes, Borrower shall not, without the prior written consent of all of the
Secured Parties, at their sole and absolute discretion:

 

a. Sell, transfer, assign, or dispose of (by operation of law or otherwise), any
of the Collateral outside of the ordinary course of business;

 

b. Create or suffer to exist any lien, security interest, or other charge or
encumbrance upon or with respect to any of the Collateral, except the security
interests created hereby; or

 

c. Permit any of the Collateral to be levied upon under any legal process.

 

4. Representations and Warranties. Borrower hereby represents and warrants to
the Secured Parties as follows: (a) to Borrower’s knowledge, Borrower is the
owner of the Collateral (or, in the case of after-acquired Collateral, at the
time Borrower acquires rights in the Collateral, will be the owner thereof) and
that, except as expressly provided herein or contemplated pursuant to Section
2(c) herein, no other person has (or, in the case of after-acquired Collateral,
at the time Borrower acquires rights therein, will have) any right, title, claim
or interest (by way of Lien or otherwise) in, against or to the Collateral; (b)
to Borrower’s knowledge, except as expressly provided herein, upon the filing of
a Financing Statement with the California Secretary of State, the Secured
Parties (or in the case of after-acquired Collateral, at the time Borrower
acquires rights therein, will have) will have a perfected security interest in
the Collateral to the extent that a security interest in the Collateral can be
perfected by such filing; (c) all Accounts Receivable (as defined in Exhibit A)
are genuine and enforceable against the party obligated to pay the same; (d)
Borrower has full power and authority to enter into the transactions provided
for in this Agreement and the Notes; (e) this Agreement and the Notes, when
executed and delivered by Borrower, will constitute the legal, valid and binding
obligations of Borrower enforceable in accordance with their terms; (f) the
execution and delivery by Borrower of this Agreement and the Notes and the
performance and consummation of the transactions contemplated hereby and thereby
do not and will not violate Borrower’s Certificate of Incorporation or Bylaws or
any material judgment, order, writ, decree, statute, rule or regulation
applicable to Borrower (g) there does not exist any default or violation by
Borrower of or under any of the terms, conditions or obligations of (i) any
indenture, mortgage, deed of trust, franchise, permit, contract, agreement, or
other instrument to which Borrower is a party or by which Borrower is bound, or
(ii) any law, ordinance, regulation, ruling, order, injunction, decree,
condition or other requirement applicable to or imposed upon Borrower by any
law, the action of any court or any governmental authority or agency; and the
execution, delivery and performance of this Agreement will not result in any
such default or violation; (h) there is no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand pending or, to the knowledge
of Borrower, threatened which adversely affects Borrower’s business or financial
condition and there is no basis known to Borrower for any action, suit,
proceeding, hearing, investigation, charge, complaint, claim, or demand which
could result in the same; and (i) this Agreement and the Notes do not contain
any untrue statement of material fact or omit to state a material fact necessary
in order to make the statements contained in this Agreement and the Notes not
misleading.

 

 -2- 

 

 

5. Events of Default. For purposes of this Agreement, the term “Event of
Default” shall mean and refer to any of the following:

 

  d. Failure of Borrower to perform or observe any covenant set forth in this
Agreement, or to perform or observe any other term, condition, covenant,
warranty, agreement or other provision contained in this Agreement, where such
failure continues for fifteen (15) days after receipt of written notice from
Lender specifying such failure;         e. Any representation or warranty made
or furnished by Borrower in writing in connection with this Agreement and the
Notes or any statement or representation made in any certificate, report or
opinion delivered pursuant to this Agreement or in connection with this
Agreement is false, incorrect or incomplete in any material respect at the time
it is furnished; or         f. Occurrence of any other Event of Default as
defined in the Note.

