SECURITIES PURCHASE AGREEMENT

 

SECURITIES PURCHASE AGREEMENT (the "Agreement"), dated as of February 12, 2014,
by and among LabStyle Innovations Corp., a Delaware corporation, with
headquarters located at Halamish 9, Caesarea Industrial Park, 38900, Israel (the
"Company"), and the investors listed on the Schedule of Buyers attached hereto
(individually, a "Buyer" and collectively, the "Buyers").

 

WHEREAS:

 

A.           The Company and each Buyer is 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) of Regulation D ("Regulation D") as promulgated by the United
States Securities and Exchange Commission (the "SEC") under the 1933 Act.

 

B.           Each Buyer wishes to purchase, and the Company wishes to sell, upon
the terms and conditions stated in this Agreement, (i) that aggregate number of
shares of the Company's common stock, par value $0.0001 per share (the "Common
Stock"), set forth opposite such Buyer's name in column (3) on the Schedule of
Buyers (which aggregate number for all Buyers together shall be 2,226,956 shares
of Common Stock and shall collectively be referred to herein as the "Common
Shares") and (ii) Warrants, in substantially the form attached hereto as Exhibit
A (the "Warrants"), representing the right to acquire up to that number of
additional shares of Common Stock set forth opposite such Buyer's name in column
(4) on the Schedule of Buyers (as exercised, collectively, the "Warrant
Shares").

 

C.           Contemporaneously with the execution and delivery of this
Agreement, the parties hereto are executing and delivering a Registration Rights
Agreement, substantially in the form attached hereto as Exhibit B (the
"Registration Rights Agreement"), pursuant to which the Company has agreed to
provide certain registration rights with respect to the Registrable Securities
(as defined in the Registration Rights Agreement) under the 1933 Act and the
rules and regulations promulgated thereunder, and applicable state securities
laws.

 

D.           The Common Shares, the Adjustment Shares (as defined in Section
1(b)), the Warrants and the Warrant Shares collectively are referred to herein
as the "Securities".

 

NOW, THEREFORE, the Company and each Buyer hereby agree as follows:

 

1.          PURCHASE AND SALE OF COMMON SHARES AND WARRANTS; ADJUSTMENT SHARES
OBLIGATION.

 

(a)   Purchase and Sale of Common Shares and Warrants.

 

 

 

 

(i)          Purchase of Common Shares and Warrants. Subject to the satisfaction
(or waiver) of the conditions set forth in Sections 6 and 7 below, the Company
shall issue and sell to each Buyer, and each Buyer severally, but not jointly,
agrees to purchase from the Company on the Closing Date (as defined below), (x)
the number of Common Shares as is set forth opposite such Buyer's name in column
(3) on the Schedule of Buyers, along with (y) Warrants to acquire up to that
number of Warrant Shares as is set forth opposite such Buyer's name in column
(4) on the Schedule of Buyers (the "Closing").

 

(ii)         Closing. The date and time of the Closing (the "Closing Date")
shall be 10:00 a.m., New York City time, on the date hereof (or such other date
and time as is mutually agreed to by the Company and each Buyer) after
notification of satisfaction (or waiver) of the conditions to the Closing set
forth in Sections 6 and 7 below, at the offices of Schulte Roth & Zabel LLP, 919
Third Avenue, New York, New York 10022. The Closing may also be undertaken
remotely by electronic transfer of Closing documentation.

 

(iii)        Purchase Price. The purchase price for the Common Shares and the
related Warrants to be purchased by each Buyer at the Closing shall be the
amount set forth opposite such Buyer's name in column (5) of the Schedule of
Buyers (the "Purchase Price") which shall be equal to the amount of $1.88 per
Common Share and the related Warrants.

 

(iv)        Form of Payment. On the Closing Date, (i) each Buyer shall pay its
respective Purchase Price to the Company for the Common Shares and the Warrants
to be issued and sold to such Buyer at the Closing by wire transfer of
immediately available funds in accordance with the Company's written wire
instructions and (ii) the Company shall deliver to each Buyer (x) one or more
stock certificates, evidencing the number of Common Shares such Buyer is
purchasing as is set forth opposite such Buyer's name in column (3) of the
Schedule of Buyers and (y) Warrants (allocated in the amounts as such Buyer
shall request) which such Buyer is purchasing hereunder pursuant to which such
Buyer shall have the right to acquire up to such number of Warrant Shares as is
set forth opposite such Buyer's name in column (4) of the Schedule of Buyers, in
each case duly executed on behalf of the Company and registered in the name of
such Buyer or its designee.

 

(v)         Placement Agent Fees. On the Closing Date, the Company shall pay to
ROTH Capital Partners, LLC, as placement agent (the "Placement Agent"), all fees
and expenses due to the Placement Agent as of such Closing Date, pursuant to the
terms of the engagement letter, dated as of January 9, 2014, between the Company
and the Placement Agent (the "Engagement Letter"), by wire transfer of
immediately available funds in accordance with the Placement Agent's written
wire instructions.

 

(b)   Adjustment Shares.

 

(i)          The following terms used herein shall have the following meanings:

 

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(1)         "Adjustment Date" means, as applicable, the First Adjustment Date
together with the Second Adjustment Date and/or the Third Adjustment Date.

 

(2)         "Adjustment Price" means, as applicable, the First Adjustment Price
together with the Second Adjustment Price and/or the Third Adjustment Price.

 

(3)         "Affiliate" means, with respect to any Person, any other Person that
directly or indirectly controls, is controlled by, or is under common control
with, such Person, it being understood for purposes of this definition that
"control" of a Person means the power directly or indirectly either to vote 10%
or more of the stock having ordinary voting power for the election of directors
of such Person or direct or cause the direction of the management and policies
of such Person whether by contract or otherwise.

 

(4)         "Approved Stock Plan" means any employee benefit plan which has been
approved by the Board of Directors of the Company, pursuant to which the
Company's securities may be issued to any employee, officer or director for
services provided to the Company.

 

(5)         "Bloomberg" means Bloomberg Financial Markets.

 

(6)         "Closing Sale Price" means, for any security as of any date, the
last closing trade price for such security on the Principal Market, as reported
by Bloomberg, or, if the Principal Market begins to operate on an extended hours
basis and does not designate the closing trade price, then the last trade price
of such security prior to 4:00:00 p.m., New York Time, as reported by Bloomberg,
or, if the Principal Market is not the principal securities exchange or trading
market for such security, the last trade price of such security on the principal
securities exchange or trading market where such security is listed or traded as
reported by Bloomberg, or if the foregoing do not apply, the last trade price of
such security in the over-the-counter market on the electronic bulletin board
for such security as reported by Bloomberg, or, if no last trade price is
reported for such security by Bloomberg, the average of the ask prices of any
market makers for such security as reported in the OTC Link or "pink sheets" by
OTC Markets Group Inc. (formerly Pink OTC Markets Inc.). If the Closing Sale
Price cannot be calculated for a security on a particular date on any of the
foregoing bases, the Closing Sale Price of such security on such date shall be
the fair market value as mutually determined by the Company and the Required
Holders. If the Company and the Required Holders are unable to agree upon the
fair market value of such security, then such dispute shall be resolved pursuant
to Section 1(c). All such determinations to be appropriately adjusted for any
stock dividend, stock split, stock combination, reclassification or other
similar transaction during the applicable calculation period.

 

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(7)         "Convertible Securities" means any stock or securities (other than
Options) directly or indirectly convertible into or exercisable or exchangeable
for shares of Common Stock.

 

(8)         "Common Stock Equivalents" means, collectively, Options and
Convertible Securities.

 

(9)         "Eligible Market" means the Principal Market (as hereinafter
defined), the OTCQX Market, the OTCQB Market, The NASDAQ Capital Market, The
NASDAQ Global Market, The NASDAQ Global Select Market, The New York Stock
Exchange or the NYSE MKT LLC.

 

(10)        "First Adjustment Date" means the date that is the earliest of (1)
the date that is the twenty first (21st) Trading Day immediately following the
date that some or all of the Registrable Securities (as defined in the
Registration Rights Agreement) have become registered pursuant to an effective
Registration Statement (as defined in the Registration Rights Agreement), (2)
the date that is the twenty first (21st) Trading Day immediately following the
date that such Buyer can sell all of the Registrable Securities without
restriction or limitation pursuant to Rule 144 and (3) the date that is the
twenty first (21st) Trading Day immediately following the date that is six (6)
months immediately following the Closing Date.

 

(11)        "First Adjustment Price" means ninety percent (90%) of the ten (10)
lowest Weighted Average Prices of the Common Stock during the twenty (20)
Trading Days immediately preceding the First Adjustment Date (as adjusted for
stock splits, stock dividends, recapitalizations, reorganizations,
reclassification, combinations, reverse stock splits or other similar events
during such period).

 

(12)        "Fundamental Transaction" shall have the meaning ascribed to such
term in the Warrants.

 

(13)        "Options" means any rights, warrants or options to subscribe for or
purchase shares of Common Stock or Convertible Securities.

 

(14)        "Parent Entity" shall have the meaning ascribed to such term in the
Warrants.

 

(15)        "Person" means an individual, a limited liability company, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization and a government or any department or agency thereof.

 

(16)        "Second Adjustment Date" means a date after the First Adjustment
Date that is the earliest of (1) the date that is the twenty first (21st)
Trading Day immediately following the date that some or all of the Registrable
Securities have become registered pursuant to an effective Registration
Statement, (2) the date that is the twenty first (21st) Trading Day immediately
following the date that such Buyer can sell all of the Registrable Securities
without restriction or limitation pursuant to Rule 144, (3) the date that is the
twenty first (21st) Trading Day immediately following the date that is one (1)
year immediately following the Closing Date.

 

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(17)        "Second Adjustment Price" means ninety percent (90%) of the ten (10)
lowest Weighted Average Prices of the Common Stock during the twenty (20)
Trading Days immediately preceding the Second Adjustment Date (as adjusted for
stock splits, stock dividends, recapitalizations, reorganizations,
reclassification, combinations, reverse stock splits or other similar events
during such period).

 

(18)        "Successor Entity" means the Person (or, if so elected by the
Required Holders, the Parent Entity), which may be the Company, formed by,
resulting from or surviving any Fundamental Transaction or the Person (or, if so
elected by the Required Holders, the Parent Entity) with which such Fundamental
Transaction shall have been entered into, provided that if such Person is not a
publicly traded entity whose common stock or equivalent equity security is
quoted or listed for trading on an Eligible Market, Successor Entity shall mean
such Person's Parent Entity.

 

(19)        "Third Adjustment Date" means a date after the Second Adjustment
Date that is the twenty first (21st) Trading Day immediately following the
earlier of (i) the date that such Buyer can sell all of the Registrable
Securities without restriction or limitation pursuant to Rule 144 and without
the requirement to be in compliance with Rule 144(c)(1) and (ii) the date that
is one (1) year immediately following the Closing Date.

 

(20)        "Third Adjustment Price" means ninety percent (90%) of the ten (10)
lowest Weighted Average Prices of the Common Stock during the twenty (20)
Trading Days immediately preceding the Third Adjustment Date (as adjusted for
stock splits, stock dividends, recapitalizations, reorganizations,
reclassification, combinations, reverse stock splits or other similar events
during such period).

 

(21)        "Trading Day" shall have the meaning ascribed to such term in the
Warrants.

 

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(22)        "Weighted Average Price" means, for any security as of any date, the
dollar volume-weighted average price for such security on the Principal Market
during the period beginning at 9:30:01 a.m., New York Time (or such other time
as the Principal Market publicly announces is the official open of trading), and
ending at 4:00:00 p.m., New York Time (or such other time as the Principal
Market publicly announces is the official close of trading), as reported by
Bloomberg through its "Volume at Price" function or, if the foregoing does not
apply, the dollar volume-weighted average price of such security in the
over-the-counter market on the electronic bulletin board for such security
during the period beginning at 9:30:01 a.m., New York Time (or such other time
as such market publicly announces is the official open of trading), and ending
at 4:00:00 p.m., New York time (or such other time as the Principal Market
publicly announces is the official close of trading) as reported by Bloomberg,
or, if no dollar volume-weighted average price is reported for such security by
Bloomberg for such hours, the average of the highest closing bid price and the
lowest closing ask price of any of the market makers for such security as
reported in the OTC Link or "pink sheets" by OTC Markets Group Inc. (formerly
Pink OTC Markets Inc.). If the Weighted Average Price cannot be calculated for a
security on a particular date on any of the foregoing bases, the Weighted
Average Price of such security on such date shall be the fair market value as
mutually determined by the Company and the Required Holders. If the Company and
the Required Holders are unable to agree upon the fair market value of such
security, then such dispute shall be resolved pursuant to Section 1(c). All such
determinations shall be appropriately adjusted for any stock dividend, stock
split, stock combination, reclassification or other similar transaction during
the applicable calculation period.

 

(ii)         Obligation to Issue Adjustment Shares. The Company shall, without
any additional consideration, issue to each Buyer a number of shares of Common
Stock on the First Adjustment Date equal to the number (if positive) obtained by
subtracting (I) the number of Common Shares purchased by such Buyer on the
Closing Date (as adjusted for stock splits, stock dividends, recapitalizations,
reorganizations, reclassification, combinations, reverse stock splits or other
similar events) (the "Initial Shares") from (II) the quotient determined by
dividing (x) the aggregate Purchase Price paid by such Buyer on the Closing
Date, by (y) the First Adjustment Price (such number, the "First Adjustment
Share Amount"). If (A) the First Adjustment Date was triggered by clause (1) of
such definition and the Registration Statement is not available for the resale
of all Registrable Securities thereunder at all times from the First Adjustment
Date until the sixtieth (60th) day following the First Adjustment Date, (B) the
First Adjustment Date was triggered by clause (2) of such definition and there
shall occur a Public Information Failure (as hereinafter defined) at any time on
or prior to the sixtieth (60th) day following the First Adjustment Date or (C)
the First Adjustment Date was triggered by clause (3) of such definition and
clause (2) of such definition is not satisfied, the Company shall, without any
additional consideration, issue to each Buyer a number of shares of Common Stock
on the Second Adjustment Date equal to the number (if positive) obtained by
subtracting the sum of (i) the First Adjustment Share Amount and (ii) the number
of Initial Shares, from the quotient determined by dividing (x) the aggregate
Purchase Price paid by such Buyer on the Closing Date, by (y) the Second
Adjustment Price (such number, the "Second Adjustment Share Amount"). If (A) the
Second Adjustment Date was triggered by clause (1) of such definition and the
Registration Statement is not available for the resale of all Registrable
Securities thereunder at all times from the Second Adjustment Date until the
sixtieth (60th) day following the Second Adjustment Date or (B) the Second
Adjustment Date was triggered by clause (2) of such definition and there shall
occur a Public Information Failure at any time on or prior to the sixtieth
(60th) day following the Second Adjustment Date, the Company shall, without any
additional consideration, issue to each Buyer a number of shares of Common Stock
on the Third Adjustment Date equal to the number (if positive) obtained by
subtracting the sum of (i) the Second Adjustment Share Amount, (ii) the First
Adjustment Share Amount and (iii) the number of Initial Shares, from the
quotient determined by dividing (x) the aggregate Purchase Price paid by such
Buyer on the Closing Date, by (B) the Third Adjustment Price (such number, the
"Third Adjustment Share Amount" and, together with the First Adjustment Share
Amount and the Second Adjustment Share Amount, the "Adjustment Shares").