 

6. Remedies. Upon the occurrence and during the continuance of an Event of
Default (subject to the notice and cure provisions provided for herein, if any),
each Secured Party shall have the rights of a secured creditor under the
California Uniform Commercial Code, all rights granted by the Notes, this
Security Agreement and by law, including the right to require Borrower to
assemble the Collateral and make it available to the Secured Parties at a place
to be designated by Borrower. The rights and remedies provided in this Agreement
and the Notes are cumulative and may be exercised independently or concurrently,
and are not exclusive of any other right or remedy provided at law or in equity.
No failure to exercise or delay by the Secured Parties in exercising any right
or remedy under this Agreement or the Notes shall impair or prohibit the
exercise of any such rights or remedies in the future or be deemed to constitute
a waiver or limitation of any such right or remedy or acquiescence therein.
Every right and remedy granted to the Secured Parties under this Agreement and
the Notes or by law or in equity may be exercised by any Secured Party at any
time and from time to time.

 

7. Further Assurances. Borrower agrees that, from time to time, at its own
expense, it will:

 

  g. Protect and defend the Collateral against all claims and demands of all
persons at any time claiming the same or any interest therein, and preserve and
protect Secured Party’s security interest in the Collateral.         h. Promptly
execute and deliver to Secured Parties all instruments and documents, and take
all further action necessary or desirable, as any Secured Party may reasonably
request to (i) continue, perfect, or protect any security interest granted or
purported to be granted hereby, and (ii) enable a Secured Party to exercise and
enforce any of Secured Party’s rights and remedies hereunder with respect to any
Collateral.         i. Permit a Secured Party’s representatives to inspect and
make copies of all books and records relating to the Collateral, wherever such
books and records are located, and to conduct an audit relating to the
Collateral at any reasonable time or times.

 

8. Collateral Agent. All of the powers granted to the Collateral Agent pursuant
to that certain intercreditor and collateral agent, dated as of the date hereof,
by and among the Borrower, the Secured Parties and the Collateral Agent, shall
be granted to the Collateral Agent hereunder with respect to the Secured
Obligations and Collateral hereunder, and shall be incorporated herein by
reference thereto, to the extent applicable to this Agreement.

 

 -3- 

 

 

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 telex, e-mail or facsimile if sent during
normal business hours of the recipient, if not, then on the next business day,
(c) five (5) 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. All communications shall be sent as follows:

 

  If to the Collateral Agent: FirstFire Global Opportunities Fund LLC     1040
First Avenue, Suite 190     New York, New York 10022         If to Borrower:
QuantumSphere, Inc.     2905 Tech Center Dr.     Santa Ana, CA 92705    
Facsimile: 714-545-6265

 

or to such other address or telecopy number as the party to whom notice is to be
given may have furnished to the other party in writing in accordance herewith.

 

10. Amendments and Waivers. No modification, amendment or waiver of any
provision of, or consent required by, this Agreement, nor any consent to any
departure herefrom, shall be effective unless it is in writing and signed by
each of the parties hereto. Such modification, amendment, waiver or consent
shall be effective only in the specific instance and for the purpose for which
given.

 

11. Exclusivity and Waiver of Rights. No failure to exercise and no delay in
exercising on the part of any party, any right, power or privilege hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise of
any right, power or privilege preclude any other right, power or privilege. The
rights and remedies herein provided are cumulative and are not exclusive of any
other rights or remedies provided by law.

 

12. Invalidity. Any term or provision of this Agreement shall be ineffective to
the extent it is declared invalid or unenforceable, without rendering invalid or
enforceable the remaining terms and provisions of this Agreement.

 

13. Headings. Headings used in this Agreement are inserted for convenience only
and shall not affect the meaning of any term or provision of this Agreement.

 

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

 

15. Assignment. This Agreement and the rights and obligations hereunder shall
not be assignable or transferable by the any of the parties without the prior
written consent of all Secured Parties, at their sole and absolute discretion.

 

 -4- 

 

 

16. Survival. Unless otherwise expressly provided herein, all representations
warranties, agreements and covenants contained in this Agreement shall survive
the execution hereof and shall remain in full force and effect until the
earliest to occur of (a) the payment in full of the Notes, and (b) the
conversion of the principal and accrued and unpaid interest and all other
amounts owing under the Notes into common stock of Borrower.

 

17. Miscellaneous. This Agreement shall inure to the benefit of each of the
parties hereto and all their respective successors and permitted assigns.
Nothing in this Agreement is intended or shall be construed to give to any other
person, firm or corporation any legal or equitable right, remedy or claim under
or in respect of this Agreement or any provision herein contained.

 

18. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEVADA (WITHOUT GIVING EFFECT TO ANY
CHOICE OR CONFLICT OF LAWS PROVISIONS).

 

19. CONSENT TO JURISDICTION. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY AND
UNCONDITIONALLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF THE COURTS OF THE
STATE OF CALIFORNIA. EACH OF THE PARTIES HERETO AGREES THAT ALL ACTIONS OR
PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY MUST BE LITIGATED EXCLUSIVELY IN ANY SUCH STATE OR FEDERAL
COURT, AND ACCORDINGLY, EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES ANY
OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY
SUCH LITIGATION IN ANY SUCH COURT.

 

20. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY WAIVES, TO THE
FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY
JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER
OR IN CONNECTION WITH THIS AGREEMENT. EACH OF THE PARTIES HERETO (A) CERTIFIES
THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED,
EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF
LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT
AND EACH OF THE OTHER PARTIES HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT, BY,
AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 20.

 

21. Attorneys’ Fees. In the event that any suit or action is instituted to
enforce any provision in this 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, including without limitation, such reasonable fees and expenses of
attorneys and accountants, which shall include, without limitation, all fees,
costs and expenses of appeals.

 

22. Entire Agreement. This Agreement contains the entire agreement among the
parties with respect to the transactions contemplated by this Agreement and
supersedes all prior agreements or understandings among the parties with respect
to the subject matter hereof.

 

[SIGNATURE PAGE(S) FOLLOW]

 

 -5- 

 

 

IN WITNESS WHEREOF, this Security Agreement has been executed as of the date
first set written above.

 

“SECURED PARTIES”         FIRSTFIRE GLOBAL OPPORTUNITIES FUND, LLC         By:  
  Name:     Title:           PURITAN PARTNERS, LLC         By:     Name:    
Title:           ROCKWELL CAPITAL PARTNERS, INC.         By:     Name:    
Title:    

 

    By: TOMER COHEN           By: FRANCIS POLI  

 

“COLLATERAL AGENT”         FIRSTFIRE GLOBAL OPPORTUNITIES FUND, LLC         By:
    Name:     Title:    

 

“BORROWER”         QUANTUMSPHERE, INC.,   a Nevada corporation         By:      
Kevin D. Maloney   Title: Chief Executive Officer & President  

 

 -6- 

 

 

EXHIBIT A

 

COLLATERAL

 

Subject to Section 2(c) of the Security Agreement, Borrower hereby grants,
pledges, and assigns for the benefit of each Secured Party, and there is hereby
created in favor of the Secured Parties, a security interest in and to all of
Borrower’s right, title, and interest in, to, and under all assets and all
personal property of Borrower, whether now or hereafter existing, or now owned
or hereafter acquired, including but not limited to the following (collectively,
“Collateral”):

 

1. All accounts, chattel paper, contracts, contract rights, accounts receivable,
tax refunds, notes receivable, documents, other choses in action and general
intangibles, including, but not limited to, proceeds of inventory and returned
goods and proceeds from the sale of goods and services, and all rights, liens,
securities, guaranties, remedies and privileges related thereto, including the
right of stoppage in transit and rights and property of any kind forming the
subject matter of any of the foregoing (“Accounts Receivable”);

 