 

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(iii)        Blocker. Notwithstanding anything to the contrary contained herein,
the Company shall not issue Adjustment Shares, and no Buyer shall have the right
to receive Adjustment Shares, and any such issuance shall be null and void and
treated as if never made, to the extent that after giving effect to such
issuance, such Buyer (together with such Buyer's Affiliates) would beneficially
own in excess of 4.99% (the "Maximum Percentage") of the number of shares of
Common Stock outstanding immediately after giving effect to such issuance. For
purposes of the foregoing sentence, the aggregate number of shares of Common
Stock beneficially owned by such Buyer and its Affiliates shall include the
number of shares of Common Stock issuable pursuant to Section 1(b) hereof with
respect to which the determination of such sentence is being made, but shall
exclude the number of shares of Common Stock which would be issuable upon (i)
exercise of the remaining, unexercised portion of the Warrants beneficially
owned by such Buyer or any of its Affiliates and (ii) exercise or conversion of
the unexercised or unconverted portion of any other securities of the Company
beneficially owned by such Buyer or any of its Affiliates (including, without
limitation, any convertible notes or convertible preferred stock or warrants)
subject to a limitation on conversion or exercise analogous to the limitation
contained herein. Except as set forth in the preceding sentence, for purposes of
this paragraph, beneficial ownership shall be calculated in accordance with
Section 13(d) of the Securities Exchange Act of 1934, as amended (the "1934
Act"). For purposes of determining the number of outstanding shares of Common
Stock, the Buyers may rely on the number of outstanding shares of Common Stock
as reflected in (1) the Company's most recent Form 10-K, Form 10-Q, Form 8-K or
other public filing with the SEC, as the case may be, (2) a more recent public
announcement by the Company or (3) any other notice by the Company or the
Company's transfer agent setting forth the number of shares of Common Stock
outstanding. For any reason at any time, upon the written or oral request of a
Buyer, the Company shall within one (1) Business Day confirm orally and in
writing to such Buyer the number of shares of Common Stock then outstanding. In
any case, the number of outstanding shares of Common Stock shall be determined
after giving effect to the issuance of the Adjustment Shares and the conversion
or exercise of securities of the Company, including the Warrants, held by each
Buyer and its Affiliates since the date as of which such number of outstanding
shares of Common Stock was reported. By written notice to the Company, each
Buyer may from time to time increase or decrease the Maximum Percentage to any
other percentage not in excess of 9.99% specified in such notice; provided that
(i) any such increase will not be effective until the sixty-first (61st) day
after such notice is delivered to the Company and (ii) any such increase or
decrease will apply only to such Buyer and not to any of the other Buyers. The
provisions of this paragraph shall be construed and implemented in a manner
otherwise than in strict conformity with the terms of this paragraph to correct
this paragraph (or any portion hereof) which may be defective or inconsistent
with the intended beneficial ownership limitation herein contained or to make
changes or supplements necessary or desirable to properly give effect to such
limitation. If a Buyer's right to receive Adjustment Shares is limited, in whole
or in part, by this Section, all such Adjustment Shares that are so limited
shall be held in abeyance for the benefit of such Buyer by the Company until
such time, if ever, as the Buyer notifies the Company that its right thereto
would not result in such Buyer exceeding the Maximum Percentage. As used herein,
"Business Day" means any day other than Saturday, Sunday or other day on which
commercial banks in The City of New York are authorized or required by law to
remain closed.

 

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(iv)        Cash Settlement. In the event that the Company does not deliver any
Adjustment Shares to any Buyer for any reason (other than Section 1(b)(iii)), in
lieu of delivering the Adjustment Shares otherwise required to be delivered
pursuant to this Section 1(b), the Company shall pay such Buyer in cash by wire
transfer of immediately available funds in a dollar amount determined by
multiplying the number of Adjustment Shares which are not delivered to such
Buyer pursuant to this Section 1(b) by the highest Closing Sale Price during the
period starting on the Trading Day immediately prior to the applicable
Adjustment Date and ending on the date that the Company makes the cash payment
contemplated under this provision. In the event the Company fails to make any
cash payments required under this Agreement by a specified deadline, such
payments shall bear interest at the rate of one and one-half percent (1.5%) per
month (prorated for partial months) (or such lesser maximum amount that is
permitted to be paid by applicable law) until paid in full.

 

(v)         Mechanics of Issuance.

 

(1)   Delivery of Adjustment Shares. Adjustment Shares shall be transmitted by
the Company's transfer agent to a Buyer by crediting the account of such Buyer's
prime broker with The Depository Trust Company ("DTC") through its
Deposit/Withdrawal At Custodian system if the Company is then a participant in
such system and there is an effective registration statement permitting the
issuance of the Adjustment Shares to or resale of the Adjustment Shares by Buyer
and otherwise by physical delivery to the address specified by such Buyer in a
written notice delivered prior to the delivery of such Adjustment Shares (such
date, the "Adjustment Shares Delivery Date").   Notwithstanding anything to the
contrary contained herein, in no event will any Adjustment Shares be issued with
any restrictive legends or any restrictions or limitations on resale by the
Buyers. If the Company and/or its transfer agent requires any legal opinions
with respect to the issuance of any Adjustment Shares without restrictive
legends or the removal of any such restrictive legends, the Company agrees to
cause its legal counsel to issue any such legal opinions. The Company hereby
acknowledges and agrees that the holding period of any Adjustment Shares issued
hereunder for purposes of Rule 144 shall be deemed to have commenced on the
Closing Date.

 

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(2)   Company's Failure to Timely Deliver Securities. If the Company shall fail
for any reason or for no reason to issue to a Buyer on or prior to the
Adjustment Shares Delivery Date a certificate for the number of shares of Common
Stock to which such Buyer is entitled and register such shares of Common Stock
on the Company's share register or to credit such Buyer's balance account with
DTC for such number of shares of Common Stock to which such Buyer is entitled
under Section 1(b), then, in addition to all other remedies available to such
Buyer, the Company shall pay in cash to such Buyer on each day after such
Adjustment Shares Delivery Date that the issuance of such shares of Common Stock
is not timely effected an amount equal to 1.5% of the product of (A) the sum of
the number of shares of Common Stock not issued to such Buyer on a timely basis
and to which such Buyer 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 of Common Stock to the Buyer without
violating Section 1(b). In addition to the foregoing, if on or prior to the
Adjustment Shares Delivery Date the Company shall fail to issue and deliver a
certificate to the Buyer and register such shares of Common Stock on the
Company's share register or credit the Buyer's balance account with DTC for the
number of shares of Common Stock to which the Buyer is entitled pursuant to the
Company's obligation pursuant to Section 1(b)(ii) or clause (ii) below, and if
on or after such Trading Day the Buyer purchases (in an open market transaction
or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the
Buyer of shares of Common Stock the Buyer anticipated receiving from the Company
(a "Buy-In") under Section 1(b), then the Company shall, within three (3)
Trading Days after the Buyer's request and in the Buyer's discretion, either (i)
pay cash to the Buyer in an amount equal to the Buyer'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 of Common Stock) or credit such Buyer's
balance account with DTC for such shares of Common Stock shall terminate, or
(ii) promptly honor its obligation to deliver to the Buyer a certificate or
certificates representing such shares of Common Stock or credit such Buyer's
balance account with DTC and pay cash to the Buyer 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 Sale Price on the applicable
Adjustment Shares Delivery Date. Nothing shall limit the Buyer'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 shares of Common Stock (or to electronically deliver such shares of
Common Stock) as required pursuant to the terms hereof.

 

(3)   Charges, Taxes and Expenses.  Issuance of certificates for Adjustment
Shares shall be made without charge to the Buyers for any issue or transfer tax
or other incidental expense in respect of the issuance of such certificate, all
of which taxes and expenses shall be paid by the Company, and such certificates
shall be issued in the name of the respective Buyer or in such name or names as
may be directed by the respective Buyer.

 

(4)   Closing of Books.  The Company will not close its stockholder books or
records in any manner which prevents the timely exercise of such Buyer's rights
with respect to the Adjustment Shares.

 

(vi)        Certain Adjustments. 

 

(1)   Adjustment Upon Subdivision or Combination of Shares of Common Stock. If
the Company at any time on or after the date of this Agreement subdivides (by
any stock split, stock dividend, recapitalization or otherwise) one or more
classes of its outstanding shares of Common Stock into a greater number of
shares, the number of Adjustment Shares will be proportionately increased. If
the Company at any time on or after the date of this Agreement combines (by
combination, reverse stock split or otherwise) one or more classes of its
outstanding shares of Common Stock into a smaller number of shares, the number
of Adjustment Shares will be proportionately decreased. Any adjustment under
this Section 1(b)(vi) shall become effective at the close of business on the
date the subdivision or combination becomes effective.

 

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(2)    Purchase Rights. While any Adjustment Shares may be issued hereunder, the
Company shall not grant, issue or sell any Purchase Rights (as defined in the
Warrants).

 

(3)    Other Events. If any event occurs of the type contemplated by the
provisions of this Section 1(b)(vi) but not expressly provided for by such
provisions (including, without limitation, the granting of stock appreciation
rights, phantom stock rights or other rights with equity features), then the
Company's Board of Directors will make an appropriate adjustment in the number
of Adjustment Shares, as mutually determined by the Company's Board of Directors
and the holders of at least a majority of the aggregate amount of Securities
issued and issuable hereunder and under the Warrants (the "Required Holders"),
so as to protect the rights of the Buyers; provided that no such adjustment
pursuant to this Section 1(b)(vi) will decrease the number of Adjustment Shares
as otherwise determined pursuant to this Section 1(b)(vi).

 

(4)    Pro Rata Distributions.  If the Company shall declare or make any
dividend or other distributions of its assets (or rights to acquire its assets)
to any or all holders of Common Stock, by way of return of capital or otherwise
(including, without limitation, any distribution of cash, stock or other
securities, property or options by way of a dividend, spin off,
reclassification, corporate rearrangement, scheme of arrangement or other
similar transaction) (a "Distribution"), at any time after the Closing Date and
prior to the later of the date of delivery of all Adjustment Shares which the
Company is obligated to deliver under this Agreement and the date that the right
to receive Adjustment Shares shall expire then, in each such case, each Buyer
shall be entitled to participate in such Distribution, with respect to each
unissued Adjustment Share, to the same extent that such Buyer would have
participated therein with respect to each such Adjustment Share if such Buyer
had held such unissued Adjustment Shares (without taking into account any
limitations or restrictions on the issuance of Adjustment Shares, including
without limitation, the Maximum Percentage) immediately before the date of which
a record is taken for such Distribution, or, if no such record is taken, the
date as of which the record holders of shares of Common Stock are to be
determined for the participation in such Distribution (provided, however, to the
extent that such Buyer's right to participate in any such Distribution would
result in such Buyer exceeding the Maximum Percentage, then such Buyer shall not
be entitled to participate in such Distribution to such extent (or in the
beneficial ownership of any shares of Common Stock as a result of such
Distribution to such extent) and the portion of such Distribution shall be held
in abeyance for the benefit of such Buyer until such time, if ever, as its right
thereto would not result in such Buyer exceeding the Maximum Percentage).

 

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(5)    Fundamental Transaction. If, at any time after the Closing Date and prior
to an Adjustment Date, a Fundamental Transaction occurs, then for each
Adjustment Share otherwise issuable under Section 1(b) not issued prior to the
date of such Fundamental Transaction, the respective Buyer shall be entitled to
receive the number of shares of capital stock of the successor or acquiring
corporation or of the Company, if it is the surviving corporation, and any
additional consideration (the "Alternate Consideration") receivable as a result
of such Fundamental Transaction by a holder of shares of Common Stock
immediately prior to such Fundamental Transaction.  If holders of Common Stock
are given any choice as to the securities, cash or property to be received in a
Fundamental Transaction, then the Buyer shall be given the same choice as to the
Alternate Consideration it receives upon the issuance of an Adjustment Share
following such Fundamental Transaction. The Company shall cause any successor
entity in a Fundamental Transaction in which the Company is not the survivor
(the "Successor Entity") to assume in writing all of the obligations of the
Company under this Section 1(b) in accordance with the provisions of this
Section 1(b)(vi)(5) pursuant to written agreements in form and substance
reasonably satisfactory to the Required Holders (as defined in the Registration
Rights Agreement). If a Fundamental Transaction is publicly announced or occurs
prior to occurrence of an Adjustment Event or the issuance of the Adjustment
Shares, for all purposes under this Subsection (5) an Adjustment Date will have
deemed to have occurred twenty one (21) Trading Days immediately preceding the
consummation of such Fundamental Transaction and the applicable Adjustment Price
shall be deemed to equal ninety percent (90%) of the ten (10) lowest Weighted
Average Prices of the Common Stock during the twenty (20) Trading Days
immediately following such deemed Adjustment Date (as adjusted for stock splits,
stock dividends, recapitalizations, reorganizations, reclassification,
combinations, reverse stock splits or other similar events during such period).
The Company shall provide each Buyer with written notice, including a summary of
material terms, of any Fundamental Transaction described in the preceding
sentence no less than twenty one (21) Trading Days prior to the consummation
such Fundamental Transaction, provided that if the Company does not have
knowledge of such Fundamental Transaction or material terms thereof at least
twenty one (21) Trading Days prior to the consummation, the Company shall
provide written notice, including a summary of material terms, within two (2)
Trading Days of having such knowledge.  

 

(6)    Calculations. All calculations under this Section 1(b) shall be made to
the nearest cent or the nearest 1/100th of a share, as the case may be. For
purposes of this Section 1(b), the number of shares of Common Stock deemed to be
issued and outstanding as of a given date shall be the sum of the number of
shares of Common Stock (excluding treasury shares, if any) issued and
outstanding.

 

(7)    Notice to Buyers.

 

(A) Adjustment to Number of Adjustment Shares. Whenever there is an adjustment
pursuant to any provision of Section 1(b)(vi), the Company shall promptly notify
each Buyer a notice setting forth the adjustment to the number of Adjustment
Shares and setting forth a brief statement of the facts requiring such
adjustment.

 

- 11 -

 

 

(B) Notice of Certain Events. If (A) the Company shall declare a dividend (or
any other distribution in whatever form) on the Common Stock, (B) the Company
shall declare a special nonrecurring cash dividend on or a redemption of the
Common Stock, (C) the Company shall authorize the granting to all holders of the
Common Stock rights or warrants to subscribe for or purchase any shares of
capital stock of any class or of any rights, (D) the approval of any
stockholders of the Company shall be required in connection with any
reclassification of the Common Stock, any consolidation or merger to which the
Company is a party, any sale or transfer of all or substantially all of the
assets of the Company, or any compulsory share exchange whereby the Common Stock
are converted into other securities, cash or property, or (E) the Company shall
authorize the voluntary or involuntary dissolution, liquidation or winding up of
the affairs of the Company, in each case prior to the later of an Adjustment
Date or the issuance of the applicable number of Adjustment Shares issuable in
respect of such Adjustment Date, then, in each case, the Company shall notify
each Buyer at its last address, at least twenty (20) calendar days prior to the
applicable record or effective date hereinafter specified, a notice stating (x)
the date on which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record is not to be taken,
the date as of which the holders of the Common Stock of record to be entitled to
such dividend, distributions, redemption, rights or warrants are to be
determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of the Common Stock
of record shall be entitled to exchange their shares of the Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer or share exchange; provided that the
failure to mail such notice or any defect therein or in the mailing thereof
shall not affect the validity of the corporate action required to be specified
in such notice.  To the extent that any notice provided hereunder constitutes,
or contains, material, non-public information regarding the Company or any of
its subsidiaries, the Company shall simultaneously file such notice with the SEC
pursuant to a Current Report on Form 8-K. On or prior to any Adjustment Date,
the Company shall file with the SEC on a Current Report on Form 8-K disclosing
the number of Adjustment Shares issued or issuable on such date (each, an
"Adjustment 8-K Filing"). From and after the filing of an Adjustment 8-K Filing
with the SEC, no Buyer shall be 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
such Adjustment 8-K Filing.

 

(c)          Dispute Resolution.  In the case of a dispute as to the
determination of the number of Adjustment Shares deliverable hereunder and/or
the amount of cash payable hereunder, the Company shall submit the disputed
determinations or arithmetic calculations via facsimile within two (2) Business
Days of event giving rise to such dispute, as the case may be, to the
Buyers.  If a Buyer and the Company are unable to agree upon such determination
or calculation of the number of shares of Common Stock issuable within three (3)
Business Days of such disputed determination or arithmetic calculation being
submitted to the Buyers, then the Company shall, within two (2) Business Days
submit via facsimile (a) the disputed determination of the number of Adjustment
Shares and/or the amount of cash to an independent, reputable investment bank
selected by the Company and approved by the Required Holders or (b) the disputed
arithmetic calculation of the number of Adjustment Shares and/or the amount of
cash to the Company's independent, outside accountant.  The Company shall cause
at its expense the investment bank or accountant, as the case may be, to perform
the determinations or calculations and notify the Company and the applicable
Buyer(s) of the results no later than ten (10) Business Days from the time it
receives the disputed determinations or calculations.  Such accountant's
determination or calculation shall be binding upon all parties absent
demonstrable error.

 

- 12 -

 

 

2.          BUYER'S REPRESENTATIONS AND WARRANTIES. Each Buyer, severally and
not jointly, represents and warrants with respect to only itself to the Company
and the Placement Agent that:

 

(a)   No Public Sale or Distribution. Such Buyer is (i) acquiring the Common
Shares and the Warrants and (ii) upon exercise of the Warrants (other than
pursuant to a Cashless Exercise (as defined in the Warrants)) will acquire the
Warrant Shares issuable upon exercise of the Warrants, for its own account and
not with a view towards, or for resale in connection with, the public sale or
distribution thereof, except pursuant to sales registered or exempted under the
1933 Act; provided, however, that by making the representations herein, such
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 under
the 1933 Act. Such Buyer is acquiring the Securities hereunder in the ordinary
course of its business. Such Buyer does not presently have any agreement or
understanding, directly or indirectly, with any Person to distribute any of the
Securities.

 

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

 

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

 

(d)   Information. Such Buyer and its advisors, if any, have been 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 that have been
requested by such Buyer. Such Buyer and its advisors, if any, have been afforded
the opportunity to ask questions of the Company. Neither such inquiries nor any
other due diligence investigations conducted by such Buyer or its advisors, if
any, or its representatives shall modify, amend or affect such Buyer's right to
rely on the Company's representations and warranties contained herein. Such
Buyer understands that its investment in the Securities involves a high degree
of risk. Such Buyer has sought such accounting, legal and tax advice as it has
considered necessary to make an informed investment decision with respect to its
acquisition of the Securities.

 

(e)   No Governmental Review. Such Buyer understands that no United States
federal or state agency or any other government or governmental agency has
passed on or made any recommendation or endorsement of the Securities or the
fairness or suitability of the investment in the Securities nor have such
authorities passed upon or endorsed the merits of the offering of the
Securities.

 

- 13 -

 

 

(f)    Transfer or Resale. Such Buyer understands that except as provided in the
Registration Rights Agreement: (i) the Securities have not been and are not
being registered under the 1933 Act or any state securities laws, and may not be
offered for sale, sold, assigned or transferred unless (A) subsequently
registered thereunder, (B) such Buyer shall have delivered to the Company an
opinion of counsel, in a generally acceptable form, to the effect that such
Securities to be sold, assigned or transferred may be sold, assigned or
transferred pursuant to an exemption from such registration, or (C) such Buyer
provides the Company with reasonable assurance that such Securities can be sold,
assigned or transferred pursuant to Rule 144 or Rule 144A promulgated under the
1933 Act, as amended, (or a successor rule thereto) (collectively, "Rule 144");
(ii) any sale of the Securities made in reliance on Rule 144 may be made only in
accordance with the terms of Rule 144 and further, if Rule 144 is not
applicable, any resale of the 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 the Securities under the 1933 Act or any state securities laws or to
comply with the terms and conditions of any exemption thereunder.
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 and such pledge of Securities shall not be deemed to be a transfer,
sale or assignment of the Securities hereunder, and no Buyer effecting a pledge
of Securities shall be required to provide the Company with any notice thereof
or otherwise make any delivery to the Company pursuant to this Agreement or any
other Transaction Document (as defined in Section 3(b)), including, without
limitation, this Section 2(f).

 

(g)   Legends. Such Buyer understands that the certificates or other instruments
representing the Common Shares and the Warrants and, until such time as the
resale of the Common Shares and the Warrant Shares have been registered under
the 1933 Act as contemplated by the Registration Rights Agreement, the stock
certificates representing the Warrant Shares, except as set forth below, shall
bear any legend as required by the "blue sky" laws of any state and a
restrictive legend in substantially the following form (and a stop-transfer
order may be placed against transfer of such stock certificates):

 

[NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN][THE
SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT 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, IN A GENERALLY
ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS
SOLD PURSUANT TO RULE 144 OR RULE 144A 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.

 

- 14 -

 

 

The legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of the Securities upon which it is
stamped or issue to such holder by electronic delivery at the applicable balance
account at the DTC, if, unless otherwise required by state securities laws, (i)
such Securities are registered for resale under the 1933 Act, (ii) in connection
with a sale, assignment or other transfer, such holder provides the Company with
an opinion of counsel (which in the case of the Adjustment Shares, shall, to the
extent required by the Company or its transfer agent, be an opinion of counsel
to the Company), in a generally acceptable form, to the effect that such sale,
assignment or transfer of the Securities may be made without registration under
the applicable requirements of the 1933 Act, or (iii) the Securities can be
sold, assigned or transferred pursuant to Rule 144 or Rule 144A. The Company
shall be responsible for the fees of its transfer agent and all DTC fees
associated with such issuance. If the Company shall fail for any reason or for
no reason to issue to the holder of the Securities within three (3) Trading Days
after the occurrence of any of (i) through (iii) above, a certificate without
such legend to such Holder or to issue such Securities to such holder by
electronic delivery at the applicable balance account at DTC, and if on or after
such Trading Day the holder effects a Buy-In, then the Company shall, within
three (3) Trading Days after the holder's request and in the holder's
discretion, either (i) pay the Buy-In Price in cash, at which point the
Company's obligation to deliver such unlegended Securities shall terminate, or
(ii) promptly honor its obligation to deliver to the holder such unlegended
Securities as provided above 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 Sale Price (as defined in the
Warrants) on the date of the occurrence of any of clauses (i) through (iii), as
applicable.

 

(h)    Validity; Enforcement. This Agreement and the Registration Rights
Agreement have been duly and validly authorized, executed and delivered on
behalf of such Buyer and shall constitute the legal, valid and binding
obligations of such Buyer enforceable against such Buyer in accordance with
their respective terms, except as such enforceability may be limited by general
principles of equity or to applicable bankruptcy, insolvency, reorganization,
moratorium, liquidation and other similar laws relating to, or affecting
generally, the enforcement of applicable creditors' rights and remedies.

 

(i)     No Conflicts. The execution, delivery and performance by such Buyer of
this Agreement and the Registration Rights Agreement and the consummation by
such Buyer of the transactions contemplated hereby and thereby will not (i)
result in a violation of the organizational documents of such Buyer or (ii)
conflict with, or constitute a default (or an event which with notice or lapse
of time or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of, any agreement,
indenture or instrument to which such Buyer is a party, or (iii) result in a
violation of any law, rule, regulation, order, judgment or decree (including
federal and state securities laws) applicable to such Buyer, except in the case
of clauses (ii) and (iii) above, for such conflicts, defaults, rights or
violations which would not, individually or in the aggregate, reasonably be
expected to have a material adverse effect on the ability of such Buyer to
perform its obligations hereunder.

 

- 15 -

 

 

(j)    Residency. Such Buyer is a resident of that jurisdiction specified below
its address on the Schedule of Buyers.

 

(k)   Independent Evaluation. Such Buyer confirms and agrees that (i) it has
independently evaluated the merits of its decision to purchase the Securities,
(ii) it has not relied on the advice of, or any representations by the Placement
Agent or any affiliate thereof or any representative of the Placement Agent or
its affiliates in making such decision, and (iii) neither the Placement Agent
nor any of its representatives has any responsibility with respect to the
completeness or accuracy of any information or materials furnished to such Buyer
in connection with the transactions contemplated hereby.

 

(l)    Acknowledgement of Risk. Such Buyer acknowledges and understands that its
investment in the Securities involves a significant degree of risk, including,
without limitation, (i) the Company remains an early stage business with limited
operating history and requires substantial funds in addition to the proceeds
from the sale of the Securities; (ii) an investment in the Company is
speculative, and only purchasers who can afford the loss of their entire
investment should consider investing in the Company and the Securities;
(iii) such Buyer may not be able to liquidate its investment;
(iv) transferability of the Securities is limited; (v) in the event of a
disposition of the Securities, the Purchaser could sustain the loss of its
entire investment; and (vi) the Company has not paid any dividends on its Common
Stock since inception and does not anticipate the payment of dividends in the
foreseeable future.

 

(m)  No Short Sales. Between the time the Buyer learned about the transactions
contemplated hereby and the date hereof, the Buyer has not engaged in any short
sales or similar transactions with respect to the Common Stock or any derivative
thereof, nor has the Buyer, directly or indirectly, caused any Person to engage
in any short sales or similar transactions with respect to the Common Stock or
any derivative thereof, including, without limitation, and in each case, in any
transaction aimed, directly or indirectly, at affecting the price of the Common
Stock for purposes of the transactions contemplated by this Agreement.

 

(n)  Acknowledgements Regarding Placement Agent. The Buyer acknowledges that the
Placement Agent are acting as the exclusive placement agents on a “best efforts”
basis for the Securities being offered hereby and will be compensated by the
Company for acting in such capacity. The Buyer represents that (i)  the Buyer
was contacted regarding the sale of the Securities by the Placement Agent (or an
authorized agent or representative thereof) with whom the Buyer had a
substantial pre-existing relationship and who entered into a confidentiality
agreement or otherwise agreed, orally or in writing, to keep information with
respect to the transactions contemplated hereby confidential and (ii) to such
Buyer's knowledge, no Securities were offered or sold to such Buyer by means of
any form of general solicitation or general advertising.

 

- 16 -

 

 

3.          REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

 

The Company represents and warrants to each of the Buyers and the Placement
Agent that, as of the date hereof and as of the Closing Date:

 

(a)   Organization and Qualification. Each of the Company and each of its
"Subsidiaries" (which for purposes of this Agreement means any entity in which
the Company, directly or indirectly, owns any of the capital stock or holds an
equity or similar interest) are entities duly organized and validly existing and
in good standing under the laws of the jurisdiction in which they are formed,
and have the requisite power and authorization to own their properties and to
carry on their business as now being conducted and as presently proposed to be
conducted. Each of the Company and each of its Subsidiaries is duly qualified as
a foreign entity to do business and is in good standing in every jurisdiction in
which its ownership of property or the nature of the business conducted by it
makes such qualification necessary, except to the extent that the failure to be
so qualified or be in good standing would not reasonably be expected to have a
Material Adverse Effect. As used in this Agreement, "Material Adverse Effect"
means any material adverse effect on the business, properties, assets,
liabilities, operations, results of operations, condition (financial or
otherwise) or prospects of the Company and its Subsidiaries, individually or
taken as a whole, or on the transactions contemplated hereby or on the other
Transaction Documents or by the agreements and instruments to be entered into in
connection herewith or therewith, or on the authority or ability of the Company
to perform any of its obligations under any of the Transaction Documents (as
defined below). The Company has no Subsidiaries except as set forth in Schedule
3(a).

 

(b)   Authorization; Enforcement; Validity. The Company has the requisite
corporate power and authority to enter into and perform its obligations under
this Agreement, the Warrants, the Registration Rights Agreement, the Lock-Up
Agreements (as defined in Section 7(x)), the Irrevocable Transfer Agent
Instructions (as defined in Section 5(b)), and each of the other agreements
entered into by the parties hereto in connection with the transactions
contemplated by this Agreement (collectively, the "Transaction Documents") and
to issue the Securities in accordance with the terms hereof and thereof. The
execution and delivery of this Agreement and the other Transaction Documents by
the Company and the consummation by the Company of the transactions contemplated
hereby and thereby, including, without limitation, the issuance of the Common
Shares and the Warrants, the reservation for issuance and the issuance of the
Warrant Shares issuable upon exercise of the Warrants and the reservation for
issuance and issuance of the Adjustment Shares pursuant to the terms of this
Agreement have been duly authorized by the Company's Board of Directors and
(other than the filing with the SEC of one or more Registration Statements (as
defined in the Registration Rights Agreement) in accordance with the
requirements of the Registration Rights Agreement, a Form D with the SEC and any
other filings as may be required by any state securities agencies) no further
filing, consent or authorization is required by the Company, its Board of
Directors or its stockholders. This Agreement and the other Transaction
Documents have been duly executed and delivered by the Company, and constitute
the legal, valid and binding obligations of the Company, enforceable against the
Company in accordance with their respective terms, except as such enforceability
may be limited by general principles of equity or applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation or similar laws relating to,
or affecting generally, the enforcement of applicable creditors' rights and
remedies.

 

- 17 -

 

 

(c)   Issuance of Securities. The issuance of the Common Shares, the Adjustment
and the Warrants are duly authorized and, upon issuance in accordance with the
terms of the Transaction Documents, the Common Shares and the Warrants shall be
validly issued and free from all preemptive or similar rights (except for those
which have been validly waived prior to the date hereof), taxes, liens and
charges and other encumbrances with respect to the issue thereof and the Common
Shares shall be fully paid and nonassessable with the holders being entitled to
all rights accorded to a holder of Common Stock. As of the Closing Date, a
number of shares of Common Stock shall have been duly authorized and reserved
for issuance which equals or exceeds (i) the maximum number of Warrant Shares
issuable upon exercise of the Warrants (without taking into account any
limitations on the exercise of the Warrants set forth therein) and (ii) the
maximum number of Adjustment Shares issuable pursuant to the terms of this
Agreement (without taking into account the Maximum Percentage and assuming an
Adjustment Price of $0.50 (as adjusted for any stock dividend, stock split,
stock combination, reclassification or similar transaction occurring after the
date hereof)). Upon exercise of the Warrants in accordance with the Warrants,
the Warrant Shares when issued will be validly issued, fully paid and
nonassessable and free from all preemptive or similar rights, taxes, liens,
charges and other encumbrances with respect to the issue thereof, with the
holders being entitled to all rights accorded to a holder of Common Stock. The
Adjustment Shares, when issued in accordance with the terms of Section 1(b),
will be validly issued, fully paid and nonassessable and free from all
preemptive or similar rights, taxes, liens, charges and other encumbrances with
respect to the issue thereof, with the holders being entitled to all rights
accorded to a holder of Common Stock. Assuming the accuracy of each of the
representations and warranties set forth in Section 2 of this Agreement, the
offer and issuance by the Company of the Securities is exempt from registration
under the 1933 Act.

 

(d)   No Conflicts. The execution, delivery and performance of the Transaction
Documents by the Company and the consummation by the Company of the transactions
contemplated hereby and thereby (including, without limitation, the issuance of
the Common Shares and the Warrants and reservation for issuance and issuance of
the Warrant Shares and the Adjustment Shares) will not (i) result in a violation
of the Certificate of Incorporation (as defined below) or Bylaws (as defined
below) or other organizational documents of the Company or any of its
Subsidiaries, any capital stock of the Company or any of its Subsidiaries or the
articles of association or bylaws of the Company or any of its Subsidiaries or
(ii) conflict with, or constitute a default (or an event which with notice or
lapse of time or both would become a default) in any respect under, or 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 (iii) result in a violation of any law, rule,
regulation, order, judgment or decree (including foreign, federal and state
securities laws and regulations and the rules and regulations of the OTC
Bulletin Board (the "Principal Market") and including all applicable foreign,
federal laws, rules and regulations) 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.

 

- 18 -

 

 

(e)   Consents. The Company is not required to obtain any consent from,
authorization or order of, or make any filing or registration with (other than
the filing with the SEC of one or more Registration Statements in accordance
with the requirements of the Registration Rights Agreement, a Form D with the
SEC and any other filings as may be required by any state securities agencies),
any court, governmental agency or any regulatory or self-regulatory agency or
any other Person in order for it to execute, deliver or perform any of its
obligations under or contemplated by the Transaction Documents, in each case, in
accordance with the terms hereof or thereof. 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 Closing Date (or in the case of filings detailed above, will be made timely
after the Closing Date), and the Company is unaware of any facts or
circumstances which might prevent the Company from obtaining or effecting any of
the registration, application or filings contemplated by the Transaction
Documents. The Company is not in violation of the requirements of the Principal
Market and has no knowledge of any facts or circumstances which could reasonably
lead to delisting or suspension of the Common Stock in the foreseeable future.
The issuance by the Company of the Securities shall not have the effect of
delisting or suspending the Common Stock from the Principal Market.

 

(f)    Acknowledgment Regarding Buyer's Purchase of Securities. The Company
acknowledges and agrees that each Buyer is acting solely in the capacity of an
arm's length purchaser with respect to the Transaction Documents and the
transactions contemplated hereby and thereby and that no Buyer is (i) an
"affiliate" (as defined in Rule 144) of the Company or any of its Subsidiaries
or (ii) to its knowledge (based solely on filings made with the SEC), a
"beneficial owner" of more than 10% of the shares of Common Stock (as defined
for purposes of Rule 13d-3 of the 1934 Act). The Company further acknowledges
that no Buyer is acting as a financial advisor or fiduciary of the Company or
any of its Subsidiaries (or in any similar capacity) with respect to the
Transaction Documents and the transactions contemplated hereby and thereby, and
any advice given by a Buyer or any of its representatives or agents in
connection with the Transaction Documents and the transactions contemplated
hereby and thereby is merely incidental to such Buyer's purchase of the
Securities. The Company further represents to each Buyer that the Company's
decision to enter into the Transaction Documents has been based solely on the
independent evaluation by the Company and its representatives.