2. All time, savings, demand, certificate of deposit or other accounts in the
name of Borrower or in which Borrower has any right, title or interest,
including but not limited to all sums now or at any time hereafter on deposit,
and any renewals, extensions or replacements of and all other property which may
from time to time be acquired directly or indirectly using the proceeds of any
of the foregoing;

 

3. All inventory and equipment of every type or description wherever located,
including, but not limited to all raw materials, parts, containers, work in
process, finished goods, goods in transit, wares, merchandise furniture,
fixtures, hardware, machinery, tools, parts, supplies, automobiles, trucks,
other intangible property of whatever kind and wherever located associated with
the Borrower’s business, tools and goods returned for credit, repossessed,
reclaimed or otherwise reacquired by Borrower;

 

4. All documents of title and other property from time to time received,
receivable or otherwise distributed in respect of, exchange or substitution for
or addition to any of the foregoing including, but not limited to, any documents
of title;

 

5. All know-how, information, permits, patents, copyrights, goodwill,
trademarks, trade names, licenses and approvals held by Borrower, including all
other intangible property of Borrower;

 

6. All assets of any type or description that may at any time be assigned or
delivered to or come into possession of Borrower for any purpose for the account
of Borrower or as to which Borrower may have any right, title, interest or
power, and property in the possession or custody of or in transit to anyone for
the account of Borrower, as well as all proceeds and products thereof and
accessions and annexations thereto; and

 

7. All proceeds (including but not limited to insurance proceeds) and products
of and accessions and annexations to any of the foregoing.

 

EXHIBITS

 

   

 

 

EXHIBIT E

 

REGISTRATION RIGHTS

 

All of the Conversion Shares and Warrant Shares will be deemed “Registrable
Securities” subject to the provisions of this Exhibit E. All capitalized terms
used but not defined in this Exhibit E shall have the meanings ascribed to such
terms in the Securities Purchase Agreement to which this Exhibit is attached.

 

1. Piggy-Back Registration.

 

1.1 Piggy-Back Rights. If at any time on or after the date of the Closing the
Company proposes to file any Registration Statement under the 1933 Act (a
“Registration Statement”) with respect to any offering of equity securities, or
securities or other obligations exercisable or exchangeable for, or convertible
into, equity securities, by the Company for its own account or for shareholders
of the Company for their account (or by the Company and by shareholders of the
Company), other than a Registration Statement (i) filed in connection with any
employee stock option or other benefit plan on Form S-8, (ii) for a dividend
reinvestment plan or (iii) in connection with a merger or acquisition, then the
Company shall (x) give written notice of such proposed filing to the holders of
Registrable Securities appearing on the books and records of the Company as such
a holder as soon as practicable but in no event less than ten (10) days before
the anticipated filing date of the Registration Statement, which notice shall
describe the amount and type of securities to be included in such Registration
Statement, the intended method(s) of distribution, and the name of the proposed
managing underwriter or underwriters, if any, of the offering, and (y) offer to
the holders of Registrable Securities in such notice the opportunity to register
the sale of such number of Registrable Securities as such holders may request in
writing within five (5) days following receipt of such notice (a “Piggy-Back
Registration”). The Company shall use its best efforts to cause such Registrable
Securities to be included in such registration and its best efforts to cause the
managing underwriter or underwriters of a proposed underwritten offering to
permit the Registrable Securities requested to be included in a Piggy-Back
Registration on the same terms and conditions as any similar securities of the
Company and to permit the sale or other disposition of such Registrable
Securities in accordance with the intended method(s) of distribution thereof;
provided, however, in the case of an underwritten offering, the managing
underwriter (or, in the case of an offering that is not underwritten, an
investment banker) shall advise the Company that, in its good faith opinion, the
number of securities requested and otherwise proposed to be included in such
Piggy-Back Registration exceeds the number which can be sold in such offering
without adversely affecting the marketability of the offering, the Company will
include in such Registration Statement, to the extent of the number which the
Company is so advised can be sold in such offering, first, the securities the
Company proposes to sell for its own account pursuant to such Registration
Statement and second, the Registrable Securities of the Holder requesting to be
included in such Registration Statement and all other securities requested to be
included in such Registration on a pro rata basis, if any. All holders of
Registrable Securities proposing to distribute their securities through a
Piggy-Back Registration that involves an underwriter or underwriters shall enter
into an underwriting agreement in customary form with the underwriter or
underwriters selected for such Piggy-Back Registration.

 

1.2 Withdrawal. Any holder of Registrable Securities may elect to withdraw such
holder’s request for inclusion of Registrable Securities in any Piggy-Back
Registration by giving written notice to the Company of such request to withdraw
prior to the effectiveness of the Registration Statement. The Company (whether
on its own determination or as the result of a withdrawal by persons making a
demand pursuant to written contractual obligations) may withdraw a Registration
Statement at any time prior to the effectiveness of such Registration Statement.
Notwithstanding any such withdrawal, the Company shall pay all expenses incurred
by the holders of Registrable Securities in connection with such Piggy-Back
Registration as provided in Section 1.5 below.

 

1.3 The Company shall notify the holders of Registrable Securities at any time
when a prospectus relating to such holder’s Registrable Securities is required
to be delivered under the 1933 Act, upon discovery that, or upon the happening
of any event as a result of which, the prospectus included in such Registration
Statement, as then in effect, includes an untrue statement of a material fact or
omits to state any material fact required to be stated therein or necessary to
make the statements therein not misleading in light of the circumstances then
existing. At the request of such holder, the Company shall also prepare, file
and furnish to such holder a reasonable number of copies of a supplement to or
an amendment of such prospectus as may be necessary so that, as thereafter
delivered to the purchasers of the Registrable Securities, such prospectus shall
not include an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading in light of the circumstances then existing. The holders of
Registrable Securities shall not to offer or sell any Registrable Securities
covered by the Registration Statement after receipt of such notification until
the receipt of such supplement or amendment.

 

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1.4 The Company may request a holder of Registrable Securities to furnish the
Company such information with respect to such holder and such holder’s proposed
distribution of the Registrable Securities pursuant to the Registration
Statement as the Company may from time to time reasonably request in writing or
as shall be required by law or by the SEC in connection therewith, and such
holders shall furnish the Company with such information.

 

1.5 All fees and expenses incident to the performance of or compliance with this
Exhibit E by the Company shall be borne by the Company whether or not any
Registrable Securities are sold pursuant to a Registration Statement. The fees
and expenses referred to in the foregoing sentence shall include, without
limitation, (i) all registration and filing fees (including, without limitation,
fees and expenses of the Company’s counsel and independent registered public
accountants) (A) with respect to filings made with the SEC, (B) with respect to
filings required to be made with any trading market on which the Common Stock is
then listed for trading, (C) in compliance with applicable state securities or
Blue Sky laws reasonably agreed to by the Company in writing (including, without
limitation, fees and disbursements of counsel for the Company in connection with
Blue Sky qualifications or exemptions of the Registrable Securities) and (D)
with respect to any filing that may be required to be made by any broker through
which a holder of Registrable Securities intends to make sales of Registrable
Securities with the FINRA, (ii) printing expenses, (iii) messenger, telephone
and delivery expenses, (iv) fees and disbursements of counsel for the Company,
(v) 1933 Act liability insurance, if the Company so desires such insurance, (vi)
fees and expenses of all other persons or entities retained by the Company in
connection with the consummation of the transactions contemplated by this
Exhibit E and (vii) reasonable fees and disbursements of a single special
counsel for the holders of Registrable Securities (selected by holders of the
majority of the Registrable Securities requesting such registration), up to
$10,000 for each registration. In addition, the Company shall be responsible for
all of its internal expenses incurred in connection with the consummation of the
transactions contemplated by this Agreement (including, without limitation, all
salaries and expenses of its officers and employees performing legal or
accounting duties), the expense of any annual audit and the fees and expenses
incurred in connection with the listing of the Registrable Securities on any
securities exchange as required hereunder. In no event shall the Company be
responsible for any broker or similar commissions of any holder of Registrable
Securities.