 

(g)   No General Solicitation; Placement Agent's Fees. Neither the Company, nor
any of its Subsidiaries or affiliates, nor any Person acting on its or their
behalf, has engaged in any form of general solicitation or general advertising
(within the meaning of Regulation D) in connection with the offer or sale of the
Securities. The Company shall be responsible for the payment of any placement
agent's fees, financial advisory fees, or brokers' commissions (other than for
Persons engaged by any Buyer or its investment advisor) relating to or arising
out of the transactions contemplated hereby, including, without limitation,
placement agent fees payable to the Placement Agent pursuant to the terms of the
Engagement Letter in connection with the sale of the Securities. The Company
shall pay, and hold each Buyer harmless against, any liability, loss or expense
(including, without limitation, attorney's fees and out-of-pocket expenses)
arising in connection with any such claim. The Company acknowledges that it has
engaged the Placement Agent in connection with the sale of the Securities. Other
than the Placement Agent, neither the Company nor any of its Subsidiaries has
engaged any placement agent or other agent in connection with the offer or sale
of the Securities.

 

- 19 -

 

 

(h)   No Integrated Offering. None of the Company, its Subsidiaries or any of
their affiliates, nor any Person acting on their behalf has, directly or
indirectly, made any offers or sales of any security or solicited any offers to
buy any security, under circumstances that would require registration of the
issuance of any of the Securities under the 1933 Act, whether through
integration with prior offerings or otherwise, or cause this offering of the
Securities to require approval of stockholders of the Company for purposes of
the 1933 Act or any applicable stockholder approval provisions, including,
without limitation, under the rules and regulations of any exchange or automated
quotation system on which any of the securities of the Company are listed or
designated for quotation. None of the Company, its Subsidiaries, their
affiliates nor any Person acting on their behalf will take any action or steps
that would require registration of the issuance of any of the Securities under
the 1933 Act or cause the offering of any of the Securities to be integrated
with other offerings for purposes of any such applicable stockholder approval
provisions.

 

(i)    Dilutive Effect. The Company understands and acknowledges that the number
of Warrant Shares issuable upon exercise of the Warrants and Adjustment Shares
issuable pursuant to the terms of this Agreement will increase in certain
circumstances. The Company further acknowledges that its obligation to issue the
Warrant Shares upon exercise of the Warrants in accordance with this Agreement
and the Warrants and to issue the Adjustment Shares in accordance with Section
1(b) is, in each case, is absolute and unconditional regardless of the dilutive
effect that such issuance may have on the ownership interests of other
stockholders of the Company.

 

(j)    Application of Takeover Protections; Rights Agreement. The Company and
its board of directors have taken all necessary action, if any, in order to
render inapplicable any control share acquisition, interested stockholder,
business combination, poison pill (including, without limitation, any
distribution under a rights agreement) or other similar anti-takeover provision
under the Certificate of Incorporation, Bylaws or other organizational documents
or the laws of the jurisdiction of its formation which is or could become
applicable to any Buyer as a result of the transactions contemplated by this
Agreement, including, without limitation, the Company's issuance of the
Securities and any Buyer's ownership of the Securities. The Company and its
Board of Directors have taken all necessary action, if any, in order to render
inapplicable any stockholder rights plan or similar arrangement relating to
accumulations of beneficial ownership of shares of Common Stock or a change in
control of the Company or any of its Subsidiaries.

 

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(k)   SEC Documents; Financial Statements. Since February 14, 2013, and except
as in connection with the transactions contemplated hereby, 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 1934 Act (all of the foregoing filed prior to the date hereof or prior to
the Closing Date, and all exhibits included therein and financial statements,
notes and schedules thereto and documents incorporated by reference therein
being hereinafter referred to as the "SEC Documents"). The Company has delivered
to the Buyers or their respective representatives true, correct and complete
copies of the SEC Documents not available on the EDGAR system. As of their
respective filing dates, the SEC Documents complied in all material respects
with the requirements of the 1934 Act applicable to the Company 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 the light of the circumstances under which they were
made, not misleading. As of their respective filing 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 U.S. generally accepted accounting
principles, consistently applied, during the periods involved ("GAAP") (except
(i) as may be otherwise indicated in such financial statements or the notes
thereto, or (ii) in the case of unaudited interim statements, to the extent they
may exclude footnotes or may be condensed or summary statements) and fairly
present in all material respects the financial position of the Company and its
Subsidiaries as of the dates thereof and the results of its operations and cash
flows for the periods then ended (subject, in the case of unaudited statements,
to normal year-end audit adjustments which will not be material, either
individually or in the aggregate). No other information provided by or on behalf
of the Company to any of the Buyers which is not included in the SEC Documents
(including, without limitation, information referred to in Section 2(d) of this
Agreement or in the disclosure schedules to this Agreement) contains any untrue
statement of a material fact or omits to state any material fact necessary in
order to make the statements therein not misleading, in the light of the
circumstance under which they are or were made.

 

(l)    Absence of Certain Changes. Since September 30, 2013, there has been no
material adverse change and no material adverse development in the business,
assets, liabilities, properties, operations, condition (financial or otherwise),
results of operations or prospects of the Company or any of its Subsidiaries.
Since September 30, 2013, neither the Company nor any of its Subsidiaries has
(i) declared or paid any dividends or (ii) sold any assets, individually or in
the aggregate, in excess of $100,000 outside of the ordinary course of business.
Neither the Company nor any of its Subsidiaries has taken any steps to seek
protection pursuant to any law or statute relating to bankruptcy, insolvency,
reorganization, receivership, liquidation or winding up, nor does the Company or
any Subsidiary have any knowledge or reason to believe that any of their
respective creditors intend to initiate involuntary bankruptcy proceedings or
any actual knowledge of any fact which would reasonably lead a creditor to do
so. The Company and its Subsidiaries, individually and on a consolidated basis,
are not as of the date hereof, and after giving effect to the transactions
contemplated hereby to occur at the Closing, will not be Insolvent (as defined
below). For purposes of this Section 3(l), "Insolvent" means, with respect to
any Person, (i) the present fair saleable value of such Person's assets is less
than the amount required to pay such Person's total Indebtedness (as defined in
Section 3(s)), (ii) such Person is unable to pay its debts and liabilities,
subordinated, contingent or otherwise, as such debts and liabilities become
absolute and matured, (iii) such Person intends to incur or believes that it
will incur debts that would be beyond its ability to pay as such debts mature or
(iv) such Person has unreasonably small capital with which to conduct the
business in which it is engaged as such business is now conducted and is
proposed to be conducted.

 

- 21 -

 

 

(m)  No Undisclosed Events, Liabilities, Developments or Circumstances. No
event, liability, development or circumstance has occurred or exists, or is
contemplated to occur with respect to the Company, its Subsidiaries or their
respective business, properties, prospects, operations or financial condition,
that would be required to be disclosed by the Company under applicable
securities laws on a registration statement on Form S-1 filed with the SEC
relating to an issuance and sale by the Company of its Common Stock and which
has not been publicly announced.

 

(n)   Conduct of Business; Regulatory Permits. Neither the Company nor any of
its Subsidiaries is in violation of any term of or in default under its
Certificate of Incorporation, any certificate of designations, preferences or
rights of any other outstanding series of preferred stock of the Company or any
of its Subsidiaries or Bylaws or their organizational charter, certificate of
formation or certificate of incorporation or bylaws, respectively. Neither the
Company nor any of its Subsidiaries is in violation of any judgment, decree or
order or any statute, ordinance, rule or regulation applicable to the Company or
any of its Subsidiaries, and neither the Company nor any of its Subsidiaries
will conduct its business in violation of any of the foregoing, except in all
cases for possible violations which could not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect. Without limiting the
generality of the foregoing, the Company is not in violation of any of the
rules, regulations or requirements of the Principal Market and has no knowledge
of any facts or circumstances that could reasonably lead to delisting or
suspension of the Common Stock by the Principal Market in the foreseeable
future. Since April 9, 2013, (i) the Common Stock has been listed or designated
for quotation on the Principal Market, (ii) trading in the Common Stock has not
been suspended by the SEC or the Principal Market and (iii) the Company has
received no communication, written or oral, from the SEC or the Principal Market
regarding the suspension or delisting of the Common Stock from the Principal
Market. The Company and each of its Subsidiaries possess all certificates,
authorizations and permits issued by the appropriate foreign, federal or state
regulatory authorities necessary to conduct their respective businesses, except
where the failure to possess such certificates, authorizations or permits would
not have, individually or in the aggregate, a Material Adverse Effect, and
neither the Company nor any such Subsidiary has received any notice of
proceedings relating to the revocation or modification of any such certificate,
authorization or permit.

 

(o)   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 of its Subsidiaries has, in the course of its
actions for, or on behalf of, the Company or any of its Subsidiaries (i) used
any corporate funds for any unlawful contribution, gift, entertainment or other
unlawful expenses relating to political activity; (ii) made any direct or
indirect unlawful payment to any foreign or domestic government official or
employee from corporate funds; (iii) violated or is in violation of any
provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended; or (iv)
made any unlawful bribe, rebate, payoff, influence payment, kickback or other
unlawful payment to any foreign or domestic government official or employee.

 

- 22 -

 

 

(p)   Sarbanes-Oxley Act. The Company is in compliance with any and all
applicable requirements of the Sarbanes-Oxley Act of 2002, as amended, that are
effective as of the date hereof, and any and all applicable rules and
regulations promulgated by the SEC thereunder that are effective as of the date
hereof.

 

(q)   Transactions With Affiliates. Except as set forth in Schedule 3(q), none
of the officers, directors or employees of the Company or any of its
Subsidiaries is presently a party to any transaction with the Company or any of
its Subsidiaries (other than for ordinary course services as employees, officers
or 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
such officer, director or employee or, to the knowledge of the Company or any of
its Subsidiaries, any corporation, partnership, trust or other Person in which
any such officer, director, or employee has a substantial interest or is an
employee, officer, director, trustee or partner.

 

(r)    Equity Capitalization. As of the date hereof, the authorized capital
stock of the Company consists of (i) 45,000,000 shares of Common Stock, of
which, 20,071,817 are issued and outstanding and 8,254,312 shares are reserved
for issuance pursuant to securities (other than the Warrants) exercisable or
exchangeable for, or convertible into, shares of Common Stock and (ii) 5,000,000
shares of preferred stock, none of which are issued and outstanding. No shares
of Common Stock are held in treasury. All of such outstanding shares are duly
authorized and have been, or upon issuance will be, validly issued and are fully
paid and nonassessable. 5,125,000 shares of the Company's issued and outstanding
Common Stock are as of the date hereof owned by Persons who are "affiliates" (as
defined in Rule 405 of the 1933 Act) of the Company or any of its Subsidiaries.
(i) Except as disclosed in Schedule 3(r)(i), none of the Company's or any
Subsidiary's capital stock is subject to preemptive rights or any other similar
rights or any liens or encumbrances suffered or permitted by the Company or any
Subsidiary; (ii) except as disclosed in Schedule 3(r)(ii), there are no
outstanding options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into, or exercisable or exchangeable for, any capital stock of the
Company or any of its Subsidiaries, or contracts, commitments, understandings or
arrangements by which the Company or any of its Subsidiaries is or may become
bound to issue additional capital stock of the Company or any of its
Subsidiaries or options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into, or exercisable or exchangeable for, any capital stock of the
Company or any of its Subsidiaries; (iii) except as disclosed in Schedule
3(r)(iii), there are no outstanding debt securities, notes, credit agreements,
credit facilities or other agreements, documents or instruments evidencing
Indebtedness of the Company or any of its Subsidiaries or by which the Company
or any of its Subsidiaries is or may become bound; (iv) there are no financing
statements securing obligations in any amounts filed in connection with the
Company or any of its Subsidiaries; (v) except as disclosed in Schedule 3(r)(v)
or pursuant to the Registration Rights Agreement, there are no agreements or
arrangements under which the Company or any of its Subsidiaries is obligated to
register the sale of any of their securities under the 1933 Act; (vi) there are
no outstanding securities or instruments of the Company or any of its
Subsidiaries which contain any redemption or similar provisions, and there are
no contracts, commitments, understandings or arrangements by which the Company
or any of its Subsidiaries is or may become bound to redeem a security of the
Company or any of its Subsidiaries; (vii) except as disclosed in Schedule
3(r)(vii), there are no securities or instruments containing anti-dilution or
similar provisions that will be triggered by the issuance of the Securities;
(viii) neither the Company nor any Subsidiary has any stock appreciation rights
or "phantom stock" plans or agreements or any similar plan or agreement; and
(ix) neither the Company nor any of its Subsidiaries have any liabilities or
obligations required to be disclosed in the SEC Documents which are not so
disclosed in the SEC Documents, other than those incurred in the ordinary course
of the Company's or its Subsidiaries' respective businesses and which,
individually or in the aggregate, do not or could not have a Material Adverse
Effect. True, correct and complete copies of the Company's certificate of
incorporation, as amended and as in effect on the date hereof (the "Certificate
of Incorporation"), and the Company's bylaws, as amended and as in effect on the
date hereof (the "Bylaws"), and the terms of all securities convertible into, or
exercisable or exchangeable for, shares of Common Stock and the material rights
of the holders thereof in respect thereto have heretofore been filed as part of
the SEC Documents.

 

- 23 -

 

 

(s)   Indebtedness and Other Contracts. Neither the Company nor any of its
Subsidiaries, (i) except as disclosed in Schedule 3(s), has any outstanding
Indebtedness (as defined below), (ii) is a party to any contract, agreement or
instrument, the violation of which, or default under which, by the other
party(ies) to such contract, agreement or instrument could reasonably be
expected to result in a Material Adverse Effect, (iii) is in violation of any
term of, or in default under, any contract, agreement or instrument relating to
any Indebtedness, except where such violations and defaults would not result,
individually or in the aggregate, in a Material Adverse Effect, or (iv) is a
party to any contract, agreement or instrument relating to any Indebtedness, the
performance of which, in the judgment of the Company's officers, has or is
expected to have a Material Adverse Effect. For purposes of this Agreement: (x)
"Indebtedness" of any Person means, without duplication (A) all indebtedness for
borrowed money, (B) all obligations issued, undertaken or assumed as the
deferred purchase price of property or services (including, without limitation,
"capital leases" in accordance with GAAP consistently applied, during the
periods involved) (other than trade payables entered into in the ordinary course
of business), (C) all reimbursement or payment obligations with respect to
letters of credit, surety bonds and other similar instruments, (D) all
obligations evidenced by notes, bonds, debentures or similar instruments,
including obligations so evidenced incurred in connection with the acquisition
of property, assets or businesses, (E) all indebtedness created or arising under
any conditional sale or other title retention agreement, or incurred as
financing, in either case with respect to any property or assets acquired with
the proceeds of such indebtedness (even though the rights and remedies of the
seller or bank under such agreement in the event of default are limited to
repossession or sale of such property), (F) all monetary obligations under any
leasing or similar arrangement which, in connection with GAAP, consistently
applied for the periods covered thereby, is classified as a capital lease, (G)
all indebtedness referred to in clauses (A) through (F) above secured by (or for
which the holder of such Indebtedness has an existing right, contingent or
otherwise, to be secured by) any mortgage, claim, lien, tax, right of first
refusal, pledge, charge, security interest or other encumbrance upon or in any
property or assets (including accounts and contract rights) owned by any Person,
even though the Person which owns such assets or property has not assumed or
become liable for the payment of such indebtedness, and (H) all Contingent
Obligations in respect of indebtedness or obligations of others of the kinds
referred to in clauses (A) through (G) above; (y) "Contingent Obligation" means,
as to any Person, any direct or indirect liability, contingent or otherwise, of
that Person with respect to any indebtedness, capital lease, dividend or other
obligation of another Person if the primary purpose or intent of the Person
incurring such liability, or the primary effect thereof, is to provide assurance
to the obligee of such liability that such liability will be paid or discharged,
or that any agreements relating thereto will be complied with, or that the
holders of such liability will be protected (in whole or in part) against loss
with respect thereto; and (z) "Person" means an individual, a limited liability
company, a partnership, a joint venture, a corporation, a trust, an
unincorporated organization, any other entity and any Governmental Entity or any
department or agency thereof.