 

1.6 The Company and its successors and assigns shall indemnify and hold harmless
the Buyer, each holder of Registrable Securities, the officers, directors,
members, partners, agents and employees (and any other individuals or entities
with a functionally equivalent role of a person holding such titles,
notwithstanding a lack of such title or any other title) of each of them, each
individual or entity who controls the Buyer or any such holder of Registrable
Securities (within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act) and the officers, directors, members, stockholders, partners,
agents and employees (and any other individuals or entities with a functionally
equivalent role of a person holding such titles, notwithstanding a lack of such
title or any other title) of each such controlling individual or entity (each,
an “Indemnified Party”), to the fullest extent permitted by applicable law, from
and against any and all losses, claims, damages, liabilities, costs (including,
without limitation, reasonable attorneys’ fees) and expenses (collectively,
“Losses”), as incurred, arising out of or relating to (1) any untrue or alleged
untrue statement of a material fact contained in a Registration Statement, any
related prospectus or any form of prospectus or in any amendment or supplement
thereto or in any preliminary prospectus, or arising out of or relating to any
omission or alleged omission of a material fact required to be stated therein or
necessary to make the statements therein (in the case of any such prospectus or
supplement thereto, in light of the circumstances under which they were made)
not misleading or (2) any violation or alleged violation by the Company of the
1933 Act, the 1934 Act or any state securities law, or any rule or regulation
thereunder, in connection with the performance of its obligations under this
Exhibit E, except to the extent, but only to the extent, that (i) such untrue
statements or omissions are based upon information regarding the Buyer or such
holder of Registrable Securities furnished to the Company by such party for use
therein. The Company shall notify the Buyer and each holder of Registrable
Securities promptly of the institution, threat or assertion of any proceeding
arising from or in connection with the transactions contemplated by this Exhibit
E of which the Company is aware.

 

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1.7 If the indemnification under Section 1.6 is unavailable to an Indemnified
Party or insufficient to hold an Indemnified Party harmless for any Losses, then
the Company shall contribute to the amount paid or payable by such Indemnified
Party, in such proportion as is appropriate to reflect the relative fault of the
Company and Indemnified Party in connection with the actions, statements or
omissions that resulted in such Losses as well as any other relevant equitable
considerations. The relative fault of the Company and Indemnified Party shall be
determined by reference to, among other things, whether any action in question,
including any untrue or alleged untrue statement of a material fact or omission
or alleged omission of a material fact, has been taken or made by, or relates to
information supplied by, the Company or the Indemnified Party, and the parties’
relative intent, knowledge, access to information and opportunity to correct or
prevent such action, statement or omission. The amount paid or payable by a
party as a result of any Losses shall be deemed to include any reasonable
attorneys’ or other fees or expenses incurred by such party in connection with
any proceeding to the extent such party would have been indemnified for such
fees or expenses if the indemnification provided for in Section 1.6 was
available to such party in accordance with its terms. It is agreed that it would
not be just and equitable if contribution pursuant to this Section 1.7 were
determined by pro rata allocation or by any other method of allocation that does
not take into account the equitable considerations referred to in the
immediately preceding sentence. Notwithstanding the provisions of this Section
1.7, neither the Buyer nor any holder of Registrable Securities shall be
required to contribute, in the aggregate, any amount in excess of the amount by
which the net proceeds actually received by such party from the sale of all of
their Registrable Securities pursuant to such Registration Statement or related
prospectus exceeds the amount of any damages that such party has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission.

 

[End of Exhibit E]

 

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