 

- 24 -

 

 

(t)    Absence of Litigation. There is no action, suit, proceeding, inquiry or
investigation before or by the Principal Market, any court, public board,
government agency, self-regulatory organization or body pending or, to the
knowledge of the Company, threatened against or affecting the Company or any of
its Subsidiaries, the Common Stock or any of the Company's Subsidiaries or any
of the Company's or its Subsidiaries' officers or directors, whether of a civil
or criminal nature or otherwise, in their capacities as such.

 

(u)   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 been refused any
insurance coverage sought or applied for and neither the Company nor any such
Subsidiary has any reason to believe that it will be unable 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.

 

(v)   Employee Relations. Neither the Company nor any of its Subsidiaries is a
party to any collective bargaining agreement or employs any member of a union.
The Company believes that its and its Subsidiaries' relations with their
respective employees are good. No executive officer (as defined in Rule 501(f)
promulgated under the 1933 Act) or other key employee of the Company or any of
its Subsidiaries has notified the Company or any such Subsidiary that such
officer intends to leave the Company or any such Subsidiary or otherwise
terminate such officer's employment with the Company or any such Subsidiary. No
executive officer or other key employee of the Company or any of its
Subsidiaries is, or is now expected to be, in violation of any material term of
any employment contract, confidentiality, disclosure or proprietary information
agreement, non-competition agreement, or any other contract or agreement or any
restrictive covenant, and the continued employment of each such executive
officer or other key employee (as the case may be) does not subject the Company
or any of its Subsidiaries to any liability with respect to any of the foregoing
matters. The Company and its Subsidiaries are in compliance with all federal,
state, local and foreign laws and regulations respecting labor, employment and
employment practices and benefits, terms and conditions of employment and wages
and hours, except where failure to be in compliance would not, either
individually or in the aggregate, reasonably be expected to result in a Material
Adverse Effect.

 

- 25 -

 

 

(w)   Title. 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 such as do not materially affect the value of such property and do not
interfere with the use made and proposed to be made of such property by the
Company and any of its Subsidiaries. Any real property and facilities held under
lease by the Company or any of its Subsidiaries are held by them under valid,
subsisting and enforceable leases with such exceptions as are not material and
do not interfere with the use made and proposed to be made of such property and
buildings by the Company or any of its Subsidiaries.

 

(x)    Intellectual Property Rights. The Company and its Subsidiaries own or
possess adequate rights or licenses to use all trademarks, trade names, service
marks, service mark registrations, service names, patents, patent rights,
copyrights, original works of authorship, inventions, licenses, approvals,
governmental authorizations, trade secrets and other intellectual property
rights and all applications and registrations therefor ("Intellectual Property
Rights") necessary to conduct their respective businesses as now conducted and
as presently proposed to be conducted. None of the Company's or its
Subsidiaries' Intellectual Property Rights have expired, terminated or been
abandoned, or are expected to expire, terminate or be abandoned, within three
years from the date of this Agreement. The Company has no knowledge of any
infringement by the Company or any of its Subsidiaries of Intellectual Property
Rights of others. There is no claim, action or proceeding being made or brought,
or to the knowledge of the Company or any of its Subsidiaries, being threatened,
against the Company or any of its Subsidiaries regarding their Intellectual
Property Rights. The Company is not aware of any facts or circumstances which
might give rise to any of the foregoing infringements or claims, actions or
proceedings. The Company and each of its Subsidiaries have taken reasonable
security measures to protect the secrecy, confidentiality and value of all of
their Intellectual Property Rights.

 

(y)   Environmental Laws. The Company and its Subsidiaries (A) are in compliance
with all Environmental Laws (as defined below), (B) have received all permits,
licenses or other approvals required of them under applicable Environmental Laws
to conduct their respective businesses and (C) are in compliance with all terms
and conditions of any such permit, license or approval where, in each of the
foregoing clauses (A), (B) and (C), the failure to so comply could be reasonably
expected to have, individually or in the aggregate, a Material Adverse Effect.
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.

 

- 26 -

 

 

(z)     Subsidiary Rights. The Company or one of its Subsidiaries has the
unrestricted right to vote, and (subject to limitations imposed by applicable
law) to receive dividends and distributions on, all capital securities of its
Subsidiaries as owned by the Company or such Subsidiary.

 

(aa)   Tax Status. The Company and each of its Subsidiaries (i) has timely made
or filed all foreign, federal and state income and all other tax returns,
reports and declarations required by any jurisdiction to which it is subject,
(ii) has timely 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 (iii)
has set aside on its books provision 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 and its Subsidiaries know of no basis for any such claim.

 

(bb)   Internal Accounting and Disclosure Controls. The Company and each of its
Subsidiaries maintain a system of internal accounting controls sufficient 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
and liability accountability, (iii) access to assets or incurrence of
liabilities is permitted only in accordance with management's general or
specific authorization and (iv) the recorded accountability for assets and
liabilities is compared with the existing assets and liabilities at reasonable
intervals and appropriate action is taken with respect to any difference. The
Company maintains disclosure controls and procedures (as such term is defined in
Rule 13a-15 under the 1934 Act) that are effective in ensuring that information
required to be disclosed by the Company in the reports that it files or submits
under the 1934 Act is recorded, processed, summarized and reported, within the
time periods specified in the rules and forms of the SEC, including, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by the Company in the reports that it files or submits under the
1934 Act is accumulated and communicated to the Company's management, including
its principal executive officer or officers and its principal financial officer
or officers, as appropriate, to allow timely decisions regarding required
disclosure. Except as set forth in Schedule 3(bb), during the twelve months
prior to the date hereof neither the Company nor any of its Subsidiaries has
received any notice or correspondence from any accountant relating to any
material weakness in any part of the system of internal accounting controls of
the Company or any of its Subsidiaries.

 

(cc)   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.

 

- 27 -

 

 

(dd)   Investment Company Status. Neither the Company nor any of its
Subsidiaries is, and upon consummation of the sale of the Securities will not
be, an "investment company," an affiliate of an "investment company," a company
controlled by an "investment company" or an "affiliated person" of, or
"promoter" or "principal underwriter" for, an "investment company" as such terms
are defined in the Investment Company Act of 1940, as amended.

 

(ee)    Acknowledgement Regarding Buyers' Trading Activity. Except as set forth
in Sections 2(m) and 4(s), the Company acknowledges and agrees that (i) none of
the Buyers has been asked to agree, nor has any Buyer agreed, to desist from
purchasing or selling, long and/or short, securities of the Company, or
"derivative" securities based on securities issued by the Company or to hold the
Securities for any specified term; (ii) any Buyer, and counter-parties in
"derivative" transactions to which any such Buyer is a party, directly or
indirectly, presently may have a "short" position in the Common Stock, and (iii)
each Buyer shall not be deemed to have any affiliation with or control over any
arm's length counter-party in any "derivative" transaction. The Company further
understands and acknowledges that one or more Buyers may engage in hedging
and/or trading activities at various times during the period that the Securities
are outstanding, including, without limitation, during the periods that the
value of the Warrant Shares and/or the Adjustment Shares are being determined
and (b) such hedging and/or trading activities, if any, can reduce the value of
the existing stockholders' equity interest in the Company both at and after the
time the hedging and/or trading activities are being conducted. The Company
acknowledges that such aforementioned hedging and/or trading activities do not
constitute a breach of this Agreement, the Warrants or any of the documents
executed in connection herewith.

 

(ff)    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) other than the
Placement Agent, sold, bid for, purchased, or paid any compensation for
soliciting purchases of, any of the Securities, or (iii) other than the
Placement Agent, paid or agreed to pay to any person any compensation for
soliciting another to purchase any other securities of the Company.

 

(gg)  U.S. Real Property Holding Corporation.  Neither the Company nor any of
its Subsidiaries is, or has ever been, and so long as any of the Securities are
held by any of the Buyers, shall become, a U.S. real property holding
corporation within the meaning of Section 897 of the Internal Revenue Code of
1986, as amended, and the Company and each Subsidiary shall so certify upon any
Buyer's request.

 

(hh)  Transfer Taxes.  On the Closing Date, all stock transfer or other taxes
(other than income or similar taxes) which are required to be paid in connection
with the issuance, sale and transfer of the Securities to be sold to each Buyer
hereunder will be, or will have been, fully paid or provided for by the Company,
and all laws imposing such taxes will be or will have been complied with.

 

- 28 -

 

 

(ii)      Bank Holding Company Act. Neither the Company nor any of its
Subsidiaries is subject to the Bank Holding Company Act of 1956, as amended (the
"BHCA") and to regulation by the Board of Governors of the Federal Reserve
System (the "Federal Reserve"). Neither the Company nor any of its Subsidiaries
or affiliates owns or controls, directly or indirectly, five percent (5%) or
more of the outstanding shares of any class of voting securities or twenty-five
percent (25%) or more of the total equity of a bank or any equity that is
subject to the BHCA and to regulation by the Federal Reserve. Neither the
Company nor any of its Subsidiaries or affiliates exercises a controlling
influence over the management or policies of a bank or any entity that is
subject to the BHCA and to regulation by the Federal Reserve.

 

(jj)      Shell Company Status. The Company is not, and has never been, an
issuer identified in, or subject to, Rule 144(i).

 

(kk)    Money Laundering. The Company and its Subsidiaries are in compliance
with, and have not previously violated, the USA Patriot Act of 2001 and all
other applicable U.S. and non-U.S. anti-money laundering laws and regulations,
including, but not limited to, the laws, regulations and Executive Orders and
sanctions programs administered by the U.S. Office of Foreign Assets Control,
including, but not limited, to (i) Executive Order 13224 of September 23, 2001
entitled, "Blocking Property and Prohibiting Transactions With Persons Who
Commit, Threaten to Commit, or Support Terrorism" (66 Fed. Reg. 49079 (2001));
and (ii) any regulations contained in 31 CFR, Subtitle B, Chapter V.

 

(ll)     No Additional Agreements. The Company does not have any agreement or
understanding with any Buyer with respect to the transactions contemplated by
the Transaction Documents other than as specified in the Transaction Documents.

 

(mm)   Disclosure. Except for discussions specifically regarding the offer and
sale of the Securities, the Company confirms that neither it nor any other
Person acting on its behalf has provided any of the Buyers or their agents or
counsel with any information that constitutes or could reasonably be expected to
constitute material, non-public information concerning the Company or any of its
Subsidiaries, other than the existence of the transactions contemplated by this
Agreement and the other Transaction Documents. The Company understands and
confirms that each of the Buyers will rely on the foregoing representations in
effecting transactions in securities of the Company. All disclosure provided to
the Buyers regarding the Company and its Subsidiaries, their businesses and the
transactions contemplated hereby, including the schedules to this Agreement,
furnished by or on behalf of the Company or any of its Subsidiaries is true and
correct and does not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements made therein,
in the light of the circumstances under which they were made, not misleading.
All of the written information furnished after the date hereof by or on behalf
of the Company or any of its Subsidiaries to you pursuant to or in connection
with this Agreement and the other Transaction Documents, taken as a whole, will
be true and correct in all material respects as of the date on which such
information is so provided and will not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements made therein, in the light of the circumstances under which they are
made, not misleading. Each press release issued by the Company or any of its
Subsidiaries during the twelve (12) months preceding the date of this Agreement
did not at the time of release contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading. No event or circumstance has occurred or
information exists with respect to the Company or any of its Subsidiaries or its
or their business, properties, liabilities, prospects, operations (including
results thereof) or conditions (financial or otherwise), which, under applicable
law, rule or regulation, requires public disclosure at or before the date hereof
or announcement by the Company but which has not been so publicly disclosed. The
Company acknowledges and agrees that no Buyer makes or has made any
representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth in Section 2.

 

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

 

(oo)    No Disagreements with Accountants and Lawyers. There are no material
disagreements of any kind presently existing, or reasonably anticipated by the
Company to arise, between the Company and the accountants and lawyers formerly
or presently employed by the Company and the Company is current with respect to
any fees owed to its accountants and lawyers which could affect the Company's
ability to perform any of its obligations under any of the Transaction
Documents.

 

(pp)    No Disqualification Events. With respect to Securities to be offered and
sold hereunder in reliance on Rule 506(b) under the 1933 Act ("Regulation D
Securities"), 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" and, together, "Issuer Covered Persons") is subject
to any of the "Bad Actor" disqualifications described in Rule 506(d)(1)(i) to
(viii) under the 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. The Company has complied, to the extent
applicable, with its disclosure obligations under Rule 506(e), and has furnished
to the Buyers a copy of any disclosures provided thereunder.

 

(qq)    Other Covered Persons. The Company is not aware of any Person (other
than the Placement Agent) that has been or will be paid (directly or indirectly)
remuneration for solicitation of Buyers or potential purchasers in connection
with the sale of any Regulation D Securities.

 

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4.          COVENANTS.

 

(a)    Reasonable Best Efforts. Each party shall use its reasonable best efforts
timely to satisfy each of the covenants and the conditions to be satisfied by it
as provided in Sections 6 and 7 of this Agreement.

 

(b)    Form D and Blue Sky. 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
each Buyer promptly after such filing. The Company shall, on or before the
Closing Date, take such action as the Company shall reasonably determine is
necessary in order to obtain an exemption for or to qualify the Securities for
sale to the Buyers at the Closing pursuant to this Agreement under applicable
securities or "Blue Sky" laws of the states of the United States (or to obtain
an exemption from such qualification), and shall provide evidence of any such
action so taken to the Buyers on or prior to the Closing Date. The Company shall
make all filings and reports relating to the offer and sale of the Securities
required under applicable securities or "Blue Sky" laws of the states of the
United States following the Closing Date.

 

(c)    Reporting Status. Until the date on which the Investors (as defined in
the Registration Rights Agreement) shall have sold all of the Common Shares,
Adjustment Shares and Warrant Shares, none of the Warrants are outstanding and
no additional Adjustment Shares are issuable hereunder (the "Reporting Period"),
the Company shall timely file all reports required to be filed with the SEC
pursuant to the 1934 Act, and the Company shall not terminate its status as an
issuer required to file reports under the 1934 Act even if the 1934 Act or the
rules and regulations thereunder would no longer require or otherwise permit
such termination, and the Company shall take all actions necessary to maintain
its eligibility to register the Common Shares and Warrant Shares for resale by
the Investors on Form S-3.

 

(d)    Use of Proceeds. The Company will use the proceeds from the sale of the
Securities for general corporate purposes and for working capital purposes but
not for (i) the repayment of any outstanding Indebtedness of the Company or any
of its Subsidiaries or (ii) the redemption or repurchase of any of its or its
Subsidiaries' equity securities.

 

(e)    Financial Information. The Company agrees to send the following to each
Investor (as defined in the Registration Rights Agreement) during the Reporting
Period (i) unless the following are filed with the SEC through EDGAR and are
available to the public through the EDGAR system, within one (1) Business Day
after the filing thereof with the SEC, a copy of its Annual Reports on Form
10-K, any Quarterly Reports on Form 10-Q, any Current Reports on Form 8-K (or
any analogous reports under the 1934 Act) and any registration statements (other
than on Form S-8) or amendments filed pursuant to the 1933 Act, (ii) on the same
day as the release thereof, facsimile or e-mailed copies of all press releases
issued by the Company or any of its Subsidiaries, and (iii) copies of any
notices and other information made available or given to the stockholders of the
Company generally, contemporaneously with the making available or giving thereof
to the stockholders.

 

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(f)    Listing. The Company shall promptly secure the listing of all of the
Registrable Securities (as defined in the Registration Rights Agreement) upon
each national securities exchange and automated quotation system, if any, upon
which the Common Stock is then listed (subject to official notice of issuance)
and shall maintain such listing of all Registrable Securities from time to time
issuable under the terms of the Transaction Documents. The Company shall
maintain the authorization for quotation of the Common Stock on the Principal
Market or any other Eligible Market (as defined in the Warrants). Neither the
Company nor any of its Subsidiaries shall take any action which would be
reasonably expected to result in the delisting or suspension of the Common Stock
on the Principal Market. The Company shall pay all fees and expenses in
connection with satisfying its obligations under this Section 4(f).

 

(g)   Fees. The Company shall be responsible for the payment of any placement
agent's fees, financial advisory fees, or broker's commissions (other than for
Persons engaged by any Buyer) relating to or arising out of the transactions
contemplated hereby, including, without limitation, any fees or commissions
payable to the Placement Agent. The Company shall pay, and hold each Buyer
harmless against, any liability, loss or expense (including, without limitation,
reasonable attorney's fees and out-of-pocket expenses) arising in connection
with any claim relating to any such payment. Except as otherwise set forth in
the Transaction Documents, each party to this Agreement shall bear its own
expenses in connection with the sale of the Securities to the Buyers.

 

(h)   Pledge of Securities. The Company acknowledges and agrees that the
Securities may be pledged by an Investor in connection with a bona fide margin
agreement or other loan or financing arrangement that is secured by the
Securities. The pledge of Securities shall not be deemed to be a transfer, sale
or assignment of the Securities hereunder, and no Investor effecting a pledge of
Securities shall be required to provide the Company with any notice thereof or
otherwise make any delivery to the Company pursuant to this Agreement or any
other Transaction Document, including, without limitation, Section 2(f) hereof;
provided that an Investor and its pledgee shall be required to comply with the
provisions of Section 2(f) hereof in order to effect a sale, transfer or
assignment of Securities to such pledgee. The Company hereby agrees to execute
and deliver such documentation as a pledgee of the Securities may reasonably
request in connection with a pledge of the Securities to such pledgee by an
Investor.

 

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(i)    Disclosure of Transactions and Other Material Information. On or before
8:30 a.m., New York City time, on the first Business Day after this Agreement
has been executed, the Company shall issue a customary press release and file a
Current Report on Form 8-K describing the terms of the transactions contemplated
by the Transaction Documents in the form required by the 1934 Act and attaching
the material Transaction Documents (including, without limitation, this
Agreement (and all schedules and exhibits to this Agreement), the form of the
Warrant, the form of Lock-Up Agreement and the form of the Registration Rights
Agreement as exhibits to such filing (including all attachments), the "8-K
Filing"). From and after the filing of the 8-K Filing with the SEC, no Buyer
shall be 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 any of the Buyers or any of their affiliates, on the other hand,
shall terminate. The Company shall not, and shall cause each of its Subsidiaries
and its and each of their respective officers, directors, employees and agents,
not to, provide any Buyer with any material, nonpublic information regarding the
Company or any of its Subsidiaries from and after the filing of the 8-K Filing
with the SEC without the express prior written consent of such Buyer. If a Buyer
has, or believes it has, received any such material, nonpublic information
regarding the Company or any of its Subsidiaries from the Company, any of its
Subsidiaries or any of their respective officers, directors, affiliates or
agents, it may provide the Company with written notice thereof. The Company
shall, within two (2) Trading Days of receipt of such notice, make public
disclosure of such material, nonpublic information. In the event of a breach of
the foregoing covenant by the Company, any of its Subsidiaries, or any of its or
their respective officers, directors, employees and agents, in addition to any
other remedy provided herein or in the Transaction Documents, a Buyer shall have
the right to make a public disclosure, in the form of a press release, public
advertisement or otherwise, of such material, nonpublic information without the
prior approval by the Company, its Subsidiaries, or any of its or their
respective officers, directors, employees or agents. No Buyer shall have any
liability to the Company, its Subsidiaries, or any of its or their respective
officers, directors, employees, stockholders or agents for any such disclosure.
To the extent that the Company delivers any material, non-public information to
a Buyer without such Buyer's consent, the Company hereby covenants and agrees
that such Buyer shall not have any duty of confidentiality with respect to, or a
duty not to trade on the basis of, such material, non-public information.
Subject to the foregoing, neither the Company, its Subsidiaries nor any Buyer
shall issue any press releases 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 any Buyer, to make any press release
or other public disclosure with respect to such transactions (i) in substantial
conformity with the 8-K Filing and contemporaneously therewith and (ii) as is
required by applicable law and regulations (provided that in the case of clause
(i) each Buyer shall be consulted by the Company in connection with any such
press release or other public disclosure prior to its release). Except for the
Registration Statement required to be filed pursuant to the Registration Rights
Agreement, without the prior written consent of any applicable Buyer, neither
the Company nor any of its Subsidiaries or affiliates shall disclose the name of
such Buyer in any filing, announcement, release or otherwise.

 

(j)    Restrictions on Specific Offerings. For so long as any Warrants remain
outstanding, the Company shall not, in any manner, enter into any equity line of
credit, "at-the-market" offering (as defined in Rule 415(a)(4) under the 1933
Act) or substantially similar transaction.

 

(k)   Corporate Existence. So long as any Buyer beneficially owns any
Securities, the Company shall maintain its corporate existence and shall not be
party to any Fundamental Transaction (as defined in the Warrants) unless the
Company is in compliance with the applicable provisions governing Fundamental
Transactions set forth in the Warrants.

 

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(l)    Reservation of Shares. So long as any Buyer owns any Securities, the
Company shall take all action necessary to at all times have authorized, and
reserved for the purpose of issuance, no less than the sum of (i) the number of
shares of Common Stock issuable upon exercise of the Warrants then outstanding
(without taking into account any limitations on the exercise of the Warrants set
forth in the Warrants) and (ii) the maximum number of Adjustment Shares issuable
pursuant to the terms of this Agreement (without taking into account the Maximum
Percentage and assuming an Adjustment Price of $0.50 (as adjusted for any stock
dividend, stock split, stock combination, reclassification or similar
transaction occurring after the date hereof)). If at any time the number of
shares of Common Stock authorized and reserved for issuance is not sufficient to
meet the Required Reserved Amount, the Company will promptly take all corporate
action necessary to authorize and reserve a sufficient number of shares,
including, without limitation, calling a special meeting of stockholders to
authorize additional shares to meet the Company's obligations under Section
3(c), in the case of an insufficient number of authorized shares, obtain
stockholder approval of an increase in such authorized number of shares, and
voting the management shares of the Company in favor of an increase in the
authorized shares of the Company to ensure that the number of authorized shares
is sufficient to meet the Required Reserved Amount.

 

(m)    Conduct of Business. The business of the Company and its Subsidiaries
shall not be conducted in violation of any law, ordinance or regulation of any
governmental entity, except where such violations would not result, either
individually or in the aggregate, in a Material Adverse Effect.

 

(n)    Additional Registration Statements. Except for required post-effective
amendments to any registration statement of the Company previously declared
effective by the SEC, from the date hereof until the date the Registration
Statement(s) covering the resale of all of the Registrable Securities (as
defined in the Registration Rights Agreement) has been declared effective by the
SEC and each prospectus contained therein is available for use on such date),
the Company will not, directly or indirectly, file any registration statement
with the SEC other than the Registration Statements (as defined in the
Registration Rights Agreement).

 

(o)    Additional Issuances of Securities. From the date hereof until the date
that is the earlier of (A) sixty-one (61) days immediately following the last
date that Adjustment Shares may be issued hereunder and (B) seven (7) months
immediately following the Closing Date (the "Trigger Date"), the Company will
not (except, in each case, for any Excluded Issuances (as defined below), which
issuances shall be excluded from the provisions of this Section 4(o)):
(i) directly or indirectly, offer, sell, grant any option to purchase, 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' equity or
equity equivalent securities, including without limitation any debt, preferred
stock 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 or Common Stock Equivalents to the extent at a per share purchase
price or at an exercise price, conversion price or exchange price, as
applicable, (a "Future Purchase Price") that is less than $1.88 (as adjusted for
any stock dividend, stock split, stock combination, reclassification or similar
transaction occurring after the date hereof) or (ii) be party to any
solicitations, negotiations or discussions with regard to the foregoing. For
purposes of determining the Future Purchase Price under this Section 4(o), the
following shall be applicable:

 

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(i)    Issuance of Options. If the Company in any manner grants or sells any
Options and the lowest price per share for which one share of Common Stock is
issuable upon the exercise of any such Option or upon conversion or exchange or
exercise of any Convertible Securities issuable upon exercise of any such Option
is less than the Purchase Price (as adjusted for any stock dividend, stock
split, stock combination, reclassification or similar transaction occurring
after the date hereof), then such share of Common Stock shall be deemed to be
outstanding and to have been issued and sold by the Company at the time of the
granting or sale of such Option for such price per share. For purposes of this
Section 4(o), the "lowest price per share for which one share of Common Stock is
issuable upon the exercise of any such Options or upon conversion or exchange or
exercise of any Convertible Securities issuable upon exercise of such Option"
shall be equal to the sum of the lowest amounts of consideration (if any)
received or receivable by the Company with respect to any one share of Common
Stock upon granting or sale of the Option, upon exercise of the Option and upon
conversion or exchange or exercise of any Convertible Security issuable upon
exercise of such Option less any consideration paid or payable by the Company
with respect to such one share of Common Stock upon the granting or sale of such
Option, upon exercise of such Option and upon conversion exercise or exchange of
any Convertible Security issuable upon exercise of such Option.

 

(ii)   Issuance of Convertible Securities. If the Company in any manner issues
or sells any Convertible Securities and the lowest price per share for which one
share of Common Stock is issuable upon the conversion or exchange or exercise
thereof is less than the Purchase Price (as adjusted for any stock dividend,
stock split, stock combination, reclassification or similar transaction
occurring after the date hereof, then such share of Common Stock shall be deemed
to be outstanding and to have been issued and sold by the Company at the time of
the issuance or sale of such Convertible Securities for such price per share.
For the purposes of this Section 4(o), the "lowest price per share for which one
share of Common Stock is issuable upon the conversion or exchange or exercise
thereof" shall be equal to the sum of the lowest amounts of consideration (if
any) received or receivable by the Company with respect to any one share of
Common Stock upon the issuance or sale of the Convertible Security and upon the
conversion or exchange or exercise of such Convertible Security less any
consideration paid or payable by the Company with respect to such one share of
Common Stock upon the issuance or sale of the Convertible Security and upon the
conversion or exchange or exercise of such Convertible Security.

 

(iii)  Change in Option Price or Rate of Conversion. If the purchase price
provided for in any Options, the additional consideration, if any, payable upon
the issue, conversion, exchange or exercise of any Convertible Securities, or
the rate at which any Convertible Securities are convertible into or
exchangeable or exercisable for shares of Common Stock decreases at any time to
below the per share Purchase Price (as adjusted for any stock dividend, stock
split, stock combination, reclassification or similar transaction occurring
after the date hereof), the Company shall be deemed to have made a Restricted
Issuance at such decreased purchase price as of the date of such increase or
decrease.

 

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(iv)   Calculation of Consideration Received. In case any Option is issued in
connection with the issue or sale of other securities of the Company, together
comprising one integrated transaction (a) the Options will be deemed to have
been issued for the Option Value and (b) the other securities issued or sold in
such integrated transaction shall be deemed to have been issued or sold for the
difference of (1) the aggregate consideration received by the Company less any
consideration paid or payable by the Company pursuant to the terms of such other
securities of the Company, less (2) the Option Value. If any shares of Common
Stock, Options or Convertible Securities are issued or sold or deemed to have
been issued or sold for cash, the consideration other than cash received
therefor will be deemed to be the net amount received by the Company therefor.
If any shares of Common Stock, Options or Convertible Securities are issued or
sold for a consideration other than cash, the amount of such consideration
received by the Company will be the fair value of such consideration, except
where such consideration consists of securities, in which case the amount of
consideration received by the Company will be the Closing Sale Price of such
securities on the date of receipt. If any shares of Common Stock, Options or
Convertible Securities are issued to the owners of the non-surviving entity in
connection with any merger in which the Company is the surviving entity, the
amount of consideration therefor will be deemed to be the fair value of such
portion of the net assets and business of the non-surviving entity as is
attributable to such shares of Common Stock, Options or Convertible Securities,
as the case may be. The fair value of any consideration other than cash or
securities will be determined jointly by the Company and the Required Holders.
If such parties are unable to reach agreement within ten (10) days after the
occurrence of an event requiring valuation (the "Valuation Event"), the fair
value of such consideration will be determined within five (5) Business Days
after the tenth (10th) day following the Valuation Event by an independent,
reputable appraiser jointly selected by the Company and the Required Holders.
The determination of such appraiser shall be final and binding upon all parties
absent manifest error and the fees and expenses of such appraiser shall be borne
by the Company.

 

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(v)   Definitions. As used herein, (I) "Restricted Issuance" means any such
offer, sale, grant, option to purchase or other disposition prior to the Trigger
Date at a Future Purchase Price that is less than the per share Purchase Price
(as adjusted for any stock dividend, stock split, stock combination,
reclassification or similar transaction occurring after the date hereof), (II)
"Option Value" means the value of an Option based on the Black and Scholes
Option Pricing model obtained from the "OV" function on Bloomberg determined as
of (i) the Trading Day prior to the public announcement of the applicable Option
if the issuance of such Option is publicly announced or (ii) the Trading Day
immediately following the issuance of the applicable Option if the issuance of
such Option is not publicly announced, for pricing purposes and reflecting (a) a
risk-free interest rate corresponding to the U.S. Treasury rate for a period
equal to the remaining term of the applicable Option as of the applicable date
of determination, (b) an expected volatility equal to the 100 day volatility
obtained from the HVT function on Bloomberg as of the day immediately following
the public announcement of (i) the Trading Day immediately following the public
announcement of the applicable Option if the issuance of such Option is publicly
announced or (ii) the Trading Day immediately following the issuance of the
applicable Option if the issuance of such Option is not publicly announced, (c)
the underlying price per share used in such calculation shall be the highest
Weighted Average Price during the period beginning on the day prior to the
execution of definitive documentation relating to the issuance of the applicable
Option and the public announcement of such issuance, (d) a zero cost of borrow
and (e) a 360 day annualization factor, and (III) “Excluded Issuance” means any
issuance or grant of Common Stock, Option or Convertible Security issued or
issuable: (A) to directors, officers, employees or bona fide consultants
performing services typically performed by employees of the Company in their
capacity as such pursuant to the Company’s existing or any future stock option,
stock incentive or similar plan (as the same may be amended from time to time)
approved by the Company’s Board of Directors and majority stockholders, (B) upon
the conversion or exercise of Options or Convertible Securities (other than
securities that are covered by clause (A) above) issued prior to the date
hereof, provided that the exercise or conversion price of such Options or
Convertible Securities is not lowered and such Options or Convertible Securities
are not amended to increase the number of shares issuable thereunder, except in
each case pursuant to the terms thereof in existence on the date hereof; (C)
upon exercise of any Warrant issued hereunder, provided that the exercise price
of such Warrant is not lowered and such Warrant is not amended to increase the
number of shares issuable thereunder and (D) pursuant to acquisitions or
strategic transactions approved by a majority of the disinterested directors of
the Company, provided that any such issuance shall only be to a Person (or to
the equity holders of a Person) which is, itself or through its subsidiaries, an
operating company or an owner of an asset in a business synergistic with the
business of the Company and shall 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 for the purpose of raising capital or to
an entity whose primary business is investing in securities.

 

(vi)   Record Date. If the Company takes a record of the holders of shares of
Common Stock for the purpose of entitling them to subscribe for or purchase
shares of Common Stock, Options or Convertible Securities, then such record date
will be deemed to be the date of the issue or sale of the shares of Common Stock
deemed to have been issued or sold upon the date of the granting of such right
of subscription or purchase.

 

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(p)    Public Information. At any time during the period commencing from the six
(6) month anniversary of the Closing Date and ending at such time that all of
the Securities, if a registration statement is not available for the resale of
all of the Securities, may be sold without restriction or limitation pursuant to
Rule 144 and without the requirement to be in compliance with Rule 144(c)(1), 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 has
ever been an issuer described in Rule 144(i)(1)(i) or becomes such an issuer in
the future, 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 any holder of Securities 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 at law or in equity), the Company
shall pay to each such holder an amount in cash equal to one and one-half
percent (1.5%) of the aggregate Purchase Price of such holder's Securities on
the day of a Public Information Failure and on every thirtieth day (pro rated
for periods totaling less than thirty days) thereafter until the earlier of (i)
the date such Public Information Failure is cured and (ii) such time that such
Public Information Failure no longer prevents a holder of Securities from
selling such Securities pursuant to Rule 144 without any restrictions or
limitations. The payments to which a holder shall be entitled pursuant to this
Section 4(o) are referred to herein as "Public Information Failure Payments."
Public Information Failure Payments shall be paid on the earlier of (I) the last
day of the calendar month during which such Public Information Failure Payments
are incurred and (II) the third Business Day after the event or failure giving
rise to the Public Information Failure Payments is cured. In the event the
Company fails to make Public Information Failure Payments in a timely manner,
such Public Information Failure Payments shall bear interest at the rate of 1.5%
per month (prorated for partial months) until paid in full.

 

(q)    Lock-Up. The Company shall not amend, modify, waive or terminate any
provision of any of the Lock-Up Agreements except to extend the term of the
lock-up period and shall enforce the provisions of each Lock-Up Agreement in
accordance with its terms. If any officer or director that is a party to a
Lock-Up Agreement breaches any provision of a Lock-Up Agreement, the Company
shall promptly use its reasonable best efforts to seek specific performance of
the terms of such Lock-Up Agreement.

 

(r)     Notice of Disqualification Events. The Company will notify the Buyers in
writing, prior to the Closing Date of (i) any Disqualification Event relating to
any Issuer Covered Person and (ii) any event that would, with the passage of
time, become a Disqualification Event relating to any Issuer Covered Person.

 

(s)    Short Sales. During the period commencing on the date hereof and ending
with the close of trading on the Principal Market on the last Adjustment Date
hereunder (such period, the "Restricted Period"), each Buyer, severally and not
jointly with the other Buyers, covenants that neither it nor any of its Buyer
Trading Affiliates shall maintain a Net Short Position. For purposes hereof, a
"Net Short Position" by a person means a position whereby such person has
executed one or more sales of Common Stock that is marked as a "short sale" (as
defined in Rule 200 of Regulation SHO under the 1934 Act) and that is executed
at a time when such Buyer has no equivalent offsetting long position in the
Common Stock or contract for the foregoing. For purposes of determining whether
a Buyer has an equivalent offsetting long position in the Common Stock, all
Common Stock (i) that is owned by such Buyer, (ii) that may be issued as
Adjustment Shares pursuant to Section 1(b) if reasonably determinable (without
regard to the provisions of Section 1(b)(iii)), and (iii) that would be issuable
upon exercise in full of the Warrants then held by such Buyer (assuming that
such Warrants were then fully exercisable, notwithstanding any provisions to the
contrary) shall be deemed to be held long by such Buyer. Notwithstanding the
foregoing, for the avoidance of doubt, nothing contained herein shall constitute
a covenant, or preclude any actions, with respect to the identification of the
availability of, or securing of, available shares to borrow in order to effect
short sales or similar transactions not during the Restricted Period. As used
herein, "Buyer Trading Affiliates" means any Person acting on behalf of or
pursuant to any understanding with such Buyer which had knowledge of the
transactions contemplated hereby, (x) has or shares discretion relating to such
Buyer's investments and trading or information concerning such Buyer's
investments or (y) is subject to such Buyer's review or input concerning such
Person's investments or trading.

 

- 38 -

 

 

(t)    Additional Issuances of Securities.

 

(i)          From the date hereof until the second anniversary of the Closing
Date, the Company will not, (i) directly or indirectly, offer, sell, grant any
option to purchase, 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 Shares or Common Share Equivalents (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(t)(i).

 

(1)   The Company shall deliver to each 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 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, sold or exchanged, (y) identify the persons 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
such Buyers, in the aggregate, at least thirty-five percent (35%) of the Offered
Securities, allocated among such Buyers (a) based on such Buyer's pro rata
portion of the aggregate principal amount of Notes purchased hereunder (the
"Basic Amount"), and (b) with respect to each Buyer that elects to purchase its
Basic Amount, any additional portion of the Offered Securities attributable to
the Basic Amounts of other Buyers as such Buyer shall indicate it will purchase
or acquire should the other Buyers subscribe for less than their Basic Amounts
(the "Undersubscription Amount"), which process shall be repeated until the
Buyers shall have an opportunity to subscribe for any remaining
Undersubscription Amount.

 

(2)   To accept an Offer, in whole or in part, such Buyer must deliver a written
notice to the Company prior to the end of the fifth (5th) Business Day after
such Buyer's receipt of the Offer Notice (the "Offer Period"), setting forth the
portion of such Buyer's Basic Amount that such Buyer elects to purchase and, if
such Buyer shall elect to purchase all of its Basic Amount, the
Undersubscription Amount, if any, that such Buyer elects to purchase (in either
case, the "Notice of Acceptance"). If the Basic Amounts subscribed for by all
Buyers are less than the total of all of the Basic Amounts, then each Buyer who
has set forth an Undersubscription Amount in its Notice of Acceptance shall be
entitled to purchase, in addition to the Basic Amounts subscribed for, the
Undersubscription Amount it has subscribed for; provided, however, that if the
Undersubscription Amounts subscribed for exceed the difference between the total
of all the Basic Amounts and the Basic Amounts subscribed for (the "Available
Undersubscription Amount"), each Buyer who has subscribed for any
Undersubscription Amount shall be entitled to purchase only that portion of the
Available Undersubscription Amount as the Basic Amount of such Buyer bears to
the total Basic Amounts of all Buyers that have subscribed for Undersubscription
Amounts, subject to rounding by the Company to the extent its deems reasonably
necessary. Notwithstanding anything to the contrary contained herein, if the
Company desires to modify or amend the terms and conditions of the Offer prior
to the expiration of the Offer Period, the Company may deliver to the Buyers a
new Offer Notice and the Offer Period shall expire on the tenth (10th) Business
Day after such Buyer's receipt of such new Offer Notice.

 

- 39 -

 

 

(3)   The Company shall have ten (10) Business Days (other than with respect to
a Public Offering Subsequent Placement, in which case the Company shall have
fifteen (15) Business Days) from the expiration of the Offer Period above to
offer, issue, sell or exchange all or any part of such Offered Securities as to
which a Notice of Acceptance has not been given by the Buyers (the "Refused
Securities") pursuant to a definitive agreement (the "Subsequent Placement
Agreement") but only to the offerees described in the Offer Notice (if so
described therein) and only upon terms and conditions (including, without
limitation, unit prices and interest rates) that are not more favorable to the
acquiring Person or Persons or less favorable to the Company than those set
forth in the Offer Notice and (ii) to publicly announce (a) the execution of
such Subsequent Placement Agreement, and (b) either (x) the consummation of the
transactions contemplated by such Subsequent Placement Agreement or (y) the
termination of such Subsequent Placement Agreement, which shall be filed with
the SEC on a Current Report on Form 8-K with such Subsequent Placement Agreement
and any documents contemplated therein filed as exhibits thereto.

 

(4)   In the event the Company shall propose to sell less than all the Refused
Securities (any such sale to be in the manner and on the terms specified in
Section 4(t)(i)(3) above), then each Buyer may, at its sole option and in its
sole discretion, reduce the number or amount of the Offered Securities specified
in its Notice of Acceptance to an amount that shall be not less than the number
or amount of the Offered Securities that such Buyer elected to purchase pursuant
to Section 4(t)(i)(2) above multiplied by a fraction, (i) the numerator of which
shall be the number or amount of Offered Securities the Company actually
proposes to issue, sell or exchange (including Offered Securities to be issued
or sold to Buyers pursuant to Section 4(t)(i)(3) above prior to such reduction)
and (ii) the denominator of which shall be the original amount of the Offered
Securities. In the event that any Buyer so elects to reduce the number or amount
of Offered Securities specified in its Notice of Acceptance, the Company may not
issue, sell or exchange more than the reduced number or amount of the Offered
Securities unless and until such securities have again been offered to the
Buyers in accordance with Section 4(t)(i)(1) above.

 

- 40 -

 

 

(5)   Upon the closing of the issuance, sale or exchange of all or less than all
of the Refused Securities, the Buyers shall acquire from the Company, and the
Company shall issue to the Buyers, the number or amount of Offered Securities
specified in the Notices of Acceptance, as reduced pursuant to Section
4(t)(i)(3) above if the Buyers have so elected, upon the terms and conditions
specified in the Offer. The purchase by the Buyers of any Offered Securities is
subject in all cases (other than with respect to a Public Offering Subsequent
Placement) to the preparation, execution and delivery by the Company and the
Buyers of a purchase agreement relating to such Offered Securities reasonably
satisfactory in form and substance to the Buyers and their respective counsel.

 

(6)   Any Offered Securities not acquired by the Buyers or other persons in
accordance with Section 4(t)(i)(3) above may not be issued, sold or exchanged
until they are again offered to the Buyers under the procedures specified in
this Agreement.

 

(7)   The Company and the Buyers agree that if any Buyer elects to participate
in the Offer, (x) neither the Subsequent Placement Agreement with respect to
such Offer nor any other transaction documents related thereto (collectively,
the "Subsequent Placement Documents") shall include any term or provisions
whereby any Buyer shall be required to agree to any restrictions in trading as
to any securities of the Company owned by such Buyer prior to such Subsequent
Placement, and (y) unless the securities being issued pursuant to the applicable
Subsequent Placement are freely tradable and issued without any restrictive
securities law legends, any registration rights set forth in such Subsequent
Placement Documents shall be similar in all material respects to the
registration rights contained in the Registration Rights Agreement.

 

(8)   Notwithstanding anything to the contrary in this Section 4(t) and unless
otherwise agreed to by the Buyers, the Company shall either confirm in writing
to the Buyers that the transaction with respect to the Subsequent Placement has
been abandoned or shall publicly disclose its intention to issue the Offered
Securities, in either case in such a manner such that the Buyers will not be in
possession of material non-public information, by the fifteenth (15th) Business
Day following delivery of the Offer Notice. If by the fifteenth (15th) Business
Day following delivery of the Offer Notice no public disclosure regarding a
transaction with respect to the Offered Securities has been made, and no notice
regarding the abandonment of such transaction has been received by the Buyers,
such transaction shall be deemed to have been abandoned and the Buyers shall not
be deemed to be in possession of any material, non-public information with
respect to the Company. Should the Company decide to pursue such transaction
with respect to the Offered Securities, the Company shall provide each Buyer
with another Offer Notice and each Buyer will again have the right of
participation set forth in this Section 4(t)(i). The Company shall not be
permitted to deliver more than one such Offer Notice to the Buyers in any 60 day
period.

 

(ii)         The restrictions contained in this Section 4(t) shall not apply in
connection with the any actual or deemed Excluded Issuance or the entry into any
agreement regarding any Excluded Issuance.

 

- 41 -

 

 

(iii)        As used in this Section 4(t), a "Public Offering Subsequent
Issuance" shall mean a firm commitment public offering of shares of Common
Stock.

 

(u)   Closing Documents. On or prior to thirty (30) calendar days after the
Closing Date, the Company agrees to deliver, or cause to be delivered, to the
Placement Agent, each Buyer and Schulte Roth & Zabel LLP a complete closing set
of the executed Transaction Documents, Securities and any other documents
required to be delivered to any party pursuant to Section 7 hereof or otherwise.

 

5.          REGISTER; TRANSFER AGENT INSTRUCTIONS.

 

(a)   Register. The Company shall maintain at its principal executive offices
(or such other office or agency of the Company as it may designate by notice to
each holder of Securities), a register for the Warrants in which the Company
shall record the name and address of the Person in whose name the Warrants have
been issued (including the name and address of each transferee) and the number
of Warrant Shares issuable upon exercise of the Warrants held by such Person.
The Company shall keep the register open and available at all times during
business hours for inspection of any Buyer or its legal representatives.

 

(b)   Transfer Agent Instructions. The Company shall issue irrevocable
instructions to its transfer agent, and any subsequent transfer agent, in the
form of Exhibit C attached hereto (the "Irrevocable Transfer Agent
Instructions") to issue certificates or credit shares to the applicable balance
accounts at DTC, registered in the name of each Buyer or its respective
nominee(s), for the Common Shares and the Warrant Shares issued at the Closing
or upon exercise of the Warrants in such amounts as specified from time to time
by each Buyer to the Company upon exercise of the Warrants. The Company warrants
that no instruction other than the Irrevocable Transfer Agent Instructions
referred to in this Section 5(b), and stop transfer instructions to give effect
to Section 2(f) hereof, 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
other Transaction Documents. If a Buyer effects a sale, assignment or transfer
of the Securities in accordance with Section 2(f), the Company shall permit the
transfer and shall promptly instruct its transfer agent to issue one or more
certificates or credit shares to the applicable balance accounts at DTC in such
name and in such denominations as specified by such Buyer to effect such sale,
transfer or assignment. In the event that such sale, assignment or transfer
involves the Warrant Shares sold, assigned or transferred pursuant to an
effective registration statement or pursuant to Rule 144, the transfer agent
shall issue such Securities to the Buyer, assignee or transferee, as the case
may be, without any restrictive legend. The Company acknowledges that a breach
by it of its obligations hereunder will cause irreparable harm to a Buyer.
Accordingly, the Company acknowledges that the remedy at law for a breach of its
obligations under this Section 5(b) will be inadequate and agrees, in the event
of a breach or threatened breach by the Company of the provisions of this
Section 5(b), that a Buyer shall be entitled, in addition to all other available
remedies, to an order and/or injunction restraining any breach and requiring
immediate issuance and transfer, without the necessity of showing economic loss
and without any bond or other security being required.

 

- 42 -

 

 

6.          CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.

 

The obligation of the Company hereunder to issue and sell the Common Shares and
the related Warrants to each Buyer at the Closing is subject to the
satisfaction, at or before the Closing Date, of each of the following
conditions, 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 by providing
each Buyer with prior written notice thereof:

 

(i)          Such Buyer shall have executed each of the Transaction Documents to
which it is a party and delivered the same to the Company.

 

(ii)         Such Buyer shall have delivered to the Company the Purchase Price
for the Common Shares and the related Warrants being purchased by such Buyer at
the Closing by wire transfer of immediately available funds pursuant to the wire
instructions provided by the Company.

 

(iii)        The representations and warranties of such Buyer shall be true and
correct 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 which shall be true and correct as of such specified date), and such 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 such Buyer at or prior to the Closing Date.

 

7.          CONDITIONS TO EACH BUYER'S OBLIGATION TO PURCHASE.

 

The obligation of each Buyer hereunder to purchase the Common Shares and the
related Warrants at the Closing is subject to the satisfaction, at or before the
Closing Date, of each of the following conditions, provided that these
conditions are for each Buyer's sole benefit and may be waived by such Buyer at
any time in its sole discretion by providing the Company with prior written
notice thereof:

 

(i)          The Company shall have duly executed and delivered to such Buyer
(A) each of the Transaction Documents, (B) the Common Shares (allocated in such
amounts as such Buyer shall request), being purchased by such Buyer at the
Closing pursuant to this Agreement and (C) the related Warrants (allocated in
such amounts as such Buyer shall request) being purchased by such Buyer at the
Closing pursuant to this Agreement.

 

(ii)         Such Buyer and the Placement Agent shall have received the opinion
of Ellenoff Grossman & Schole LLP, the Company's outside counsel, dated as of
the Closing Date, in a customary form agreed to by counsel to the Placement
Agent.

 

(iii)        The Company shall have delivered to such Buyer a copy of the
Irrevocable Transfer Agent Instructions, which instructions shall have been
delivered to and acknowledged in writing by the Company's transfer agent.

 

(iv)        The Company shall have delivered to such 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.

 

- 43 -

 

 

(v)         The Company shall have delivered to such Buyer a certificate
evidencing the Company's qualification as a foreign corporation and good
standing issued by the Secretary of State (or comparable office) of each
jurisdiction in which the Company conducts business, as of a date within ten
(10) days of the Closing Date.

 

(vi)        The Company shall have delivered to such Buyer a certified copy of
the Certificate of Incorporation as certified by the Secretary of State (or
comparable office) of the State of Delaware within ten (10) days of the Closing
Date.

 

(vii)       The Company shall have delivered to such Buyer a certificate,
executed by the Secretary of the Company and dated as of the Closing Date, as to
(i) the resolutions consistent with Section 3(b) as adopted by the Company's
Board of Directors in a form reasonably acceptable to such Buyer, (ii) the
Certificate of Incorporation and (iii) the Bylaws, each as in effect at the
Closing, in the form attached hereto as Exhibit D.

 

(viii)      The representations and warranties of the Company shall be true and
correct 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 which shall be true and correct as of such specified date) and the Company
shall have performed, satisfied and complied in all respects with the covenants,
agreements and conditions required by the Transaction Documents to be performed,
satisfied or complied with by the Company at or prior to the Closing Date. Such
Buyer shall have received a certificate, executed by the Chief Executive Officer
of the Company, dated as of the Closing Date, to the foregoing effect and as to
such other matters as may be reasonably requested by such Buyer in the form
attached hereto as Exhibit E.

 

(ix)         The Company shall have delivered to such Buyer a letter from the
Company's transfer agent certifying the number of shares of Common Stock
outstanding as of a date within five (5) days of the Closing Date.

 

(x)          The Company shall have delivered to each Buyer a lock-up agreement
in the form attached hereto as Exhibit F executed and delivered by each of the
Persons listed on Schedule 7(x) (collectively, the "Lock Up Agreements").

 

(xi)         The Common Stock (I) shall be designated for quotation or listed on
the Principal Market and (II) shall not have been suspended, as of the Closing
Date, by the SEC or the Principal Market from trading on the Principal Market
nor shall suspension by the SEC or the Principal Market have been threatened, as
of the Closing Date, either (A) in writing by the SEC or the Principal Market or
(B) by falling below the minimum listing maintenance requirements of the
Principal Market.

 

(xii)        The Company shall have obtained all governmental, regulatory or
third party consents and approvals, if any, necessary for the sale of the
Securities.

 

- 44 -

 

 

(xiii)       The Company shall have delivered to such Buyer such other customary
documents relating to the transactions contemplated by this Agreement as such
Buyer or its counsel may reasonably request.

 

8.          TERMINATION. In the event that the Closing shall not have occurred
with respect to a Buyer on or before five (5) Business Days from the date hereof
due to the Company's or such Buyer's failure to satisfy the conditions set forth
in Sections 6 and 7 above (and the nonbreaching party's failure to waive such
unsatisfied condition(s)), the nonbreaching party shall have the option to
terminate this Agreement with respect to such breaching party at the close of
business on such date by delivering a written notice to that effect to each
other party to this Agreement and without liability of any party to any other
party.

 

9.          MISCELLANEOUS.

 

(a)    Governing Law; Jurisdiction; Jury Trial. All questions concerning the
construction, validity, enforcement and interpretation of this Agreement shall
be governed by the internal laws of the State of New York, without giving effect
to any choice of law or conflict of law provision or rule (whether of the State
of New York or any other jurisdictions) that would cause the application of the
laws of any jurisdictions other than the State of New York. Each party hereby
irrevocably submits to the exclusive jurisdiction of the state and federal
courts sitting in The City of New York, Borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, 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 brought in an inconvenient forum or that the
venue of 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 for such 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 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 TRANSACTION CONTEMPLATED HEREBY.

 

(b)   Counterparts. This Agreement may be executed in two or more identical
counterparts, all of which shall be considered one and the same agreement and
shall become effective when counterparts have been signed by each party and
delivered to the other party; provided that 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)   Headings. The headings of this Agreement are for convenience of reference
and shall not form part of, or affect the interpretation of, this Agreement.

 

- 45 -

 

 

(d)   Severability. If any provision of this Agreement is prohibited by law or
otherwise determined to be invalid or unenforceable by a court of competent
jurisdiction, the provision that would otherwise be prohibited, invalid or
unenforceable shall be deemed amended to apply to the broadest extent that it
would be valid and enforceable, and the invalidity or unenforceability of such
provision shall not affect the validity of the remaining provisions of this
Agreement so long as this Agreement as so modified continues to express, without
material change, the original intentions of the parties as to the subject matter
hereof and the prohibited nature, invalidity or unenforceability of the
provision(s) in question does not substantially impair the respective
expectations or reciprocal obligations of the parties or the practical
realization of the benefits that would otherwise be conferred upon the parties.
The parties will endeavor in good faith negotiations to replace the prohibited,
invalid or unenforceable provision(s) with a valid provision(s), the effect of
which comes as close as possible to that of the prohibited, invalid or
unenforceable provision(s).

 

(e)   Entire Agreement; Amendments. This Agreement and the other Transaction
Documents supersede all other prior oral or written agreements between the
Buyers, the Company, their affiliates and Persons acting on their behalf with
respect to the matters discussed herein, and this Agreement, the other
Transaction Documents and the instruments referenced herein and therein 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 any Buyer makes any representation, warranty, covenant
or undertaking with respect to such matters. No provision of this Agreement may
be amended other than by an instrument in writing signed by the Company and the
Required Holders, and any amendment to this Agreement made in conformity with
the provisions of this Section 9(e) shall be binding on all Buyers and holders
of Securities and the Company; provided that (i) any such amendment or waiver
that complies with the foregoing but that disproportionately, materially and
adversely affects the rights and obligations of any Buyer relative to the
comparable rights and obligations of the other Buyers shall require the prior
written consent of such adversely affected Buyer and (ii) any such amendment or
waiver that materially and adversely affects the rights of the Placement Agent
shall require the prior written consent of the Placement Agent. No provisions
hereto may be waived other than by an instrument in writing signed by the party
against whom enforcement is sought. No such amendment shall be effective to the
extent that it applies to less than all of the Buyers or holders of the
applicable Securities then outstanding. No consideration shall be offered or
paid to any Person to amend or consent to a waiver or modification of any
provision of any of the Transaction Documents unless the same consideration
(other than the reimbursement of legal fees) also is offered to all of the
parties to the Transaction Documents, holders of Common Shares or holders of the
Warrants, as the case may be. The Company has not, directly or indirectly, made
any agreements with any Buyers relating to the terms or conditions of the
transactions contemplated by the Transaction Documents except as set forth in
the Transaction Documents. Without limiting the foregoing, the Company confirms
that, except as set forth in this Agreement, no Buyer has made any commitment or
promise or has any other obligation to provide any financing to the Company or
otherwise.

 

- 46 -

 

 

(f)   Notices. Any notices, consents, waivers or other communications required
or permitted to be given under the terms of this Agreement must be in writing
and will be deemed to have been delivered: (i) upon receipt, when delivered
personally; (ii) upon receipt, when sent by facsimile (provided confirmation of
transmission is mechanically or electronically generated and kept on file by the
sending party) or by electronic mail; or (iii) one Business Day after deposit
with an overnight courier service, in each case properly addressed to the party
to receive the same. The addresses, facsimile numbers and e-mail addresses for
such communications shall be:

 

If to the Company:

 

LabStyle Innovations Corp.

Halamish 9

Caesarea Industrial Park

38900, Israel

Telephone:     +(972)-(4) 770 4054

Facsimile:      +(972)-(4) 770 4059

Attention:      Chief Executive Officer

E-mail:          erez@mydario.com

 

With a copy (for informational purposes only) to:

 

Ellenoff Grossman & Schole LLP

1345 Avenue of the Americas

New York, New York 10105

Telephone:      (212) 370-1300

Facsimile:       (646) 895-7204

Attention:       Lawrence A. Rosenbloom, Esq.

 

If to the Placement Agent:

 

ROTH Capital Partners, LLC
730 Fifth Avenue
New York, New York 10019
Telephone:      (646) 338-1905

Attention: Michael Chill

E-mail: mchill@roth.com

 

With a copy (for informational purposes only) to:

 

Schulte Roth & Zabel LLP
919 Third Avenue
New York, New York 10022
Telephone:      (212) 756-2000
Facsimile:       (212) 593-5955
Attention:       Eleazer N. Klein, Esq.
E-mail:           eleazer.klein@srz.com

 

- 47 -

 

 

If to the Transfer Agent:

 

VStock Transfer, LLC

77 Spruce Street, Suite 201

Cedarhurst, NY 11516

Telephone:      (212) 828-8436

Facsimile:       (646) 536-3179

Attention:       Yoel Goldfeder

E-mail:           yoel@vstocktransfer.com

 

If to a Buyer, to its address, facsimile number and e-mail address set forth on
the Schedule of Buyers, with copies to such Buyer's representatives as set forth
on the Schedule of Buyers, or to such other address, facsimile number and/or
e-mail address and/or to the attention of such other Person as the recipient
party has specified by written notice given to each other party five (5) days
prior to the effectiveness of such change. Written confirmation of receipt (A)
given by the recipient of such notice, consent, waiver or other communication,
(B) mechanically or electronically generated by the sender's facsimile machine
or e-mail containing the time, date, recipient facsimile number and an image of
the first page of such transmission or (C) provided by an overnight courier
service shall be rebuttable evidence of personal service, receipt by facsimile
or receipt from an overnight courier service in accordance with clause (i), (ii)
or (iii) above, respectively.

 

(g)    Successors and Assigns. This Agreement shall be binding upon and inure to
the benefit of the parties and their respective successors and assigns,
including any purchasers of the Common Shares or the Warrants. The Company shall
not assign this Agreement or any rights or obligations hereunder without the
prior written consent of the Required Holders, including by way of a Fundamental
Transaction (unless the Company is in compliance with the applicable provisions
governing Fundamental Transactions set forth in the Warrants). A Buyer may
assign some or all of its rights hereunder without the consent of the Company,
in which event such assignee shall be deemed to be a Buyer hereunder with
respect to such assigned rights.

 

(h)    No 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, except that (i) each Indemnitee shall have the right to enforce
the obligations of the Company with respect to Section 9(m) and (ii) the
Placement Agent shall be a third-party beneficiary of this Section 9(h) and
Sections 1(a)(v), 2(k), 3(g), 4(g), 9(i) and 9(j).

 

(i)     Reliance by the Placement Agent. Each party agrees and acknowledges that
the Placement Agent may rely on the representations, warranties, agreements and
covenants of the Company contained in this Agreement and may rely on the
representations and warranties of the respective Buyers contained in this
Agreement as if such representations, warranties, agreements, and covenants, as
applicable, were made directly to the Placement Agent. The parties further
agreement that the Placement Agent may rely on or, if the Placement Agent so
requests, be specifically named as an addressee of, the legal opinions to be
delivered pursuant to Section 7(ii) of this Agreement.

 

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(j)     Exculpation of Placement Agent. Each party hereto agrees for the express
benefit of each of the Placement Agent, their affiliates and representatives
that:

 

(i)          Neither the Placement Agent nor any of its affiliates or any of its
representatives (1) has any duties or obligations other than those specifically
set forth herein or in the Engagement Letter; (2) shall be liable for any
improper payment made in accordance with the information provided by the
Company; (3) makes any representation or warranty, or has any responsibilities
as to the validity, accuracy, value or genuineness of any information,
certificates or documentation delivered by or on behalf of the Company pursuant
to this Agreement or the Transaction Documents or in connection with any of the
transactions contemplated hereby; or (4) shall be liable (x) for any action
taken, suffered or omitted by any of them in good faith and reasonably believed
to be authorized or within the discretion or rights or powers conferred upon it
by this Agreement or any Transaction Document or (y) for anything which any of
them may do or refrain from doing in connection with this Agreement or any
Transaction Document, except for such party's own gross negligence, willful
misconduct or bad faith.

 

(ii)         The Placement Agent, and its affiliates and representatives shall
be entitled to (1) rely on, and shall be protected in acting upon, any
certificate, instrument, opinion, notice, letter or any other document or
security delivered to any of them by or on behalf of the Company, and (2) be
indemnified by the Company for acting as Placement Agent hereunder pursuant the
indemnification provisions set forth in the Engagement Letter.

 

(k)    Survival. Unless this Agreement is terminated under Section 8, the
representations and warranties of the Company and the Buyers contained in
Sections 2 and 3, and the agreements and covenants set forth in Sections 4, 5
and 9 shall survive the Closing. Each Buyer shall be responsible only for its
own representations, warranties, agreements and covenants hereunder.

 

(l)     Further Assurances. 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 any 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.

 

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(m)    Indemnification. In consideration of each Buyer's execution and delivery
of the Transaction Documents and acquiring the Securities thereunder and in
addition to all of the Company's other obligations under the Transaction
Documents, the Company shall defend, protect, indemnify and hold harmless each
Buyer and each other holder of the Securities and all of their 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 the Transaction Documents or any other certificate, instrument or
document contemplated hereby or thereby, (b) any breach of any covenant,
agreement or obligation of the Company contained in the Transaction Documents or
any other 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 the Transaction Documents or any other
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, (iii) any
disclosure made by such Buyer pursuant to Section 4(i), or (iv) the status of
such Buyer or holder of the Securities as an investor in the Company pursuant to
the transactions contemplated by the Transaction Documents. 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.
Except as otherwise set forth herein, the mechanics and procedures with respect
to the rights and obligations under this Section 9(m) shall be the same as those
set forth in Section 6 of the Registration Rights Agreement.

 

(n)    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.

 

(o)    Remedies. Each Buyer and each holder of the Securities shall have all
rights and remedies set forth in the Transaction Documents and all rights and
remedies which such holders have been granted at any time under any other
agreement or contract and all of the rights which such holders have under any
law. Any Person having any rights under any provision of this Agreement shall be
entitled to enforce such rights specifically (without posting a bond or other
security), to recover damages by reason of any breach of any provision of this
Agreement and to exercise all other rights granted by law. Furthermore, the
Company recognizes that in the event that it fails to perform, observe, or
discharge any or all of its obligations under the Transaction Documents, any
remedy at law may prove to be inadequate relief to the Buyers. The Company
therefore agrees that the Buyers shall be entitled to seek temporary and
permanent injunctive relief in any such case without the necessity of proving
actual damages and without posting a bond or other security.

 

(p)    Rescission and Withdrawal Right. Notwithstanding anything to the contrary
contained in (and without limiting any similar provisions of) the Transaction
Documents, whenever any Buyer exercises a right, election, demand or option
under a Transaction Document and the Company does not timely perform its related
obligations within the periods therein provided, then such Buyer may rescind or
withdraw, in its sole discretion from time to time upon written notice to the
Company, any relevant notice, demand or election in whole or in part without
prejudice to its future actions and rights.

 

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(q)    Payment Set Aside. To the extent that the Company makes a payment or
payments to the Buyers hereunder or pursuant to any of the other Transaction
Documents or the Buyers enforce or exercise their 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 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.

 

(r)     Independent Nature of Buyers' Obligations and Rights. The obligations of
each Buyer under any Transaction Document are several and not joint with the
obligations of any other Buyer, and no Buyer shall be responsible in any way for
the performance of the obligations of any other Buyer under any Transaction
Document. Nothing contained herein or in any other Transaction Document, and no
action taken by any Buyer pursuant hereto or thereto, shall be deemed to
constitute the Buyers as, and the Company acknowledges that the Buyers do not so
constitute, a partnership, an association, a joint venture or any other kind of
entity, or create a presumption that the Buyers are in any way acting in concert
or as a group, and the Company shall not assert any such claim with respect to
such obligations or the transactions contemplated by the Transaction Documents
and the Company acknowledges that the Buyers are not acting in concert or as a
group with respect to such obligations or the transactions contemplated by the
Transaction Documents. The Company acknowledges and each Buyer confirms that it
has independently participated in the negotiation of the transaction
contemplated hereby with the advice of its own counsel and advisors. Each Buyer
shall be entitled to independently protect and enforce its rights, including,
without limitation, the rights arising out of this Agreement or out of any other
Transaction Documents, and it shall not be necessary for any other Buyer to be
joined as an additional party in any proceeding for such purpose.

 

[Signature Page Follows]

 

- 51 -

 

 

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.

 

  COMPANY:       LABSTYLE INNOVATIONS CORP.       By: /s/ Erez Raphael     Name:
Erez Raphael     Title:  President and CEO

 

[Signature Page to Securities Purchase Agreement]

 

 

 

 

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.

 

  BUYERS:       By:       Name:     Title:

 

[Signature Page to Securities Purchase Agreement]

 

 

 

 

SCHEDULE OF BUYERS

 

Capital Ventures International Hudson Bay Master Fund, Ltd. Empery Asset Master,
Ltd. Empery Tax Efficient, LP Anson Investments Master Fund LP Brio Capital
Master Fund Ltd. Cranshire Capital Master Fund, Ltd. Equitec Specialists, LLC
Alpha Capital Anstalt Iroquois Master Fund Ltd. Sabby Healthcare Volatility
Master Fund, Ltd. Mark A. Mays Kingsbrook Opportunities Master Fund LP FireRock
Global Opportunities Fund L.P. Do – Tsach Ltd B.F.I Investments LP Amir Ohana
Orocom Strategies Ltd. A to Z Finance Ltd.

 

 

 

  

EXHIBITS

 

Exhibit A Form of Warrants Exhibit B Form of Registration Rights Agreement
Exhibit C Form of Irrevocable Transfer Agent Instructions Exhibit D Form of
Secretary's Certificate Exhibit E Form of Officer's Certificate Exhibit F Form
of Lock-Up Agreement

 

SCHEDULES

 

Schedule 3(a) Subsidiaries Schedule 3(q) Transactions with Affiliates Schedule
3(r) Equity Capitalization Schedule 3(s) Indebtedness and Other Contracts
Schedule 3(bb) Internal Accounting and Disclosure Controls